Pursuant to Paragraph 9.19(37) of the Main Listing Requirement of Bursa Malaysia Securities Berhad, the Board of Directors of Zelan Berhad (“Zelan” or “the Company”) wishes to announce that the Company’s External Auditor, Messrs Afrizan Tarmili Khairul Azhar PLT had expressed their unqualified opinion with material uncertainty related to going concern in the Audited Financial Statements of the Company for the financial year ended 31 December 2021.

Extract of the Auditors’ Report:

Material uncertainty related to going concern

We draw attention to Note 2.1(i) in the financial statements, which indicates that the Company incurred a net loss of RM3.04 million during the year ended 31 December 2021 and, as of that date, the Group and the Company’s current liabilities exceeded its current assets by RM186.89 million and RM21.67 million respectively. As stated in Note 2.1(i), these events or conditions, along with other matters as set forth in Note 2.1(i), indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

 Independence and other ethical responsibilities

We are independent of the Group and of the Company in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants (“By-Laws”) and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (“IESBA Code”), and we have fulfilled our other ethical responsibilities in accordance with the By-Laws and the IESBA Code.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the Group and of the Company for the current year. These matters were addressed in the context of our audit of the financial statements of the Group and of the Company as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Revenue and costs recognition- construction contracts

The Group recognises revenue from construction contracts over time in the Consolidated Statement of Comprehensive Income. Progress of completion is measured using the input method which is based on the contract costs incurred up to the end of the reporting period as a percentage of the estimated total costs of the project.

The Group recognised revenue and gross loss from construction contracts of RM20.39 million and RM3.83 million respectively for the financial year ended 31 December 2021.

Revenue recognition of a construction contract is inherently complex and we focused on this area because there are significant management estimates and judgment involved in determining the:

⦁ Stage of completion;

⦁ Extent of the construction costs incurred to date;

⦁ Estimated total construction costs; and

⦁ Need to estimated liquidated ascertained damages ("LAD") on projects where the estimated completion dates are beyond the contractual completion dates.

Refer to Note 3 on critical accounting estimates and judgements, Note 2.21 on summary of significant accounting policies and Note 4 and 5 to the financial statements.

In addressing this area of audit focus, we performed, amongst others, the following procedures:

1. Tested the operating effectiveness of the key controls in respect of the review and approval of project budgets to assess the reliability of these budgets.

2. Identified and assessed the significant estimates and judgements made by management on the recognition of revenue and costs arising from construction contracts. This was performed by corroborating the stage of completion and extent of costs incurred to date on major projects by agreeing to internal or external quantity surveyors’ latest valuations.

3. Agreed on the cost incurred, on a sample basis, to the supporting documentation such as subcontractor claim certificates and invoices from vendors.

4. Assessed the reasonableness of the estimated total construction costs of major projects by agreeing to support documentation such as approved budgets, quotations, correspondences, contracts, and variation orders with sub-contractors.

5. Assessed the cause of delays, inspected correspondence with project owners and corroborated key judgement applied by management in assessing any need for LAD to be provided to determine the final account of the respective project.

Steps taken or proposed to be taken to address the key audit matters that relate to the material uncertainty to going concern as mentioned in the Auditor’s Report with the proposed timeline below.

The validity of the going concern assumption is dependent upon the following:

i. Ability of the Group to generate sufficient cash from its operations;

ii. Monitor and manage the progress of its existing construction projects. The Group will engage the project owners on potential extension of time for the on-going projects which may be delayed;

iii. Re-evaluate current contracts to optimise potential revenue and progressively reduce costs on the job scopes and services provided;

iv. Negotiate with subcontractors on the terms and timing of settlement payments for ongoing and completed projects; and

v. Receipt of retention sum from the main contractor within 12 months after the current reporting date for completed projects.

As at the date of this report, there is no reason for the Directors to believe that the Group will not generate sufficient cash from its operations within the next twelve months from the reporting date to repay the existing borrowings, complete the projects in progress and meet working capital. Accordingly, the financial statements of the Group does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary if the Group is unable to continue as a going concern.

This Announcement is dated 18 May 2022