4. RISK FACTORS 4. RISK FACTORS
Notwithstanding the prospects of our Group outlined in this Prospectus, you should carefully consider the following risk faclors (which may not be exhaustive) and ranked in order of priority based on our evaluation, that may have a significant impact on our future performance, in addition to all other relevant information contained elsewhere in this Prospectus, before making an application for the IPO Shares. 4.1 RISKS RELATING TO OUR GROUP 4.1.1 Dependency on EON Bank as a major customer As at the LPO, our Group has derived revenue from the major customers particularly EON Bank as detailed in Section 6.21 of this Prospectus. For the FYE 2007 to FYE 2009 and the FPE 20 I0, our Group had recorded revenues of approximately RM2.24 milliou, RM2.85 million, RM4.31 million and RM3.32 million representing 36.81%, 42.08%, 54.72% and 50.24% respectively from EON Bank. Save for these contracts, our Group does not depend on the revenue contributed by the other Financial Institutions and our Board is of the opinion that the dependence on the other Financial Institutions and customers is limited as the previous sales derived are either non-recurrent and on project basis or does not contribute materially to our revenue. In addition, we are constantly diversifying our product range and customer base which forms as a natural hedge against reliance on a single customer which is demonstrated by our ongoing marketing strategies as disclosed in Section 6.15 of this Prospectus. Hence, the reliance on these other major customers are mitigated. In addition to the above, there is no assurance that the following agreements will be renewed: With EON Bank: (i) EMV Card Personalisation Services agreement dated I August 2009 and expiring on 31 July 2011; and
(ii) Master Rental agreement dated I April 2005 unless otherwise terminated by either party due to breaches or non-compliance with the agreement.
(i) External Sales Agent Merchant Recruitment agreement dated 15 September 2009 and expiring on 14 September 2011.
In the event that the abovementioned agreements lapsed or terminated or the potential take-over of EON Bank by Hong Leong Bank Berhad is successful, which mayor may not result in termination of our existing agreements with EON Bank, there may be adverse financial impact to our Group. However, our Group is of the view that we will be able to source other Financial Institutions as the Acquiring Banks for our existing pool of Merchants and to expand and diversify our products and services to different industries based on our existing product range and our technology experience garnered deployed in various industries since our incorporation. As at the LPO, we have one (I) proposal submitted to a non-bank Credit Card issuer for our Terminal Services. In addition, our Group believes that the existing relationships established between our Group and these Financial Institutions should deter any material loss of business. Further, for avoidance of doubt, there is no conflict of interests between the External Sales Agent Merchant Recruitment agreement and Master Rental agreement. The Master Rental agreement entered between MPSB and EON Bank is essentially a vendor programme to install EOCPOS Terminals for the Merchants acquired by EON Bank, whereas, the External Sales Agent Merchant Recruitment agreement entered between MPSB and MBB allows MPSB to: (i) source and recruit Merchants on behalf of MBB; and
(ii) install EOCPOS Terminals pursuant to the recruitment of the Merchants.
4. RISK FACTORS (Cont’d) 4.1.2 Impact of e-bidding by Financial Institutions on the industry E-bidding is when industry players (i.e. third party service providers) tenders for contracts electronically. Typically an e-bidding system promotes efficiency and transparency as prices are visible to official bidders. An e-bidding system may reduce the terminal rental fees as participants are able to bid against each other in a transparent environment. The industry players that are able to offer the most competitive terminal rental fees will thrive in such an environment. As a result of implementing e-bidding system, the competitiveness of all industry players including our Group increases. However, there is a risk that, in an open e-bidding system, other competitors may be able to offer more competitively-priced terminals rental fees. In an immediate term, the e-bidding system implemented by Financial Iustitutions reduces the profitability of the terminal rental business. Further, over time, some players become more aware and knowledgeable of other fellow competitors’ prices, and this may also negatively impact our Group’s competitiveness. However, our Board is of the view that such competitiveness forces companies to become leaner and more cost efficient and weed out the weaker players in the indUStry. As demanded by the competitive environment, our management will strive to achieve an optimal operating cost, to source for more competitively-priced EDCPOS Terminals and to introduce innovative terminal and maintenance service packages as mitigating factors to maintain our profit
margin. 4.1.3 Operating risk There is no assurance that our Group will be profitable in the future, or that it will achieve increasing or consistent levels of profitability. Our Group’s revenue and operating results are difficult to forecast and could be adversely affected by many factors. These include, amongst others, changes in our Group’s operating expenses, the ability of our Group to develop and market new products and services and to control costs, market acceptance of new products or services, and other business risks common to going concerns. Our Directors believe that our Group should be able to maintain its record of profitability. Our Directors believe that our business activities consist of recurring and non-recurring based revenue models which should be sufficient to cover our operating expenses. Our management regularly monitors our debtors position, continue to have long-term relationships with our customers and business partners, close monitoring of operating expenditure, and careful consideration of any proposed capital expenditure and its effect On our Group. 4.1.4 Visa International and Mastercard WorldWide certification and appointment from Financial Institutions To provide Terminal Services, our Group must be awarded or appointed by the Financial Institutions which are in the Credit Card issuing and acquiring business and to have our EDCPOS Terminals, payment gateway solutions and other related software applications to be certified by Visa International and MasterCard Worldwide to allow us to acquire Merchants. As at the LPD, save for the agreements entered between our subsidiaries with EON Bank and MBB as disclosed in Section 6. 18(iii) of this Prospectus, there is no agreement entered between us and VISA International or MasterCard Worldwide. These designations awarded or appointed or certified are subject to adherence to the standards set by the Acquiring Banks, Visa International and MasterCard Worldwide. Any failure to comply with these standards may have our designation revoked or terminated. The termination of any of these may result in the loss in revenue and our ability to provide Terminal Services. Nonetheless, our Group has over the years established good rapport with certain Financial Iustitutions, and will continue to be diligent adhering to the standards set by Visa International and MasterCard Worldwide. Our Directors do not foresee any issues in continuing to be designated as Merchant Service Provider in the future so long as our Group continue to operate within the parameters ofthe standards.
4. RISK FACTORS (Cont’d) 4.1.5 Competition Our Group is involved in the following activities: (i) Payment Services;
(ii) Terminal Services;
(iii) Loyalty Management Services; (iv) Business Process Outsourcing; and
(v) Software, Security and ICT Services.
The markets in which our Group operates are competitive and characterised by rapid technological innovation. Our Group has experienced and expects to continue to experience intense competition from current and future competitors. Our Group believes that our ability to compete depends upon many factors both within and outside our control, including timing and market acceptance of new products and services and enhancements developed by our Group and our competitors, product and service functionality, ease of use) performance, price, value for money, reliability, customer service and support, sales and marketing efforts, and product and service distribution channels. Our Group’s competitors vary in size and in the scope and breadth of the products and services offered. Our Group encounters competition from a number of sources. Our Group’s current primary competitors are mentioned in Section 7.4 of this Prospectus. While the barriers to entry in the Merchant Acquisition which is an integral part of our Terminal Services may be relatively low, since Merchant Acquisition is largely a sales function requiring little technical and/or capital requirements, the barriers to entry within the rest of the Electronic Payment Solutions industry is fairly high. Merchant Acquisition forms only one part of the Electronic Payment Solution industry value chain, and successful indUStry players typically provide other hardware and software related services as well, such as Payment Services, in addition to recruiting Merchants. Some of our Group’s competitors may have significantly greater resources than our Group, in terms of product pricing, finance, technical and human resources and others. Our Group’s competitors may be able to respond more quickly to new or emerging technologies and changes in customer preference or to devote greater resources to the development, promotion, sale and service of their products and services. Our Group also expects to face additional competition from international competitors that have greater narne recognition. Emerging companies could enter the market and introduce new products and technologies. Increased competition could result in price reductions, reduced revenue and margins, and loss of market share, anyone of which could materially and adversely affect our Group’s business, operating results and [mancial condition. Our Group focuses on technology that is highly reliable and able to handle high volume and also invests in product innovation to ensure its competitiveness in capturing market share and garnering market acceptance. However, there can be no assurance that our Group will be able to maintain its competitiveness against current and future competitors or that competitive pressures will not materially and adversely affect our Group’s business, operating results and financial condition. The rest ofthis page is intentionally left blank 4. RISK FACTORS (Cont’d)
4.1.6 Dependency on Hypercom as single supplier of EDCPOS Terminals MPSB has entered into a non-exclusive agreement with Hypercom as a local reseller of the EDCPOS Terminals. This agreement is auto renewable on a yearly basis subject to either party giving termination notice at least ninety (90) days prior to the expiration of the agreement. There is no assurance that Hypercom will not terminate its agreement with MPSB. In the event that the agreement between Hypercom and MPSB is terminated, our Group is of the .view that alternative brands of EMVcompliant EDCPOS Terminals can be sourced easily from Verifone Holdings, Inc., Ingenico S.A. and Gemalto NY who are readily accepted by Merchants. Besides the three terminal suppliers mentioned, as at the LPD, our management has: (i) started purchasing the EDCPOS Terminals from the local supplier of Vcrifone Holdings, Inc; and
(ii) discussed with other EDCPOS Terminal manufacturers with the intention to jointly develop new applications.
Nevertheless, the failure of MPSB to maintain our existing relationship with Hypercom, or to satisfY the terms and conditions of our contract with Hypercom, may affect our Group’s business, operating results and fmancial condition in the future.
4.1.7 Changes in technology and products/services The markets for our Group’s products and services are characterised by rapid technological developments, evolving industry standards, swift changes in customer requirements, computer operating environments and software applications, and frequent new product introductions and enhancements. Our Group’s future depends substantially upon our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database and networking platforms. The timely development of new or enhanced products and services is a complex and uncertain process. To mitigate these risks, our Group believes that we have sufficient funding and in-house expertise to implement our business plan and to manage long development cycles which involve undertaking requirement analysis, software testing and usability testing. Notwithstanding these; our Group may experience design, marketing and other difficulties that could delay or prevent the development, introduction or marketing of our products and services, as well as new products and services and enhancements. To mitigate these possible adverse developments, our Group may collaborate with third parties to develop products and services on a timely and cost-effective basis. There can be no assurance that our Group is able to develop new products and services or enhancements to our existing products and services on a timely and cost-effective basis, or if our Group’s new products and services or enhancements fail to achieve market acceptance, or if one or more of our Group’s competitors introduce products and services that belter address customer needs or for any reason gain market share, our Group’s business, operating results and financial condition would be adversely affected.
4.1.8 Continuing demand for our Group’s products and services Our Group’s future results will depend on the overall demand for our Group’s products and services. Any economic slowdown may cause our Group’s customers to defer or terminate purchases or rental of our Group’s products and services or otherwise alter their usage patterns. Uncertainty in the economic environment may cause some businesses to curtail or eliminate spending on payment technology. In addition, our Group may experience hesitancy on the part of existing and potential customers to commit to continuing or new services from our Group. To date, our Group’s products and services have been well-received by our customers and our Group expects that enhancements and improvements of features, quick time to market and good technical service should ensure continuing acceptance of our products and services. 4. RISK FACTORS (Cont’d)
4.1.9 Future growth Our Group has grown since we started offering our Managed Electronic Payment Solutions. As at the LPD, our Group’s installed base of EDCPOS Terminals at Merchants’ outlets has reached approximately 5,300 units, and our Group has had to recruit and hire more personnel, modifY our processing systems and expand our operations to accommodate our growth. In addition, to achieve our Group’s growth targets as set out in our business plan, there may be significant strain on our Group’s management, fmancial, customer support, operational and other resources. There can be no assurance that our Group will be successful in managing our growth. Our Group’s proposed future plan and prospects will be dependent upon, amongst others, our Group’s ability to enter into strategic marketing and other arrangements on a timely basis and on favourable terms; hire and retain skilled management as well as fmancial, technical, marketing and other personnel; successfully manage growth (including monitoring operations, controlling costs and maintaining effective quality, inventory and service controls); and obtain adequate financing as and when needed. There can be no assurance that our Group will be able to successfully implement our business plan or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in our implementation or even deviation from our original plans. In addition, the actual results may deviate from the business plan due to rapid technological changes, and market as well as competitive pressures.
4.1.10 Reliance on Agency Managers Our products and services are marketed primarily through our in-house sales team and the Agency Managers. As such, our revenue is dependent also upon the efforts of our Agency Managers, and any growth in future sales volume will require an increase in the productivity of our in-house sales team and our Agency Managers. Our Group’s Agency Manager Programme allows our Agency Managers to represent our Group in eleven (II) locations as our sales and service centres. The Agency Managers have, as at the LPD, acquired 250 Merchants. The agreements eotered into between the respective Ageney Managers and our Group would prohibit the Agency Managers from directly or indirectly, own, maintain, engage in the operation of other directly competing business. However, these Ageney Managers are not bound to remain with our Group after the expiry of the agreements between our Group and the Agency Managers. Hence, these Agency Managers do not have an obligation to continue to market and sell our products, or to achieve any targets which may be set for them by our Group. In addition, the agreements entered into between the respective Agency Managers and our Group provides that the Agency Managers shall not, for a period of two (2) years after the termination of the agreements, engage in or participate in the operation of any business which is similar to our Group within a radius of ten (10) kilometres of the location specified in their respective agreements. However, there can be no assurance that the Agency Managers may not be attracted to other similar opportunities. Should this happen, and if the Agency Managers persuaded the Merchants to switch to other Financial Institutions, the business and performance of our Group may be adversely affected. Our Group recognises this risk and has taken steps to mitigate it by having in place eommission and motivation programmes organised from time to time to maintain the level of dedication, commitment and loyalty of the Agency Managers to our Group. In addition, our Group has in place agreements with the Agency Manager for a duration of up to ten (10) years and shall be automatically renewed for another period of up to ten (10) years on the expiry thereof until terminated by either party by giving not less than ninety (90) days notice prior to any renewal date. The salient terms of our Agency Manager Programme agreement are set out in Section 6.15(b) ofthis Prospectus. 4. RISK FACTORS (Cont’d) The enforceability of our Agency Manager Programme agreement entered into between our Agency Managers and our Group are governed by the laws of Malaysia. In the event of any default from our Agency Managers, our Group has the right to, amongst others, terminate the said agreement and the Agency Manager shall cease all such usage of our Group’s proprietary information and proprietary marks. In addition, for any liability for breach as a result of our Agency Manager’s default, the Agency Manager shall indemnify our Group for any losses or damages incurred by our Group. The Agency Manager Programme agreements are governed under Section 10 of the Malaysian Contracts Act, 1950 which deals with the contractual relationship of parties and constitute legal, valid and binding obligations which are enforceable against the parties under Malaysian laws and are structured to limit our Group’s exposure to liabilities which may arise from any breaches or defaults by our Agency Managers.
4.1.11 Credit Card eharged back risk Our Group is subject to the credit risks of our Merchants being unable to satisfy obligations for which our Group also may be liable. For example, our Group and our Merchants are contingently liable for transactions originally acquired by the Acquiring Bank that are disputed by the Card holders and charged back to the Merchants. If the Acquiring Bank is unable to collect this amount from the Merchants, due to the Merchants’ insolvency or other reasons, our Group will bear the loss for the amount of the refund paid to the Card holders. As at the LPD, there is no payment made or obligation force on us arising from our Merchant’s failure to satisfy their Credit Card charged back obligations for the past three (3) FYEs 2007 to 2009 and the FPE 2010. To mitigate these risks, our Group has in place a credit control monitoring process and upfront collection of terminal deposit as collateral as well as executing a customer agreement which allows our Group to take legal actions against any defaulted Merchants. Notwithstanding that, it is possible that a default on such obligations by one or more of our Group’s Merchants could have a material adverse effect on our Group’s business.
4.1.12 Financial risk We are reasonably comfortable with our present gearing position. Based on our proforma fmancial statements for the FPE 20 I0, our total borrowings of approximately RM214,000 represent a gearing ratio of 0.0 I times. Notwithstanding the above, there is no assurance that there will not be any future development or event, which will require us to seek additional capitals/funds and that if such additional capitals/funds are so required, they will be available or, if available, will be on terms and conditions satisfactory to us. . Further, the issue of additional equity in our Company in the future for the purpose of raising additional capitaVfunds, if any, may result in a dilution to the percentage equity holding of our shareholders upon our Listing.
4.1.13 Foreign exchange fluctuations Save for the purchase of the EDCPOS Terminals on demand basis which exposed our Group to foreign currency risks, our operations are not subject to foreign exchange risk as our revenue and operating expenses are denominated in RM. However, with BNM’s efforts, the exchange rate of RM vis-a-vis other major foreign currencies, which is being operated on a managed float basis, will be closely monitored where the value of RM is determined by economic fundamentals to ensure, amongst others, that the exchange rate of RM remains stable and close to its fair value. Notwithstanding with such efforts, there is no assurance that any currency control will not recur or any future significant fluctuations in foreign exchange rates and financial crisis will not occur, which may adversely affect our revenue and earnings. As at the LPD, we do not use forward contracts or other derivative instruments to mitigate this risk. Notwithstanding that, our Group may undertake hedging activities for future spending, if required, against foreign exchange fluctuations. 4. RISK FACTORS (Cont’d)
4.1.14 Protection of intellectual property rights Our Group’s success is also dependent on our ability to protect our intellectual property, which includes our proprietary technologies. Intellectual property laws in Malaysia afford protection in various forms, such as trademark protection, copyrights, patents and industrial design. Companies that deal heavily with intellectual property, such as software and hardware design, must therefore, take necessary precautions to safeguard against unlawful duplication, use and exploitation of these proprietary rights by third parties. Our Group enjoys copyright protection over the literary aspects of our products, including but not limited to the source code for software products, by virtue of the Copyrights Act, 1987. As at the LPO, our Group has appointed Naqiz & Partners as our trademark agent to facilitate the registrationofour logos as trademarks setout in Section6.17 ofthisProspectus. Our Group’s proprietary technology, which is primarily in the form of software, is protected by copyright laws applicable in Malaysia. These software comprises a series of computer programmes developed in-house to enable seamless integration between the EOCPOS Terminals and Host Application Server to facilitate CreditlDebit Cards payment transactions. In securing these rights, our Group has put in place several security measures to protect our proprietary technology, including never revealing the source codes of our Group’s software to our customers to whom the software is sold, and having built-in controls in some of the software developed by our Group which will lock a particular copy of the software onto the hardware on which it is running, thus preventing any unauthorised copying of the software. The nature of our Group’s software also acts as a barrier against illegal usage as specialised knowledge and familiarisation with the software is required to make it work, and most of our software requires special training and domain knowledge to develop or customise; hence, such software is often sold to customers bundled with our Group’s professional services. However, even with the steps taken by the Company to secure these rights, there can be no assurance that our Group will be able to protect our proprietary rights against unauthorised third party copying, use or exploitation, any of which could have a material adverse effect on our Group’s business, operating results and financial condition. Third parties may challenge or dispute our Group’s intellectual property rights in terms of, amongst others, title and third party intellectual property rights infringement and our Group 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 the disputes could be time consuming, cause delays in introducing new or improved products and services or require that our Group discontinue using the challenged technology, and could have a material adverse effect on our Group’s reputation, business, operating results and fmancial condition. Intellectual property generated by our employees during their course of employment are governed by the principles of “work for hire”, which permits our Company to retain the legal rights relating to such intellectual property save and except where an express alternative ownership arrangement is reached between our employee and our Company. However, as at the LPO, no such agreement has been entered into between our Group and any of our employees. 4. RISK FACTORS (Cont’d)
4.1.15 Change in or loss of MSC status MPSB and Sinatec were granted MSC status in 2001 and 2006 respectively by MDeC. MDeC is the body responsible for assessing and monitoring all MSC status companies. As MSC status companies, MPSB and Sinatec enjoy certain financial and non-financial incentives which are guaranteed under the Malaysian Government’s Bill of Guarantees for MSC status companies. Amongst others, MPSB and Sinatec are, by virtue of their MSC status, granted pioneer status by MITI under the Promotion of Investments Act, 1986, vide letters dated 30 April 2001 and 7 November 2006 respectively, and enjoy full exemption from paying Malaysian federal income tax for a period of ten (10) years. This exemption only applies in respect of income derived from MPSB and Sinatec’s MSCqualifying activities as set out in its application documents submitted to MDeC at the time when the subsidiaries applied for their MSC status and upon submission of the application for the determination of effective date of Pioneer Status under the Promotion of Investment Act, 1986. As at the LPD. both MPSB and Sinatec have been granted the MSC status. MPSB has enjoyed the benefits accorded in respect to the MSC status granted since 30 April 2001 whereas Sinatec has applied to MDeC for the effective date of its pioneer status. On 5 April 20I0, MDeC has informed Sinatec that they have submitted its application to the MITI for the determination and commencement of effective date of its pioneer status. On 23 June 20I0, the MITI has informed Sinatec that the effective date for the commencement of its pioneer status shall be 7 November 2006. MPSB and Sinatec will be subjected to pay statutory income tax upon the expiry ofits pioneer status. Apart from the tax exemptions, the incentives of having the MSC Status to our Group, amongst others, are as follows: (i) eligible for R&D grants that is exclusive to majority Malaysian ownership MSC Status companies such as large MSC Research Grant, Anchor Project for MSC Flagship Application, Thrust Project for Vertical Community and Special Grant which promote ICT adoption at national level;
(ii) MDeC provide a comprehensive regulatory framework of intellectual property protection and cyberlaws to facilitate and assist the development of a truly ICT and multimedia environment;
(iii) ensure freedom of ownership of companies; (iv) easy access to foreign expertise and investment; and
(v) profiling of our Group by MDeC’s Industry Development Division whose primary objective is to increase Malaysia ICT competitiveness and ICT business revenue growth.
Furthermore, whilst it is usual for MSC status to be conferred so long as MPSB and Sinatec continue to comply with the conditions for MSC status as set out in the grant of MSC status by MDeC, MDeC has the right to revoke or withdraw the subsidiaries’ MSC status at any time at its discretion. Although MPSB and Sinatec believe that they have and will continue to be able to fulfil the conditions of MSC status, there can be no assurance that MPSB and Sinatec will continue to retain their MSC status or that they will continue to enjoy the benefits accorded to MSC status companies. If MPSB and Sinatec lose their MSC status, they will cease to be entitled to the benefits accorded to MSC status companies. A loss or suspension of MSC status could subject MPSB and Sinatec to be liable to pay statutory income tax. The rest ofthis page is intentionally left blank 4. RISK FACTORS (Cont’d)
4.1.16 Dependence on our Managing Director and key management personnel Our present success and achievements are largely attributable to the concerted efforts and invaluable experience of our Managing Director and key management personnel. We believe that our continued success in the future will, to a certain extent, hinge on our abilities to retain our existing Managing Director and key management personnel. As such, loss of our Managing Director and/or key management personnel could have a material effect on our business, performance and continuing ability to compete effectively in the industry. We recognise the importance of our ability to attract and retain our key management personnel and have in place a human resource strategy, which includes the maintenance of a competitive remuneration package and the opportunities for long-term career development for our employees. In addition, we have included Pink Form Allocations for our eligible employees pursuant to our Listing with the objective of providing added motivation and incentive for them to remain with us through equity participation. Efforts have been made to promote and groom lower and middle management staff to gradually assume the roles and responsibilities undertaken by the senior management tearn to ensure continuity in our management team and thus providing a· clear management succession plan. Nonetheless, there can be no assurance that we will be able to recruit, develop and retain adequate number of highly skilled and motivated employees.
4.1.17 Security breaches or system failures The success of our Group’s business is also dependent on our ability to provide secured transmissions of confidential information over network accessible to the public which is subject to capacity limitations, breaches of security by computer viruses, sabotage, break-ins and other factors. As a mitigating factor, our Group has installed fIrewalis and anti-virus software to protect our e-commerce, loyalty and payment Hosting Application Servers and provided a 24-hour service helpdesk personnel with mobile phones. Despite a variety of network security and alternative measures taken by our Group, our Group cannot assure that unauthorised access, eomputer virusesJ accidental or intentional actions and other disruptions will not occur. Advances in technology capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breaeh of the technology that our Group uses to protect confidential customer and end-user data stored on or transmitted through our ecommerce, loyalty and payment Hosting Application Servers. In addition, any of these occurrences may cause systems failures, interruptions in service or redueed customer capacityJ which could have an impact on OUf Group’s ability to acquire, manage or service our customers or partners and could materially and adversely affect our Group. The rest ofthis page is intentionally left blank 4. RISK FACTORS (Cont’d)
4.1.18 Litigation Our Group’s agreements with our customers and the Acquiring Banks typically contain provisions designed to limit our Group’s exposure to potential product and/or service liability claims. As at the LPD, our Group has not experienced any material product and/or service liability claims. It is possible, however, that the limitation of liability provisions contained in our Group’s customer agreements and/or Acquiring Bank agreements may not be effective as a result of existing or future laws or unfavourable judicial decisions. As our Group has not purchased any product liability insurance, there is a risk that our Group’s interests may not be adequately protected in the event of a potential litigation. However, our Group, as a payment enable service provider that provides Managed Electronic Payment Solutions to our customers and the Acquiring Banks, hence, our Group’s liability is limited by the terms and conditions of the agreements between our Group and the customers and the Acquiring Banks. As at the LPD, our Group has adbered to the terms and conditions of our arrangements with our customcrs and the Acquiring Banks and our management will continue to comply with the terms and conditions in delivering our products and services which are generally non-mission critical solutions as failure or disruption of our solutions will not result in the failure of our customers and Acquiring Banks’ business operations. Save for the litigation risks as disclosed above, our Group does not anticipate litigation risks arising from the Merchants acquired by our Agency Managers as our Agency Managers are to adhere strictly to the operation manual provided by our Group in soliciting and acquiring Merchants. In the event should there be any non-adherence by any of our Agency Managers in their solicitation and acquisition of Merchants, our Group may be exposed to potcntial claims from the Acquiring Banks due to breach of representations and warranties. As such, we have taken proactive measures to mitigate any potential litigation arising therefrom by executing the Agency Manager Programme agreement. Detail of the salient terms ofAgency Manager Programme agreement is set out in Section 6.15 of this Prospectus. In addition, our Group has also entered into the following agreements with the Merchants and has not experienced any material product and/or service liability claims: (i) customer agreement that protects our Group from possibility of chargeback imposed by the .Financial Institutions; and
(ii) terminal rental/assignment agreement to protect our Group from the losses of terminal rental
income and terminals. These agreements entered with the Merchants limit our Group’s liabilities on matters such as obligations, compliance, authorisation of transaction, chargebacks and disputed transactions, liabilities, indemnities, confidentiality and trademarks. 4.1.19 Change in policy by Financial Institutions regarding Merchant Acquisition/recruitment The change in policy by Financial Institutions to conduct Merchant Acquisition and/or electronic payment services in-house rather than outsource to a third party provider would pose a threat to existing electronic payment solution providers, as this would translate to a loss of business in these areas for the service providers. Most industry players are cognizant of this possibility, and many have moved to mitigate this risk by offering additional services other than the existing Merchant Acquisition or Merchant services. These other services include internet, mobile and cash Card payment services; Card personalisation services; loyalty management services; and other ICT-related services, among others. 4. RISK FACTORS (Cont’d) 4.1.20 Lack of long-term contracts limits our ability to secure long-term and eonsistent streams of income from our eustomers Our Group has not entered into any long-term contracts with our customers for the provision of our products and services. Save for the MAITA Co-branded Card -Management of Loyalty Programme agreement entered into between Sinatec and EON Bank, which has fix duration, generally, any conlTact entered into by our Group spans over a period of two (2) to five (5) years. The lack of long-term conlTacts is mainly due to the present industry practice where Financial Institutions do not normally enter into long-term conlTacts for better priced service packages from other service providers. Consequently, the fmancial performance of our Group would be dependent on our ability to continuously secure new contracts on a consistent basis. Failure to do so may have a material adverse impact on our Group. However, our Group has established long standing and cordial relationships with majority of our customers which provides us with business continuity and growth and mitigate the absence of such long-term contracts. The rest ofthis page is intentionally left blank 4. RISK FACTORS (Cont’d)
4.1.21 Risks relating to conflict of interests As at the LPD, our Group’s principal activities are dependent on the relationships with the Acquiring Banks and their relative intents to acquire Merchants. Currently, our Group has entered into the following agreements with EON Bank and MBB respectively for the Merchant Acquisitions activities: (i) MATTA Co-branded card -Management of Loyalty Programme agreement dated 15 January 2008 unless otherwise terminated by either party due to breaches or non-compliance with the agreement (with EON Bank); and
(ii) External Sales Agent Merchant Recruitment agreement dated 15 September 2009 and expiring on 14 September 2011 (with MBB).
The above banks have business relationship of more than nine (9) years with our Group. We note the purposes for both the agreements maybe however similar, our Board is of the opinion that there is no conflict of interests between the External Sales Agent Merchant Recruitment agreement and MATTA Co-branded card -Management of Loyalty Programme agreement as the following salient differences between these agreements are summarised below; (i) MATTA Co-branded card -Management of Loyalty Programme agreement: EON Bank appointed Sinatee to recruit Merchants who wish to participate in the MATTA Loyalty Programme, manage and operate the MATTA Co-branded Card namely a Credit or prepaid Card which allows the Cardholders to earn MATTA Co-branded loyalty points and to obtain discounts, rebates or other privileges offered by any Merchant recruited under the MATTA ioyalty programme. This affinity programme was established for the MATTA community and EON Bank where the Merchants affiliated to the tourism industry were sourced and recruited.
(ii) External Sales Agent Merchant Recruitment agreement: MBB appointed MPSB to source and recruit interested parties to participate in its Card acceptance program in accordance with the selection criteria determined by MBB whereby MPSB shall install the required EDCPOS Terminals at the Merchants’ outlets to enable payments by way of a Charge, Credit and/or Debit Card. Unlike the MATTA Co-branded Card -Management of Loyalty Programme agreement which specifically targets Merchants affiliated to the tourism industry, this agreement with MBB is to source, recruit and install EDCPOS Terminals across the industry wide.
In addition to the above and as a mitigating factor, our management has incorporated separate legal entities in their own rights to undertake the scope as provided by the agreements. Premised on these, our Board is of the opinion that agreements entered by our Group will not give rise to any conflict of interest situation. Notwithstanding the mitigating factor, Naqiz & Partners, our legal adviser for the IPO has also given their views via their legal memorandum dated 20 August 20I0 to concur with our management’s opinion and adding that the services provided by the two (2) entities under each agreement are different and as such there would be no conflict of interest between the two (2) agreements.
4.1.22 Unfavourable economic, social and political conditions Any adverse change in the political, economic and regulatory environment and uncertamtles in Malaysia and regions where we operate could have unfavourable effect on our financial and business prospects. These include but not limited to the risk of war, terrorist attacks, riots, changes in political leadership, global economic downturn and unfavourable changes in the governmental policies such as changes in the methods of taxation, interest rates, licensing or introduction of new regulations and method of taxation in which we operate in. Whilst we would continue to take effective measures such as prudent financial management and continue seeking new markets, there is no assurance that any change to these factors will not materially and adversely affect our financial position or business in the future. 4. RISK FACTORS (Cont’d) 4.1.23 Economic costs of regulatory compliance There may be changes in general company and contract laws, and other specific legislation or regulations introduced by the Government such as the recently imposed service tax of RM50.00 per principal Card and RM25.00 per supplementary Card to be charged to each principal Cardholder may have adverse impact to our revenue. However, our Board does not expect the revenue of our Group to be materially affected. Unlike the service providers that focus on Credit Card holders acquisition will be materially affected due to the reduction of Credit Card applicants, our business activities do not include the procurement or acquisition of Credit Card holders. The Directors are unable to predict whether any of this potential legislation and/or regulation will be enacted or changed that may affect the operations of our Group in the future. Notwithstanding the abovementioned, our Group strives to keep abreast with the legislative and regulatory development and constantly upgrade our product offerings to counter any adverse impact in order to remain profitable. 4.1.24 Risk of disruption to our Business Process Outsourcing operations As at the LPD, all of our business activities are carried out within our rented premises except for our Business Process Outsourcing activities which is operating from Wisma EON Bank. In the provision of this service, .both EON Bank and our Business Process Outsourcing center has complied with the processes and security tests required by Visa International and MasterCard WorldWide in accordance with EMV standards to which, our Group has invested a substantial amount in installing, commissioning and professional work for adhering to these requirements. Our Board is of the view that should EON Bank decides to discontinue our Business Process Outsourcing activities on the aforementioned premise or re-evaluate the existing contract entered between EON Bank and Whatdevice due to reasons. amongst others, business right sizing or downsizing, OUf Business Process Outsourcing operations may be disrupted as it would have to source for new contract to utilise our equipment on a short notice and would have to incur relocation, installation and regulatory costs. However, our Board is of the view that our Group enjoys a cordial relationship with EON Bank for the past seven (7) years and this relationship is expected to continue. As at the LPD, our Board has no knowledge of any potential disruption to the operations of our Business Process Outsourcing. The rest ofthis page is intentionally left blank 4. RISK FACTORS (Cont’d)
4.2 RISKS RELATING TO TIlE INVESTMENT IN OUR SHARES 4.2.1 No prior market for our Shares Prior to our Listing, there was no public trading for our Shares. Accordingly, there can be no assurance that an active market for our Shares will develop upon our Listing or, if developed, that such market will be sustained. The Issue Price was determined after taking into consideration a number of factors including but not limited to our historical earnings, prospects and future plans, and our financial and operating history before the issue of the Prospectus. There can be no assurance that the Issue Price will correspond to the price at which our Shares will be traded on the ACE Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop and continue upon or subsequent to our Listing. The price at which our Shares will trade on the ACE Market of Bursa Securities after the IPO may be influenced by a number of factors including, amongst others, the depth and liquidity of the market for our Shares, investors’ individual perceptions of our Group, market and economic conditions, etc.
4.2.2 Failure / Delay in or abortion of the Listing Our Listing is exposed to the risk that it may be aborted or delayed on the occurrence of anyone or more of the following events; (i) force majeure events or events/circumstances, outside the control of our Group such as systemic interruption or failure of electricity or telephone service, which are beyond the control of our Company and/or Underwriter, arising prior to our Listing;
(ii) the identified investors fail to subscribe for the portion of the Issue Shares by way of private placement pursuant to our IPO;
(iii) the eligible employees and/or persons who have contributed to our success fail to subscribe for their respective portions of our Issue Shares allocated to them pursuant to the Pink Form Allocations; (iv) the Underwriter exercising their rights pursuant to the Underwriting Agreement discharging themselves from their obligations therein; and
(v) we are unable to meet the public shareholding spreads requirement, which is at least 25% of our total number of Shares for which listing is sought must be held by a minimum number of 200 public shareholders holding not less than 100 shares each upon the completion of our IPO and at the point of Listing.
In this respect, we will exercise our best endeavour to comply with the Listing Requirements with regard to paragraph (v) above. However, there can be no assurance that the abovementioned factors/events will not cause a delay in or non-implementation of our Listing.
4.2.3 Continued control by existing shareholders Upon Listing, the Promoters, substantial shareholders and person(s) connected with them will collectively hold a total of approximately 69.00% of our enlarged issued and paid-up share capital. Depending on how they choose to vote and because of their shareholdings, these shareholders will generally be expected to have significant influence on the outcome of certain mallers requiring the vote of our shareholders unless they are required to abstain from voting by law and/or as required by the relevant authorities. Nevertheless, as a step towards good cOrPorate governance, we have appointed two (2) Independent Directors and set up an Audit Commillee to ensure that, inter-alia, all future transactions involving related parties are entered into at arm’s length basis, on normal commercial terms which are not more favourable to the related parties than those generally available to the public and are not to the detriment of our minority shareholders. 4. RISK FACTORS (Cont’d) 4.3 OrnER RISKS 4.3.1 Forward-looking I Prospective statements Certain statements in this Prospectus are based on historical data which may not be reflective of future results and others are forward-looking in nature that are based on assumptions and subject to uncertainties and contingencies which mayor may not be achievable. Whether such statements would ultimately prove to be accurate depends upon a variety of factors that may affect our businesses and operations, and such forward-looking statements also involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, plans, performances and achievements, expressed or implied, by such prospective statements. Although we believe that the expectations reflected in such future statements are reasonable at this time, there can be no assurance that such prospective statements or expectations will prove to be correct in the future. Any deviation from the expectations may have a material adverse effect on our business and financial performance. The rest ofthis page is intentionally left blank