Final Results

Kenetics Group Limited 10 April 2007 Kenetics Group Limited ('Kenetics' or the 'Group' or the 'Company') Preliminary Results for the Year Ended 31 December 2006 Kenetics Group Limited (Kenetics or the Company), the Radio Frequency Identification (RFID) company focused on Security and RFID systems and products, announces the Preliminary Results for the year ended 31 December 2006. Financial Highlights • Revenue of £ 316,176 (2005: £ 916, 942) • Pre-tax losses of £ 449,034 (2005: Pre-tax profit of £303,122) • Free Cash position as at end of the year of £ 290,417 (2005: £ 167,372) Operational Highlights • Listed on AIM in August 2006 • Established a subsidiary in Beijing to tap business opportunities in China • Embarked on the development of new GEN 2 product lines • Implemented structural changes to improve operational efficiencies • Entered into technical collaborations with two major chip manufacturers to develop RFID products Commenting on the Preliminary Results, Ken Wong, Chairman of Kenetics said: 'The Group had a challenging 2006 which resulted in the company falling into the red after three years of profitability. Nonetheless, the listing has improved the international profile of the company and has provided us a platform to grow the business. With the implementation of structural changes almost completed and the launch of the new range of GEN 2 product lines, we are confident that the Group is in a strong position to recover from its temporary setback and to grow the business. 2007 is expected to show a marked improvement. ' Contact: Ken Wong Kenetics Group Limited Tel: +65 9616 6883 Tim Thompson Buchanan Communications Tel: + 44 20 7466 5000 Nandita Sahgal Insinger de Beaufort Tel: + 44 20 7190 7000 Chairman's Statement Introduction This is the first financial result since Kenetics was admitted on AIM of the London Stock Exchange on 18 August 2006. It marked the transformation of the Company from a start-up in 2001 to a full-fledged publicly-listed corporation. The Company raised £ 827,000 in pre-IPO funds before listing the company on AIM, through means of an introduction. We believe our listing on AIM has significantly improved our profile internationally, provided us with a platform to grow the business and paved the way for us to work closely with many global partners. Financial Results Group sales in 2006 amounted to £ 316,176, a decrease of 66% on the prior period (2005: £ 916,942). Operating expenses were £ 765,297 (2005: £ 665,810). The loss before tax amounted to £ 449,034 against a profit before tax of £ 303,122 for 2005. The decrease in sales was the result of delays in the completion of some projects and the deferral of several other major projects to 2007. As a result of the delayed projects, additional resources had to be committed to bring these projects back on track. Higher costs were incurred which also contributed to the loss for 2006. On a more positive note, we are pleased to mention that some of these deferred projects have already begun and these should deliver improved sales for the company in 2007. During the year, the Kenetics Innovations (Beijing) Co Limited subsidiary was established to spearhead the Group's business in China. Start-up expenses relating to the establishment of the subsidiary have contributed to the increase in operating expenses for the Group. Free cash at the end of the year was at £ 290,417 (2005: £ 167,372). The increase is due mainly to proceeds from the issue of ordinary shares of the Company prior to the listing on AIM. As the Company is in an early stage of development, the Directors do not feel it appropriate to recommended payment of a dividend. Sales and Marketing As reported in the half-year results ended June 2006, two projects for our ODM (Original Design Manufacturer) customers were delayed and not completed as scheduled. In addition, a key ODM RFID project with Singapore's Housing Development Board that we expected to be launched in 2006 was deferred to 2007. We are pleased to announce that this project, with a sales value of about £ 250,000, was secured by the Company's Singapore subsidiary in February 2007. Delivery began in March 2007 and it is expected that the project will be completed within 12 calendar months. In addition, the anticipated projects in China have also been revived and we are expecting the projects to begin in Q2 of 2007. During the second half of 2006, we commenced the development of a new generation of product lines to meet market requirements. We are delighted to announce that two of these products have been developed in collaboration with major global partners. One of these products is a RFID reader incorporating Intel's new Integrated GEN2 Ultra High Frequency (UHF) R1000 Reader Chip Platform. The product is expected to be ready for the market in the second quarter of 2007. We believe that these collaborations will open up business opportunities for the Company in Europe and the US and are expected to bring immediate revenue opportunities in 2007 and further growth in 2008. We are optimistic that 2007 will bring greater sales revenues and opportunities for the Company. We are currently exploring a number of different options to extend our European marketing and sales network, including the setting up of a European sales office to manage our sales distribution channels. With the new range of products and Kenetics' entry into the European and US markets the Board is confident for the medium term business outlook. Operating Review It became apparent in 2006 that the Company needed to improve its management structure and operating procedures. During 2006, the Company did not sufficiently monitor the progress of several projects, which affected revenue generation and the profitability of the Company. Manpower turnover and the lack of experienced RF engineers had also contributed to the slow progress made in both the development of new products and the completion of ODM projects. Despite these challenges, several measures were implemented in 2006 to improve operational efficiency. These include: • Putting in place a Project Management System to plan and monitor on-going projects • Intensifying recruitment efforts especially for capable technical staff • Tracking sales performance, retaining customers and monitoring project tender opportunities • Establishing financial procedures and practices for efficient use of resources • Improving production processes and controlling work in progress For 2007, the management will focus on the following operational actions: • Continue to recruit, retain and develop capable technical staff • Strengthen the middle management team • Accelerate the establishment of new distribution channels to improve revenue • Establish new partnerships to enhance and improve market opportunities • Build up the sales momentum and strengthen our relationships with key customers • Lower manufacturing costs through strategic outsourcing of certain manufacturing requirements to China • Implement operating practices to ensure timely deliveries • Co-ordinate global sales and marketing efforts to achieve operational efficiencies New Product Development A significant amount of resources were spent in the second half of 2006 to develop a new range of products (GEN 2). The new high frequency (HF) product lines should open new market opportunities especially in Europe. Our new handheld HF RFID reader was showcased recently in CEBIT 2007 (an international Information and Communication Technology trade exhibition in Hanover that had over 400,000 visitors), and has attracted significant interests especially for logistics and library applications. Volume production and shipment of this handheld reader is ongoing for a Japanese customer and it will be made available in Europe by the second quarter of 2007. The first half of 2007 will also see the launch of our new GEN 2 Ultra High Frequency (UHF) reader in the US. This UHF reader developed in collaboration with Intel is expected to provide an important springboard into the vast US market. We are pleased to report that, with the launch of this UHF reader, Kenetics has the full capabilities to address various market needs and opportunities in the Asia Pacific region, Europe and the US. Outlook for 2007 We are confident that 2007 will bring in many new business opportunities for the Group. With the launch of the new GEN 2 product lines and the establishment of new sales and distributing channels, the Board is confident that the outlook will improve significantly in the medium term. Ken Wong Chairman, Kenetics Group Limited 10th April 2007 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 Group 2006 2005 Proforma £ £ Continuing operations Revenue 316,176 916,942 Other operating income 87 51,990 Changes in inventories of finished goods and work-in-progress 29,112 (7,092) Raw materials and consumables used (139,210) (261,345) Employee benefits expenses (382,398) (269,069) Depreciation of plant and equipment (49,605) (44,879) Other operating expenses (225,649) (83,679) Finance costs 2,453 254 (Loss)/profit before tax (449,034) 303,122 Income tax expenses - (55,639) (Loss)/profit for the year (449,034) 247,483 Attributable to: Equity holders of the company (446,414) 247,483 Minority interests (2,620) - (449,034) 247,483 (Loss)/ Earnings per share (cents) - Basic and diluted (1.93) 2.20 BALANCE SHEETS AS AT 31 DECEMBER 2006 Group Company 2006 2005 2006 Proforma £ £ £ Non-Current Assets Plant and equipment 144,950 136,491 - Investment in subsidiaries - - 235,928 Available for sale financial asset 138,861 - - Total non-current assets 283,811 136,491 235,928 Current Assets Contract work-in-progress 5,277 20,430 - Stocks and work-in-progress 155,114 38,887 - Trade receivables 101,159 181,771 - Other receivables 65,644 93,606 240,782 Cash and cash equivalents 375,751 255,312 154,044 Total current assets 702,945 590,006 394,826 Total assets 986,756 726,497 630,754 Equity Share capital 263,495 152,944 263,495 Share premium 280,204 - 280,204 Share application - 4,146 - Share option reserve 26,481 - 26,481 Merger reserve 369,579 - - Foreign currency translation reserve (17,649) 10,774 - (Accumulated losses)/ Retained profits (205,556) 240,858 5,945 Total equity 716,554 408,722 576,125 Non-Current Liabilities Amount owing to director 47,977 - - Obligations under finance leases 5,758 11,342 - Total non-current liabilities 53,735 11,342 - Current liabilities Excess of progress billings over contract work-in-progress 33,554 24,140 - Trade payables 31,633 95,510 - Other payables 136,506 41,356 54,629 Amount owing to directors 9,710 88,246 - Obligations under finance leases 5,064 5,039 - Provision for taxation - 52,142 - Total current liabilities 216,467 306,433 54,629 Total liabilities 270,202 317,775 54,629 Total equity and liabilities 986,756 726,497 630,754 KENETICS GROUP LIMITED (Incorporated in Jersey) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 Attributable to Equity Holders of the Company Foreign Retained Share Currency Profits/ Share Share Share Option Merger Translation (Accumulated Minority Capital Premium Application Reserve Reserve Reserve Losses) Subtotal Interest Total £ £ £ £ £ £ £ £ £ £ Balance as at 1/1/05 * (Proforma) 152,944 - 2,936 - - - 70,347 226,227 - 226,227 Additional share application - - 1,210 - - - - 1,210 - 1,210 Currency translation differences - - - - - 10,774 - 10,774 - 10,774 Dividend paid - - - - - - (76,972) (76,972) - (76,972) Net profit for the year - - - - - - 247,483 247,483 - 247,483 Balance as at 31/12/05 (Proforma)152,944 - 4,146 - - 10,774 240,858 408,722 - 408,722 Movement arising from Restructuring Exercise Increase in paid up capital by a sub- sidiary 449,939 - - - - - - 449,939 - 449,939 Refund of share application monies of subsidiary - - (1,522) - - - - (1,522) - (1,522) Adjustment arising from Restruct- uring Exercise #(366,955) - (2,624) - 369,579 - - - - - Sub-total 82,984 - (4,146) - 369,579 - - 448,417 - 448,417 Currency translation differences - - - - - (28,423) - (28,423) - (28,423) Issue of new shares in connection with the AIM listing 27,567 799,433 - - - - - 827,000 - 827,000 AIM listing expenses - (519,229) - - - - - (519,229) - (519,229) Share option granted - - - 26,481 - - - 26,481 - 26,481 Net loss for the year - - - - - - (446,414) (446,414) (2,620) (449,034) Incorporation of a subsidiary - - - - - - - - 2,620 2,620 Balance as at 31/12/06 263,495 280,204 - 26,481 369,579 (17,649) (205,556) 716,554 - 716,554 * The share capital, share application monies and retained profits represent the share capital, share application monies and retained profits of the subsidiary prior to the Restructuring Exercise. # The adjustment arising from the Restructuring Exercise represents the excess of the nominal value of shares acquired by the Company over the nominal value of shares issued by the Company in exchange for those shares, accounted for using merger accounting. CONSOLIDATED CASH FLOWS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006 Group 2006 2005 Proforma £ £ Cash Flow From Operating Activities (Loss)/ Profit before taxation (449,034) 303,122 Adjustments for: Depreciation 49,605 44,879 Interest received (3,123) (1,134) Operating profit before working capital changes (402,552) 346,867 Decrease in contract work-in-progress/ Excess of progress billings over contract work-in-progress 24,738 - Decrease/ (Increase) in trade and other receivables 98,885 (39,892) (Increase) in inventories (118,010) (11,206) Increase/ (Decrease) in trade and other payables 37,548 (94,036) Cash generated used in operations (359,391) 201,733 Income tax paid (52,688) (11,755) Net cash flows used in operating activities (412,079) 189,978 Cash Flows from Investing Activities Purchase of unquoted shares (138,861) - Purchase of plant and equipment (64,321) (37,289) Capital contribution from minority interests 2,620 - Interest received 3,123 1,134 Net cash flows used in investing activities (197,439) (36,155) Cash Flows from Financing Activities Loan to director (26,513) (14,402) Proceed from issue of ordinary shares of holding company 827,000 - Proceed from issue of ordinary shares of subsidiary 449,939 - Payment of trust receipts - (78,750) Payment of AIM listing expenses (492,748) - Receipt of share application monies - 1,242 Payment of dividend (1,522) (76,972) Difference of fixed deposit balance due to accumulation of interest (1,426) (689) Loan from hire purchase creditor (4,808) - Net cash flows from financing activities 749,922 (169,571) Net increase in cash and cash equivalents 140,404 (15,748) Effect of exchange rate changes (17,359) 15,532 Cash and cash equivalents at beginning of year 167,372 167,588 Cash and cash equivalents at end of year 290,417 167,372 1. Abbreviated notes to the financial statements Accounting policies Financial information The preliminary results were approved by the Board of Directors on 10 April 2007. The financial information set out above does not comprise the Company's statutory accounts for the year ended 31 December 2006, but is derived from those accounts. The auditors have yet to sign their report on the 2006 accounts. The statutory accounts for the year ended 31 December 2006 will be finalized on the basis of the financial information presented by the Directors in this preliminary announcement. Exchange Rates The financial statements of the Group are presented in Sterling Pounds, which is the Company's functional currency. The functional currencies of Kenetics Innovations Pte Ltd and Kenetics Innovations (Beijing) Co Ltd are in Singapore Dollars and Renminbi respectively. The following exchange rates have been used in preparing the financial statements as at 31 December 2006: SGD 1 = £0.33300 RMB 1 = £0.06549 Basis of preparation These preliminary results have been prepared in accordance with the accounting policies normally adopted by the Company which are consistent with those adopted in the Accountants' Report. These preliminary results have also been prepared in accordance with International Financial Reporting Standards and prepared under the historical cost convention. Basis of consolidation For the purpose of the Company's listing on AIM, the Company undertook a Restructuring Exercise. The Group Restructuring has been accounted for using merger accounting as it involved combinations of entities under common control. Accordingly, the Group's consolidated figures for the years ended 31 December 2005 and 2006 have been prepared as if the Group had been in existence prior to the Group Restructuring Exercise. The consolidated results of the Group have been accounted for since 1 January 2005. The assets and liabilities are brought into the consolidated balance sheet at their existing carrying amounts. The comparative figures of the Group represent the combined results, state of affairs, changes in equity and cash flows of the Group pursuant to the Restructuring Exercise has existed since 1 January 2005. Subsidiaries Subsidiaries are entities (including special purpose entities) over which the Group has power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases. In preparing the consolidated financial statements, transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Minority interests are that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned directly or indirectly by the Group. It is measured at the minorities' share of the fair value of the subsidiaries' identifiable assets and liabilities at the date of acquisition by the Group and the minorities' share of changes in equity since the date of acquisition, except when the losses applicable to the minority interests in a subsidiary exceed the minority interests in the equity of that subsidiary. In such cases, the excess and further losses applicable to the minority interests are attributed to the equity holders of the Company, unless the minority interests have a binding obligation to, and are able to, make good the losses. When that subsidiary subsequently reports profits, the profits applicable to the minority interests are attributed to the equity holders of the Company until the minority interests' share of losses previously absorbed by the equity holders of the Company have been recovered. Plant and Equipment Measurement (i) Plant and equipment All items of plant and equipment are initially recognised at cost and subsequently carried at cost less accumulated depreciation and accumulated impairment losses. (ii) Components of costs The cost of an item of plant and equipment includes its purchase price and any cost that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the management. The projected cost of dismantlement, removal or restoration is also included as part of the cost of plant and equipment if the obligation for the dismantlement, removal or restoration is incurred as a consequence of acquiring or using the asset. Depreciation Depreciation on items of plant and equipment is calculated using the straight-line method to allocate their depreciable amounts over their estimated useful lives as follows: Useful lives Computers 3 years Furniture and Fittings 5 years Tools and Equipment 5 years Renovation 5 years The residual values and useful lives of plant and equipment are reviewed, and adjusted as appropriate, at each balance sheet date. The effects of any revision of the residual values and useful lives are included in the income statement for the financial year in which the changes arise. Subsequent expenditure Subsequent expenditure relating to plant and equipment that has already been recognized is added to the carrying amount of the asset only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Other subsequent expenditure is recognised as repair and maintenance expense in the income statement during the financial year in which it is incurred. Disposal On disposal of an item of plant and equipment, the difference between the net disposal proceeds and its carrying amount is taken to the income statement. Financial Assets Classification The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, held-to-maturity, and available for sale. The classification depends on the purpose for which the assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date. The designation of financial assets at fair value through profit or loss is irrevocable. (i) Loan and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except those maturing later than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are classified within ' trade and other receivables ' and 'cash and cash equivalents ' on the balance sheet. (ii) Financial assets, available-for-sale Financial assets, available-for-sale are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the assets within 12 months after the balance sheet date. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. On sale of a financial asset, the difference between the net sale proceeds and its carrying amount is taken to the income statement. Any amount in the fair value reserve relating to that asset is also taken to the income statement. Initial measurement Financial assets are initially recognised at fair value plus transaction costs except for financial assets at fair value through profit or loss, which are recognised at fair value. Transaction costs for financial assets at fair value through profit and loss are recognised in the income statement. Subsequent measurement Financial assets, available-for-sale and at fair value through profit or loss are subsequently carried at fair value. Investments in equity instruments that do not have a quoted market price in an active market and the fair value cannot be reliably measured shall be measured at cost. Loans and receivables and financial assets, held-to-maturity are carried at amortised cost using the effective interest method. Changes in the fair value of monetary assets denominated in a foreign currency and classified as available-for-sale are analysed into translation differences resulting from changes in amortised cost of the asset and other changes. The translation differences are recognised in the income statement, and other changes are recognised in the fair value reserve within equity. Changes in fair values of other monetary and non-monetary assets that are classified as available-for-sale are recognised in the fair value reserve within equity. Interest on financial assets, available-for-sale, calculated using the effective interest method, is recognised in the income statement. Dividends on available-for-sale equity securities are recognised in the income statement when the Group's right to receive payment is established. When financial assets classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are recognised in the fair value reserve within equity are included in the income statement as 'gains and losses from investment securities'. Impairment The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. (i) Loans and receivables An allowance for impairment of loans and receivables, including trade and other receivables, is recognised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the allowance for impairment is recognised in the income statement within 'Other operating expenses'. (ii) Financial assets, available-for-sale In the case of an equity classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the security is impaired. When there is objective evidence that an available-for-sale financial asset is impaired, the cumulative loss that has been recognised directly in the fair value reserve is removed from the fair value reserve within equity and recognised in the income statement. The cumulative loss is measured as the difference between the acquisition cost (net of any principal repayments and amortisation) and the current fair value, less any impairment loss on that financial asset previously recognised in income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale financial assets are not reversed through the income statement. Inventories Inventories are stated at the lower of cost and net realisable value after adequate allowance has been made for deteriorated, damaged, obsolete or slow-moving inventories on the weighted average basis. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. In the case of finished goods and work-in-progress, cost includes direct materials, direct labour and allocation of related production overheads. Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, packing and distribution. Contracts Profit on contract with completion dates extending over more than one financial year are brought to account using the percentage of completion method, the percentage used being the proportion of costs incurred at the balance sheet date to estimated total cost. Losses are taken to the income statement in the period in which they are identified. Cash and Cash Equivalents Cash and cash equivalents comprise cash in hand, cash at bank and fixed deposits, which are subject to insignificant risks of changes in value. Cash equivalents are stated at amounts at which they are convertible into cash. Trade and Other Payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Income Taxes Current income tax liabilities (and assets) for current and prior periods are recognised at the amounts expected to be paid to (or recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantially enacted by the balance sheet date. Deferred income tax assets/liabilities are recognised for all deductible taxable temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements except when the deferred income tax assets/liabilities arise from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred income tax liability is recognised on temporary differences arising on investments in subsidiaries, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax asset is recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are measured at: (i) the tax rates that are expected to apply when the related deferred income tax assets are realised or deferred income tax liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted by the balance sheet date; and (ii) the tax consequence that would follow from the manner in which the Group expects, at the balance sheet date, to recover or settle the carrying amounts of its assets and liabilities. Current and deferred income tax are recognised as income or expenses in the income statement for the period, except to the extent that the tax arises from a business combination or a transaction which is recognised directly in the equity. Currency translation (a) Functional and presentation currency Items included in the financial statements of each entity in the Group are measured using the currency of the primary economic environment in which the entity operates ('functional currency'). The financial statements are presented in Sterling Pounds, which is the Company's functional currency. The figures presented in the financial statements are rounded to the nearest Sterling Pounds. (b) Transactions and balances Transactions in a currency other than the functional currency ('foreign currency ') are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Currency translation gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the closing rates at the balance sheet date are recognised in the income statement, except for currency translation differences on the net investment in foreign operations, borrowings in foreign currencies and other currency instruments qualifying as net investment hedges for foreign operations, which are included in the currency translation reserve within equity in the consolidated financial statements. (c) Translation of Group entities' financial statements The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) Assets and liabilities are translated at the closing rates at the date of the balance sheet; (ii) Income and expenses are translated at average exchange rates (unless the average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated using the exchange rates at the dates of the transactions); and (iii) All resulting exchange differences are taken to the currency translation reserve within equity. Revenue Recognition (a) Sales of goods Revenue from sale of good is recognised upon delivery of the goods and acceptance by the customer. (b) Interest income Interest income is recognised on a time-proportion basis, using the effective interest method, unless collectibility is in doubt. Employee Benefits (a) Defined contribution plans As required by the law, the Group makes contributions to the state provident funds of the respective countries. Such contributions are recognised as compensation expenses in the same period as the employment that gave rise to the contributions. (b) Short-term compensated absences Employees entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for employee entitlements to annual leave as a result of services rendered by employees up to the balance sheet date. Impairment of non-financial assets Plant and equipment Investment in subsidiaries Plant and equipment and investments in subsidiaries are reviewed for impairment whenever there is any indication that these assets may be impaired. If any such indication exists, the recoverable amount (ie. the higher of the fair value less cost to sell and the value-in-use) of the asset is estimated to determine the amount of impairment loss. For the purpose of impairment testing of these assets, recoverable amount is determined on an individual asset basis unless the asset does not generate cash flows that are largely independent of those from other assets. If this is the case, recoverable amount is determined for the CGU to which the asset belongs. If the recoverable amount of the asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. The impairment loss is recognised in the income statement unless the asset is carried at revalued amount, in which case, such impairment loss is treated as a revaluation decrease. An impairment loss for an asset other than goodwill is reversed if, and only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. The carrying amount of an asset other than goodwill is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. A reversal of impairment loss for an asset other than goodwill is recognised in the income statement unless the asset is carried at revalued amount, in which case, such reversal is treated as a revaluation increase. However, to the extent that an impairment loss on the same revalued asset was previously recognised in the income statement, a reversal of that impairment is also recognised in the income statement. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Leases (a) Finance leases Leases which effectively transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are classified as finance leases. When the Group is the lessee, property, plant and equipment acquired by way of finance leases are capitalised at an amount equal to the lower of its fair value and the present value minimum lease payments at the inception of the lease, less accumulated depreciation and any impairment losses. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the capitalised leased asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. (b) Operating leases Leases whereby the lessor effectively retains substantially all the risks and benefits of ownership of the leased item are classified as operating leases. When the Group is the lessee, operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term. Research and development costs Costs associated with research activities are expensed as they occur. During the year, the research and development costs incurred were charged to the income statement. Borrowing costs Borrowing costs, interest paid on finance leases, are recognised as expenses in the period in which they are incurred. Related parties Related parties are entities with common direct or indirect shareholders or directors. Or, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operation decisions. Investment in subsidiaries Investments in subsidiaries are stated at cost less accumulated impairment losses in the Company's balance sheet. On disposal of investments in subsidiaries, the difference between net disposal proceeds and the carrying amounts of the investments are taken to the income statement. 2) (Loss)/Earnings per share Basic (loss)/earnings per share has been calculated by dividing the net loss attributable to the equity holders of the Company of £446,414 (2005: profit attributable to the equity holders of the Company of £247,483) by the weighted average number of ordinary shares outstanding during the financial year of 23,125,500 (2005: 11,252,500). The number of ordinary shares used for the calculation of basic (loss)/earnings per share in 2005 and 2006 where merger accounting is applied, is based on the contributed capital of Kenetics Innovations Pte Ltd, adjusted to equivalent shares of the Company whose shares are outstanding after the combination. 3) Segment Reporting Business Segments For management purposes, the Group is currently organized into three operating divisions - Original Design Manufacturer ('ODM'), Industrial System and Industrial Products. These divisions are the basis on which the Group reports its primary information. Group 2006 2005 £ £ Segment revenue ODM 46,396 141,065 Industrial systems - 551,400 Industrial products 269,780 224,477 316,176 916,942 Segment results ODM (128,840) 11,284 Industrial systems - 311,023 Industrial products 152,930 119,210 24,090 441,517 Unallocated corporate expenses (475,664) (190,639) Other operating income 87 51,990 Finance costs 2,453 254 (Loss)/Profit before taxation (449,034) 303,122 Income tax expenses - (55,639) (Loss)/Profit after taxation (449,034) 247,483 Unallocated capital expenditure 64,321 53,669 Unallocated depreciation 49,605 44,879 Segment assets ODM 54,109 28,257 Industrial systems 42,817 142,431 Industrial products 205,529 31,514 Unallocated corporate assets 684,301 524,295 Total assets 986,756 726,497 Segment liabilities ODM 46,850 32,568 Industrial systems - 84,688 Industrial products 22,105 2,394 Unallocated corporate liabilities 201,247 198,125 Total liabilities 270,202 317,775 Segment revenue by location of customers People's Republic of China 4,368 19,751 Asia Pacific 249,085 854,887 Europe 62,152 42,304 Others 571 - 316,176 916,942 Capital expenditure by geographical location of assets People's Republic of China 6,135 - Asia Pacific 58,186 53,669 64,321 53,669 Segment assets by geographical location of assets People's Republic of China 35,905 19,751 Asia Pacific 946,348 689,607 Europe 4,503 17,139 986,756 726,497 This information is provided by RNS The company news service from the London Stock Exchange

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