Walcom Group Ltd - Final Results

9 May 2018

WALCOM GROUP LIMITED

(“Walcom” or “the Company”)

Final results for the year ended 31 December 2017

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 2017.

Results

In line with China’s slowing economy and the continued poor performance of the domestic pig farming industry, the Group’s sales in China recorded a small decrease during 2017.  With the aggregated effect of greater competition in the market and escalating costs in raw materials, a loss attributable to the Company’s shareholders of HK$4.34 million (2016: profit HK$1.26 million) was incurred for the year under review. Further, the high volatility in the exchange rate of Renminbi against Hong Kong Dollar has resulted in an accounting exchange loss of HK$2.2 million (2016: profit HK$2.1 million) in foreign currency translations, which is the major cause of the set back in the Group’s 2017 annual results.

Turnover (2017: HK$44.5 million; 2016: HK$46.5 million) and gross profit (2017: HK$24.3 million; 2016: HK$27.3 million) for the year decreased by approximately four per cent. and 11 per cent. respectively. The Group reported a net loss of HK$3.94 million for the year under review as compared with a net profit of HK$1.42 million in 2016. EBITDA also recorded a loss of HK$3.16 million in 2017 (2016: profit HK$3.38 million).

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

	Year ended	Year ended	Change
	31 December	31 December
	2017	2016
	HK$’000	HK$’000	per cent.
Turnover	44,488	46,469	(4.26)
Gross profit	24,311	27,322	(11.02)
(Loss) / profit from operations	(4,796)	2,811	n/a
EBITDA	(3,163)	3,376	n/a
Net finance expense	(124)	(70)	77.14
(Loss) / profit for the year	(3,940)	1,424	n/a
	Year ended	Year ended	Change
	31 December	31 December
	2017	2016
	HK$’000	HK$’000	per cent.
(Loss) / profit attributable to owners of the Company  - total  - basic per share (HK cents)  - diluted per share (HK cents)	(4,341) (6.31) (6.31)	1,263 1.84 1.84	n/a n/a n/a
Total equity attributable to owners of the Company   -total   -per share (HK cents)	14,720 21.38	15,872 23.06	(7.26) (7.26)

Operation and market review

As a result of the weak consumer market in China during 2017, the demand for pork and meat products remained low, which continued to drive the farmgate pig prices down.  Accordingly, the pig farms and feedmills, both of which are highly cost sensitive, reduced the use of feed additive products in their feedstuffs during the period. This led to reduced demand for feed additive products, including the Group’s products.  In line with these weak market conditions, the Group’s sales in the PRC decreased by two per cent. to HK$25.8 million during 2017 when compared with the HK$26.4 million in 2016.

Sales in Thailand increased by two per cent. to HK$16.9 million in 2017 (2016: HK$16.6 million), representing approximately 38 per cent. (2016: 36 per cent.) of the Group’s total sales. Although the economy in Thailand has still not recovered fully from the change of government regime in 2014, it has shown slow improvement. The increase in sales in Thailand can be attributed to an increase in consumption of the Group’s products by existing customers.

Sales in Korea decreased by 47 per cent. to HK$1.8 million in 2017 (2016: HK$3.4 million), representing approximately four per cent. (2016: seven per cent.) of the Group’s total sales. The Group’s distributor in Korea lost a major customer during 2017 which caused the decline in the Group’s sales 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 appreciated approximately one per cent. against China’s Renminbi (“RMB”). As approximately 58 per cent. of the Group’s sales were transacted in RMB, the appreciation of the HKD has had a negative exchange impact on the Group’s 2017 revenue. As mentioned above, during the years 2016 and 2017, the RMB exchange rate has been highly volatile against the HKD and this has caused an accounting exchange loss of HK$2.2 million in 2017, comparing to an accounting exchange profit of HK$2.1 million in 2016, in translating assets and liabilities within the Group.

Recent Developments

As mentioned in my statement in the 2017 half-yearly report, the Group has focused on increasing sales penetration of existing big customers which have low usage of the Group’s products and also those integrated meat producing companies whose businesses include feed milling, pig farming, pig slaughtering and pork product production. Enhanced by other sales tactics, this sales strategy has successfully gained some sales traction during the year, although more time is needed for it to become fruitful.

Patents

At the end of 2017 the Group held 36 granted patents in respect of:

• its core Cysteamine technology in China, India, South Korea and Vietnam;
• poultry feed in the UK, North Korea, Taiwan, Russia, China, Australia, Philippines and Thailand;
• dairy cow feed in New Zealand, the UK, Europe, Mexico, India, China, Russia, Australia and Malaysia;
• fish feed in the UK, China, Thailand, Philippines, Vietnam and Taiwan; and
• shellfish feed in Europe, Vietnam, Indonesia, Taiwan, Philippines and China.

Most of the patents for which the Group has applied in recent years have been granted. The Directors believe that there is wide patent coverage in jurisdictions where there are significant demands 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 year end, the Group had a short-term bank loan of HK$2.4 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 14 February 2018, the Group has negotiated and agreed a new secured three-year RMB 2 million revolving credit facility via its wholly owned subsidiary Shanghai Walcom Bio-Chem Co., Ltd. The funds will be used to finance the Group’s general working capital.

Dividend

The Directors do not recommend any dividend payment for the year ended 31 December 2017.

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 Thursday 14 June 2018.  A notice of the AGM will be sent to the Company’s shareholders, along with the 2017 annual report and financial statements, during the third week of May 2018.

Outlook

A new term of the PRC government, which is basically a continuation of the leadership from the last administration, has started in 2018. Therefore it is highly likely that the policy of structural transformation in the country’s economy, which was brought forward from the previous administration, will continue in the coming years.  In line with the last few years, this policy of economic structural transformation is expected to cause slower growth in the Chinese economy for the foreseeable future.  The trade war between the governments of China and the United States of America has been escalating and the outcome has yet to be confirmed. In addition, the expected interest rate hikes in the United States of America this year has added uncertainty to the global economy. With all these factors in mind, the Board believes 2018 will be another challenging year for the Group as the Board anticipates a volatile global economic outlook for the year. Although the increase in the raw material costs and the production costs of the Group’s products have become less significant than 2017, they nevertheless will still have an adverse impact on the Group’s gross profit margin this year.

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

Frankie Y. L. Wong

Chairman

9 May 2018

Further enquiries:

Walcom Group Limited Francis Chi (Chief Executive Officer) Albert Wong (Chief Financial Officer)	[phone]
Allenby Capital Limited Virginia Bull	[phone]

Consolidated statement of profit or loss

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

	Note	2017		2016
		HK$		HK$
Revenue	3	44,488,372		46,469,041
Cost of sales		(20,177,334)		(19,147,412)
Gross profit		24,311,038		27,321,629
Other income	4	215,041		275,269
Research and development expenses		(1,482,466)		(1,565,262)
Selling and distribution expenses		(12,743,778)		(11,346,594)
General and administrative expenses		(15,096,244)		(11,874,526)
(Loss) / profit from operations		(4,796,409)		2,810,516
Net finance expense	5	(123,687)		(70,342)
(Loss) / profit before income tax	6	(4,920,096)		2,740,174
Income tax credit / (expense)	7	979,861		(1,316,475)
(Loss) / profit for the year		(3,940,235)		1,423,699
(Loss) / profit attributable to:
Owners of the Company		(4,341,039)		1,263,286
Non-controlling interests		400,804		160,413
(Loss) / profit for the year		(3,940,235)		1,423,699
(Losses) /earnings per share - basic, HK cents	10	(6.31)		1.84
- diluted, HK cents		(6.31)		1.84

Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

		2017		2016
		HK$		HK$
(Loss) / profit for the year		(3,940,235)		1,423,699
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries		3,429,000		(2,603,259)
Total comprehensive loss for the year		(511,235)		(1,179,560)
Total comprehensive loss attributable to:
Owners of the Company		(1,151,641)		(1,356,994)
Non-controlling interests		640,406		177,434
Total comprehensive loss for the year		(511,235)		(1,179,560)

Consolidated balance sheet as at 31 December 2017

(Expressed in Hong Kong dollars)

	Note		2017			2016
			HK$			HK$
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment	12		6,001,662			4,832,774
Patents	13		468,463			1,814,096
Goodwill	14		-			-
Deferred tax assets	23		1,072,500			-
			7,542,625			6,646,870
CURRENT ASSETS
Inventories	16		2,907,267			1,380,728
Trade and other receivables	17		12,090,127			8,985,988
Tax recoverable			134,027			42,168
Cash and cash equivalents	18		3,594,050			9,012,203
Restricted cash	18		116,377			105,210
			18,841,848			19,526,297
TOTAL ASSETS			26,384,473			26,173,167
EQUITY
Share capital	22		688,344			688,344
Reserves			14,031,518			15,183,159
Total equity attributable to OWNERs of the Company			14,719,862			15,871,503
Non-controlling interests			2,904,435			2,264,029
TOTAL EQUITY			17,624,297			18,135,532
CURRENT LIABILITIES
Trade and other payables	19		5,571,861			4,744,113
Tax payables			317,638			1,057,636
Loans from non-controlling interests	20		478,046			-
Bank borrowings	21		2,392,631			2,235,886
			8,760,176			8,037,635
TOTAL LIABILITIES			8,760,176			8,037,635
TOTAL EQUITY AND LIABILITIES			26,384,473			26,173,167
NET CURRENT ASSETS			10,081,672			11,488,662
TOTAL ASSETS LESS CURRENT LIABILITIES			17,624,297			18,135,532

Consolidated statement of changes in equity

For the year ended 31 December 2017

(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 22(b)(i))		(Note 22(b)(ii))				(Note 22(b)(iii))		(Note 22(b)(iv))
At 1 January 2016	688,344		95,298,644		23,852,469		1,568,769		225,525		3,263,694		(107,668,948)		17,228,497		2,086,595		19,315,092
Comprehensive income
Profit for the year	-		-		-		-		-		-		1,263,286		1,263,286		160,413		1,423,699
Other comprehensive income
Exchange difference on translation of
financial statements of overseas subsidiaries	-		-		-		-		(2,620,280)		-		-		(2,620,280)		17,021		(2,603,259)
Total comprehensive loss for the year	-		-		-		-		(2,620,280)		-		1,263,286		(1,356,994)		177,434		(1,179,560)
Appropriation to surplus reserve	-		-		-		-		-		338,633		(338,633)		-		-		-
At 31 December 2016	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
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 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

Consolidated statement of cash flows

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

	Note	2017		2016
		HK$		HK$
Cash flow from operating activities
(Loss) / profit before income tax		(4,920,096)		2,740,174
Amortisation of patents	6(b)	265,538		265,538
Impairment loss of patents	6(b)	766,073		-
Interest received	5	(14,220)		(63,460)
Depreciation	12	285,927		288,704
Foreign exchange loss / (gain), net	6(b)	2,260,760		(2,083,712)
Interest paid	5	137,907		133,802
Loss on disposal of property, plant and equipment	6(b)	2,286		11,317
Patents written off	6(b)	314,022		-
Operating (loss) / profit before working capital changes		(901,803)		1,292,363
(Increase) / decrease in inventories		(1,526,539)		867,156
Increase in trade and other receivables		(3,104,139)		(1,290,281)
Increase / (decrease) in trade and other payables		827,748		(210,806)
Net cash (used in) / generated from operations		(4,704,733)		658,432
Corporate income tax paid		(924,496)		(961,878)
Interest paid		(137,907)		(133,802)
Net cash used in operating activities		(5,767,136)		(437,248)
Cash flow from investing activities
Purchases of property, plant and equipment		(920,725)		(3,649,857)
Proceeds from disposal of property, plant and equipment		23		-
Interest received		14,220		63,460
Net cash used in investing activities		(906,482)		(3,586,397)
Cash flow from financing activities
Increase in restricted bank balances	28	(424)		(1,397)
Proceeds from loans from non-controlling interests	28	478,046		-
Repayment of bank borrowings	28	(2,392,631)		(2,387,205)
Proceeds from new bank borrowings	28	2,392,631		2,235,886
Net cash generated from / (used in) financing activities		477,622		(152,716)
Net decrease in cash and cash equivalents		(6,195,996)		(4,176,361)
Cash and cash equivalents at the beginning of the year		9,012,203		13,670,351
Exchange gain / (loss) on cash and cash equivalents		777,843		(481,787)
Cash and cash equivalents at the end of the year	18	3,594,050		9,012,203

Notes to the consolidated financial statements

For the year ended 31 December 2017

(Expressed in Hong Kong dollars)

1      Publication of non-statutory accounts

The financial information set out in this preliminary announcement does not constitute statutory accounts.

The financial information for the year ended 31 December 2017 has been extracted from the Company’s financial statements to that date, which have received an unqualified auditors’ report.

2      Basis of preparation

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.

3      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. 

	2017	2016
Sale of chemical feed additive products	HK$	HK$
	44,488,372	46,469,041

4      Other income

	2017	2016
	HK$	HK$
Government grants	177,946	248,841
Sundry income	37,095	26,428
	215,041	275,269

Note: During the years ended 31 December 2017 and 2016, the Group received grants from local government bodies in the PRC, which aimed at the technology development of the Group.

5      Net finance expense

	2017	2016
	HK$	HK$
Bank interest income	14,220	63,460
Interest expense on loans from non-controlling interests	(4,780)	-
Interest expense on bank loan	(133,127)	(133,802)
	(123,687)	(70,342)

6      (Loss) / profit before income tax

        (Loss) / profit before income tax is stated after charging the following items:-

(a)  Staff costs (including directors’ emoluments)

	2017	2016
	HK$	HK$
Salaries, wages and commission	10,186,056	10,275,948
Contributions to defined contribution retirement plans	877,054	839,484
Other staff benefits	3,042,257	3,545,683
	14,105,367	14,661,115

(b)    Other items

	2017	2016
	HK$	HK$
Amortisation of patents	265,538	265,538
Auditor’s remuneration	335,977	312,226
Cost of inventories sold (note 16)	19,190,422	17,675,779
Depreciation not charged to cost of sales	189,086	210,131
Exchange losses/(gains), net	2,260,760	(2,083,712)
Loss on disposal of property, plant and equipment	2,286	11,317
Patents written off	314,022	-
Impairment loss of patents	766,073	-
Rental charges under operating leases in respect of
land and buildings	841,008	878,599

7      Income tax (credit) / expense

	2017	2016
	HK$	HK$
Current income tax
- Thailand corporate income tax	237,963	122,526
- Shanghai foreign enterprise income tax	141,999	1,193,949
	379,962	1,316,475
Adjustments in respect of prior years
- Shanghai foreign enterprise income tax	(287,323)	-
	92,639	1,316,475
Deferred income tax (Note 23)	(1,072,500)	-
	(979,861)	1,316,475

(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 (2016: 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.

        Hong Kong Profits Tax is calculated at 16.5% (2016: 16.5%) of the estimated assessable profit for the year. However, no provision for Hong Kong profits tax has been made (2016: 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 25% (2016: 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 not granted tax relief whereby the applicable income tax rate was 25% for the years 2016 and 2017.

Thailand Corporate Income Tax is calculated at 20% (2016: 20%) of the net profit for the year.

(b)    Taxation for the Group (continued)

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

	2017	2016
	HK$	HK$
(Loss) / profit before income tax	(4,920,096)	2,740,174
Notional tax calculated on (loss) / profit before income tax, calculated
at the rates applicable to profits in the countries concerned	(858,046)	931,990
Tax effect of:
Expenses not deductible for tax purpose	1,614,889	692,099
Non-taxable revenue	(8)	(13)
Temporary differences not recognised	572	(911)
Overprovision in prior years	(287,323)	-
Tax losses not recognised	5,474	-
Previously unrecognised tax losses used to reduce deferred tax expenses	(1,072,500)	-
Utilisation of previously unrecognised tax losses	(382,919)	(306,690)
Income tax (credit) / expense	(979,861)	1,316,475

(iii)   At 31 December 2017, the Group has unused tax losses of approximately HK$45,585,000 (2016: HK$47,905,000) available for offset against future profits. During the year, deferred tax asset of approximately HK$1,073,000 (2016: Nil) has been recognised in respect of such tax losses. No deferred tax asset has been recognised in respect of the remaining HK$34,085,000 due to the unpredictability of future profit streams. The unrecognised tax losses may be carried forward indefinitely.

8      Loss attributable to shareholders

Loss attributable to owners of the Company for the year ended 31 December 2017 dealt with in the financial statements of the Company was approximately HK$239,000 (2016: Profit of HK$55,000).

9      Dividends

The Company does not recommend the payment of any dividend for the year ended 31 December 2017 (2016: Nil).

10    (Losses) / earnings per share

       There is no difference between basic and diluted (losses) / earnings per share. The basic and diluted losses per share for the year ended 31 December 2017 are calculated by dividing the Group’s loss attributable to owners of the Group of HK$4,341,039 (2016: profit of HK$1,263,286) by the weighted average number of 68,834,388 ordinary shares (2016: 68,834,388 ordinary shares). The computation of diluted (losses) / earnings 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 2017 and 2016.

11    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

	2017	2016
	HK$	HK$
PRC	25,759,215	26,447,044
Thailand	16,854,536	16,643,536
Korea	1,799,741	3,378,461
Others	74,880	-
	44,488,372	46,469,041

(b)    Geographical information (continued)

       (ii)      Segment assets by geographical location of the assets

	2017	2016
	HK$	HK$
Hong Kong	2,449,543	1,499,263
PRC	13,943,939	14,882,387
The Philippines	-	93,115
Thailand	9,613,986	8,287,443
Taiwan	-	252,221
Other Asia-Pacific countries	164,232	577,499
Europe and United Kingdom	183,478	538,778
America and Canada	29,295	34,046
Others	-	8,415
	26,384,473	26,173,167

(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.

	2017	2016
Revenue from major customers:	HK$	HK$
Sale of chemical feed additive products
Customer A	7,612,493	7,447,862
Customer B	7,458,638	5,709,373
Customer C	6,050,715	6,718,528

12   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 1.1.2016	944,835	1,374,847	89,716	999,121	2,563,331	534,043	6,505,893
Additions	3,496,822	-	-	56,892	96,143	-	3,649,857
Disposal	-	-	-	(103,227)	(9,943)	-	(113,170)
Exchange
realignment	9,425	(75,011)	(4,230)	(43,881)	(162,276)	(33,852)	(309,825)
At 31.12.2016	4,451,082	1,299,836	85,486	908,905	2,487,255	500,191	9,732,755
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
Disposals	-	-	(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
Accumulated
depreciation
At 1.1.2016	286,594	1,249,504	64,748	805,348	2,257,863	321,138	4,985,195
Charge for
the year	43,545	16,968	8,236	59,120	80,560	80,275	288,704
Eliminated
on disposals	-	-	-	(92,905)	(8,948)	-	(101,853)
Exchange
realignment	2,196	(72,892)	(3,151)	(34,926)	(142,935)	(20,357)	(272,065)
At 31.12.2016	332,335	1,193,580	69,833	736,637	2,186,540	381,056	4,899,981
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
Net book value
At 31.12.2017	5,305,087	97,209	12,071	288,725	235,977	62,593	6,001,662
At 31.12.2016	4,118,747	106,256	15,653	172,268	300,715	119,135	4,832,774

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 2017, the carrying amount of HK$4,666,918 represented the Group’s interest of 66.67% in the land (2016: HK$3,496,822).

13    Patents

		Group HK$
Cost
	At 1.1.2016 and 31.12.2016	4,610,405
	Patent written off	(989,146)
	At 31.12.2017	3,621,259
Accumulated amortisation and impairment
	At 1.1.2016	2,530,771
	Charge for the year	265,538
	At 31.12.2016	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
Net book value
	At 31.12.2017	468,463
	At 31.12.2016	1,814,096

The remaining amortisation period of the patents ranged from 3 years to 10 years. The amortisation charge is included in selling and distribution expenses in the consolidated statement of profit or loss and other comprehensive income.

14    Goodwill

		Group HK$
Cost
	At 31.12.2016 and 31.12.2017	127,857
Impairment losses
	At 31.12.2016 and 31.12.2017	127,857
Net book value
	At 31.12.2017	-
	At 31.12.2016	-

15    Investments in subsidiaries

	Company
	2017	2016
	HK$	HK$
Unlisted investment, at cost	384	384
Amounts due from subsidiaries
Non-trade related balances	36,487,626	42,005,281
Impairment losses on non-trade related balances	(36,487,626)	(42,005,281)
	-	-

(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.

16    Inventories

	Group
	2017	2016
	HK$	HK$
Raw materials	1,068,157	546,031
Finished goods	1,839,110	834,697
	2,907,267	1,380,728

The cost of inventories sold recognised as expenses and included in cost of sales amounted to HK$19,190,422 (2016: HK$17,675,779).

17    Trade and other receivables

	Group
	2017	2016
	HK$	HK$
Trade receivables	11,501,231	8,019,256
Less: provision for impairment loss	(508,758)	(508,758)
Trade receivables - net	10,992,473	7,510,498
Deposits and prepayments	1,019,758	1,237,171
Other receivables	77,896	238,319
	12,090,127	8,985,988

All trade and other receivables are expected to be recovered within one year.

1. Impairment of trade receivables

The movement in the provision of impairment for doubtful debts during the year, including both specific and collective loss components, is as follows:

	2017	2016
	HK$	HK$
At 1 January	508,758	508,758
Written off	-	-
At 31 December	508,758	508,758

At 31 December 2017, the Group’s trade receivables of HK$508,758 (2016: HK$508,758) have been outstanding for a certain period of time. The management assessed that only a portion of the receivables is expected to be recoverable. No further individual provision of impairment for doubtful debts was provided in the year ended 31 December 2017 (2016: Nil). 

The Group does not hold any collateral over these balances.

1. 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:

	2017	2016
	HK$	HK$
Neither past due nor impaired	5,816,790	5,519,269
Less than one month past due	725,390	985,081
1 to 4 months past due	1,579,136	1,006,148
Over 4 months past due	2,871,157	-
	5,175,683	1,991,229
	10,992,473	7,510,498

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 impairment allowance 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.  The Group does not hold any collateral over these balances.

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

	Group
	2017	2016
Thai Baht	THB 14,229,327	THB 13,636,000
Renminbi	RMB 6,345,600	RMB 4,072,800

18    Cash and bank balances

	Group
	2017	2016
	HK$	HK$
Cash at bank and on hand	3,710,427	9,117,413
Less: Cash at bank – restricted	(116,377)	(105,210)
Cash and cash equivalents in the statement of cash flows	3,594,050	9,012,203
	The Company
	2017	2016
	HK$	HK$
Cash and cash equivalents in the balance sheet	25,327	25,309

Included in the cash and cash equivalents of the Group, HK$1,420,165 (2016: HK$4,562,565) 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 2017, HK$116,377 (2016: HK$105,210) 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:

		2017			2016
Renminbi United States dollars	RMB US$	1,187,643 168,649		RMB US$	4,081,738 433,896
British Pound	GB£	856		GB£	2,267
Thai Baht	THB	1,362,910		THB	2,924,537

19    Trade and other payables

	Group
	2017	2016
	HK$	HK$
Trade payables	1,238,690	1,318,966
Other payables and accrued expenses	4,333,171	3,425,147
	5,571,861	4,744,113

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:

	2017	2016
Renminbi	RMB  1,035,421	RMB  1,179,815

20    Loans from non-controlling interests

At 31 December 2017, the loans from non-controlling interests were unsecured and repayable as follows:

	Group
	2017	2016
	HK$	HK$
Current liabilities
Loans from non-controlling interests – unsecured	478,046	-
Total borrowings	478,046	-

1. The maturity of borrowings is as follows:

	Group
	2017	2016
	HK$	HK$
Within 1 year or on demand	478,046	-

1. The effective interest rate per annum for loans from non-controlling interests at balance sheet date is at 12% (2016: Nil) per annum.

On 28 November 2017, an indirectly held subsidiary of the Group situated in Thailand has obtained borrowings of HK$478,046 denominated in THB with maturity of 1 year. The borrowing was unsecured.

21    Bank borrowings

At 31 December 2017, the bank borrowings were unsecured and repayable as follows:

	Group
	2017	2016
	HK$	HK$
Current liabilities
Bank borrowings – unsecured	2,392,631	2,235,886
Total borrowings	2,392,631	2,235,886

1. The maturity of borrowings is as follows:

	Group
	2017	2016
	HK$	HK$
Within 1 year or on demand	2,392,631	2,235,886

1. The effective interest rate per annum for bank borrowings at balance sheet date is at 5.7% (2016: 5.7%) per annum.

During the 2017 reporting period, the Group fully repaid a bank borrowing of HK$2,235,886 denominated in RMB, which was unsecured.

On 14 November 2017, an indirectly held subsidiary of the Group situated in the PRC has obtained a bank borrowing of HK$2,392,631 denominated in RMB with maturity of 1 year. The bank borrowing was unsecured.

22    Capital and reserves

(a)    Share capital

	2017		2016
	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 1.1.2016			95,298,644		6,410,193		(102,827,765)		(1,118,928)
Comprehensive income
Profit for the year			-		-		54,854		54,854
Balance at 31.12.2016			95,298,644		6,410,193		(102,772,911)		(1,064,074)
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)

(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) to the report and accounts.

(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) of the report and accounts; 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 22(b)(i), no reserves were available at 31 December 2016 and 2017 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 2017 and 2016 were 21% and 12% respectively, calculated as follows :

		2017		2016
		HK$		HK$
Current liabilities:
- Loans from non-controlling interests		478,046		-
- Bank borrowings		2,392,631		2,235,886
Total debts		2,870,677		2,235,886
Owners’ equity		14,719,862		15,871,503
(Less) / add : Exchange reserve		(794,643)		2,394,755
Adjusted capital		13,925,219		18,266,258
Gearing ratio		21%		12%

23    Deferred tax assets

        The analysis of deferred tax assets is as follows:

	2017	2016
	HK$	HK$
Deferred tax assets:
-Deferred income tax assets to be recovered after more than 12 months	858,000	-
-Deferred income tax assets to be recovered within 12 months	214,500	-
	1,072,500	-

        The movement in deferred income tax assets is as follows:

	Tax losses
	2017	2016
	HK$	HK$
At 1 January	-	-
Credited to the consolidated statement of profit or loss (note 7)	1,072,500	-
At 31 December	1,072,500	-

24    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 2017, 1,830,000 ordinary shares options have been granted to directors and employees of the Company under the Share Option Scheme. During the year, 1,500,000 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 2017		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
Albert Siu Fai Wong		9 June 2010		250,000		2 years commencing from 9 June 2010		From 9 June 2012 to 8 June 2020 (both days inclusive)		GB£ 0.07
		9 June 2010		250,000		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		165,000		2 years commencing from 9 June 2010		From 9 June 2012 to 8 June 2020 (both days inclusive)		GB£ 0.07
		9 June 2010		165,000		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.

25    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 (2016: 70,163) ordinary shares held by the trustee at 31 December 2017.

26    Related party transactions

The management considered the ultimate controlling party since date of incorporation to 31 December 2017 was Mr. Francis Chi.

	2017	2016
	HK$	HK$
(a)    Transactions with key management personnel
Salaries and other short term employee benefits	5,608,629	7,530,816
(b)    Transactions with non-controlling interests
Interest expenses	4,780	-

        Balances with related parties are disclosed in the balance sheet and in note 15.

27    Commitments

(a)    Capital commitments

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

	2017	2016
	HK$	HK$
Property, plant and equipment	-	726,720

(b)    Operating lease commitments

        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:

	2017	2016
	HK$	HK$
Within one year	1,561,711	1,335,881
In the second to fifth years inclusive	-	24,952
	1,561,711	1,360,833

28    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	10,743	-	(156,745)	(146,002)
As at 31 December 2017	116,377	(478,046)	(2,392,631)	(2,754,300)

29    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$468,463 (2016: HK$1,814,096).  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.

Impairment losses for bad and doubtful debts are assessed and provided based on the directors’ regular review of ageing analysis and evaluation of collectability.  A considerable level of judgement is exercised by the directors when assessing the credit worthiness and past collection history of each individual customer.

An increase or decrease in the above impairment loss would affect the net (loss) / profit 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.

30    Reconciliation of (loss) / profit before income tax to EBITDA

	2017	2016
	HK$	HK$
(Loss) / profit before income tax	(4,920,096)	2,740,174
Depreciation	285,927	288,704
Amortisation of patents	265,538	265,538
Interest income	(14,220)	(63,460)
Interest expenses	137,907	133,802
Patents written off	314,022	-
Impairment loss of patents	766,073	-
Loss on disposal of property, plant and equipment	2,286	11,317
EBITDA	(3,162,563)	3,376,075

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.

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