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Walcom Group Ltd (WALG)

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Tuesday 07 May, 2019

Walcom Group Ltd

Final Results

7 May 2019

WALCOM GROUP LIMITED
(“Walcom”, “the Group” or “the Company”)

Final results for the year ended 31 December 2018

CHAIRMAN’S STATEMENT

On behalf of the board of directors (the “Board”) of Walcom Group Limited (the “Company”), I am pleased to present the final results of the Company and its subsidiaries (together referred to as the “Group”) for the year ended 31 December 2018.

Results

In addition to China’s slowing economy, the domestic pig farming industry has been adversely affected by the outbreak of an epidemic African swine fever since August 2018. The Group’s sales in China dropped significantly during 2018 which, combined with the aggregated effect of greater competition in the market and escalating manufacturing costs, resulted in a loss attributable to the Company’s shareholders of HK$10.25 million (2017: HK$4.34 million loss) for the year under review. The stronger exchange rate of Renminbi against Hong Kong Dollar during 2018 produced an accounting exchange gain of HK$1.7 million (2017: HK$2.2 million loss) in foreign currency translations.

Turnover (2018: HK$34.7 million; 2017: HK$44.5 million) and gross profit (2018: HK$19.4 million; 2017: HK$24.3 million) for the year decreased by approximately 22 per cent. and 20 per cent. respectively. The Group reported a net loss of HK$9.49 million for the year under review as compared with a net loss of HK$3.94 million in 2017. EBITDA also recorded a loss of HK$1.96 million in 2018 (2017: HK$3.16 million loss).

A summary of the results for the period under review is set out below:

Year ended Year ended Change
31 December 31 December
2018 2017
HK$’000 HK$’000 per cent.
Turnover 34,691 44,488 (22.02)
Gross profit 19,370 24,311 (20.32)
Loss from operations (8,297) (4,796) 73.00

 
Year ended Year ended Change
31 December 31 December
2018 2017
HK$’000 HK$’000 per cent.
EBITDA (1,959) (3,163) (38.07)
Net finance expense (269) (124) 116.94
Loss for the year (9,485) (3,940) 140.74
Loss attributable to owners of the Company
 - total
 - basic per share (HK cents)
 - diluted per share (HK cents)


(10,253)
(14.90)
(14.90)


(4,341)
(6.31)
(6.31)


136.19
136.13
136.13
Total equity attributable to owners of the Company
  -total
  -per share (HK cents)


2,754
4.00


14,720
21.38


(81.29)
(81.29)

Operation and market review

The demand for pig feedstuff remained weak in the first six months of the year due to the low demand for pork and meat products, which continued to drive down both the pig farmgate prices and the pig numbers. The outbreak of African swine fever since August 2018 has spread widely all over China. This pig disease, for which there is no readily available vaccine, is highly contagious and lethal to pigs. As a result, pig farms have reduced their operations and the number of pigs has been reduced further. It is reported that a total of two million pigs have been culled since the start of the epidemic. Accordingly, the demand for feedstuff and feed additive products, including the Group’s products, have reduced significantly as well. With these poor market conditions, the Group’s sales in the PRC decreased by 38 per cent. to HK$16.0 million during 2018 compared to PRC sales of HK$25.8 million in 2017.

Sales in Thailand increased by one per cent. to HK$17.0 million in 2018 (2017: HK$16.9 million), representing approximately 49 per cent. (2017: 38 per cent.) of the Group’s total sales. The increase in sales seen in Thailand is attributable to the increase in consumption of the Group’s products by an existing customer with a higher unit selling price, despite the drop in sales volume by eight per cent. in 2018 in the country compared with 2017.

Sales in Korea decreased by 14 per cent. to HK$1.5 million in 2018 (2017: HK$1.8 million), representing approximately four per cent. of the Group’s total sales in both 2017 and 2018.. The Group’s distributor in Korea considers the reduced sales in 2018 were caused by the weak market in the country.

The Group’s financial statements are reported in Hong Kong Dollars (“HKD”). During the period under review, the average monthly exchange rate of HKD currency devalued by approximately two per cent. against China’s Renminbi (“RMB”). As approximately 46 per cent. of the Group’s sales were transacted in RMB, the devaluation of the HKD has had a positive exchange impact on the Group’s 2018 revenue. During the years 2017 and 2018, the RMB exchange rate has been highly volatile against the HKD and this has resulted in an accounting exchange gain of HK$1.7 million in 2018, compared to an accounting exchange loss of HK$2.2 million in 2017, in translating assets and liabilities within the Group.

Recent Developments

As mentioned in my statement in the 2018 half-yearly report, the Group’s largest customer in China (the “Customer”), which is a sizable listed company, defaulted on paying large overdue trade receivables owed to the Group in the year under review. The Group has commenced legal proceedings against the Customer to recover the debt and the Group has made a full provision of HK$7.9 million on the trade receivable in line with its prudent accounting policies. Following the commencement of legal proceedings, there has been positive progress, with the Customer paying approximately HK$2.5 million towards the outstanding debt. As such the amount due from the customer at the year end was approximately HK$5.4 million.  Currently it is unclear as to when and how much this overdue amount will be recovered, with no further amounts being received subsequent to the year end.

The aggregate effect of poor performance of the Group in 2018 and the afore-mentioned unrecovered trade receivable have driven the working capital of the Group into a severely constrained position. The Company had made several announcements in the past twelve months informing the market in this regard.  The Company disposed of its entire interest in its 55 per cent. owned subsidiary Walcom Bio-Chem (Thailand) Company Limited for a cash consideration of 16.5 million Thai Baht (approximately HK$4.1 million) on 20 March 2019 to raise working capital.  After deducting certain amounts owed to the purchaser, the net proceeds received by the Company was approximately HK$3 million.  The net proceeds of the disposal are being used to ease the Group’s working capital position in the short term and to enable the Group to meet its liabilities as they fall due until the middle of June 2019, when a bank loan of RMB1.5 million (approximately HK$1.8 million) will be due for review and repayment. The Company intends to renew this loan if possible and will continue  to closely monitor its working capital position.  However, there is no guarantee that it will be possible to replace this loan or source a replacement facility if it should be required.  The Company continues to consider all options available to it in order to safeguard its working capital and liquidity, and further updates will be provided in due course.  In the event that the Group fails to reach agreement on renewing or replacing the bank loan referred to above and without any alternate arrangement to repay the loan or injection of additional funds, it is likely that the board will be required to take actions to protect the interest of creditors, which could result in part or all of the Group entering into an insolvency process.

The Group believes that it will benefit from focusing on increasing sales penetration with existing big customers which currently have low usage of the Group’s products and on integrated meat producing companies whose businesses include feed milling, pig farming, pig slaughtering and pork product production. However, the board notes that, in the current difficult trading conditions, further time is required in order to produce the desired results.

Patents

At the end of 2018, the Group held 13 granted patents in respect of:

·           its core Cysteamine technology in China, South Korea and Vietnam;

·           poultry feed in China, Philippines and Thailand;

·           feed for dairy animals in China;

·           fish feed in the UK, China, Thailand; and

·           shellfish feed in Philippines and China.

The Directors believe that there is wide patent coverage in certain jurisdictions where there is significant demand for the Group’s products. Some patents, which the management believes have a lower chance of commercialisation, were dropped during the year.

Debt

As at the 2018 year end, the Group had a short-term bank loan of HK$4.0 million and two short-term loans amounting to an aggregate of HK$0.5 million from minority shareholders of its subsidiary in Thailand, both of which were used to finance the Group’s general working capital. In addition, as announced on 21 November 2018, the Group agreed to repay a bank loan of approximately HK$2.3 million, (which is part of the afore-mentioned HK$4.0 million short-term bank loan), on a quarterly basis starting from January 2019.  Following the disposal of the subsidiary in Thailand on 20 March 2019, the Group is no longer responsible for the HK$0.5 million loan from the minority shareholders to Walcom Thailand. The Group is watching its cash flow position and loan repayments closely and is exploring different options to improve liquidity.

Dividend

The Directors do not recommend any dividend payment for the year ended 31 December 2018.

Annual General Meeting

The Company’s annual general meeting (the “AGM”) will be held at the offices of the Company’s solicitors, Reeds Smith Richards Butler, in Hong Kong at 2:30 pm on Wednesday 12 June 2019.  A notice of the AGM will be sent to the Company’s shareholders, along with the 2018 annual report and financial statements, during the third week of May 2019.

Outlook

Continuing from the last few years, the policy of economic structural transformation is still ongoing in China and is expected to cause slower growth in the Chinese economy for the foreseeable future. The aggregate effect of the economic structural transformation and the China-US trade war has adversely affected the growth of China’s economy, although it has shown some improvement in the first quarter of 2019 owing to the effort of the Chinese administration, inter alia, in lowering the tax and financial burdens on businesses and civilians, as well as encouraging investment in new technologies and personal spending.

After the disposal of the subsidiary in Thailand in March 2019, the Group continues to explore the markets in Thailand and Indo-China through the former Thai subsidiary as it has now become the exclusive distributor of the Group’s products in Thailand. With its proven track record of success in marketing Walcom’s products in the region, the Company is optimistic that better results will be achieved in the coming years.

Although it is currently facing a very constrained working capital position, the Company continues to consider all possible options to improve the cash flow situation. Bearing all of these factors in mind, the Board believes 2019 will be a difficult year for the Group as the Board anticipates a slower Chinese economy and a volatile global economic outlook for the year.

Sadly, we lost Mr Timothy R. Nelson, one of our non-executive directors since the Company was admitted to AIM in 2006, as he passed away in January 2019 due to illness.  The Board sincerely coveys its condolences to his family and loved ones.

As announced previously, Mr Albert S. F. Wong, the chief financial officer and secretary of the Company, is leaving the Company and retiring on 30 June 2019 having served the Company for over 13 years. On behalf of the Board, I would like to express our gratitude to Mr Wong and thank him for his contributions during his term of service and wish him well in his retirement. The Board is actively finding a successor for Mr Wong during the past few months and hopefully a suitable candidate could be in place before 30 June 2019.

In addition, the Board announces that it intends to appoint Mr ChongZe Li as CEO-China of Walcom Group and General Manager of Shanghai Walcom Bio-Chem Co. Ltd, on 9 May 2019. Most recently, Mr ChongZe Li’s was general manager at Hunan Kexinhua, and will focus on sales and marketing at Walcom.

On behalf of the Board, I would also like to express our sincere thanks to the management team and staff, professional advisers and shareholders for their continued support and contributions during what has been a very challenging year.

Frankie Y. L. Wong
Chairman
7 May 2019

Further enquiries:

Walcom Group Limited
Francis Chi (Chief Executive Officer)
Albert Wong (Chief Financial Officer)
+852 2494 0133
Allenby Capital Limited
David Hart / Asha Chotai
+44 20 3328 5656


Consolidated statement of profit or loss
For the year ended 31 December 2018
(Expressed in Hong Kong dollars)

Note 2018 2017
HK$ HK$
Revenue 4 34,691,030 44,488,372
Cost of sales (15,320,919) (20,177,334)
Gross profit 19,370,111 24,311,038
Other income 5 207,762 215,041
Research and development expenses (1,222,370) (1,482,466)
Selling and distribution expenses (16,589,116) (12,743,778)
General and administrative expenses (10,063,495) (15,096,244)
Loss from operations (8,297,108) (4,796,409)
Net finance expense 6     (268,616)     (123,687)
Loss before income tax 7 (8,565,724) (4,920,096)
Income tax (expense) / credit  8     (919,124)      979,861
Loss for the year   (9,484,848)
   
  (3,940,235)
   
(Loss) / profit attributable to:
Owners of the Company  (10,253,282)  (4,341,039)
Non-controlling interests    768,434    400,804
Loss for the year  (9,484,848)  (3,940,235)
Losses per share - basic, HK cents 11     (14.90)      (6.31)
                   - diluted, HK cents       (14.90)       (6.31)


Consolidated statement of profit or loss and other comprehensive income
For the year ended 31 December 2018
(Expressed in Hong Kong dollars)

2018 2017
HK$ HK$
Loss for the year  (9,484,848)
   
 (3,940,235)
   
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange difference on translation of
financial statements of overseas subsidiaries   (1,701,349)   3,429,000
Total comprehensive loss for the year  ( 11,186,197)   ( 511,235)
Total comprehensive (loss) / income attributable to:
Owners of the Company (11,965,901) (1,151,641)
Non-controlling interests     779,704     640,406
Total comprehensive loss for the year   (11,186,197)    (511,235)


Consolidated balance sheet as at 31 December 2018
(Expressed in Hong Kong dollars)

Note 2018 2017
HK$ HK$
ASSETS
NON-CURRENT ASSETS
   Property, plant and equipment 13 5,849,236 6,001,662
   Patents 14 97,094 468,463
Goodwill 15 - -
Deferred tax assets 24   575,845   1,072,500
 6,522,175  7,542,625
CURRENT ASSETS
   Inventories      17 2,169,866 2,907,267
   Trade and other receivables 18 4,085,775 12,090,127
   Tax recoverable 210,263 134,027
   Cash and cash equivalents 19 4,825,759 3,594,050
   Restricted bank balances 19          -    116,377
 11,291,663  18,841,848
TOTAL ASSETS  17,813,838  26,384,473
EQUITY
   Share capital 23 688,344     688,344    
   Reserves  2,065,617  14,031,518
Total equity attributable to OWNERs of the Company
 2,753,961

 14,719,862
Non-controlling interests  3,203,016  2,904,435
TOTAL EQUITY  5,956,977  17,624,297
CURRENT LIABILITIES
   Trade and other payables 20   7,126,883   5,571,861
   Tax payables 253,830 317,638
   Loans from non-controlling interests 21 481,626 478,046
   Bank borrowings 22   3,994,522   2,392,631
  11,856,861    8,760,176 
TOTAL LIABILITIES   11,856,861   8,760,176
TOTAL EQUITY AND LIABILITIES  17,813,838  26,384,473
NET CURRENT (LIABILITIES) / ASSETS  (565,198)  10,081,672
TOTAL ASSETS LESS CURRENT LIABILITIES  5,956,977  17,624,297


Consolidated statement of changes in equity
For the year ended 31 December 2018
(Expressed in Hong Kong dollars)

Share-based Non-
Share Share Merger compensation Exchange Surplus Accumulated controlling Total
capital premium reserve reserve reserve reserve losses Total interests equity
HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$
(Note 23(b)(i)) (Note 23(b)(ii)) (Note 23(b)(iii)) (Note 23(b)(iv))
At 1 January 2017 688,344 95,298,644 23,852,469 1,568,769 (2,394,755) 3,602,327 (106,744,295) 15,871,503 2,264,029 18,135,532
Comprehensive income
(Loss) / profit for the year - - -        - - - (4,341,039) (4,341,039) 400,804 (3,940,235)
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries - - -        - 3,189,398 - - 3,189,398 239,602 3,429,000
Total comprehensive (loss) / income for the year - - - - 3,189,398 - (4,341,039) (1,151,641) 640,406 (511,235)
-
Lapse of share options - - - (684,771) - - 684,771 - - -
Appropriation to surplus reserve - - - - - 170,774 (170,774) - - -
At 31 December 2017 688,344 95,298,644 23,852,469 883,998 794,643 3,773,101 (110,571,337) 14,719,862 2,904,435 17,624,297
At 1 January 2018 688,344 95,298,644 23,852,469 883,998 794,643 3,773,101 (110,571,337) 14,719,862 2,904,435 17,624,297
Comprehensive income
(Loss) / profit for the year - - -        - - - (10,253,282) (10,253,282) 768,434 (9,484,848)
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries - - -        - (1,712,619) - - (1,712,619)  11,270 (1,701,349)
Total comprehensive (loss) / income for the year - - - - (1,712,619) - (10,253,282) (11,965,901) 779,704 (11,186,197)
Lapse of share options - - - (68,477) - - 68,477 - - -
Dividends to non-controlling interests - - - - - - - - (481,123) (481,123)
At 31 December 2018 688,344 95,298,644 23,852,469 815,521 (917,976) 3,773,101 (120,756,142) 2,753,961 3,203,016 5,956,977


Notes to the consolidated financial statements
For the year ended 31 December 2018
(Expressed in Hong Kong dollars)

1.         General information

Walcom Group Limited is a company incorporated and domiciled in the British Virgin Islands. The shares of the Company are traded on AIM, a market operated by the London Stock Exchange.

The address of the registered office of the Company is Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands and its principal place of business is located at Part D, Mingtai Bldg., No. 351 Guo Shou Jing Road, ZJ Hi-tech Park, Shanghai 201203, People’s Republic of China. 

The principal activity of the Company is investment holding.  The principal activities of the subsidiaries are set out in note 16.

These consolidated financial statements were authorised for issue by the board of directors on 7 May 2019.

2.         Summary of significant accounting policies

This note provides a list of the significant accounting policies adopted in the preparation of these consolidated financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the Group consisting of Walcom Group Limited and its subsidiaries.

(a)   Basis of preparation

The consolidated financial statements have been prepared on a going concern basis notwithstanding that the Group had incurred a loss for the year of HK$9,484,848 during the year ended 31 December 2018 and, as of that date, the Group’s current liabilities exceeded its current assets by HK$565,198. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. In preparing the consolidated financial statements, the directors have carefully reviewed the Group’s cash position as at the balance sheet date and the cash flow forecast for the next twelve months. In reviewing the Group’s cash flows, the directors have considered the following factors:

-            A stable sales target for 2019 and stable gross profit ratio with the escalating cost of production

-            Continuous close monitoring of outgoing expenses

-            Current cash level and committed lines of funding from financial institutions

-            Net cash inflow from the disposal of an indirectly held subsidiary

-            Failure to renew or replace the above mentioned lines of funding from financial institutions

The directors believe that the Group is able to meet its financial obligations in full as and when they fall due and consider that the preparation of the consolidated financial statements on going concern basis is appropriate.

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). These consolidated financial statements also comply with the applicable disclosure provisions of the AIM Rules for Companies of the London Stock Exchange. The financial statements have been prepared on a historical cost basis.

(b)   Change in accounting policy and disclosures

New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2018:

Annual Improvements                        Amendments to IFRS 1 Deletion of Short-term

2014-2016 Cycle                               Exemptions for First-time Adopters

Annual Improvements                        Amendments to IAS 28 Measuring an Associate or

2014-2016 Cycle                               Joint Venture at Fair Value

IFRS 2 (Amendments)                       Classification and Measurement of Share-based Payment Transactions

IFRS 4 (Amendments)                       Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

IFRS 9                                             Financial Instruments

IFRS 15                                           Revenue from Contracts with Customers

IFRS 15 (Amendments)                     Clarifications to IFRS 15

IFRIC 22                                          Foreign Currency Transactions and Advance Consideration

The Group had to change its accounting policies following the adoption of IFRS 9 and IFRS 15. Most of the other amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods.

IFRS 9, ‘Financial Instruments’

IFRS 9 replaces IAS 39, Financial instruments: recognition and measurement. It sets out the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.

The adoption of IFRS 9 from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the consolidated financial statements. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated.

Further details of the nature and effect of the changes to previous accounting policies and the transition approach are set out below:

a.   Classification and measurement

On 1 January 2018 (the date of initial application of IFRS 9), the Group’s management has assessed which business models apply to the financial assets held by the Group and has classified its financial instruments into the appropriate IFRS 9 categories. The adoption of IFRS 9 did not have material impact on the classification and measurement of the Group’s financial assets and liabilities.

b.   Impairment of financial assets

The Group has two main types of financial assets that are subject to IFRS 9’s new expected credit loss model:

·              Trade receivables; and

·              Other financial assets measured at amortised costs (including cash and cash equivalents, deposits and other receivables)
 

The Group was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The impact of the change in impairment methodology is detailed in note 3(d).

IFRS 15, ‘Revenue from Contracts with Customers’

IFRS 15 establishes a comprehensive framework for recognising revenue and some costs from contracts with customers. IFRS 15 replaces IAS 18, Revenue, which covered revenue arising from sale of goods and rendering of services, and IAS 11, Construction contracts, which specified the accounting for construction contracts. The Group has elected to use the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings at 1 January 2018. Therefore, comparative information has not been restated and continues to be reported under IAS18. As allowed by IFRS 15, the Group has applied the new requirements only to contracts that were not completed before 1 January 2018.

IFRS 15 requires that revenue from contracts with customers be recognised upon the transfer of control over goods or services to the customer. Upon adoption, this requirement under IFRS 15 resulted in immaterial impact to the financial statements as the timing of revenue recognition on sale of goods is nearly unchanged. The adoption of IFRS 15 does not have a significant impact on the Group’s financial position and results of operation for the period. There is also no material impact to the Group’s retained earnings as at 1 January 2018.

a.   Presentation of contract assets and liabilities

Under IFRS 15, a receivable is recognised only if the Group has an unconditional right to consideration. If the Group recognises the related revenue before being unconditionally entitled to the consideration for the promised goods and services in the contract, then the entitlement to consideration is classified as a contract asset.

Similarly, a contract liability, rather than a payable, is recognised when a customer pays consideration, or is contractually required to pay consideration and the amount is already due, before the Group recognises the related revenue. For a single contract with the customer, either a net contract asset or a net contract liability is presented. For multiple contracts, contract assets and contract liabilities of unrelated contracts are not presented on a net basis. The impact on the Group’s financial position by the application of IFRS 15 as compared to IAS 18 that was previously in effect before the adoption of IFRS 15 is as follows:


As
previously stated
HK$
As at
1 January 2018 Reclassification under IFRS 15
HK$



Restated
HK$
Consolidated balance sheet (extract)
Current liabilities:
Other payables and accrued expenses 4,333,171 (29,942) 4,303,229
Contract liabilities       - 29,942 29,942

New standards and interpretations not yet adopted

Annual Improvements                        Amendments to IFRSs (effective from 1 January 2019)

                                         2015-2017 Cycle                                                                                                

IAS 1 and IAS 8 (Amendments)          Definition of Material (effective from 1 January 2020)

IAS 28 (Amendments)                       Long-term Interests in Associates and Joint Ventures (effective from 1 January 2019)

IAS 40 (Amendments)                       Transfers of Investment Property (effective from 1 July 2018)

IFRS 3 (Amendments)                       Definition of a Business (effective for business combinations and asset acquisitions for which the acquisition date is on or after the beginning of the first annual period beginning on or after 1 January 2020)

IFRS 9 (Amendments)                       Prepayment Features with Negative Compensation (effective from 1 January 2019)

IFRS 10 and IAS 28 (Amendments)    Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective from a date to be determined by IASB)

IFRS 16                                           Leases (effective from 1 January 2019)

IFRS 17                                           Insurance Contracts (effective from 1 January 2021)

IFRIC 23                                           Uncertainty over Income Tax Treatments (effective from 1 January 2019)

                  Conceptual Framework for                    Revised Conceptual Framework for Financial

                      Financial Reporting 2018                    Reporting (effective from 1 January 2020)

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below.

IFRS 16, ‘Leases’

IFRS 16 will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases.

The accounting for lessors will not significantly change.

The standard will affect primarily the accounting for Group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of HK$1,497,844, see note 28. However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s loss and classification of cash flows.

Some of the commitments may be covered by the exception for short-term and low value leases and some commitments may relate to arrangements that will not qualify as leases under IFRS 16.

The new standard is mandatory for financial years commencing on or after 1 January 2019. At this stage, the Group does not intend to adopt the standard before its effective date.

The Group is in the process of making an assessment of the impact of these new standards, new interpretations and amendments to existing standards upon initial application.

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and no foreseeable future transactions.

(c)    Principles of consolidation

(i)  Subsidiaries               

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combinations by the Group.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity and balance sheet respectively.

(ii) Joint arrangements

Under IFRS 11 Joint Arrangements investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Group has joint operations.

Joint operations

The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings. Details of the joint operation are set out in note 13.

(d)    Business combinations

The acquisition method of accounting is used to account for all business combinations, regardless of whether entity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:

· fair values of the assets transferred

· liabilities incurred to the former owners of the acquired business

· equity interests issued by the Group

· fair value of any asset or liability resulting from a contingent consideration arrangement, and

· fair value of any pre-existing equity interest in the subsidiary.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets.

Acquisition-related costs are expensed as incurred.

The excess of the

· consideration transferred,

· amount of any non-controlling interest in the acquired entity, and

· acquisition-date fair value of any previous equity interest in the acquired entity

over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss.

 (e)   Separate financial statements

Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.

 (f)    Property, plant and equipment

Property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, 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. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred.

Depreciation is calculated using the straight-line method to allocate their costs, net of their residual values over their estimated useful lives, as follows:

Building                                                     5%

Leasehold improvements                            20% or term of lease, whichever is shorter

Furniture and fixtures                                  20%

Office equipment                                        20%

Plant and machinery                                  10% - 30%

Motor vehicles                                           20%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss.

 (g)   Patents

Patents that are acquired by the Group and/or self-invented are stated in the consolidated balance sheet at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see note 2(i)).

Amortisation of patents is charged to profit or loss on a straight line basis over the assets’ estimated useful lives. The patents are amortised from the date they are available for use and their estimated useful lives are 20 years.

Both the period and method of amortisation are reviewed annually.

(h)    Goodwill

Goodwill is measured as described in note 2(i). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments.

(i)     Impairment of investments in subsidiaries and non-financial assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or group of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each balance sheet date.

(j)     Inventories

Inventories are stated at the lower of cost and net realisable value.

Cost is determined using the weighted average cost method and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

(k)    Trade receivables

Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are generally due for settlement with 30 to 60 days and therefore are all classified as current.

Trade receivables are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value. The Group holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. See note 18 for further information about the Group's accounting for trade receivables and note 3(d) for a description of the Group's impairment policies.

(l)     Cash and cash equivalents

For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.

(m)   Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method.

(n)    Borrowings

Borrowings are initially recognised at fair value, net of transaction costs incurred.  Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

(o)    Borrowing costs

Borrowing costs are expensed in the period in which they are incurred.

(p)    Provisions

Provisions for legal claims, service warranties and make good obligations 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 the amount can be reliably estimated. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to passage of time is recognised as interest expense.

(q)    Revenue recognition

Accounting policies applied from 1 January 2018:

Revenue is measured at the fair value of the consideration received and receivable, and represents amounts receivable for goods supplied or service performed, stated net of rebates and returns. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group’s activities, as described below. The Group bases its estimates of returns on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.

(i)   Sales of goods

Revenue from the sale of good directly to the customers is recognised at the point that the control of the inventory have passed to the customers, which is primarily upon the acceptance of the products by the customers. The customers have full discretion over the products, and there is no unfulfilled obligation that could affect the customers’ acceptance of the products.

(ii)   Interest income

Interest income is recognised as other income using the effect interest method.

Accounting policies applied until 31 December 2017:

The Group has applied IFRS 15, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Group’s previous accounting policy.

(i)   Sale of goods

Revenue from the sales of goods is recognised on the transfer of significant risks and rewards of ownership, which generally coincides with the time when the goods are delivered and the title has passed to the customers. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts and eliminating sales within the Group.

(ii)   Interest income

Interest income is recognised using the effective interest method.

(r)     Research and development expenditure

Research expenditure and development expenditure that do not meet the criteria as intangible assets are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

(s)     Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

The board of the Group has appointed a strategic steering committee which assesses the financial performance and position of the Group, and makes strategic decisions. The steering committee which has been identified as being the chief operating decision maker, consists of the chief executive officer, the chief financial officer and the manager for corporate planning.

(t)     Operating leases

Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases.  Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight line basis over the period of the lease.

(u)   Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Hong Kong dollars (HK$), which is the Company’s functional and the Group’s presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognised in profit or loss.

Group companies

The results and financial position of foreign operations (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:

·      assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet

·      income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this 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 at the dates of the transactions), and

·      all resulting exchange differences are recognised in other comprehensive income.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

(v)    Employee benefits

Pension obligations

The Group contributes to defined contribution plans including the Hong Kong Mandatory Provident Fund Scheme, the People’s Republic of China Central Pension Scheme and the pension fund of Thailand.  The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

Share-based payments

Share-based compensation benefits are provided to employees via a share option scheme. Information relating to this scheme is set out in note 25.

The fair value of options granted under the share option scheme is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted:

·      including any market performance conditions (e.g. the entity’s share price)

·      excluding the impact of any service and non-market performance vesting conditions (e.g. profitability, sales growth targets and remaining an employee of the entity over a specified time period), and

·      including the impact of any non-vesting conditions (e.g. the requirement for employees to save or holdings shares for a specific period of time).

The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

The proceeds received net of any directly attributable transaction costs are credited directly to equity.

(w)   Current and deferred income tax

The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

(x)    Dividend distribution

Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the balance sheet date but not distributed at the balance sheet date.

(y)    Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the profit or loss over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight-line basis over the expected lives of the related assets.

(z)    Impairment of other financial assets

The Group recognises loss allowances for expected credit loss on the financial instruments that are not measured at fair value through profit or loss. The Group considers the probability of default upon initial recognition of financial assets and assesses whether there has been a significant increase in credit risk on an ongoing basis.

The Group considers the credit risk on a financial instrument is low if the financial instrument has a low risk of default, the debtor has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the debtor to fulfil its contractual cash flow obligations.

The carrying amount of the receivables is reduced through the use of the receivable impairment charges account. Changes in the carrying amount of the receivable impairment charges account are recognised in profit or loss. The receivable is written off against the receivable impairment charges account when the company has no reasonable expectations of recovering the receivable.

If, in a subsequent period, the amount of expected credit losses decreases, the reversal would be adjusted to the receivable impairment charges account at the reporting date. The amount of any reversal is recognised in profit or loss.

(za) Contract liabilities (applicable from 1 January 2018)

A contract liability is the obligation to transfer goods or services to a customer for which the Group has received a consideration (or an amount of consideration that is due) from the customer. If a customer pays the consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as and when the Group performs under the contract.

3.   Financial risk management

The Group’s activities expose it to a variety of financial risks, including foreign currency risk, price risk, credit risk, liquidity risk and interest rate risk.  The Group does not hold or issue derivative financial instruments either for hedging or for trading purposes.  These risks are managed by the Group’s financial management policies and practices as described below to minimise potential effects on the Group’s financial performance.

(a)    Foreign currency risk

The Group has certain exposure to foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in Hong Kong dollars, United States dollars (“US dollars”), Thai Baht and Renminbi (“RMB”).

The Group manages its foreign currency risk by closely monitoring the movements of the foreign currency exchange rates. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

At 31 December 2018, if the currency had weakened / strengthened by 10% against the RMB and Thai Baht with all other variables held constant, post-tax loss for the year would have been HK$173,000 lower / higher (2017: HK$863,000), mainly as a result of foreign exchange gains / losses on translation of RMB and Thai Baht-denominated trade receivables and cash and bank balances and foreign exchange losses / gains on translation of RMB-denominated trade payables and RMB and Thai Baht-denominated borrowings.

(b)    Equity securities price risk

The Group is not exposed to any equity securities price risk because the unquoted investments are held for long term strategic purposes.  Their performance is assessed and monitored by the management on and on going basis.

(c)    Raw material price risk

The Group is exposed to risk from increases in the price of raw materials, cysteamine hydrochloride and cyclodexin, labour cost and rental expense which are used in the production of inventories.  To minimise this risk, the Group closely monitors its inventories level and enters into contracts with suppliers in advance and make prepayments to suppliers to secure future supplies.

(d)    Credit risk

The credit risk of the Group mainly arises from bank balances, trade receivables, deposits and other receivables. The carrying amounts of these balances represent the Group’s maximum exposure to credit risk in relation to financial assets.

In respect of cash deposited at banks, the credit risk is considered to be low as the counterparties are reputable banks. The existing counterparties do not have defaults in the past. Therefore, expected credit loss rate of cash at bank is assessed to be close to zero and no provision was made as of 31 December 2018.

The Group trades only with recognised, creditworthy customers and hence there is no requirement for collateral. The Group has a policy in place that all customers who are offered credit terms are subject to credit verification procedures. The credit period granted to customers ranges from 30 days to 60 days.

The Group applies the simplified approach to provide for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected credit loss provision for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics. The Group has performed historical analysis and identified the expected credit loss. It considers available reasonable and forwarding-looking information.

As at 31 December 2018, trade receivables that are individually significant have been separately assessed for impairment. The Group makes periodic assessments on the recoverability of the receivables based on the background and reputation of the customers, historical settlement records and past experience.

Majority of the Group’s revenue is received from individual customers in relation to animal feed additive products sold and are transacted in cash or credit. The Group’s trade receivables arise from sales of animal feed additive products to the customers. As at the end of the year, the top three debtors and the largest debtor accounted for approximately 89.5% and 65.2% (2017: 74.1% and 51.6%), of the Group’s trade receivables balance. In view of the history of business dealings with the debtors and the sound collection history of the receivables due from them, management believes that there is no material credit risk inherent in the Group’s outstanding receivable balance due from these debtors saved for the debtor related to the impaired trade receivable disclosed in the below. Management makes periodic assessment on the recoverability of the trade and other receivables based on historical payment records, the length of overdue period, the financial strength of the debtors and whether there are any disputes with the debtors. The directors consider the Group’s credit risk of these receivables to be low except for the impaired trade receivable disclosed in the below.

The Group classifies its trade receivables by nature of customer accounts. These include overseas customers and PRC customers.

Lifetime Gross Lifetime Net
expected credit carrying expected carrying
loss rate amount credit loss amount
HK$ HK$ HK$
As at 31 December 2018
Overseas customers
Provision on collective basis 0% 2,341,545 - 2,341,545
PRC customers
Provision on individual basis 100% 5,432,550 5,432,550 -
Provision on collective basis        0%   559,461         -   559,461
       8,333,556 5,432,550 2,901,006

The credit quality of other receivables excluding prepayments has been assessed with reference to historical information about the counterparties default rates and financial position of the counterparties. The directors are of the opinion that the credit risk of other receivables is low due to the sound collection history of the receivables due from them. Therefore, expected credit loss rate of the other receivables excluding prepayments is assessed to be close to zero and no provision was made as of 31 December 2018.

Previous accounting policy for impairment

All trade receivables are monitored on an ongoing basis and overdue balances are reviewed regularly by Credit Committee. The continued supply of goods to customers with trade debts past due are reviewed and approved by the management on an individual basis.

With respect to credit risk arising from the other financial assets of the Group which comprise cash and bank balances, the Group’s exposure to credit risk arising from default of the counterparties is limited as the counterparties have good credit standing and the Group does not expect to incur significant loss for uncollected deposits from these entities.

The maximum exposure to credit risk in the event of the counterparties’ failure to perform their obligations is represented by the carrying amount of each financial asset in the consolidated balance sheet.  The Group does not provide any other guarantees which expose the Group to credit risk.

(e)    Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and overdrafts.  The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

The table analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flow.

2018
Between Between
Within 1 year 1 to 2 2 to 5 Over
or on demand years years 5 years Total
HK$ HK$ HK$ HK$ HK$
Trade and other payables 7,126,883 - - - 7,126,883
Tax payables 253,830 - - - 253,830
Loans from non-controlling interests
481,626




481,626
Bank borrowings 3,994,522        -        -        - 3,994,522
11,856,861        -        -        - 11,856,861
2017
Between Between
Within 1 year 1 to 2 2 to 5 Over
or on demand years years 5 years Total
HK$ HK$ HK$ HK$ HK$
Trade and other payables 5,571,861 - - - 5,571,861
Tax payables 317,638 - - - 317,638
Loans from
non-controlling interests 478,046 478,046
Bank borrowings 2,392,631        -        -        - 2,392,631
8,760,176        -        -        - 8,760,176

In order to manage the above liquidity demands, at 31 December 2018, HK$4,825,759 (2017: HK$3,594,050) of the Group’s assets respectively were held as cash that are considered readily realisable.             

(f)  Interest rate risk

The Group’s interest rate risk arises from loans from bank borrowings, bank overdrafts and deposits. Borrowings and deposits issued at variable rates expose the Group to cash flow interest-rate risk. Borrowings and deposits issued at fixed rates expose the Group to fair value interest-rate risk.

At the balance sheet date, if interest rates had been increased or decreased by 25 basis-point and all other variables were held constant, the Group’s loss before income tax for the year ended 31 December 2018 would decrease or increase by HK$2,074 (2017: HK$2,873).

Decrease/ Decrease/
Increase of (increase) Decrease of (increase)
25 basis points in loss before 25 basis points in loss before
 income tax  income tax
HK$ HK$
2018
On bank deposits 0.25% 12,060 0.25% (12,060)
On bank borrowings 0.25% (9,986) 0.25% 9,986
Decrease/ Decrease/
Increase of (increase) Decrease of (increase)
25 basis points in loss before 25 basis points in loss before
 income tax  income tax
HK$ HK$
2017
On bank deposits 0.25% 8,855 0.25% (8,855)
On bank borrowings 0.25% (5,982) 0.25% 5,982

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the exposure to interest rate risk for financial instruments in existence at that date.  The 25 basis-point increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date.  The analysis performed on the same basis for 2017.

(g)    Fair values

All financial assets and liabilities are carried at amounts not materially different from their fair values as at 31 December 2018 and 2017.

4.   Revenue

The principal activities of the Group are manufacturing and sale of chemical feed additive products.

Revenue represents the sales value of goods supplied to customers less returns, discounts, value added tax and sales taxes. 

2018 2017

Sale of chemical feed additive products
HK$ HK$
34,691,030 44,488,372

5.         Other income

2018 2017
HK$ HK$
Government grants 105,096 177,946
Sundry income  102,666  37,095
207,762 215,041

Note: During the years ended 31 December 2018 and 2017, the Group received grants from local government bodies in the PRC, which aimed at the technology development of the Group.

6.   Net finance expense

2018 2017
HK$ HK$
Bank interest income 23,059 14,220
Interest expense on loans from non-controlling interests (64,690) (4,780)
Interest expense on bank loans  (226,985)  (133,127)
  (268,616)   (123,687)

7.   Loss before income tax

Loss before income tax is stated after charging the following items :-

(a)  Staff costs (including directors’ emoluments)                                                                                     

2018 2017
HK$ HK$
Salaries, wages and commission 9,321,216 10,186,056
Contributions to defined contribution retirement plans 893,779 877,054
Other staff benefits  2,496,701  3,042,257
12,711,696 14,105,367

(b)    Other items

2018 2017
HK$ HK$
Amortisation of patents 92,447 265,538
Auditor’s remuneration 298,683 335,977
Provision of impairment of trade receivables 5,750,768 -
Cost of inventories sold (note 17) 14,648,394 19,190,422
Depreciation not charged to cost of sales 139,287 189,086
Exchange (gains) / losses, net (1,665,315) 2,260,760
Property, plant and equipment written off 6,752 -
Loss on disposal of property, plant and equipment - 2,286
Patents written off 278,922 314,022
Impairment loss of patents - 766,073
Rental charges under operating leases in respect of
land and buildings   1,022,660   841,008

8.   Income tax expense / (credit) 

2018 2017
HK$ HK$
Current income tax
- Thailand corporate income tax 422,469 237,963
- Shanghai foreign enterprise income tax        - 141,999
422,469 379,962
Adjustments in respect of prior years
- Shanghai foreign enterprise income tax        -    (287,323)
  422,469   92,639
Deferred income tax (Note 24) 496,655 (1,072,500)
 919,124 (979,861)

(a)     Taxation for the Company

No provision for profits tax has been made for the Company as it is exempted from taxation in the British Virgin Islands.

No deferred taxation has been provided as the Company has no material unprovided deferred tax assets or liabilities which are expected to be crystallised in the foreseeable future (2017: Nil).

(b)    Taxation for the Group

(i)       Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rate of taxation prevailing in the countries in which the Group companies operate. The income tax expense stated in consolidated statement of profit or loss and other comprehensive income represented the corporate income tax and foreign enterprise income tax arisen from the business of subsidiaries operating in Thailand and Shanghai respectively.

Under the two-tiered profits tax rates regime, the first HK$2 million of profits of the qualifying group entity will be taxed at 8.25% (2017: 16.5%), and profits above HK$2 million will be taxed at 16.5% (2017: 16.5%). The profits of group entities not qualifying for the two-tiered profits tax rates regime will continue to be taxed at a flat rate of 16.5% (2017: 16.5%). However, no provision for Hong Kong profits tax has been made (2017: Nil) as the Group’s assessable profit subject to Hong Kong profits tax for the year is fully set-off by tax loss brought forward from last year.

Provision for foreign enterprise income tax (“FEIT”) in the People’s Republic of China (“PRC”) has been made at 15% (2017: 25%) as Shanghai Walcom Bio-Chem Co., Ltd. (“Shanghai Walcom”), a wholly owned subsidiary operating in Shanghai, has assessable profits for the year.

Pursuant to the relevant income tax rules and regulations in the PRC, Shanghai Walcom is granted tax relief whereby the applicable income tax rate was 15% for the year 2018 (2017: 25%).

Thailand Corporate Income Tax is calculated at 20% (2017: 20%) of the net profit for the year.

(ii)      A reconciliation between the Group’s income tax expense / (credit) and the accounting loss, at the applicable tax rate, is set out below:-

2018 2017
HK$ HK$
Loss before income tax  (8,565,724)  (4,920,096)
Notional tax calculated on loss before income tax, calculated
   at the rates applicable to profits in the countries concerned  (1,215,506)  (858,046)
Tax effect of:
Expenses not deductible for tax purpose 517,308 1,614,889
Non-taxable revenue - (8)
Temporary differences not recognised 265 572
Overprovision in prior years - (287,323)
Tax losses not recognised 1,273,805 5,474
Previously unrecognised tax losses used to reduce deferred tax expenses

(1,072,500)
Deferred tax expense arising from the write-down of a deferred tax asset
496,655

Utilisation of previously unrecognised tax losses  (153,403)  (382,919)
Income tax expense / (credit)   919,124   (979,861)

9.   Loss attributable to shareholders

Loss attributable to owners of the Company for the year ended 31 December 2018 dealt with in the financial statements of the Company was approximately HK$540,000 (2017: HK$239,000).

10.  Dividends

The Company does not recommend the payment of any dividend for the year ended 31 December 2018 (2017: Nil).

11.  Losses per share

There is no difference between basic and diluted losses per share. The basic and diluted losses per share for the year ended 31 December 2018 are calculated by dividing the Group’s loss attributable to owners of the Group of HK$10,253,282 (2017: HK$4,341,039) by the weighted average number of 68,834,388 ordinary shares (2017: 68,834,388 ordinary shares). The computation of diluted losses per share does not assume the exercise of the Company’s outstanding share options because the exercise price of the options is higher than the average market price for the years ended 31 December 2018 and 2017.

12.  Segment reporting

(a)      Segment reporting

Information reported to the Executive Directors of the Company, being the chief operating decision makers (“CODM”), for the purpose of resource allocation and assessment of segment performance focuses on type of goods delivered.

The executive directors have identified that, the Group has only one reportable operating segment, which is the manufacture, distribution and sales of chemical feed additive products. Since this is the only reportable operating segment of the Group, no further operating segment analysis thereof is presented.

(b)      Geographical information

The following table sets out information about the geographical location of (i) the group’s revenue from external customers and (ii) the group’s fixed assets, intangible assets, goodwill and other current and non-current assets. The geographical location of customers is based on the location at which the services were provided or the goods delivered. The geographical location of the assets is allocated based on the operations of the segment and the physical location of the asset.

           (i) Sales revenue by geographical location of customers

                                                                                                                             2018               2017

                                                                                                                              HK$               HK$

                    PRC                                                                                         15,994,416      25,759,215

                    Thailand                                                                                    17,012,750      16,854,536

                    Korea                                                                                         1,541,592       1,799,741

                    Others                                                                                           142,272            74,880

                                                                                                                    34,691,030      44,488,372

(b)      Geographical information (continued)

(ii)       Segment assets by geographical location of the assets

                                                                                                                             2018               2017

                                                                                                                              HK$               HK$

                    Hong Kong                                                                                    868,917       2,499,543

                    PRC                                                                                           7,181,498      13,943,939

                    Thailand                                                                                      9,738,811       9,613,986

                    Other Asia-Pacific countries                                                              24,612          164,232

                    Europe and United Kingdom                                                                      -          183,478

                    America and Canada                                                                                -          29,295 

                                                                                                                    17,813,838      26,384,473

(c)      Information about major customers

The Group’s customer base is diversified and includes only three customers with whom transactions have exceeded 10% of the Group’s revenue.

                                                                                                            2018               2017

        Revenue from major customers:                                                      HK$               HK$

        Sale of chemical feed additive products                                                             

Customer A                                                                                 11,505,935       7,458,638

Customer B                                                                                   5,651,749       6,050,715

Customer C                                                                                   3,827,167       7,612,493

13.  Property, plant and equipment

Furniture
Land and Leasehold and Office Plant and Motor
Group building improvements fixtures equipment machinery vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$ HK$
Cost
At 1.1.2017 4,451,082 1,299,836 85,486 908,905 2,487,255 500,191 9,732,755
Additions 759,587 - - 151,448 9,690 - 920,725
Disposal - - (7,094) (7,804) (8,193) - (23,091)
Exchange
realignment 507,950 96,473 6,552 84,372 174,269 35,066 904,682
At 31.12.2017 5,718,619 1,396,309 84,944 1,136,921 2,663,021 535,257 11,535,071
At 1.1.2018 5,718,619 1,396,309 84,944 1,136,921 2,663,021 535,257 11,535,071
Additions - - - 26,366 18,672 - 45,038
Written off - - - (62,468) (5,935) - (68,403)
Exchange
Realignment 42,828 (54,373) (2,724) (37,062) (122,484) (24,619) (198,434)
At 31.12.2018 5,761,447 1,341,936 82,220 1,063,757 2,553,274 510,638 11,313,272
Accumulated
 depreciation
At 1.1.2017 332,335 1,193,580 69,833 736,637 2,186,540 381,056 4,899,981
Charge for
 the year 45,662 17,792 3,966 64,504 91,373 62,630 285,927
Eliminated
 on disposals - - (6,385) (7,023) (7,374) - (20,782)
Exchange
 realignment 35,535 87,728 5,459 54,078 156,505 28,978 368,283
At 31.12.2017 413,532 1,299,100 72,873 848,196 2,427,044 472,664 5,533,409
At 1.1.2018 413,532 1,299,100 72,873 848,196 2,427,044 472,664 5,533,409
Charge for
 the year 47,933 18,677 3,502 63,265 66,668 9,038 209,083
Written off - -  - (56,302) (5,349) - (61,651)
Exchange
 Realignment 2,778 (52,575) (2,387) (28,003) (114,491) (22,127) (216,805)
At 31.12.2018 464,243 1,265,202 73,988 827,156 2,373,872 459,575 5,464,036
Net book value
At 31.12.2018 5,297,204 76,734 8,232 236,601 179,402 51,063 5,849,236
At 31.12.2017 5,305,087 97,209 12,071 288,725 235,977 62,593 6,001,662

On 18 July 2016, a subsidiary of the Group and the non-controlling interests (the “Joint Operators”) entered into an agreement pursuant of which the Joint Operators jointly purchased one piece of land in Samut Sakorn Province, which is located in the outskirt area of Bangkok, Thailand. The Group and the non-controlling interests hold 66.67% and 33.33% interests in the land respectively after completion of the purchase. The transaction constituted to a joint arrangement.

As at 31 December 2018, the carrying amount of approximately HK$4,701,870 represented the Group’s interest of 66.67% in the land (2017: HK$4,666,918).

As at 31 December 2018, the land and building of carrying amount of approximately HK$595,334 was pledged as securities for bank overdraft (2017: Nil).

14.  Patents

Group
HK$
Cost    
At 1.1.2017  4,610,405
Patent written off (989,146)
At 31.12.2017 3,621,259
Patent written off (2,398,359)
At 31.12.2018 1,222,900
Accumulated amortisation and impairment
At 1.1.2017 2,796,309
Charge for the year 265,538
Patent written off (675,124)
Impairment loss   766,073
At 31.12.2017 3,152,796
Charge for the year 92,447
Patent written off (2,119,437)
At 31.12.2018 1,125,806
Net book value
At 31.12.2018 97,094
At 31.12.2017 468,463

The remaining amortisation period of the patents ranged from 2 years to 6 years. The amortisation charge is included in selling and distribution expenses in the consolidated statement of profit or loss and other comprehensive income.

15.  Goodwill                 

Group
HK$
Cost    
At 31.12.2017 and 31.12.2018 127,857
Impairment losses
At 31.12.2017 and 31.12.2018 127,857
Net book value
At 31.12.2018       -
At 31.12.2017       -

16.  Investments in subsidiaries

Company
2018 2017
HK$ HK$
Unlisted investment, at cost 384 384
Amounts due from subsidiaries
Non-trade related balances 33,197,126 36,487,626
Impairment losses on non-trade related balances  (33,197,126) (36,487,626)

(a) The amounts due from subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

(b) Listed below are the Group’s principal subsidiaries:

Proportion of ownership interest


Name
Place of incorporation/ business Particulars of issued / registered and fully paid share capital Group’s
effective interest
Held by the company Held by non-
controlling
interests


Principal activities
Walcom International Limited The British Virgin Islands 4,000,000 ordinary shares of US$1 each 100% 100% - Investment holding
 
Shanghai Walcom
Bio-Chem Co., Ltd.
The People’s
Republic of China
US$1,500,000
Registered
Capital
100% - - Manufacturing
of chemical
feed
additive
products
Walcom Bio-Chemicals
Industrial Limited
Hong Kong 100 ordinary
shares 10,000 non-voting
deferred shares*
100% - - Investment
holding and
trading of
chemical feed
additive
products
Walcom Nutritions
International Limited
Hong Kong 2 ordinary shares 100% - - Investment holding
Walcom Bio-Chem (Thailand)
Company Limited
Thailand 100,000 ordinary
shares of
THB 10 each
55% - 45% Trading of
chemical feed
additive
products
Walcom Bio-Chemicals
(USA) LLC
Delaware,
United
States of
America
US$100
Registered
capital
100% - - Investment holding
Walcom Animal Science
(I.P) Limited
Republic of
Mauritius
1 ordinary share
of US$1 each
100% - - Holding of
Patents
Walcom Animal Science
(I.P.2) Limited
Republic of
Mauritius
1 ordinary share
of US$1 each
100% - - Holding of
Patents
Walcom Animal Science
(I.P.3) Limited
Republic of
Mauritius
1 ordinary share
of US$1 each
100% - - Holding of
Patents
Walcom Animal Science
(I.P.5) Limited
Republic of
Mauritius
1 ordinary share
of US$1 each
100% - - Holding of
Patents

The deferred shares, which are not held by the Group, carry practically no rights to dividends nor to receive notice of nor attend or vote at any general meeting of the subsidiaries nor to participate in any distribution or winding up.

17.  Inventories

Group

                                                                                                                      2018                     2017

                                                                                                                       HK$                      HK$

        Raw materials                                                                                     804,065             1,068,157

        Finished goods                                                                                 1,365,801             1,839,110

                                                                                                                2,169,866             2,907,267

The cost of inventories sold recognised as expenses and included in cost of sales amounted to HK$14,648,394 (2017: HK$19,190,422).

18.  Trade and other receivables

Group

                                                                                                                    2018                    2017  

                                                                                                                    HK$                     HK$

        Trade receivables                                                                           8,333,556           11,501,231

        Less: provision for impairment loss                                                (5,432,550)            (508,758)

        Trade receivables – net                                                                   2,901,006           10,992,473

        Deposits and prepayments                                                                 939,968             1,019,758

        Other receivables                                                                               244,801                 77,896

                                                                                                              4,085,775          12,090,127

All trade and other receivables are expected to be recovered within one year. Due to the short-term nature of the current receivables, their carrying amount is considered to be the same as their fair value.

(a)    Impairment of trade receivables

The movement in the provision for impairment during the year is as follows:

       2018 2017
HK$ HK$
At 1 January
Impairment loss recognised
508,758
5,750,768
508,758
Written off
Exchange difference
 (508,758)
(318,218)
      -
       -
At 31 December  5,432,550  508,758

The Group applies the IFRS 9 simplified approach to provide for expected credit losses which uses a lifetime expected loss provision for trade receivables.

Information about the impairment of trade receivables and the Group's exposure to credit risk can be found in note 3(d). The Group does not hold any collateral over these balances.

As at 31 December 2018, the trade receivables of HK$5,992,011 (2017: Nil) were pledged as securities for secured bank borrowings (note 22).

(b)    Trade receivables that are not impaired

Majority of the Group’s revenue are with credit terms ranging from 30 to 60 days. Ageing analysis of trade receivables that are neither individually nor collectively considered to be impaired are as follows:

                        2018 2017
HK$ HK$
Neither past due nor impaired 2,879,322 5,816,790
Less than one month past due 21,684 725,390
1 to 4 months past due - 1,579,136
Over 4 months past due         -   2,871,157
   21,684   5,175,683
2,901,006 10,992,473

Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group.  Based on past experience, management believes that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are considered fully recoverable. 

(c)    The carrying amounts of trade receivables are denominated in the following currencies:

                        Group
2018 2017
Thai Baht THB 9,723,500 THB 14,229,327
Renminbi  RMB 490,200  RMB 6,345,600

19.        Cash and cash equivalents                                                                 

                        Group
2018
HK$
2017
HK$
Cash at bank and on hand 4,825,758 3,710,427
Less: Cash at bank - restricted -  (116,377)
Cash and cash equivalents in the statement of cash flows 4,825,759 3,594,050

   

                        Company
2018
HK$
2017
HK$
Cash and cash equivalents in the balance sheet 25,353 25,327

Included in the cash and cash equivalents of the Group, HK$3,250,421 (2017: HK$1,420,165) were denominated in RMB and kept in PRC. The remittance of these funds out of the PRC is subject to the foreign exchange control restrictions imposed by the PRC government.

As at 31 December 2018, nil amount (2017: HK$116,377) denominated in THB in a saving bank account in Thailand has been pledged to a bank as security to obtain a facility under a forward exchange contract.

Included in cash and cash equivalents in the consolidated balance sheet are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

2018 2017
Renminbi
United States dollars
RMB
US$
 2,848,550
26,046
RMB
US$
 1,187,643
168,649
British Pound GB£   689 GB£   856
Thai Baht THB 5,621,425 THB 1,362,910

20.        Trade and other payables

                        Group
2018
HK$
2017
HK$
Trade payables 1,295,639 1,238,690
Contract liabilities    329,062                -
Other payables and accrued expenses 5,502,182 4,333,171
7,126,883 5,571,861

All of the trade and other payables are expected to be settled within one year.

The carrying amounts of trade payables are denominated in the following currencies:

2018 2017
Renminbi RMB  1,135,239 RMB  1,035,421

21.        Loans from non-controlling interests

At 31 December 2018, the loans from non-controlling interests were unsecured and repayable as follows:

                                                                                                                         Group

2018 2017
HK$ HK$
Current liabilities
    Loans from non-controlling interests – unsecured  481,626  478,046
Total borrowings  481,626  478,046

The maturity of borrowings is as follows:

                                                                                                                          Group

2018 2017
HK$ HK$
Within 1 year or on demand 481,626  478,046

The effective interest rate per annum for loans from non-controlling interests at balance sheet date is at 12% (2017: 12%) per annum.

On 28 November 2018, an indirectly held subsidiary of the Group situated in Thailand has extended borrowings of HK$481,626 denominated in THB with maturity of 1 year. The borrowing was unsecured.

22.        Bank borrowings

At 31 December 2018, the bank borrowings were unsecured and repayable as follows:

                                                                                                                         Group

2018 2017
HK$ HK$
Current liabilities
    Bank borrowings – unsecured
    Bank borrowings – secured
1,711,938
2,282,584
2,392,631
       -
Total borrowings 3,994,522 2,392,631

The maturity of borrowings is as follows:

                                                                                                                          Group

2018 2017
HK$ HK$
Within 1 year or on demand 3,994,522 2,392,631

The effective interest rate per annum for bank borrowings at balance sheet date is at 6.4% (2017: 5.7%) per annum.

During the 2018 reporting period, the Group fully repaid a bank borrowing of HK$2,392,631 denominated in RMB, which was unsecured.

On 12 December 2018, an indirectly held subsidiary of the Group situated in the PRC has obtained a bank borrowing of HK$1,711,938 denominated in RMB with maturity of 0.5 year. The bank borrowing was unsecured.

On 4 May 2018, an indirectly held subsidiary of the Group situated in the PRC has obtained a bank borrowing of HK$2,282,584 denominated in RMB with maturity of 1 year. The bank borrowing was secured by trade receivables (note 18).

23.        Capital and reserves

(a)        Share capital

2018 2017
No. of No. of
Shares HK$ shares HK$
Authorised:
Ordinary shares of
   HK$0.01 each

150,000,000

1,500,000

150,000,000

1,500,000
Ordinary shares, issued
  and fully paid:
At 1 January and 31 December  68,834,388   688,344  68,834,388   688,344

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.  All ordinary shares rank equally with regard to the Company’s residual assets.

(b)      Nature and purpose of reserves

                                                                                               Company

Share Capital Accumulated
premium reserve losses Total
HK$ HK$ HK$ HK$

   

Balance at 1.1.2017 95,298,644 6,410,193 (102,772,911) (1,064,074)
Comprehensive income
Lapse of share options - (684,771) 684,771 -
Loss for the year          -         -    (238,889)   (238,889)
Balance at 31.12.2017  95,298,644 5,725,422  (102,327,029)  (1,302,963)
Balance at 1.1.2018 95,298,644 5,725,422 (102,327,029) (1,302,963)
Comprehensive income
Lapse of share options - (68,477) 68,477 -
Loss for the year          -         -    (539,565)   (539,565)
Balance at 31.12.2018  95,298,644 5,656,945  (102,798,117)  (1,842,528)

(i) Share premium

The application of the share premium account is governed by the Memorandum and Articles of the Association of the Company. In accordance with the Companies Law of the British Virgin Islands, the share premium account is distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business.  The share premium may also be distributed in the form of fully paid bonus shares.

(ii)      Merger reserve

The merger reserve arose in the Group reorganisation before Admission to AIM. There was no movement during the year.

(iii)     Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations.  The reserve is dealt with in accordance with the accounting policies set out in note 2(u).

(iv)     Surplus reserve

Surplus reserve of the Group currently comprises statutory surplus reserve. In accordance with the laws and regulations in the PRC, the PRC entities are required to appropriate 10% of their profit after tax, after offsetting any prior years’ losses, to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of the PRC entities’ registered share capital, any further appropriation is optional. The statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into share capital by issuing new shares to shareholders in proportion to their existing shareholding or by increasing the par value of the shares currently held by them, provided that the remaining balance of the statutory surplus reserve after such issue is not less than 25% of share capital.

(v)      Capital reserve of the Company

The capital reserve comprises the followings:

·              The fair value of the actual or estimated number of unexercised share options granted to employees of the Group recognised in accordance with the accounting policy adopted for share-based payment in note 2(v); and

·              There was HK$4,841,424 balance brought forward as a result of the Group reorganization in 2004.

(c)      Distributability of reserves

Save as mentioned in note 23(b)(i), no reserves were available at 31 December 2017 and 2018 for cash distribution as the Company recorded accumulated losses for the year.

(d)      Capital management

The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders, by pricing products and services commensurately with the level of risk and by securing access to finance at a reasonable cost.

The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position, and makes judgements to the capital structure in light of changes in economic conditions.

Consistent with industry practice, the Group monitors its capital structure using a gearing ratio, which is total debts divided by adjusted capital. Total debts represent total bank overdrafts and borrowings.  Adjusted capital includes all components of shareholders’ equity less unrealised reserves.

In order to maintain or adjust the gearing ratio, the Group may issue new shares, return capital to shareholders, raise new debt financing or sell assets to reduce debt.

The gearing at 31 December 2018 and 2017 were 122% and 21% respectively, calculated as follows :

2018 2017
HK$ HK$
Current liabilities:
- Loans from non-controlling interests 481,626 478,046
- Bank borrowings 3,994,522 2,392,631
Total debts 4,476,148 2,870,677
Owners’ equity 2,753,961 14,719,862
Add / (less) : Exchange reserve 917,976 (794,643)
Adjusted capital 3,671,937 13,925,219
Gearing ratio    122%    21%

24.        Deferred tax assets

The analysis of deferred tax assets is as follows:

2018 2017
HK$ HK$
Deferred tax assets:
-Deferred income tax assets to be recovered after more than 12 months
 460,676

       858,000
-Deferred income tax assets to be recovered within 12 months
 115,169

 214,500
 575,845  1,072,500

The movement in deferred income tax assets is as follows:

Tax losses
2018 2017
HK$ HK$
At 1 January 1,072,500         -
(Debited) / credited to the consolidated statement of profit or loss (note 8)
 (496,655)

1,072,500
At 31 December   575,845  1,072,500

At 31 December 2018, the Group has unused tax losses of approximately HK$44,429,000 (2017: HK$45,585,000) available for offset against future profits. At 31 December 2018, deferred tax asset of approximately HK$576,000 (2017: HK$1,073,000) has been recognised in respect of such tax losses. No deferred tax asset has been recognised in respect of the remaining HK$37,449,000 due to the unpredictability of future profit streams. The unrecognised tax losses may be carried forward indefinitely.

25.        Share option scheme

A share option scheme (the “scheme”) was adopted pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives and rewards to any director of any member of the Group who is in service with any such Company or any employee of any member of the Group (the “eligible directors and employees”).

The maximum number of shares in respect of which options or rights to subscribe for shares pursuant to the scheme when aggregated with number of shares in respect of which options or rights to subscribe for shares has been granted in previous years under the scheme and other share option or share incentive plan adopted by the Company shall not exceed 10% of the shares issued by the Company from time to time. An option share shall only be exercisable (a) after one year from date of grant, (b) before the expiry of the option period, (c) at a time permitted by the Model Code for Securities Transactions by Directors of Listed Issuers, and (d) if any performance conditions imposed pursuant to the scheme rules have been fulfilled or obtained.

As at 31 December 2018, 1,680,000 ordinary shares options have been granted to directors and employees of the Company under the Share Option Scheme. During the year, 150,000 options were lapsed and no other options were exercised or cancelled.

(a)  The terms and conditions of the grants that existed during the year are as follows, hereby all options are settled by physical delivery of shares:

Participant Date of grant No. of options outstanding as at 31 December 2018 Vesting
period
Exercise
period
Exercise
price
Options granted to directors:
Yong Chian Tan 9 June 2010 500,000 2 years commencing from 9 June 2010 From 9 June 2012 to 8 June 2020 (both days inclusive) GB£ 0.07
9 June 2010 500,000 3 years commencing from 9 June 2010 From 9 June 2013 to 8 June 2020 (both days inclusive) GB£ 0.07
Options granted to employees:
Employees of the Group 9 June 2010 340,000 2 years commencing from 9 June 2010 From 9 June 2012 to 8 June 2020 (both days inclusive) GB£ 0.07
9 June 2010 340,000 3 years commencing from 9 June 2010 From 9 June 2013 to 8 June 2020 (both days inclusive) GB£ 0.07

(b)  Fair value of share options

The fair value of the share options granted during the year ended 31 December 2010 have been valued by an independent qualified valuer using Binomial Option Pricing Model.

26.        Share award plan

The Company’s share award plan (the “plan”) was adopted pursuant to a resolution of an extraordinary general meeting of the Company held on 20 September 2006 for the purpose of providing incentives or rewards to selected PRC      employees and officers of the Group but excluding officers of the Company (the “eligible PRC officers”).

Prior to the Admission to AIM, 433,163 ordinary shares were transferred to Walcom China Staff Incentive Limited (the “trustee”) by certain of the then existing shareholders of the Company, to hold pursuant to the terms of the trust deed applicable to the plan.  These shares are held on trust for the eligible PRC officers.

The plan shall be valid and effective for a term of ten years from the date of adoption and it shall be subject to the administration of a committee delegated from time to time by the board and the trustee in accordance with the provisions of the trust deed and plan rules.  The term of the plan was extended for another ten years and the board of directors was empowered to terminate the plan before its expiry in accordance with the plan rules. There were 70,163 (2017: 70,163) ordinary shares held by the trustee at 31 December 2018.

27.        Related party transactions

The management considered the ultimate controlling party since date of incorporation to 31 December 2018 was Mr. Francis Chi.

2018 2017
HK$ HK$
(a) Transactions with key management personnel
Salaries and other short term employee benefits 4,782,453      5,608,629
(b) Transactions with non-controlling interests
Interest expense 64,690 4,780

Balances with related parties are disclosed in the balance sheet and in note 16.

28.        Commitments

(a)        Capital commitments

Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:

2018 2017
HK$ HK$
Contracted for 6,956 -

(b)        Operating lease

The future aggregate minimum lease rental expenses in respect of the manufacturing plants and office premises under non-cancellable operating lease are payable in the following periods:

2018 2017
HK$ HK$
Within one year 1,497,844 1,561,711
In the second to fifth years inclusive                -                -
1,497,844 1,561,711

29.        Reconciliations of liabilities arising from financing activities

Other assets Liabilities from
financing activities
Restricted
bank balances
(Current)
Loans from non-controlling interests
(Current)

Bank
Borrowings
(Current)



Total
HK$ HK$ HK$ HK$
As at 1 January 2017   105,210  -  (2,235,886) (2,130,676)
Inflow from financing activities     - (478,046)  (2,392,631)  (2,870,677)
Outflow from financing activities    424 - 2,392,631  2,393,055
Currency translations  10,473        -   (156,745)   (146,002)
As at 31 December 2017 116,377 (478,046) (2,392,631) (2,754,300)
As at 1 January 2018 116,377    (478,046) (2,392,631) (2,754,300)
Inflow from financing activities (117,249) - (3,994,522) (4,111,771)
Outflow from financing activities - - 2,282,584 2,282,584
Currency translations      872    (3,580)  110,047  107,339
As at 31 December 2018       -  (481,626) (3,994,522) (4,476,148)

30.        Critical accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities with the next financial year are discussed below.

(a)        Patents

The carrying amount of patents representing mainly legal costs for application of patents in respect of the various uses of formulation of cysteamine in various regions is HK$97,094 (2017: HK$468,463).  The Group carried an impairment test based on a variety of assumptions of the possibilities that the pending patents could be circumvented and concluded that no impairment was required.  Should the pending patents be circumvented, for example by an alternative formulation of cysteamine, then an impairment might arise and could have significant effect on the carrying amount of the patents stated at the balance sheet date.

 (b)       Depreciation

The measurement determines the estimated useful lives and residual values for its property, plant and equipment. Property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives.  The Group reviews annually the useful life of an asset and its residual value, if any.  The depreciation expense for future periods is revised if there are significant changes from previous estimation.

(c)        Impairments

In considering the impairment loss that may be required for certain property, plant and equipment, investments in subsidiaries of the Group, recoverable amount of the asset needs to be determined.  The recoverable amount is the greater of the net selling price and the value in use.  It is difficult to precisely estimate selling price because quoted market prices for these assets may not be readily available.  In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to items such as level of turnover and amount of operating costs.  The Group uses all readily available information in determining an amount that is reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of items such as turnover and operating costs.

For trade receivables (excluding non-financial assets), the Group applies the simplified approach to provide for expected credit losses as prescribed by IFRS 9, which requires the use of the lifetime expected loss allowance for all trade receivables (excluding non-financial assets). Management performed periodic assessment on the recoverability of the trade receivables and the sufficiency of provision for impairment based on information including credit profile of different customers, ageing of the trade receivables, historical settlement records, subsequent settlement status, expected timing and amount of realisation of outstanding balances, and on-going trading relationships with the relevant customers. Management also considered forward-looking information that may impact the customers’ ability to repay the outstanding balances in order to estimate the expected credit losses for the impairment assessment.

An increase or decrease in the above impairment loss would affect the net loss in the year and in future years.

(d)        Income taxes

Determining income tax provisions involves judgement on the future tax treatment of certain transactions and interpretation of tax rules.  The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly.  The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislation.

Deferred tax assets are recognised for tax losses not yet used and temporary deduction differences.  As those deferred tax assets can only be recognised to the extent that it is probable that future profit will be available against which the unused tax credit can be utilised, management’s judgement is required to assess the probability of future taxable profits.  Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered.

 (e)       Inventory provision

The Group performs regular reviews of the carrying amounts of inventories with reference to aged inventories analyses, projections of expected future saleability of goods and management experience and judgement.  Based on this review, write-down of inventories will be made when the carrying amounts of inventories decline below their estimated net realisable value.  Due to changes in customers’ performance, actual saleability of goods may be different from estimation and profit or loss could be affected by differences in this estimation.

31.        Reconciliation of loss before income tax to EBITDA

            2018 2017
HK$ HK$
Loss before income tax (8,565,724) (4,920,096)
Depreciation 209,083 285,927
Amortisation of patents 92,447 265,538
Interest income (23,059) (14,220)
Interest expenses 291,675 137,907
Patents written off 278,922 314,022
Impairment loss of patents
Provision of impairment of trade receivables
-
5,750,768
766,073
Property, plant and equipment written off 6,752 -
Loss on disposal of property, plant and equipment         -     2,286
EBITDA (1,959,136) (3,162,563)

EBITDA is defined herein as earnings before depreciation, amortisation, interest and tax, plus specific charges which are considered non-recurring in nature. Specific charges include impairment loss in value and gain/loss in disposal of non-current assets, and amortization of fair value of share-based compensation. EBITDA is not a recognised term under generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation may not be comparable to other similarly titled measures of other companies.

32.        Events after the balance sheet date

On 20 March 2019, the Group disposed of an indirectly held subsidiary, Walcom Bio-Chem (Thailand) Company Limited, to non-controlling interests at a consideration of THB16,500,000 (approximately HK$4,100,000).


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