All references to “Renminbi,”
“RMB” or “yuan” are to the legal currency of the People’s Republic of China, and all references to “U.S.
dollars,” “dollars,” “$” are to the legal currency of the United States. This Report contains translations
of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the
Renminbi or U.S. dollar amounts referred to in this Report could have been or could be converted into U.S. dollars or Renminbi, as the
case may be, at any particular rate or at all. On April 23, 2021, the buying rate announced by the Federal Reserve Statistical Release
was RMB 6.4945 to $1.00.
PART I
ITEM 1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not
required.
ITEM 2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
Not
required.
|
A.
|
Selected financial data
|
The
following selected consolidated financial data as of and for the years ended December 31, 2020, 2019, 2018, 2017, and 2016 have
been derived from the audited consolidated financial statements of Antelope Enterprises included in this Annual Report. This information
is only a summary and should be read together with the consolidated financial statements, the related notes, the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations of Antelope Enterprises” and other financial information
included in this Annual Report.
The
consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS,
as issued by the International Accounting Standards Board (“IASB”). The results of operations of Antelope Enterprises in
any period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors”
included elsewhere in this Annual Report.
ANTELOPE
ENTERPRISE HOLDINGS LIMITED AND SUBSIDIARIES
Selected
Consolidated Financial Data
(RMB
in Thousands except per Share and Operating Data)
|
|
As
of December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
2016
|
|
Consolidated Statements of Financial Position Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
12,344
|
|
|
|
8,212
|
|
|
|
9,016
|
|
|
|
2,328
|
|
|
110
|
|
Total current assets
|
|
|
166,860
|
|
|
|
362,248
|
|
|
|
366,895
|
|
|
|
728,535
|
|
|
781,769
|
|
Total assets
|
|
|
225,386
|
|
|
|
362,283
|
|
|
|
366,941
|
|
|
|
825,418
|
|
|
931,281
|
|
Total current liabilities
|
|
|
81,309
|
|
|
|
89,390
|
|
|
|
90,923
|
|
|
|
130,682
|
|
|
158,832
|
|
Long-term obligations
|
|
|
46,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Total liabilities
|
|
|
128,037
|
|
|
|
89,390
|
|
|
|
90,923
|
|
|
|
130,682
|
|
|
158,832
|
|
Total equity
|
|
|
97,349
|
|
|
|
272,893
|
|
|
|
276,018
|
|
|
|
694,736
|
|
|
772,449
|
|
Outstanding shares *
|
|
|
3,674,370
|
|
|
|
2,435,662
|
|
|
|
1,892,901
|
|
|
|
1,283,828
|
|
|
940,313
|
|
|
•
|
Reflects
3:1 reverse stock split effected on September 3, 2020
|
|
|
As
of December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Consolidated Statement of Comprehensive Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
182,989
|
|
|
|
327,581
|
|
|
|
498,189
|
|
|
|
821,792
|
|
|
|
793,745
|
|
Gross profit (loss)
|
|
|
(26,002)
|
|
|
|
81,326
|
|
|
|
(1,166)
|
|
|
|
50,354
|
|
|
|
(30,111)
|
|
Operating income (loss)
|
|
|
(214,993
|
)
|
|
|
(24,081
|
)
|
|
|
(346,620
|
)
|
|
|
(50,635
|
)
|
|
|
(89,714)
|
|
Loss before taxation
|
|
|
(193,062
|
)
|
|
|
(9,445
|
)
|
|
|
(418,465
|
)
|
|
|
(78,285
|
)
|
|
|
(316,221
|
)
|
Loss attributable to shareholders
|
|
|
(193,095
|
)
|
|
|
(9,501
|
)
|
|
|
(418,674
|
)
|
|
|
(88,026
|
)
|
|
|
(321,802
|
)
|
Earnings per share – *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(65.67
|
)
|
|
|
(4.68
|
)
|
|
|
(279.54
|
)
|
|
|
(79.08
|
)
|
|
|
(349.53
|
)
|
Diluted
|
|
|
(65.67
|
)
|
|
|
(4.68
|
)
|
|
|
(279.54
|
)
|
|
|
(79.08
|
)
|
|
|
(349.53
|
)
|
Weighted average shares outstanding – *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,940,265
|
|
|
|
2,025,222
|
|
|
|
1,497,679
|
|
|
|
1,113,162
|
|
|
|
920,666
|
|
Diluted
|
|
|
2,940,265
|
|
|
|
2,025,222
|
|
|
|
1,497,679
|
|
|
|
1,113,162
|
|
|
|
920,666
|
|
Cash dividends declared
per share (RMB)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
•
|
Reflect
3:1 reverse stock split effected on September 3, 2020
|
The following table sets forth
information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. On April 23, 2021, the buying rate
announced by the Federal Reserve Statistical Release was RMB 6.4945 to $1.00 .
|
|
|
|
|
|
Spot Exchange Rate
|
|
Period
|
|
|
Period
Ended
|
|
|
Average
(1)
|
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(RMB
per US$1.00)
|
|
2016
|
|
|
|
|
|
|
|
6.9421
|
|
|
|
6.6424
|
|
|
|
6.4498
|
|
|
|
6.9570
|
|
2017
|
|
|
|
|
|
|
|
6.5063
|
|
|
|
6.7568
|
|
|
|
6.4773
|
|
|
|
6.9575
|
|
2018
|
|
|
|
|
|
|
|
6.8755
|
|
|
|
6.6896
|
|
|
|
6.2649
|
|
|
|
6.9737
|
|
2019
|
|
|
|
|
|
|
|
6.9618
|
|
|
|
6.9081
|
|
|
|
6.6822
|
|
|
|
7.1786
|
|
2020
|
|
|
|
|
|
|
|
6.5250
|
|
|
|
6.9042
|
|
|
|
6.5208
|
|
|
|
7.1681
|
|
2021
|
|
|
|
January
|
|
|
|
6.4282
|
|
|
|
6.4678
|
|
|
|
6.4282
|
|
|
|
6.4822
|
|
|
|
|
|
February
|
|
|
|
6.4730
|
|
|
|
6.4601
|
|
|
|
6.4344
|
|
|
|
6.4869
|
|
|
|
|
|
March
|
|
|
|
6.5518
|
|
|
|
6.5109
|
|
|
|
6.4648
|
|
|
|
6.5716
|
|
Source: Federal
Reserve Statistical Release.
(1)
|
Annual averages, lows,
and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using the average of the daily rates
during the relevant period.
|
|
B.
|
Capitalization and Indebtedness
|
Not
required.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not
required.
You
should carefully consider the following risk factors, together with all of the other information included in this Annual Report.
Risk
Factors Relating to Our Business
We
generate a large percentage of our revenues from a limited number of customers and our business will suffer if sales to such customers
decline.
Our
five largest customers accounted for an aggregate of 96.7%, 43.3% and 76.0% of our total revenue in fiscal years 2018, 2019 and 2020.
We are particularly exposed to the credit risks of these customers as defaults in payment by our major customers would have a significant
impact on our cash flows and financial results. Our agreements with our major customers do not specify minimum sales volume. There is
no assurance that we will continue to retain these customers or that they will continue to purchase our products at their current levels
in the future. If there is any reduction or cancellation of purchase orders by these customers for any reason, including a fall in demand
from our customers’ downstream developer clients, or a termination of a relationship with these customers, our revenues will be
negatively impacted.
Payment
defaults by the customers to whom we extend credit would harm our cash flows and results.
Our
financial position and profitability are dependent on the creditworthiness of our customers. We are exposed to the credit risks of our
customers and this risk increases the larger the orders are. We usually offer our customers credit terms of approximately 120 to 150
days. During the past two years our trade receivable turnover has increased substantially. As of fiscal year end 2020, it was 242 days.
We may experience increased credit risk from our customers resulting in an increased level of doubtful or bad debts in the future. Should
we experience any unexpected delay or difficulty in collecting receivables from our customers, our cash flows and financial results may
be adversely affected.
If
our suppliers are unable to fulfill our orders for raw materials, we may lose business.
Our
suppliers are all located in the PRC. Our purchases of raw materials is based on expected production levels, after taking into consideration,
amongst other factors, sales forecasts and actual orders from our customers. To ensure that we are able to deliver quality products at
competitive prices, we need to secure sufficient quantities of raw materials at acceptable prices and quality on a timely basis. Typically,
we do not enter into any long-term supply agreements with our suppliers. There is no assurance that these suppliers will continue to
supply us in the future or that they will do so at acceptable prices. In the event our suppliers are unable to fulfill our orders or
meet our requirements, we may not be able to find timely replacements at acceptable prices and quality, and this will delay the fulfillment
of our customers’ orders. Consequently, our reputation may be negatively affected, leading to a loss of business and affecting
our ability to attract new business.
Increases
in the price of raw materials will negatively impact our profitability.
In
fiscal years 2018, 2019 and 2020 our cost of raw materials and energy source, which consist of clay (comprising mainly of kaolin, flint
and feldspar), coal and natural gas (used to heat our kilns), coloring materials and glazing materials, accounted for approximately 61.6%,
56.7% and 25.1% of our total cost of sales in fiscal years 2018, 2019 and 2020. The price of clay, coal, natural gas, coloring materials
and glazing materials may fluctuate due to factors such as global supply and demand for such raw materials and changes in global economic
conditions. Coal and natural gas in aggregate accounted for approximately 12.9%, 12.1% and 5.2% of our total costs of raw materials as
an energy source in fiscal years 2018, 2019 and 2020. Any shortages or interruptions in the supply of clay, coal and natural gas, coloring
materials or glazing materials will result in an increase in the cost of production, thus increasing our cost of sales. If we are not
able to pass on such an increase to our customers or are unable to find alternative sources of clay, coal, coloring materials, or glazing
materials or appropriate substitute raw materials at comparable prices, our gross margins and overall financial performance will be adversely
affected.
The
Company may incur significant delays and/or expenses relating to the COVID-19 (coronavirus) outbreak in China and beyond
Beginning
in late 2019, a novel strain of coronavirus (COVID-19) was reported and the World Health Organization has declared the outbreak to constitute
a “Public Health Emergency of International Concern.” This has prompted government-imposed quarantines, closures of certain
travel and businesses. Following this outbreak, in February 2020, the Company temporarily shut down its operations in Jinjiang City,
Fujian Province, and Gao’An City, Jiangxi Province, as mandated by the local authorities. In March 2020, the Company gradually
resumed its operations in these cities and continues to operate such production facilities. It is presently unknown whether and to what
extent the Company’s supply chains may be affected if the pandemic persists for an extended period of time. The Company may incur
significant delays or expenses relating to such events outside of its control, which could have a material adverse impact on its business,
operating results and financial condition.
If
China’s inflation increases or the prices of energy or raw materials increase, we may not be able to pass the resulting increased
costs to our customers and this may adversely affect our profitability or cause us to suffer operating losses.
Economic
growth in China has, in the past, been accompanied by periods of high inflation. In the past, the Chinese government has implemented
various policies from time to time to control inflation. For example, the Chinese government has periodically introduced measures in
certain sectors to avoid overheating of the economy, including tighter bank lending policies, increases in bank interest rates, and measures
to curb inflation, which has resulted in a decrease in the rate of inflation. An increase in inflation could cause our costs for energy,
labor costs, raw materials and other operating costs to increase, which would adversely affect our financial condition and results of
operations.
We
are dependent on our management team and any loss of our key management personnel without timely and suitable replacements may reduce
our revenues and profits.
Our
business is also dependent on our executive officers who are responsible for implementing our business plans and driving growth. Please
refer to “Directors, Senior Management and Employees” herein for more information about our directors and officers. The demand
for such experienced personnel is intense and the search for personnel with the relevant skills set can be time consuming. The loss of
our key management personnel without timely and suitable replacements may reduce our revenues and profits.
Failure
to compete successfully with our competitors and new entrants to the ceramics industry in the PRC may result in Antelope Enterprises
losing market share.
We
operate in a competitive and fragmented industry. There is no assurance that we will not face competition from our existing competitors
and new entrants. We compete with a variety of companies, some of which have advantages that include: longer operating history, larger
clientele base, superior products, better access to capital, personnel and technology, or are better entrenched. Our competitors may
be able to respond more quickly to new and emerging technologies and changes in customer requirements or succeed in developing products
that are more effective or less costly than our products. Any increase in competition could have a negative impact on our pricing (thus
eroding our profit margins) and reduce our market share. If we are unable to compete effectively with our existing and future competitors
and do not adapt quickly to changing market conditions, we may lose market share.
We
have not purchased product liability insurance and any loss resulting from product liability claims must be paid by us.
Accidents
may arise as a result of defects in our products. If there are any defects in the products designed and/or manufactured by us, we may
face claims from our customers or third parties for the personal injury or property damage suffered as a result of such defects. We have
not purchased insurance coverage for product liability or third party liability and are therefore not covered or compensated by insurance
in respect of losses, damages, claims and liabilities arising from or in connection with product liability or third party liability.
Our
production facilities may be affected by power shortages which could result in a loss of business.
Our
production facilities consume substantial amounts of electrical power, which is the principal source of energy for our manufacturing
operations. Although we have a back-up generator at both our production facilities, we may experience occasional temporary power shortages
disrupting production due to power rationing activities conducted by the authorities, thunderstorms or other natural events beyond our
control. Accordingly, these production disruptions could result in a loss of business.
Our
research and development efforts may not result in marketable products.
Our
research and development team develops products which we have identified as having good potential in the market. There is no assurance
that we will not experience delays in future product developments. There is also no assurance that the products which we are currently
developing or may develop in the future will be successful or that we will be able to market these new products to our customers successfully.
If our new products are unable to gain the acceptance of our customers or potential customers, we will not be able to generate future
sales from our investment in research and development.
We
may not be able to ensure the successful implementation of our future plans and strategies, resulting in reduced financial performance.
We
intend to expand our market presence and explore opportunities in strategic investments or alliances and acquisitions. These initiatives
involve various risks including, but not limited to, the investment costs in setting up new offices and sales offices and working capital
requirements. There is no assurance that any future plan can be successfully implemented as the successful execution could depend on
several factors, some of which are not within our control. Failure to successfully implement our future plans or to effectively manage
costs may lead to a material adverse change in our operating environment or affect our ability to respond to market or industry changes,
resulting in reduced financial performance. Decelerating economic growth in China has caused challenging market conditions in the real
estate and construction sectors resulting in a contraction in investment and new housing projects by property developers. The challenging
market conditions has resulted in an expected contraction in demand for our products. Due to the reduced demand for our products, we
recently recorded an impairment of assets. As we are currently operating our facilities at significantly less than our maximum capacity,
this could reduce our profitability.
Our
facilities currently provide an aggregate annual maximum production capacity of approximately 51.6 million square meters of ceramic tiles.
However, due to a reduction in demand, as of fiscal year end 2020, we are utilizing production facilities capable of producing only 4.19
million square meters of ceramic tiles. In addition, we currently have 12 production lines of which only one was utilized as of fiscal
year end 2020 due to challenging macroeconomic conditions that began in the fourth quarter of 2012 and which was recently exacerbated
by the COVID-19 pandemic. The fact that a significant portion of our facilities are not being used means that our net income will be
significantly less than it would otherwise be because we need to maintain those unused facilities even though they are not currently
being productive. Because certain of our facilities have remained idle for an extended period of time, the Company recorded an impairment
charge of RMB 85.0 million (US$ 12.9 million) in the second half of 2018 related to property, plant and equipment, and land use rights
at its Hengda and Hengdali production facilities. The impairment of the non-current assets is attributable to challenging market conditions
in China which resulted in a contraction in demand for the Company’s products in 2018. If our facilities continue to remain idle,
we may be required to take an additional impairment charge on our financial statements.
For
the full fiscal year 2020, revenue decreased by 44.1% as compared to fiscal 2019 mainly due to the 35.4% decrease in sales volume and
a decrease in our average selling price of 13.6% resulting from a contraction in business from our customers which was primarily caused
by the COVID-19 pandemic. In order to maintain our market share and move inventory, in October 2019, we decreased the pricing of our
ceramic tile products by an average of 15%. This resulted in a 26% increase in our sales volume for the second half of 2019 as compared
to the same period of 2018. For the full fiscal year 2019, revenue decreased by 34.2% as compared to fiscal 2018 mainly due to the 27.0%
decrease in sales volume resulting from the continued slowdown of China’s economy, especially in the manufacturing sector and the
real estate industry. However, in July of 2018, we decreased the pricing of our ceramic tile products by an average of 10%, but
this decrease did not offset the fall in our sales volume due to deteriorating market conditions that persisted through the second half
of 2018, and we do not believe that further price decreases would have had a beneficial effect upon sales volume for this period. In
past periods, we also decreased the pricing of our products in order to increase sales. On July 1, 2016, we reduced the selling
price of certain of our slow-moving products beginning on July 1, 2016 with the goal to turn some of this inventory into cash. Beginning
on October 1, 2016, in order to generate sales and move inventory, we instituted a 20% reduction of our slow-moving products. This
price reduction led to a 35% increase in our sales volume in the fourth quarter of 2016 compared to the same period of 2015. The fourth
quarter of 2016 growth in sales volume was the first positive comparison to the previous comparable period after four straight fiscal
quarters of period over period decline in this key metric. Our strategy of decreasing the pricing of our products may or may not result
in an increase in our sales volume during differing periods. In addition, if customers grow accustomed to such significant reductions,
we may need to offer significant discounts in the future, which could reduce our net income and revenues long term.
We
may lose revenue if our intellectual property rights are not protected and counterfeit HD, Hengda, HDL, Hengdeli, WULIQIAO, TOERTO or
Pottery Capital of Tang Dynasty brand products are sold in the market.
We
believe our intellectual property rights are important to our success and competitive position. A portion of our products are manufactured
and marketed under our “HD” or “Hengda,” “HDL” or “Hengdeli,” “Pottery Capital
of Tang Dynasty”, “TOERTO” and “WULIQIAO” labels. We have filed our labels as trademarks in the PRC. Before
April13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. Hengda signed
a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and was licensed the exclusive
right to use WULIQIAO during the terms of that trademark. Since April 13, 2011, WULIQIAO has been transferred to Hengdali, according
to Certificate of Approved Transference of Trademark issued on April 13, 2011 by the Trademark Office of the State Administration
for Industry & Commerce of the P.R.C. In addition, we own twenty-two utility model patents and have certain trade secrets and
unpatented proprietary technology. We cannot assure you that there will not be any unauthorized usage or misuse of our trademarks and
patent rights or that our intellectual property rights will be adequately protected as it may be difficult and costly to monitor any
infringements of our intellectual property rights in the PRC. If we cannot adequately protect our intellectual property, we may lose
revenue. In addition, we believe the branding of our products and the brand equity in our “HD” or “Hengda”, “HDL
or Hengdeli”, “Pottery Capital of Tang Dynasty”, “TOERTO” and “WULIQIAO” trademarks is critical
to our expansion effort and the continued success of our business. Our efforts to build our brand may be undermined by the sale of counterfeit
goods. The counterfeiting of our products may increase if our products become more popular. In order to preserve and enforce our intellectual
property rights, we may have to resort to litigation against the infringing or counterfeiting parties. Such litigation could result in
substantial costs and diversion of management resources which may have an effect on our financial performance.
We
may inadvertently infringe third-party intellectual property rights, which could negatively impact our business and financial results.
We
are not aware of, nor have we received any claims from third parties for, any violations or infringements of intellectual property rights
of third parties by us as of the date of this Annual Report. Nevertheless, there can be no assurance that as we develop new product designs
and production methods, we would not inadvertently infringe the intellectual property rights of others or others would not assert infringement
claims against us or claim that we have infringed their intellectual property rights. Claims against us, even if untrue or baseless,
could result in significant costs, legal or otherwise, cause product shipment delays, require us to develop non-infringing products,
enter into licensing agreements or may be a distraction to our management. Licensing agreements, if required, may not be available on
terms acceptable to us or at all. In the event of a successful claim of intellectual property rights infringement against us and our
failure or inability to develop non-infringing products or to license the infringed intellectual property rights in a timely or cost-effective
basis, our business and/or financial results will be negatively impacted.
The
PRC government has historically introduced certain policy and regulatory measures to control the rapid increase in housing prices and
cool down the real estate construction market and has more recently adopted policies to stimulate the real estate sector, and the government
in the future may refrain from supporting the sector or adopt measures in the future that may further adversely affect our business.
Our
business depends on the level of business activity in the property development and construction industries that use our products in their
operations in the PRC. Our products are sold to customers in the property development and construction industries. If the property and
construction industries fall into a recession in the future, the demand for construction materials, such as ceramic tiles, may consequently
decrease and have a significant adverse effect on our business. The PRC government has committed to taking steps to regulate real estate
development, promote the healthy development of the real estate industry in China, and strengthen the supervision over land for real
estate development purposes. For example, in his 2010 annual report to the National People’s Congress, as part of the 12th Five-Year
Plan, Chinese Premier Wen Jiabao pledged to curb the rise of housing prices in certain cities to increase the availability of affordable
housing. The PRC government has also enacted measures to cool down the real estate construction market and imposed lending curbs, higher
mortgage rates, higher down payments, a price cap on new developments and restrictions on the number of homes each family can buy. This
offered some incentive for property developers to develop new residential housing due to continued uncertainty, resulting in the recent
slowing construction sector. The PRC government has also adopted an array of policies to stimulate the real estate sector which includes
cutting benchmark interest rates five times in 2015, a lowering of the reserve requirement ratio for banks, lower first home down payment
ratios and a cut in the minimum capital ratio for fixed asset investments which would help property developers. Although the Central
Government’s measures have helped to sustain the real estate sector from time to time, there has been a substantial slowdown in
construction activity, and it is not clear if supportive monetary and regulatory policies will continue in the future. We also cannot
be certain that the PRC government will not issue additional and more stringent regulations or measures or that agencies and banks will
not adopt restrictive measures or practices in response to PRC governmental policies and regulations, which could negatively affect the
industries we serve in the PRC, and thereby harm our sales.
Our
manufacturing activities are dependent upon availability of skilled and unskilled labor, a deficiency of which could result in a reduction
in profits.
Our
manufacturing activities are labor intensive and dependent on the availability of skilled and unskilled labor in large numbers. Large
labor intensive operations call for good monitoring and maintenance of cordial relations. Non-availability of labor, poor labor management
and/or any disputes between the labor and management may result in a reduction in profits. Further, we rely on contractors who engage
on-site laborers for performance of many of our unskilled operations. The scarcity or unavailability of contract laborers may affect
our operations and financial performance.
We
face increasing labor costs and other costs of production in the PRC, which could limit our profitability.
The
ceramic tile manufacturing industry is labor intensive. Labor costs in China have been increasing in recent years and our labor costs
in the PRC could continue to increase in the future. If labor costs in the PRC continue to increase, our production costs will likely
increase which may in turn affect the selling prices of our products. We may not be able to pass on these increased costs to consumers
by increasing the selling prices of our products in light of competitive pressure in the markets where we operate. In such circumstances,
our profit margin may decrease.
Violation
of Foreign Corrupt Practices Act or China anti-corruption law could subject us to penalties and other adverse consequences.
We
are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States public companies from bribing
or making prohibited payments to foreign officials to obtain or retain business. PRC law also strictly prohibits bribery of government
officials. While we take precautions to educate our employees about the Foreign Corrupt Practices Act and Chinese anti-corruption law,
there can be no assurance that we or the employees or agents of our subsidiaries will not engage in such conduct, for which we may be
held responsible. If that were to occur, we could suffer penalties that may have a material adverse effect on our business, financial
condition and results of operations.
Our
independent registered public accounting firm’s audit documentation related to their audit reports included in this annual report
may be located in the People’s Republic of China. The Public Company Accounting Oversight Board currently cannot inspect audit
documentation located in China and, as such, you may be deprived of the benefits of such inspection.
Auditors
of companies whose shares are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States, including
our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board (the “PCAOB”)
and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws
of the United States and professional standards applicable to auditors. Because we have substantial operations within the PRC, a jurisdiction
where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently
inspected by the PCAOB. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation
with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework
between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or
the Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the
Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies
that trade on U.S. exchanges. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality
control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits
of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the
effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are
subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our
financial statements.
Proceedings
instituted by the SEC against certain PRC-based accounting firms could result in financial statements being determined to not be in compliance
with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
On
December 3, 2012, the SEC issued an order instituting administrative proceedings against five of the largest global public accounting
firms relating to work performed in the PRC and such firms’ failure to provide audit work papers to the SEC in this regard. Our
independent registered public accounting firm is not one of the accounting firms referenced in the order. On January 22, 2014, an
initial administrative law decision was issued, censuring the five accounting firms and suspending four of the five firms from practicing
before the SEC for a period of six months. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against
this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to
settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed
procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these
procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. In the event that
the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC
operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial
statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover,
any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of our shares may be adversely affected. If our independent registered public accounting firm was denied,
temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit
and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements
of the Exchange Act.
Risk
Factors Relating to Operations in China
We
are dependent on political, economic, regulatory and social conditions in the PRC.
Approximately
100%, 99.7% and 95.4% of our revenue in each of the last three fiscal years was derived from the PRC market and we anticipate that the
PRC market will continue to be the major source of revenue for the foreseeable future. Accordingly, any significant slowdown in the PRC
economy or decline in demand for our products from our customers in the PRC will have an adverse effect on our business and financial
performance. Furthermore, as our operations and production facilities are located in the PRC, any unfavorable changes in the social and/or
political conditions may also adversely affect our business and operations. While the current policy of the PRC government seems to be
one of economic reform to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy
will continue to prevail in the future. There is no assurance that our operations will not be adversely affected should there be any
policy changes.
We
are subject to risks related to the laws and regulations of the PRC and the interpretation and implementation thereof.
Our business and operations,
as well as those of our customers and suppliers in the PRC, are subject to the laws and regulations promulgated by relevant PRC governmental
authorities. The PRC government is still in the process of developing a comprehensive set of laws and regulations in the course of the
PRC’s transformation from a centrally planned economy to a market-oriented economy. As the legal system in the PRC is still in
flux, laws and regulations or their interpretation may be subject to change. Furthermore, any change in the political and economic policy
of the PRC government may also result in similar changes in the laws and regulations or the interpretation thereof. Such changes may
adversely affect our operations and business in the PRC. The PRC legal system is a codified legal system comprising written laws, regulations,
circulars, administrative directives, and internal guidelines as well as judicial interpretations. Decided cases do not form part of
the legal structure of the PRC and thus have no binding effect. As such, the administration of PRC laws and regulations may be subject
to a certain degree of discretion by the authorities. This has resulted in the outcome of dispute resolutions not having the level of
consistency or predictability as in other countries with more developed legal systems. Due to such inconsistency and unpredictability,
if we should be involved in any legal dispute in the PRC, we may experience difficulties in obtaining legal redress or in enforcing our
legal rights. From time to time, changes in law, registration requirements, and regulations or the implementation thereof may also require
us to obtain additional approvals and licenses from the PRC authorities for carrying out our operations in the PRC which would require
us to incur additional expenses in order to comply with such requirements and in turn affect our financial performance with the increase
in our business costs. Furthermore, there can be no assurance that approvals, registrations, or licenses will be granted to us promptly
or at all. If we experience delays in obtaining or are unable to obtain such required approvals, registrations, or licenses, our operations
and business in the PRC, and hence our overall financial performance will be adversely affected.
Our
business activities are subject to certain PRC laws and regulations.
As
our production and operations are carried out in the PRC, we are subject to certain PRC laws and regulations. In addition, being wholly
foreign-owned enterprises, we are required to comply with certain additional laws and regulations. Pursuant to PRC laws and regulations,
the breach or non-compliance with such laws and regulations may result in the PRC authorities suspending, withdrawing or terminating
our business license, causing us to cease production of all or certain of our products, and this would materially and adversely affect
our business and financial performance. Our corporate affairs in the PRC are governed by our articles of association and the corporate
and foreign investment laws and regulations of the PRC. The principles of the PRC laws relating to matters such as the fiduciary duties
of directors and other corporate governance matters and foreign investment laws in the PRC are relatively new. Hence, the enforcement
of investors or shareholders’ rights under the articles of association of a PRC company and the interpretation of the relevant
laws relating to corporate governance matters remain largely untested in the PRC.
PRC
foreign exchange control may limit our ability to utilize our profits effectively and affect our ability to receive dividends and other
payments from our PRC subsidiaries.
Hengda
is a foreign investment enterprise, or “FIE,” and is subject to the rules and regulations in the PRC on currency conversion.
In the PRC, State Administration of Foreign Exchange, or SAFE, regulates the conversion of the RMB into foreign currencies. Currently,
FIEs are required to apply to SAFE for “Foreign Exchange Registration Certificates for Foreign Investment Enterprise”. With
such registration certifications (which need to be renewed annually), FIEs are allowed to open foreign currency accounts including the
“current account” and “capital account”. Currently, conversion of currency within the scope of the “current
account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval
of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans,
securities, etc.) still requires the approval of SAFE. On October 21, 2005, SAFE promulgated the “Notice on Issues concerning
Foreign Exchange Management in Financing by PRC Residents by Overseas Special Purpose Vehicle and Return Investments” (the “No. 75
Notice”). The No. 75 Notice came into effect on November 1, 2005 and requires the following matters, among others, to
be complied with: every PRC domestic resident who establishes or controls an overseas special purpose vehicle, or “SPV,”
must apply to the local bureau of SAFE for an “overseas investment foreign exchange registration.” Every PRC domestic resident
of an SPV who has completed the “overseas investment foreign exchange registration”, or “Registrant,” must make
an application to the local bureau of SAFE to amend their registration particulars upon (i) the injection of any PRC domestic assets
or the equity interests of any PRC domestic company owned by the PRC domestic resident into the SPV, and (ii) the implementation
of any overseas equity fund-raising by the SPV following an injection of PRC domestic assets or the equity interests of a PRC domestic
company; every Registrant must apply to the local bureau of SAFE for change of registration particulars or recordation within 30 days
after the occurrence of any capital increase or reduction, changes in shareholdings or share swap, merger, long-term investment in equities
or debentures, guarantee of foreign indebtedness and other major capital changes not involving “return investment”, undertaken
by an SPV; and every Registrant must repatriate, within 180 days, dividends or profits which he receives from an SPV and/or income derived
from changes in the shareholding of an SPV. On July 14, 2014, China’s State Administration of Foreign Exchange (SAFE), the
foreign exchange control authority, released the Notice of the State Administration of Foreign Exchange on Relevant Issues Concerning
Foreign Exchange Administration for Overseas Investment, Financing and Round Trip Investment Undertaken by Domestic Residents via Special
Purpose Vehicles (Notice 37). The new regulation took effect July 4, 2014. At that time, the old regulation, “Notice on Issues
concerning Foreign Exchange Management in Financing by PRC Residents by Overseas Special Purpose Vehicle and Return Investments”
(the “No. 75 Notice”), which was issued in 2005, was repealed. Compared with Circular 75, Circular 37 reflects the trend
of SAFE’s policy to gradually loosen the restrictions and simplify the procedures for overseas financing and investment by Chinese
residents, so as to fully utilize the financial resources in domestic and overseas markets. However, as Circular 37 has only recently
been issued, the actual interpretation and enforcement of the above changes by SAFE in practice remain to be seen. There can be no assurance
that SAFE will not continue to issue new rules and regulations and/or further interpretations of the No. 37 Notice that will
strengthen the foreign exchange control. As we are located in the PRC and all of our sales are denominated in RMB, our ability to pay
dividends or make other distributions may be restricted by PRC foreign exchange control restrictions. There can be no assurance that
the relevant regulations will not be amended to our detriment and that our ability to distribute dividends will not be adversely affected.
Introduction
of new laws or changes to existing laws by the PRC government may adversely affect our business.
The
PRC legal system is based on the Constitution of the People’s Republic of China and is made up of written laws, regulations, circulars
and directives. With the PRC’s entry into the WTO, the PRC government is in the process of developing its legal system so as to
encourage foreign investments and to meet the needs of investors. As the PRC economy is developing at a generally faster rate than its
legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations will apply to certain
events or circumstances. Some of the laws and regulations, and the interpretation, implementation and enforcement thereof, are still
at the experimental stage and therefore subject to policy changes. There is no assurance that the introduction of new laws or regulations,
changes to existing laws and regulations and the interpretation or application thereof or the delays in obtaining approvals from the
relevant PRC authorities will not have an adverse impact on our business or prospects. In particular, on August 8, 2006, the Ministry
of Commerce, the China Securities Regulatory Commission, the State-owned Assets Supervision and Administration Commission, the State
Administration of Taxation, the State Administration of Industry and Commerce and the State Administration of Foreign Exchange promulgated
the “Rules on the Mergers and Acquisition of Domestic Enterprises by Foreign Investors” which came into effect on September 8,
2006, or “the M&A Rules.” Foreign investors should comply with the rules when they purchase shareholding equities
of a PRC domestic non-foreign-funded enterprise, or Domestic Company, or subscribe to the increased capital of a Domestic Company, and
thus changing the nature of the Domestic Company into a foreign investment enterprise. The rules stipulate, inter alia, (i) that
the acquisition of a Domestic Company by an affiliated foreign enterprise established or controlled by PRC entities or individuals must
be approved by the Ministry of Commerce; (ii) that the incorporation of a special purpose vehicle, which is directly or indirectly
controlled by PRC entities for the purpose of an overseas listing of the equity interest of a Domestic Company, must be subject to the
approval of the Ministry of Commerce; (iii) that the acquisition of a Domestic Company by a special purpose vehicle shall be subject
to approval of the Ministry of Commerce and (iv) the offshore listing of a special purpose vehicle shall be subject to the prior
approval from China Securities Regulatory Commission. As Hengda was incorporated as a FIE and Antelope Enterprises does not fall within
the scope of being classified as a special purpose vehicle directly or indirectly established or controlled by PRC entities or individuals,
the M&A Rules did not apply to the Business Combination, and we were not required to obtain the approval from the Ministry of
Commerce, the approval from the China Securities Regulatory Commission and/or any other approvals from PRC government authorities as
stipulated by the M&A Rules. There is however no assurance that the PRC authorities will not issue further directives, regulations,
clarifications or implementation rules, which may require us or other relevant parties to obtain further approvals with respect to the
Business Combination. If new laws are promulgated or the existing laws are reinterpreted, our structure could be determined to be in
violation of such laws and subject to sanction by applicable government authorities.
Environmental,
health and safety laws have in the past and may in the future impose material liabilities on us and require us to incur material capital
and operational costs.
We
are subject to environmental, health and safety laws and regulations in the PRC that impose controls on our air, water and waste discharges,
on our storage, handling, use, discharge and disposal of chemicals, and on exposure of our employees to hazardous substances. These laws
and regulations could require us to incur costs to maintain compliance and could impose liability to remedy the effects of hazardous
substance contamination. Although we do not believe that we have violated any of such laws and regulations and therefore have not incurred
any significant liabilities under these laws and regulations in the past, the environmental laws and regulations are constantly evolving
and becoming stricter in the PRC. The adoption of new laws or regulations or our failure to comply with these laws or regulations in
the future could cause us to incur material liabilities and could require us to incur additional expenses, curtail operations and/or
restrict our ability to expand. Hengdali is currently in the process of applying for a Pollutant Discharge Permit, and the environmental
protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not issued and Hengdali discharges
pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency. During
2014, our Hengda facility was required by the local governmental entity to begin using natural gas to operate the facility, as opposed
to coal. This mandated change in fuel source is part of a province-wide (and country-wide) effort to reduce pollution. This change resulted
in our incurring a one-time charge of approximately RMB5.6 million ($0.9 million) in December 2013, and will increase our cost of
goods produced at that facility because natural gas is a more expensive energy source than coal. There is no assurance that in the future
our other production facilities will not be required to make similar modifications which could have similar adverse effects on our operations.
Our
business will suffer if we lose our land use rights.
There
is no private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives. In
the case of land used for business purposes, land use rights can be obtained from the government for a period up to 50 years, and are
typically renewable. Land use rights can be granted upon approval by the land administrative authorities of China (State Land Administration
Bureau) upon payment of the required land granting fee, the entry into a land use agreement with a competent governmental authority and
certain other ministerial procedures. We have received land use certificates for certain parcels of land on which our operations reside,
but we may not have followed all procedures required to obtain such certificates or paid all required fees. If the Chinese administrative
authorities determine that we have not fully complied with all procedures and requirements needed to hold a land use certificate, we
may be forced by the Chinese administrative authorities to retroactively comply with such procedures and requirements, which may be burdensome
and require us to make payments, or such Chinese administrative authorities may invalidate or revoke our land use certificate entirely.
If the land use right certificates needed for our operations are determined by the government of China to be invalid or if they are not
renewed, we may lose production facilities or employee accommodations that would be difficult or even impossible to replace. Should we
have to relocate, our workforce may be unable or unwilling to work in the new location and our business operations will be disrupted
during the relocation. The relocation or loss of facilities could cause us to lose sales and/or increase our costs of production, which
would negatively impact our financial results.
We
own certain buildings collectively, which may limit our right to use, renovate or dispose of such buildings.
Together
with three other companies, we collectively own several buildings located at the Junbing Industrial Zone in Jinjiang City with a total
construction area of 29,120.83 square meters. As a result, our right to use, renovate and dispose of such buildings may be limited.
Our
business will suffer if we fail to comply with environmental protection regulations
Companies
which cause severe pollution to the environment are required to restore the environment or remedy the effects of the pollution within
a prescribed time limit. If a company fails to report and/or register the environmental pollution it caused, it will receive a warning
or be penalized. Companies that fail to restore the environment or remedy the effects of the pollution within the prescribed time will
be penalized or have their business licenses terminated. Companies that have polluted and endangered the environment must bear the responsibility
for remedying the danger and effects of the pollution, as well as to compensate any losses or damages suffered as a result of such environmental
pollution. Our Hengda facility obtained a Temporary Pollutant Discharge Permit (No.350582-2014-000260) granted by Jinjiang City Environmental
Protection Bureau that will expire on May 1, 2016. Hengdali is currently in the process of applying for a Pollutant Discharge Permit,
and the environmental protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not
issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental
protection agency. If Hengdali’s application is denied, or if the Hengdali facility is ordered to stop discharging pollutants or
is fined, that could have a material adverse effect on our results of operations and financial condition.
Our
corporate structure together with applicable law impede shareholders from asserting claims against us and our principals.
All
of our operations and records, and all of our senior management are located in the People’s Republic of China. Shareholders of
companies such as ours have limited ability to assert and collect on claims in litigation against such companies and their principals.
In addition, China has very restrictive secrecy laws that prohibit the delivery of many of the financial records maintained by a business
located in China to third parties absent Chinese government approval. Since discovery is an important part of proving a claim in litigation,
and since most if not all of our records are in China, Chinese secrecy laws could frustrate efforts to prove a claim against us or our
management. In order to commence litigation in the United States against an individual such as an officer or director, that individual
must be served. Generally, service requires the cooperation of the country in which a defendant resides. China has a history of failing
to cooperate in efforts to affect such service upon Chinese citizens in China.
If
we become directly subject to the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and/or defend the matter, which could harm our business operations, stock price and reputation and could result in a complete
loss of your investment in us.
In
recent years, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny
by investors, financial commentators and regulatory agencies. Although a portion of this scrutiny seems to have abated, this scrutiny
has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting
and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies
that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits
and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we become the subject
of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations
and/or defend our company. Such investigations or allegations will be costly and time-consuming and distract our management from our
business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless
of the truthfulness of the allegations.
Risks
to Antelope Enterprises’ Shareholders
The
price of our shares could be volatile and could decline at a time when you want to sell your holdings.
The
price of our shares has been and may continue to be volatile, and that volatility may continue for an extended period of time.
There
is a risk that Antelope Enterprises could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the Redomestication
and the Business Combination, which, among other things, could result in significantly greater U.S. federal income tax liability to Antelope
Enterprises.
Section 7874(b) of
the Internal Revenue Code of 1986, as amended (the “Code”) generally provides that a corporation organized outside the United
States that acquires, directly or indirectly, pursuant to a plan or series of related transactions substantially all of the assets of
a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if shareholders
of the acquired corporation, by reason of owning shares of the acquired corporation, own at least 80% (of either the voting power or
the value) of the stock of the acquiring corporation after the acquisition. Under regulations promulgated under Section 7874, a
warrant holder of either the acquired corporation or the acquiring corporation generally is treated for this purpose as owning stock
of the acquired corporation or the acquiring corporation, as the case may be, with a value equal to the excess of the value of the shares
underlying the warrant over the exercise price of the warrant. If Section 7874(b) were to have applied to the Redomestication,
then, among other things, Antelope Enterprises, as the surviving entity, would have been subject to U.S. federal income tax on its worldwide
taxable income following the Redomestication and the Business Combination as if Antelope Enterprises were a domestic corporation. Although
Section 7874(b) should not have applied to treat Antelope Enterprises as a domestic corporation for U.S. federal income tax
purposes, due to the absence of full guidance on how the rules of Section 7874(b) applied to the transactions completed
pursuant to the Redomestication and Business Combination, this result is not entirely free from doubt. Shareholders are urged to consult
their own tax advisors on this issue. See the discussion in the section entitled “Taxation — United States Federal Income
Taxation — Tax Treatment of Antelope Enterprises After the Redomestication and the Business Combination.” The balance of
this discussion assumes that Antelope Enterprises has been and will be treated as a foreign corporation for U.S. federal income tax purposes.
There
is a risk that Antelope Enterprises will be classified as a passive foreign investment company, or “PFIC,” which could result
in adverse U.S. federal income tax consequences to U.S. holders of its securities.
In
general, Antelope Enterprises will be treated as a PFIC for any taxable year in which either (1) at least 75% of its gross income
(including its pro rata share of the gross income of its 25% or more-owned corporate subsidiaries) is passive income or (2) at least
50% of the average value of its assets (including its pro rata share of the assets of its 25% or more-owned corporate subsidiaries) produce,
or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains
from the disposition of passive assets. If Antelope Enterprises is determined to be a PFIC for any taxable year (or portion thereof)
that is included in the holding period of a U.S. Holder (as defined in the section entitled “Taxation—United States Federal
Income Taxation—General”) of its shares, the U.S. Holder may be subject to increased U.S. federal income tax liability upon
a sale or other disposition of the shares of Antelope Enterprises or the receipt of certain excess distributions from Antelope Enterprises
and may be subject to additional reporting requirements. Based on the composition (and estimated values) of the assets and the nature
of the income of Antelope Enterprises and its subsidiaries during its 2015 taxable year, Antelope Enterprises does not believe that it
would be treated as a PFIC for such year. However, because Antelope Enterprises has not performed a definitive analysis as to its PFIC
status for its 2015 taxable year, there can be no assurance in respect to its PFIC status for such year. There also can be no assurance
with respect to Antelope Enterprises’ status as a PFIC for its current (2016) taxable year or any future taxable year. U.S. Holders
of the shares of Antelope Enterprises are urged to consult their own tax advisors regarding the possible application of the PFIC rules.
See the discussion in the section entitled “Taxation—United States Federal Income Taxation—U.S. Holders—Passive
Foreign Investment Company Rules.”
Under
the EIT Law, Antelope Enterprises, Success Winner and/or Stand Best may be classified as a “resident enterprise” of the PRC.
Such classification could result in PRC tax consequences to Antelope Enterprises, our non-PRC resident shareholders, Success Winner and/or
Stand Best.
On
March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law,
or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as “resident
enterprises” and non-resident enterprises. An enterprise established outside of China with “de facto management bodies”
within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise
for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing
body that in practice exercises “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing
body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities
determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis. If the PRC tax authorities determine
that Antelope Enterprises, Success Winner and/or Stand Best is a “resident enterprise” for PRC enterprise income tax purposes,
a number of PRC tax consequences could follow. First, Antelope Enterprises, Success Winner and/or Stand Best may be subject to the enterprise
income tax at a rate of 25% on Antelope Enterprises’, Success Winner’s and/or Stand Best’s worldwide taxable income,
as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between
“qualified resident enterprises” are exempt from enterprise income tax. As a result, if Antelope Enterprises, Success Winner
and Stand Best are each treated as “qualified resident enterprises,” all dividends from Hengda to Antelope Enterprises (through
Success Winner and Stand Best) should be exempt from the PRC enterprise income tax.
If
Stand Best were treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that Stand Best receives from
Hengda (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, provided
that Stand Best owns more than 25% of the registered capital of Hengda continuously within 12 months immediately prior to obtaining such
dividend from Hengda, and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, or the “PRC-Hong Kong Tax Treaty,”
were otherwise applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Stand Best to be
a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly, if Success Winner were treated as
a “non-resident enterprise” under the EIT Law and Stand Best were treated as a “resident enterprise” under the
EIT Law, then dividends Success Winner receives from Stand Best (assuming such dividends were considered sourced within the PRC) may
be subject to a 10% PRC withholding tax. A similar situation may arise if Antelope Enterprises were treated as a “non-resident
enterprise” under the EIT Law, and Success Winner were treated as a “resident enterprise” under the EIT Law. Any such
taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders. Finally, if Antelope Enterprises
is determined to be a “resident enterprise” under the EIT Law, this could result in a situation in which a 10% PRC tax is
imposed on dividends Antelope Enterprises pays to its shareholders that are not tax residents of the PRC, or “non-resident investors,”
and that are enterprises but not individuals, and gains derived by them from transferring Antelope Enterprises’ shares, if such
income is considered PRC-sourced income by the relevant PRC tax authorities. In such event, Antelope Enterprises may be required to withhold
a 10% PRC tax on any dividends paid to such non-resident investors. Such non-resident investors also may be responsible for paying PRC
tax at a rate of 10% on any gain derived by such investors from the sale or transfer of Antelope Enterprises’ shares in certain
circumstances. Antelope Enterprises would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC
tax laws. Also, if Antelope Enterprises is determined to be a “resident enterprise,” its nonresident investors who are individuals
may also be subject to potential PRC individual income tax at a rate of 20% with respect to dividends received from Antelope Enterprises
and/or gains derived by them from the sale or transfer of Antelope Enterprises’ shares. Moreover, the State Administration of Taxation,
or “SAT,” released Circular Guoshuihan No. 698, or Circular 698, on December 10, 2009 that reinforces the taxation
of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 addresses indirect equity transfers
as well as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a nonresident
investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers
an equity interest in the PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located
in a country or jurisdiction where the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable,
the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant
information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization
and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form.
A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply
with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a
transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject
the non-resident investor to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty
as to its application. We (or a nonresident investor) may become at risk of being taxed under Circular 698 and may be required to expend
valuable resources to comply with Circular 698 or to establish that we (or such non-resident investor) should not be taxed under Circular
698, which could have a material adverse effect on our financial condition and results of operations (or such non-resident investor’s
investment in us). In additional, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement
of Circular 698. On February 3, 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income
Tax Matters on Indirect Transfer of Properties by Non-tax Resident Enterprise, or Public Notice 7. Public Notice 7 has introduced a new
tax regime that is significantly different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer
of a foreign intermediate holding company. In addition, Public Notice 7 provides clearer criteria the Circular 698 on how to assess reasonable
commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public
securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated
to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring
the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being
the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority
such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect
transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in China, As a result,
gains derived from such indirect transfer may be subject on PRC enterprise income tax, and the transferee or other person who is obligated
to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests
in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if transferee fails
to withhold the taxes and the transferor fails to pay the taxes.
We
face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions
involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in
other non-PRC resident companies or other taxable assets by us. Our company and other non-resident enterprises in our group may be subject
to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions,
and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such
transactions, under Circular 698 and Public Notice 7. For the transfer to shares in our company by investors that are non-PRC resident
enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may
be required to expend valuable resources to comply with Circular 698 and Public Notice 7 to request the relevant transferors from whom
we purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident enterprises in our
group should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based
on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make
adjustments to the taxable income of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such
potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations. If any
PRC tax applies to a non-resident investor, the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable
income tax treaty and/or a deduction for such PRC tax against such investor’s domestic taxable income or a foreign tax credit in
respect of such PRC tax against such investor’s domestic income tax liability (subject to applicable conditions and limitations).
Shareholders should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable
income tax treaties, and any available deductions or foreign tax credits. For a further discussion of these issues, see the section herein
captioned “Taxation—PRC Taxation.”
Fluctuations
in exchange rates could adversely affect our business and the value of our shares.
The
value of our shares will be indirectly affected by the foreign exchange rate between U.S. dollars and the Renminbi and between those
currencies and other currencies in which our revenue may be denominated. Because all of our earnings and cash assets are denominated
in Renminbi, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of
these proceeds, as well as our financial results reported in U.S. dollar terms without giving effect to any underlying change in our
business, financial condition or results of operations. Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future. Since July 2005, the Renminbi has not been pegged to the U.S. dollar. Although the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate,
the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is
possible that in the future the Chinese authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention
in the foreign exchange market. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility
increased to 2% in order to proceed further with reform of the RMB exchange rate regime. These could result in a further and more significant
fluctuation in the RMB’s value against the U.S. Dollar. Very limited hedging transactions are available in China to reduce our
exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure
to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of
these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency
exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.
As
the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our
corporate affairs will be governed by our memorandum and articles of association, the BVI Business Companies Act, 2004 (as amended) (the
“BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our
directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are
governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived
in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which is applied
in the British Virgin Islands by virtue of the Common Law (Declaration of Application) Act. The rights of our shareholders and the fiduciary
responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or
judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of
securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted
bodies of corporate law. As a result of all of the above, holders of our shares may have more difficulty in protecting their interests
through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.
British
Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to
protect their interests.
British
Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The
circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action,
may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company
organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate
wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in
the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions
brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There
is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British
Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial
on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up
for the losses suffered.
The
laws of the British Virgin Islands may provide comparatively limited protection for minority shareholders, so minority shareholders will
have limited recourse if the shareholders are dissatisfied with the conduct of our affairs.
Under
the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders in the form of the
provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring
an action to enforce the constitutional documents of the company, i.e. the memorandum and articles of association as shareholders are
entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of
the company. A shareholder may also bring an action under statute if he feels that the affairs of the company have been or will be carried
out in a manner that is unfairly prejudicial or discriminating or oppressive to him. There are also common law rights for the protection
of shareholders that may be invoked, largely dependent on English common law, since the common law of the British Virgin Islands for
business companies is limited.
The
market price for our shares has been and may continue to be volatile.
The
market price for our shares has been and is likely to continue to be highly volatile and subject to wide fluctuations in response to
factors including the following:
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actual or anticipated fluctuations
in our quarterly operating results and changes or revisions of our expected results;
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changes in financial estimates
by securities research analysts;
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changes in the economic
performance or market valuations of companies specializing in the ceramics business in China;
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announcements by us and
our affiliates or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;
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•
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addition or departure of our senior management and
key personnel; and
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•
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fluctuations of exchange rates between the RMB and
the U.S. dollar.
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Volatility
in the price of our shares may result in shareholder litigation that could in turn result in substantial costs and a diversion of our
management’s attention and resources.
The
financial markets in the United States and other countries have experienced significant price and volume fluctuations, and market prices
have been and continue to be extremely volatile. Volatility in the price of our shares may be caused by factors outside of our control
and may be unrelated or disproportionate to our results of operations. In the past, following periods of volatility in the market price
of a public company’s securities, shareholders have frequently instituted securities class action litigation against that company.
Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
Although
we paid semi-annual dividends in July 2013, January 2014, July 2014 and January 2015, we did not pay a dividend after
January 2015 and do not currently plan to pay a dividend in the near future. Therefore, shareholders will benefit from an investment
in our shares only if those shares appreciate in value
We
paid dividends in July 2013, January 2014, July 2014 and January 2015. The declaration and payment of cash dividends
is at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including among others,
our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities, if
any, and any other financing arrangements. We currently do not plan to pay a dividend in the near future. Therefore, the realization
of a gain on shareholders’ investments will depend on the appreciation of the price of our shares, and there is no guarantee that
our shares will appreciate in value.
We
may not be able to pay any dividends on our shares in the future due to British Virgin Islands law.
Under
British Virgin Islands law, we may only pay dividends to our shareholders if the value of our assets exceeds our liabilities and we are
able to pay our debts as they become due. We cannot give any assurance that we will declare dividends of any amounts, at any rate or
at all in the future. Future dividends, if any, will be at the discretion of our board of directors, and will depend upon our results
of operations, cash flows, financial condition, payment to us of cash dividends by our subsidiaries, capital needs, future prospects
and other factors that our directors may deem appropriate.
We
may need additional capital, and the sale of additional shares or equity or debt securities could result in additional dilution to our
shareholders.
We
believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated
cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy
our cash requirements, we may seek to sell additional equity or debt securities or obtain one or more additional credit facilities. The
sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result
in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is
uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
ITEM
4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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Our
principal PRC-based operating subsidiary, Hengda, was established on September 30, 1993 under the laws of the PRC. Hengda is a wholly
foreign-owned enterprise in China.
Our
other PRC-based operating subsidiary, Hengdali, was established on May 4, 2008 under the laws of the PRC. All of the equity interests
in Hengdali are 100% owned by Hengda.
The
third PRC-based operating subsidiary, Chengdu Future, was established on November 20, 2019 under the law of PRC. Chengdu Future is a
wholly foreign-owned enterprise in China. All of the equity interests in Future Talented are 100% owned by Vast Elite.
The
fourth of our PRC- based operating subsidiary, Antelope Chengdu, was established on May 9, 2020 under the law of PRC. Antelope Chengdu
is a wolly foreign-owned enterprise in China. All of the equity interest in Antelope Chengdu are 100% owned by Antelope HK.
Vast
Elited Limited was established on September 22, 2017 under the laws of Hong Kong. Vast Elite is 100% owned by Success Winner.
Antelope
Enterprise (HK) Holdings Limited was established on December 3, 2019 under the laws of Hong Kong. Antelope HK is 100% owned by Success
Winner
Stand
Best was established on January 17, 2008 under the laws of Hong Kong. Stand Best acquired the entire shareholdings of Hengda on
April 1, 2008 for consideration of RMB 58,980,000. As a result of this acquisition, Hengda became the wholly owned subsidiary of
Stand Best.
Success
Winner was established on May 29, 2009 under the laws of British Virgin Islands with Mr. Wong Kung Tok as its sole shareholder
and sole director.
On
June 30, 2009, pursuant to the capitalization agreement dated June 30, 2009, Success Winner was issued the 9,999 shares allotted
by Stand Best as per the capitalization exercise of a shareholder’s loan of HK$67.9 million (RMB 58.9 million). On the same date,
the shareholder of Stand Best, Mr. Wong Kung Tok transferred all his shareholdings in Stand Best to Success Winner. Therefore, Mr. Wong
Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned 100% of Stand Best and in turn, 100% of Hengda.
CHAC
was incorporated in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a
stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating
business that had its principal operations in Asia, with a focus on potential acquisition targets in China.
Pursuant
to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into
Antelope Enterprises, its wholly owned British Virgin Islands subsidiary, and immediately thereafter, and as part of the same integrated
transaction, Antelope Enterprises acquired all of the outstanding securities of Success Winner.
Prior
to Antelope Enterprises’ acquisition of Success Winner, neither CHAC nor Antelope Enterprises had any operations.
On
November 19, 2009, Hengda entered into a definitive acquisition agreement to acquire a new production facility in Gaoan, Jiangxi
Province, PRC by purchasing 100% of the equity interests in Hengdali. The closing of the acquisition was subject to the Gaoan City Administration
for Industry and Commerce transferring the registration and business license of Hengdali from Hengdali’s former shareholders to
Hengda. The transfer occurred on January 8, 2010. Hengda appointed an executive officer to take control over Hengdali’s operating
and financing activities on the same day. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration of RMB 185.5
million for the acquisition.
On
September 17, 2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated
in Pingtan, Fujian Province, and is 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building
materials and interior and exterior decoration materials. Fujian Hengdali had no operations since the incorporation date, and in August 2017,
the Company disposed Fujian Hengdali for RMB0 to a third-party.
The
total maximum annual production capacity from our two facilities was 51.6 million square meters of ceramic tiles as of December 31,
2020.
On
September 22, 2017, Success Winner incorporated a 100% owned subsidiary Vast Elite Limited (“Vast Elite”) in Hong Kong
with an initial registered capital of HKD1. Vast Elite is engaged in the trading of building materials, but had no operations during
the year ended December 31, 2017.
On
November 20, 2019, Vast Elite incorporated a 100% owned subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu
Future”) in China. Chengdu Future is engaged in the business management and consulting services.
On
December 3, 2019, Success Winner incorporated a 100% owned subsidiary Antelope Enterprise (HK) Holdings Limited (“Antelope
HK”) in Hong Kong. Antelope HK only serves the purpose as a holding company.
On
May 9, 2020, Antelope HK incorporate a 100% owned subsidiary Antelope Holdings (Chengdu) Co., Ltd (Antelope Chengdu) in China. Antelope
Chengduis engaged in computer consulting and software development.
Antelope Enterprise Holdings
Limited and its subsidiaries’ (the “Company”) corporate structure as of December 31, 2020 is as follows:
Antelope
Enterprises’ History
Antelope
Enterprises is a British Virgin Islands limited liability company whose predecessor, CHAC, incorporated in Delaware on June 22,
2007, was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar
business combination, or controlling, through contractual arrangements, an operating business, that has its principal operations in Asia.
The
Initial Public Offering
On
November 21, 2007, CHAC consummated its initial public offering of 12,000,000 units. On December 14, 2007, the underwriters
of CHAC’s initial public offering exercised their over-allotment option for an offering of 800,000 units. Each unit in the offering
consisted of one share and one share purchase warrant. Each warrant entitled the holder to purchase from Antelope Enterprises one share
in Antelope Enterprises at an exercise price of $7.50. CHAC’s shares and warrants started trading separately as of December 17,
2007.
The
Business Combination
Pursuant
to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into
Antelope Enterprises, its wholly owned British Virgin Islands subsidiary, and, immediately thereafter, and as part of the same integrated
transaction, Antelope Enterprises acquired all of the issued and outstanding shares of Success Winner held by its former shareholder
in exchange for $10.00 and 5,743,320 shares of Antelope Enterprises shares. In addition, 8,185,763 shares of the Antelope Enterprises
shares were placed in escrow (the “Contingent Shares”) to be released to the seller in the event certain earnings and stock
price thresholds were achieved. Of the Contingent Shares, 5,185,763 Contingent Shares were released based on our achieving growth in
either net earnings before tax or net earnings after tax. 3,000,000 Contingent Shares that were eligible to be released if Antelope Enterprises
shares closed at or above certain share price targets for any twenty trading days within a thirty trading day period prior to April 30,
2012 were canceled because we did not meet applicable price targets. Concurrent with the Business Combination, we redeemed and purchased
an aggregate of 11,193,149 of our shares from our public stockholders for an aggregate purchase price of approximately $109.6 million
(in transactions intended to assure the successful completion of the Business Combination). Such shares were voted in favor of the Business
Combination and the other related proposals. On November 16, 2012 all of our share purchase warrants expired and ceased to trade.
Antelope Enterprises’ registered office is c/o Harneys Corporate Services Limited of Craigmuir Chambers, P.O. Box 71, Road
Town, Tortola, British Virgin Islands.
January 2020
Private Placement
On
January 8, 2020, the Company executed subscription agreements (each, a “Subscription Agreement”) in connection with
a $500,000 private placement of its ordinary shares with three accredited investors (the “Offering”) at the price of $0.75
per share. The Company agreed to register the shares sold in the Offering for resale no later than 270 days after the closing of the
Offering. All respective purchasers in the Offering were “accredited investors” (as such term is defined under rules and
regulations promulgated under the Securities Act), and the Company sold the securities in the Offering in reliance upon an exemption
from registration contained in Section 4(2) and Rule 506 under the Securities Act. There were no discounts or brokerage
fees associated with this Offering. The net proceeds of the Offering will be used for working capital and general corporate purposes.
May
2020 Registered Direct Offering
On
May 22, 2020, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional
investors (the “Investors”) for the sale by the Company of 1,102,950 common shares (the “Common Shares”), at
a purchase price of $0.68 per share. Concurrently with the sale of the Common Shares, pursuant to the Purchase Agreement the Company
also sold warrants to purchase 1,102,950 common shares (the “Warrants”). The Company sold the Common Shares and Warrants
for aggregate gross proceeds of $750,006 (the “Offering”). Subject to certain beneficial ownership limitations, the five-year
Warrants will be initially exercisable on the six-month anniversary of the issuance date at an exercise price equal to $0.79 per share,
subject to adjustments as provided under the terms of the Warrants, and will terminate on the five-year anniversary of the initial exercise
date of the Warrants. The closing of the sales of these securities under the Purchase Agreement will take place on May 27, 2020. The
net proceeds from the transactions will be approximately $595,000, after deducting certain fees due to the placement agent and the Company’s
estimated transaction expenses, and will be used for working capital and general corporate purposes. The Warrants and the shares issuable
upon exercise of the Warrants were sold without registration under the Securities Act of 1933 (the “Securities Act”) in reliance
on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving a public offering and Rule 506 promulgated
under the Securities Act as sales to accredited investors, and in reliance on similar exemptions under applicable state laws. Dawson
James Securities, Inc. acted as the Company’s exclusive placement agent (the “Placement Agent”), on a best-efforts
basis, in connection with the Offering. Pursuant to the terms and provisions of the engagement letter between the Company and the Placement
Agent, the Company agreed to pay the Placement Agent a cash placement fee equal to 8% of the gross proceeds of the Offering, or $60,000,
plus other expenses of the Placement Agent not to exceed $45,000. The Placement Agent also received five-year warrants (the “Compensation
Warrants”) to purchase up to a number of common shares equal to 5% of the aggregate number of shares sold in the Offering, including
the warrant shares issuable upon exercise of the Warrants, which such Compensation Warrants have substantially the same terms as the
Warrants sold in the Offering, except that such Compensation Warrants have an exercise price of $0.85 per share and will terminate on
the five year anniversary of the effective date of this offering.
December
2020 Private Offering
On
December 7, 2020, the Company executed subscription agreements with three individual accredited investors to offer and sell in a private
placement 566,379 of the Company’s common shares at the per share price of $2.32 (which was the closing price for the Company’s
common shares on December 4, 2020) for the gross proceeds of approximately $1.3 million. The shares were sold without registration under
the Securities Act of 1933 in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving
a public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors. The proceeds of the transaction
will be used for working capital and general working purposes. There were no discounts or brokerage fees associated with this offering.
Corporate
Name Change
In October 2020, the Company
announced its corporate name change to “Antelope Enterprise Holdings Limited”. Commencing on October 15, 2020, the Company’s
shares will continue traded on the Nasdaq Stock Market under a new ticker symbol “AEHL”; the new CUSIP number associated
with the name change is G041JN106. The Company’s shareholders approved the name change proposal at its February 2020 Annual Meeting.
Reverse
Stock Split
Following
the September 3, 2020 record date, the Company’s ordinary shares began trading on the NASDAQ Stock Market on a split-adjusted basis.
The new CUSIP number for the Company’s common stock following the reverse split is G2113X159. The Board approved a reverse stock
split so as to regain compliance with the minimum bid price requirement of $1.00 per share for continued listing on the NASDAQ Stock
Market. As a result of the reverse stock split, every three issued and outstanding ordinary shares as of the effective date were combined
into one issued and outstanding share. The reverse stock split reduced the number of outstanding ordinary shares of the Company from
approximately 9.2 million shares to approximately 3.1 million shares, and the par value per share increased from $0.008 to $0.024. In
lieu of issuing fractional shares, the Company issued one full share of the post-reverse stock split common share to any stockholder
who would have been entitled to receive a fractional share. All outstanding stock options, warrants and other rights to purchase the
Company’s ordinary shares were adjusted proportionately as a result of the reverse stock split. Following the split, the Company
regained its compliance with NASDAQ’s minimum bid requirements for continued listing requirements on the NASDAQ Stock Market on
September 18, 2020.
Operational
Updates
The
Company primarily conducts its mainland China business operations in two cities: Jinjiang City, Fujian Province, and Gao’An City,
Jiangxi Province. This business is conducted through the Company’s two subsidiaries: Jinjiang Hengda Ceramics Co., Ltd. and Jiangxi
Hengdali Ceramic Materials Co., Ltd. Following the COVID-19 outbreak in China, both companies were required by the local authorities
to cease their operations in February 2020; the respective operations gradually resumed beginning on March 1, 2020.
• Jinjiang
Hengda Ceramics Co., Ltd. (Jinjiang City, Fujian Province) – there is a total of 223 employees at this location; no employee has
been affected by the novel coronavirus. The local government maintains daily control and monitoring of traffic to Fujian province from
more severely affected provinces. In general, business entities in Jinjiang province resumed their operations, with some restrictions
on operations of commercial banks and municipal entities.
•
Jiangxi Hengdali Ceramic Materials Co. Ltd. (Gao’An City, Jiangxi Province) – there is a total 64 employees at this location;
no employee has been affected by the novel coronavirus. As a general matter, the municipal authorities require travel registration, routine
self-checks for elevated body temperature and other symptoms, with periodic reporting to such authorities.
In
addition to the foregoing:
•
Most of the branches of Fujian and Jianxi commercial banks where the Company maintains bank accounts have not fully resumed their operation
or otherwise have refused to perform bank confirmations for fear of contacting contaminated items.
•
Cities and municipalities where the Company’s key customers and suppliers operate maintain monitoring and compulsory quarantine
policies adopted during the COVID-19 outbreak; a number of the Company’s key customers and suppliers are unable to provide confirmations
on time.
•
The express delivery companies have not fully resumed their operations in most cities. The delivery periods have significantly extended
as compared with those prior to the COVID-19 outbreak due to shortage of active staff. Additional disinfection and sterilization requirements
are in place to prevent the potential virus transmission through courier packages.
•
We have also begun to implement a diversification strategy into computer consulting and software development to broaden our business
operations and fuel our growth. In August 2020, we announced several contracts related to fintech that were entered into by our newly-formed
wholly-owned subsidiary which focuses on software development, Antelope Holdings (Chengdu), Co., Ltd. Although this business is currently
operating on a small scale and is not currently an important contributor to revenue or earnings, we are intent upon growing this business
over time.
The
principle office of the Company’s auditors is located in Hong Kong Special Administrative Region of PRC (“HKSAR”).
In order to prevent the COVID-19 disease outbreak in HKSAR, the government of HKSAR announced that (i) beginning on February 4, 2020,
individuals, including Hong Kong residents, travelling between Hong Kong and the Mainland or between Hong Kong and other places will
have to use control points at the Hong Kong International Airport, Shenzhen Bay and the Hong Kong-Zhuhai-Macao Bridge, and closed other
land and water ports between mainland and HKSAR, and (ii) beginning on February 8, 2020, the Department of Health of the HKSAR issued
quarantine orders to all people entering Hong Kong from the Mainland, including Hong Kong residents, Mainland residents and visitors
from other places. People involved are required to stay at home or are required to find other accommodations to complete a fourteen-day
compulsory quarantine. The Chief Executive of the government of the HKSAR under section 8 of the Prevention and Control of Disease Ordinance
(Cap. 599) enacted the Compulsory Quarantine of Certain Persons Arriving at Hong Kong Regulation (“the Regulation”) to enforce
the quarantine measure described in item (ii) above. The updated expiry date of the Regulation is midnight June 7, 2020.
The
Company files this Annual Report in compliance with and reliance upon the SEC Order under Section 36 of the Securities Exchange Act of
1934, as amended, granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules thereunder (SEC Release No. 34-88318/March
4, 2020). As a standard audit procedure, the auditors are required to control the confirmation procedures to ensure the effectiveness
of this audit procedure, i.e. to issue confirmations to bank, customers and suppliers directly, and required the counterparties to mail
back the confirmations directly to the auditors’ office. However, in light of the limited operation of the commercial banks and
other business entities (especially small and medium sized entities), and the extended processing period of the express delivery service
during the outbreak and subsequent recovery periods, the issuing time and related response period of audit confirmations was delayed.
The recovery rate of the audit confirmations distributed (especially for those to customers and suppliers) is also expected to be lower
than in previous years, as a result, additional alternative procedures would be required, such measures would also in return delay the
overall audit process. The above-referenced measures had or will have adverse impacts on the timeliness to the Company’s annual
audit, i.e., adversely affect the auditors’ overall on-site audit schedules as well as the timeliness of express delivery service
of documents (such as audit confirmations) between mainland and HKSAR, and the filing of this Annual Report.
Overview
We
are a leading Chinese manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and
commercial buildings. The ceramic tiles, sold under the “HD” or “Hengda,” “HDL” or “Hengdeli”,
“Pottery Capital of Tang Dynasty”, “TOERTO” and ”WULIQIAO” brands are available in over two
thousand styles, colors and size combinations. Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed
tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling
products, accounting for over 77.7% of our total revenue in 2020.
Ceramic
tiles are widely used in the PRC as a construction material for residential and commercial buildings. Ceramic tiles are used for flooring,
interior walls for decorative purposes and on exterior siding due to their resistance to temperature, extreme environments, erosion,
abrasion and discoloration for extended periods of time. Citigroup Global Markets reports that the PRC government has actively promoted
the construction of affordable housing by ensuring that 77% of the new land made available was allocated to those in the low-income bracket,
especially in Tier II and III cities. During the 11th National People’s Congress (NPC) relating to the central government’s
draft 12th Five Year Plan (2011 - 2015), Premier Wen Jiabao pledged that the government will curb excessive housing price growth and
provide enough affordable houses for needy residents. Premier Wen stated that, from 2011 to 2015, the country aims to build 36 million
units of affordable housing covering 20 percent of the country’s households. In addition, the government recently released a statement
stating that the greatest potential for expanding domestic demand and sustaining economic growth lies in urbanization. Since urbanization
leads to new property development and construction, this could positively impact the Company’s business.
Our
manufacturing facilities operated by Jinjiang Hengda Ceramics Co., Ltd. are located in Jinjiang, Fujian Province, and our manufacturing
facilities operated by Jiangxi Hengdali Ceramic Materials Co., Ltd. are located in Gaoan, Jiangxi Province. Combined, these facilities
currently provide an aggregate annual maximum production capacity of approximately 72 million square meters. However, our annual production
capacity has been effectively reduced from 72 million square meters of ceramic tiles to 66 million square meters of ceramic tiles due
to an eight-year contract to lease out one of the production lines from our Hengdali facility that we entered into in March 2016.
Therefore, for the term of the eight-year lease, and as a result of two old furnaces having been put out of use at the facility, we may
only produce up to 28.8 million square meters of ceramic tiles from our Hengdali facility. In 2017, Hengda retired two old furnaces;
in July of 2018, Hengda retired two more old furnaces, which caused Hengda’s annual maximum production capacity to be reduced to
approximately 22.8 million. Therefore, the Company’s effective annual production capacity has been effectively reduced from 72
million square meters of ceramic tiles, to 51.6 million ceramic tiles as of fiscal year end 2019. Due to a reduction in demand, as of
fiscal year end 2020, we are utilizing production facilities capable of producing only 4.19 million square meters of ceramic tiles. In
addition, we currently have 12 production lines of which only one was utilized as of fiscal year end of 2020 due to challenging macroeconomic
conditions that began in the fourth quarter of 2012 and which was exacerbated by the COVID-19 pandemic. Each production line is optimized
to manufacture specific size ranges to maximize efficiency and output.
We
primarily sell our products through an exclusive distributor network or directly to property developers. We have long-term relationships
with our customers; most of our top ten customers in 2020 have been purchasing from us for over ten years. We have been in discussions
with some large property developers in China to be their exclusive or primary provider of ceramic tiles and, although no arrangements
or agreements have been entered into, we expect to enter into arrangements of that type in the foreseeable future.
We
focus our research and development efforts on developing innovative and environmentally friendly products. We own eighteen utility model
patents. Our stringent tile management and marketing efforts have created a strong business reputation and high brand awareness as demonstrated
by us receiving the “Chinese Well-Known Trademark” award from the Intermediate People’s Court of Xiangtan City and
“Asia’s 500 Most Influential Brands 2014” award from the World Brand Laboratory.
Our
Industry
We
operate in the Chinese ceramic tile industry which is fragmented, highly competitive and closely tied to the PRC economy. Although there
is little industry data available, management believes from its knowledge of other manufactures that it is one of the largest PRC-based
manufacturers of ceramic tiles.
In
2020, China’s gross domestic product (GDP) totaled approximately $14.7 trillion and was the world’s second largest economy
after the United States. China’s annual 2020 GDP grew by 2.3% compared to 6.1% annual GDP growth in 2019, with the year-to-year
slowdown attributable to the outbreak of the COVID-19 pandemic. However, once business conditions normalize, we believe that construction
and real estate development will continue to be a key driver behind China’s GDP growth with property investment and related industries
constituting a significant percentage of its GDP. Demand for ceramic tile product depends upon and directly correlates to activity in
the construction and real estate development industries. The ceramic tile industry’s two primary markets in the PRC are residential
construction applications and commercial construction applications.
We
believe that China’s real estate sector is likely to be relatively stable as speculative activities have prompted government policies
to restrict construction with the intent to rein in rising prices. Further, tighter policy in the sector has occurred as some banks have
increased their mortgage lending rates and down payment requirements. However, the government has issued statements stating that the
greatest potential for expanding domestic demand and sustaining economic growth lies in urbanization. Since urbanization leads to new
property development and construction, this could positively impact our business.
We
believe that the real estate and the construction and building materials sectors continue to be vital to sustaining China’s economy
growth. The Chinese Government is intent upon curbing real estate speculation and stabilizing prices by pronouncing that real estate
is for habitation versus speculation and by promoting affordable housing and inexpensive rental housing. However, from time to time the
Chinese government has also taken various actions to stimulate real estate development and home purchases which include interest rate
cuts, lowering the reserve requirement ratio for banks, lowering first home down payment ratios and cutting the minimum capital ratio
for fixed asset investments to aid property developers.
Although
the Chinese Government’s measures have helped to sustain the real estate sector, there is an oversupply of building materials companies
which, in combination with occasional slowdowns in construction and real estate activities, has hindered our operating results.
Commencing in the fourth
quarter of 2012, we began experiencing challenging market conditions in China’s real estate and construction markets which resulted
in a marked decrease of our sales volume of our ceramic tile products. Beginning in December 2012, we began reducing the selling
price of our ceramic tile products to be competitive in the market and to maintain market share. For fiscal 2013, our full year revenue
was down 35.4% as compared to fiscal 2012 full year revenue, resulting from a 24.8% decrease in the sales volume of our ceramic tiles
and a 14.1% decline in our average selling price. In fiscal 2014, we began emerging from the sector downturn that occurred in late 2012
due to challenging macroeconomic conditions. For fiscal 2014, our full year revenue increased 11.2% as compared to fiscal 2013 resulting
from a 1.2% increase in the sales volume of our ceramic tiles and a 9.7% increase in our average selling price. However, for fiscal 2015,
our full year revenue decreased by 2.0% as compared to fiscal 2014 resulting from a 5.8% decrease in the sales volume of our ceramic
tiles somewhat offset by a 4.2% increase in our average selling price. The decrease in revenue in fiscal 2015 as compared to fiscal 2014
was primarily due to a substantial decline in business activity in the fourth quarter of 2015 as compared to the fourth quarter of 2014.
The Company’s sales volume of 6.7 million square meters represented a 13.0% reduction in sales volume from the 7.7 million square
meters recorded in the fourth quarter of 2014. The average selling price in the fourth quarter of 2015 rose 0.3% to 31.2 per square meter
of ceramic tile as compared to the fourth quarter of 2014 as we had been able to retain our pricing power. The increase in average selling
price in the fourth quarter of 2015 represents eight consecutive quarters of period over year-ago period growth in average selling price.
However, business conditions became very challenging since the beginning of 2016. For fiscal 2016, our full year revenue decreased by
22.0% as compared to fiscal 2015 resulting from a 12.9% decrease in the sales volume of our ceramic tiles and an 11.5% decrease in our
average selling price. The decrease in revenue in fiscal 2016 as compared to fiscal 2015 was primarily due to continued challenging market
conditions and an overall decline in business activity. Consequently, beginning on July 1, 2016, we reduced the selling price of
certain of our slow- moving products by 10% with the goal to turn some of this inventory into cash. Beginning on October 1, 2016,
in order to generate sales and move inventory, we instituted a 20% reduction of our slow-moving products. This further price reduction
led to a 35% increase in our sales volume to 9.00 million square meters in the fourth quarter of 2016 compared to 6.68 million square
meters for the same period of 2015. However, the average selling price in the fourth quarter of 2016 fell 28.2% to RMB 22.4 per square
meter of ceramic tile as compared to the fourth quarter of 2015 due to the price discounting instituted at the beginning of the fourth
quarter. The decreases in average selling price in beginning in the third quarter of 2016 reversed eight consecutive quarters of period
over year-ago period growth in this metric. Business conditions continued to be challenging in fiscal 2017 as we experienced a year-over-year
6.5% decrease to RMB 25.8 in our average selling price as compared to RMB 27.6 for fiscal 2016. However, due to competitive pricing and
the strong sales of our porcelain ceramic tiles, we were able to generate a 10.6% increase in sales volume to 30.8 million square meters
of ceramic tiles in 2017 from 28.8 million square meters of ceramic tiles for fiscal 2016. In fiscal 2018, we experienced difficult market
conditions, especially in the second half of the year, which resulted in a 44.6% decline in sales volume as compared to fiscal 2017.
In an effort to bolster sales, in July of 2018, we decreased the pricing of our ceramic tile products by an average of 10%, but
certain core products maintained their pricing levels which resulted in a 9.4% increase to RMB 28.2 in our average selling price as compared
to RMB 25.8 for fiscal 2017. In October 2019, we decreased the pricing of our ceramic tile products by an average of 15%. This resulted
in a 26% increase in our sales volume for the second half of 2019 as compared to the same period of 2018. For the full fiscal year 2019
revenue decreased by 34.2% as compared to fiscal 2018 mainly due to the 27.0% decrease in sales volume resulting from the continued slowdown
of China’s economy, especially in the manufacturing sector and the real estate industry. For the full fiscal year 2020, revenue
decreased by 44.1% as compared to fiscal 2019 mainly due to the 35.4% decrease in sales volume resulting from a contraction in business
from our customers which was primarily caused by the COVID-19 pandemic.
Key Factors
Affecting the Chinese Ceramic Tile Industry
The
overall performance of the ceramic tile industry is influenced by consumer confidence, spending for durable goods, interest rates, turnover
in housing, the condition of the residential and commercial construction industries and the overall strength of the economy and the recent
restriction policy on the purchase of property. Demand for our ceramic tile products in the PRC heavily depends on the following economic
factors and government policies designed to drive growth in the construction and real estate development sectors of the PRC economy.
Urbanization
Over
the last twenty years, China has experienced rapid urbanization due to the increasingly limited capacity of rural areas to provide adequate
economic support for a large agrarian population, the increasing disparity in disposable incomes between rural and urban dwellers and
the easing of restrictions which historically limited rural to urban migration from rural areas to towns and cities. The development
of an industrial base and service sector in urban areas has also driven large labor pools with a broad range of skills to urban areas.
It is estimated that China’s urban population will expand from 572 million in 2005 to 926 million in 2025 and hit the one billion
mark by 2030. In 20 years, China’s cities will have added 350 million people to its urban population — more than the entire
population of the United States today. As a result of the urbanization trend and the associated need to expand an underdeveloped infrastructure
to accommodate and house such growth, we believe that commercial and residential construction will expand measurably in future years,
thereby creating additional demand for our products.
Potential
of Tier II and III cities
Much
of the growth in China’s GDP is being driven by economic activity in Tier II and Tier III cities, such as Chengdu, Chongqing, and
Tianjin, which commonly have populations that exceed 10 million individuals who often live in dwellings that do not meet modern standards.
According to Jones Lang LaSalle, Tier I cities will account for only 10% of China’s commercial real estate activities by 2020,
which highlights the attractive commercial development opportunities in Tier II and III cities. The economic impact of this trend is
being felt across China’s Tier II and Tier III cities as the upswing in new residential and commercial construction projects and
renovations is generating new demand for construction materials.
Importance
of distributors
The
majority of exterior ceramic tile manufacturers do not have sufficient resources to provide their own sales coverage nationwide and rely
heavily on local distributors. As competition has intensified, many manufacturers have started to bid directly to real-estate developers
for large construction projects. Our direct sales represented 0%, 0% and 4% of total sales in 2020, 2019 and 2018, and market participants
expect that this share could increase, placing a premium on a manufacturer’s internal sales force while requiring product lines
with greater flexibility to meet customer demands.
Industry
and Product Offerings
There
are two product segments within the ceramic tile industry: exterior and interior.
Exterior
ceramic tiles
Exterior
ceramic tile is mainly used as a decorative and protective component on building exteriors. Unlike other types of tiles, exterior ceramic
tile must endure harsh environmental conditions and typically is manufactured to be water/dirt-resistant, non-corrosive and energy efficient.
In addition, exterior ceramic tiles have other demands that interior ceramic tiles do not always have, including mandatory expansion
joints, moisture considerations and thermal demands. Depending on the ultimate use of the ceramic tile and customer preferences, exterior
ceramic tiles are often manufactured with customized glazing, coloring and other design and aesthetic features.
Interior
ceramic tiles
Interior
ceramic tiles are mainly used for decorative purposes on walls and floors in kitchens and bathrooms. Interior ceramic tiles are differentiated
by design, style and perceived quality. Within China, interior ceramic tiles are typically purchased by residential owners or renovation
contractors rather than property developers.
The
manufacturing process is similar for both segments, however the distribution channels are different. Interior ceramic tiles are sold
through retail stores and directly to contractors or residential owners. Exterior ceramic tiles are sold through distributors or directly
to large property developers. Due to the higher cost distribution chain and typically smaller order sizes, profit margins are generally
less within the interior ceramic tile industry.
Future
Product Trends
As
the ceramic tile industry in the PRC matures, builders are demanding construction materials that reduce building weight, making it possible
to use light building structures and accelerate the speed of construction. Government policies meant to address energy efficiency are
promoting the use of innovative wall materials, particularly those performing well in heat preservation and insulation and that are light
in weight, and manufactured utilizing waste materials, less energy and fewer raw materials. In an effort to differentiate their products
and meet government policies, ceramic tile manufacturers are increasingly focusing on research and development efforts.
Antelope
Enterprises’ Products
Currently,
all of our products are exterior wall ceramic tiles. We produce five types of ceramic tiles:
Porcelain
tiles: Porcelain tiles are fired at extreme temperatures and are therefore stronger and harder than other types of ceramic
tiles. The material and the color are the same throughout and porcelain tiles are extremely durable. Although porcelain tiles have a
matte surface, they absorb less water than other ceramic tiles, and as such, they are a superior solution for exterior tiling where there
is frequent exposure to moisture.
Glazed
tiles: Glazed tiles have a glossy finish and color patterns may be added to the exterior surface of the tile. The glaze
does not go beyond the exterior surface of the tile and the interior color will show if the tile is chipped. Although glazed tiles are
less water-resistant than matte porcelain tiles, they are easier to clean due to their glossy surface.
Glazed
porcelain tiles: Glazed porcelain tiles combine the advantages of porcelain tiles and glazed tiles, thus enabling the
tiles to have a porcelain body with a stain-proof and glossy finish.
Rustic
tiles: Rustic tiles have greater versatility in their design as textures and colors can be added to their exterior surfaces
and therefore can be used in more decorative situations. In addition to being used on exterior walls, rustic tiles are also used for
interior walls and flooring.
Polished
glazed tiles: Ceramic tiles can be manufactured in differing sizes according to customer specifications, with the largest sized tiles
measuring 800 mm by 800 mm.
We
can produce over 2,000 different combinations of products, colors, textures and sizes to meet the various demands of our customers.
In fiscal 2015, we constructed
a new production line to manufacture glazed brick ceramic tiles in our Hengdali facility, which we believe will be an attractive addition
to our current product portfolio. This new product is engineered to be competitively priced and a highly effective roofing solution for
both high rise apartment buildings and housing projects, and it complements our existing ceramic tile building siding products. In fiscal
2019, the Company announced that it has developed a new type of exterior ceramic tile designed to cool indoor temperatures of buildings.
The Company intends for this new product, when fully tested and receives its certification, to target the Southeast Asia market due to
the region’s generally hot and wet climate. The Company anticipates utilizing existing production lines in its Hengdali facility
to manufacture the new ceramic tiles. The new ceramic tiles are designed to allow air to pass through its surface which the Company believes
that this makes this product a well-suited material for designing evaporative cooling systems and an energy efficient building materials
solution for both high rise apartment buildings and general housing.
Our
Competitive Strengths
We
believe the following competitive strengths will enable us to take advantage of the rapid growth of the ceramic tile industry in China:
Brand
Recognition
We
believe that the “Hengda,” “HD,” “Hengdeli,” “HDL,”, “Pottery Capital of Tang Dynasty”,
“TOERTO” and “WULIQIAO” brands are well recognized and highly regarded in markets where our products are sold.
Before April 13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd.
Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and was
licensed the exclusive right to use WULIQIAO during the term of that trademark, which expires on January 27, 2020. On April 13,
2011, WULIQIAO was transferred to Hengdali. In 2005, the brands “Hengda” and “HD” were each certified as a Fujian
Well-Known Trademark by the Fujian Well-Known Trademark Award Commission and recognized as a “Chinese Well-known Trademark”
in 2005 by the Intermediate People’s Court of Xiangtan City. Since 2012, we have been recognized with the “Asia’s 500
Most Influential Brands” award from the World Brand Laboratory. Our products are selected for inclusion in strategic and high-profile
projects such as the 16th Asian Games, the 11th National Chinese Games Village and the Chinese Academy of Sciences.
Focus
on Tier II and Tier III Cities
Because of recent efforts
by the PRC government to tighten monetary policy and constrain real estate prices in the “Tier-I” cities such as Beijing,
Shanghai, Shenzhen, and Guangzhou, we believe the outlook for our business has improved, given our concentration in Tier-II and Tier-III
cities. We expect continued demand growth in the Tier-II and Tier-III cities, driven by urbanization trends as well as by the PRC government’s
commitment to low-income housing.
Long-Term
Sales Relationships
We have established an extensive
distributor network and long-term customer relationships, where most of Hengda’s top ten customers in 2020 have been purchasing
from us for over 10 years each.
Experienced
Management Team
Our
experienced, professional and dedicated management team brings a wealth of knowledge to our day-to-day operations and provides us with
strategic direction and many years of experience in the ceramic industry.
Modern,
environmentally friendly, and efficient manufacturing capabilities
We
have modern manufacturing facilities. Our Hengda facility received an ISO 9001:2000 accreditation, an international standard that acknowledged
our quality control process. Our employees are required to undergo internal training regarding quality control policies, targets and
procedures, as well as production and processing techniques.
We
upgraded our Hengda production lines to recover and/or reuse waste water, waste dust, exhaust and kiln after-heat in 2007, which reduced
our energy usage and energy costs. Our new Hengdali production lines were also built using new equipment that incorporates recovery methods
for recycling waste water, waste dust, exhaust and kiln after-heat that operate at a higher efficiency rate. We received an Energy Conservation
Advance Enterprise Award in 2008 from the Jinjiang City Government.
Focus
on Research and Development
We
have devoted substantial resources to establishing research and development capabilities in an effort to improve our products and diversify
our product mix. Our R&D team has developed over 2000 types of different product combinations. As of the date of this Annual Report,
we own eighteen utility model patents. “Utility model patents” means any new technical solution relating to the shape, the
structure, or their combination, of a product, which is fit for practical use. In addition, we were awarded a “High-tech Enterprise
Certificate” in 2007 from Fujian Provincial Department of Science and Technology, affirming our innovations in the industry. As
of December 31, 2020, our research and development team includes 7 employees and focuses on new products as well as developing energy
and resource efficient production methods.
Strategic
Location within the PRC
We
are located in Jinjiang and Gaoan. The Jinjiang region is an established ceramic and construction material hub in the PRC, and the Gaoan
region is a developing ceramic production area supported by the local government. Both of these areas are located near the raw materials
required to produce ceramic tiles. As distributors and direct customers come to these areas to procure construction materials for sale,
construction projects or export, these locations provide us a regular flow of customers and demand. These centralized industry locations
allow us to respond quickly to customer demands and react rapidly to emerging market trends. The proximity and ease of access to major
ports and transportation infrastructure in both of these regions enables us to decrease transportation and logistics costs.
Our
Growth Strategy
We
intend to further strengthen our position as a leading manufacturer of ceramic tiles in China by implementing the following strategies:
Broadening Our Distribution
Network
We sell our products mainly
to distributors located in major Tier-II cities such as Tianjin, Wuhan, Chengdu and Shenyang. We plan to establish and/or increase our
presence in Tier-II and Tier-III cities in provinces such as Zhejiang, Anhui, Heilongjiang, Guizhou, Henan, Hebei, Shandong, Shanxi,
Shaanxi, and Yunnan.
We believe that our new Hengdali
production facility in Gaoan will better position us to expand into new markets and reach additional end customers as transportation
and logistical costs of delivering products to these areas will be reduced.
Evaluating Opportunities
to Increase Exports
We intend to increase the
exported volume of our products with additional PRC trading companies and by promoting our products in regional and international trade
shows with a focus on direct selling efforts to property developers in the PRC. While we are in its early stages, we also plan upon increasing
our currently modest levels of exports to the Southeast Asia market due to a potential rise in construction in the region and its climate
conditions which make it an ideal fit for certain of our ceramic tile products.
Pursuing
Selective Acquisition Opportunities
We
will explore business combinations that broaden our product line, expand our customer base and allow us to penetrate new geographic regions.
Our management believes that it has sufficient expertise to find and acquire suitable ceramic production facilities and/or companies
to increase our scale and geographic diversification within the PRC. Our management intends to only pursue acquisitions where it believes
that we will be able to continue to provide cost competitive, high quality ceramic tiles to our customers.
Further
Enhancing Our Brand Awareness
We
plan to enhance awareness of the “Hengda” or “HD,” “HDL” or “Hengdeli,” “TOERTO”
and “WULIQIAO” brands in the PRC exterior ceramic tile industry. Hengda produces our “Hengda” or “HD”
brands, which are marketed toward the high-end market. Hengdali produces our “HDL” or “Hengdeli” brands, which
are marketed to the mid-level market, “TOERTO” brand, which is a specialized brand for our large-sized rustic tiles and “WULIQIAO”
brand, which is a specialized brand for oriental pattern large-sized rustic tiles. WULIQIAO is a trademark owned by Fujian Province Jinjiang
City Hengda Construction Materials Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda
Construction Materials Co., Ltd. and has been licensed the exclusive right to use WULIQIAO during the term of that trademark. Our
branding strategy is to reach a larger customer base with a wide spectrum of product offerings. We plan on strengthening our brands by
marketing our products to property developers and the construction industry, partnering with local distributors, attending national fairs
and promoting our products through inclusion in strategic high-profile projects.
Developing
Advanced Products That Meet Evolving Building Construction Requirements
We
strive to develop new products that address market demand for advanced building materials that meet or exceed evolving government policies
for energy efficiency. Further, we will continue to invest in research and development to maintain our competitive position in the industry.
Our research and development efforts are focused on developing tiles which:
|
•
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Reduce raw materials and
energy consumption in the production process;
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•
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Have a density less than
half of other tiles;
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•
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Reduce load bearing stress
on exterior walls of buildings and tile shedding;
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|
•
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Recycle our by-products
and limit waste output in our production process;
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•
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Utilize a honeycomb structure
which optimizes insulation performance for new products, such as our light-weight product lines;
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•
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Have higher standards for water resistance; and
|
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•
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Are easier to attach to exterior walls.
|
|
•
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Are designed to cool indoor
temperatures of buildings and are sustainable energy efficient solution for both high rise apartment buildings and general housing.
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Ceramic
Tile Production Process and Facilities
A
typical production line for ceramic tiles is comprised of preparation equipment (which typically includes a miller and a spray dryer),
a press (which is used for shaping raw ceramic material), a glazing line (used to supply glazed materials to the pressed tiles), a kiln
(used to harden the soft mixture of clay and minerals into a hard ceramic body by subjecting the mixture to high temperature) and packaging.
The
procedures involved in the production of ceramic tiles are summarized below:
Raw
materials for ceramic products consist mainly of clay (comprised of inorganic materials such as kaolin, flint and feldspar) obtained
mostly from areas adjacent to our facilities, such as Dehua county of Quanzhou city and the Fujian province. Raw materials are inspected
by quality control staff upon receipt. Batch calculations that take into consideration both physical properties and chemical compositions
of the raw materials are performed to ensure that the right amounts are mixed.
After
stringent checks on the quality of the clay and weighing, the raw material department mixes the clay as determined during inspection.
The mixture is then sent to a ball mill where water is added to form a slurry for finer grinding. This process takes approximately 12
hours to complete. The slurry is then filtered and metallic particles are removed magnetically. The slurry is inspected at this stage
for density, flow speed and water ratio. Compared with many competitors who use stone ball millers, we use aluminum ball millers to grind
materials. Aluminum ball millers have a higher initial cost, but have higher grinding speed and can better process stone chips existing
in the slurry. The slurry is then moved to a large slurry pool. Based on the production schedule, portions of the slurry may be moved
to smaller slurry pools where coloring materials can be added. The mixture in smaller slurry pools are churned for approximately 24 hours
to keep quality and color consistent in the end product.
A
spray dryer is then used to remove most of the water content in the slurry to obtain granules with the required moisture level for processing.
The slurry is pumped into an atomizer, consisting of a rapidly rotating disk or nozzle where droplets are formed. The droplets of the
slurry spray are then dried by a rising hot air column, forming small free-flowing granules of a standard size and specific moisture
content which is used in the next stage. The stream of gases used to dry the slurry can be at temperatures as high as 1,100°C. The
granules are then moved to and held in steel containers called hoppers for over 24 hours to ensure consistency and uniformity of granule
size and color.
The
granules flow from a hopper into the mold die where they are compressed by steel plungers and then ejected by the bottom plunger in varying
sizes based on specifications. The automated presses used operate at pressures as high as 1,600 tons per square meter. The ceramic bisque,
a shaped non-fired ceramic tile, is then passed through to the dryer to remove most of the remaining water content present in preparation
for the firing and/or glazing stages. The tiles are fed into the dryer and conveyed horizontally on rollers, at temperatures of 250°C
for approximately 15 to 25 minutes based on tile type.
Glazing
involves applying one or more coats of glaze, comprised mainly of silica and other coloring agents such as iron, chromium, cobalt or
manganese, onto the tile surface. The dried ceramic bisque is then sent to the glazing station where a design and/or color is added.
The glaze concentration and glazing quantity is controlled by computers to avoid chromatic aberration and lack of uniformity. Not all
products, such as porcelain tiles, require glazing.
After
molding and/or glazing, the ceramic bisque is fired in a kiln. Typically, the temperature in a kiln is about 1,200°C and the firing
process takes less than one hour. The entire firing process is monitored and controlled by computers. We currently have twelve firing
lines, nine located in the Hengda facility and three located at the Hengdali facility.
After
the firing process, tiles are inspected for quality. Tiles which pass inspection are packaged and moved to the storage facility.
Quality
Control & Assurance
The quality of our products
is critical to our continued growth and success. In July 2002, our Hengda facility received ISO 9001:2000 accreditation, an international
certification certificate, acknowledging our quality control process. Quality control procedures begin at the receipt of raw materials
and continue throughout the manufacturing process ending with a final quality check prior to packaging. Our employees are required to
undergo internal training regarding our quality control policies, targets and procedures, as well as production and processing techniques.
As of December 31, 2020, our quality assurance team consisted of 13 members.
Notable
Awards & Certificates
We
have received numerous awards and certificates for our branding, product quality and R&D achievements. Select awards include:
Year
Initially
Received
|
|
Award &
Certificate Name
|
|
Issuer
|
2002
|
|
ISO 9001:2000 Quality Management
System Certificate
|
|
China Certification Center
for Quality Mark
|
|
|
|
|
|
2005
|
|
ISO 14001:2004 Environmental
Management Standards Certificate
|
|
Fujian Branch of Beijing World
Standards Certification Centre
|
|
|
|
|
|
2005
|
|
Fujian Well-known Trademark
|
|
Fujian Well-known Trademark
Award Commission
|
|
|
|
|
|
2005
|
|
Chinese Well-known Trademark
|
|
Intermediate People’s
Court of Xiangtan City
|
|
|
|
|
|
2006
|
|
Inspection Exempted Products
Certificate
|
|
National Bureau of Quality
and Technical Supervision
|
|
|
|
|
|
2007
|
|
High-tech Enterprise Certificate
|
|
Fujian Provincial Department
of Science and Technology
|
|
|
|
|
|
2008
|
|
Energy Conservation Advanced
Enterprise
|
|
Jinjiang City Government
|
|
|
|
|
|
2009
|
|
Fujian 100 Important Industrial
Enterprise
|
|
Fujian Economic and Trading
Commission
|
|
|
|
|
|
2010
|
|
Asia’s 500 Most Influential
Brands 2010
|
|
World Brand Laboratory
|
|
|
|
|
|
2010
|
|
Fujian’s Top 300 Enterprises
|
|
Fujian Enterprise Evaluation
Center and Fujian Enterprise Evaluation Association
|
|
|
|
|
|
2011
|
|
China’s 500 Most Valuable
Brands
|
|
World Brand Laboratory
|
|
|
|
|
|
2011
|
|
Top 100 Fastest Growing Enterprises
for China Building Material
|
|
China Building Materials Enterprise
Management Association
|
|
|
|
|
|
2011
|
|
Top 500 Enterprise in China
Building Material
|
|
China Building Materials Enterprise
Management Association
|
|
|
|
|
|
2011
|
|
Customer Preferred Top 10
Brand
|
|
China International Nameplate
Development Association
|
|
|
|
|
|
2012
|
|
Asia’s 500 Most Influential
Brands 2012
|
|
World Brand Laboratory
|
|
|
|
|
|
2013
|
|
China’s 500 Most Valuable
Brands
|
|
World Brand Laboratory
|
|
|
|
|
|
2013
|
|
Asia’s 500 Most Influential
Brands 2013
|
|
World Brand Laboratory
|
|
|
|
|
|
2014
|
|
China’s 500 Most Valuable
Brands
|
|
World Brand Laboratory
|
Customers,
Sales & Marketing
We
primarily sell our products through an exclusive distributor network or directly to property developers. Distributors are located in
major cities such as Shanghai, Beijing, and Shenyang and second and third tier cities such as Chengdu, Haikou, Hefei, Tianjin, Wuhan
and other rural areas in the PRC. We have long-term relationships with many of our customers; most of our top ten customers in 2020 have
been purchasing from us for several years.
The
following table sets forth revenues by geographic market and the related percentage for the years ended 2018, 2019 and 2020:
Geographic
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Market
|
|
RMB’000
|
|
|
Percentage
|
|
|
RMB’000
|
|
|
Percentage
|
|
|
RMB’000
|
|
|
Percentage
|
|
PRC
|
|
|
475,413
|
|
|
|
95.0
|
%
|
|
|
326,561
|
|
|
|
99.7
|
%
|
|
|
182,989
|
|
|
|
100
|
%
|
Japan
|
|
|
3,113
|
|
|
|
0.6
|
%
|
|
|
1,020
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Burma
|
|
|
2,840
|
|
|
|
0.6
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
India
|
|
|
2,393
|
|
|
|
0.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Korea
|
|
|
2,673
|
|
|
|
0.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Thailand
|
|
|
2,122
|
|
|
|
0.4
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Hong Kong
|
|
|
1,661
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Spain
|
|
|
1,013
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Turkey
|
|
|
1,358
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
South Africa
|
|
|
1,495
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Sierra Leone
|
|
|
935
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Ghana
|
|
|
866
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Russia
|
|
|
709
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Morocco
|
|
|
773
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Great Britain
|
|
|
825
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
|
498,189
|
|
|
|
100
|
%
|
|
|
327,581
|
|
|
|
100
|
%
|
|
|
182,989
|
|
|
|
100
|
%
|
The
following table sets forth revenue for our major customers and the related percentage of our net revenue for the years 2018, 2019 and
2020:
|
|
2018
|
|
Customer
Name
|
|
RMB’000
|
|
|
Percentage
|
|
Foshan City Jundian Ceramics Co.,
Ltd.
|
|
|
65,815
|
|
|
|
13.2
|
%
|
Gaoan Hechang Trading Co., Ltd.
|
|
|
33,065
|
|
|
|
6.6
|
%
|
Xiamen Xinrui Materials Co., Ltd.
|
|
|
45,971
|
|
|
|
9.2
|
%
|
Chengdu City Dehui Construction Materials Co., Ltd.
|
|
|
42,285
|
|
|
|
8.5
|
%
|
Yangzhou Qiyang Trading Co., Ltd
|
|
|
20,079
|
|
|
|
4.0
|
%
|
Gaoan JinfaTrading Co. Ltd..
|
|
|
29,884
|
|
|
|
6.0
|
%
|
Nanjing Huli Construction Materials Co., Ltd.
|
|
|
22,770
|
|
|
|
4.6
|
%
|
Liuzhou City Shengquanda Trading Co., Ltd
|
|
|
23,084
|
|
|
|
6.0
|
%
|
Shangrao New Fangyuan Materials Co., Ltd.
|
|
|
8,022
|
|
|
|
1.6
|
%
|
Wuhan Dashunkai Materials Co., Ltd.
|
|
|
19,613
|
|
|
|
3.9
|
%
|
|
|
2019
|
|
Customer
Name
|
|
RMB’000
|
|
|
Percentage
|
|
Foshan City Jundian Ceramics Co.,
Ltd.
|
|
|
56,128
|
|
|
|
17.1
|
%
|
Xiamen Xinrui Materials Co., Ltd.
|
|
|
40,189
|
|
|
|
12.3
|
%
|
Chengdu City Dehui Construction Materials Co., Ltd.
|
|
|
36,056
|
|
|
|
11.0
|
%
|
Gaoan Hechang Trading Co., Ltd
|
|
|
25,383
|
|
|
|
7.7
|
%
|
Gaoan Jinfa Trading Co. Ltd.
|
|
|
23,781
|
|
|
|
7.3
|
%
|
Wuhan Dashunkai Materials Co., Ltd.
|
|
|
18,123
|
|
|
|
5.5
|
%
|
Liuzhou City Shengquanda Trading Co., Ltd
|
|
|
17,837
|
|
|
|
5.4
|
%
|
Zhengzhou Qiyang Trading Co.,Ltd
|
|
|
17,190
|
|
|
|
5.2
|
%
|
Kunming Wuye Trading Co., Ltd.
|
|
|
14,586
|
|
|
|
4.5
|
%
|
Xieli (Fujian) Co., Ltd.
|
|
|
11,312
|
|
|
|
3.5
|
%
|
|
|
2020
|
|
Customer
Name
|
|
RMB’000
|
|
|
Percentage
|
|
Foshan City Jundian Ceramics Co.,
Ltd.
|
|
|
49,702
|
|
|
|
27.2
|
%
|
Xiamen Xinrui Materials Co., Ltd.
|
|
|
34,938
|
|
|
|
19.1
|
%
|
Chengdu City Dehui Construction Materials Co., Ltd.
|
|
|
29,868
|
|
|
|
16.3
|
%
|
Liuzhou City Shengquanda Trading Co., Ltd
|
|
|
14,930
|
|
|
|
8.2
|
%
|
Zhengzhou Qiyang Trading Co., Ltd
|
|
|
9,542
|
|
|
|
5.2
|
%
|
Sichuan Heli Construction Materials Co., Ltd
|
|
|
8,837
|
|
|
|
4.8
|
%
|
Nanning Guchen Trading Co. Ltd.
|
|
|
8,078
|
|
|
|
4.4
|
%
|
Wuhan Dashunka Construction Materials Co., Ltd.
|
|
|
8,019
|
|
|
|
4.4
|
%
|
Xieli Fujian Trading Co., Ltd
|
|
|
7,135
|
|
|
|
3.9
|
%
|
Hubei Wanshi Trading Co., Ltd.
|
|
|
6,001
|
|
|
|
3.3
|
%
|
Fushan Yirui Materials Co., Ltd.
|
|
|
5,939
|
|
|
|
3.3
|
%
|
Our business and profitability
are not materially dependent on any industrial, commercial or financial contract with any of our customers. None of our directors or
executive officers or their respective affiliates has any interest, direct or indirect, in any of our customers.
Sales
and Marketing
The
sales and marketing department is responsible for formulating sales policies and pricing based on market analysis, surveys and forecasts,
developing and implementing our sales and marketing campaigns, and promoting our products and brand. Additionally, our sales department
is responsible for cultivating new customers and business relationships, as well as servicing existing accounts.
We
participate in a variety of sales and marketing activities including trade shows, in-house sales and marketing seminars, factory tours,
outdoor advertising, B2B catalogs and customer calls. We believe that these techniques allow us to gather and better understand customers’
needs and requirements and to obtain feedback on our products and services and intend to continue utilizing these techniques.
In
the future, we intend to participate in international trade fairs and seminars from time to time to promote our brand and products, and
to establish a network with industry professionals outside the PRC. To augment our plan to expand our markets internationally, our products
will also be advertised on and available to purchase on the Internet. As of December 31, 2020, our Sales and Marketing Department
had 46 employees.
Backlog
We
typically receive orders from customers two months in advance of production on a rolling basis. We enter into a dealership agreement
with customers, and a sales or purchase contract each time a customer places an order. If a customer makes any changes to an order after
we have used any raw materials in fulfilling the order, the customer bears the losses. Once we have delivered the products to the customer
and the customer has examined and accepted the products, we provide no quality guarantees. We confirm amounts payable with each customer
on a monthly basis. The products typically must be delivered to customers within 90 days of receipt of the sales order, and the customers
typically must pay for the products within 120 to 150 days of delivery.
As
of December 31, 2020, our backlog was nil attributable to the novel coronavirus pandemic and the disruption of normal business activities.
Major
Suppliers & Raw Materials
Our
suppliers are selected by our purchasing department and are assessed on criteria such as the quality of materials supplied, duration
of their business relationship with us, pricing, delivery reliability and response time to orders placed by us. We have sufficient raw
materials on hand to support, on average, three weeks of production at any point in time to minimize any potential production delays
that could arise due to a delay in raw material delivery.
We
have not experienced significant production disruptions due to a supply shortage from our suppliers, nor have we had a major dispute
with a supplier.
Our major suppliers for the
last three years are set forth in the table below, and except for Jinjiang Xinao Gas Company Limited and Foshan City Sanshui Baoligao
Inorganic Materials Co., Ltd., no suppliers accounted for more than 15% of our total purchases of raw materials and energy sources
for the years ended December 31, 2018, 2019 and 2020. Our business or profitability is not materially dependent on any industrial,
commercial or financial contract with any of our suppliers.
The
following chart lists our major suppliers and the related percentage of our total purchases of raw materials and energy sources in fiscal
years 2018, 2019 and 2020:
|
|
|
|
|
2018
|
|
Supplier
Name
|
|
Type
|
|
|
RMB’000
|
|
|
Percentage
|
|
Jinjiang Xinao Gas Company Limited
|
|
Gas
|
|
|
|
36,050
|
|
|
|
10.9
|
%
|
Quanzhou Like Ceramic Materials Co., Ltd.
|
|
Color
|
|
|
|
10,573
|
|
|
|
3.1
|
%
|
Foshan City Nanhai Huaxiong Ceramic Materials
Co., Ltd.
|
|
Color
|
|
|
|
30,843
|
|
|
|
9.2
|
%
|
Fengxin Huafeng Ceramic Co., Ltd.
|
|
Clay
|
|
|
|
31,275
|
|
|
|
9.4
|
%
|
Yongchun Junjie Mining Co., Ltd.
|
|
Coal
|
|
|
|
34,351
|
|
|
|
10.3
|
%
|
Foshan City Nanhai Zhongtai Glaze Production Plant
|
|
Color
|
|
|
|
30,843
|
|
|
|
9.3
|
%
|
Foshan City Sanshui Golden Eagle Inorganic Materials
Co., Ltd.
|
|
Color
|
|
|
|
25,975
|
|
|
|
7.8
|
%
|
Fujian Nanping Minning Mining Exploitation Co., Ltd.
|
|
Clay
|
|
|
|
18,023
|
|
|
|
5.4
|
%
|
|
|
|
|
|
2019
|
|
Supplier
Name
|
|
Type
|
|
|
RMB’000
|
|
|
Percentage
|
|
Jinjiang Xinao Gas Company Limited
|
|
Gas
|
|
|
|
21,970
|
|
|
|
10.5
|
%
|
Quanzhou Like Ceramic Materials Co., Ltd.
|
|
Color
|
|
|
|
9,920
|
|
|
|
4.7
|
%
|
Foshan City Nanhai Huaxiong Ceramic Materials
Co., Ltd.
|
|
Color
|
|
|
|
24,443
|
|
|
|
11.7
|
%
|
Fengxin Huafeng Ceramic Co., Ltd.
|
|
Clay
|
|
|
|
28,419
|
|
|
|
13.6
|
%
|
Yongchun Junjie Mining Co., Ltd.
|
|
Coal
|
|
|
|
26,551
|
|
|
|
10.3
|
%
|
Foshan City Nanhai Zhongtai Glaze Production Plant
|
|
Color
|
|
|
|
-
|
|
|
|
-
|
%
|
Foshan City Sanshui Golden Eagle Inorganic Materials
Co., Ltd.
|
|
Color
|
|
|
|
29,088
|
|
|
|
13.9
|
%
|
Fujian Nanping Minning Mining Exploitation Co., Ltd.
|
|
Clay
|
|
|
|
10,524
|
|
|
|
5.0
|
%
|
|
|
|
|
|
2020
|
|
Supplier
Name
|
|
Type
|
|
|
RMB’000
|
|
|
Percentage
|
|
Jinjiang Xinao Gas Company Limited
|
|
Gas
|
|
|
|
7,846
|
|
|
|
12.2
|
%
|
Quanzhou Like Ceramic Materials Co., Ltd.
|
|
Color
|
|
|
|
8,324
|
|
|
|
13.0
|
%
|
Foshan City Nanhai Huaxiong Ceramic Materials
Co., Ltd.
|
|
Color
|
|
|
|
8,676
|
|
|
|
13.5
|
%
|
Quanzhou City Like Ceramic Co., Ltd.
|
|
Clay
|
|
|
|
8,710
|
|
|
|
13.6
|
%
|
Foshan City Sanshui Golden Eagle Inorganic Materials
Co., Ltd.
|
|
Color
|
|
|
|
9,451
|
|
|
|
14.8
|
%
|
Yongchun Junjie Mining Co., Ltd
|
|
Coal
|
|
|
|
6,870
|
|
|
|
10.7
|
%
|
None
of our officers or directors or their respective affiliates has any interest, direct or indirect, in any of the above major suppliers.
There are no arrangements or understanding with any suppliers pursuant to which any of our directors and executive officers were appointed.
Research
and Development
We
have devoted substantial resources to establishing research and development capabilities in an effort to improve our products and diversify
our product mix. Our research and development team focuses on new products as well as developing energy and resource efficient production
methods.
We
focus our research and development efforts on the following:
|
•
|
Expanding and improving
production capacity;
|
|
•
|
Improving and developing
new production and processing techniques;
|
|
•
|
Improving the use and selection
of raw materials to lower costs; and
|
|
•
|
Developing new products
and designs to address changing market demands.
|
Our
research and development costs were approximately RMB 0.76 million, RMB 6.38 million, and RMB 1.21 million for fiscal years 2018, 2019
and 2020. From time to time, we may enter into collaboration agreements with research institutes to develop new products or improve our
production process. As of December 31, 2020, our R&D department had 7 employees.
Competition
We
face intense competition from our existing competitors and new market entrants. Our primary competitors are usually privately owned companies
that are located mainly in the PRC. Our principal competitors are Guangdong White Rabbit Ceramics, Foshan Shiwan Yulong Ceramics Co.,
Ltd, Jinjiang Haoyuan Ceramics, Co., Ltd, Jinjiang Wanli Ceramics Co., Ltd, Jinjiang Tengda Ceramics Co., Ltd and Jinjiang Haoshan
Construction Materials Co., Ltd. We compete primarily based on product quality, brand recognition, and an extensive distributor
network.
Intellectual
Property
We
protect our intellectual property primarily through a mix of patent and trademark registrations.
Registered
Trademarks
Our
brand name distinguishes our products and promotes consumer awareness of our products.
We
have registered the following trademarks in the PRC:
Trademark
|
|
Class/Products
|
|
Validity
Term
|
|
Registration
No.
|
|
|
19/ Tile, ceramic tile and
wave pattern tile
|
|
From February 21, 2012
to February 20, 2022
|
|
1716827
|
|
|
|
|
|
|
|
|
|
19/ Tile; non-metallic tile;
non-metallic tile for constructional use; non-metallic wall tile for constructional use; non-metallic floor tile; non-metallic ground
tile; glass mosaic; plaster; cement; concrete building unit.
|
|
From May 14, 2011 to
May 13, 2021
|
|
8289754
|
|
|
|
|
|
|
|
|
|
19/ Tile; non-metallic
tile; non-metallic tile for constructional use; non-metallic wall tile for constructional use; non-metallic floor tile; non-metallic
ground tile; glass mosaic; plaster; cement; concrete building unit.
|
|
From May 14,
2011 to May 13, 2021
|
|
8289921
|
Patents
We
currently own twenty-two utility model patents in the PRC for exterior wall tiles, which were applied for in November of 2007, July of
2011 and November of 2012 respectively. A “utility model patent” is a new technical solution relating to the shape,
the structure, or their combination, of a product, which is fit for practical use. Utility model patents have a ten-year term from the
application date.
Except
as disclosed above, as of December 31, 2020, our business or profitability is not materially dependent on any other trademarks,
copyrights, registered designs, patents, grant of licenses from third parties, new manufacturing processes or other intellectual property
rights.
Environmental
We
are subject to various environmental regulations with respect to noise and air pollution and discharge of hazardous materials. We are
also subject to periodic inspection. Our Hengda facility obtained a Temporary Pollutant Discharge Permit (No.350582-2014-000260) granted
by Jinjiang City Environmental Protection Bureau that expired on May 1, 2016, and we are currently in the process of applying for
the renewal of the permit. The permit is subject to annual renewal. We are currently in the process of applying for a Pollutant Discharge
Permit for our Hengdali production facility. We are not subject to any pending actions of alleged violations of applicable PRC environmental
laws. If the Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging
pollutants, and/or fined by the environmental protection agency.
Legal
Proceedings
We
are currently not involved in any legal proceedings; nor are we aware of any claims that could have a material adverse effect on our
business, financial condition, results of operations or cash flows.
Seasonality
The
second and third calendar quarters have been the peak season of the property developing industry, and, therefore, our quarterly sales
are usually highest from May to September compared to the rest of the year. We have lower sales between the months of January and
March due to the effects of cold weather and the PRC Spring Festival. The seasonality information above is based on our turnover
trend in the last three years and may vary slightly from year to year depending on the demand by our customers and end customers for
our products. However, management believes that the seasonality information for the last three years is representative of the seasonality
trend going forward.
Governmental
Regulations
Environmental
Protection Regulations
In
accordance with the PRC Environmental Protection Law adopted on December 26, 1989, the Administration Supervisory Department of
Environmental Protection of the State Council sets the national guidelines for the discharge of pollutants. The People’s Governments
of provinces, autonomous regions and municipalities may also set their own guidelines for the discharge of pollutants within their own
provinces or districts in the event that the national guidelines are inadequate. A company which causes environmental pollution and discharges
other polluting materials which endanger the public should implement environmental protection methods and procedures into their business
operations. This may be achieved by setting up a system of accountability within the company’s business structure for environmental
protection, adopting effective procedures to prevent environmental hazards such as waste gases, water and residues, dust powder, radioactive
materials and noise arising from production, construction and other activities from polluting and endangering the environment. The environmental
protection system and procedures should be implemented simultaneously with the commencement of and during the operation of construction,
production and other activities undertaken by the company. Any company which discharges environmental pollutants should report and register
such discharge with the Administration Supervisory Department of Environmental Protection and pay any fines imposed for the discharge.
A fee may also be imposed on the company for the cost of any work required to restore the environment to its original state. Companies
which have caused severe pollution to the environment are required to restore the environment or remedy the effects of the pollution
within a prescribed time limit. If a company fails to report and/or register the environmental pollution it caused, it will receive a
warning or be penalized. Companies that fail to restore the environment or remedy the effects of the pollution within the prescribed
time will be penalized or have their business licenses terminated. Companies that have polluted and endangered the environment must bear
the responsibility for remedying the danger and effects of the pollution, as well as to compensate any losses or damages suffered as
a result of such environmental pollution. Our Hengda facility obtained a Temporary Pollutant Discharge Permit (No.350582-2014-000260)
granted by Jinjiang City Environmental Protection Bureau that will expire on May 1, 2016, and we are currently in the process of
applying for the renewal of the permit. Hengdali is currently in the process of applying for a Pollutant Discharge Permit, and the environmental
protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not issued and Hengdali discharges
pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency.
Government
Regulations Relating to Foreign Exchange Controls
The
principal regulation governing foreign exchange in the PRC is the Foreign Currency Administration Rules and a series of implementing
rules and regulations, as amended. Under these rules, the Renminbi, the PRC’s currency, is freely convertible for trade and
service related foreign exchange transactions (such as normal purchases and sales of goods and services from providers in foreign countries),
but not for direct investment, loan or investment in securities outside of China unless the prior approval of the State Administration
for Foreign Exchange, or SAFE, of the PRC is obtained. Foreign investment enterprises, or FIEs, are required to apply to the SAFE for
Foreign Exchange Registration Certificates for FIEs. With such registration certificates, which need to be renewed annually, FIEs are
allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the
basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the
SAFE. Such transactions are subject to the consent of PRC banks which are authorized by the SAFE to review basic account currency transactions.
However, conversion of currency in the capital account, including capital items such as direct investment, loans and securities, still
require approval of the SAFE. On November 21, 2005, the SAFE issued Circular No. 75 on Relevant Issues Concerning Foreign Exchange
Control on Domestic Residents Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles. Circular No. 75
confirms that the use of offshore special purpose vehicles as holding companies for PRC investments are permitted, but proper foreign
exchange registration applications are required to be reviewed and accepted by the SAFE.
Regulation
of Foreign Currency Exchange
Foreign
currency exchange in the PRC is governed by a series of regulations, including, without limitation, the Foreign Currency Administrative
Rules (1996), as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996),
as amended. Under these regulations, the Renminbi is freely convertible for trade and service-related foreign exchange transactions,
but not for direct investment, loans or investments in securities outside China without the prior approval of the SAFE. Pursuant to the
Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises in China may purchase
foreign exchange without the approval of the SAFE for trade and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign
exchange liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of
foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from the SAFE.
On August 29, 2008, SAFE issued Circular No. 142 on Relevant Business Operations Issues Concerning Improving the Administration
of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, with respect to the administration of conversion
of foreign exchange capital contributions of FIEs into Renminbi, unless otherwise permitted by PRC laws or regulations, Renminbi converted
from foreign exchange capital contributions can only be applied to activities within the approved business scope of FIEs and cannot be
used for domestic equity investment or acquisitions.
Regulation
of Dividend Distribution
The
principal laws and regulations in China governing distribution of dividends by foreign-invested companies include:
|
•
|
The Sino-foreign Equity
Joint Venture Law (1979), as amended;
|
|
•
|
The Regulations for the
Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended;
|
|
•
|
The Sino-foreign Cooperative Enterprise Law (1988),
as amended;
|
|
•
|
The Detailed Rules for
the Implementation of the Sino-foreign Cooperative Enterprise Law (1995), as amended;
|
|
•
|
The Foreign Investment
Enterprise Law (1986), as amended; and
|
|
•
|
The Regulations of Implementation
of the Foreign Investment Enterprise Law (1990), as amended.
|
Under
these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined
in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required
to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve
funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends.
Insurance
We
have not purchased insurance coverage for product liability or third party liability and are therefore not covered or compensated by
insurance in respect of losses, damages, claims and liabilities arising from or in connection with product liability or third party liability.
In addition, we currently do not maintain business interruption insurance. As a result, our business and prospects could be adversely
affected in the event of such problems in our operations and may suffer losses that could have a material adverse effect on our business,
financial condition, results of operations, or cash flows.
|
C.
|
Organizational Structure
|
The
following chart illustrates Antelope Enterprises’ organizational structure as of December 31, 2020:
Corporate
Structure and Background
Our
principal PRC-based operating subsidiary, Hengda, was established on September 30, 1993 under the laws of PRC. All of the equity
interests in Hengda are 100% owned by Stand Best. Hengda is a wholly foreign-owned enterprise in China.
Hengdali
was established on May 4, 2008 under the laws of PRC. All of the equity interests in Hengdali are 100% owned by Hengda.
Stand
Best was established on January 17, 2008 under the laws of Hong Kong. Stand Best acquired the entire shareholdings of Hengda on
April 1, 2008 for consideration of RMB 58,980,000. As a result of this acquisition, Hengda became the wholly owned subsidiary of
Stand Best.
Success
Winner was established on May 29, 2009 under the laws of British Virgin Islands with Mr. Wong Kung Tok as its sole shareholder
and sole director.
On
June 30, 2009, pursuant to the capitalization agreement dated June 30, 2009, Success Winner was issued the 9,999 shares allotted
by Stand Best as per the capitalization exercise of a shareholder’s loan of HK$67.9 million (RMB 58.9 million). On the same date,
the shareholder of Stand Best, Mr. Wong Kung Tok transferred all his shareholdings in Stand Best to Success Winner. Therefore, Mr. Wong
Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned 100% of Stand Best and in turn, 100% of Hengda.
CHAC
was incorporated in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a
stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating
business that had its principal operations in Asia, with a focus on potential acquisition target in China.
Pursuant
to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into
Antelope Enterprises, its wholly owned British Virgin Islands subsidiary, and immediately thereafter, as part of the same integrated
transaction, Antelope Enterprises acquired all of the outstanding securities of Success Winner.
Prior to Antelope Enterprises’
acquisition of Success Winner, neither CHAC nor Antelope Enterprises had any operations.
On
November 19, 2009, Hengda entered into a definitive acquisition agreement to acquire a new production facility in Gaoan, Jiangxi
Province, PRC by purchasing 100% of the equity interests in Hengdali. The closing of the acquisition was subject to the Gaoan City Administration
for Industry and Commerce transferring the registration and business license of Hengdali from Hengdali’s former shareholders to
Hengda. The transfer occurred on January 8, 2010. Hengda appointed an executive officer to take control over Hengdali’s operating
and financing activities on the same day. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration of RMB 185.5
million for the acquisition, of which RMB 145.4 million was advanced to Hengdali’s former shareholders by December 31, 2009.
On
September 17, 2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated
in Pingtan, Fujian Province, and is 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building
materials and interior and exterior decoration materials. Fujian Hengdali had no operations since the incorporation date, and in August 2017,
the Company disposed Fujian Hengdali for RMB0 to a third-party. A loss on disposal of RMB736,000 was recognized in other expenses for
the year ended December 31, 2017 relating to this transaction.
On
September 22, 2017, Success Winner incorporated a 100% owned subsidiary Vast Elite Limited (“Vast Elite”) in Hong Kong
with initial registered capital of HKD1. Vast Elite is engaged in the trading of building materials but during the year ended December 31,
2020, Vast Elite had no operations.
On
November 20, 2019, Vast Elite incorporated a 100% owned subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu
Future”) in China. Chengdu Future is engaged in the business management and consulting services.
On
December 3, 2019, Success Winner incorporated a 100% owned subsidiary Antelope Enterprise Holdings Limited (“Antelope Holdings”)
in Hong Kong. Antelope Holdings only serves the purpose as a holding company.
On
May 9, 2020, Antelope HK incorporated a 100% owned subsidiary Antelope Holdings (Chengdu) Co., Ltd in China, Antelope Chengdu is engaged
in computer consulting and software development.
At the February 21,
2020 Annual Meeting, the Company’s shareholders approved, among others, a proposal to amend the Company’s Memorandum of Association
to effect a reverse stock split of the outstanding the Company’s common shares, at one of several split ratios, to be determined
by the Board of Directors in its sole discretion, prior to the one-year anniversary of this Annual Meeting, for the purposes of regaining
compliance with the NASDAQ continued listing requirements. On September 3, 2020, the Company effected a reverse stock split, where every
three issued and outstanding ordinary shares as of the effective date were automatically be combined into one issued and outstanding
share. Consequently, the reverse stock split reduced the number of outstanding ordinary shares of the Company from approximately 9.2
million shares to approximately 3.1 million shares, and the par value per share increased from $0.008 to $0.024. All outstanding stock
options, warrants and other rights to purchase the Company’s ordinary shares were adjusted proportionately as a result of the reverse
stock split. Following the split, the Company regained its compliance with NASDAQ’s minimum bid requirements for continued listing
requirements on the NASDAQ Stock Market on September 18, 2020.
|
D.
|
Property, plant and
equipment
|
We
jointly own six buildings comprised of one office building and five workshops in Jinjiang, Fujian Province. We recorded the related fixed
assets in proportion to the amount we paid for our part of the buildings, which represents our interests in the buildings. As co-owners
of these six buildings under the relevant Building Ownership Certificate, all co-owners have collective rights and obligations to the
jointly-owned property under PRC law, and typically the disposal of such jointly owned property by one owner without the consent of all
other owners is prohibited.
The
land-use rights of this workshop and the co-owned six buildings expire in 2055 and cover approximately 10,023 square meters. We also
own land-use rights at two locations and seven buildings in Gaoan for office buildings, workshops, warehouses, and raw material yards
and staff quarters. The land-use rights for these two facilities expire in 2058 and cover an aggregate of approximately 244,324 square
meters.
We
currently lease 17 properties in Jinjiang, Fujian Province in the PRC for various uses including warehouses, office space, workshops,
staff quarters and stock yards. The lease terms range from three to five years. As of December 31, 2016 our Hengda production facility
in Jinjiang City, Fujian Province in the PRC, had a total gross floor area of approximately 140,000 square meters and employed 728 production
personnel and our Hengdali production facility in Gaoan, Jiangxi Province in the PRC, has a total gross floor area of approximately 244,324
square meters and employed 393 production personnel. The Hengda facility consists of nine production lines with an annual production
capacity of 42 million square meters. The Hengdali facility consists of five production lines with an annual production capacity of 30
million square meters of ceramic tiles. Historically, we have not experienced any form of disruption in our production facility. However,
our annual production capacity has been effectively reduced from 72 million square meters of ceramic tiles to 66 million square meters
of ceramic tiles due to an eight-year contract to lease out one of the production lines from our Hengdali facility that we entered into
in March 2016. Our annual production capacity was further reduced to 56.5 million square meters of ceramic tiles due to our having
retired two old furnaces at the Hengda facility in July of 2018. Due to current economic conditions, we are currently utilizing
production facilities capable of producing 16.9 million square meters. We currently have twelve production lines (three of which were
utilized at the end of 2018), with each production line optimized to manufacture specific size ranges to maximize efficiency and output.
During
2014, our Hengda facility was required by the local governmental entity to begin using natural gas to operate the facility, as opposed
to coal. This mandated change in fuel source is part of a province-wide (and country-wide) effort to reduce pollution. This change resulted
in our incurring a one-time charge of approximately RMB 5.6 million (US$ 0.9 million) in December 2013, and will increase our cost
of goods produced at that facility because natural gas is a more expensive energy source than coal. Fuel source (comprising coal and
natural gas) accounted for 12.1% and 5.20% of the total cost of sales in 2019 and 2020, respectively. There is no assurance that in the
future our other production facilities will not be required to make similar modifications which could have similar adverse effects on
our operations.
In
2015, we began renovating the showroom in our Hengda facility (the Hengda Exhibition Hall) that is a valuable resource for the marketing
and promotion of our extensive line of building material products. We believe that upgrading this showroom will enable us to continue
to secure significant new contracts for our products, especially from larger property developers. Capital expenditures for the new renovations
to the Hengda Exhibition Hall were RMB 3.9 million (US$ 0.6 million) in the third quarter of 2015 and RMB 6.6 million (US$ 1.0 million)
in the fourth quarter of 2015, with no unpaid balances as of December 31, 2015. The total cost of the renovations, which were completed
in the fourth quarter, was RMB 10.5 million (US$ 1.6 million). We also constructed a new production line to manufacture glazed brick
ceramic tiles in our Hengdali facility. Capital expenditures for the new line were RMB 18.6 million (US$ 2.9 million) in the third quarter
of 2015 and RMB 130.1 million (US$ 20.1 million) in the fourth quarter of 2015, with no unpaid balances as of December 31, 2015.
The total cost of the new production line was RMB 148.7 million (US$ 23.0 million). In March 2016, we entered into an eight-year
contract to lease out one of the production lines from our Hengdali facility. The production line has the capacity to produce approximately
10 million square meters of ceramic tiles annually. The term of the contract is from March 1, 2016 to February 29, 2024, and
the contract stipulates for the receipt of rental income of RMB 15.0 million (US$ 0.5 million) per year, including 6% value added tax.
The purpose of this arrangement was to generate income from the unused production capacity. Therefore, for the term of the eight-year
lease, and as a result of two old furnaces having been put out of use at the facility, we may only produce up to 28.8 million square
meters of ceramic tiles from our Hengdali facility. In 2017, Hengda retired two old furnaces; in July of 2018, Hengda retired two more
old furnaces, which caused Hengda’s annual maximum production capacity to be reduced to approximately 22.8 million. Therefore,
the Company’s effective annual production capacity has been effectively reduced from 72 million square meters of ceramic tiles,
to 51.6 million ceramic tiles as of fiscal year end 2020.
ITEM
4A.
|
UNRESOLVED STAFF COMMENTS
|
Not
applicable.
ITEM 5.
|
OPERATING AND FINANCIAL
REVIEW AND PROSPECTS
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We
are a British Virgin Islands limited liability company whose predecessor, CHAC, was incorporated in Delaware on June 22, 2007 and was
organized as a “blank check” company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar
business combination, or controlling, through contractual arrangements, an operating business that had its principal operations in Asia,
with a focus on potential acquisition target in China.
Pursuant
to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into Antelope
Enterprise Holdings Limited (“Antelope Enterprise”, formerly known as China Ceramics Co., Ltd), its wholly owned British
Virgin Islands subsidiary, and, immediately thereafter, as part of the same integrated transaction, Antelope Enterprise acquired all
of the outstanding securities of Success Winner.
Antelope
Enterprise, through its operating subsidiaries, is a leading PRC-based manufacturer of ceramic tiles used for exterior siding and for
interior flooring and design in residential and commercial buildings. The ceramic tiles sold under the “HD” or “Hengda”,
“HDL” or “Hengdali”, “TOERTO” and “WULIQIAO” brands, are available in over two thousand
styles, colors and size combinations. Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed tiles, (iii)
glazed porcelain tiles, (iv) rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling products, accounting for
77.73% and 76.12% of our total revenue for the years ended December 31, 2020 and 2019, respectively.
The
Company’s combined facilities currently provide an aggregate annual maximum production capacity of approximately 51.6 million square
meters (excluding 10 million square meters that is leased out) as of December 31, 2020. In March 2016, the Company entered into an eight-year
contract to lease out one of the production lines from its Hengdali facility. The production line has the capacity to produce approximately
10 million square meters of ceramic tiles annually. The term of the contract is from March 1, 2016 to February 29, 2024. The Company
believes that it is prudent to generate income from its unused production capacity from a third party rather than let it remain idle.
Therefore, for the term of the eight-year lease, the Company may only produce up to 28.8 million square meters of ceramic tiles from
its Hengdali facility. In 2017, Hengda retired two old furnaces; in July of 2018, Hengda retired two more old furnaces, which caused
Hengda’s annual maximum production capacity to be reduced to approximately 22.8 million, and total effective annual production
capacity to 51.6 million ceramic tiles for both Hengda and Hengdali at December 31, 2020.
Due
to currently challenging economic conditions, for the year ended December 31, 2020, we utilized production facilities capable of producing
4.19 million square meters ceramic tiles, as compared with the year ended December 31, 2019, when we utilized production facilities capable
of producing 12.42 million square meters, During the year ended December 31, 2020, we had 12 production lines available for production
and utilized two production lines during the peak season. As of December 31, 2020, we had twelve production lines available for production,
one of which were in use as of December 31, 2020. When in operation, each production line is optimized to manufacture specific size ranges
to maximize efficiency and output.
On
November 20, 2019, we incorporated a 100% owned operating subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu
Future”) in China. Chengdu Future is engaged in business management and consulting services.
On
May 5, 2020, Antelope Enterprise (HK) Holdings Limited incorporated a 100% owned subsidiary Antelope Holdings (Chengdu) Co., Ltd (“Antelope
Chengdu”) in China. Antelope Chengdu is engaged in computer consulting and software development.
In
December 2019, a novel strain of coronavirus (COVID-19) was reported and the World Health Organization has declared the outbreak to constitute
a “Public Health Emergency of International Concern” and a global pandemic. We experienced (and continue to experience) significant
adverse impacts resulting from COVID-19 pandemic and the related public health orders. The COVID-19 pandemic is disrupting supply chains
and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics
restrictions in connection with the outbreak. Our factories were closed from the beginning of the Lunar New Year Holiday through the
end of February. We are also experiencing reduced demand for our products both internationally and domestically and an increased level
of purchase order cancellations as a result of the COVID-19 pandemic. The impact of the COVID-19 outbreak had a material adverse impact
on our operations and financial results.
On September 3, 2020, the
Company effected a reverse stock split, where every three issued and outstanding ordinary shares as of the effective date were automatically
be combined into one issued and outstanding share. Consequently, the reverse stock split reduced the number of outstanding ordinary shares
of the Company from approximately 9.2 million shares to approximately 3.1 million shares, and the par value per share increased from
$0.008 to $0.024. All outstanding stock options, warrants and other rights to purchase the Company’s ordinary shares were adjusted
proportionately as a result of the reverse stock split. The consolidated financial statements as of December 31, 2020 and 2019, and for
the years ended December 31, 2020, 2019 and 2018 were retroactively restated to reflect this reverse stock split.
Basis
of Presentation
The
following discussion and analysis of our financial condition and results of operations is based on the selected financial information
as of and for the year ended December 31, 2020 and has been prepared based on the consolidated financial statements of Antelope
Enterprise Holdings Limited and its subsidiaries. The consolidated financial statements of Antelope Enterprise Holdings Limited and its
subsidiaries have been prepared in accordance with IFRS as issued by the International Accounting Standards Board, or “IASB.”
The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments that
have been measured at fair value.
The
business combination on November 20, 2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted in
the former owner of Success Winner obtaining effective operating and financial control of the combined entity. Prior to the acquisition,
we had no operating business. Accordingly, the acquisition does not constitute a business combination for accounting purposes and is
accounted for as a capital transaction. That is, the transaction is in substance a reverse recapitalization, equivalent to the issuance
of equity interests by Success Winner for the net monetary assets of Antelope Enterprise accompanied by a recapitalization. The consolidated
financial statements are a continuation of the financial statements of Success Winner. The assets and liabilities of Antelope Enterprise
are recognized at their carrying amounts at the date of acquisition with a corresponding credit to the consolidated equity and no goodwill
or other intangible assets are recognized. The equity of the combined entity recognized at the date of acquisition represents the equity
balances of Success Winner together with the deemed proceeds from the reverse recapitalization determined as described above. However,
the equity structure presented in the consolidated financial statements (number and values of equity instruments issued) reflects the
equity structure of the legal parent, Antelope Enterprise. Costs directly attributable to the transaction have been debited to equity
to the extent of net monetary assets received.
Results
of Operations
The
following table sets forth our financial results for the years ended December 31, 2018, 2019 and 2020, respectively:
RMB(‘000)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Revenue
|
|
|
498,189
|
|
|
|
327,581
|
|
|
|
182,989
|
|
Cost of sales
|
|
|
(499,355
|
)
|
|
|
(246,255
|
)
|
|
|
(208,991
|
)
|
Gross profit (loss)
|
|
|
(1,166
|
)
|
|
|
81,326
|
|
|
|
(26,002
|
)
|
Other income
|
|
|
14,637
|
|
|
|
14,636
|
|
|
|
21,931
|
|
Other expenses
|
|
|
(1,461
|
)
|
|
|
-
|
|
|
|
-
|
|
Selling and distribution expenses
|
|
|
(11,026
|
)
|
|
|
(11,321
|
)
|
|
|
(9,356
|
)
|
Administrative expenses
|
|
|
(17,990
|
)
|
|
|
(25,111
|
)
|
|
|
(26,619
|
)
|
Bad debt expense
|
|
|
(316,438
|
)
|
|
|
(68,660
|
)
|
|
|
(150,268
|
)
|
Loss from asset devaluation
|
|
|
(85,021
|
)
|
|
|
-
|
|
|
|
|
|
Finance costs
|
|
|
-
|
|
|
|
(315
|
)
|
|
|
(2,748
|
)
|
Loss before taxation
|
|
|
(418,465
|
)
|
|
|
(9,445
|
)
|
|
|
(193,062
|
)
|
Income tax expenses
|
|
|
209
|
|
|
|
56
|
|
|
|
33
|
|
Loss attributable to shareholders
|
|
|
(418,674
|
)
|
|
|
(9,501
|
)
|
|
|
(193,095
|
)
|
Description
of Selected Income Statement Items
Revenue. We
generate revenue from the sales of ceramic tiles, including porcelain tiles, glazed porcelain tiles, glazed tiles, rustic tiles and polished
glazed tiles, net of rebates and discounts. For the past three fiscal years, the second and third calendar quarters have been the peak
season of the property developing industry, and, therefore, our quarterly sales are usually highest from May to September compared to
the rest of the year. Conversely, our sales were lower between the months of January to March. This is because property developing activities
tend to be low due to the effects of cold weather and the PRC Spring Festival. Beginning on July 1, 2016, we reduced the selling price
of certain of our slow-moving products by 10% with the goal of turning some of this inventory into cash. Beginning on October 1, 2016,
in order to generate sales and move inventory, we instituted a 20% reduction in price of our slow-moving products. However, in 2017,
we increased the pricing of our ceramic tile products by an average of 20%. Although we increased our average selling price twice with
10% product raises in 2017, we were not able to return to the price levels achieved prior to 2016. In April of 2018, we increased the
pricing of our ceramic tile products by an average of 5%, but the sales did not improve as we expected, but decreased sharply due to
a slowdown of the real estate industry. Therefore, we decreased the pricing of our ceramic tile products by an average of 10% in July
2018 to respond to the difficult market conditions. In October 2019, we further decreased the pricing of our ceramic tile products by
an average of 15%. However, while the 15% price decrease in October 2019 helped boost sales volume in the latter half of the fiscal year,
it did not offset the fall in our sales volume due to deteriorating market conditions that persisted through the entire year 2019. We
did not have any price adjustment in 2020, and our sales was significantly impacted by the COVID-19 pandemic. Revenue decreased by 44.1%
for the year ended December 31, 2020, as compared to the year ended December 31, 2019, mainly due to the 35.4% decrease in sales volume
and a decrease in our average selling price of 13.6% resulting from a contraction in business from our customers which was primarily
caused by the COVID-19 pandemic.
Cost
of sales. Cost of sales consists of costs directly attributable to production, including the cost of clay, color materials,
glaze materials, coal, salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.
The
most significant factors that directly or indirectly affect our cost of sales are as follows:
|
•
|
Availability
and price of clay;
|
|
•
|
Availability
and price of coal; and
|
|
•
|
Availability
and price of dyes; and
|
Clay
is a key material for making ceramic tiles, and accounted for approximately 8.8% and 22.4% of our cost of sales for the years ended December
31, 2020 and 2019, respectively. Fujian and Jiangxi Provinces, where our production facilities are located, are the largest clay resources
areas in China and clay supply is stable and sufficient for our production and planned production.
Dyes
are another key material for making ceramic tiles, and accounted for approximately 10.5% and 22.2% of our cost of sales for the years
ended December 31, 2020 and 2019, respectively. A number of dyes are used in ceramic tiles, and the prices of different dyes have experienced
fluctuations over the past few years.
Coal
is another key material for making ceramic tiles during the firing stage. Coal accounted for approximately 2.4% and 6.5% of our cost
of sales for the years ended December 31, 2020 and 2019, respectively. We have long-term relationships with our coal suppliers. The price
of coal has experienced fluctuations over the past few years. The Company’s Hengda facility used natural gas instead of coal for
manufacturing ceramic tiles, and natural gas accounted for approximately 2.8% and 5.6% of our cost of sales for the years ended December
31, 2020 and 2019.
Other
income and other expenses. Other income consists of interest income, foreign exchange gain/loss, gain on disposal of equipment
and rental income by leasing out one of its production lines. Other expenses primarily consist of the loss on disposal of equipment and
the depreciation by leasing out one of our production lines. In addition, we had RMB 7.2 million and RMB 109,000 in technology consulting
income from our newly incorporated subsidiaries Chengdu Future and Antelope Chengdu during the years ended December 31, 2020 and 2019.
Selling
and distribution expenses. Selling and distribution expenses consist of payroll, traveling expenses, transportation and
advertising expenses incurred by our selling and distribution team.
Administrative
expenses. Administrative expenses consist primarily of R&D expense, employee remuneration, payroll taxes and benefits,
general office expenses, depreciation. We expect administrative expenses to remain constant as compared to the prior year.
Income
taxes. Our subsidiaries in the PRC are subject to the PRC Enterprise Income Tax Law, and the applicable income tax rate pursuant
to such law for the years ended December 31, 2020 and 2019 is 25% for Hengda and Hengdali, 5% for Chengdu Future and Antelope Chengdu.
Results
of Operations
Fiscal
Year Ended 2020 Compared to the Fiscal Year Ended 2019
Revenue. The
following table sets forth the breakdown of revenue, by product categories, for the years ended December 31, 2020 and 2019:
Revenue RMB (000)
|
|
2019
|
|
|
Percentage
|
|
|
2020
|
|
|
Percentage
|
|
Porcelain
|
|
|
249,355
|
|
|
|
76.1
|
%
|
|
|
142,230
|
|
|
|
77.7
|
%
|
Glazed Porcelain
|
|
|
5,975
|
|
|
|
1.8
|
%
|
|
|
1,624
|
|
|
|
0.9
|
%
|
Glazed
|
|
|
6,323
|
|
|
|
1.9
|
%
|
|
|
2,736
|
|
|
|
1.5
|
%
|
Rustic
|
|
|
40,507
|
|
|
|
12.4
|
%
|
|
|
24,461
|
|
|
|
13.4
|
%
|
Polished Glazed
|
|
|
25,421
|
|
|
|
7.8
|
%
|
|
|
11,938
|
|
|
|
6.5
|
%
|
Total
|
|
|
327,581
|
|
|
|
100.0
|
%
|
|
|
182,989
|
|
|
|
100.0
|
%
|
Revenue
decreased by RMB 144.6 million, or 44.1%, to RMB 183.0 million ($26.5 million) in the year ended December 31, 2020, from RMB 327.6 million
(US$ 47.4 million) for the year ended December 31, 2019. The decrease in revenue was primarily due to the decrease in sales volume of
35.4% and a decrease in average sales price of 13.6%.
Porcelain
tiles. Revenue from the sales of porcelain tiles decreased 43.0%, from RMB 249.4 million ($36.1 million) for the year ended December
31, 2019 to RMB 142.2 million ($20.6 million) for the year ended December 31, 2020. The decrease was primarily attributable to a decrease
in our sales volume in 2020 as compared to 2019. Porcelain tiles for exterior walls are still our most popular product and have the largest
market potential of all of our tiles. We expect porcelain tiles to continue to be our key product for the foreseeable future.
Glazed
porcelain tiles. Revenue from glazed porcelain tiles decreased 72.8%, from RMB 6.0 million ($0.9 million) for the year ended
December 31, 2019 to RMB 1.6 million ($0.2 million) for the year ended December 31, 2020.
Glazed
tiles. Revenue from glazed tiles decreased 56.7%, from RMB 6.3 million ($0.9 million) for the year ended December 31, 2019 to RMB
2.7 million ($0.4 million) for the year ended December 31, 2020.
Rustic
tiles. Revenue from rustic tiles decreased 39.6%, from RMB 40.5 million ($5.9 million) for the year ended December 31, 2019
to RMB 24.5 million ($3.5 million) for the year ended December 31, 2020.
Polished
glazed tiles. Revenue from polished glazed tiles decreased 53.0%, from RMB 25.4 million ($3.7 million) for the year ended December
31, 2019 to RMB 11.9 million ($1.7 million) for the year ended December 31, 2020. We began selling polished glazed tiles in the second
quarter of 2011. We believe that this product represents both a functional and cost-effective replacement for actual marble or stone
materials used in a decorative fashion inside homes. The polished glazed tiles are larger than our other tiles and we believe that demand
for this series will increase in the future.
Cost
of sales. The following table sets forth the breakdown of cost of sales, by product segment, for the years ended December 31,
2020 and 2019:
Cost of sales RMB (‘000)
|
|
2019
|
|
|
Percentage
|
|
|
2020
|
|
|
Percentage
|
|
Porcelain
|
|
|
187,176
|
|
|
|
76.0
|
%
|
|
|
164,247
|
|
|
|
78.6
|
%
|
Glazed Porcelain
|
|
|
5,379
|
|
|
|
2.2
|
%
|
|
|
2,334
|
|
|
|
1.1
|
%
|
Glazed
|
|
|
4,711
|
|
|
|
1.9
|
%
|
|
|
3,132
|
|
|
|
1.5
|
%
|
Rustic
|
|
|
29,293
|
|
|
|
11.9
|
%
|
|
|
25,538
|
|
|
|
12.2
|
%
|
Polished Glazed
|
|
|
19,696
|
|
|
|
8.0
|
%
|
|
|
13,740
|
|
|
|
6.6
|
%
|
Total
|
|
|
246,255
|
|
|
|
100.0
|
%
|
|
|
208,991
|
|
|
|
100.0
|
%
|
Cost
of sales was RMB 209.0 million ($30.3 million) for the year ended December 31, 2020 compared to RMB 246.3 million (US$ 35.6 million)
for the year ended December 31, 2019, representing a decrease of RMB 37.3 million, or 15.1%. The decrease in cost of sales was primarily
due to decreased sales and production.
Gross
profit (loss). The following table breaks down of our gross profit (loss) and gross profit (loss) margin by product segment
for the years ended December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2019
|
|
|
2020
|
|
RMB (‘000)
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
Porcelain
|
|
|
62,179
|
|
|
|
24.9
|
%
|
|
|
(22,017
|
)
|
|
|
(15.5
|
)%
|
Glazed Porcelain
|
|
|
596
|
|
|
|
10.0
|
%
|
|
|
(710
|
)
|
|
|
(43.8
|
)%
|
Glazed
|
|
|
1,612
|
|
|
|
25.5
|
%
|
|
|
(396
|
)
|
|
|
(14.5
|
)%
|
Rustic
|
|
|
11,214
|
|
|
|
27.7
|
%
|
|
|
(1,077
|
)
|
|
|
(4.4
|
)%
|
Polished Glazed
|
|
|
5,725
|
|
|
|
22.5
|
%
|
|
|
(1,802
|
)
|
|
|
(15.1
|
)%
|
All products
|
|
|
81,326
|
|
|
|
24.8
|
%
|
|
|
(26,002
|
)
|
|
|
(14.2
|
)%
|
Our
gross profit (loss) decreased RMB 107.3 million from a gross profit of RMB 81.3 million (US$ 11.8 million) for the year ended December
31, 2019 to a gross loss of RMB 26.0 million ($3.8 million) for 2020.
Other
income. Other income for the year ended December 31, 2020 was RMB 21.9 million ($3.2 million), as compared to RMB 14.6 million
($2.1 million) for the same period of 2019. For both 2020 and 2019, other income was mainly the leasing income from leasing out one of
the production lines from its Hengdali facility pursuant to an eight-year lease contract. In addition, we generated consulting income
from our new incorporated subsidiary of Chengdu Future and Antelope Chengdu in 2019 and 2020.
Selling
and distribution expenses. Selling and distribution expenses were RMB 9.4 million ($1.4 million) for the year ended December
31, 2020, as compared to RMB 11.3 million ($1.6 million) for the year ended December 31, 2019, representing a decrease of RMB 1,965,000,
or 17.4%. The decrease in selling and distribution expenses was primarily due to a decrease in payroll expense of RMB 630,000; a decreased
in travel expenses of RMB 268,000 and a decrease in advertising expense of RMB 1,060,000.
Administrative
expenses. Administrative expenses were RMB 26.6 million ($3.9 million) for the year ended December 31, 2020, as compared to
RMB 25.1 million ($3.6 million) for the year ended December 31, 2019, representing an increase of RMB 1,508,000, or 6.0%. The increase
in administrative expenses was mainly due to the increase in consulting fees of RMB 1,440,000 for the year ended December 31, 2020.
Bad
debt expense. Bad debt expense was RMB 150.3 million ($21.8 million) for the year ended December 31, 2020, as compared to RMB
68.7 million ($10.0 million) for the year ended December 31, 2019, representing an increase of RMB 81.6 million, or 118.9%. We recognize
a loss allowance for expected credit loss on our financial assets, primarily on trade receivables, which are subject to impairment under
IFRS 9, Financial Instruments, first effective for the current accounting period. We believe that we have undertaken appropriate
measures to resolve the bad debt expense. We will continue to review each of our customers for credit quality as well as assiduously
test their accounts receivables balances in each upcoming fiscal period.
Finance
costs. Finance costs increased from RMB 315,000 (US$ 0.05 million) for the year ended December 31, 2019 to RMB 2.7 million (US
$0.4 million) for the year ended December 31, 2020. The increase was mainly due to an increase in interest expense associated with our
lease liability.
Loss
before taxation. Loss before taxation was RMB 193.1 million ($28.0 million) for the year ended December 31, 2020, as compared
to a loss before taxation of RMB 9.4 million ($1.4 million) for the year ended December 31, 2019 . The increase in loss before taxation
was mainly due to the gross loss and an increase in bad debt expense for the year ended December 31, 2020.
Income
taxes. We incurred an income tax expense of RMB 33,000 ($5,000) for the year ended December 31, 2020, as compared to an income
tax expense of RMB 56,000 ($8,000) for the year ended December 31, 2019, representing a decrease in tax expense of RMB 23,000. Our PRC
statutory enterprise income tax rate was 25% for Hengda and Hengdali, and 5% for Chengdu Future and Antelope Chengdu for the years ended
December 31, 2020 and 2019.
Loss
attributable to shareholders. Loss attributable to shareholders was RMB 193.1 million ($28.0 million) for the year ended December
31, 2020, as compared to a loss attributable to shareholders of RMB 9.5 million ($1.4 million) for year ended December 31, 2019. The
increase in net loss attributable to shareholders in 2020 was for the reasons described above.
Fiscal
Year Ended 2019 Compared to the Fiscal Year Ended 2018
Revenue. The
following table sets forth the breakdown of revenue, by product categories, for the years ended December 31, 2019 and 2018
Revenue RMB (000)
|
|
2018
|
|
|
Percentage
|
|
|
2019
|
|
|
Percentage
|
|
Porcelain
|
|
|
350,749
|
|
|
|
70.4
|
%
|
|
|
249,355
|
|
|
|
76.1
|
%
|
Glazed Porcelain
|
|
|
11,031
|
|
|
|
2.2
|
%
|
|
|
5,975
|
|
|
|
1.8
|
%
|
Glazed
|
|
|
9,973
|
|
|
|
2.1
|
%
|
|
|
6,323
|
|
|
|
1.9
|
%
|
Rustic
|
|
|
56,264
|
|
|
|
11.2
|
%
|
|
|
40,507
|
|
|
|
12.4
|
%
|
Polished Glazed
|
|
|
70,172
|
|
|
|
14.1
|
%
|
|
|
25,421
|
|
|
|
7.8
|
%
|
Total
|
|
|
498,189
|
|
|
|
100.0
|
%
|
|
|
327,581
|
|
|
|
100.0
|
%
|
Revenue
was to RMB 327.6 million (US$ 47.4 million) for the year ended December 31, 2019, compared to RMB 498.2 million (US$ 75.4 million) for
the year ended December 31, 2018, representing a decrease of RMB 170.6 million, or 34.2%. The decrease in revenue was primarily
due to the decrease in sales volume of 27.0% and a decrease in average selling price of 9.9%. The decrease in sales resulted from the
continued slowdown of China’s economy as China’s GDP growth rate decreased to 6.1% in 2019, the lowest figure since 1990,
and both the manufacturing sector and the real estate industry were affected by the weaker economy.
Porcelain
tiles. Revenue from the sales of porcelain tiles decreased 28.9%, from RMB 350.7 million (US$ 53.1 million) for the year ended December
31, 2018 to RMB 249.4 million (US$ 36.1 million) for the year ended December 31, 2019. The decrease was primarily attributable to a decrease
in our sales volume for the year of 2019 as compared to the same period of 2018. Porcelain tiles for exterior walls are still our most
popular product and have the largest market potential of all of our tiles. We expect porcelain tiles to continue to be our key product
for the foreseeable future.
Glazed
porcelain tiles. Revenue from glazed porcelain tiles decreased 45.8%, from approximately RMB 11.0 million (US$ 1.7 million)
for the year ended December 31, 2018 to RMB 6.0 million (US$ 0.9 million) for the year ended December 31, 2019.
Glazed
tiles. Revenue from glazed tiles decreased 36.6%, from RMB 10.0 million (US$ 1.5 million) for the year ended December 31, 2018 to
RMB 6.3 million (US$ 0.9 million) for the year ended December 31, 2019.
Rustic
tiles. Revenue from rustic tiles decreased 28.0%, from RMB 56.3 million (US$ 8.5 million) for the year ended December 31, 2018
to RMB 40.5 million (US$ 5.9 million) for the year ended December 31, 2019.
Polished
glazed tiles. Revenue from polished glazed tiles decreased 63.8%, from RMB 70.2 million (US$ 10.6 million) for the year ended
December 31, 2018 to RMB 25.4 million (US$ 3.7 million) for the year ended December 31, 2019. We began selling polished glazed tiles
in the second quarter of 2011. We believe that this product represents both a functional and cost-effective replacement for actual marble
or stone materials used in a decorative fashion inside homes. The polished glazed tiles are larger than our other tiles and we believe
that demand for this series will increase in the future.
Cost
of sales. The following table sets forth the breakdown of cost of sales, by product segment, for the years ended December 31,
2019 and 2018:
Cost of sales RMB (‘000)
|
|
2018
|
|
|
Percentage
|
|
|
2019
|
|
|
Percentage
|
|
Porcelain
|
|
|
350,644
|
|
|
|
70.2
|
%
|
|
|
187,176
|
|
|
|
76.0
|
%
|
Glazed Porcelain
|
|
|
12,285
|
|
|
|
2.5
|
%
|
|
|
5,379
|
|
|
|
2.2
|
%
|
Glazed
|
|
|
10,368
|
|
|
|
2.1
|
%
|
|
|
4,711
|
|
|
|
1.9
|
%
|
Rustic
|
|
|
55,093
|
|
|
|
11.0
|
%
|
|
|
29,293
|
|
|
|
11.9
|
%
|
Polished Glazed
|
|
|
70,965
|
|
|
|
14.2
|
%
|
|
|
19,696
|
|
|
|
8.0
|
%
|
Total
|
|
|
499,355
|
|
|
|
100.00
|
%
|
|
|
246,255
|
|
|
|
100.00
|
%
|
Cost
of sales was RMB 246.3 million (US$ 35.6 million) for the year ended December 31, 2019 compared to RMB 499.4 million (US$ 75.6 million)
for the year ended December 31, 2018, representing a decrease of RMB 253.1 million, or 50.7%. The decrease in cost of sales was primarily
due to decreased sales and production, and the decrease in inventory provision.
Gross
profit. The following table breaks down of our gross profit (loss) and gross profit (loss) margin by product segment for the
years ended December 31, 2019 and 2018:
|
|
2018
|
|
|
2019
|
|
RMB (‘000)
|
|
Gross
Profit
(Loss)
|
|
|
Profit (Loss)
Margin
|
|
|
Gross
Profit
|
|
|
Profit
Margin
|
|
Porcelain
|
|
|
105
|
|
|
|
0.0
|
%
|
|
|
62,179
|
|
|
|
24.9
|
%
|
Glazed Porcelain
|
|
|
(1,254
|
)
|
|
|
(11.4
|
)%
|
|
|
596
|
|
|
|
10.0
|
%
|
Glazed
|
|
|
(395
|
)
|
|
|
(4.0
|
)%
|
|
|
1,612
|
|
|
|
25.5
|
%
|
Rustic
|
|
|
1,171
|
|
|
|
2.1
|
%
|
|
|
11,214
|
|
|
|
27.7
|
%
|
Polished Glazed
|
|
|
(793
|
)
|
|
|
(1.1
|
)%
|
|
|
5,725
|
|
|
|
22.5
|
%
|
All products
|
|
|
(1,166
|
)
|
|
|
(0.2
|
)%
|
|
|
81,326
|
|
|
|
24.8
|
%
|
Gross
profit was RMB 81.3 million (US$ 11.8 million) for the year ended December 31, 2019, as compared to a gross loss of RMB 1.2 million (US$
0.2 million) for the year ended December 31, 2018, a decrease of RMB 82.5 million.
Other
income. Other income for the year ended December 31, 2019 was RMB 14.6 million (US$ 2.1 million), as compared to RMB 14.6 million
(US$ 2.2 million) for the same period of 2018. For both 2019 and 2018, other income was mainly the leasing income from leasing out one
of the production lines from our Hengdali facility pursuant to an eight-year lease contract. In addition, RMB 109,000 in technology consulting
income was generated from our newly incorporated subsidiary Chengdu Future during the year ended December 31, 2019.
Selling
and distribution expenses. Selling and distribution expenses were RMB 11.3 million (US$ 1.6 million) for the year ended December
31, 2019, compared to RMB 11.0 million (US$ 1.7 million) for the year ended December 31, 2018, representing an increase of RMB 295,000,
or 2.7%.
Administrative
expenses. Administrative expenses were RMB 25.1 million (US$ 3.6 million) for the year ended December 31, 2019, compared to
RMB 18.0 million (US$ 2.7 million) for the year ended December 31, 2018, representing an increase of RMB 7.1 million, or 39.6%. The increase
in administrative expenses was primarily due to increased research and development expenses of RMB 6.4 million and increase in consultant
fees of RMB 0.8 million. which was partly offset by an RMB 0.1 million decrease in meal and entertainment expenses.
Bad
debt expense. Bad debt expense was RMB 68.7 million (US$ 10.0 million) for the year ended December 31, 2019, compared to RMB
316.4 million (US$ 47.9 million) for the year ended December 31, 2018. We recognize a loss allowance for expected credit loss on our
financial assets, primarily on trade receivables, which are subject to impairment under IFRS 9, Financial Instruments, first effective
for year 2018. We believe that we have undertaken appropriate measures to resolve the bad debt expense. We will continue to review each
of our customers for credit quality as well as assiduously test their accounts receivables balances in each upcoming fiscal period.
Finance
costs. Finance costs were RMB 315,000 (US$ 0.05 million) for the year ended December 31, 2019, compared to nil for the year
ended December 31, 2018. The increase was mainly due to the interest expense on lease liabilities. We adopted IFRS 16 during the
year ended December 31, 2019, and recognized lease liabilities in relation to leases which had previously been classified as “operating
leases”. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s
incremental borrowing rate as of January 1, 2019. The difference between the actual payment and lease liabilities was the interest expense.
Other
expenses. Other expenses were RMB nil (US$ nil) for the year ended December 31, 2019, as compared to RMB 1.5 million (US $0.2
million) for the year ended December 31, 2018, representing a decrease of RMB 1.5 million or 100.0%. The decreased other expenses were
mainly due to decreased depreciation expense resulting from the fixed asset write-off due to impairment that occurred in the year ended
December 31, 2018.
Loss
before taxation. Loss before taxation was RMB 9.4 million (US$ 1.4 million) for the year ended December 31, 2019, as compared
to a loss before taxation of RMB 418.5 million (US$ 63.3 million) for the year ended December 31, 2018. The decrease in loss before taxation
was mainly due to decreased bad debt expense and decreased loss from assets devaluation for the year ended December 31, 2019.
Income
taxes. We incurred an income tax expense of RMB 56,000 (US$ 8,000) for the year ended December 31, 2019 compared to an income
tax expense of RMB 209,000 (US$ 31,000) for the year ended December 31, 2018. Our PRC statutory enterprise income tax rate was 25% for
the year ended December 31, 2019 and 2018.
Loss
attributable to shareholders. Loss attributable to shareholders was RMB 9.5 million (US$ 1.4 million) for the year ended December
31, 2019, as compared to a loss attributable to shareholders of RMB 418.7 million (US$ 63.4 million) for the year ended December 31,
2018. The decrease in net loss attributable to shareholders in 2019 was for the reasons described above.
Liquidity
and Capital Resources
The
following table presents a summary of our cash flows and beginning and ending cash balances for the years ended December 31, 2018, 2019
and 2020:
RMB (‘000)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Net cash generated from / (used in) operating activities
|
|
|
(6,234
|
)
|
|
|
6,287
|
|
|
|
(313
|
)
|
Net cash used in investing activities
|
|
|
(1,719
|
)
|
|
|
(1,066
|
)
|
|
|
2,739
|
|
Net cash generated from / (used in) financing activities
|
|
|
15,448
|
|
|
|
(5,907
|
)
|
|
|
1,335
|
|
Net cash flow
|
|
|
7,495
|
|
|
|
(686
|
)
|
|
|
3,761
|
|
Cash and cash equivalents at beginning of year
|
|
|
2,328
|
|
|
|
9,016
|
|
|
|
8,212
|
|
Effect of foreign exchange rate differences
|
|
|
(807
|
)
|
|
|
(118
|
)
|
|
|
371
|
|
Cash and cash equivalents at end of year
|
|
|
9,016
|
|
|
|
8,212
|
|
|
|
12,344
|
|
We
have historically financed our liquidity requirements mainly through operating cash flow, bank loans and issuance of new shares. We believe
that we will generate sufficient cash from operations to meet our needs for the next twelve months.
However,
we may sell additional equity or obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future
acquisitions and capital equipment expenditures. The sale of additional equity would result in further dilution to our shareholders.
The incurrence in indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict
our operations. We cannot provide assurance that financing will be available in amounts or on terms acceptable to us, if at all.
On
April 19, 2018, the Company entered into a securities purchase agreement (the “Agreement”) with certain individual investors
relating to a registered direct offering, issuance and sale (the “Offering”) of an aggregate of 770,299 of its pre-reverse
stock split shares (the “Shares”), at a purchase price of $1.56 per share (pre-reverse stock split), the closing price of
the Company’s equity securities as reported on Nasdaq on the same date. The gross proceeds to the Company from the Offering, before
deducting the Company’s estimated offering expenses, were approximately US$ 1.2 million. The Offering closed on April 23, 2018.
Proceeds from the Offering were used for working capital and general corporate purposes. There were no discounts or brokerage fees associated
with this Offering.
On
November 29, 2018, the Company announced and on December 4, 2018, the Company closed a public offering of its common shares (and common
stock warrants) with net proceeds of RMB 7,332,000 (US$ 1.07 million). The gross proceeds were RMB 8,732,000 (US$ 1.27 million) and related
commission and legal expense was RMB 1,400,000 (US $203,600). The Company intends to use the net proceeds from the offering to fund inventory,
distribution expenses, vendor obligations outside of the PRC, as well as for general corporate and working capital purposes.
In
connection with the offering, the Company issued 1,000,000 pre-reverse stock split common shares at the price of US$ 1.27 per share (pre-reverse
stock split), with each common share coupled with a warrant (500,000 pre-reverse split warrants in the aggregate) to purchase one common
share. The common shares and the warrants were sold as units, but are immediately separable and will be issued separately. The warrants
have an exercise price of US$ 1.27 per share (pre-reverse stock split). The warrants will be exercisable on or after the date of issuance
and will terminate on the five-year anniversary of the date of issuance.
In
connection with the offering, the Company executed a Placement Agency Agreement, to pay the Placement Agent a cash placement fee equal
to 8% of the gross proceeds of the offering, plus road show, diligence, legal and other expenses incurred by the Placement Agent of US$
45,000. The Placement Agent also receive five-year warrants to purchase up to 50,000 pre-reverse stock split common shares, which such
Compensation Warrants will have substantially the same terms as the warrants sold in the offering, except that such Compensation Warrants
will have an exercise price of US$ 1.5875 per share (pre-reverse stock split) or 125% of the public offering price and will terminate
on the five year anniversary of the effective date of this offering.
On
December 16, 2019, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the
Company of 1,200,000 pre-reverse stock split common shares, at a purchase price of $0.75 per share (pre-reverse stock split). Concurrently
with the sale of the Common Shares, the Company also sold warrants to purchase 1,200,000 pre-reverse stock split common shares. The Company
sold the Common Shares and Warrants for aggregate gross proceeds of $900,000 (the “Offering”). Subject to certain beneficial
ownership limitations, the five-year Warrants will be initially exercisable on the six-month anniversary of the issuance date at an exercise
price equal to $0.82 per share (pre-reverse stock split), subject to adjustments as provided under the terms of the Warrants, and will
terminate on the five-year anniversary of the initial exercise date of the Warrants. The closing of the sales of these securities under
the Purchase Agreement took place on December 18, 2019. The Company received net proceeds from the transactions of approximately $748,000,
after deducting certain fees due to the placement agent and the Company’s estimated transaction expenses. The net proceeds received
by the Company from the transactions will be used for working capital and general corporate purposes.
Pursuant
to the terms and provisions of the engagement letter between the Company and the Placement Agent, the Company agreed to pay the Placement
Agent a cash placement fee equal to 8% of the gross proceeds of the Offering, or $72,000, plus other expenses of the Placement Agent
not to exceed $45,000. The Placement Agent also received five-year warrants to purchase up to a number of common shares equal to 5% of
the aggregate number of shares sold in the Offering, including the warrant shares issuable upon exercise of the Warrants, which such
Compensation Warrants have substantially the same terms as the Warrants sold in the Offering, except that such Compensation Warrants
have an exercise price of $0.9375 per share (pre-reverse stock split) and will terminate on the five year anniversary of the effective
date of this offering.
On
January 8, 2020, the Company executed subscription agreements (each, a “Subscription Agreement”) in connection with
a $500,000 private placement of its ordinary shares with three accredited investors (the “Offering”) at the price of $0.75
per share (pre-reverse stock split). The Company agreed to register the shares sold in the Offering for resale no later than 270 days
after the closing of the Offering. There were no discounts or brokerage fees associated with this Offering. The net proceeds of the Offering
will be used for working capital and general corporate purposes.
On
May 22, 2020, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company
of 1,102,950 common shares (pre-reverse stock split), at a purchase price of $0.68 per share (pre-reverse stock split). Concurrently
with the sale of the Common Shares, pursuant to the Purchase Agreement the Company also sold Warrants to purchase 1,102,950 Common Shares
(pre-reverse stock split). The Company sold the Common Shares and Warrants for aggregate gross proceeds of $750,006. Subject to certain
beneficial ownership limitations, the five-year Warrants will be initially exercisable on the six-month anniversary of the issuance date
at an exercise price equal to $0.79 per share (pre-reverse stock split), and will terminate on the five-year anniversary of the initial
exercise date of the Warrants. The closing of the sales of these securities under the Purchase Agreement will take place on May 27, 2020.
The net proceeds from the transactions will be approximately $595,000, after deducting certain fees due to the placement agent and the
Company’s estimated transaction expenses, and will be used for working capital and general corporate purposes.
The
Placement Agent also received five-year Warrants to purchase up to a number of common shares equal to 5% of the aggregate number of shares
sold in the offering, including the warrant shares issuable upon exercise of the Warrants, which such Compensation Warrants having substantially
the same terms as the Warrants sold in the Offering, except that such Compensation Warrants have an exercise price of $0.85 per share
(pre-reverse stock split) and will terminate on the five year anniversary of the effective date of this offering.
On
December 7, 2020, Company executed subscription agreements with three individual accredited investors to offer and sell in a private
placement 566,379 of the Company’s common shares at the per share price of $2.32 (which was the closing price for the Company’s
common shares on December 4, 2020) for the gross proceeds of approximately $1.3 million. The proceeds of the transaction will be used
for working capital and general working purposes. There were no discounts or brokerage fees associated with this offering.
Cash
flows from operating activities.
Our
net cash used in operating activities was RMB 0.3 million (US$ 45,000) for the year ended December 31, 2020, a decrease of RMB 6.6
million as compared to a cash inflow of RMB 6.3 million for the year ended December 31, 2019. The decrease of cash inflow was mainly
due to a decrease in operating cash inflow before working capital changes of RMB 46.4 million, an increase in cash outflow on trade receivables
of RMB 53.1 million and an increase in cash outflow on trade payables of RMB 14.1 million, which were partly offset by an increase of
cash inflow from inventories of RMB 96.6 million and decreased cash outflow from taxes payable of RMB 8.4 million and decreased cash
outflow from other payables of RMB 2.1 million.
Our
net cash provided by operating activities was RMB 6.3 million (US$ 0.9 million) for the year ended December 31, 2019, an increase
of RMB 12.5 million as compared to a cash outflow of RMB 6.2 million for the year ended December 31, 2018. The increase of cash inflow
was mainly due to an increase in cash inflow from inventory of RMB 10.5 million and a decrease in cash outflow on trade payables of RMB
35.0 million, both of which were partly offset by a decrease in operating cash inflow before working capital of RMB 32.9 million.
Cash
flows from investing activities.
Net
cash generated from investing activities for the year ended December 31, 2020 was RMB 2.7 million (US$ 0.4 million), compared to cash
outflow of RMB 1.1 million for the year ended December 31, 2019. The increase of cash inflow was mainly due to decrease in restricted
cash.
Net
cash used in investing activities for the year ended December 31, 2019 was RMB 1.1 million (US$ 0.2 million), compared to RMB 1.7 million
for the year ended December 31, 2018. The decrease of cash outflow was mainly due to decrease in restricted cash.
Cash
flows from financing activities.
Net
cash generated from financing activities was RMB 1.3 million (US$ 0.2 million) for the year ended December 31, 2020, compared to a cash
outflow of RMB 5.9 million for the year ended December 31, 2019, primarily due to an increase in the issuance of share capital by RMB
11.0 million and an increase in advance from related parties by RMB 117,000 for the year ended December 31, 2020, which was partly offset
by increased payment for lease liability by RMB 0.9 million and decreased proceeds from warrants exercised by RMB 2.9 million.
Net
cash used in financing activities was RMB 5.9 million (US$ 0.9 million) for the year ended December 31, 2019, compared to a cash inflow
of RMB 15.4 million for the year ended December 31, 2018, primarily due to a decrease in the issuance of share capital of RMB 7.3 million
and a payment for lease liabilities of RMB 13.9 million for the year ended December 31, 2019.
Cash
and bank balances were RMB 12.3 million (US$ 1.9 million) as of December 31, 2020, as compared to RMB 8.2 million as of December 31,
2019.
As
of December 31, 2020, our total outstanding bank loan amounts were nil.
Operating
lease commitments totaled RMB 60.2 million ($9.2 million) as of December 31, 2020. Operating lease commitments totaled RMB 5.8 million
($0.8 million) as of December 31, 2019.
There
were no commitments for advertising and insurance expenditure as of December 31, 2020.
In
our opinion, our working capital, including our cash, income and cash flows from operations, and short-term borrowings, is sufficient
for our present requirements.
However,
we may sell additional equity or obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future
acquisitions and capital equipment expenditures. The sale of additional equity would result in further dilution to our shareholders.
The incurrence in indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict
our operations. We cannot provide assurance that financing will be available in amounts or on terms acceptable to us, if at all.
Inventory
Management
Our
inventory is comprised of raw materials, work in progress and finished goods. Raw materials are purchased from our suppliers located
in Fujian, Guangdong and Jiangxi Provinces and comprise mainly of clay, coal, colorings, and glazing materials.
We
have sufficient raw materials to support, on average, three weeks of production at any point in time. This helps to minimize any potential
delays in our production process which may arise due to insufficient raw materials. Our production of ceramic tiles is based on customers’
orders. In doing so, we minimize storage space and maintain a relatively low inventory level of finished products. Our inventory turnover
for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Inventories (RMB’000)
|
|
|
127,346
|
|
|
|
165,296
|
|
|
|
52,201
|
|
Inventory turnover (days) (1)
|
|
|
117
|
|
|
|
217
|
|
|
|
190
|
|
(1)
|
The
average inventory turnover is computed based on the formula: (simple average opening and closing inventories balance in a financial
year / cost of sales) × 365 days.
|
The
write-down of inventory for the years ended December 31, 2020, 2019 and 2018 was a reversal of write-down RMB 2.3 million in 2020, a
reversal of write-down RMB 56.8 million in 2019, and a write-down RMB of 56.0 million in 2018, and was charged to Cost of Sales.
Credit
Management
Credit
terms to our customers
We
typically extend credit terms of approximately 90 days to our customers. We grant credit terms based on the reputation, creditworthiness,
size of orders, payment records and number of years we have done business with the customer. We do not have a products’ return
policy. In the year ended December 31, 2020 and December 31, 2019, we recorded RMB 150.3 million (US$ 21.8 million) and RMB 68.7 million
(US$ 9.9 million), respectively, for provision for bad debt related to the amount of outstanding trade receivables that did not conform
with the Company’s credit policy.
Personnel
from our sales and marketing department typically conduct visits to new customers to evaluate their credit worthiness before entering
into any arrangements with them. In addition, as Hengda was awarded a Top 500 Brand award, we increased the deposit required from
new distributors from RMB 0.4 million to RMB 1.0 million.
Our
average trade receivables’ turnover for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Trade receivables (RMB’000)
|
|
|
224,114
|
|
|
|
177,023
|
|
|
|
101,470
|
|
Trade receivables turnover
(days) (1)
|
|
|
233
|
|
|
|
194
|
|
|
|
242
|
|
(1)
|
The
average trade receivables’ turnover is computed based on the formula: (simple average opening and closing trade receivables
balance, net of value-added tax in fiscal year / revenue) × 365 days.
|
Credit
terms from our suppliers
Our
typical credit terms from our major suppliers are from 1 to 4 months after the raw materials have been delivered. Our average trade payables’
turnover days for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Trade payables (RMB’000)
|
|
|
24,329
|
|
|
|
22,577
|
|
|
|
6,750
|
|
Trade payables turnover (days) (1)
|
|
|
26
|
|
|
|
30
|
|
|
|
22
|
|
(1)
|
The
average trade payables’ turnover is computed based on the formula: (simple average opening and closing trade payables balance,
net of value-added tax in facial year / purchases) × 365 days.
|
Capital
Expenditures
Our
capital expenditures primarily consist of expenditures on property, plant and equipment.
There
were no capital expenditures for the fiscal year ended December 31, 2020.
Contractual
Obligations
Our
contractual obligations consist mainly of debt obligations, operating lease obligations and other purchase obligations and commitments,
and will be paid off with our cash flow from operations. The following table sets forth a breakdown of our contractual obligations (including
both interest and principal cash flows) as of December 31, 2020:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Short-term debt obligations (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating purchase
obligations (2)
|
|
|
60,159
|
|
|
|
13,431
|
|
|
|
40,769
|
|
|
|
5,959
|
|
|
|
-
|
|
Other
obligations (3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
60,159
|
|
|
|
13,431
|
|
|
|
40,769
|
|
|
|
5,959
|
|
|
|
-
|
|
(1)
|
Amounts
represent principal and interest cash payments over the life of the bank loans, including anticipated interest payments that are
not recorded in the financial statements.
|
(2)
|
We lease
plant buildings, production factories, warehouses and employees’ hostel from non-related parties under non-cancellable operating
lease arrangements.
|
(3)
|
Includes
advertising and insurance expenditure contracted but not provided for in the financial statements.
|
Off-Balance
Sheet Arrangements
We
do not have any outstanding off-balance arrangements and have not entered into any transactions that are established for the purpose
of facilitating off-balance sheet arrangements.
Impact
of Inflation
The
general annual inflation rate in China was approximately 2.9% in 2019, and 2.5% in 2020 according to the National Bureau of Statistics.
Our results of operations may be affected by inflation, particularly rising prices for energy, labor costs, raw materials and other operating
costs. See “Item 3. Key Information — Risk Factors — Risks relating to our business. If China’s inflation increases
or the prices of energy or raw materials increase, we may not be able to pass the resulting increased costs to our customers and this
may adversely affect our profitability or cause us to suffer operating losses.”
FINANCIAL
RISK MANAGEMENT
We
are exposed to financial risks arising from our operations and the use of financial instruments. The key financial risks included credit
risk, liquidity risk, interest rate risk, foreign currency risk and market price risk.
We
do not hold or issue derivative financial instruments for trading purposes or to hedge against fluctuations, if any, in interest rates
and foreign exchange rates.
Credit
risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss us. Our exposure
to credit risk arises primarily from bank balances and trade receivables. For trade receivables, we adopt the policy of dealing only
with customers of appropriate credit history to mitigate credit risk. For other financial assets, we adopt the policy of dealing only
with high credit quality counterparties.
As
we do not hold any collateral, the maximum exposure to credit risk for each class of financial assets is the carrying amount of that
class of financial assets presented on the consolidated statements of financial position.
Cash
and bank balances
Our
bank deposits are placed with reputable banks in the PRC, Hong Kong and the United States. The credit exposure of our cash and bank balances
(excluding restricted cash) as of December 31, 2018, 2019 and 2020 were RMB 9,016,000 and RMB 8,212,000 and RMB 12,344,000, respectively.
Liquidity
risk is the risk that we will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity
risk may result from an inability to sell a financial asset quickly at close to its fair value.
Our
exposure to liquidity risk arises primarily from mismatches of the maturities of financial assets and liabilities. Our objective is to
maintain a balance between continuity of funding and flexibility through the use of stand-by credit facilities.
The
table below summarizes the maturity profile of the liabilities based on contractual undiscounted payments:
|
|
As of December
31, 2020
|
|
|
|
Within 1 year
|
|
|
More than 1
year but less
than 5 years
|
|
|
Total
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Trade
payables
|
|
|
6,750
|
|
|
|
-
|
|
|
|
6,750
|
|
Amounts
owed to related parties
|
|
|
36,348
|
|
|
|
-
|
|
|
|
36,348
|
|
Lease
liabilities
|
|
|
15,478
|
|
|
|
49,469
|
|
|
|
64,947
|
|
Total
|
|
|
58,576
|
|
|
|
49,469
|
|
|
|
108,045
|
|
Interest
rate risk is the risk that the fair value or future cash flows of our financial instruments will fluctuate because of changes in market
interest rates.
Our
interest-bearing bank deposits and borrowings were nil as of December 31, 2020.
|
(iv)
|
Foreign
currency risk
|
Currency
risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises
when transactions are denominated in foreign currencies.
Our
operations are primarily conducted in the PRC. All the sales and purchases transactions are denominated in RMB. As such, our operations
are not exposed to exchange rate fluctuation.
As
at December 31, 2018, 2019 and 2020, nearly all of our monetary assets and monetary liabilities were denominated in RMB except certain
bank balances and other payables which were denominated in US dollars and HKD.
Critical
Accounting Policies and Judgment
The
preparation of the condensed consolidated interim financial statements, which have been prepared in accordance with International Accounting
Standard (“IAS”) as issued by the International Accounting Standards Board (“IASB”), requires us to make estimates,
judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and judgments are
continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed
to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions.
See
Note 2 to our condensed consolidated interim financial statements, “Basis of Preparation and Summary of Significant Accounting
Policies.”
Inventories
Inventories
are carried at the lower of cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work
in progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overhead.
Net
realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and applicable
selling expenses.
When
inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue
is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an
expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction
in the amount of inventories recognized as an expense in the period in which the reversal occurs.
Financial
instruments
Financial
assets and financial liabilities are recognized when a group entity becomes a party to the contractual provisions of the instrument.
Financial
assets and financial liabilities are initially measured at fair value except for trade debtors arising from contracts with customers
which are initially measured in accordance with HKFRS 15 since 1 January 2018. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities (other than financial assets or liabilities at fair value through
profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial
recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through
profit or loss are recognized immediately in profit or loss.
The
effective interest method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating
interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated
future cash receipts and payments (including all fees and points paid or received that form an integral part of the effective interest
rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or financial liability, or,
where appropriate, a shorter period, to the net carrying amount on initial recognition.
Interest
income which are derived from the Company’s ordinary course of business are presented as revenue.
Financial
assets
Classification
and subsequent measurement of financial assets (upon application of IFRS 9)
Financial
assets that meet the following conditions are subsequently measured at amortized cost:
•
the financial asset is held within a business model whose objective is to
collect contractual cash flows; and
•
the contractual terms give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
All
other financial assets are subsequently measured at fair value through profit or loss (“FVTPL”).
A
financial asset is classified as held for trading if:
•
it has been acquired principally for the purpose of selling in the near term;
or
•
on initial recognition it is a part of a portfolio of identified financial
instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or
•
it is a derivative that is not designated and effective as a hedging instrument.
In
addition, the Company may irrevocably designate a financial asset that are required to be measured at the amortized cost as measured
at FVTPL if doing so eliminates or significantly reduces an accounting mismatch.
(i)
Amortized cost and interest income
Interest
income is recognized using the effective interest method for financial assets measured subsequently at amortized cost. Interest income
is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets
that have subsequently become credit-impaired. For financial assets that have subsequently become credit-impaired, interest income is
recognized by applying the effective interest rate to the amortized cost of the financial asset from the next reporting period. If the
credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income
is recognized by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the reporting
period following the determination that the asset is no longer credit impaired.
(ii)
Financial assets at FVTPL
Financial
assets that do not meet the criteria for being measured at amortized cost are measured at FVTPL.
Financial
assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognized in profit
or loss. The net gain or loss recognized in profit or loss includes any dividend or interest earned on the financial asset and is included
in the “other gains and losses” line item.
Impairment
of financial assets (upon application IFRS 9)
The
Company recognizes a loss allowance for expected credit loss (“ECL”) on financial assets which are subject to impairment
under IFRS 9 (including trade and other receivables, bank deposits and bank balances). ECLs are based on the difference between the contractual
cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation
of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms. The amount of ECL is updated at each reporting date to reflect changes in credit
risk since initial recognition.
General
approach
ECLs
are recognized in two measurement bases. For credit exposures for which there has not been a significant increase in credit risk since
initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months
(a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition,
a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default
(a lifetime ECL).
At
each reporting date, the Company assesses whether the credit risk on a financial instrument has increased significantly since initial
recognition. When making the assessment, the Company compares the risk of a default occurring on the financial instrument as at the reporting
date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable
and supportable information that is available without undue cost or effort, including historical and forward looking information.
The
Company considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Company
may also consider a financial asset to be in default when internal or external information indicates that the Company is unlikely to
receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Company. A financial
asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Financial
assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for
measurement of ECLs except for trade receivables which apply the simplified approach as detailed below.
Stage
1 — Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss
allowance is measured at an amount equal to 12-month ECLs
Stage
2 — Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired
financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs
Stage
3 — Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired)
and for which the loss allowance is measured at an amount equal to lifetime ECLs
Simplified
approach
For
trade receivables that do not contain a significant financing component or when the Company applies the practical expedient of not adjusting
the effect of a significant financing component, the Company applies the simplified approach in calculating ECLs. Under the simplified
approach, the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting
date.
The
Company assesses at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial
assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact
on the estimated future cash flows of the financial asset or the Company of financial assets that can be reliably estimated. Evidence
of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or
delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and
observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Financial
assets carried at amortized cost
For
financial assets carried at amortized cost, the Company first assesses whether impairment exists individually for financial assets that
are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that
no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the
asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that
are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective
assessment of impairment.
The
amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value
of estimated future cash flows (excluding future credit losses that have not been incurred). The present value of the estimated future
cash flows is discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed
at initial recognition).
The
carrying amount of the asset is reduced through the use of an allowance account and the loss is recognized in profit or loss. Interest
income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is
no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Company.
If,
in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment
was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off
is later recovered, the recovery is credited to other expenses in the statement of profit or loss.
Loans
and receivables
Loans
and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They
are initially recognized at fair value. Subsequent to initial recognition, loans and receivables (including trade and other receivables,
pledged bank deposits, fixed bank deposits with maturity periods over three months and bank balances) are measured at amortized cost
using the effective interest method, less any identified impairment losses).
Impairment
of financial assets
Financial
assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired
when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial
asset, the estimated future cash flows of the financial assets have been affected.
Objective
evidence of impairment could include:
•
significant financial difficulty of the issuer or counterparty; or
•
breach of contract, such as a default or delinquency in interest or principal
payments; or
•
it becoming probable that the borrower will enter bankruptcy or financial
re-organization; or disappearance of an active market for that financial asset because of financial difficulties.
If
any such evidence exists, the impairment loss on trade receivables and other current receivables and other financial assets carried at
amortized cost is measured as the difference between the asset’s carrying amount and the present value of the estimated future
cash flows discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial
recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial
assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future
cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with
credit risk characteristics similar to the collective group.
If
in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after
the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not
result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in
prior years.
Impairment
losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of trade receivables
included within trade and other receivables and prepayments, whose recovery is considered doubtful, but not remote. In this case, the
impairment losses for doubtful debts are recorded using an allowance account. When the Company is satisfied that recovery is remote,
the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating
to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance
account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in
profit or loss.
Derecognition
of financial assets
The
Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers
the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers
nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes
its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all
the risks and rewards of ownership of a transferred financial asset, the Company continues to recognize the financial asset and recognizes
a collateralized borrowing for the proceeds received.
On
derecognition of a financial asset measured at amortized cost, the difference between the asset’s carrying amount and the sum of
the consideration received and receivable is recognized in profit or loss.
Financial
liabilities and equity instruments
Debt
and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance
of the contractual arrangements and the definitions of a financial liability and an equity instrument.
Equity
instruments
An
equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.
Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs.
Effective
interest method
The
effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over
the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees
and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts)
through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial
recognition.
Interest
expense is recognized on an effective interest basis.
Financial
liabilities
Interest-bearing
borrowings are recognized initially at fair value less attributable transaction costs. They are subsequently stated at amortized cost
with any difference between the amount initially recognized and redemption value being recognized in profit or loss over the period of
the borrowings, together with any interest and fees payable, using the effective interest method.
Trade
and other payables are initially recognized at fair value. They are subsequently stated at amortized cost unless the effect of discounting
would be immaterial, in which case they are stated at cost.
Derecognition
The
Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire.
On
derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration
received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity
is recognized in profit or loss.
The
Company derecognizes a financial liability when, and only when, the Company’s obligations are discharged, cancelled or expire.
The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized
in profit or loss.
Derivative
financial instruments
Initial
recognition and subsequent measurement
We
use derivative financial instruments, such as forward currency contracts, for investment purposes. Such derivative financial instruments
are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at
fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value
is negative.
Any
gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss.
Leases
Financial
leases refers to the situation that the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially
all the risks and rewards of ownership of the leased asset.
All
other leases are treated as operating leases. Where we have the right to use of assets held under operating leases, payments made under
the leases are charged to profit or loss on a straight line basis over the lease terms except where an alternative basis is more representative
of the time pattern of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an
integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in
which they are incurred. Operating leases were treated in accordance to IFRS 16 commencing January 1, 2019.
All
of our leases are operating leases for the years ended December 31, 2020, 2019 and 2018.
Revenue
recognition
Revenue
comprises the fair value of the consideration received or receivable for the sale of goods, net of rebates and discounts. No such rebates
were paid to distributors since year 2013. Provided it is probable that the economic benefits will flow to us and the revenue and costs,
if applicable, can be measured reliably, revenue is recognized as follows:
•
|
Sales
of goods are recognized upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as
the time when the goods are delivered and the customer has accepted the goods. Once goods are accepted by a customer, there is no
continuing management involvement with the goods and we do not have the obligation to accept the return of the goods to us from the
customer.
|
|
|
•
|
Rental income is recognized based upon our annual rental
over the life of the lease under operating lease, using the straight-line method.
|
•
|
Interest
income is recognized on a time-proportion basis using the effective interest method.
|
Impairment
of non-financial assets
Impairment
testing is made on our goodwill at each reporting date. Property, plant and equipment and land use rights are tested for impairment if
there is any indication that the assets may be impaired at the balance sheet date.
If
any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount.
Calculation
of recoverable amount
An
asset’s recoverable amount is the greater of an asset’s or cash-generating unit’s fair value less costs of disposal
and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset
does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest
group of assets that generates cash inflows independently (i.e. a cash-generating unit).
Recognition
of impairment losses
An
impairment loss is recognized in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs,
exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the carrying
amount of the other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced below its
individual fair value less costs of disposal (if measurable) or value in use (if determinable).
Reversal
of impairment losses
In
respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine
the recoverable amount. An impairment loss in respect to goodwill is not reversed.
A
reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss
been recognized in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are
recognized.
Share-based
employee remuneration
We
operate equity-settled share-based remuneration plans for its employees. None of our plans feature any options for a cash settlement.
The
fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in the share-based payment
reserve within equity. The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account
the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally
entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account
the probability that the options will vest.
During
the vesting period, the number of share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized
in prior years is charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for
recognition as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized
as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based
payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of our shares.
The equity amount is recognized in the share-based payment reserve until either the option is exercised (when it is transferred to the
share premium account) or the option expires (when it is released directly to retained earnings).
Accounting
for income taxes
Income
tax comprises current tax and deferred tax.
Current
tax and movements in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to items
recognized in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive
income or directly in equity, respectively.
Current
tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the
reporting period, and any adjustment to tax payable in respect of previous years.
Deferred
tax is calculated using the liability method on temporary differences at the reporting date between the carrying amounts of assets and
liabilities in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable
temporary differences. Deferred tax assets are recognized for all deductible temporary differences, tax losses available to be carried
forward as well as other unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary
differences, will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.
Deferred
tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from initial recognition (other than
in a business combination) of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
Deferred
tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures,
except where we are able to control the reversal of the temporary differences and it is probable that the temporary differences will
not reverse in the foreseeable future.
Deferred
tax is calculated, without discounting, at tax rates that are expected to apply in the period the liability is settled or the asset realized,
based on tax rate (and tax laws) that have been enacted or substantively enacted at the reporting date.
The
carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed
to the extent that it becomes probable that sufficient taxable profits will be available.
Additional
income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.
Current
tax assets and current tax liabilities are presented in net if we have the legally enforceable right to set off the recognized amounts
and the following additional conditions are met:
|
a)
|
in
the case of current tax assets and liabilities, we intend either to settle on a net basis, or to realize the asset and settle the
liability simultaneously; or
|
|
b)
|
in
the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
|
|
(i)
|
the
same taxable entity; or
|
|
(ii)
|
different
taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to
be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to
settle the liabilities and realize the assets simultaneously.
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Critical
accounting estimates and assumptions
We
make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related
actual results. The key sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting period,
that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial
year are discussed below:
Useful
lives and impairment assessment of property, plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives
impacts the level of annual depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a
specific asset basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash
flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Useful
lives and impairment assessment of investment property
Investment
properties are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts
the level of annual depreciation expenses recorded. Investment properties are evaluated for possible impairment on a specific asset basis
or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by each
asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount
is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Impairment
loss recognized in respect of property, plant and equipment
As
of December 31, 2020, the carrying amount of property, plant and equipment was approximately RMB 68,000 (2019: RMB 35,000). No impairment
loss was recognized in 2020. An impairment loss of approximately RMB nil and RMB 75,906,000 were recognized against the original carrying
amount of property, plant and equipment in fiscal 2019 and 2018, respectively. Determining whether property, plant and equipment are
impaired requires an estimation of the recoverable amount of the property, plant and equipment. Such an estimate was based on certain
assumptions which are subject to uncertainty and might materially differ from the actual results.
Impairment
loss recognized in respect of investment property
As
of December 31, 2020, the carrying amount of investment property was nil (2019: nil). No impairment loss was recognized in 2020. An impairment
loss of approximately RMB nil and RMB 4,858,000 were recognized against the original carrying amount of investment property in fiscal
2019 and 2018, respectively. Determining whether an investment property is impaired requires an estimate of the recoverable amount of
the investment property. Such an estimate was based on certain assumptions which are subject to uncertainty and might materially differ
from the actual results.
Impairment
loss recognized in respect of land use rights
As
of December 31, 2020, the carrying amounts of land used rights was nil (2019: nil). An impairment loss of approximately RMB nil and RMB
4,257,000 were recognized against the original carrying amount of land use rights in fiscal 2019 and 2018, respectively. Determining
whether land use rights are impaired requires an estimate of the recoverable amount of the land use rights. Such an estimate was based
on certain assumptions which are subject to uncertainty and might materially differ from the actual results.
Income
tax
The
Company has exposure to income taxes in the PRC. Significant judgment is required in determining the provision for income taxes. There
are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business.
The Company recognizes liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final
tax outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax
and deferred tax provisions in the period in which such determination is made.
Impairment
of financial assets (trade receivables)
The
Company recognizes a loss allowance for expected credit loss (“ECL”) on financial assets which are subject to impairment
under IFRS 9 (including trade and other receivables, amounts due from related parties, restricted cash, bank balances and cash). The
amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition.
Lifetime
ECL represents the ECL that will result from all possible default events over the expected life of the relevant instrument. In contrast,
12-month ECL (“12m ECL”) represents the portion of lifetime ECL that is expected to result from default events that are possible
within 12 months after the reporting date. Assessment are done based on the Company’s historical credit loss experience, adjusted
for factors that are specific to the debtors, general economic conditions and an assessment of both the current conditions at the reporting
date as well as the forecast of future conditions.
The
Company applies the IFRS 9 simplified approach to measure ECL which uses a lifetime ECL for all trade receivables. The ECL on these assets
are assessed individually for debtors with significant balances and/or collectively using a provision matrix with appropriate groupings.
For
all other instruments, the Company measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in
credit risk since initial recognition, the Company recognizes lifetime ECL. The assessment of whether lifetime ECL should be recognized
is based on significant increases in the likelihood or risk of a default occurring since initial recognition.
The
Company recognized bad debts of RMB 150.3 million and RMB 68.7 million in the years ended December 31, 2020 and 2019, respectively.
Net
realizable value of inventories
Net
realizable value of inventories is management’s estimate of future selling price in the ordinary course of business, less estimated
costs of completion and selling expenses. These estimates are based on current market conditions and the historical experience of selling
products of a similar nature and could change significantly as a result of various market factors.
Share-based
payment transaction
The
Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the
date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate
valuation model which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate
inputs to the valuation model including the expected life of the stock option, volatility and dividend yield, and the assumptions as
to these components.
ITEM
6.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and senior management
|
Our
current directors and executive officers are:
Name
|
|
Age
|
|
Position
|
Huang Meishuang
|
|
36
|
|
Chair of the Board and Chief Executive Officer
|
Hen Man Edmund
|
|
48
|
|
Chief Financial Officer
|
Roy Tan Choon Kang (1)(2)(3)(4)
|
|
49
|
|
Director
|
Shen
Cheng Liang (1)(2)(3)
|
|
65
|
|
Director
|
Song Chungen (1)(2)(3)
|
|
44
|
|
Director
|
Alex Ng Man Shek
|
|
51
|
|
Executive Director and Corporate Secretary
|
(1)
|
Member of audit committee
|
(2)
|
Member of compensation committee
|
(3)
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Member of nominations committee
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(4)
|
Audit committee financial expert
|
Huang
Meishuang was appointed the Chairman of the Board effective as of June 17, 2019, following Huang Jia Dong’s resignation.
Ms. Huang is Mr. Huang’s daughter. She has been employed at the Company’s Treasury Department from August 2008
to August 2013. From September 2013 to present, she has been employed as CEO’s Assistant. Ms. Huang holds a Bachelor’s
degree in Business Administration from JiMei University, Xiamen (2008). She also holds a postgraduate diploma of the Executive Development
Program from Xiamen University (2009).
Hen
Man Edmund has served as our Chief Financial Officer since November 20, 2009. Mr. Hen joined Hengda in 2008 as the Chief
Financial Officer. Mr. Hen is responsible for the corporate finance function and oversees matters relating to compliance and reporting
obligation of our company. Prior to joining Hengda, Mr. Hen was a Financial Controller of a switchgear manufacturer in Sichuan PRC
and was responsible for the corporate finance function of the company. Prior to that, Mr. Hen was the accountant of Dickson Concepts
(International) Ltd., a public listed company in Hong Kong and oversaw the accounting and financial administration of the company. He
also worked at a variety of international accountancy firms, including Deloitte Touche Tohmatsu, in assurance and advisory services during
the period from 1995 to 2001. Mr. Hen graduated from the University of East Anglia, United Kingdom, with a Bachelor’s Degree
in Science in 1995. He is a member of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute
of Certified Public Accountants.
Roy
Tan Choon Kang commenced his career at the Government of Singapore Investment Corporation (GIC) in 1996 at the Economics &
Strategy Department handling GIC’s equity and fixed income investments in North America and Latin America. From February 1,
2009 to December 31, 2016, Mr. Tan held the title of Managing Partner of One Tree Partners PTE Ltd., an asset management company.
From November 2016 to July 31, 2017, Mr. Tan held the office of the CFO of Fuse Enterprises Inc., a digital marketing
and mining company. Mr. Tan holds a joint MBA degree from National University of Singapore and Columbia University, NY (1999).
Song
Chungen was appointed effective as of November 1, 2019 as an independent member of the Board as well as a member of Audit, Compensation
and Nominating Committees, to fill the vacancy following Liu Jun’s resignation. From 2009 to present, Song Chungen has been a practicing
lawyer at Guangdong Weihao Law firm. He obtained his law license in May 2003, and in November 2009, he obtained Securities
Qualification in China. Song Chungen holds a Bachelor’s degree in Law from Sun Yat Sen University (2007).
Shen
Cheng Liang is a ceramics production expert with over 30 years of experience in the ceramics industry in China. Prior to his retirement
from the industry in 2012, he was a senior production engineer and general manager at Fujian Yiyan Ceramics Ltd. where he worked from
1983 to 2012. Mr. Liang graduated with a bachelor’s degree in material physics from Jingdezhen Ceramics College in 1983.
Alex
Ng Man Shek has been served as the position of corporate secretary of Nova Lifestyle Inc. (NASDAQ: NVFY) from June 2011 to October 2016
and the chief operating officer of a wholly-owned subsidiary of Nova Lifestyle Inc. in Dongguan, the PRC since 2003. He worked in various
companies in Hong Kong, Canada and the PRC. Mr. Ng received his Bachelor’s degree in Economics from York University, Canada
in 1994. He has also received a Certificate in Securities Course, a Certificate in Technical Analysis Course and a Certificate in Derivatives
Course from The Canadian Securities Institute during the period from 1998 to 2002. There is no arrangement or understanding between Mr. Ng
and any other persons pursuant to which he was appointed as discussed above. Nor are there any family relationships between Mr. Ng
and any executive officers and directors.
There
are no family relationships among our directors or officers.
The
business address of each party described above is c/o Jinjiang Hengda Ceramics Co., Ltd., Junbing Industrial Zone, Anhai, Jinjiang
City, Fujian Province, People’s Republic of China.
Compensation
Committee Interlocks and Insider Participation
No
member of our compensation committee has at any time been our officer or employee, or our subsidiaries. No interlocking relationship
exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company,
nor has any interlocking relationship existed in the past.
During
the last fiscal year, none of our officers and employees, and none of our former officers participated in deliberations of our Board
of Directors concerning executive officer compensation.
Director
Compensation
Starting
April 1, 2010, our Board determined to provide its non-employee members annual compensation of $40,000. The following table sets
forth all of the compensation paid by us or our significant subsidiaries in 2020 to each of our non-employee directors for such person’s
service as a director (including contingent or deferred compensation accrued during 2020):
Name and Principal Position
|
|
|
Compensation
RMB
|
|
|
|
Value of
Options(1)
RMB
|
|
|
|
Total RMB
|
|
Song Chungen
|
|
|
276,168
|
|
|
|
-
|
|
|
|
276,168
|
|
Roy Tan Choon Kang
|
|
|
310,689
|
|
|
|
-
|
|
|
|
310,689
|
|
Alex Ng Man Shek
|
|
|
978,000
|
|
|
|
-
|
|
|
|
978,000
|
|
Shen Cheng Liang
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
No options were granted to our directors in 2020.
|
Executive
Officers
The
following table sets forth all of the compensation paid by us or our significant subsidiaries in 2020 to each of our officers for such
person’s service as an officer (including contingent or deferred compensation accrued during 2020, but not including any amounts
paid to such persons for their services as directors):
|
|
Salary
|
|
|
Bonus
|
|
|
|
Value of
Stock
Compensation (2)
|
|
|
Total
|
|
Name
and Principal Position (1)
|
|
RMB
|
|
|
RMB
|
|
|
|
RMB
|
|
|
RMB
|
|
Huang Meishuang, CEO
|
|
65,274
|
|
|
-
|
|
|
|
548,000
|
|
|
613,274
|
|
Hen Man Edmund, CFO
|
|
624,277
|
|
|
-
|
|
|
|
587,000
|
|
|
1,211,277
|
|
(1)
|
No options were granted to our executives in 2020.
|
(2)
|
Stock Compensation were granted
to our Chief Executive Officer and Chief Financial Officer in 2020.
|
Retirement
Benefits
As
of December 31, 2020, we have contributed to the government-mandated employee welfare and retirement benefit plan and provided pension,
retirement or similar benefits to its employees. The PRC regulations require us to pay the local labor administration bureau a monthly
contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The local labor administration
bureau, which manages various investment funds, will take care of employee retirement, medical and other fringe benefits. We have no
further commitments beyond our monthly contribution.
Employment
Agreements
Upon
consummation of the acquisition of Success Winner, we entered into employment agreements with certain of our executive officers. The
following discussion summarizes the material terms of employment agreements entered into between us and our executive officers:
We
entered into employment agreements with the following officers: Huang Meishuang, CEO, Hen Man Edmund, CFO, and Alex Ng Man Shek, Executive
Director and Corporate Secretary.
|
•
|
The term of the employment agreements
is three years (June 19, 2019 to June 18, 2022 for Huang Meishuang), one year (July 1,
2020 to June 30, 2021 for Hen Man Edmund and Alex Ng Man Shek).
|
|
•
|
From July 1, 2017, Hen
Man Edmund received compensation of RMB 50,715 (HKD 58,500) per month. From July 1, 2017, Alex Ng Man Shek received compensation
of RMB 69,354 (HKD 80,000) per month. Alex became our director starting from October 2017.
|
|
•
|
We may dismiss any of the
above officers if any of the following events occurs with respect to the officer: (1) failure to show up for work, (2) failure
to provide required documents, (3) falsification of documents, criminal record, etc., (4) serious violation of such
officers’ labor rules and of regulations, (5) serious lapse of duties and responsibilities, (6) activities that
violate regulations, resulting in loss of more than RMB 4,000, (7) operation of his own business during the term of his employment,
(8) criminal prosecution and labor punishment, (9) request by the officer to resign, (10) causing us to sign or change
any contract through fraud, coercion and other fraudulent means, or (11) other situations stipulated by law and statutes.
|
|
•
|
Each officer is subject
to the non-compete provisions of the agreement for a period of three years following termination of the employment agreement and
non-solicitation provisions of the agreement for a period of two years following termination of the employment agreement.
|
Other
Employees
Compensation
for our senior executives is comprised of four elements: a base salary, an annual performance bonus, equity and benefits.
In
developing salary ranges, potential bonus payouts, equity awards and benefit plans, it is anticipated that our compensation committee
takes into account: 1) competitive compensation among comparable companies and for similar positions in the market, 2) relevant ways
to incentivize and reward senior management for improving shareholder value while building a successful company, 3) individual performance,
4) how best to retain key executives, 5) the overall performance of us and our various key component entities, 6) our ability to pay
and 7) other factors deemed to be relevant at the time.
Our
senior management have discussed our above-mentioned planned process for executive compensation and the four compensation components.
Specific compensation plans for our key executives are negotiated and established by our compensation committee.
We
have not entered into any service contracts with any of our officers, directors or employees that contain any provisions for benefits
upon termination of employment.
Antelope Enterprise Holdings Limited 2010
Incentive Compensation Plan
On
December 27, 2010, our shareholders approved the 2010 Incentive Plan. The purpose of the 2010 Incentive Plan is to assist us and
our subsidiaries in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors,
and independent contractors by enabling such persons to acquire or increase a proprietary interest in us in order to strengthen the mutuality
of interests between such persons and our shareholders, and providing such persons with annual and long-term performance incentives to
expand their maximum efforts in the creation of shareholder value. Awards under the 2010 Incentive Plan will be limited in
the aggregate to 1,200,000 shares. The 2010 Incentive Plan shall terminate at such time as no shares remain available for issuance under
the 2010 Incentive Plan, when we have no further obligations with respect to outstanding awards under the 2010 Incentive Plan. As
of December 31, 2016, no stock options under the 2010 Incentive Plan have been granted.
Administration.
The 2010 Incentive Plan is administered by a committee (the “Committee”) designated by our board of directors (the “Board”),
which shall consist of at least two directors, each of whom is (i) a “non-employee director” within the meaning of Rule 16b-3
promulgated under the Exchange Act and (ii) an “outside director” within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations
thereto (the “Code”); provided, however, that except as otherwise expressly provided in the 2010 Incentive Plan or in order
to comply with Code Section 162(m) or Rule 13b-3 under the Exchange Act, the Board may exercise any power or authority
granted to the Committee under the 2010 Incentive Plan. Among other things, the Committee has complete discretion, subject to the express
limits of the 2010 Incentive Plan, to determine the officers, directors, employees and independent contractors to be granted an award,
the type of award to be granted, the number of shares subject to each award, the terms and conditions of each award, the exercise price
of each award which is a stock option (“Option”) and the base price of each award which is a stock appreciation right (“SAR”),
the term of each award, the vesting schedule for an award, whether to accelerate award vesting, the value of the Shares underlying an
award, and the required withholdings, if any. The Committee is also authorized to construe the award agreements, and may prescribe rules relating
to the 2010 Incentive Plan. Notwithstanding the foregoing, neither the Committee nor the Board has any authority to grant or modify an
award under the 2010 Incentive Plan with terms or conditions that would cause the award to be considered nonqualified “deferred
compensation” subject to Code Section 409A.
Grant
of Awards; Shares Available for Awards. The 2010 Incentive Plan provides for the grant of Options (both incentive stock options and
non-incentive stock options), SARs (including limited SARs), restricted stock, deferred stock, stock granted as a bonus or in lieu of
another award, dividend equivalents, bonus stock, awards in lieu of obligations, and performance or annual incentive awards (each an
“award”) to our executive officers, directors and employees, and independent contractors (each a “participant”)
(however, solely employees are eligible for awards which are incentive stock options). We have reserved a total of 1,200,000 shares for
issuance as or under awards to be made under the 2010 Incentive Plan. If any award lapses, expires, is cancelled, or terminates
unexercised or ceases to be exercisable for any reason, the number of shares subject thereto is again available for grant under the 2010
Incentive Plan. The number of shares for which awards which are Options, SARs, performance awards or annual incentive awards may be granted
to a participant under the 2010 Incentive Plan in any fiscal year is limited to 350,000.
The
number of awards to be granted to officers, directors, employees and consultants cannot be determined at this time as the grant of awards
is dependent upon various factors such as hiring requirements and job performance.
Options.
The exercise price per share purchasable under an Option shall be determined by the Committee or the Board, provided that such per share
exercise price shall not be less than 100% of the fair market value of a share on the date of grant of the Option and shall not, in any
event, be less than the par value of a share on the date of grant of such option. The Committee or the Board shall determine the time
or times at which or the circumstances under which an Option may be exercised in whole or in part, the time or times at which Options
shall cease to be or become exercisable following termination of employment or upon other conditions, the methods by which such exercise
price may be paid or deemed to be paid, the form of such payment, and the methods by or forms in which shares will be delivered or deemed
to be delivered to participants who exercise Options.
Options
which are incentive stock options (“ISOs”) granted under the 2010 Incentive Plan shall comply in all respects with Code Section 422.
In the case of ISOs, if an employee owns or is deemed to own (by reason of the attribution rules applicable under Code Section 424(d))
more than 10% of the combined voting power of all classes of our shares or the shares of any parent or subsidiary (a “ten percent
shareholder”) and an ISO is granted to such employee, the per share exercise price under such ISO (to the extent required by the
Code at the time of grant) shall be no less than 110% of the fair market value of a share on the date such ISO is granted. The term of
an ISO may not exceed 10 years (5 years in the case of an ISO granted to a ten percent shareholder). ISOs may be granted to solely employees.
In addition, the aggregate fair market value of the shares subject to an ISO (determined at the time of grant) which are exercisable
for the first time by an employee during any calendar year may not exceed $100,000.
Stock
Appreciation Rights. A SAR provides the participant to whom it is granted the right to receive, upon its exercise, the excess of
(A) the fair market value of the number of shares subject to the SAR on the date of exercise (or, in the case of a “Limited
SAR” (as defined in the 2010 Incentive Plan) which may be exercised only in the event of a “change in control” (as
defined in the 2010 Incentive Plan), the fair market value determined by reference to the change in control price, as defined in the
2010 Incentive Plan), over (B) the product of the number of shares subject to the SAR multiplied by the grant price under the SAR,
as determined by the Committee or the Board. The per share grant price of a SAR shall not be less than the fair market value of a share
on the date of grant.
Restricted
Stock Awards. A restricted stock award is a grant or sale of shares to the participant, subject to such restrictions on transferability,
risk of forfeiture and other restrictions, if any, as the Committee or the Board may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee or the Board may determine at the date of grant or purchase or thereafter.
Except to the extent restricted under the terms of the 2010 Incentive Plan and any agreement relating to the restricted stock award,
a participant who is granted or has purchased restricted stock shall have all of the rights of a shareholder, including the right to
vote the restricted stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed
by the Committee or the Board). During the restricted period applicable to the restricted stock, subject to certain exceptions, the restricted
stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the participant.
Deferred
Stock. A deferred stock award is a right to receive shares, cash, or a combination thereof at the end of a specified deferral period,
subject to certain terms and conditions, and in compliance with Code Section 409A. Payment under an award of deferred stock shall
occur upon expiration of the deferral period specified for such deferred stock award by the Committee or the Board (or, if permitted
by the Committee or the Board, as elected by the participant). In addition, deferred stock awards shall be subject to such restrictions
(which may include a risk of forfeiture) as the Committee or the Board may impose, if any, which restrictions may lapse at the expiration
of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements),
separately or in combination, in installments or otherwise, as the Committee or the Board may determine. Payments under deferred stock
awards may be by delivery of Shares, cash equal to the fair market value of the specified number of shares covered by the deferred stock
award, or a combination thereof, as determined by the Committee or the Board at the date of grant or thereafter. Prior to the end of
the specified deferral period for a deferred stock award, the award carries no voting or dividend or other rights associated with share
ownership.
Bonus
Shares and Awards in Lieu of Obligations. The Committee and the Board are each authorized to grant shares as a bonus, or to grant
shares or other awards in lieu of our obligations to pay cash or deliver other property under the 2010 Incentive Plan or under other
plans or compensatory arrangements, provided that, in the case of participants subject to Section 16 of the Exchange Act, the amount
of such grants remains within the discretion of the Committee to the extent necessary to ensure that acquisitions of shares or other
awards are exempt from liability under Section 16(b) of the Exchange Act. These bonus shares or awards granted under the 2010
Incentive Plan shall be subject to such other terms as shall be determined by the Committee or the Board.
Dividend
Equivalents. The Committee and the Board are each authorized to grant dividend equivalents to a participant, entitling the participant
to receive cash, shares, other awards, or other property equal in value to dividends paid with respect to a specified number of Shares,
or other periodic payments. Dividend equivalents may be awarded on a free-standing basis or in connection with another award. The Committee
or the Board may provide that dividend equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested
in additional shares, awards, or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture,
as the Committee or the Board may specify.
Other
Stock-Based Awards. The Committee and the Board are each authorized, subject to limitations under applicable law, to grant to participants
such other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related
to, shares, as deemed by the Committee or the Board to be consistent with the purposes of the 2010 Incentive Plan, including, without
limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares, purchase rights for shares,
awards with value and payment contingent upon our performance or any other factors designated by the Committee or the Board, and awards
valued by reference to the book value of shares or the value of securities of or the performance of our specified subsidiaries or business
units.
Performance
and Annual Incentive Awards. The Committee and the Board (except for such awards to be made to participants who are “covered
employees” for purposes of Code Section 162(m), which awards must be made by the Committee) are each authorized to grant (i) performance
awards, under which participants will receive cash payments, shares or other awards upon the satisfaction of pre-specified (generally,
other than annual) performance criteria, and (ii) annual incentive awards, under which participants will receive cash payments,
shares or other awards upon the satisfaction of pre-specified annual performance criteria. The performance criteria which
may be used for performance awards or annual incentive awards made to participants who are “covered employees” for purposes
of Code Section 162(m) may solely include, for us, on a consolidated basis and/or our specified subsidiaries or business units
(except with respect to total shareholder return and earnings per share criteria) - total shareholder return; total shareholder return
as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard &
Poor’s 500 Stock Index or the S&P Specialty Retailer Index; net income; pretax earnings; earnings before interest expense,
taxes, depreciation and amortization; pretax operating earnings after interest expense and before bonuses, service fees, and extraordinary
or special items; operating margin; earnings per share; return on equity; return on capital; return on investment; operating earnings;
working capital or inventory; and ratio of debt to shareholders’ equity.
Change
in Control Provisions. In the event of a change in control (as defined in the 2010 Incentive Plan), (i) any award subject to
vesting and exercisability requirements that was not previously vested and exercisable shall become fully vested and exercisable as of
the occurrence of the change in control, subject to certain restrictions; (ii) Limited SARs (and other SARs if so provided by their
terms) shall become exercisable for amounts, in cash, determined by reference to the change in control price; (iii) the restrictions,
deferral of settlement, and forfeiture conditions applicable to any other award shall lapse and such awards shall be deemed fully vested
as of the occurrence of the change in control, except to the extent of any waiver by the participant and subject to certain restrictions;
(iv) with respect to any outstanding award subject to achievement of performance goals and conditions under the 2010 Incentive Plan,
such performance goals and other conditions will be deemed to be met if and to the extent so provided by the Committee in the award agreement
relating to such award; (v) the Board may in its sole and absolute discretion, provide on a case by case basis that Options shall
terminate, provided however, that a participant holding a terminating Option shall have the right, immediately prior to the occurrence
of such change in control and during such period as the Board in its sole discretion shall determine and designate, to exercise that
Option, to the extent exercisable, in whole or in part; and (vi) the Board may in its sole and absolute discretion, provide on a
case by case basis that any award entitled to be settled in shares shall instead be entitled to be settled, during such period as the
Board in its sole discretion shall determine and designate, by means of a cash payment equal to the fair market value of such award immediately
prior to the occurrence of such change in control, as determined in good faith by the Board.
Amendment
and Termination. The Board may amend, alter, suspend, discontinue or terminate the 2010 Incentive Plan, or the Committee’s
authority to grant awards under the 2010 Incentive Plan, without the consent of shareholders or participants, except that any amendment
or alteration to the 2010 Incentive Plan shall be subject to the approval of the Company’s shareholders not later than the annual
meeting next following such Board action if such shareholder approval is required by any federal or state law or regulation (including,
without limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock exchange or automated quotation system
on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes
to the 2010 Incentive Plan to shareholders for approval; provided that, without the consent of an affected participant, no such Board
action may materially and adversely affect the rights of such participant under any previously granted and outstanding award. The Committee
or the Board may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any award theretofore granted
and any award agreement relating thereto, except as otherwise provided in the 2010 Incentive Plan; provided that, without the consent
of an affected participant, no such Committee or the Board action may materially and adversely affect the rights of such participant
under such award.
Compensation
Committee. The shareholders of the Company approved the 2010 Incentive Plan at the annual meeting held on December 27, 2010.
In accordance with the 2010 Incentive Plan, the Board of Directors of the Company has appointed the Compensation Committee (the “Committee”)
to administer the 2010 Incentive Plan. The Company granted an aggregate of 1,130,000 stock options to Huang Jia Dong, Su Pei Zhi, Su
Wei Feng, Hen Man Edmund, Paul K. Kelly, Cheng Yan Davis, Ding Wei Dong and William L. Stulginsky, upon the approval by the Board of
Directors on January 27, 2011, the grant date. The exercise price of the share options granted is $7.65 per share and the share
options are valid for a period of 5 years from January 27, 2011 to January 27, 2016. One-fourth of options granted will vest
in every year from the grant date. As at the grant date of January 27, 2011, the estimated total fair value of the options granted
is $3,977,600.
Certain
U.S. Federal Income Tax Consequences of the 2010 Incentive Plan
The
following is a general summary of the U.S. federal income tax consequences under current tax law to Antelope Enterprises, were it subject
to U.S. federal income taxation on a net income basis, and to participants under the 2010 Incentive Plan who are individual citizens
or residents of the United States for U.S. federal income tax purposes (“U.S. participants”) of Options, which include ISOs
and Options that are not ISOs, SARs, restricted stock, deferred stock, performance shares, performance units, restricted stock units,
dividend equivalent rights and bonus stock. It does not purport to cover all of the special rules that may apply, including special
rules relating to limitations on the ability of Antelope Enterprises to deduct certain compensation, special rules relating
to deferred compensation, golden parachutes, participants subject to Section 16(b) of the Exchange Act and the exercise of
an Option with previously-acquired shares. This summary assumes that U.S. participants will hold their shares as capital assets within
the meaning of Section 1221 of the Code. This summary does not address the application of the passive foreign investment company
rules of the Code to U.S. participants. These rules are discussed generally under the section below entitled “Taxation–United
States Federal Income Taxation–U.S. Holders–Passive Foreign Investment Company Rules”. In addition, this summary does
not address the foreign, state or local income or other tax consequences, or any U.S. federal non-income tax consequences, inherent in
the acquisition, ownership, vesting, exercise, termination or disposition of an award under the 2010 Incentive Plan or shares issued
pursuant thereto. Participants are urged to consult their own tax advisors concerning the tax consequences to them of an award under
the 2010 Incentive Plan or shares issued pursuant thereto.
A
U.S. participant generally does not recognize taxable income upon the grant of an Option. Upon the exercise of an Option that is not
an ISO, the participant generally recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the
shares acquired on the date of exercise over the exercise price therefor, and Antelope Enterprises would be entitled to a deduction for
such amount at that time. If the U.S. participant later disposes of the shares acquired under an Option that is not an ISO, the U.S.
participant generally recognizes a long-term or short-term gain or loss, depending upon the period for which the shares were held thereby.
A long-term capital gain generally is subject to more favorable tax treatment than ordinary income or a short-term capital gain. The
deductibility of capital losses is subject to certain limitations.
Upon
the exercise of an ISO, a U.S. participant generally does not recognize taxable income. If the U.S. participant disposes of the shares
acquired pursuant to the exercise of an ISO more than two years after the date of grant and more than one year after the transfer of
the shares to the participant, the U.S. participant generally recognizes a long-term capital gain or loss, and Antelope Enterprises would
not be entitled to a deduction. However, if the U.S. participant disposes of such shares prior to the end of the required holding period,
all or a portion of the gain is treated as ordinary income, and Antelope Enterprises generally would be entitled to deduct such amount.
In
addition to the U.S. federal income tax consequences described above, the U.S. participant may be subject to the alternative minimum
tax (“AMT”), which is payable to the extent it exceeds the participant’s regular income tax. For this purpose, upon
the exercise of an ISO, the excess of the fair market value of the shares for which the ISO is exercised over the exercise price thereunder
for such shares is a preference item for purposes of the AMT. In addition, the U.S. participant’s basis in such shares is increased
by such excess for purposes of computing the gain or loss on the disposition of the shares for AMT purposes. If a U.S. participant is
required to pay any AMT, the amount of such tax which is attributable to deferral preferences (including any ISO adjustment) generally
may be allowed as a credit against the participant’s regular income tax liability (and, in certain cases, may be refunded to the
participant) in subsequent years. To the extent the credit is not used, it may be carried forward.
A
U.S. participant who receives a restricted stock award or who purchases shares of restricted stock, which shares, in either case, are
subject to a substantial risk of forfeiture and certain transfer restrictions, generally does not recognize income on the receipt of
the award or the purchased restricted shares and generally recognizes ordinary compensation income at the time the restrictions lapse
in an amount equal to the excess, if any, of the fair market value of the shares at such time over any amount paid by the U.S. participant
for the shares. Alternatively, the U.S. participant may elect to be taxed upon receipt of the restricted shares based on the value of
the shares at the time of receipt. Antelope Enterprises generally would be entitled to deduct such amount at the same time as ordinary
compensation income is required to be included by the U.S. participant and in the same amount. Dividends received with respect to restricted
shares generally are treated as compensation, unless the U.S. participant elects to be taxed on the receipt (rather than the vesting)
of the restricted shares.
A
U.S. participant generally does not recognize income upon the grant of an SAR. The U.S. participant recognizes ordinary compensation
income upon the exercise of the SAR equal to the increase in the value of the underlying shares, and Antelope Enterprises generally would
be entitled to a deduction for such amount.
A
U.S. participant generally does not recognize income on the receipt of a deferred stock award or a bonus stock award and generally recognizes
income when the shares are received. At such time, the U.S. participant recognizes ordinary compensation income equal to the excess,
if any, of the fair market value of the shares over any amount paid for the shares, and Antelope Enterprises generally would be entitled
to deduct such amount at such time.
A
U.S. participant generally does not recognize income on the receipt of a performance award, annual incentive award or dividend equivalent
right award until a payment is received under the award. At such time, the U.S. participant recognizes ordinary compensation
income equal to the amount of any cash payments and the fair market value of any shares received, and Antelope Enterprises generally
would be entitled to deduct such amount at such time.
Antelope
Enterprise Holdings Limited 2017 Equity Compensation Plan
On
May 21, 2017, the Board of Directors of the Company (the “Board”) approved the 2017 Equity Compensation Plan (the “Plan”)
is to attract and retain outstanding individuals as employees, directors and consultants of the Company and its subsidiaries, to recognize
the contributions made to the Company and its Subsidiaries by such individuals and to provide them with additional incentive to expand
and improve the profits and achieve the objectives of the Company
The
Plan is administered by the Board. The Board, in its sole discretion, will determine the eligible individuals to whom, and the time or
times at which awards will be granted, the form and amount of each award, the expiration date of each award, the time or times within
which the awards may be exercised, the cancellation of the awards and the other limitations, restrictions, terms and conditions applicable
to the grant of the awards.
The
total number of shares that may be issued under the Plan is 280,000, subject to adjustments in the event of any reorganization, recapitalization,
share split, distribution, merger, consolidation, split-up, spin-off, combination, subdivision, consolidation or exchange of shares,
any change in the capital structure of the Company or any similar corporate transaction. The Board may, in its discretion, (a) grant
shares under the Plan to any participant without consideration from such Participant or (b) sell shares under the Plan to any participant
for such amount of cash, shares or other consideration as the Board deems appropriate. Notwithstanding any of the provisions of the Plan
or any outstanding award agreement, upon a Change in Control of the Company, the Board is authorized and has sole discretion to provide
that all restrictions applicable to all awards shall terminate or lapse in order that Participants may fully realize the benefits thereunder.
Awards granted under the Plan, and any rights and privileges pertaining thereto, may not be transferred, assigned, pledged or hypothecated
in any manner, or be subject to execution, attachment or similar process, by operation of law or otherwise, other than by will or by
the laws of descent and distribution. The Board may terminate, suspend, or amend the Plan, in whole or in part, from time to time. The
Board also has the authority to amend any award agreement at any time.
2019
Equity Incentive Plan
At
the 2019 Annual Meeting the Company’s shareholders approved the 2019 Equity Incentive Plan. In December 2019, our Board approved
the 2019 Equity Incentive Plan, subject to shareholder approval. All of our employees, officers, and directors, and consultants are eligible
to be granted options or restricted stock awards (each, an “Award”) under the Plan. The Plan is currently administered by
the Board, which has all the power to administer the Plan according to its terms, including the power to grant Awards, determine who
may be granted Awards and the types and amounts of Awards to be granted, prescribe Award agreements, and establish programs for granting
Awards. Awards may be made under the Plan for up to 1,000,000 of our common shares. No awards have been granted under the Plan as of
today. The Plan is a stock-based compensation plan that provides for discretionary grants of, among others, stock options, stock awards
and stock unit awards to employees and directors of the Company. The purpose of the Plan is to recognize contributions made to our company
and its subsidiaries by such individuals and to provide them with additional incentive to achieve the objectives of our Company.
Administration.
The Plan will be administered by our board of directors, or, once constituted, the Compensation Committee of the board of directors (we
refer to body administering the Plan as the “Committee”).
Number
of Shares of Common Shares. The number of common shares that may be issued under the Plan is 1,000,000. Shares issuable under the
Plan may be authorized but unissued shares or treasury shares. If there is a lapse, forfeiture, expiration, termination or cancellation
of any award made under the Plan for any reason, the shares subject to the award will again be available for issuance. Any shares subject
to an award that are delivered to us by a participant, or withheld by us on behalf of a participant, as payment for an award or payment
of withholding taxes due in connection with an award will not again be available for issuance, and all such shares will count toward
the number of shares issued under the Plan. The number of common shares issuable under the Plan is subject to adjustment, in the event
of any reorganization, recapitalization, stock split, stock distribution, merger, consolidation, split-up, spin-off, combination, subdivision,
consolidation or exchange of shares, any change in the capital structure of the company or any similar corporate transaction. In each
case, the Committee has the discretion to make adjustments it deems necessary to preserve the intended benefits under the Plan. No award
granted under the Plan may be transferred, except by will, the laws of descent and distribution.
Eligibility.
All employees, directors, and consultants of the Company are eligible to receive awards under the Plan.
Awards
to Participants. The Plan provides for discretionary awards of, among others, stock options, stock awards and stock unit awards to
participants. Each award made under the Plan will be evidenced by a written award agreement specifying the terms and conditions of the
award as determined by the Committee in its sole discretion, consistent with the terms of the Plan.
Stock
Options. The Committee has the discretion to grant non-qualified stock options or incentive stock options to participants and to
set the terms and conditions applicable to the options, including the type of option, the number of shares subject to the option and
the vesting schedule; each option will expire ten years from the date of grant and no dividend equivalents may be paid with respect to
stock options.
Stock
Awards. The Committee has the discretion to grant stock awards to participants. Shares granted under the Plan will be effective and
exercisable as of the Company’s completion of our initial public offering of its securities and other terms, restrictions and qualifications
that may be set forth in the individual grant agreements. Stock awards will consist of common shares granted without any consideration
from the participant or shares sold to the participant for appropriate consideration as determined by the Board. The number of shares
awarded to each participant, and the restrictions, terms and conditions of the award, will be at the discretion of the Committee. Subject
to the restrictions, a participant will be a shareholder with respect to the shares awarded to him or her and will have the rights of
a shareholder with respect to the shares, including the right to vote the shares and receive dividends on the shares; provided that dividends
otherwise payable on any performance-based stock award will be held by us and will be paid to the holder of the stock award only to the
extent the restrictions on such stock award lapse, and the Committee in its discretion can accumulate and hold such amounts payable on
any other stock awards until the restrictions on the stock award lapse.
Payment
for Stock Options and Withholding Taxes. The Committee may make one or more of the following methods available for payment of any
award, including the exercise price of a stock option, and for payment of the minimum required tax obligation associated with an award:
(i) cash; (ii) cash received from a broker-dealer to whom the holder has submitted an exercise notice together with irrevocable
instructions to deliver promptly to us the amount of sales proceeds from the sale of the shares subject to the award to pay the exercise
price or withholding tax; (iii) by directing us to withhold common shares otherwise issuable in connection with the award having
a fair market value equal to the amount required to be withheld; and (iv) by delivery of previously acquired common shares that
are acceptable to the Committee and that have an aggregate fair market value on the date of exercise equal to the exercise price or withholding
tax, or certification of ownership by attestation of such previously acquired shares.
Amendment
of Award Agreements; Amendment and Termination of the Plan; Term of the Plan. The Committee may amend any award agreement at any
time, provided that no amendment may adversely affect the right of any participant under any agreement in any material way without the
written consent of the participant, unless such amendment is required by applicable law, regulation or stock exchange rule. The Board
may terminate, suspend or amend the Plan, in whole or in part, from time to time, without the approval of the shareholders, unless such
approval is required by applicable law, regulation or stock exchange rule, and provided that no amendment may adversely affect the right
of any participant under any outstanding award in any material way without the written consent of the participant, unless such amendment
is required by applicable law, regulation or rule of any stock exchange on which the shares are listed. Notwithstanding the foregoing,
neither the Plan nor any outstanding award agreement can be amended in a way that results in the repricing of a stock option. Repricing
is broadly defined to include reducing the exercise price of a stock option or cancelling a stock option in exchange for cash, other
stock options with a lower exercise price or other stock awards. No awards may be granted under the Plan on or after the tenth anniversary
of the effective date of the Plan.
The
term of each director is until their resignation or removal.
Our
board of directors has established an audit committee, a compensation committee and a governance and nominating committee.
Audit
Committee. The audit committee consists of Roy Tan Choon Kang (Chair and the Audit Committee financial expert), Shen Cheng
Liang and Song Chungen.
The
board of directors has adopted an audit committee charter, providing for the following responsibilities of the audit committee:
|
•
|
appointing and replacing
our independent auditors and pre-approving all auditing and permitted non-auditing services to be performed by the independent auditors;
|
|
•
|
reviewing and discussing
the annual audited financial statements with management and the independent auditors;
|
|
•
|
annually reviewing and
reassessing the adequacy of our audit committee charter;
|
|
•
|
such other matters that
are specifically delegated to our audit committee by our board of directors from time to time;
|
|
•
|
meeting separately and
periodically with management, the internal auditors and the independent auditors; and
|
|
•
|
reporting regularly to
the board of directors.
|
A
copy of the audit committee charter is available on our website at http://aehltd.com/Corporate-Governance.html. The information
contained on our website is not a part of this Annual Report.
Compensation
Committee. Our compensation committee consists of Shen Cheng Liang (Chair), Song Chungen and Roy Tan. Our board of directors adopted
a compensation committee charter, providing for the following responsibilities of the compensation committee:
|
•
|
reviewing and making recommendations
to the board regarding our compensation policies and forms of compensation provided to our directors and officers;
|
|
•
|
reviewing and making recommendations
to the board regarding bonuses for our officers and other employees;
|
|
•
|
administering our incentive-compensation
plans for our directors and officers;
|
|
•
|
reviewing and assessing
the adequacy of the charter annually;
|
|
•
|
administering our share
option plans, if they are established in the future, in accordance with the terms thereof; and
|
|
•
|
such other matters that
are specifically delegated to the compensation committee by our board of directors from time to time.
|
A
copy of the compensation committee charter is available on our website at http://aehltd.com/Corporate-Governance.html. The information
contained on our website is not a part of this Annual Report.
Governance
and Nominating Committee. Our governance and nominating committee consists Shen Cheng Liang (Chair), Song Chungen and
Roy Tan. Our board of directors adopted a governance and nominating committee charter, providing for the following responsibilities
of the governance and nominating committee:
|
•
|
overseeing the process
by which individuals may be nominated to our board of directors;
|
|
•
|
identifying potential directors
and making recommendations as to the size, functions and composition of our board of directors and its committees;
|
|
•
|
reviewing candidates proposed
by our shareholders;
|
|
•
|
developing the criteria
and qualifications for the selection of potential directors; and
|
|
•
|
making recommendations
to the board of directors on new candidates for board membership.
|
A
copy of the governance and nominating committee charter is available on our website at http://aehltd.com/Corporate-Governance.html.
The information contained on our website is not a part of this Annual Report.
In
making nominations, the governance and nominating committee is required to submit candidates who have the highest personal and professional
integrity, who have demonstrated exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees
to the board, in collectively serving the long-term interests of the shareholders. In evaluating nominees, the governance and nominating
committee is required to take into consideration the following attributes, which are desirable for a member of the board: leadership,
independence, interpersonal skills, financial acumen, business experiences, industry knowledge, and diversity of viewpoints.
Code
of Ethics
In
May 2010, our board of directors adopted a code of ethics that applies to our directors, officers and employees. Our code of ethics
is available on our website at http://aehltd.com/Corporate-Governance.html.
Director
Independence
Our
Board is subject to the independence requirements of the Nasdaq Stock Market (“Nasdaq”). The Board undertakes periodic reviews
of director independence. During this review, the Board considers transactions and relationships between each director or any member
of his immediate family, the Company and its affiliates to determine whether any such relationships or transactions exist that are inconsistent
with a determination that the director is independent. Our Board has determined that all current members of the Audit Committee, the
Compensation Committee and the Nominating and Governance Committee (Song Chungen, Roy Tan Choon Kang, and Shen Cheng Liang) are ‘‘independent”
in accordance with the Nasdaq independence requirements. Our Chairman and Chief Executive Officer does not serve on any of the Board
committees. The majority of the Board is comprised of independent directors. The Board based these determinations primarily on a review
of the responses of the directors and executive officers to questions regarding employment and transaction history, affiliations and
family and other relationships and on discussions with the directors and the fact that no director previously reported a change in circumstances
that could affect his independence.
The
table below provides information as to the total number of employees at the end of the last three fiscal years. We reduced the number
of our employees in 2020 due to the reduction in the facilities that were being operated. We have no contracts or collective bargaining
agreements with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our
employees to be good.
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Number of Employees
|
|
|
579
|
|
|
|
431
|
|
|
|
297
|
|
See
Item 7 below.
ITEM 7.
|
MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS
|
The
following table sets forth certain information regarding beneficial ownership of our shares by each person who is known by us to beneficially
own more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of our named executive officers,
and all directors and officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment
powers with respect to the shares indicated. Our major shareholders do not have different voting rights than any other holder of our
shares.
Shares
which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other
similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown
in the table.
Beneficial
ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and
investment power. Except as otherwise indicated below, each beneficial owner holds voting and investment power directly. The percentage
of ownership is based on 4,4405,854 shares issued and outstanding as of April 20, 2021.
Name (1)
|
|
Number of
Shares
Beneficially
Owned
|
|
|
% of
Ownership
|
|
Huang Meishuang
|
|
|
13,750
|
|
|
|
|
*
|
Hen Man Edmund
|
|
|
2,411
|
|
|
|
|
*
|
Song Chungen
|
|
|
-
|
|
|
|
-
|
|
Roy Tan Choon Kang
|
|
|
-
|
|
|
|
-
|
|
Shen Cheng Liang
|
|
|
-
|
|
|
|
-
|
|
Alex Ng Man Shek
|
|
|
-
|
|
|
|
-
|
|
All directors and executive officers as a group (6 individuals)
|
|
|
16,161
|
|
|
|
|
*
|
Sound Treasure Limited
|
|
|
344,887
|
(2)
|
|
|
7.83
|
%
|
Weilai Zhang
|
|
|
977,755
|
(3)
|
|
|
22.19
|
%
|
*
Less than 1%
(1) Unless
otherwise indicated, the business address of each of the individuals is c/o Jinjiang Hengda Ceramics Co., Ltd.; Junbing Industrial
Zone; Anhai, Jinjiang City; Fujian Province, PRC.
(2) Huang
Jia Dong is the sole director and shareholder of Sound Treasure Limited. The mailing address for Sound Treasure is c/o c/o Jinjiang Hengda
Ceramics Co., Ltd.; Junbing Industrial Zone; Anhai, Jinjiang City; Fujian Province, PRC, Attn: Huang Jia Dong. Includes (i) an
aggregate of 344,887 shares owned by Mr. Huang’s spouse and children for which Mr. Huang may be deemed to be the beneficial
owner, which beneficial ownership Mr. Huang disclaims, and (ii) 217,204 shares owned by Sound Treasure Limited, an entity of
which Mr. Huang is the sole director and shareholder.
(3) The
mailing address for this individual is 2302 Bldg. 2 Renheng, Binhewan No. 88, Jinjiang District, Chengdu, China.
|
B.
|
Related Party Transactions
|
Mr. Huang Jia Dong,
the founder of Hengda and former Chairman and the former Chief Executive Officer and former director of the Company and Mr. Wong
Kung Tok, formerly one of the Company’s significant shareholders, provide working capital loans to the Company from time to time
during the normal course of its business. These loans amounted to RMB 35,057,000 and RMB 35,057,000 as of December 31, 2020 and
2019, respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law.
Mr. Huang and Mr. Wong are brothers-in-law.
As of December 31, 2020,
the Company had a loan of US$167,000 (equivalent to RMB 1,160,000) (2019: US$167,000 (equivalent to RMB 1,146,000)) payable to Sound
Treasure Limited, an affiliate of Mr. Huang Jia Dong and a shareholder of the Company. This loan is interest free, unsecured and
repayable on demand.
As of December 31, 2020,
the Company had a loan of US $20,000 (equivalent to RMB 131,000) (2019: nil) payable to Alex Ng Man Shek, a director and corporate secretary
of the Company. This loan is interest free, unsecured and repayable on demand.
|
C.
|
Interests of Experts and Counsel
|
Not
required.
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information.
|
See
Item 18 for our audited consolidated financial statements.
Legal
Proceedings
From
time to time in the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable.
The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result
in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able
to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and
estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages, and until
such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability;
and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. We have insurance
policies covering potential losses where such coverage is cost effective.
We
are not at this time involved in any legal proceedings.
Dividend
Policy
Our
Board of Directors has discretion to pay dividends. The form, frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual restrictions and other factors that our Board of Directors
may deem relevant. Although we have paid dividends in the past, there is no assurance that we will continue to pay dividends in the future.
On
February 25, 2014, we announced two semi-annual cash dividends of $0.0125 per share. The first dividend of $0.0125 per share was
paid on July 14, 2014 and the second of $0.0125 per share was paid on January 14, 2015, with record dates of June 13,
2014 and December 12, 2014, respectively. No dividends were paid subsequent to January 14, 2015. The Company does not anticipate
paying dividends in the near future.
We
are a holding company incorporated in the British Virgin Islands. We rely on dividends paid by our Hong Kong and Chinese subsidiaries
for our cash needs. The payment of dividends by entities organized in China is subject to limitations. If the Boards of our Chinese subsidiaries
decide to pay dividends in the future, these restrictions may impede our ability to pay dividends and/or the amount of dividends we could
pay. In addition, if our Chinese subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other distributions to us.
Except
as disclosed elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this Annual Report.
ITEM
9.
|
THE
OFFER AND LISTING
|
|
A.
|
Offer and Listing Details
|
The
following tables set forth, for the calendar quarters indicated and through April 2020, the quarterly high and low sale prices for
our shares, as reported on NASDAQ Stock Market, the OTC Bulletin Board or the NYSE Amex, as applicable. The OTC Bulletin Board market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
|
|
Shares
|
|
|
|
High
|
|
|
Low
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
|
2012
|
|
|
36.32
|
|
|
|
11.76
|
|
2013
|
|
|
32.48
|
|
|
|
15.84
|
|
2014
|
|
|
20.48
|
|
|
|
5.92
|
|
2015
|
|
|
11.36
|
|
|
|
6.00
|
|
2016
|
|
|
8.64
|
|
|
|
2.09
|
|
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.53
|
|
|
|
2.08
|
|
Second Quarter
|
|
|
2.26
|
|
|
|
1.32
|
|
Third Quarter
|
|
|
1.68
|
|
|
|
1.31
|
|
Fourth Quarter
|
|
|
2.39
|
|
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.69
|
|
|
|
1.43
|
|
Second Quarter
|
|
|
1.76
|
|
|
|
1.37
|
|
Third Quarter
|
|
|
1.87
|
|
|
|
1.32
|
|
Fourth Quarter
|
|
|
3.67
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.08
|
|
|
|
1.38
|
|
Second Quarter
|
|
|
1.76
|
|
|
|
0.80
|
|
Third Quarter
|
|
|
0.93
|
|
|
|
0.73
|
|
Fourth
|
|
|
1.06
|
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
0.90
|
|
|
|
0.27
|
|
Second Quarter
|
|
|
0.94
|
|
|
|
0.38
|
|
Third Quarter
|
|
|
3.12
|
|
|
|
1.83
|
|
Fourth
|
|
|
2.64
|
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
|
|
|
|
|
January
|
|
|
3.33
|
|
|
|
2.42
|
|
February
|
|
|
4.90
|
|
|
|
2.75
|
|
March
|
|
|
3.90
|
|
|
|
2.54
|
|
Not
Applicable.
Our
shares have been listed on the Nasdaq Capital Market beginning on October 15, 2020 under the symbol “AEHL” subsequent to
our publicly announced corporate name change to Antelope Enterprise Holdings Limited from China Ceramics Co., Ltd. Previously, our shares
have been listed on the NASDAQ Stock Market under the symbol “CCCL” since January 18, 2011. Our shares were listed on
the NASDAQ Capital Market from November 3, 2010 through January 17, 2011 and were relisted on the NASDAQ Capital Market on
March 23, 2016 following the listing transfer where it is trading now under the same symbol “CCCL.” Our shares were
listed on the NASDAQ Global Market from January 18, 2011 until March 22, 2016. The shares were previously quoted on the OTC
Bulletin Board from December 29, 2009 through November 2, 2010. Prior to December 29, 2009, our shares were traded on
NYSE Amex, under the symbols “HOL.” CHAC’s shares commenced to trade on December 17, 2007.
Not
Applicable.
Not
Applicable.
Not
Applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not
Applicable.
|
B.
|
Memorandum and Articles of Association
|
The
information required by Item 10.B of Form 20-F is included in the section titled “Description of Securities–Memorandum
and Articles of Association” in our Registration Statement on Form F-1 initially filed with the SEC on October 29, 2010
(File No.: 333-170237), which section is incorporated herein by reference.
The
Company did not enter into any other material contracts during our fiscal years 2019 or 2020.
Under
British Virgin Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls
or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
The
following summary of the material PRC and U.S. federal income tax consequences of the acquisition, ownership and disposition of Antelope
Enterprises shares, sometimes referred to as “securities,” is based upon laws and relevant interpretations thereof in effect
as of the date of this Annual Report, all of which are subject to change. This summary does not deal with all possible tax consequences
relating to an investment in Antelope Enterprises’ securities, such as the tax consequences under state, local and other tax laws.
For purposes of this discussion, references to “Antelope Enterprises,” “we,” “us” or “our”
refer only to Antelope Enterprises Co., Ltd.
PRC
Taxation
The
following discussion summarizes the material PRC income tax considerations relating to the acquisition, ownership and disposition of
Antelope Enterprises’ securities. You should consult with your own tax adviser regarding the PRC tax consequences of the acquisition,
ownership and disposition of Antelope Enterprises’ securities.
Resident
Enterprise Treatment
On
March 16, 2007, the Fifth Session of the Tenth National People’s Congress passed the Enterprise Income Tax Law of the PRC
(“EIT Law”), which became effective on January 1, 2008. Under the EIT Law, enterprises are classified as “resident
enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its implementing rules, enterprises established
outside China whose “de facto management bodies” are located in China are considered “resident enterprises” and
subject to the uniform 25% enterprise income tax rate on their worldwide taxable income. According to the implementing rules of
the EIT Law, “de facto management body” refers to a managing body that in practice exercises overall management control over
the production and business, personnel, accounting and assets of an enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice on the Issues Regarding Recognition of Enterprises that are
Domestically Controlled as PRC Resident Enterprises Based on the De Facto Management Body Criteria, which was retroactively effective
as of January 1, 2008. This notice provides that an overseas incorporated enterprise that is controlled by PRC domestic companies
will be recognized as a “tax-resident enterprise” if it satisfies all of the following conditions: (i) the senior management
responsible for daily production/business operations are primarily located in the PRC, and the location(s) where such senior management
execute their responsibilities are primarily in the PRC; (ii) strategic financial and personnel decisions are made or approved by
organizations or personnel located in the PRC; (iii) major properties, accounting ledgers, company seals and minutes of board meetings
and stockholder meetings, etc., are maintained in the PRC; and (iv) 50% or more of the board members with voting rights or
senior management habitually reside in the PRC.
Given
the short history of the EIT Law and lack of applicable legal precedent, it remains unclear how the PRC tax authorities will determine
the resident enterprise status of a company organized under the laws of a foreign (non-PRC) jurisdiction, such as Antelope Enterprises,
Success Winner and Stand Best. If the PRC tax authorities determine that Antelope Enterprises, Success Winner and/or Stand Best is a
“resident enterprise” under the EIT Law, a number of tax consequences could follow. First, Antelope Enterprises, Success
Winner and/or Stand Best could be subject to the enterprise income tax at a rate of 25% on their worldwide taxable income, as well as
PRC enterprise income tax reporting obligations. Second, the EIT Law provides that dividend income between “qualified resident
enterprises” is exempt from income tax. As a result, if Antelope Enterprises, Success Winner and Stand Best are each treated as
a “qualified resident enterprise,” all dividends paid from Hengda to Antelope Enterprises, through Success Winner and Stand
Best, should be exempt from the PRC enterprise income tax.
As
of the date of this Annual Report, there has not been a definitive determination by Antelope Enterprises, Success Winner, Stand Best
or the PRC tax authorities as to the “resident enterprise” or “non-resident enterprise” status of Antelope Enterprises,
Success Winner and Stand Best. However, since it is not anticipated that Antelope Enterprises, Success Winner and/or Stand Best would
receive dividends or generate other income in the near future, Antelope Enterprises, Success Winner and Stand Best are not expected to
have any income that would be subject to the 25% enterprise income tax on worldwide taxable income in the near future. Antelope Enterprises,
Success Winner and Stand Best will make any necessary tax payment if Antelope Enterprises, Success Winner or Stand Best (based on future
clarifying guidance issued by the PRC), or the PRC tax authorities, determine that Antelope Enterprises, Success Winner or Stand Best
is a resident enterprise under the EIT Law, and if Antelope Enterprises, Success Winner or Stand Best were to have income in the future.
Dividends
From Hengda
If
Stand Best is not treated as a resident enterprise under the EIT Law, then dividends that Stand Best receives from Hengda may be subject
to PRC withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% will
normally be applicable to investors that are “non-resident enterprises” which (i) have an establishment or place of
business inside the PRC, and (ii) have income in connection with their establishment or place of business that is sourced from the
PRC or is earned outside the PRC but has an actual connection with their establishment or place of business inside the PRC, and (B) a
PRC withholding tax at a rate of 10% will normally be applicable to dividends payable to non-resident enterprises that (i) do not
have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant
income is not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources
within the PRC.
As
described above, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign
jurisdictions on a case-by-case basis. Antelope Enterprises, Success Winner and Stand Best are holding companies and substantially all
of Antelope Enterprises’, Success Winner’s and Stand Best’s income may be derived from dividends. Thus, if Antelope
Enterprises, Success Winner and/or Stand Best are considered a “non-resident enterprise” under the EIT Law and the dividends
paid to Antelope Enterprises, Success Winner and/or Stand Best are considered income sourced within the PRC, such dividends received
may be subject to PRC withholding tax as described in the foregoing paragraph.
The
State Council of the PRC or a tax treaty between China and the jurisdiction in which the non-resident enterprise resides may reduce such
income or withholding tax, with respect to a non-resident enterprise. Pursuant to the Arrangement between the Mainland of China and the
Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income (the “PRC-Hong Kong Tax Treaty”), if the Hong Kong resident enterprise that is not deemed to be a conduit by the
PRC tax authorities owns more than 25% of the equity interest in a PRC resident enterprise, the 10% PRC withholding tax on the dividends
the Hong Kong resident enterprise receives from such PRC resident enterprise is reduced to 5%.
Antelope
Enterprises is a British Virgin Islands holding company, and it has a British Virgin Islands subsidiary (Success Winner), which owns
a 100% equity interest in a subsidiary in Hong Kong (Stand Best), which in turns owns a 100% equity interest in Hengda, a PRC company.
As a result, if Stand Best were treated as a “non-resident enterprise” under the EIT Law, then dividends that Stand Best
receives from Hengda (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding
tax, if the PRC-Hong Kong Tax Treaty were applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities
may deem Stand Best to be a conduit that is not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly,
if Success Winner were treated as a PRC “non-resident enterprise” under the EIT Law and Stand Best were treated as a PRC
“resident enterprise” under the EIT Law, then dividends that Success Winner receives from Stand Best (assuming such dividends
were considered sourced within the PRC) may be subject to a 10% PRC withholding tax. A similar situation may arise if Antelope Enterprises
were treated as a “non-resident enterprise” under the EIT Law, and Success Winner were treated as a “resident enterprise”
under EIT Law. Any such taxes on dividends could materially reduce the amount of dividends, if any, Antelope Enterprises could pay to
its shareholders.
As
of the date of this Annual Report, there has not been a definitive determination by Antelope Enterprises, Success Winner, Stand Best
or the PRC tax authorities as to the “resident enterprise” or “non-resident enterprise” status of Antelope Enterprises,
Success Winner and Stand Best. As described above, however, Hengda, Stand Best and Success Winner are not expected to pay any dividends
in the near future. Hengda, Stand Best and Success Winner will make any necessary tax withholding if, in the future, Hengda, Stand Best
or Success Winner were to pay any dividends and Hengda, Stand Best or Success Winner (based on future clarifying guidance issued by the
PRC), or the PRC tax authorities, determine that Stand Best, Success Winner or Antelope Enterprises is a non-resident enterprise under
the EIT Law.
Dividends
that Non-PRC Resident Investors Receive From Antelope Enterprises; Gain on the Sale or Transfer of Antelope Enterprises’ Securities
If
we are determined to be a resident enterprise under the EIT Law and dividends payable to (or gains realized by) Antelope Enterprises’
investors that are not tax residents of the PRC (“non-resident investors”) are treated as income derived from sources within
the PRC, then the dividends that the non-resident investors receive from us and any such gain derived by such investors on the sale or
transfer of Antelope Enterprises’ securities may be subject to income tax under the PRC tax laws.
Under
the PRC tax laws, PRC withholding tax at the rate of 10% is applicable to dividends payable to non-resident investors that are enterprises,
but not individuals, and that (i) do not have an establishment or place of business in the PRC or (ii) have an establishment
or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to
the extent that such dividends are deemed to be sourced within the PRC. Similarly, any gain realized on the transfer of Antelope Enterprises’
securities by such investors also is subject to 10% PRC income tax if such gain is regarded as income derived from sources within the
PRC.
The
dividends paid by us to such non-resident investors with respect to Antelope Enterprises’ securities, or gain such non-resident
investors may realize from the sale or transfer of Antelope Enterprises’ securities, may be treated as PRC-sourced income and,
as a result, may be subject to PRC tax at a rate of 10%. In such event, Antelope Enterprises may be required to withhold a 10% PRC tax
on any dividends paid to such non-resident investors. In addition, such non-resident investors in Antelope Enterprises’ securities
may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of Antelope Enterprises’
securities if such non-resident investors and the gain satisfy the requirements under the PRC tax laws. However, under the PRC tax laws,
Antelope Enterprises would not have an obligation to withhold PRC income tax in respect of the gains that such non-resident investors
(including U.S. enterprise investors) may realize from the sale or transfer of Antelope Enterprises’ securities. Also, if Antelope
Enterprises is determined to be a “resident enterprise,” its non-resident investors who are individuals may also be subject
to potential PRC individual income tax at a rate of 20% with respect to dividends received from Antelope Enterprises and/or gains derived
by them from the sale or transfer of Antelope Enterprises’ securities.
If
Antelope Enterprises were to pay any dividends in the future, and if Antelope Enterprises (based on future clarifying guidance issued
by the PRC), or the PRC tax authorities, determine that Antelope Enterprises must withhold PRC tax on any dividends payable by Antelope
Enterprises under the PRC tax laws, Antelope Enterprises will make any necessary tax withholding on dividends payable to its non-resident
investors. If non-resident investors as described under the PRC tax laws (including U.S. investors) realize any gain from the sale or
transfer of Antelope Enterprises’ securities and if such gain were considered as PRC-sourced income, such non-resident investors
would be responsible for paying the applicable PRC income tax on the gain from the sale or transfer of Antelope Enterprises’ securities.
As indicated above, under the PRC tax laws, Antelope Enterprises would not have an obligation to withhold PRC income tax in respect of
the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of Antelope Enterprises’
securities.
On
December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”) that reinforces the taxation of
certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 addresses indirect equity transfers
as well as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a non-resident
investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers
an equity interest in the PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located
in a country or jurisdiction where the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable,
the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant
information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the PRC tax authorities determine that such transfer is abusing forms of business organization
and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form.
A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply
with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a
transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject
the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its
application. Antelope Enterprises (or a non-resident investor) may become at risk of being taxed under Circular 698 and may be required
to expend valuable resources to comply with Circular 698 or to establish that Antelope Enterprises (or such non-resident investor) should
not be taxed under Circular 698, which could have a material adverse effect on Antelope Enterprises’ financial condition and results
of operations (or such non-resident investor’s investment in Antelope Enterprises).
In
addition, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.
On
February 3, 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect
Transfer of Properties by Non-tax Resident Enterprise, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly
different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular
698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding
company. In addition, Public Notice 7 provides clearer criteria the Circular 698 on how to assess reasonable commercial purposes and
has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market.
Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the
transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable
assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor,
or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer.
Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a direct transfer
of the equity interests in the PRC tax resident enterprise and other properties in China. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is
obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests in a PRC resident enterprise.
Both the transferor and the transferee may be subject to penalties under PRC tax laws if transferee fails to withhold the taxes and the
transferor fails to pay the taxes.
We
face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions
involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in
other non-PRC resident companies or other taxable assets by us. Our company and other non-resident enterprises in our group may be subject
to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions,
and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such
transactions, under Circular 698 and Public Notice 7. For the transfer of shares to our company by investors that are non-PRC resident
enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may
be required to expend valuable resources to comply with Circular 698 and Public Notice 7 to request the relevant transferors from whom
we purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident enterprises in our
group should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The
PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based
on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make
adjustments to the taxable income of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such
potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
Penalties
for Failure to Pay Applicable PRC Income Tax
A
non-resident investor in us may be responsible for paying PRC tax on any gain realized from the sale or transfer of Antelope Enterprises’
securities if such non-resident investor and the gain satisfy the requirements under the PRC tax laws, as described above.
According
to the EIT Law and its implementing rules, the PRC Individual Income Tax Law and its implementing rules, the PRC Tax Administration Law
(the “Tax Administration Law”) and its implementing rules, the Provisional Measures for the Administration of Withholding
of Enterprise Income Tax for Non-resident Enterprises (the “Administration Measures”) and other applicable PRC laws or regulations
(collectively the “Tax Related Laws”), where any gain derived by a non-resident investor from the sale or transfer of Antelope
Enterprises’ securities is subject to any income tax in the PRC, and such non-resident investor fails to file any tax return or
pay tax in this regard pursuant to the Tax Related Laws, such investor may be subject to certain fines, penalties or punishments, including
without limitation: (1) if the non-resident investor fails to file a tax return and present the relevant information in connection
with tax payments, the competent tax authorities shall order it to do so within the prescribed time limit and may impose a fine up to
RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000 to RMB 10,000; (2) if the non-resident investor fails
to file a tax return or fails to pay all or part of the amount of tax payable, the non-resident investor shall be required to pay the
unpaid tax amount payable, a surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue amount, beginning from the
day the deferral begins) and a fine ranging from 50% to 500% of the unpaid amount of the tax payable; (3) if the non-resident investor
fails to file a tax return and to pay the tax within the prescribed time limit according to the order by the PRC tax authorities, the
PRC tax authorities may collect and check information about the income receivable by the non-resident investor in the PRC from other
payers (the “Other Payers”) who will pay amounts to such non-resident investor, and send a “Notice of Tax Issues”
to the Other Payers to collect and recover the tax payable and overdue fines imposed on such non-resident investor from the amounts otherwise
payable to such non-resident investor by the Other Payers; (4) if the non-resident investor fails to pay the tax payable within
the prescribed time limit as ordered by the PRC tax authorities, a fine may be imposed on the non-resident investor ranging from 50%
to 500% of the unpaid tax payable, and the PRC tax authorities may, upon approval by the director of the tax bureau (or sub-bureau) of,
or higher than, the county level, take the following compulsory measures: (i) notify in writing the non-resident investor’s
bank or other financial institution to withhold from the account thereof for payment of the amount of tax payable, and (ii) detain,
seal off, or sell by auction or on the market the non-resident investor’s commodities, goods or other property in a value equivalent
to the amount of tax payable; or (5) if the non-resident investor fails to pay all or part of the amount of tax payable or surcharge
for overdue tax payment, and cannot provide a guarantee to the PRC tax authorities, the tax authorities may notify the frontier authorities
to prevent the non-resident investor or its legal representative from leaving the PRC.
United
States Federal Income Taxation
General
The
following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of Antelope
Enterprises’ securities.
The
discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of Antelope
Enterprises’ securities that is for U.S. federal income tax purposes:
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an individual citizen or
resident of the United States;
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a corporation (or other
entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United
States, any state thereof or the District of Columbia;
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an estate whose income
is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if (i) a U.S.
court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control
all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations
to be treated as a U.S. person.
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A
beneficial owner of our securities that is described above is referred to herein as a “U.S. Holder.” If a beneficial
owner of Antelope Enterprises’ securities is not described as a U.S. Holder and is not an entity treated as a partnership or other
pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material
U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S.
Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” its legislative history, Treasury regulations
promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or
differing interpretations, possibly on a retroactive basis.
This
discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder of Antelope Enterprises’
securities based on such holder’s individual circumstances. In particular, this discussion considers only holders that own and
hold Antelope Enterprises’ securities as capital assets within the meaning of Section 1221 of the Code. This discussion also
does not address the alternative minimum tax. In addition, this discussion does not address the U.S. federal income tax consequences
to holders that are subject to special rules, including:
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financial institutions or financial services entities;
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persons that are subject to the mark-to-market accounting
rules under Section 475 of the Code;
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governments or agencies or instrumentalities thereof;
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regulated investment companies;
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real estate investment trusts;
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certain expatriates or former long-term residents of
the United States;
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persons that actually or constructively own 5% or more
of Antelope Enterprises’ voting shares;
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persons that acquired Antelope
Enterprises’ securities pursuant to an exercise of employee share options, in connection with employee share incentive plans
or otherwise as compensation;
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persons that hold Antelope
Enterprises’ securities as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
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persons whose functional currency is not the U.S. dollar;
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controlled foreign corporations; or
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passive foreign investment companies.
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This
discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S.
tax laws, or, except as discussed herein, any tax reporting obligations of a holder of Antelope Enterprises’ securities. Additionally,
this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold Antelope Enterprises’
securities through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes)
is the beneficial owner of Antelope Enterprises’ securities, the U.S. federal income tax treatment of a partner in the partnership
will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution
made (or deemed made) in respect to the Antelope Enterprises’ securities and any consideration received (or deemed received) by
a holder in connection with the sale or other disposition of such securities will be in U.S. dollars.
Antelope
Enterprises has not sought, and will not seek, a ruling from the Internal Revenue Service, or “IRS,” or an opinion of counsel,
as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination
may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions
will not adversely affect the accuracy of the statements in this discussion.
THIS
DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ANTELOPE
ENTERPRISES’ SECURITIES. EACH HOLDER OF ANTELOPE ENTERPRISES’ SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT
TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ANTELOPE ENTERPRISES’ SECURITIES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.
Tax
Treatment of Antelope Enterprises After the Redomestication and the Business Combination
Section 7874(b) of
the Code generally provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant to
a plan or series of related transactions, substantially all of the assets of a corporation organized in the United States will be treated
as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares
of the acquired corporation, own at least 80% of either the voting power or the value of the stock of the acquiring corporation after
the acquisition. Under regulations promulgated under Section 7874, a warrant holder of either the acquired corporation or the acquiring
corporation generally is treated for this purpose as owning stock of the acquired corporation or the acquiring corporation, as the case
may be, with a value equal to the excess of the value of the shares underlying the warrant over the exercise price of the warrant. If
Section 7874(b) were to have applied to the Redomestication, then, among other things, Antelope Enterprises, as the surviving
entity, would have been subject to U.S. federal income tax on its worldwide taxable income following the Redomestication and the Business
Combination as if it were a domestic corporation.
After
the completion of the Business Combination, which occurred immediately after and as part of the same integrated transaction as the Redomestication,
the former stockholders of CHAC (including warrant holders treated as owning stock of CHAC pursuant to the regulations under Section 7874)
should have been considered as owning, by reason of owning (or being treated as owning) stock of CHAC, less than 80% of the voting power
and the value of the shares of Antelope Enterprises (including any warrants treated as shares of Antelope Enterprises pursuant to the
regulations promulgated under Section 7874). Accordingly, Section 7874(b) should not have applied to treat Antelope Enterprises
as a domestic corporation for U.S. federal income tax purposes. However, due to the absence of full guidance on how the rules of
Section 7874(b) applied to the transactions completed pursuant to the Redomestication and the Business Combination, this result
is not entirely free from doubt. If, for example, the Redomestication were ultimately determined for purposes of Section 7874(b) as
having occurred prior to, and separate from, the Business Combination for U.S. federal income tax purposes, the share ownership threshold
for applicability of Section 7874(b) generally would have been satisfied (and Antelope Enterprises would have been treated
as a domestic corporation for U.S. federal income tax purposes) because the former stockholders of CHAC (including warrant holders treated
as owning stock of CHAC), by reason of owning (or being treated as owning) stock of CHAC, would have owned all of the shares (including
any warrants treated as shares) of Antelope Enterprises immediately after the Redomestication. Although normal “step transaction”
tax principles supported the view that the Redomestication and the Business Combination should have been viewed together for purposes
of determining whether Section 7874(b) was applicable, because of the absence of guidance under Section 7874(b) directly
on point, this result is not entirely free from doubt. The balance of this discussion assumes that Antelope Enterprises has been and
will be treated as a foreign corporation for U.S. federal income tax purposes.
U.S.
Holders
Taxation
of Cash Distributions Paid on Shares
Subject
to the passive foreign investment company, or “PFIC,” rules discussed below, a U.S. Holder generally will be required
to include in gross income as ordinary income the amount of any cash dividend paid on the shares of Antelope Enterprises. A cash distribution
on such shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out
of current or accumulated earnings and profits of Antelope Enterprises (as determined for U.S. federal income tax purposes). Such dividend
generally will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect of dividends received
from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against
and reduce (but not below zero) the U.S. Holder’s adjusted basis in its shares in Antelope Enterprises. Any remaining excess generally
will be treated as gain from the sale or other taxable disposition of such shares.
With
respect to non-corporate U.S. Holders, such dividends may be subject to U.S. federal income tax at the lower applicable regular long-term
capital gains tax rate (see “—Taxation on the Disposition of Securities” below) provided that (1) the shares of
Antelope Enterprises are readily tradable on an established securities market in the United States or, in the event Antelope Enterprises
is deemed to be a Chinese “resident enterprise” under the EIT Law, Antelope Enterprises is eligible for the benefits of the
Agreement between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance
of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the “U.S.-PRC Tax Treaty,” (2) Antelope
Enterprises is not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year,
and (3) certain holding period requirements are met. Under published IRS authority, shares are considered for purposes of clause
(1) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges,
which presently include the NASDAQ Stock Market. Although Antelope Enterprises’ shares are currently listed and traded on the NASDAQ
Stock Market, it cannot guarantee that its shares will continue to be listed or traded on the NASDAQ Stock Market. U.S. Holders should
consult their own tax advisors regarding the availability of the lower rate for any dividends paid with respect to the shares of Antelope
Enterprises.
If
a PRC income tax applies to any cash dividends paid to a U.S. Holder on the shares of Antelope Enterprises, such tax may be treated
as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s
U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to such dividends,
such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United
States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors
regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.
Taxation
on the Disposition of Securities
Upon
a sale or other taxable disposition of the securities in Antelope Enterprises, and subject to the PFIC rules discussed below, a
U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S.
Holder’s adjusted tax basis in the securities.
The
regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income
tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S.
federal income tax at a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the U.S.
Holder’s holding period for the securities exceeds one year. The deductibility of capital losses is subject to various limitations.
If
a PRC income tax applies to any gain from the disposition of the securities in Antelope Enterprises by a U.S. Holder, such tax may be
treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against
such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax
applies to any gain, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered
a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should
consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC
Tax Treaty.
Additional
Taxes
U.S.
Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare
contribution tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition
of, Antelope Enterprises’ securities, subject to certain limitations and exceptions. Under regulations, in the absence of a special
election, such unearned income generally would not include income inclusions under the qualified electing fund, or QEF, rules discussed
below under “ Passive Foreign Investment Company Rules,” but would include distributions of earnings and profits from a QEF.
U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of Antelope
Enterprises’ securities.
Passive
Foreign Investment Company Rules
A
foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation,
including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value,
is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign
corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the
assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived
from the active conduct of a trade or business) and gains from the disposition of passive assets.
Based
on the composition (and estimated values) of the assets and the nature of the income of Antelope Enterprises and its subsidiaries during
its 2015 taxable year, Antelope Enterprises does not believe that it was treated as a PFIC for such year. However, because Antelope Enterprises
has not performed a definitive analysis as to its PFIC status for its 2015 taxable year, there can be no assurance in respect to its
PFIC status for such year. There also can be no assurance with respect to Antelope Enterprises’ status as a PFIC for its current
(2016) taxable year or any future taxable year.
If
Antelope Enterprises is determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a
U.S. Holder of Antelope Enterprises’ shares and, the U.S. Holder did not make a timely QEF election for Antelope Enterprises’
first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) shares, a QEF election along with a purging election
or a mark-to-market election, each as described below, such holder generally will be subject to special rules for regular U.S. federal
income tax purposes with respect to:
|
•
|
any gain recognized by
the U.S. Holder on the sale or other disposition of its shares; and
|
|
•
|
any “excess distribution”
made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater
than 125% of the average annual distributions received by such U.S. Holder in respect of the shares of Antelope Enterprises during
the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the shares).
|
Under
these rules:
|
•
|
the U.S. Holder’s
gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares;
|
|
•
|
the amount allocated to
the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period
in the U.S. Holder’s holding period before the first day of the first taxable year of Antelope Enterprises in which Antelope
Enterprises qualified as a PFIC will be taxed as ordinary income;
|
|
•
|
the amount allocated to
other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax
rate in effect for that year and applicable to the U.S. Holder; and
|
|
•
|
the interest charge generally
applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S.
Holder.
|
In
general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its shares
in Antelope Enterprises by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election,
a U.S. Holder generally will be required to include in income its pro rata share of Antelope Enterprises’ net capital gains (as
long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed,
in the taxable year of the U.S. Holder in which or with which Antelope Enterprises’ taxable year ends if Antelope Enterprises is
treated as a PFIC for that taxable year. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income
inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
The
QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder
generally makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely
filed U.S. federal income tax return for the taxable year to which the election relates. Retroactive QEF elections generally may be made
only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS.
In
order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from Antelope Enterprises. Upon
request from a U.S. Holder, Antelope Enterprises will endeavor to provide to the U.S. Holder, no later than 90 days after the request,
such information as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and
maintain a QEF election. However, there is no assurance that Antelope Enterprises will have timely knowledge of its status as a PFIC
in the future or of the required information to be provided.
If
a U.S. Holder has made a QEF election with respect to its shares in Antelope Enterprises, and the special tax and interest charge rules do
not apply to such shares (because of a timely QEF election for Antelope Enterprises’ first taxable year as a PFIC in which the
U.S. Holder holds (or is deemed to hold) such shares or a QEF election, along with a purge of the PFIC taint pursuant to a purging election,
as described below), any gain recognized on the sale or other taxable disposition of such shares generally will be taxable as capital
gain and no interest charge will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders of a QEF
generally are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case,
a subsequent distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend
to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included
in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to
property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares
in a QEF.
Although
a determination as to Antelope Enterprises’ PFIC status will be made annually, an initial determination that it is a PFIC generally
will apply for subsequent years to a U.S. Holder who held shares of Antelope Enterprises while it was a PFIC, whether or not it met the
test for PFIC status in those subsequent years. A U.S. Holder who makes the QEF election discussed above for Antelope Enterprises’
first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) shares in Antelope Enterprises, however, will not
be subject to the PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will
not be subject to the QEF inclusion regime with respect to such shares for any taxable year of Antelope Enterprises that ends within
or with a taxable year of the U.S. Holder and in which Antelope Enterprises is not a PFIC. On the other hand, if the QEF election is
not effective for each of the taxable years of Antelope Enterprises in which Antelope Enterprises is a PFIC and during which the U.S.
Holder holds (or is deemed to hold) shares in Antelope Enterprises, the PFIC rules discussed above will continue to apply to such
shares unless the holder files on a timely filed U.S. income tax return (including extensions) a QEF election and a purging election
to recognize under the rules of Section 1291 of the Code any gain that the U.S. Holder would otherwise recognize if the U.S.
Holder had sold its shares for their fair market value on the “qualification” date. The qualification date is the first day
of Antelope Enterprises’ tax year in which it qualifies as a QEF with respect to such U.S. Holder. The purging election can only
be made if such U.S. Holder held shares on the qualification date. The gain recognized by the purging election will be subject to the
special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging
election, the U.S. Holder will increase the adjusted tax basis in its shares by the amount of the gain recognized and will also have
a new holding period in the shares for purposes of the PFIC rules.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder may make
a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election
for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) shares in Antelope Enterprises and
for which Antelope Enterprises is determined to be a PFIC, such holder generally will not be subject to the PFIC rules described
above in respect to its shares as long as such shares continue to be treated as marketable stock. Instead, in general, the U.S. Holder
will include as ordinary income for each year that Antelope Enterprises is treated as a PFIC, the excess, if any, of the fair market
value of its shares at the end of its taxable year over the adjusted tax basis in its shares. The U.S. Holder also will be allowed to
take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its shares over the fair market value of its shares
at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market
election). The U.S. Holder’s adjusted tax basis in its shares will be adjusted to reflect any such income or loss amounts, and
any further gain recognized on a sale or other taxable disposition of the shares in a taxable year in which Antelope Enterprises is treated
as a PFIC generally will be treated as ordinary income. Special tax rules may apply if a U.S. Holder makes a mark-to-market election
for a taxable year after the U.S. Holder holds (or is deemed to hold) the shares and for which Antelope Enterprises is determined to
be a PFIC.
The
mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with
the Securities and Exchange Commission, including the NASDAQ Stock Market, or on a foreign exchange or market that the IRS determines
has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Although Antelope Enterprises’
shares are currently listed and traded on the NASDAQ Stock Market, it cannot guarantee that its shares will continue to be listed or
traded on the NASDAQ Stock Market. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to the shares of Antelope Enterprises under their particular circumstances.
If
Antelope Enterprises is a PFIC and, at any time, has a foreign subsidiary that is classified as a PFIC, a U.S. Holder of Antelope Enterprises’
shares generally should be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the
deferred tax and interest charge described above if Antelope Enterprises receives a distribution from, or disposes of all or part of
its interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. Upon request, Antelope
Enterprises will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request the information
that may be required to make or maintain a QEF election with respect to the lower- tier PFIC. However, there is no assurance that Antelope
Enterprises will have timely knowledge of the status of any such lower-tier PFIC or will be able to cause the lower-tier PFIC to provide
the required information. A mark-to-market election generally would not be available with respect to such a lower-tier PFIC. U.S. Holders
are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.
A
U.S. Holder that owns (or is deemed to own) shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621
(whether or not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax
return and provide such other information as may be required by the U.S. Treasury Department.
The
rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition
to those described above. Accordingly, U.S. Holders of shares in Antelope Enterprises should consult their own tax advisors concerning
the application of the PFIC rules to such shares under their particular circumstances.
Non-U.S.
Holders
Cash
dividends paid or deemed paid to a Non-U.S. Holder in respect to its securities in Antelope Enterprises generally will not be subject
to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business
within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed
base that such holder maintains or maintained in the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable
disposition of securities in Antelope Enterprises unless such gain is effectively connected with its conduct of a trade or business in
the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that
such holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of such sale or other disposition and certain other conditions are met (in which case, such
gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if
required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or
maintained in the United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income
tax rates applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income
tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes should apply to distributions made on the securities of Antelope
Enterprises within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions
of securities of Antelope Enterprises by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments
made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited
circumstances. In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its securities and adjustments
to that tax basis and whether any gain or loss with respect to such securities is long-term or short-term also may be required to be
reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets)
to report their interest in our securities.
Moreover,
backup withholding of U.S. federal income tax at a rate of 28% generally will apply to dividends paid on the securities of Antelope Enterprises
to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of securities of Antelope Enterprises
by a U.S. Holder (other than an exempt recipient), in each case who (a) fails to provide an accurate taxpayer identification number;
(b) is notified by the IRS that backup withholding is required; or (c) in certain circumstances, fails to comply with applicable
certification requirements.
A
Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of
its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s
or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required
information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding
and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
|
F.
|
Dividends and paying agents
|
Not
required.
Not
required.
Documents
concerning us that are referred to in this document may be inspected at Junbing Industrial Zone, Anhai, Jinjiang City, Fujian Province,
PRC. In addition, we file annual reports and other information with the Securities and Exchange Commission. We file annual reports on
Form 20-F and submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements
of Section 14 of the Exchange Act and our officers, directors and principal shareholders are exempt from the insider short-swing
disclosure and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information we file with the
Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call
the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request copies of
the documents upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that
contains reports and other information regarding registrants (including us) that file electronically with the Commission which can be
assessed at http://www.sec.gov.
|
I.
|
Subsidiary Information
|
Not
required.
ITEM 11.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Interest
Rate Risk
Our
exposure to interest rate risk primarily relates to our outstanding debts and interest income generated by excess cash, which is mostly
held in interest-bearing bank deposits. Interest-earning instruments carry a degree of interest rate risk. As of December 31, 2020,
our total outstanding loans for the continuing operations amounted to RMB nil_ ($ nil) with interest rates in the range of -% to -% per
annum. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in market interest rates.
Foreign
Currency Risk
During
2013 and 2014, we entered into certain foreign currency transaction agreements with an unaffiliated financial institution related to
the fluctuation in value of the Renminbi against the U.S. dollar, for investment and not hedging purposes. The Company recorded fair
value gains on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. However, in 2014, as the Renminbi depreciated
against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 54,977,000 for the year ended December 31, 2014
in connection with these agreements. We do not intend to enter into similar investment transactions in the future.
In
June 2014, we, our Chief Executive Officer and the Audit Committee set out to attempt to terminate the foreign currency transaction
agreements; and to reach a resolution that would preclude the depletion of our liquid assets by virtue of its having entered into the
foreign currency transaction agreements. Ultimately our Chief Executive Officer agreed to cause an entity controlled by him to assume
those agreements. On July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer,
executed an agreement (the “Novation”) with us and the financial institution that originated the foreign currency transaction
agreements pursuant to which Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial
institution) and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising
under the foreign currency transaction agreements. As a result, we will not be required to fund any losses related to these agreements,
and will neither suffer any future liabilities arising under those agreements nor enjoy any benefits arising under those agreements.
At
the time that each of the foreign currency transaction agreements was established with the financial institution, we were required to
deposit monies (the “Deposits”) with the financial institution that was the counterparty to the agreements. RMB 6.7 million
of a total of RMB 15.6 million in deposits that we made were funded on our behalf by Wong Kung Tok (who is the brother-in-law of our
Chief Executive Officer), and were included in a total of RMB 40.2 million in loans owing by us to Wong Kung Tok as of July 9, 2014.
In connection with the Novation discussed above, our Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok executed an agreement
with the Company on July 31, 2014 (the “Offset Agreement”) pursuant to which loans totaling RMB 20.7 million owed by
us to Wong Kung Tok were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure Limited, and in return the Company
agreed to forego any claim to RMB 15.6 million in Deposits under the foreign currency transaction agreements which will be transferred
to Sound Treasure Limited pursuant to the Novation.
The
Novation and the Offset Agreement became effective on July 31, 2014. As a result of these transactions, Sound Treasure Limited released
us from liabilities aggregating RMB 76.8 million and we transferred ownership of RMB 15.6 million in deposits held at the financial institution
from us to Sound Treasure Limited. As a result of the Novation and the Offset Agreement, approximately RMB 76.8 million in liabilities
on our books were extinguished in 2014 and the Capital Reserve account was increased by approximately RMB 61.3 million.
Except
as disclosed above, we do not currently have any significant foreign exchange exposure as our sales and purchases are predominantly denominated
in RMB. As of December 31, 2017, nearly all of our monetary assets and monetary liabilities were denominated in RMB except for certain
bank balances, bank borrowings and other payables which were denominated in US dollars. However, in the future, a proportion of our sales
may be denominated in other currencies as we expand into overseas markets. In such circumstances, we anticipate our primary market risk,
if any, to be related to fluctuations in exchange rates. Exchange rate risk may arise if we are required to use different currencies
for various aspects of its operations.
The
Renminbi’s exchange rate with the U.S. dollar and other currencies is affected by, among other things, changes in China’s
political and economic conditions. The exchange rate for conversion of Renminbi into foreign currencies is heavily influenced by intervention
in the foreign exchange market by the People’s Bank of China. From 1995 until July 2005, the People’s Bank of China
intervened in the foreign exchange market to maintain an exchange rate of approximately 8.3 Renminbi per U.S. dollar. On July 21,
2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S. dollar. However,
the Renminbi is restricted to a rise or fall of no more than 0.5% per day versus the U.S. dollar, and the People’s Bank of China
continues to intervene in the foreign exchange market to prevent significant short-term fluctuations in the Renminbi exchange rate. On
March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased to 2% in order to proceed
further with reform of the RMB exchange rate regime. These could result in a further and more significant floatation in the RMB’s
value against the U.S. dollar. The international reaction to the RMB revaluation has generally been positive. But, international pressure
continues to be placed on the Chinese government to adopt an even more flexible currency policy, which could result in significant fluctuation
of the RMB against the U.S. dollar.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. While we have no present intention
to enter into currency hedging transactions in the future. we may decide to enter into hedging transactions if we are exposed to foreign
currency risk. The availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully
hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert Renminbi into foreign currency.
ITEM 12.
|
DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES
|
Not
required.
ANTELOPE
ENTERPRISE HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Notes
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxation
|
|
|
|
|
|
(193,062
|
)
|
|
|
(9,445
|
)
|
|
|
(418,465
|
)
|
Adjustments for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of land use rights
|
|
13
|
|
|
|
-
|
|
|
|
|
|
|
|
108
|
|
Operating lease charge
|
|
21
|
|
|
|
13,082
|
|
|
|
12,187
|
|
|
|
-
|
|
Depreciation of property, plant and equipment
|
|
11
|
|
|
|
12
|
|
|
|
12
|
|
|
|
11,500
|
|
Amortization of prepaid expenses
|
|
|
|
|
|
-
|
|
|
|
2,677
|
|
|
|
-
|
|
Write down of inventories ( reversal of inventory provision)
|
|
14
|
|
|
|
(2,301
|
)
|
|
|
(56,766
|
)
|
|
|
55,973
|
|
Bad debt provision of trade receivables
|
|
|
|
|
|
150,268
|
|
|
|
68,661
|
|
|
|
316,438
|
|
Loss from assets devaluation
|
|
11 - 13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,021
|
|
Share based compensation
|
|
24
|
|
|
|
1,135
|
|
|
|
627
|
|
|
|
619
|
|
Interest expense on lease liability
|
|
21
|
|
|
|
2,746
|
|
|
|
315
|
|
|
|
-
|
|
Operating cash flows before working capital changes
|
|
|
|
|
|
(28,120
|
)
|
|
|
18,268
|
|
|
|
51,194
|
|
Decrease in inventories
|
|
|
|
|
|
115,395
|
|
|
|
18,817
|
|
|
|
8,347
|
|
Increase in trade receivables
|
|
|
|
|
|
(74,714
|
)
|
|
|
(21,570
|
)
|
|
|
(23,309
|
)
|
Decrease (Increase) in other receivables and prepayments
|
|
|
|
|
|
1,191
|
|
|
|
(40
|
)
|
|
|
(2,521
|
)
|
Decrease in trade payables
|
|
|
|
|
|
(15,826
|
)
|
|
|
(1,753
|
)
|
|
|
(36,755
|
)
|
Decrease in unearned revenue
|
|
|
|
|
|
(619
|
)
|
|
|
619
|
|
|
|
-
|
|
Increase (decrease) in taxes payable
|
|
|
|
|
|
2,922
|
|
|
|
(5,502
|
)
|
|
|
635
|
|
Decrease in accrued liabilities, other payables, and amounts
owed to related parties
|
|
|
|
|
|
(497
|
)
|
|
|
(2,552
|
)
|
|
|
(3,825
|
)
|
Cash generated from (used in) operations
|
|
|
|
|
|
(268
|
)
|
|
|
6,287
|
|
|
|
(6,234
|
)
|
Interest paid
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income tax paid
|
|
|
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) operating activities
|
|
|
|
|
|
(313
|
)
|
|
|
6,287
|
|
|
|
(6,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
-
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
2,785
|
|
|
|
(1,066
|
)
|
|
|
(1,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) investing activities
|
|
|
|
|
|
2,739
|
|
|
|
(1,066
|
)
|
|
|
(1,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment for lease liabilities
|
|
|
|
|
|
(14,841
|
)
|
|
|
(13,902
|
)
|
|
|
-
|
|
Insurance of share capital for equity financing
|
|
22
|
|
|
|
16,045
|
|
|
|
5,033
|
|
|
|
15,262
|
|
Warrants exercised
|
|
22
|
|
|
|
-
|
|
|
|
2,948
|
|
|
|
-
|
|
Advance from related parties
|
|
|
|
|
|
131
|
|
|
|
14
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) financing activities
|
|
|
|
|
|
1,335
|
|
|
|
(5,907
|
)
|
|
|
15,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS
|
|
|
|
|
|
3,761
|
|
|
|
(686
|
)
|
|
|
7,495
|
|
CASH & EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
8,212
|
|
|
|
9,016
|
|
|
|
2,328
|
|
EFFECT OF FOREIGN EXCHANGE RATE DIFFERENCES
|
|
|
|
|
|
371
|
|
|
|
(118
|
)
|
|
|
(807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH & EQUIVALENTS, END OF YEAR
|
|
|
|
|
|
12,344
|
|
|
|
8,212
|
|
|
|
9,016
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
ANTELOPE
ENTERPRISE HOLDINGS LIMITED AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Years Ended December 31, 2018, 2019 and 2020
Antelope
Enterprise Holdings Limited (“Antelope Enterprise” or the “Company”), formerly known as China Ceramics Co., Ltd
(“CCCL”), is a British Virgin Islands company operating under the BVI Business Companies Act (2004) with its shares listed
on the NASDAQ (“symbol: AEHL”). Its predecessor company, China Holdings Acquisition Corp. (“CHAC”), was incorporated
in Delaware on June 22, 2007, and was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset
acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business, that has
its principal operations in Asia. The Company has no operations and has no assets or liabilities of consequence outside its investments
in its operating subsidiaries. The head office of the Company is located at Junbing Industrial Zone, Jinjiang City, Fujian Province,
the People’s Republic of China (“PRC”).
On
November 20, 2009, CHAC merged with and into Antelope Enterprise, its wholly owned British Virgin Islands subsidiary, with Antelope Enterprise
surviving the merger (the “Redomestication”). On the same day, pursuant to the terms of a merger and stock purchase agreement
dated August 19, 2009 (the “acquisition agreement”), Antelope Enterprise acquired all of the outstanding securities of Success
Winner Limited (“Success Winner”) held by Mr. Wong Kung Tok in exchange for US$10.00 and 5,743,320 shares of Antelope Enterprise
(the “Success Winner Acquisition”). The total number of issued and outstanding shares of Antelope Enterprise immediately
after the acquisition was 8,950,171.
Prior
to the Success Winner Acquisition on November 20, 2009, neither CHAC nor Antelope Enterprise had an operating business.
Jinjiang
Hengda Ceramics Co., Ltd. (“Hengda”), which became the operating entity of Antelope Enterprise in connection with the Success
Winner Acquisition, was established on September 30, 1993 under the laws of PRC with 15% of its equity interest owned by Fujian Province
Jinjiang City Anhai Junbing Hengda Construction Material Factory (“Anhai Hengda”) and 85% owned by Chi Wah Trading Import
and Export Company (“Chi Wah”). Chi Wah is a sole proprietor under the laws of Hong Kong with its legal and equitable interest
solely owned by Mr. Wong Kung Tok. Anhai Hengda was owned by Mr. Wong Kung Tok’s family, which was considered an act-in-concert
party of Mr. Wong Kung Tok for accounting purposes.
Hengda
is principally engaged in the manufacture and sale of ceramic tiles used for exterior siding and for interior flooring and design in
residential and commercial buildings.
Hengda’s
owners reorganized the corporate structure in 2008 and 2009 (the “Hengda Reorganization” or the “Reorganization”),
as follows:
Stand
Best Creation Limited (“Stand Best”) was established on January 17, 2008 under the laws of Hong Kong with its paid-up share
capital being HK$1.00 divided into 1 ordinary share solely owned by Mr. Wong Kung Tok. Stand Best acquired 100% of Hengda’s equity
interest from Anhai Hengda and Chi Wah on April 1, 2008 at the consideration of RMB 58,980,000.
Success
Winner Limited (“Success Winner”) was incorporated in the British Virgin Islands on May 29, 2009 as a limited liability company.
Its paid-up and issued capital is US$1 divided into 1 ordinary share solely owned by Mr. Wong Kung Tok.
On
June 30, 2009, through a capitalization agreement between Mr. Wong Kung Tok and Stand Best, Stand Best capitalized a shareholder loan
due to Mr. Wong Kung Tok in the amount of HK$67.9 million (equivalent to approximately RMB 58.9 million) through the issuance of an aggregate
of 9,999 ordinary shares of HK$1.00 par value which Mr. Wong Kung Tok allotted to Success Winner.
On
the same date, Mr. Wong Kung Tok transferred his ownership of the remaining 1 ordinary share of Stand Best to Success Winner, thus making
Success Winner the sole parent company of Stand Best.
On
January 8, 2010, Hengda completed the acquisition of all voting equity interests of Jiangxi Hengdali Ceramic Materials Co., Ltd. (“Hengdali”
or the “Gaoan Facility”), located in Gaoan, Jiangxi Province (the “Hengdali Acquisition”). Hengdali manufactures
and sells ceramics tiles used for exterior siding and for interior flooring. In total, Hengda assumed loans of RMB 60.0 million and paid
cash consideration of RMB 185.5 million for the acquisition.
On
September 17, 2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan,
Fujian Province, 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials and interior
and exterior decoration materials. Fujian Hengdali had no operations since the incorporation date, and in August 2017, the Company disposed
of Fujian Hengdali for RMB 0 to a third-party. A loss on disposal of RMB 736,000 was recognized in other expenses for the year ended
December 31, 2017 relating to this transaction.
On
September 22, 2017, Success Winner incorporated a 100% owned subsidiary Vast Elite Limited (“Vast Elite”) in Hong Kong with
an initial registered capital of HKD1. Vast Elite is a holding company and had no material operations during the year ended December
31, 2019.
On
November 20, 2019, Vast Elite incorporated a 100% owned subsidiary Chengdu Future Talented Management and Consulting Co, Ltd (“Chengdu
Future”) in China. Chengdu Future is engaged in the business management and consulting services.
On
December 3, 2019, Success Winner incorporated a 100% owned subsidiary Antelope Enterprise (HK) Holdings Limited (“Antelope HK”)
in Hong Kong. Antelope HK only serves the purpose as a holding company.
On
May 5, 2020, Antelope HK incorporated a 100% owned subsidiary Antelope Holdings (Chengdu) Co., Ltd (“Antelope Chengdu”) in
China. Antelope Chengdu is engaged in the business management and consulting services.
Antelope
Enterprise Holdings Limited and its subsidiaries’ (the “Company”) corporate structure as of December 31, 2020 is as
follows:
Name
|
|
Place
and date of
incorporation or
establishment/
operations
|
|
Nominal
value of
issued ordinary
share
/registered
capital
|
|
Percentage
of
equity
attributable to the
Company
|
|
|
Principal
activities
|
|
|
|
|
|
|
Direct
|
|
|
Indirect
|
|
|
|
Success
Winner Limited
|
|
British
Virgin Islands,
May 29, 2009
|
|
US$
|
|
|
1
|
|
|
|
100
|
|
|
|
-
|
|
|
Investment
holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stand
Best Creation Limited
|
|
Hong
Kong,
January 17, 2008
|
|
HKD
|
|
|
10,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Investment
holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinjiang
Hengda Ceramics Co., Ltd.
|
|
PRC,
September 30, 1993
|
|
RMB
|
|
|
288,880,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Manufacture
and sale of
ceramic tiles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jiangxi
Hengdali Ceramic Materials Co., Ltd.
|
|
PRC,
May 4, 2008
|
|
RMB
|
|
|
55,880,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Manufacture
and sale of
ceramic tiles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vast
Elite Limited
|
|
Hong
Kong,
September 22, 2017
|
|
HKD
|
|
|
1
|
|
|
|
-
|
|
|
|
100
|
|
|
Trading
of building material
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chengdu
Future Talented Management and Consulting Co, Ltd (note 2)
|
|
PRC,
November 20, 2019
|
|
RMB
|
|
|
30,000,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Business
management and consulting services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antelope
Enterprise (HK) Holdings Limited
|
|
Hong
Kong,
December 3, 2019
|
|
HKD
|
|
|
10,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Investment
holding
|
Antelope
Holdings (Chengdu) Co., Ltd (note 3)
|
|
PRC,
May 9, 2020
|
|
USD
|
|
|
10,000,000
|
|
|
|
-
|
|
|
|
100
|
|
|
Business
management and consulting services
|
Note:
1.
The registered capital of Hengda, Hengdali, Vast Elite and Antelope HK had been fully paid up.
2.
Chengdu Future is allowed to pay the registered capital in full before November 12, 2049.
3.
Antelope Chengdu is allowed to pay the registered capital in full before April 13, 2060.
On
September 3, 2020, the Company effected a reverse stock split, every three issued and outstanding ordinary shares as of the effective
date will automatically be combined into one issued and outstanding share. Consequently, the reverse stock split will reduce the number
of outstanding ordinary shares of the Company from approximately 9.2 million shares to approximately 3.1 million shares, and the par
value per share will increase from $0.008 to $0.024. All outstanding stock options, warrants and other rights to purchase the Company’s
ordinary shares will be adjusted proportionately as a result of the reverse stock split. The consolidated financial statements as of
December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018 were retroactively restated to reflect this reverse
stock split.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”)
as issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable individual
International Financial Reporting Standards, International Accounting Standards and Interpretations issued by the IASB.
The
significant accounting policies that have been used in the preparation of these consolidated financial statements are summarized below.
These policies have been consistently applied to all the years presented unless otherwise stated. The adoption of new or amended IFRSs
and the impacts on the Company’s financial statements, if any, are disclosed in Note 3.
The
COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further
business slowdowns or shutdowns, depress demand for the Company’s business, and adversely impact its results of operations.
During the year ended December 31, 2020, the Company faced increasing uncertainties around its estimates of revenue collectability, accounts
receivable credit losses, impairment of inventory and long-lived assets. The Company expects uncertainties around its key accounting
estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Its estimates may
change as new events occur and additional information emerges, and such changes are recognized or disclosed in its consolidated financial
statements. Judgments made by management in the application of IFRSs that have significant effect on the financial statements and major
sources of estimation uncertainty are discussed in Note 4.
The
consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments that have
been measured at fair value.
The
preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect
the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions
are based on historical experience and various other factors believed to be reasonable under the circumstances, the results of which
form the basis of making the judgements about carrying amounts of assets and liabilities not readily apparent from other sources. Actual
results may differ from these estimates.
The
estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period
in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the
revision affects both current and future periods.
Judgments
made by management in the application of IFRSs that have significant effect on the financial statements and major sources of estimation
uncertainty are discussed in Note 4.
The
consolidated financial statements were approved and authorized for issue by the Board of Directors on April 28, 2021.
|
2.2
|
Basis
of consolidation
|
The
Success Winner Acquisition on November 22, 2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted
in the former owner of Success Winner obtaining effective operating and financial control of the combined entity. Prior to the acquisition,
Antelope Enterprise had no operating business. Accordingly, the acquisition does not constitute a business combination for accounting
purposes and is accounted for as a capital transaction. That is, the transaction is in substance a reverse recapitalization, equivalent
to the issuance of equity interests by Success Winner for the net monetary assets of Antelope Enterprise accompanied by a recapitalization.
The consolidated financial statements are a continuation of the financial statements of Success Winner. The assets and liabilities of
Antelope Enterprise are recognized at their carrying amounts at the date of acquisition with a corresponding credit to the consolidated
equity and no goodwill or other intangible assets are recognized. The equity of the combined entity recognized at the date of acquisition
represents the equity balances of Success Winner together with the deemed proceeds from the reverse recapitalization determined as described
above. However, the equity structure presented in the consolidated financial statements (number and values of equity instruments issued)
reflects the equity structure of the legal parent, Antelope Enterprise. Costs directly attributable to the transaction have been debited
to equity to the extent of net monetary assets received.
Success
Winner and its subsidiaries as a group is regarded as a continuing entity resulting from the Hengda Reorganization since the management
of all the entities which took part in the Reorganization were controlled by the same director and shareholder before and immediately
after the Reorganization. Immediately after the Reorganization, there was a continuation of the control over the entities’ financial
and operating policy decision and risk and benefits to the ultimate shareholders that existed prior to the Reorganization. Accordingly,
the reorganization has been accounted for as a reorganization under common control and the financial statements of Success Winner, Stand
Best and Hengda have been combined on the basis of merger accounting for all periods presented.
The
assets and liabilities of the combining entities or businesses are combined using the existing book values from the controlling party’s
perspective. No amount is recognized as consideration for goodwill or excess of the acquirer’s interest in the net fair values
of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of the common control combination.
The consolidated statement of comprehensive income includes the results of each of the combining entities or businesses from the earliest
date presented or the date of their incorporation/establishment or since the date when the combining entities or businesses first came
under common control, where this is a shorter period, regardless of the date of the common control combination.
The
Hengdali Acquisition on January 8, 2010 has been accounted for as a business combination using the acquisition method. Hengdali is a
subsidiary of the Company, and the Company has the power to govern the financial and operating policies which accompanies its shareholding
of 100% of the voting rights in Hengdali. Therefore, Hengdali as a subsidiary is fully consolidated from January 8, 2010, the date on
which control was transferred to the Company.
The
accounting for the Hengdali Acquisition under the acquisition method, treats the consideration transferred for the acquisition of Hengdali
as the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration
transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related
costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in this business combination
are measured initially at their fair values at the acquisition date.
The
excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill.
The
Company’s financial statements consolidate those of the Company and all of its subsidiaries as of December 31, 2020. Subsidiaries
are entities controlled by the Company. The Company controls an entity when it is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the
Company has power, only substantive rights (held by the Company and other parties) are considered. All subsidiaries have a reporting
date of December 31.
An
investment in a subsidiary is consolidated into the consolidated financial statements form the date that control commences until the
date that control ceases. Inter-company transactions, balances and unrealized gains or losses on transactions between group companies
are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted
by the Company.
|
2.3
|
Foreign
currency translation
|
The
financial statements are presented in RMB (to the nearest thousand), being the currency that best reflects the economic substance of
the underlying events and circumstances relevant to the Company. The Company’s operations are conducted through the subsidiaries
in the People’s Republic of China (“PRC”). The functional currency of these subsidiaries in China is Renminbi (“RMB”).
The functional currency of Antelope Enterprise and Antelope HK is the United State dollars (US$). The functional currency of Vast Elite
is Hong Kong dollar.
In
the individual financial statements of the consolidated entities, foreign currency transactions are translated into the functional currency
of the individual entity using the exchange rates prevailing at the dates of the transactions. At the reporting date, monetary assets
and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at that date. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the reporting date retranslation of monetary assets and
liabilities are recognized in profit or loss.
Non-monetary
items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the
fair value was determined and are reported as part of the fair value gain or loss. Non-monetary items that are measured in terms of historical
cost in a foreign currency are not retranslated.
In
the consolidated financial statements, all individual financial statements of foreign operations, originally presented in a currency
different from the Company’s presentation currency, have been converted into Renminbi. Assets and liabilities have been translated
into Renminbi at the closing rates at the reporting date. Income and expenses have been converted into Renminbi at the exchange rates
ruling at the transaction dates, or at the average rates over the reporting period provided that the exchange rates do not fluctuate
significantly. Any differences arising from this procedure have been recognized in other comprehensive income and accumulated separately
in the currency translation reserve in equity.
When
a foreign operation is sold, such exchange differences are reclassified from equity to profit or loss as part of the gain or loss on
sale.
The
translation of certain RMB amounts as of and for the year ended December 31, 2020 into US$ is included in these financial statements
solely for the convenience of readers and was made at the rate of RMB 6.53 to US$1.00, which was based on the noon buying rate on December
31, 2020 in the City of New York cable transfers of RMB as certified for customers purposes by the Federal Reserve Bank of New York.
Such translation should be construed as representation that RMB amounts could be converted, realized or settled into US$ at the rate
stated above or at any other rate.
|
2.4
|
Property,
plant and equipment
|
Leasehold
land and buildings for own use
When
a lease includes both land and building elements, the Company assesses the classification of each element as a finance or an operating
lease separately based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element
have been transferred to the Company, unless it is clear that both elements are operating leases in which case the entire lease is classified
as an operating lease. Specifically, the minimum lease payments (including any lump sum upfront payments) are allocated between the land
and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element
of the lease at the inception of the lease.
To
the extent the allocation of the lease payments can be made reliably, interest in leasehold land that is accounted for as an operating
lease is presented as “land use rights” in the consolidated statements of financial position and is amortized over the lease
term on a straight-line basis.
All
buildings are depreciated over their expected useful lives of 40 years.
Other
property, plant and equipment
Property,
plant and equipment are stated in the consolidated statements of financial position at cost less any accumulated depreciation and any
accumulated impairment losses.
Depreciation
is provided to write off the cost less their residual values over their estimated useful lives as follows, using the straight-line method:
Plant
and machinery
|
10
years
|
Motor
vehicles
|
10
years
|
Office
equipment
|
5
years
|
The
assets’ residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting
period, with the effect of any changes in estimate accounted for on a prospective basis.
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 recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated
with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is
derecognized. All other costs, such as repairs and maintenance, are charged to profit or loss during the financial period in which they
are incurred.
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.
The
gain or loss arising on retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of
the asset and is recognized in profit or loss.
Investment
properties are properties held to earn rentals or for capital appreciation.
Investment
properties are initially measured at historical cost, including any directly attributable expenditure. Subsequent to initial recognition,
investment properties are measured at their historical cost less any accumulated depreciation and any accumulated impairment losses.
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 recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated
with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is
derecognized. All other costs, such as repairs and maintenance, are charged to profit or loss during the financial period in which they
are incurred.
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.
The
gain or loss arising on retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of
the asset and is recognized in profit or loss.
An
investment property is derecognized upon disposal or when the investment property is permanently withdrawn from use or no future economic
benefits are expected from its disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between
the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the item is derecognized.
Upfront
payments made to acquire land held under an operating lease are stated at cost less accumulated amortization and any accumulated impairment
losses. Amortization is calculated on a straight line basis over the leasing period of 50 years. The carrying amounts of land used rights
were reclassified to right-of-use assets to conform to IFRS 16.
Goodwill
arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated
impairment losses, if any.
For
the purposes of impairment testing, goodwill is allocated to each of the Company’s cash-generating units, or groups of cash-generating
units, that is expected to benefit from the synergies of the combination.
A
cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently whenever there is indication
that the unit may be impaired. If some or all of the goodwill allocated to a cash-generating unit was acquired in a business combination
during the current annual period, that unit shall be tested for impairment before the end of the current annual period. If the recoverable
amount of the cash-generating unit is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount
of any goodwill allocated to the unit and then to the other assets of the unit on a pro – rata basis based on the carrying amount
of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for
goodwill is not reversed in subsequent periods.
On
disposal of the relevant cash generating unit, the attributable amount of goodwill is included in the determination of the profit or
loss on disposal.
Inventories
are carried at the lower of cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work
in progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overhead.
Net
realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and applicable
selling expenses.
When
inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue
is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an
expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction
in the amount of inventories recognized as an expense in the period in which the reversal occurs.
|
2.9
|
Cash
and cash equivalents
|
Cash
and cash equivalents include cash at bank and in hand, demand deposits with banks and short term highly liquid investments with original
maturities of three months or less that are readily convertible into known amounts of cash and which are subject to an insignificant
risk of changes in value. For the purpose of the statement of cash flows presentation, cash and cash equivalents include bank overdrafts
which are repayable on demand and form an integral part of the Company’s cash management.
|
2.10
|
Financial
instruments
|
Financial
assets and financial liabilities are recognized when a group entity becomes a party to the contractual provisions of the instrument.
Financial
assets and financial liabilities are initially measured at fair value except for trade debtors arising from contracts with customers
which are initially measured in accordance with HKFRS 15 since 1 January 2019. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities (other than financial assets or liabilities at fair value through
profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial
recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through
profit or loss are recognized immediately in profit or loss.
The
effective interest method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating
interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated
future cash receipts and payments (including all fees and points paid or received that form an integral part of the effective interest
rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or financial liability, or,
where appropriate, a shorter period, to the net carrying amount on initial recognition.
Interest
income which are derived from the Company’s ordinary course of business are presented as revenue.
Financial
assets
Classification
and subsequent measurement of financial assets (upon application of IFRS 9)
Financial
assets that meet the following conditions are subsequently measured at amortized cost:
•
the financial asset is held within a business model whose
objective is to collect contractual cash flows; and
•
the contractual terms give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount outstanding.
All
other financial assets are subsequently measured at fair value through profit or loss (“FVTPL”).
A
financial asset is classified as held for trading if:
•
it has been acquired principally for the purpose
of selling in the near term; or
•
on initial recognition it is a part of a portfolio of identified
financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or
•
it is a derivative that is not designated and effective
as a hedging instrument.
In
addition, the Company may irrevocably designate a financial asset that are required to be measured at the amortized cost as measured
at FVTPL if doing so eliminates or significantly reduces an accounting mismatch.
(i)
Amortized cost and interest income
Interest
income is recognized using the effective interest method for financial assets measured subsequently at amortized cost. Interest income
is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets
that have subsequently become credit-impaired. For financial assets that have subsequently become credit-impaired, interest income is
recognized by applying the effective interest rate to the amortized cost of the financial asset from the next reporting period. If the
credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income
is recognized by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the reporting
period following the determination that the asset is no longer credit impaired.
(ii)
Financial assets at FVTPL
Financial
assets that do not meet the criteria for being measured at amortized cost are measured at FVTPL.
Financial
assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognized in profit
or loss. The net gain or loss recognized in profit or loss includes any dividend or interest earned on the financial asset and is included
in the “other gains and losses” line item.
Impairment
of financial assets (upon application IFRS 9)
The
Company recognizes a loss allowance for expected credit loss (“ECL”) on financial assets which are subject to impairment
under IFRS 9 (including trade and other receivables, bank deposits and bank balances). ECLs are based on the difference between the contractual
cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation
of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms. The amount of ECL is updated at each reporting date to reflect changes in credit
risk since initial recognition.
General
approach
ECLs
are recognized in two measurement bases. For credit exposures for which there has not been a significant increase in credit risk since
initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months
(a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition,
a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default
(a lifetime ECL).
At
each reporting date, the Company assesses whether the credit risk on a financial instrument has increased significantly since initial
recognition. When making the assessment, the Company compares the risk of a default occurring on the financial instrument as at the reporting
date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable
and supportable information that is available without undue cost or effort, including historical and forward looking information.
The
Company considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Company
may also consider a financial asset to be in default when internal or external information indicates that the Company is unlikely to
receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Company. A financial
asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Financial
assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for
measurement of ECLs except for trade receivables which apply the simplified approach as detailed below.
Stage
1 — Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss
allowance is measured at an amount equal to 12-month ECLs
Stage
2 — Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired
financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs
Stage
3 — Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired)
and for which the loss allowance is measured at an amount equal to lifetime ECLs
Simplified
approach
For
trade receivables that do not contain a significant financing component or when the Company applies the practical expedient of not adjusting
the effect of a significant financing component, the Company applies the simplified approach in calculating ECLs. Under the simplified
approach, the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting
date.
The
Company assesses at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial
assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact
on the estimated future cash flows of the financial asset or the Company of financial assets that can be reliably estimated. Evidence
of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or
delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and
observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
Financial
assets carried at amortized cost
For
financial assets carried at amortized cost, the Company first assesses whether impairment exists individually for financial assets that
are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that
no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the
asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that
are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective
assessment of impairment.
The
amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value
of estimated future cash flows (excluding future credit losses that have not been incurred). The present value of the estimated future
cash flows is discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed
at initial recognition).
The
carrying amount of the asset is reduced through the use of an allowance account and the loss is recognized in profit or loss. Interest
income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is
no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Company.
If,
in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment
was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off
is later recovered, the recovery is credited to other expenses in the statement of profit or loss.
Classification
and subsequent measurement of financial assets (before application of IFRS 9 on January 1, 2018)
The
Company’s financial assets are loans and receivables. The classification depends on the nature and purpose of the financial assets
and is determined at the time of initial recognition.
Loans
and receivables
Loans
and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They
are initially recognized at fair value. Subsequent to initial recognition, loans and receivables (including trade and other receivables,
pledged bank deposits, fixed bank deposits with maturity periods over three months and bank balances) are measured at amortized cost
using the effective interest method, less any identified impairment losses).
Impairment
of financial assets
Financial
assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired
when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial
asset, the estimated future cash flows of the financial assets have been affected.
Objective
evidence of impairment could include:
•
significant financial difficulty of the issuer or
counterparty; or
•
breach of contract, such as a default or delinquency
in interest or principal payments; or
•
it becoming probable that the borrower will enter
bankruptcy or financial re-organization; or disappearance of an active market for that financial asset because of financial difficulties.
If
any such evidence exists, the impairment loss on trade receivables and other current receivables and other financial assets carried at
amortized cost is measured as the difference between the asset’s carrying amount and the present value of the estimated future
cash flows discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial
recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial
assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future
cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with
credit risk characteristics similar to the collective group.
If
in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after
the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not
result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in
prior years.
Impairment
losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of trade receivables
included within trade and other receivables and prepayments, whose recovery is considered doubtful but not remote. In this case, the
impairment losses for doubtful debts are recorded using an allowance account. When the Company is satisfied that recovery is remote,
the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating
to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance
account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in
profit or loss.
Derecognition
of financial assets
The
Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers
the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Company neither transfers
nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes
its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all
the risks and rewards of ownership of a transferred financial asset, the Company continues to recognize the financial asset and recognizes
a collateralized borrowing for the proceeds received.
On
derecognition of a financial asset measured at amortized cost, the difference between the asset’s carrying amount and the sum of
the consideration received and receivable is recognized in profit or loss.
Financial
liabilities and equity instruments
Debt
and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance
of the contractual arrangements and the definitions of a financial liability and an equity instrument.
Equity
instruments
An
equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.
Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs.
Effective
interest method
The
effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over
the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees
and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts)
through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial
recognition.
Interest
expense is recognized on an effective interest basis.
Financial
liabilities
Interest-bearing
borrowings are recognized initially at fair value less attributable transaction costs. They are subsequently stated at amortized cost
with any difference between the amount initially recognized and redemption value being recognized in profit or loss over the period of
the borrowings, together with any interest and fees payable, using the effective interest method.
Trade
and other payables are initially recognized at fair value. They are subsequently stated at amortized cost unless the effect of discounting
would be immaterial, in which case they are stated at cost.
Derecognition
The
Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire.
On
derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration
received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity
is recognized in profit or loss.
The
Company derecognizes a financial liability when, and only when, the Company’s obligations are discharged, cancelled or expire.
The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized
in profit or loss.
|
2.11
|
Derivative
financial instruments
|
Initial
recognition and subsequent measurement
The
Company uses derivative financial instruments, such as forward currency contracts, for investment purposes. Such derivative financial
instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured
at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair
value is negative.
Any
gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss.
Finance
leases refers to the situation that the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially
all the risks and rewards of ownership of the leased asset.
All
other leases are treated as operating leases. Where the Company has the use of assets under operating leases, payments made under the
leases are charged to profit or loss on a straight line basis over the lease terms except where an alternative basis is more representative
of the time pattern of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an
integral part of the aggregate net lease payments made. Contingent rental are charged to profit or loss in the accounting period in which
they are incurred. Operating leases were treated in accordance to IFRS 16 commencing January 1, 2019.
All
the leases of the Company are operating leases for the years ended December 31, 2020, 2019 and 2018.
|
2.13
|
Provisions
and contingencies
|
Provisions
for product warranties, legal disputes, onerous contracts or other claims are recognized when the Company has a present obligation (legal
or constructive) as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the
obligation and a reliable estimate of the amount of the obligation can be made. Where the time value of money is material, provisions
are stated at the present value of the expenditure expected to settle the obligation.
All
provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.
Where
it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation
is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose
existence will only be confirmed by the occurrence or non-occurrence of one or more future uncertain events not wholly within the control
of the Company are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
Ordinary
shares are classified as equity. Share capital is determined using the nominal value of shares that have been issued.
Any
transaction costs associated with the issuing of shares are deducted from share premium (net of any related income tax benefit) to the
extent they are incremental costs directly attributable to the equity transaction.
Revenue comprises the fair
value of the consideration received or receivable for the sale of goods, net of rebates and discounts. No such rebates were paid to distributors
since year 2013. Provided it is probable that the economic benefits will flow to the Company and the revenue and costs, if applicable,
can be measured reliably, revenue is recognized as follows:
Sales
of goods are recognized upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as the
time when the goods are delivered and the customer has accepted the goods. Once goods are accepted by a customer, there is no continuing
management involvement with the goods and the Company does not have the obligation to accept the return of the goods to the Company from
the customer.
Rental
income is recognized based upon our annual rental over the life of the lease under operating lease, using the straight-line method.
Interest
income is recognized on a time-proportion basis using the effective interest method.
|
2.16
|
Impairment
of non-financial assets
|
Impairment
testing is made on the Company’s goodwill at each reporting date. Property, plant and equipment and land use rights are tested
for impairment if there is any indication that the assets may be impaired at the balance sheet date.
If
any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable
amount.
Calculation
of recoverable amount
An
asset’s recoverable amount is the greater of an asset’s or cash-generating unit’s fair value less costs of disposal
and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset
does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest
group of assets that generates cash inflows independently (i.e. a cash-generating unit).
Recognition
of impairment losses
An
impairment loss is recognized in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs,
exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying
amount of any goodwill allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the carrying
amount of the other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced below its
individual fair value less costs of disposal (if measurable) or value in use (if determinable).
Reversal
of impairment losses
In
respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine
the recoverable amount. An impairment loss in respect of goodwill is not reversed.
A
reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss
been recognized in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are
recognized.
Retirement
benefits
The
employees of the Company’s PRC subsidiaries are required to participate in a central pension scheme operated by the local municipal
government. Contributions are recognized as an expense in profit or loss as employees render services during the year. The Company’s
obligation under these plans is limited to the fixed percentage contributions payable.
Share-based
employee remuneration
The
Company operates equity-settled share-based remuneration plans for its employees. None of the Company’s plans feature any options
for a cash settlement.
The
fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in the share-based payment
reserve within equity. The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account
the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally
entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account
the probability that the options will vest.
During
the vesting period, the number of share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized
in prior years is charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for
recognition as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized
as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based
payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s
shares. The equity amount is recognized in the share-based payment reserve until either the option is exercised (when it is transferred
to the share premium account) or the option expires (when it is released directly to retained earnings).
Borrowing
costs consist of interest and other costs incurred in connection with the borrowing of funds. Borrowing costs directly attributable to
the acquisition, construction or production of qualifying asset which necessarily takes a substantial period of time to get ready for
its intended use or sale are capitalized as part of the cost of that asset until such time as the assets are substantially ready for
their intended use or sale. Other borrowing costs are expensed when incurred.
|
2.19
|
Accounting
for income taxes
|
Income
tax comprises current tax and deferred tax.
Current
tax and movements in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to items
recognized in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive
income or directly in equity, respectively.
Current
tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the
reporting period, and any adjustment to tax payable in respect of previous years.
Deferred
tax is calculated using the liability method on temporary differences at the reporting date between the carrying amounts of assets and
liabilities in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable
temporary differences. Deferred tax assets are recognized for all deductible temporary differences, tax losses available to be carried
forward as well as other unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary
differences, will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.
Deferred
tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from initial recognition (other than
in a business combination) of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
Deferred
tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures,
except where the Company is able to control the reversal of the temporary differences and it is probable that the temporary differences
will not reverse in the foreseeable future.
Deferred
tax is calculated, without discounting, at the tax rates that are expected to apply in the period the liability is settled or the asset
realized, based on tax rate (and tax laws) that have been enacted or substantively enacted at the reporting date.
The
carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed
to the extent that it becomes probable that sufficient taxable profits will be available.
Additional
income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.
Current
tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax
assets are offset against current tax liabilities, and deferred tax assets are offset against deferred tax liabilities, if the Company
has the legally enforceable right to set off the recognized amounts and the following additional conditions are met:
|
(a)
|
in
the case of current tax assets and liabilities, the Company intends either to settle on a net basis, or to realize the asset and
settle the liability simultaneously; or
|
|
(b)
|
in
the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
|
|
(i)
|
the
same taxable entity; or
|
|
(ii)
|
different
taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to
be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to
settle the liabilities and realize the assets simultaneously.
|
|
2.20
|
Research
and development activities
|
Costs
associated with research activities are expensed in profit or loss as they incur. Costs that are directly attributable to development
activities are recognized as intangible assets if, and only if, all of the following have been demonstrated:
|
(i)
|
the
technical feasibility of completing the intangible asset so that the asset will be available for use or sale;
|
|
(ii)
|
the
intention to complete the intangible asset and use or sell it;
|
|
(iii)
|
the
ability to use or sell the intangible asset;
|
|
(iv)
|
how
the intangible asset will generate probable future economic benefits;
|
|
(v)
|
the
availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset;
and
|
|
(vi)
|
the
ability to measure reliably the expenditure attributable to the intangible asset during its development.
|
The
amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred from the date when the
intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognized,
development expenditure is recognized in profit or loss in the period in which it is incurred.
Subsequent
to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortization and accumulated impairment
losses, on the same basis as intangible assets that are acquired separately.
Gains
and losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying
amount of the asset, are recognized in profit or loss when the asset is derecognized.
The
Company identifies operating segments and prepares segment information based on the regular internal financial information reported to
the Chief Executive Officer and executive directors, who are the Company’s chief operating decision maker, for their decisions
about the allocation of resources to the Company’s business components and for their review of the performance of those components.
Business
segment
The
Company operates principally in the manufacturing and sale of medium to high-end ceramic tiles. The Chief Executive Officer and executive
directors regularly review the Company’s business as one business segment. The Company started business management and consulting
business in 2020, but this segment of business was insignificant in 2020.
Geographical
segment
The
business of the Company is engaged entirely in the PRC. The Chief Executive Officer and executive directors regularly review the Company’s
business as one geographical segment.
|
(a)
|
A
person, or a close member of that person’s family, is related to the Company if that person:
|
|
(i)
|
has
control or joint control over the Company;
|
|
(ii)
|
has
significant influence over the Company; or
|
|
(iii)
|
is
a member of the key management personnel of the Company.
|
|
(b)
|
An
entity is related to the Company if any of the following conditions applies:
|
|
(iv)
|
The
entity and the Company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to
the others).
|
|
(v)
|
One
entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the
other entity is a member).
|
|
(vi)
|
Both
entities are joint ventures of the same third party.
|
|
(vii)
|
One
entity is a joint venture of a third entity and the other entity is an associate of the third entity.
|
|
(viii)
|
The
entity is a post-employment benefit plan for the benefit of employees of either the Company or an entity related to the Company.
|
|
(ix)
|
The
entity is controlled or jointly controlled by a person identified in (a).
|
|
(x)
|
A
person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity
(or of a parent of the entity).
|
Close
members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their
dealings with the entity.
3.
|
CHANGES
IN ACCOUNTING POLICIES AND DISCLOSURES
|
|
3.1
|
Adoption
of new or amended IFRSs
|
The following amendments
to standards have been adopted by the Company for the first time for the financial year beginning on 1 January 2019.
IFRS
16 Lease
IFRS
16 will result in almost all leases being recognized on the statement of financial position, 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 recognized. The only exceptions are short-term and low-value leases. The accounting for lessors will not be significantly changed.
The standard will affect primarily the accounting for Company’s operating leases.
Management
has just commenced its assessment and have not yet determined to what extent its commitments will result in the recognition of an asset
and a liability for future payments and how this will affect the Company’s profit and classification of cash flows.
The
Company adopted IFRS 16 Leases retrospectively from January 1, 2019. In accordance with the transitional provision under IFRS 16, the
Company applied the simplified transition approach, and all right-of-use assets were measured at the amount of the lease liabilities
on adoption (adjusted for any prepaid or accrued lease expenses). Comparative figures for the 2018 financial year have not been restated.
On
adoption of IFRS 16, the Company recognized lease liabilities in relation to leases which had previously been classified as “operating
leases” under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments,
discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental
borrowing rate applied to the lease liabilities on January 1, 2019 was 5.75% (Note 21).
|
|
RMB’000
|
|
Operating
lease commitments disclosed as at December 31, 2018
|
|
|
19,695
|
|
Discounted
using weighted average incremental borrowing rate of 5.75%
|
|
|
15,496
|
|
Lease
liabilities recognized as at January 1, 2019
|
|
|
19,380
|
|
All
right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease
payments relating to that lease recognized in the consolidated statement of financial position as at December 31, 2018. The impact on
transition of IFRS 16 is summarized as below:
|
|
January
1,
2019
|
|
|
|
RMB’000
|
|
Right-of-use
assets
|
|
|
17,266
|
|
Lease
liability
|
|
|
(19,380
|
)
|
Retained
earnings
|
|
|
2,114
|
|
The IASB has issued a number of new IFRSs and
amendments to IFRSs that are first effective for the current accounting period of the Group. Of these, the following developments are
relevant to the Group’s financial statements:
|
(i)
|
Amendments to IFRS3,
Definition of a Business
|
|
(ii)
|
Amendments to the Conceptual Framework
for Financial Reporting, Amendments to references to the Conceptual Framework in IFRS Standards
|
|
(iii)
|
Amendments to IAS1
and IAS8, Definition of Material
|
|
(iv)
|
Amendments to IFRS7,
IAS39 and IFRS9, Interest Rate Benchmark Reform (Phase 1)
|
The application of the above new and amendments to
IFRSs in the current year has had no material effect on the Group’s financial performance and positions for the current and prior
years and/or on the disclosures set out in these consolidated financial statements.
|
3.2
|
Accounting
standards issued but not yet effective
|
Up to the date of issue of
these financial statements, the IASB has issued a number of amendments, new standards and interpretations which are not yet effective
for the year ended December 31, 2020 and which have not been adopted in these financial statements. These include the following which
may be relevant to the Group:
IFRS 17
|
|
Insurance Contracts (3)
|
|
|
|
Amendments to IFRS 10 and IAS 28
|
|
Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture (4)
|
|
|
|
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS
16
|
|
Interest Rate Benchmark Reform – Phase 2 (1)
|
|
|
|
Amendments to IFRS 3
|
|
Reference to the Conceptual Framework (2)
|
|
|
|
Amendments to IAS 16
|
|
Property, Plant and Equipment—Proceeds before Intended
Use (2)
|
|
|
|
Amendments to IAS 37
|
|
Onerous Contracts—Cost of Fulfilling a Contract (2)
|
|
|
|
Amendments to IAS 1
|
|
Classification of Liabilities as Current or Non-current (3)
|
|
|
|
Amendments to IFRS 4
|
|
Extension of the Temporary Exemption from Applying IFRS 9 (3)
|
|
|
|
Annual Improvements to IFRS Standards 2018-2020 Cycle
|
|
Amendments to IFRS 1 First-time Adoption of International Financial
Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture (2)
|
|
1.
|
Effective for annual
periods beginning on or after January 1, 2021
|
|
2.
|
Effective for annual
periods beginning on or after January 1, 2022
|
|
3.
|
Effective for annual
periods beginning on or after January 1, 2023
|
|
4.
|
The effective date
of the amendments has yet to be set by the IASB; however, earlier application of the amendments
is permitted
|
The management of the Company anticipate that the
application of all the new and amendments to IFRSs will have no material impact on the consolidated financial statements in the foreseeable
future.
4.
|
CRITICAL
ACCOUNTING ESTIMATES AND JUDGMENTS
|
The
preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions
that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure
of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment
to the carrying amount of assets or liabilities affected in future periods.
Estimates
and judgments 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
Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the
related actual results. The key sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting
period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below:
Useful
lives and impairment assessment of property, plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives
impacts the level of annual depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a
specific asset basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash
flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s
carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Investment
properties are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts
the level of annual depreciation expenses recorded. Investment properties are evaluated for possible impairment on a specific asset basis
or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by each
asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount
is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.
Impairment
loss recognized in respect of property, plant and equipment
As
of December 31, 2020, the net carrying amount of property, plant and equipment was approximately RMB 68,000 (2019: RMB 35,000). No impairment
loss was recognized against the original carrying amount of property, plant and equipment for the year ended December 31, 2020. The impairment
loss recognized for the years ended December 31, 2019 and 2018 was nil and RMB 75,907,000, respectively. Determining whether property,
plant and equipment are impaired requires an estimation of the recoverable amount of the property, plant and equipment. Such estimation
was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.
Impairment
loss recognized in respect of investment property
As
of December 31, 2020, the net carrying amount of investment property was nil (2019: nil). No impairment loss was recognized against the
original carrying amount of investment property for the year ended December 31, 2020. The impairment loss recognized for the years ended
December 31, 2019 and 2018 was approximately nil and RMB 4,858,000, respectively. Determining whether investment property are impaired
requires an estimation of the recoverable amount of the investment property. Such estimation was based on certain assumptions, which
are subject to uncertainty and might materially differ from the actual results.
Impairment
loss recognized in respect of land use rights
As
of December 31, 2020, the net carrying amount of land use rights was nil (2019: nil). No impairment loss was recognized against the original
carrying amount of land use rights for the year ended December 31, 2020. The carrying amounts of land used rights were reclassified to
right-of-use assets to conform to IFRS 16 during the year ended December 31, 2020. The impairment loss recognized for the years ended
December 31, 2019 and 2018 was nil and RMB 4,256,000, respectively. Determining whether land use rights are impaired requires an estimation
of the recoverable amount of the land use rights. Such estimation was based on certain assumptions, which are subject to uncertainty
and might materially differ from the actual results.
Impairment
of goodwill
Determining
whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated.
The value in use calculation requires the Company to estimate the future cash flows expected to arise from the cash-generating unit and
a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material impairment
loss may arise. No impairment was made on goodwill for the year ended December 31, 2020. The impairment made on goodwill for the years
ended December 31, 2019 and 2018 was nil.
Income
tax
The
Company has exposure to income taxes in the PRC. Significant judgment is required in determining the provision for income taxes. There
are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business.
The Company recognizes liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final
tax outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax
and deferred tax provisions in the period in which such determination is made. The carrying amounts of the Company’s income tax
payable as of December 31, 2020 and 2019 were nil.
Provision for deferred
tax
Determining income tax provisions
involves judgement on the future tax treatment of certain transactions. The management 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 recognized for tax losses not yet used and temporary deductible differences. As those deferred
tax assets can only be recognized to the extent that it is probable that future taxable profit will be available against which the unused
tax credits can be utilized, 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 recognized if it becomes probable that future taxable profits
will allow the deferred tax asset to be recovered.
Impairment
of trade receivables
The
Company’s management assesses the collectability of trade receivables. This estimate is based on the credit history of the Company’s
customers and the current market conditions. Management assesses the collectability of trade receivables at the balance sheet dates and
makes the provision, if any. The identification of doubtful debts requires the use of judgment and estimates. Judgment is required in
assessing the ultimate realization of these receivables, including the current creditworthiness, past collection history of each customer
and on-going dealings with them. Where the expectation is different from the original estimate, such difference will impact the carrying
value of trade and other receivables and doubtful debts expenses in the period in which such estimate has been changed. The net carrying
amounts of the Company’s trade receivables as of December 31, 2020 and 2019 were RMB 101,470,000 and RMB 177,023,000, respectively.
Net
realizable value of inventories
Net
realizable value of inventories is the management’s estimation of future selling price in the ordinary course of business, less
estimated costs of completion and selling expenses. These estimates are based on the current market condition and the historical experience
of selling products of a similar nature. It could change significantly as a result of various market factors. The net carrying amounts
of the Company’s inventories as of December 31, 2020 and 2019 were RMB 52,201,000 and RMB 165,296,000, respectively.
Share-based
payment transaction
The
Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the
date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate
valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate
inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions about
them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 24.
5.
|
REVENUE
AND OTHER INCOME
|
Revenue
comprises the fair value of the consideration received or receivable for the sale of goods. An analysis of the Company’s revenue
and other income is as follows:
|
|
For the years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of goods
|
|
|
182,989
|
|
|
|
327,581
|
|
|
|
498,189
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
49
|
|
|
|
73
|
|
|
|
36
|
|
Foreign exchange gain
|
|
|
124
|
|
|
|
74
|
|
|
|
450
|
|
Consulting income
|
|
|
7,249
|
|
|
|
109
|
|
|
|
-
|
|
Rent deposit refund
|
|
|
-
|
|
|
|
88
|
|
|
|
-
|
|
Other income
|
|
|
223
|
|
|
|
96
|
|
|
|
-
|
|
Gain on disposal of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rental income
|
|
|
14,286
|
|
|
|
14,196
|
|
|
|
14,151
|
|
|
|
|
21,931
|
|
|
|
14,636
|
|
|
|
14,637
|
|
Finance
costs comprise interest expense on the Company’s bank borrowings:
|
|
For
the years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Interest
on lease liability
|
|
|
2,748
|
|
|
|
315
|
|
|
|
-
|
|
Interest
on bank borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
Company’s loss before taxation is arrived at after charging:
|
|
For
the years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Cost
of inventories recognized as expense(1)
|
|
|
208,991
|
|
|
|
246,255
|
|
|
|
499,355
|
|
Depreciation
expenses
|
|
|
12
|
|
|
|
12
|
|
|
|
11,500
|
|
Amortization
of land use rights
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
Right-of-use
asset depreciation charge
|
|
|
13,082
|
|
|
|
12,187
|
|
|
|
-
|
|
Auditors’
remuneration
|
|
|
|
|
|
|
|
|
|
|
|
|
– Audit
fees
|
|
|
1,951
|
|
|
|
1,689
|
|
|
|
1,628
|
|
– Audit-related
fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,951
|
|
|
|
1,689
|
|
|
|
1,628
|
|
Directors’
remuneration
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries
and related cost
|
|
|
1,457
|
|
|
|
1,747
|
|
|
|
1,418
|
|
– retirement
scheme contribution
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
– share-based
payments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Key
management personnel (other than directors)
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries
and related cost
|
|
|
693
|
|
|
|
671
|
|
|
|
753
|
|
– retirement
scheme contribution
|
|
|
25
|
|
|
|
20
|
|
|
|
24
|
|
– share-based
payments
|
|
|
1,135
|
|
|
|
622
|
|
|
|
619
|
|
Research
and development personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries
and related cost
|
|
|
240
|
|
|
|
313
|
|
|
|
789
|
|
– retirement
scheme contribution
|
|
|
44
|
|
|
|
45
|
|
|
|
78
|
|
Other
personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
– salaries
and related cost
|
|
|
13,351
|
|
|
|
26,001
|
|
|
|
33,023
|
|
– retirement
scheme contribution
|
|
|
2,466
|
|
|
|
3,867
|
|
|
|
5,526
|
|
Total
employee benefit expenses
|
|
|
19,427
|
|
|
|
33,302
|
|
|
|
42,246
|
|
(1)
Cost of inventories recognized as expense included staff costs of RMB 7,554,000, RMB 19,867,000 and RMB 27,087,000,
retirement scheme contribution of RMB 1,590,660, RMB 2,734,411 and RMB 4,135,000, depreciation and amortization expense of RMB nil, RMB
nil and RMB 8,457,000, right-of-use asset depreciation/operating lease charges of RMB 13,082,071, RMB 12,503,000 and RMB 13,902,000,
and (reversal of ) / (reversal) write-down of inventories of RMB (2,301,000), RMB (56,766,000) and RMB 55,973,000 for the years ended
December 31, 2020, 2019, and 2018, which amounts are also included in the respective total amounts disclosed separately for each of these
types of expenses.
8.
|
INCOME
TAX EXPENSE/(CREDIT)
|
|
|
For
the years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Current
Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
Income Tax
|
|
|
33
|
|
|
|
29
|
|
|
|
-
|
|
Reversal
of income tax refundable
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
209
|
|
|
|
|
33
|
|
|
|
56
|
|
|
|
209
|
|
Reconciliation
between income tax expense (credit) and (loss) profit before taxation at applicable tax rates is as follows:
|
|
For
the years ended December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Loss
before taxation
|
|
|
(193,062
|
)
|
|
|
(9,445
|
)
|
|
|
(418,465
|
)
|
Tax
calculated at a tax rate of 25%
|
|
|
(48,266
|
)
|
|
|
(2,361
|
)
|
|
|
(104,616
|
)
|
Tax
effect on non-deductible expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Tax
effect on different tax rates of group entities operating in other jurisdictions
|
|
|
1,607
|
|
|
|
842
|
|
|
|
588
|
|
Impairment
losses on property, plant and equipment, and investment property that are not tax deductible
|
|
|
-
|
|
|
|
-
|
|
|
|
20,191
|
|
Impairment
losses on land use right that are not tax deductible
|
|
|
-
|
|
|
|
-
|
|
|
|
1,064
|
|
Inventory
provision (reversal) that are not tax deductible (taxable)
|
|
|
(575
|
)
|
|
|
(14,192
|
)
|
|
|
13,993
|
|
Bad
debts expense that are not tax deductible
|
|
|
37,567
|
|
|
|
17,165
|
|
|
|
79,057
|
|
Depreciation
and amortization adjustments that are not tax deductible
|
|
|
(14,757
|
)
|
|
|
(18,050
|
)
|
|
|
(15,890
|
)
|
Other
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
Lease
charge under IFRS 16
|
|
|
282
|
|
|
|
-
|
|
|
|
-
|
|
Net
operating losses not recognized to deferred tax assets
|
|
|
24,175
|
|
|
|
16,623
|
|
|
|
5,822
|
|
Tax
per financial statements
|
|
|
33
|
|
|
|
56
|
|
|
|
209
|
|
British
Virgin Islands Profits Tax
The
Company has not been subject to any taxation in this jurisdiction for the years ended December 31, 2020, 2019 and 2018.
Hong
Kong Profits Tax
The
subsidiary in Hong Kong is subject to tax charged on Hong Kong sourced income with a statutory tax rate of 8.25% for the years ended
December 31, 2020, 2019 and 2018. No Hong Kong profits tax has been provided as the Company has no assessable profit arising in Hong
Kong for the years ended December 31, 2020, 2019 and 2018.
PRC
Income Tax
The
subsidiaries in the PRC are subject to the enterprise income tax in accordance with “PRC Enterprise Income Tax Law” (“EIT
Law”), and the applicable income tax rate for the years ended December 31, 2020, 2019 and 2018 is 25%.
Under
the prevailing EIT Law and its relevant regulations, any dividends paid by the Company’s PRC subsidiaries to an overseas parent
made out of profits earned after January 1, 2008 to non-PRC corporate residents are subject to a 10% PRC dividend withholding tax, unless
reduced by tax treaties or arrangements. In addition, under the Sino-Hong Kong Double Tax Arrangement and its relevant regulations, a
qualified Hong Kong tax resident will be liable for withholding tax at the rate of 5% for dividend income derived from the PRC if the
Hong Kong tax resident is the “beneficial owner” and holds 25% or more of the equity interests of the PRC company. Deferred
tax liabilities have been provided for based on the expected dividends to be distributed from these subsidiaries in the foreseeable future
in respect of the profits generated since 1 January 2008.
Dividends
withholding tax represents tax charged/to be charged by the PRC tax authority on dividends distributed or intended to be distributed
by the Company’s subsidiaries in Mainland China during the years.
Deferred
tax (assets)/liabilities recognized in the consolidated statements of financial position and the movements during the years are as follows:
|
|
Dividend withholding
|
|
|
Inventory
|
|
|
Impairment
|
|
|
Bad debt
|
|
|
Net operating
|
|
|
Depreciation and
|
|
|
|
|
|
|
tax
|
|
|
provision
|
|
|
loss
|
|
|
allowance
|
|
|
loss
|
|
|
amortization
|
|
|
Total
|
|
Deferred tax arising from:
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
|
RMB’000
|
|
As of January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(209
|
)
|
|
|
(209
|
)
|
Charges/(credits) for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
209
|
|
|
|
209
|
|
As of December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Charges/(credits) for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Charges/(credits) for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
As of December 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hengda
and Hengdali, the Company’s PRC subsidiaries, have cumulative undistributed earnings of RMB 241,065,000, RMB 267,193,000 and RMB
329,503,000, as of December 31, 2020, 2019 and 2018, which are included in consolidated retained earnings. Deferred tax liabilities of
RMB nil has been recognized to the extent of distributable profits earned by Hengda as of December 31, 2020, 2019 and 2018. No provision
has been made for deferred taxes related to future repatriation of the remaining earnings, as the Company controls the dividend policy
of these PRC subsidiaries and it has been determined that it is probable that these profits will not be distributed in the foreseeable
future. If the Company were to distribute these cumulated earnings in the foreseeable future, the deferred tax liabilities of RMB 8,704,000,
RMB 13,360,000 and RMB 16,475,000 would be recognized as of December 31, 2020, 2019 and 2018.
For
the purpose of presentation in the consolidated statements of financial position, certain deferred tax assets and liabilities have been
offset. The following is the analysis of the deferred tax balances in the consolidated statements of financial position for financial
presentation purposes:
|
|
|
As
of December 31,
|
|
|
|
|
2020
RMB’000
|
|
|
|
2019
RMB’000
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
For the years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Loss attributable to holders of ordinary shares (RMB’000):
|
|
|
(193,095
|
)
|
|
|
(9,501
|
)
|
|
|
(418,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding used in computing basic
(loss)/earnings per share
|
|
|
2,940,265
|
|
|
|
2,025,222
|
|
|
|
1,497,679
|
|
Weighted average number of ordinary shares outstanding used in computing basic
and diluted (loss)/earnings per share
|
|
|
2,940,265
|
|
|
|
2,025,222
|
|
|
|
1,497,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic (RMB)
|
|
|
(65.67
|
)
|
|
|
(4.68
|
)*
|
|
|
(279.54
|
)*
|
Loss per share – diluted (RMB)
|
|
|
(65.67
|
)
|
|
|
(4.68
|
)
|
|
|
(279.54
|
)
|
|
•
|
Reflect
3 : 1 reverse stock split
|
Warrants
to purchase common stock are not included in the diluted loss per share calculations when their effect is antidilutive. For the year
ended December 31, 2020, about 960,894 of potential shares of common stock related to outstanding warrants and stock options were excluded
from the calculation of diluted net loss per share as such shares are antidilutive when there is a loss. There were 556,479 and 242,857
post-reverse split shares for the years ended December 31, 2019 and 2018.
|
|
As
of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
RMB’000
|
|
|
RMB’000
|
|
Carrying
amount
|
|
|
3,735
|
|
|
|
3,735
|
|
Accumulated
impairment losses
|
|
|
(3,735
|
)
|
|
|
(3,735
|
)
|
|
|
|
-
|
|
|
|
-
|
|
On
January 8, 2010, the Company consummated the acquisition of all voting equity interests of Hengdali (which is considered to be a CGU),
and the excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill.
The
Company performs a goodwill impairment test in year 2015 and was fully impaired at that time. At the end of the reporting period, the
Company assessed the recoverable amount of goodwill, and determined that no further impairment of goodwill was required for the 2016
year-end because it was written down to zero in 2015. The impairment loss on goodwill recognized during the year ended December 31, 2015
was RMB 3,735,000.
11.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
Buildings
RMB’000
|
|
|
Plant and
machinery
RMB’000
|
|
|
Motor
vehicles
RMB’000
|
|
|
Office
equipment
RMB’000
|
|
|
Total
RMB’000
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2019
|
|
|
349,630
|
|
|
|
746,042
|
|
|
|
4,225
|
|
|
|
1,886
|
|
|
|
1,101,783
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31,2019
|
|
|
349,630
|
|
|
|
746,042
|
|
|
|
4,225
|
|
|
|
1,886
|
|
|
|
1,101,783
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31, 2020
|
|
|
349,630
|
|
|
|
746,042
|
|
|
|
4,225
|
|
|
|
1,932
|
|
|
|
1,101,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2019
|
|
|
49,297
|
|
|
|
349,382
|
|
|
|
3,748
|
|
|
|
1,536
|
|
|
|
403,963
|
|
Depreciation charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
At December 31, 2019
|
|
|
49,297
|
|
|
|
349,382
|
|
|
|
3,748
|
|
|
|
1,547
|
|
|
|
403,974
|
|
Depreciation charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
12
|
|
At December 31, 2020
|
|
|
49,297
|
|
|
|
349,382
|
|
|
|
3,748
|
|
|
|
1,559
|
|
|
|
403,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January1, 2019
|
|
|
300,333
|
|
|
|
396,660
|
|
|
|
477
|
|
|
|
304
|
|
|
|
697,774
|
|
Impairment losses recognized in profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31, 2019
|
|
|
300,333
|
|
|
|
396,660
|
|
|
|
477
|
|
|
|
304
|
|
|
|
697,774
|
|
Impairment losses recognized in profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At December 31, 2020
|
|
|
300,333
|
|
|
|
396,660
|
|
|
|
477
|
|
|
|
304
|
|
|
|
697,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
35
|
|
At December 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
|
|
68
|
|
All
property, plant and equipment held by the Company are located in the PRC. The Company’s buildings are situated on land under medium-term
land use rights.
For
the buildings owned collectively by the Company and other three unrelated companies, the cost of buildings are stated according to the
amounts paid by the Company for its part of buildings, which represent the Company’s interests in the buildings. Buildings are
depreciated over their expected useful lives of 40 years. These buildings’ cost was RMB 2,913,000, and accumulated depreciation
of RMB 1,226,000 and RMB 1,226,000 as of December 31, 2020 and 2019, respectively, and an impairment allocation of RMB 1,687,000 and
RMB 1,687,000 as of December 31, 2020 and 2019, respectively. No property, plant and equipment was pledged to secure the Company interest-bearing
bank borrowings at December 31, 2020 and 2019.
At
the end of the reporting period, the Company assessed the recoverable amount of property, plant and equipment, and determined that carrying
amount was RMB nil (2019: RMB nil).
Loss
(gain) on disposal of property, plant and equipment in 2020, 2019 and 2018 was nil, nil, and nil.
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Cost
|
|
|
|
|
|
|
|
|
At December 31, 2020 and 2019
|
|
|
37,253
|
|
|
|
37,253
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
As of beginning of the year
|
|
|
(1,886
|
)
|
|
|
(1,886
|
)
|
Depreciation for the year
|
|
|
-
|
|
|
|
-
|
|
As of end of the year
|
|
|
(1,886
|
)
|
|
|
(1,886
|
)
|
|
|
|
|
|
|
|
|
|
Impairment for the year
|
|
|
|
|
|
|
|
|
As of beginning of the year
|
|
|
(35,367
|
)
|
|
|
(35,367
|
)
|
Impairment losses recognized in profit or loss transferred from property, plant
and equipment
|
|
|
-
|
|
|
|
-
|
|
As of end of the year
|
|
|
(35,367
|
)
|
|
|
(35,367
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
At December 31, 2020 and 2019
|
|
|
-
|
|
|
|
-
|
|
The
fair value of this investment property, which is the estimation of the depreciated replacement cost, as of December 31, 2020 was RMB
31,800,000. However, due to the absence of the real estate ownership certificate, the Company assessed the recoverable amount of investment
property, and determined that carrying amount was RMB nil at December 31, 2020 and 2019.
The
Company’s land use rights are under medium-term leases in the PRC, and are analyzed for reporting purposes as follows:
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Cost
|
|
|
|
|
|
|
|
|
At the beginning of the year
|
|
|
32,619
|
|
|
|
32,619
|
|
Impact on initial application of HKFRS 16 (Note 2.6)
|
|
|
(32,619
|
)
|
|
|
(32,619
|
)
|
At end of the year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
(4,649
|
)
|
|
|
(4,649
|
)
|
Amortization
|
|
|
-
|
|
|
|
-
|
|
Impact on initial application of HKFRS 16 (Note 2.6)
|
|
|
4,649
|
|
|
|
4,649
|
|
At end of the year
|
|
|
-
|
|
|
|
(4,649
|
)
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
At beginning of the year
|
|
|
(27,970
|
)
|
|
|
(27,970
|
)
|
Impairment for the year
|
|
|
-
|
|
|
|
-
|
|
Impact on initial application of HKFRS 16 (Note 2.6)
|
|
|
27,970
|
|
|
|
27,970
|
|
|
|
|
|
|
|
|
|
|
At end of the year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
|
At December 31, 2020 and 2019
|
|
|
-
|
|
|
|
-
|
|
No
land use rights of the Company were pledged to the banks as securities for the Company’s interest-bearing bank borrowings at December
31, 2020 and 2019. At the end of the reporting period, the Company assessed the recoverable amount of land use right, and determined
that carrying amount was RMB nil (2019: nil). The carrying amounts of land used rights were reclassified to right-of-use assets to conform
to IFRS 16.
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Raw materials
|
|
|
6,281
|
|
|
|
14,776
|
|
Work in progress
|
|
|
1,040
|
|
|
|
1,103
|
|
Finished goods
|
|
|
44,880
|
|
|
|
149,417
|
|
|
|
|
52,201
|
|
|
|
165,296
|
|
The
analysis of the amount of inventories recognized as an expense and included in profit or loss is as follows:
|
|
For the years ended December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Carrying amount of inventories sold
|
|
|
211,292
|
|
|
|
303,021
|
|
|
|
443,382
|
|
Write down (reversal) of inventories (included in cost of sales)
|
|
|
(2,301
|
)
|
|
|
(56,766
|
)
|
|
|
55,973
|
|
|
|
|
208,991
|
|
|
|
246,255
|
|
|
|
499,355
|
|
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Trade receivables
|
|
|
747,247
|
|
|
|
672,533
|
|
Less: provision for bad debt allowance
|
|
|
(645,777
|
)
|
|
|
(495,510
|
)
|
|
|
|
101,470
|
|
|
|
177,023
|
|
The
Company’s trade receivables are denominated in Renminbi and non-interest bearing. As of December 31, 2020 and 2019, the Company
accrued RMB 645,777,000 and RMB 495,510,000, respectively, as a provision for bad debt related to the amount of outstanding trade receivables
that did not conform with the Company’s credit policy.
All
of the trade receivables are expected to be recovered within one year. An aging analysis of the Company’s trade receivables, based
on the invoice date, is as follows:
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Within 90 days
|
|
|
34,309
|
|
|
|
35,846
|
|
Between 3 and 6 months
|
|
|
52,477
|
|
|
|
72,241
|
|
More than 6 months
|
|
|
14,684
|
|
|
|
68,936
|
|
|
|
|
101,470
|
|
|
|
177,023
|
|
An
aging analysis of trade receivables that were neither past due nor impaired or past due but not impaired, is as follows:
|
|
|
|
|
|
|
|
Past
due but not impaired
|
|
|
|
|
|
|
|
|
Neither
past due nor
impaired
RMB’000
|
|
|
Less
than
30 days
RMB’000
|
|
|
31
to 120 days
RMB’000
|
|
|
Over
120
days
RMB’000
|
|
|
Sub-total
RMB’000
|
|
|
Total
RMB’000
|
|
December
31, 2019
|
|
|
|
141,177
|
|
|
|
35,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,023
|
|
December
31, 2020
|
|
|
|
67,161
|
|
|
|
34,309
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,470
|
|
Receivables
that were neither past due nor impaired relate to a large number of customers for whom there was no recent history of default. All amounts
are short-term. The Company does not hold any collateral over these receivables.
The
net carrying value of trade receivables is considered a reasonable approximation of fair value. As of December 31, 2020, the Company
is exposed to certain credit risks as 15% and 45% of the total trade receivables were due from the Company’s largest and the five
largest customers, respectively. As of December 31, 2019, the Company is exposed to certain credit risks as 13% and 42% of the total
trade receivables were due from the Company’s largest and the five largest customers, respectively.
16.
|
OTHER
RECEIVABLES AND PREPAYMENTS
|
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Prepaid expense
|
|
|
640
|
|
|
|
2,036
|
|
Security deposit
|
|
|
121
|
|
|
|
-
|
|
Other receivable
|
|
|
84
|
|
|
|
-
|
|
|
|
|
845
|
|
|
|
2,036
|
|
All
of the other receivables and prepayments are expected to be recovered or recognized as expense within one year. The net carrying value
of these balances is considered a reasonable approximation of fair value.
17.
|
CASH
AND BANK BALANCES
|
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Cash on hand
|
|
|
8
|
|
|
|
18
|
|
Cash at banks
|
|
|
12,336
|
|
|
|
8,194
|
|
Cash and bank balances
|
|
|
12,344
|
|
|
|
8,212
|
|
Cash
and bank balances are denominated in the following currencies:
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Renminbi
|
|
|
1,067
|
|
|
|
784
|
|
Hong Kong dollars
|
|
|
77
|
|
|
|
6
|
|
US dollars
|
|
|
11,200
|
|
|
|
7,422
|
|
|
|
|
12,344
|
|
|
|
8,212
|
|
Bank
balances denominated in Renminbi are deposited with banks in the PRC and are not freely convertible to foreign currencies. The conversion
of these RMB denominated balances into foreign currencies is subject to the foreign exchange control rules and regulations promulgated
by the PRC Government.
Bank
balances denominated in US dollars are mainly held in bank accounts in Hong Kong and the United States of America.
Cash
at banks and bank deposits comprise cash held by the Company and short-term bank deposits with an original maturity of three months or
less. The deposits carry interest at prevailing market rates.
As
of December 31, 2020, the Company has restricted cash of RMB nil (2019: 2,785,000), of which nil (2019: nil) was used as collateral for
the Company’s bank borrowings, and nil was used as collateral for the Company’s financial derivatives (2019: nil). They were
temporarily not available for general use by the Company.
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Trade payables
|
|
|
6,750
|
|
|
|
22,577
|
|
Trade
payables are denominated in Renminbi, non-interest bearing and generally settled within 120-day terms. All of the trade payables are
expected to be settled within one year. The carrying value of trade payables is considered to be a reasonable approximation of fair value.
19.
|
ACCRUED
LIABILITIES AND OTHER PAYABLES
|
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Deposits received from distributors
|
|
|
16,200
|
|
|
|
16,200
|
|
Accrued salary
|
|
|
871
|
|
|
|
1,208
|
|
Accrued rent, electricity and water
|
|
|
1,352
|
|
|
|
1,563
|
|
Accrued other taxes
|
|
|
1,042
|
|
|
|
1,027
|
|
Others
|
|
|
3,381
|
|
|
|
3,344
|
|
|
|
|
22,846
|
|
|
|
23,342
|
|
Accrued
liabilities and other payables are denominated in the following currencies:
|
|
As of December 31,
|
|
|
|
2020
‘000
|
|
|
2019
‘000
|
|
In Renminbi
|
|
|
22,846
|
|
|
|
23,342
|
|
In US dollars
|
|
|
-
|
|
|
|
-
|
|
Deposits
received represent deposits from the Company’s distributors. The Company usually requests a deposit from RMB 400,000 to RMB 1,000,000
from new distributors upon signing a distributorship agreement as security for the performance of their obligations under the distributorship
agreement.
Accrued
liabilities consist mainly of accrued rental, wages and utility expenses.
The
carrying value of accrued liabilities and other payables is considered to be a reasonable approximation of fair value.
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
VAT
|
|
|
1,188
|
|
|
|
92
|
|
Income tax
|
|
|
18
|
|
|
|
29
|
|
Property tax
|
|
|
718
|
|
|
|
719
|
|
Other
|
|
|
10
|
|
|
|
2
|
|
|
|
|
1,934
|
|
|
|
842
|
|
21.
|
RIGHT-OF-USE
ASSETS AND LEASES LIABILITIES
|
|
(a)
|
Amounts
recognized in the consolidated statement of financial position
|
The
carrying amounts of right-of-use assets for lease are as below:
Net
book amount at January 1, 2019
|
RMB
17,266
|
|
|
Net
book amount at December 31, 2019
|
RMB 5,078
|
|
|
Net
book amount at January 1, 2020
|
RMB 5,078
|
|
|
Net
book amount at December 31, 2020
|
RMB
58,458
|
The
lease liabilities are as below:
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Lease liabilities - current
|
|
|
13,431
|
|
|
|
5,793
|
|
Lease liabilities – noncurrent
|
|
|
46,728
|
|
|
|
-
|
|
|
|
|
60,159
|
|
|
|
5,793
|
|
Contractual
undiscounted cash flows for the leases:
|
As of December 31, 2020
|
|
|
Within
one year
RMB’000
|
|
|
|
One
to five years
RMB’000
|
|
|
|
Total
contractual
undiscounted
cash flow
RMB’000
|
|
|
15,478
|
|
|
|
49,469
|
|
|
|
64,947
|
|
(b)
Amounts recognized in the consolidated income statement
The
consolidated income statement shows the following amounts relating to leases:
|
|
Year ended December 31, 2020
|
|
Depreciation charge of right-of-use assets
|
|
|
13,082
|
|
Interest expense
|
|
|
2,746
|
|
|
|
Year ended December 31, 2019
|
|
Depreciation charge of right-of-use assets
|
|
|
12,187
|
|
Interest expense
|
|
|
315
|
|
The
total cash outflow in financing activities for leases during the year ended December 31, 2020 and 2019 was RMB 14,841,000 and RMB 13,902,000.
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
Number
of shares
|
|
|
US$
‘000
|
|
|
Number
of shares
|
|
|
US$
‘000
|
|
Authorized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
January 1 and December 31
|
|
|
|
50,000,000
|
|
|
|
1,200
|
|
|
|
50,000,000
|
|
|
|
1,200
|
|
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Number
of shares
|
|
|
RMB
‘000
|
|
|
Number
of shares
|
|
|
RMB
‘000
|
|
Issued:
|
|
|
3,674,370
|
|
|
|
591
|
|
|
|
2,435,662
|
*
|
|
|
397
|
|
Outstanding and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of US$0.008 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1
|
|
|
2,435,662
|
|
|
|
397
|
|
|
|
5,678,703
|
|
|
|
306
|
|
Issuance of new shares for equity financing
|
|
|
1,156,251
|
|
|
|
181
|
|
|
|
1,200,000
|
|
|
|
67
|
|
Warrants exercised into shares
|
|
|
-
|
|
|
|
-
|
|
|
|
333,420
|
|
|
|
19
|
|
Equity compensation
|
|
|
82,457
|
|
|
|
13
|
|
|
|
94,862
|
|
|
|
5
|
|
At December 31
|
|
|
3,674,370
|
|
|
|
591
|
(2)
|
|
|
2,435,662
|
*
|
|
|
397
|
(1)
|
(1)
Equivalent to US$58,000
(2)
Equivalent to US$91,000
*
reflect 3:1 reverse stock split
On
September 3, 2020, the Company effected a reverse stock split, every three issued and outstanding ordinary shares as of the effective
date will automatically be combined into one issued and outstanding share. Consequently, the reverse stock split will reduce the number
of outstanding ordinary shares of the Company from approximately 9.2 million shares to approximately 3.1 million shares, and the par
value per share will increase from $0.008 to $0.024. All outstanding stock options, warrants and other rights to purchase the Company’s
ordinary shares will be adjusted proportionately as a result of the reverse stock split.
On
April 19, 2018, the Company entered into a securities purchase agreement with certain individual investors relating to a registered direct
offering, issuance and sale of an aggregate of 770,299 pre-reverse split of its shares, at a purchase price of US$1.56 per share (pre-reverse
split). The net proceeds to the Company from the Offering were RMB 7,952,000 (US$1.2 million). The Offering closed on April 23, 2018.
Proceeds from the Offering is used for working capital and general corporate purposes. There were no discounts or brokerage fees associated
with this Offering.
On
November 29, 2018, the Company announced and on December 4, 2018, the Company closed a public offering of its common shares (and common
stock warrants) with net proceeds of RMB 7,332,000 (US$1.07 million). The gross proceeds was RMB 8,732,000 (US$1.27 million) and related
commission and legal expense was RMB 1,400,000 (US$203,600). The Company intends to use the net proceeds from the offering to fund inventory,
distribution expenses, vendor obligations outside of the PRC, as well as for general corporate and working capital purposes.
In
connection with the Offering, the Company issued 1,000,000 pre-reverse split common shares at the price of $1.27 per share, with each
common share coupled with a warrant (500,000 pre-reverse split warrants in the aggregate) to purchase one common share. The common shares
and the warrants were sold as units, but are immediately separable and will be issued separately. The warrants have an exercise price
of $1.27 per share (pre-reverse split). The warrants will be exercisable on or after the date of issuance and will terminate on the five-year
anniversary of the date of issuance. In January and February 2019, the investors exercised 333,420 pre-reverse split shares of warrants.
In
connection with the Offering, the Company executed a Placement Agency Agreement, to pay the Placement Agent a cash placement fee equal
to 8% of the gross proceeds of the Offering, plus road show, diligence, legal and other expenses of the Placement Agent of $45,000. The
Placement Agent also receive five-year warrants to purchase up to 50,000 pre-reverse split common shares, which such Compensation Warrants
will have substantially the same terms as the warrants sold in the Offering, except that such Compensation Warrants will have an exercise
price of $1.5875 per share (pre-reverse split) or 125% of the public offering price and will terminate on the five year anniversary of
the effective date of this offering.
The
total fair value of the warrants granted to investors and placement agent is RMB 4,955,000. The fair values of warrants granted were
determined using a variation of the Black-Scholes Option Pricing Model that takes into account factors specific to the share incentive
plans, such as the vesting period. The following principal assumptions were used in the valuation:
Grant date
|
|
December 4, 2018
|
|
Share price at date of grant (pre-reverse split)
|
|
US$
|
1.18
|
|
Exercise price at date of grant (investors and placement agent, respectively) (pre-reverse split)
|
|
US$
|
1.27 & 1.5875
|
|
Volatility
|
|
|
168
|
%
|
Warrant life
|
|
|
5 years
|
|
Dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.63
|
%
|
Fair value at grant date
|
|
US$
|
1.45
|
|
On
December 16, 2019, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the
Company of 1,200,000 pre-reverse split common shares, at a purchase price of $0.75 per share (pre-reverse split). Concurrently with the
sale of the Common Shares, the Company also sold warrants to purchase 1,200,000 pre-reverse split common shares. The Company sold the
Common Shares and Warrants for aggregate gross proceeds of $900,000 (the “Offering”). Subject to certain beneficial ownership
limitations, the five-year Warrants will be initially exercisable on the six-month anniversary of the issuance date at an exercise price
equal to $0.82 per share (pre-reverse split), subject to adjustments as provided under the terms of the Warrants, and will terminate
on the five-year anniversary of the initial exercise date of the Warrants. The closing of the sales of these securities under the Purchase
Agreement took place on December 18, 2019. The Company received net proceeds from the transactions of approximately $748,000, after deducting
certain fees due to the placement agent and the Company’s estimated transaction expenses. The net proceeds received by the Company
from the transactions will be used for working capital and general corporate purposes.
Pursuant
to the terms and provisions of the engagement letter between the Company and the Placement Agent, the Company agreed to pay the Placement
Agent a cash placement fee equal to 8% of the gross proceeds of the Offering, or $72,000, plus other expenses of the Placement Agent
not to exceed $45,000. The Placement Agent also received five-year warrants to purchase up to a number of common shares equal to 5% of
the aggregate number of shares sold in the Offering, including the warrant shares issuable upon exercise of the Warrants, which such
Compensation Warrants have substantially the same terms as the Warrants sold in the Offering, except that such Compensation Warrants
have an exercise price of $0.9375 per share (pre-reverse split) and will terminate on the five year anniversary of the effective date
of this offering.
The
total fair value of the warrants granted to investors and placement agent is RMB 5,250,000. The fair values of warrants granted were
determined using a variation of the Black-Scholes Option Pricing Model that takes into account factors specific to the share incentive
plans, such as the vesting period. The following principal assumptions were used in the valuation:
Grant date
|
|
December
18, 2019
|
|
Share price at
date of grant (pre-reverse split)
|
|
US$
|
0.68
|
|
Exercise price at date of
grant (investors and placement agent, respectively) (pre-reverse split)
|
|
US$
|
0.82
& 0.9375
|
|
Volatility
|
|
|
141
|
%
|
Warrant life
|
|
|
5
years
|
|
Dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.74
|
%
|
Average fair value at grant
date
|
|
US$
|
0.598
|
|
On
January 8, 2020, the Company executed a subscription agreement in connection with a $500,000 private placement of its 666,666 pre-reverse
stock split ordinary shares with three accredited investors at the price of $0.75 per share (pre-reverse stock split). The Company agreed
to register the shares sold in the Offering for resale no later than 270 days after the closing of the Offering. There were no discounts
or brokerage fees associated with this Offering. The net proceeds of the Offering will be used for working capital and general corporate
purposes.
On
May 22, 2020, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale by the Company
of 1,102,950 common shares (pre-reverse stock split), at a purchase price of $0.68 per share (pre-reverse stock split). Concurrently
with the sale of the Common Shares, pursuant to the Purchase Agreement the Company also sold Warrants to purchase 1,102,950 Common Shares
(pre-reverse stock split). The Company sold the Common Shares and Warrants for aggregate gross proceeds of $750,006. Subject to certain
beneficial ownership limitations, the five-year Warrants will be initially exercisable on the six-month anniversary of the issuance date
at an exercise price equal to $0.79 per share (pre-reverse stock split), and will terminate on the five-year anniversary of the initial
exercise date of the Warrants. The closing of the sales of these securities under the Purchase Agreement will take place on May 27, 2020.
The net proceeds from the transactions will be approximately $595,000, after deducting certain fees due to the placement agent and the
Company’s estimated transaction expenses, and will be used for working capital and general corporate purposes.
The
Placement Agent also received five-year Warrants to purchase up to a number of common shares equal to 5% of the aggregate number of shares
sold in the offering, including the warrant shares issuable upon exercise of the Warrants, which such Compensation Warrants having substantially
the same terms as the Warrants sold in the Offering, except that such Compensation Warrants have an exercise price of $0.85 per share
(pre-reverse stock split) and will terminate on the five year anniversary of the effective date of this offering.
The
total fair value of the Warrants granted to investors and the Placement Agent is RMB 3,552,000. The fair value of the Warrants granted
were determined using a variation of the Black-Scholes Option Pricing Model that takes into account factors specific to the share incentive
plans, such as the vesting period. The following principal assumptions were used in the valuation:
Grant date (investors and placement agent, respectively)
|
|
May 27 and May 25, 2020
|
|
Share price at date of grant (investors and placement agent, respectively) (pre-reverse stock split)
|
|
US$
|
|
|
0.59 & 0.64
|
|
Exercise price at date of grant (investors and placement agent, respectively) (pre-reverse stock split)
|
|
US$
|
|
|
0.79 & 0.85
|
|
Volatility
|
|
|
|
|
|
|
100
|
%
|
Warrant life
|
|
|
|
|
|
|
5
years
|
|
Dividend yield
|
|
|
|
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
0.34
|
%
|
Average fair value at grant date
|
|
|
US$
|
|
|
|
0.416
|
|
Following
is a summary of the warrant activity (post-reverse stock split) for the years ended December 31, 2020 and 2019:
|
|
|
Number
of
Warrants
|
|
|
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
in
Years
|
|
Outstanding at
January 1, 2019
|
|
|
|
247,619
|
|
|
$
|
7.74
|
|
|
|
4.19
|
|
Exercisable at January 1,
2019
|
|
|
|
247,619
|
|
|
$
|
7.74
|
|
|
|
4.19
|
|
Granted
|
|
|
|
420,000
|
|
|
|
2.49
|
|
|
|
5
|
|
Exercised
|
|
|
|
(111,140
|
)
|
|
|
3.90
|
|
|
|
-
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31,
2019
|
|
|
|
556,479
|
|
|
|
4.56
|
|
|
|
4.38
|
|
Exercisable at December 31,
2019
|
|
|
|
556,479
|
|
|
|
4.56
|
|
|
|
4.38
|
|
Granted
|
|
|
|
404,415
|
|
|
|
0.80
|
|
|
|
5.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2020
|
|
|
|
960,894
|
|
|
$
|
1.21
|
|
|
|
3.85
|
|
Exercisable at December 31,
2020
|
|
|
|
960,894
|
|
|
$
|
1.21
|
|
|
|
3.85
|
|
On
December 7, 2020, Company executed subscription agreements with three individual accredited investors to offer and sell in a private
placement 566,379 of the Company’s common shares at the per share price of $2.32 (which was the closing price for the Company’s
common shares on December 4, 2020) for the gross proceeds of approximately $1.3 million. The proceeds of the transaction will be used
for working capital and general working purposes. There were no discounts or brokerage fees associated with this offering.
From
January to December 31, 2019, the Company issued aggregate of 94,862 shares to its Chief Financial Officer as stock compensation expense.
The fair value of 94,862 shares was RMB 627,000.
From
January to December 31, 2020, the Company issued aggregate of 46,256 shares to its Chief Financial Officer as stock compensation expense.
The fair value of 46,256 shares was RMB 587,000. From January to December 31, 2020, the Company issued aggregate of 36,201 shares to
its Chief Executive Officer as stock compensation expense. The fair value of 36,201 shares was RMB 548,000.
In
accordance with the relevant laws and regulations of the PRC, the Company’s PRC subsidiaries are required to transfer 10% of its
profit after taxation prepared in accordance with the accounting regulation of the PRC to the statutory reserve until the reserve balance
reaches 50% of the respective registered capital. Such reserve may be used to offset accumulated losses or increase the registered capital
of these subsidiaries, subject to the approval from the Board of Directors, and are not available for dividend distribution to the shareholders.
|
(b)
|
Currency
translation reserve
|
The
reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations.
The
merger reserve of the Company represents the difference between the nominal value of the shares of the subsidiaries acquired in the Hengda
Reorganization (Note 1) over the nominal value of the shares of the Company issued in exchange thereof.
|
(d)
|
Share-based
payment reserve
|
After
the successful consummation of the reverse recapitalization, Mr. Wong Kung Tok, the former sole shareholder of Success Winner, allotted
a total of 1,521,528 the Company’s ordinary shares (pre-reverse stock split) to two financial advisors for their financial advisory
services related to the recapitalization activities. The shared based payment reserve represents the fair value of these allotted shares
measured based on the average market price over the service periods.
The
share-based payment reserve also represents the equity-settled share options granted to employees (Note 24). The reserve is made up of
the cumulative value of services received from employees recorded over the vesting period commencing from the grant date of equity-settled
share options, and is reduced by the expiry or exercise of the share options.
The
share-based payment reserve also represents the shares issued to its senior officers as stock compensation expense.
|
(e)
|
Reverse
recapitalization reserve
|
The
reverse recapitalization reserve arises as a result of the method of accounting for the Success Winner Acquisition. In accordance with
IFRS, the acquisition has been accounted for as a reverse recapitalization.
On
July 31, 2014, Sound Treasure Limited, the Company’s largest shareholder and an affiliate of the Company’s Chief Executive
Officer, entered into a three party agreement (the “Novation”) with the financial institution that originated the foreign
currency transaction agreements and the Company. Under the Novation, Sound Treasure Limited assumed these agreements and all assets (mainly
deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and the Company
was released from the liabilities arising under the foreign currency transaction agreements. As a result, after July 31, 2014, the Company
is no longer required to fund any losses related to these agreements, and the Company will neither suffer any future liabilities arising
under those agreements nor enjoy any benefit arising under those agreements.
At
the time that each of the foreign currency transaction agreements was established with the financial institution, the Company was required
to deposit monies with the financial institution. RMB 6.7 million of a total of RMB 15.6 million in deposits were funded on behalf of
the Company by Wong Kung Tok (who is the brother-in-law of the Company’s Chief Executive Officer) at the request of the Chief Executive
Officer, and were included in a total of RMB 40.2 million in loans owed by the Company to Wong Kung Tok as of July 9, 2014. In connection
with the Novation discussed above, the Company’s Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok entered into
an agreement with the Company (the “Offset Agreement”) pursuant to which loans totaling RMB 20.7 million owed by the Company
to Wong Kung Tok as of the date of the Offset Agreement were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure
Limited; and in return the Company agreed to forego any claim to RMB 15.6 million in deposits under the foreign currency transaction
agreements which were transferred to Sound Treasure Limited pursuant to the Novation. As a result of these transactions, Sound Treasure
Limited released the Company from liabilities aggregating RMB 76.8 million and the Company transferred ownership of RMB 15.6 million
in deposits held at the financial institution from the Company to Sound Treasure Limited. Except as disclosed above, neither the Company’s
Chief Executive Officer nor any affiliate of the Chief Executive Officer received any remuneration for agreeing to assume the foreign
currency transaction agreements. The material terms of the Novation and the Sound Treasure Agreement were reviewed and approved by the
Audit Committee of the Company. As a result of the Novation and the Offset Agreement, approximately RMB 76.8 million in liabilities on
the Company’s books were extinguished in 2014 and the Capital Reserve account was increased by approximately RMB 61.3 million.
24.
|
SHARE-BASED
EMPLOYEE REMUNERATION
|
(a)
Employee share scheme
The
Board of Directors duly adopted and approved the 2017 Equity Compensation Plan (“the 2017 Plan”) on May 21, 2017. The purpose
of the 2017 Plan was to attract and retain outstanding individuals as Employees, Directors and Consultants of the Company and its Subsidiaries,
to recognize the contributions made to the Company and its Subsidiaries by Employees, Directors and Consultants, and to provide such
Employees, Directors and Consultants with additional incentive to expand and improve the profits and achieve the objectives of the Company
and its Subsidiaries, by providing such Employees, Directors and Consultants with the opportunity to acquire or increase their proprietary
interest in the Company through receipt of Awards.
The
Board, in its sole discretion, shall determine the Employees, Consultants and Directors to whom, and the time or times at which Awards
will be granted, the form and amount of each Award, the expiration date of each Award, the time or times within which the Awards may
be exercised, the cancellation of the Awards and the other limitations, restrictions, terms and conditions applicable to the grant of
the Awards. To the extent permitted by applicable law, regulation, and rules of a stock exchange on which the Ordinary Shares are listed
or traded, the Board may delegate its authority to grant Awards to Employees or Consultants and to determine the terms and conditions
thereof to its standing committee, e.g., Compensation Committee, as it may determine in its discretion, on such terms and conditions
as it may impose.
The
total number of shares that may be issued under the 2017 Plan was 280,000 (pre-reverse split). Such shares may be either be authorized
but unissued shares or treasury shares. In the event of any reorganization, recapitalization, share split, distribution, merger, consolidation,
split-up, spin-off, combination, subdivision, consolidation or exchange of shares, any change in the capital structure of the Company
or any similar corporate transaction, the Board shall make such adjustments as it deems appropriate, in its sole discretion, to preserve
the benefits or intended benefits of the 2017 Plan and Awards granted under the 2017 Plan.
The
number of shares issued to Employees, Directors and Consultants is the offer amount divided by the Fair Market Value, meaning (i) if
the principal trading market for the Ordinary Shares is the NASDAQ Capital Market or another national securities exchange, the “closing
transaction” price at which shares of Ordinary Shares are traded on such securities exchange on the relevant date or (if there
were no trades on that date) the latest preceding date upon which a sale was reported, (ii) if the Ordinary Shares is not principally
traded on a national securities exchange, but is quoted on the NASD OTC Bulletin Board (“OTCBB”) or the Pink Sheets, the
last reported “closing transaction” price of Ordinary Shares on the relevant date, as reported by the OTCBB or Pink Sheets,
or, if not so reported, as reported in a customary financial reporting service, as the Committee determines, or (iii) if the Ordinary
Shares is not publicly traded or, if publicly traded, is not subject to reported closing transaction prices as set forth above, the Fair
Market Value per share shall be as determined by the Board.
From
January to December 31, 2018, the Company issued aggregate of 56,919 (pre-reverse split) shares to its Chief Financial Officer as stock
compensation expense. From January to December 31, 2019, the Company issued aggregate of 94,862 (pre-reverse split) shares to its Chief
Financial Officer as stock compensation expense.
From
January to December 31, 2020, the Company issued aggregate of 46,256 shares to its Chief Financial Officer as stock compensation expense.
From January to December 31, 2020, the Company issued aggregate of 36,201 shares to its Chief Executive Officer as stock compensation
expense.
For
the years ended December 31, 2020, 2019 and 2018, employee remuneration expense (all of which related to equity-settled share-based payment
transactions) of RMB 1,135,000, RMB 626,000 and RMB 619,000, respectively, has been included in profit or loss and credited to the share-based
payment reserve.
25.
|
SIGNIFICANT
RELATED PARTY TRANSACTIONS
|
|
(a)
|
Apart
from those discussed elsewhere in these financial statements, the following are significant related party transactions entered into
between the Company and its related parties at agreed rates:
|
|
|
For the years ended December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Service fees paid to Stuart Management Co.
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Amounts owed to related parties
|
|
|
36,348
|
|
|
|
36,217
|
|
Service fees accrued to Stuart Management Co.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
36,348
|
|
|
|
36,217
|
|
Pursuant
to an administrative services agreement dated as of December 1, 2009 between the Company and Stuart Management Co., an affiliate of Paul
K. Kelly, an ex-director who resigned on Nov 27, 2013, the Company paid US$6,000 (equivalent to RMB 40,000) and US$12,000 (equivalent
to RMB 81,000) during the years ended December 31, 2018 and 2017 plus out-of-pocket expenses to Stuart Management Co. for administrative
services. The initial one-year term began on December 1, 2009, and the agreement automatically renews for successive one-year terms unless
either party notifies the other of its intent not to renew. During the term of the agreement, Stuart Management Co. provided the Company
with general administrative services, including acting as the Company’s administrative agent in the United States and the British
Virgin Islands, and allow the Company to utilize certain of its office space for meetings. The agreement was renewed to reduce the amount
to US$4,900 (equivalent to RMB 30,000) a month in December 2013. The amount was further reduced to US$1,000 (equivalent to RMB 6,000)
a month commencing October 2014. The Company terminated service with Stuart Management starting from July 1, 2018.
Mr.
Huang Jia Dong, the founder and Chairman of Hengda and the Chief Executive Officer and one of the directors of the Company and Mr. Wong
Kung Tok, formerly one of the Company’s significant shareholders, provide working capital loans to the Company from time to time
during the normal course of its business. These loans amounted to RMB 35,057,000 and RMB 35,057,000 as of December 31, 2020 and 2019,
respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law. Mr. Huang
and Mr. Wong are brothers-in-law.
As
of December 31, 2020, the Company had a loan of US$167,000 (equivalent to RMB 1,160,000) (2019: US$167,000 (equivalent to RMB 1,160,000))
payable to Sound Treasure Limited, an affiliate of Mr. Huang Jia Dong and a shareholder of the Company. This loan is interest free, unsecured
and repayable on demand.
As of December 31, 2020,
the Company had a loan of US $20,000 (equivalent to RMB 131,000) (2019: nil) payable to Alex Ng Man Shek, a director and corporate secretary
of the Company. This loan is interest free, unsecured and repayable on demand.
(a)
|
Operating
lease commitments
|
The
Company leases production factories, warehouses and employees’ hostel from unrelated parties under non-cancellable operating lease
arrangements. The leases have varying terms and the total future minimum lease payments of the Company under non-cancellable operating
leases are payable as follows:
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Within one year
|
|
|
13,431
|
|
|
|
5,793
|
|
|
|
13,902
|
|
After one year and within five years
|
|
|
46,728
|
|
|
|
-
|
|
|
|
5,792
|
|
|
|
|
60,159
|
|
|
|
5,793
|
|
|
|
19,694
|
|
The
leases typically run for an initial period of three to five years, with an option to renew the lease when all terms are renegotiated.
Lease payments are usually increased every five years to reflect market rentals. None of the leases includes contingent rentals.
The
Company’s capital expenditures consist of expenditures on property, plant and equipment and capital contribution. Capital expenditures
contracted for at the balance sheet date but not recognized in the financial statements are as follows:
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Contracted for capital commitment in respect of capital contribution to its wholly foreign owned subsidiary in the PRC:
|
|
|
|
|
|
|
|
|
|
Chengdu Future
|
|
|
30,000,000
|
|
|
|
30,000,000
|
|
|
|
-
|
|
Antelope Chengdu
|
|
|
65,250,000
|
|
|
|
-
|
|
|
|
-
|
|
Contracted but not provided for in the financial statements – acquisition
of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
27.
|
FINANCIAL
RISK MANAGEMENT
|
The
Company’s overall financial risk management program seeks to minimize potential adverse effects of financial performance of the
Company. Management has in place processes and procedures to monitor the Company’s risk exposures while balancing the costs associated
with such monitoring and management against the costs of risk occurrence. The Company’s risk management policies are reviewed periodically
for changes in market conditions and the Company’s operations.
The
Company is exposed to financial risks arising from its operations and the use of financial instruments. The key financial risks included
credit risk, liquidity risk, interest rate risk, foreign currency risk and market price risk.
Except
as disclosed in (d), the Company does not hold or issue derivative financial instruments for trading purposes or to hedge against fluctuations,
if any, in interest rates and foreign exchange rates.
Credit
risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The
Company’s exposure to credit risk arises primarily from bank balances and trade receivables. For trade receivables, the Company
adopts the policy of dealing only with customers of appropriate credit history to mitigate credit risk. For other financial assets, the
Company adopts the policy of dealing only with high credit quality counterparties.
As
the Company does not hold any collateral, the maximum exposure to credit risk for each class of financial assets is the carrying amount
of that class of financial assets presented on the consolidated statements of financial position.
Cash
and bank balances
The
Company’s bank deposits are placed with reputable banks in the PRC, Hong Kong and the United States, which management believes
are of high credit quality. The Company performs periodic evaluations of the relative credit standing of these financial institutions.
Trade
receivables
The
Company’s objective is to seek continual growth while minimizing losses incurred due to increased credit risk exposure.
The
Company’s exposure to credit risks is influenced mainly by the individual characteristics of each customer. The Company typically
gives the existing customers credit terms of approximately 120 days to 150 days. In deciding whether credit shall be extended, the Company
will take into consideration factors such as the relationship with the customer, its payment history and credit worthiness. In relation
to new customers, the sales and marketing department will prepare credit proposals for approval by the Chief Executive Officer.
The
Company performs ongoing credit evaluations of its customers’ financial condition and requires no collateral from its customers.
The provision for impairment loss for doubtful debts is based upon a review of the expected collectability of all trade and other receivables.
The
Company’s concentration of credit risk by geographical location is wholly in the PRC as of December 31, 2020 and 2019. Further
details of the Company’s concentration of credit risk are set out in Note 15.
The
Company’s policy is to regularly monitor current and expected liquidity requirements and its compliance with loan covenants to
ensure that it maintains a sufficient amount of cash and adequate committed lines of funding from major financial institutions to meet
its liquidity requirements in the short and longer term.
The
following table details the Company’s remaining contractual maturities for its financial liabilities. The table has been drawn
up based on undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay.
The table includes both interest and principal cash flows. To the extent that interest flows are at a floating rate, the undiscounted
amount is calculated based on interest rate at the end of the reporting periods:
|
|
As of December 31, 2020
|
|
|
|
|
Within
1 year
RMB’000
|
|
|
|
More
than 1
year but less
than 5 years
RMB’000
|
|
|
|
Total
contractual
undiscounted
cash flow
RMB’000
|
|
|
|
Carrying
amount
RMB’000
|
|
Trade payables
|
|
|
6,750
|
|
|
|
-
|
|
|
|
6,750
|
|
|
|
6,750
|
|
Amounts owed to related parties
|
|
|
36,348
|
|
|
|
-
|
|
|
|
36,348
|
|
|
|
36,348
|
|
Lease liabilities
|
|
|
15,478
|
|
|
|
49,469
|
|
|
|
64,947
|
|
|
|
64,947
|
|
Interest-bearing bank borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
58,576
|
|
|
|
49,469
|
|
|
|
108,045
|
|
|
|
108,045
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Within
1 year
RMB’000
|
|
|
|
More
than 1
year but less
than 5 years
RMB’000
|
|
|
|
Total
contractual
undiscounted
cash flow
RMB’000
|
|
|
|
Carrying
amount
RMB’000
|
|
Trade payables
|
|
|
22,577
|
|
|
|
-
|
|
|
|
22,577
|
|
|
|
22,577
|
|
Amounts owed to related parties
|
|
|
36,217
|
|
|
|
|
|
|
|
36,217
|
|
|
|
36,217
|
|
Interest-bearing bank borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
58,794
|
|
|
|
-
|
|
|
|
58,794
|
|
|
|
58,794
|
|
Interest
rate risk is the risk that the fair value or future cash flows of the Company’s financial instruments will fluctuate because of
changes in market interest rates.
The
Company’s exposure to interest rate risk arises primarily from the Company’s interest-bearing bank deposits and borrowings.
The
Company is exposed to fair value interest rate risk in relation to its fixed-rate bank borrowings. Bank borrowings subject to fixed interest
rates are contractually repriced at intervals of 12 months. The Company currently does not have an interest rate hedging policy. However,
the management monitors interest rate exposure and will consider other necessary actions when significant interest rate exposure is anticipated.
The
Company is also exposed to cash flow interest rate risk related to bank balances and cash held at financial institutions carried at the
prevailing market rates and variable-rate bank borrowings.
At
December 31, 2020 and 2019, the company has paid off all its loan. Thus was no variable-rate risk.
|
(d)
|
Foreign
currency risk
|
Currency
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange
rates. Currency risk arises when transactions are denominated in foreign currencies.
The
Company is mainly exposed to foreign exchange risk arising from future commercial transactions, recognized assets and liabilities denominated
in currencies other than the functional currency of the Company entities to which they relate. The Company’s operations are primarily
conducted in the PRC. All the sales and purchases transactions are denominated in RMB. As such, the operations are not exposed to exchange
rate fluctuation.
As
of December 31, 2020 and 2019, nearly all of the Company’s monetary assets and monetary liabilities were denominated in RMB except
that as of December 31, 2020 and 2019, certain bank balances (Note 17) were denominated in US dollars and HKD.
Sensitivity
analysis
The
Company’s foreign currency risk is mainly concentrated on the fluctuation of US$ and HK$. The following table details the Company’s
sensitivity to a 4% increase and decrease in RMB against the relevant foreign currencies. The sensitivity analysis includes only outstanding
foreign currency denominated monetary items and adjusts their translation at the years end for a 4% change. On this basis, if RMB strengthens
against foreign currencies by 4%, the Company’s loss before taxation for the year would decrease by the following amount, and vice
versa.
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
|
2018
RMB’000
|
|
Loss before taxation
|
|
|
421
|
|
|
|
414
|
|
|
|
353
|
|
The
sensitivity analysis has been determined assuming that the change in foreign exchange rates had occurred at the end of the reporting
period and had been applied to re-measure those financial instruments held by the Company which expose the Company to foreign currency
risk at the end of the reporting period. The stated changes represent management’s assessment of reasonably possible changes in
foreign exchange rates over the period until the end of next annual reporting period. The analysis is performed on the same basis for
2020, 2019 and 2018.
In
management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure
at the end of the reporting period does not reflect the exposure during the year.
|
(e)
|
Fair
value measurements
|
|
(i)
|
Financial
instruments carried at fair value
|
Fair
value hierarchy
The
following table presents the fair value of the Company’s financial instruments measured at the end of the reporting period on a
recurring basis, categorized into the three-level fair value hierarchy as defined in IFRS 13 Fair value measurement. The level into which
a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation
technique as follows:
|
•
|
Level
1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
•
|
Level
2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that
is, as prices) or indirectly (that is, derived from prices)
|
|
•
|
Level
3: inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs). The Company’s
directors are responsible to determine the appropriate valuation techniques and inputs for fair value measurements.
|
There
were no transfers between instrument levels during the years ended December 31, 2020 and 2019.
As
of December 31, 2020 and 2019 there were no other financial instruments measured on a recurring basis.
|
(ii)
|
Financial
assets and liabilities measured at other than fair value
|
The
carrying amounts of the Company’s other financial instruments carried at cost or amortized cost approximate their fair values as
of December 31, 2020 and 2019.
The
Company’s objectives when managing capital are:
(i)
To safeguard the Company’s ability to continue as a going
concern and to be able to service its debts when they are due;
(ii)
To maintain an optimal capital structure so as to maximize shareholder
value; and
(iii)
To maintain a strong credit rating and healthy capital ratios in order to
support the Company’s stability and growth.
The
Company actively and regularly reviews and manages its capital structure to ensure optimal shareholder returns, taking into consideration
the future capital requirements of the Company and capital efficiency, prevailing and projected profitability, projected operating cash
flows, projected capital expenditures and projected strategic investment opportunities. The Company manages its common shares and stock
options as capital.
The
Company is not subject to externally imposed capital requirements, except for, as disclosed in Note 23(a), the Company’s PRC subsidiaries
are required by the Foreign Enterprise Law of the PRC to contribute to and maintain a non-distributable statutory reserve fund whose
utilization is subject to approval by the Board of Directors. This externally imposed capital requirement has been complied with by the
PRC subsidiaries for the years ended December 31, 2020, 2019 and 2018.
In
order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital
to shareholders, increase share capital, obtain new borrowings or sell assets to reduce debt.
There
were no changes in the Company’s overall approach to capital management during the report periods.
The
capital structure of the Company consists of debts (which include borrowings, less cash and cash equivalents) and equity attributable
to shareholders of the Company (comprising issued capital and reserves). The Company monitors capital on the basis of the debt to capital
ratio, which is calculated as net debts divided by equity attributable to shareholders of the Company.
|
|
As of December 31,
|
|
|
|
2020
RMB’000
|
|
|
2019
RMB’000
|
|
Interest-bearing bank borrowings
|
|
|
-
|
|
|
|
-
|
|
Amounts owed to related parties
|
|
|
36,348
|
|
|
|
36,217
|
|
Total debts
|
|
|
36,348
|
|
|
|
36,217
|
|
Less: Cash and cash equivalents (excluding restricted bank balances)
|
|
|
(12,344
|
)
|
|
|
(8,212
|
)
|
Net debts
|
|
|
24,004
|
|
|
|
28,005
|
|
Equity attributable to shareholders of the Company
|
|
|
96,758
|
|
|
|
272,496
|
|
Gearing ratio
|
|
|
24.8
|
%
|
|
|
10.3
|
%
|
The
Company has evaluated all events that have occurred subsequent to December 31, 2020 through the date that the consolidated financial
statements were issued. Management has concluded that the following subsequent events required disclosure in these financial statements:
On
February 12, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors for the sale of 588,236
common shares, at a purchase price of $3.57 per share. Concurrently with the sale of the Common Shares, pursuant to the Purchase Agreement
the Company also sold warrants to purchase 588,236 common shares. The Company sold the Common Shares and Warrants for aggregate gross
proceeds of approximately US$2.1 million, before commissions and expenses. The five-year Warrants will be immediately exercisable at
an exercise price equal to $3.57 per share, and will terminate on the five-year anniversary of the initial exercise date of the Warrants.
The net proceeds from the transactions will be approximately US$1.86 million, after deducting certain fees due to the placement agent
and the Company’s estimated transaction expenses, and will be used for working capital and general corporate purposes.
In
addition, the Placement Agent of this offering also received five-year warrants (the “Compensation Warrants”) to purchase
up to a number of common shares equal to 5% of the aggregate number of shares sold in the Offering, including the warrant shares issuable
upon exercise of the Warrants, which such Compensation Warrants have substantially the same terms as the Warrants sold in the Offering,
except that such Compensation Warrants have an exercise price of $4.46 per share and will be exercisable six months from the effective
date of this offering and will terminate on the five year anniversary of the effective date of this offering.
On
March 2, 2021, one investor exercised 122,550 warrants (post-reverse split) at $2.37 per share for total proceeds of US$290,443; these
exercised warrants were issued from the May 22, 2020 offering.
China Ceramics (NASDAQ:CCCL)
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