3. RISK FACTORS 3. RISK FACTORS IN EVALUATING AN INVESTMENT IN THE IPO SHARES, YOU SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS PROSPECTUS INCLUDING BUT NOT LIMITED TO THE FOLLOWING GENERAL AND SPECIFIC RISKS. 3.1 RISKS RELATING TO OUR BUSINESS AND OPERATIONS 3.1.1 Business Risks Our Group’s operations are subject to the general business risks inherent in the ICT services industry. These may include, among others, greater competition faced as a result of entry of new players and product innovation by our competitors, changes in economic, government policieslregulations, business and credit conditions, sufficiency of skillful and experienced workforce as well as materialisation of our future plans. Competition among operators in the ICT training and certification industry is moderate based on various consideration factors including number of service providers of ICT training and certification, classroom based training environment, and winning Government contracts to service a large number of participants. Competition among operators that are involved in the general distribution of proprietary software licences is intense. However, the competitive intensity for the management and distribution of proprietary software licences to government bodies and large organisations is low due to various consideration factors including the following:(i) The number of operators that are able to manage and distribute to large private and public organisations are few;
(ii) There are significant value-adding in the management of proprietary software licences which, among others, include keeping current the inventory of all licences under management, implementing a programme for updating software licences, and having a system for adding and deleting software licences; and
(iii) Operators that are able to distribute and manage proprietary software licences to large organisations are authorised by product owners. Product owners normally authorise only a small number of organisations to distribute and manage their proprietary software licences to large organisations. In many cases, product owners will do their own distribution and management to large organisations, and not have any authorised third parties. We seek to limit these risks through our continuous efforts in, among others, undertaking R&D activities to stay ahead of other players, maintaining good relationship with our customers and suppliers and reviewing our business strategies constantly to keep ourselves abreast of the latest developments in the ICT services industry and the business environment, retaining the service of quality instructors, providing adequate training to existing employees and recruiting new talents who can contribute to our business growth. Nevertheless, there is no assurance that any change to the mentioned risks would not have an adverse effect on our business performance in the future. [The Rest Of This Page Is Intentionally Left Blank] 3. RISK FACTORS (Cont’d)
3.1.2 Dependency On Major Customer And Government Contracts For FYEs 2008, 2009 and 2010, our top customer, the MOHE, contributed 67.41%, 90.92% and 63.14% of our total revenue respectively. There is a risk that losing this major customer may adversely affect our financial performance. Since 2006, we have been contracted by the MOHE to provide ICT training and certification, and also software licence distribution and management for public higher education institutions in Malaysia under the 3P Programme and MUSE Programme respectively. This indicates a stable business relationship and will provide the basis for continuing business growth. In 2010, we managed to reduce our dependency on the MOHE by securing new contracts from customers such as the IRB, Microsoft (Malaysia) Sdn Bhd and the MOE. Our revenue is largely derived from government contracts. For FYEs 2008, 2009 and 2010, revenue derived from government contracts contributed 98.78%, 96.35% and 89.47% of our total revenue respectively. There is a risk that losing government contracts may adversely affect our financial performance. Nonetheless, we believe that our established track record and reputation which is associated with quality, reliability, service excellence, good deliverable record as well as our continuing business relationship with our major customers will provide the basis for continuing business growth.
3.1.3 Dependency On Major Supplier For FYEs 2008, 2009 and 2010, Microsoft Regional Sales Corporation from Singapore accounted for 27.93%, 44.64% and 67.44% of our Group’s total purchases respectively. This was primarily for the purchases of Microsoft software licences including those under the Microsoft MLA, and also other licences under the Microsoft CASA and Microsoft SELECT for public higher education institutions in parallel with the 3P Programme. We have been dealing with Microsoft for approximately seven (7) years. This indicates a continuing and stable business relationship with our major supplier. Nevertheless, there is no assurance that our dependency on the major supplier would not affect our future business operations.
3.1.4 Dependency On Key Management And Skilled Personnel, Particularly Dr Abu (i) Dependency On Key Management And Skilled Personnel We are a service-based company providing ICT training and certification services and software licence distribution and management. To a large extent, the continuous growth and success of our Group is dependent on the expertise and capabilities of our key management, which include our Executive Directors, and skilled personnel. The loss of the services of a number of our key management and skilled personnel without suitable and timely replacement may affect our operations and financial performance. Recognising the importance of human capital intellectual to our Group and as part of our management succession plan, we will retain experienced and skilled personnel by haVing attractive remuneration package and providing continuous training and creating a conducive working environment to our employees. We will also empower our employees to assume more responsibilities and groom outstanding personnel as well as attract new talents to be part of our management team. In this respect, we have designed some plans such as allowing our eligible employees to participate in the IPO to instill a sense of ownership in our Company as well as to align their interests with that of our business. 3. RISK FACTORS (Cont’d) Nevertheless, there is no assurance that we are able to retain our key management and skilled personnel nor can we assure our success in recruiting suitable and qualified personnel in the future. (ii) Dependency On Dr Abu We rely on our Group’s Chief Executive Officer, Dr Abu, who has been instrumental in the development, growth and success of our Group and under his leadership, our Group has secured various contracts from the Government. As such, it is important for our Company to retain the services of Dr Abu to grow our business as well as to maximise shareholder value for our Company. If we were to lose the services of Dr Abu and are unable to find a suitable replacement in a timely manner, we may face the risk of losing the contracts secured thus far and may not be able to secure new contracts. Accordingly, the future growth of our Group may be adversely affected. Notably, Dr Abu is also the promoter and substantial shareholder of our Group, of which his profile is as set out in Section 5.2.2(ii) of this Prospectus. Prior to the implementation of the Listing Scheme as set out in Section 4.2 of this Prospectus, Dr Abu holds 89.47% equity interest in PSSB. In implementing the Listing Scheme, Dr Abu sold 9,500,000 Shares to a strategic shareholder, Loet Holding Inc. In addition, Dr Abu is selling 77,000,000 Shares under the Offer for Sale. Upon completion of the Listing Scheme, Dr Abu’s shareholding in our Company wilt be diluted to 41.20%. Notwithstanding the dilution, Dr Abu has given an undertaking letter dated 8 June 2011 to our Board of Directors stating that:(a) he will remain as the promoter and main driver of our Company and will stay committed to growing our business for long term, in line with the objectives of the Skim Jejak Jaya Bumiputera (USJJB”), a programme which was inspired in 2007 by the Malaysian Government to elevate Bumiputera entrepreneur capabilities in the economy, particularly in the area of equity ownership. It is a scheme which monitors the success of Bumiputera companies, to help boost capabilities of entrepreneurs, particularly in the area of equity ownership; and
(b) he will perform his obligations and will continue to lead the management team of our Group in delivering the projects secured under the SJJB schemes successfully,
during his tenure of the service agreement dated 8 June 2011 entered into between our Company and Dr Abu. Please refer to Section 5.8 of this Prospectus for the salient terms of the Service Agreement. [The Rest Of This Page Is Intentionally Left Blank] 3. RISK FACTORS (Cont’dj
3.1.5 Licences And MSC Status Awarded To Our Group PSSB is currently registered as an ICT contractor and Bumiputera contractor with the MOF. PSSB is also registered as a “Category An training provider with Pembangunan Sumber Malaysia Berhad. Such registrations are crucial in enabling us to win contracts and to provide ICT training and certification services. In addition, PSSB has been granted the MSC Status and the Pioneer Status by the Government of Malaysia, as represented by the MOF and the MITI, since 2005. Our Pioneer Status is valid until 2015. The MSC Status and the Pioneer Status allow us to enjoy financial and non-financial incentives. Notwithstanding the above, the Malaysian Government has the right to revoke/withdraw or refuse to renew the licences and MSC Status awarded to us if we do not fulfill and/or breach any conditions imposed by the Government. While we endeavour to comply with all the conditions imposed by the Government at all times, we can give no assurance that we will continue to retain our ICT and training provider registrations as well as our MSC Status. Any changes in our registrations with the Government and the MSC Status granted to us could materially and adversely affect our business, operating results and financial condition.
3.1.6 Foreign Exchange Exposure Our business may be affected by foreign exchange fluctuations as a certain percentage of our purchases and sales are transacted in USD. For FYE 2010, 75.38% of our total purchases and 5.18% of our total revenue were denominated in USD. In mitigation, we normally factor a buffer to cater for foreign exchange fluctuations in our quotations. We will monitor foreign currency risk closely and manage it to an acceptable level. Our management may consider using certain hedging mechanism in the future when the need arises. Notwithstanding the above, there is no assurance that fluctuations in foreign exchange will not adversely affect our future business performance.
3.1.7 Dependency On Securing New Contracts Our revenues are largely derived from medium-term and long-term contracts. It is generally very difficult to predict whether and when we will be awarded such contracts as they frequently involve lengthy and complex processes including the following:(i) Undertaking a preliminary needs analysis of each division as well as the overall organisation for scoping of project;
(ii) Preliminary solution to meet the potential customers needs and expectations;
(iii) Preparation of proposal and quotation documents such as detailed costing, programme delivery and schedule, and logistics of training and test centres; (iv) Preparation of user requirements analysis and evaluation plan; and
(v) Negotiation and finalising of contracts.
Failure to secure any new contracts could affect our future financial performance. Nonetheless, we believe that our established track record and reputation which is associated with quality, reliability, service excellence, good deliverable record as well as our continuing business relationship with our major customers would provide us with a key advantage when submitting our proposals for new contracts. 3. RISK FACTORS (Cont’d) 3.1.8 Political And Economic Risks Our Group’s operations and profitability may be affected by new development in political situation and economic conditions in Malaysia. Such uncertainties include but are not limited to changes in the political leadership, slowdown in economy, new policies and regulations which may impose and/or increase restrictions on imports, the conduct of business as well as changes in interest rates and Government’s budget and spending policies. Notwithstanding the macro uncertainties which are beyond our control, we believe that the recent initiatives by our Government in promoting ICT literacy within the Malaysian community will contribute positively to our Group’s business prospect. In addition, in the event of an economic slowdown, it is likely that our Government may implement expansionary fiscal policies to stimulate the economy. 3.2 RISKS RELATING TO OUR INDUSTRY 3.2.1 Dependency On Certified Instructors The operation of ICT training and certification is highly dependent on the knowledge and skills of instructors. Any shortage in certified instructors will have a significant impact on the business operations of ICT training and certification organisations. (Source: Independent Assessment of the ICT Services Industry Focusing on Professional ICT Training and Certification, and Distribution of Proprietary Software Licences in Malaysia prepared by Vital Factor) As at the LPD, we have two (2) certified master trainers who are involved in developing our blueprint for training comprising design, formulation and administration of training procedures. The training blueprint will be used as a guide for trainers to carry out their tasks, and to ensure that training conducted complies with our standards and procedures. As at the LPD, we have two (2) Autodesk certified trainers and one (1) certified trainer for Microsoft Office applications. In addition to our own internal certified instructors, we engage external certified trainers to undertake ICT training classes under our control and supervision. It is important that we are able to source for certified instructors and retain their services as the industry may at times, face a shortage of certified instructors. In this respect, we have made continuous efforts in looking after our external instructors by paying them competitively for their services and providing them with a conducive working environment. In addition, we maintain a database of approximately 300 external certified trainers, to ensure that we are not dependent on anyone single provider. Nevertheless, there can be no assurance that any shortage of certified instructors would not adversely affect our future business performance. 3.2.2 Changes In Distribution Methods For Proprietary Software Licences Currently, proprietary software licences are distributed via many methods. They include retail outlets, distributors for volume purchases, bundled with hardware and software, and through the Internet. There is a risk that the distribution of proprietary software licences may eventually be substantially through the Internet. Alternatively, product and technology owners may decide to undertake their own distribution. This could have a negative impact on existing distributors. Operators that are able to provide value-adding services on top of distribution of proprietary software licences will be in a better position to continue to be relevant. Value adding could include the management of software licences, which covers procurement, keeping accurate inventory, ensuring licensing compliance, managing updates and new software, provision of training and certification, and others. 3. RISK FACTORS (Cont’d) (Source: Independent Assessment of the ICT Services Industry Focusing on Professional ICT Training and Certification, and Distribution of Proprietary Software Licences in Malaysia prepared by Vital Factor) We are engaged in the software licence distribution and management based on bulk or volume basis covering various types of software licences including applications, operating systems, communications, databases, and system and development tools and utilities. Our ability to undertake software licence distribution and management is highly synergistic to our other core business activity of providing ICT training and certification. As we are partners with many of the global technology and software vendors and organisations for the provision of training and certification of their products and services, it was a natural business extension to also distribute and manage their product licences. Nonetheless there is no assurance that any changes in distribution methods for proprietary software licences will not impact on our future business performance.
3.2.3 Advances In Technologies And Products The generally rapid rate of technological advances in ICT products and services may lead to the rapid obsolescence of, among others, hardware, software and ICT training and certification courses that are focused on outdated technologies and products. There is a risk that demand for an operator’s products and services may decline as newer technologies and products are developed and introduced. The ICT industry is dynamic and is constantly evolving. As technologies and products become obsolete, new or improved technologies and products will be created to replace them. These new and improved technologies and products will continue to provide business opportunities. Operators in the ICT industry that constantly review and update their products and services to meet evolving technologies and product changes will continue to be relevant to meet the needs of the ICT industry and users of ICT. (Source: Independent Assessment of the ICT Services Industry Focusing on Professional ICT Training and Certification, and Distribution of Proprietary Software Licences in Malaysia prepared by Vital Factor) We recognise that R&D is a critical success factor for companies to remain competitive and bring innovations to the society. Through our R&D efforts, we have launched our first in-house developed ICT certification programme, namely “IC CITIZEN” for the global market in 2010. Moving forward, as part of our future plans, we will undertake more R&D activities and incorporate a continuous process of introducing new and upgrading existing training programmes and certifications to keep up with technological and software advances, especially in tandem with our technology and software vendor partners. [The Rest Of This Page Is Intentionally Left Blank] 3. RISK FACTORS (Cont’d)
3.2.4 Competition Our business faces normal competition from other providers of ICT training and certification, and software licence distribution and management in Malaysia. In normal competitive condition, the industry is subjected to normal supply and demand conditions moderated by the price mechanism. Operators compete on product and service differentiations, and other factors of competition. However, pricing for software licensing is mainly dictated by the owner of the product or technology. As such, resellers like our Group that distribute third party software licences have to abide by the pricing guidelines from their principals or product owners, like Microsoft. The ability to win contracts from the Government is a very significant competitive factor. This is because winners of Government contracts are commonly provided with high value contracts, and in most cases being the only one or one of very few organisations able to serve one or several defined user groups. As such, winning Government contracts reduces the competitive pressure from other operators in the industry. (Source: Independent Assessment of the ICT Services Industry Focusing on Professional ICT Training and Certification, and Distribution of Proprietary Software Licences in Malaysia prepared by Vital Factor) Currently our Group’s key business advantage is that a significant part of our business is derived from winning Government contracts. These contracts provide our Group with a strong platform of assured revenue stream at least till the medium term, to further expand our business. Our business is focused on high value contracts where each contract services a large group of individual users or organisations. Our strategy of focusing on high value contracts will enable us to grow our business whilst optimising our sales and marketing resources for maximum gains. Thus, we target customers that will enable us to deliver our services to large user group of individual or organisations. Furthermore, our two (2) core business activities are highly synergistic, where we commonly provide ICT training and certification together with the supply of licences for the software that we are training and certifying. Nonetheless there is no assurance that our Group will be able to continue to be competitive in the future in light of competition from other existing and potential players in the industry.
3.2.5 Availability Of Freeware Freeware is software that users can legally use without paying any fees to the owner of the software’s IP rights. An example of freeware is an Internet-based email application. The ready availability of freeware is a risk to operators, including providers of software licences, who charge a fee to users for the use of their software. However, the range of freeware that is currently available is generally limited to more generic and basic applications. Developers of freeware are typically unable to provide users with value-added services such as consulting services, customisation, or to offer managed services and extensive technical support. (Source: Independent Assessment of the ICT Services Industry Focusing on Professional ICT Training and Certification, and Distribution of Proprietary Software Licences in Malaysia prepared by Vital Factor) Notwithstanding the above, there is no assurance that the availability of freeware will not have an adverse effect on our business performance in the future. 3. RISK FACTORS (Cont’d)
3.2.6 Software Piracy Software can be easily copied, replicated and distributed. Unauthorised copying, replication and distribution deny revenue that is due to the owners of the software, which may have a negative effect on their financial performance. Nevertheless, there is a strict stance on curbing software piracy through various Government efforts including the introduction of various legislations, such as, the Trade Marks Act 1976, Patents Act 1983 and Copyright Act 1987, and confiscation of pirated software to safeguard intellectual property rights, w~ich encourages consumers to acquire proprietary software licences throl1gh legitimate channels and sources. (Source: Independent Assessment of the ICT Services Industry Focusing on Professional ICT Training and Certification, and Distribution of Proprietary Software Licences in Malaysia prepared by Vital Factor) The potential risk posed by software piracy to our business is mitigated by the contracts that we have secured to supply licensed software to our customers. We are of the opinion that it is unlikely that our customers, such as the MOHE, will use pirated software. Furthermore, suppliers of pirated software are not able to provide recognised ICT training. Users of pirated software will not be able to obtain recognised ICT certification, which can only be granted by technology and software vendors. Notwithstanding the above, there is no assurance that software piracy will not have an adverse effect on our business performance in the future. 3.3 RISKS RELATING TO INVESTMENT IN OUR SHARES 3.3.1 No Prior Market For Our Shares There has been no prior public market for our Shares. There can be no assurance that an active public market will develop or be sustained after our Listing or that the market price of our Shares will not decline below the IPO Price. The IPO Price for our Shares is determined after taking into consideration a number of factors, including but not limited to, our operating and financial history and condition, our business strategies, competitive advantages, future plans and prospects, and the outlook of the ICT services industry, and may not be indicative of the market price of our Shares after our Listing. There can be no assurance that the IPO Price will correspond to the price at which our Shares will trade on the Main Market of Bursa Securities upon or subsequent to our Listing. [The Rest Of This Page Is Intentionally Left Blank] 3. RISK FACTORS (Cont’d)
3.3.2 Capital Market Risks And Share Price Volatility The performance of the local bourse is very much dependent on external factors such as the performance of the regional and world bourses and the flows of foreign funds. Sentiments are also largely driven by internal factors such as the economic and political conditions in Malaysia as well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risk to the market price of the listed securities. In addition, the market price of our Shares may be highly volatile and could fluctuate significantly and rapidly in response to, amongst others, the following factors, some of which are beyond our control:(i} variations in our results of operations; (ii) success or failure of our management team in implementing business and growth strategies; (iii) gain or loss of an important business relationship; (iv) changes in securities analysts’ recommendations, perceptions or estimates of our financial performance;
(v) changes in conditions affecting the industry, the general economic conditions or stock market sentiments or other events or factors;
(vi) changes in market valuatio’ns and share prices of companies with similar businesses to our Company that may be listed on Bursa Securities;
(vii} additions or departures of key personnel; (viii) fluctuations in stock market prices and volume; or (ix) involvement in litigation. Although we are committed to the sound management of our business, there is no assurance that the market price of our Shares will not be subject to volatility, due to market sentiments. Nevertheless, our profitability is not dependent on the performance of Bursa Securities, as our business activities have no direct correlation with the performance of securities listed on Bursa Securities.
3.3.3 Control By Promoters Upon our Listing, our Promoters, as set out in Section 5.1 of this Prospectus, will hold approximately 41 .20% of our enlarged issued and paid-up share capital. As a result, they will still be able to, in the foreseeable future, effectively control our business direction and management as well as influence the outcome of certain matters requiring the vote of our shareholders unless our Promoters are required to abstain from voting by law and/or by the relevant guidelines or regulations. Nevertheless, as a step towards good corporate governance, we have appointed four (4) Independent Directors and set up an Audit Committee to ensure that, inter alia, all future transactions involving related parties, if any, are entered into on an arms’-Iength basis, or normal commercial terms that are not more favourable to the related parties than those generally available to third parties and are not to the detriment of our minority shareholders. 3. RISK FACTORS (Cont’dj
3.3.4 Payment Of Dividends We are principally an investment holding company and our core operations are carrieg out through our subsidiaries. Therefore, our major source of income comprises dividends and other distributions received from our subsidiaries. Our ability to pay dividends or make other distributions to our shareholders is dependent on several factors such as the future financial performance and cashflow position of our subsidiaries and covenants in our existing/future loan agreements.
3.3.5 Future Fund Raisings May Dilute Shareholders’ Equity And/Or Restrict Our Operations We may require additional funding for our future growth. This may result in dilution of our shareholders’ equity, or restrictions imposed by additional debt funding. Our capital requirements are dependent on, amongst others, our business, the availability of our resources for attracting, maintaining and enlarging our customer base and the need to maintain and expand our servicing facilities. In addition, we may need additional capital expenditure for mergers and acquisitions or investments. Any issue of Shares or other securities to raise funds will dilute shareholders’ equity interests and may, in the case of a rights issue, require additional investments by shareholders. Further, an issue of Shares below the then prevailing market price will also affect the value of Shares then held by investors. Dilution in shareholders’ equity interests may occur even if the issue of Shares is at a premium to the market price. In addition, any additional debt funding would increase our gearing ratio and may restrict our freedom to operate our business as it may have conditions that:(i) limit our ability to pay dividends or require us to seek consents for the payment of dividends;
(ii) increase our vulnerability to general adverse economic and industry conditions;
(iii) require us to dedicate a portion of our cash flow from operations to repayments of our debt, thereby reducing the availability of our cash flow for capital expenditures, working capital and other general corporate purposes; and (iv) limit our flexibility in planning for, or reacting to, changes in our businesses and our industry. If we fail in obtaining more funds to meet requirements for our business,-merger and acquisition plans or investments, we may not be able to implement future plans that are essential to our growth.
3.3.6 Failure Or Delay In Our Listing The occurrence of anyone or more of the following events, which is not exhaustive, may cause a delay in or cancellation of our listing on the Main Market of Bursa Securities:(i) the identified investors fail to subscribe to the portion of IPO Shares intended to be placed to them although they have furnished their irrevocable undertaking letters to subscribe for such Shares;
(ii) the Sole Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations thereunder;
(iii) we are unable to meet the public spread requirement as determined by Bursa Securities i.e. at least 25% of our enlarged issued and paid-up share capital must be held by a minimum number of 1,000 public shareholders holding not less than 100 Shares each at the point of our Listing; or 3. RISK FACTORS (Cont’d) (iv) we are unable to obtain permission from Bursa Securities for our Admission to the Official List and for the quotation of our entire enlarged issued and paid-up share capital on the Main Market of Bursa Securities. In such an event, subject to restrictions set out in Section 3.3.7 of this Prospectus, we will return in full without interest, all monies paid in respect of any applications accepted. Nevertheless, our Directors will endeavour to ensure compliance with the various requirements for our successful Listing.
3.3.7 Delay Between Admission And Trading Of The IPO Shares Delays in the Admission and the commencement of trading in shares on Bursa Securities have occurred in the past. In respect of the Public Issue Shares comprised in the IPO Shares, following their allotment and issue to investors, a return of monies to such investors may be effected by way of either a repurchase by our Company of those shares at the IPO Price, or by way of a reduction of our share capital. A capital reduction would require the approval by special resolution of our shareholders and approval of the Court. Further, such capital reduction shall not be effected if on the date the reduction is to be effected, there are reasonable grounds for believing that we are, or after the reduction would be, unable to pay our liabilities as they become due. There can be no assurance that monies can be recovered within a short period of time. If Bursa Securities does not admit our Shares for Listing, the market for our Shares will be illiquid and it may not be possible to trade our Shares. This may also have a materially adverse effect on the value of our Shares.
3.3.8 Disclosure Regarding Forward-Looking Statements Certain statements in this Prospectus are based on historical data that may not be reflective of the future results, whilst others are forward looking in nature and are subject to uncertainties and contingencies. All forward looking statements are based on expectations and assumptions made by our Board, and although believed to be reasonable, are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. In light of these and other uncertainties, the inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us, the Offeror or our Adviser, that our plans and objectives will be achieved. [The Rest Of This Page Is Intentionally Left Blank]