YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

12. | PROPERTY, PLANT AND EQUIPMENT AND RIGHT-OF-USE ASSETS (continued)

Impairment of assets

Property, plant and equipment and right-of-use assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. In particular, management assesses impairment of property, plant and equipment and right-of-use assets of the Food and Beverage (“F&B”) cash-generating units (“CGU”) which continued to underperform for the financial year ended 31 December 2020.

The recoverable amounts of the property, plant and equipment and right-of-use assets relating to F&B sector with indicators of impairment were determined based on their value in use and the pre-tax discount rate used was 12% (2019: 12%). The terminal growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 0% (2019: 0%).

An impairment loss of US$76,064 (2019: Nil) for property, plant and equipment and US$63,538 (2019: Nil) for right-of-use assets was recognised in the profit or loss.

13. | GOODWILL

| 2020 | 2019
| US$ | US$
At 1 January: |  |
Cost | 10,363,086 | 10,639,927
Accumulated impairment | (58,013) | (321,228)
Net carrying amount | 10,305,073 | 10,318,699
Cost at 1 January, net of accumulated impairment | 10,305,073 | 10,318,699
Acquisitions of subsidiaries and businesses (Note 33) | 1,565,988 | 110,990
Impairment (Note 6) | – | (58,013)
Disposal of subsidiaries and businesses (Note 34) | – | (208,532)
Exchange realignment | (112,231) | 141,929
Net carrying amount at 31 December | 11,758,830 | 10,305,073
At 31 December: |  |
Cost | 11,758,830 | 10,363,086
Accumulated impairment | – | (58,013)
Net carrying amount | 11,758,830 | 10,305,073

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

13. | GOODWILL (continued)

Impairment testing of goodwill

Goodwill acquired through business combinations is allocated to the following cash-generating units (“CGU”) for impairment testing:

・ Food and beverage;

・ Education;

・ Pet care service;

・ Management service; and

・ Internet media service

Food and beverage cash-generating unit

The recoverable amount of the food and beverage CGU has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period (2019: five-year period) approved by senior management. The pre-tax discount rate applied to the cash flow projections is 12% (2019: 12%). The terminal growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 0% (2019: 0%).

Education service cash-generating unit

In 2018, the recoverable amount of the education service cash-generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period approved by senior management. The discount rate applied to the cash flow projections was 15%. The growth rate used to extrapolate the cash flows of the unit beyond the five-year period was 0% beyond the five-year period.

Pet care service cash-generating unit

The recoverable amount of the pet care service cash-generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period (2019: five-year period) approved by senior management. The pre-tax discount rate applied to the cash flow projections is 15% (2019: 15%). The terminal growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 0% (2019: 0%). Anticipated revenue growth rates for the CGU ranges from 0% to 5% (2019: 2% to 6%).

Management service cash-generating unit

The recoverable amount of the management service cash-generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period (2019: five-year period) approved by senior management. The pre-tax discount rate applied to the cash flow projections is ranging from 15% to 18% (2019: 15% to 18%). The terminal growth rate used to extrapolate the cash flows of the unit beyond the five-year period is ranging from 0% to 3% (2019: 0% to 3% ). Anticipated revenue growth rates for the CGU ranges from 0% to 10% (2019: 1% to 10%).

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

13. | GOODWILL (continued)

Impairment testing of goodwill (continued)

Management service cash-generating unit (continued)

In the opinion of the directors, a decrease in the sales growth rate by 5.81% (2019: 5.58%) or increase in the pre-tax discount rate by 19.05% (2019: 13.63%), in isolation, would cause the recoverable amount of the management service cash-generating unit to be approximately equal to its carrying amount. As at 31 December 2020, the management service CGU's recoverable amount exceeds its carrying amount by US$3,144,780 (2019: US$2,790,346).

Internet media service cash-generating unit

In 2019, the recoverable amount of the advertising service cash-generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period approved by senior management. The discount rate applied to the cash flow projections was 15%. The growth rate used to extrapolate the cash flows of the unit beyond the five-year period was 0% beyond the five-year period.

The carrying amount of goodwill allocated to each of the cash-generating units is as follows:

| Food and beverage | Education service | Pet care service | Management service | Internet media service | Total
| US$ | US$ | US$ | US$ | US$ | US$
At 31 December 2020 | 113,022 | – | 3,007,598 | 8,638,210 | – | 11,758,830
At 31 December 2019 | 110,990 | – | 1,362,259 | 8,831,824 | – | 10,305,073
At 1 January 2019 | – | 205,975 | 1,345,554 | 8,709,868 | 57,302 | 10,318,699

During the year ended 31 December 2019, impairment of US$58,013 was recognised because the business of the internet media services had been loss-making in recent years. The impairment was determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The pre-tax discount rate applied to cash flow projections was 15%.

Assumptions were used in the value in use calculations of the food and beverage, pet care service and management service cash-generating units for 31 December 2020. The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill:

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

13. | GOODWILL (continued)

Impairment testing of goodwill (continued)

Budget gross margin – The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year immediately before the budget year, increased for expected efficiency improvements, and expected market development.

Discount rates – The discount rates used are before tax and reflect specific risks relating to the relevant units.

The values assigned to the key assumptions on market development of food and beverage industries, pet care service and management service and discount rates are consistent with external information sources.

As the carrying amounts of the CGUs were determined to be lower than its recoverable amount, no impairment loss was recognised. Should the assumptions not be met, impairment loss may be required in the future.

14. | OTHER INTANGIBLE ASSETS

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Intangible asset with indefinite useful life | 16,381 | 15,479 | 15,289
Intangible assets with definite useful lives | 1,529,505 | 1,983,746 | 2,169,029
| 1,545,886 | 1,999,225 | 2,184,318

Intangible asset stated with indefinite useful life

|  | 2020 | 2019
|  | US$ | US$
Internet domain name |  |  |
At beginning of year |  | 15,479 | 15,289
Exchange realignment |  | 902 | 190
At end of year |  | 16,381 | 15,479

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

14. | OTHER INTANGIBLE ASSETS (continued)

Intangible asset stated with definite useful life

| Patents and licences | Trademarks | Software | Customer relationships | Total
| US$ | US$ | US$ | US$ | US$
31 December 2020 |  |  |  |  |
At 1 January 2020: |  |  |  |  |
Cost | 172,063 | 24,056 | 452,914 | 2,114,492 | 2,763,525
Accumulated amortisation and impairment | (100,978) | (24,056) | (238,930) | (415,815) | (779,779)
Net carrying amount | 71,085 | – | 213,984 | 1,698,677 | 1,983,746
Cost at 1 January 2020, net of accumulated amortisation and impairment | 71,085 | – | 213,984 | 1,698,677 | 1,983,746
Additions | 18,595 | – | 41,898 | – | 60,493
Acquisitions of subsidiaries and businesses (Note 33) | – | – | 798 | – | 798
Disposals | (14,556) | – | (17,272) | – | (31,828)
Disposal of subsidiaries and businesses (Note 34) | (48,300) | – | (93,858) | – | (142,158)
Amortisation provided during the year | (11,370) | – | (87,234) | (186,213) | (284,817)
Impairment | (1,511) | – | (14,858) | – | (16,369)
Exchange realignment | 2,885 | – | 8,208 | (51,453) | (40,360)
At 31 December 2020 | 16,828 | – | 51,666 | 1,461,011 | 1,529,505

At 31 December 2020: |  |  |  |  |
Cost | 108,299 | – | 185,958 | 2,114,492 | 2,408,749
Accumulated amortisation and impairment | (91,471) | – | (134,292) | (653,481) | (879,244)
Net carrying amount | 16,828 | – | 51,666 | 1,461,011 | 1,529,505

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

14. | OTHER INTANGIBLE ASSETS (continued)

Intangible assets with definite useful lives (continued)

| Patents and licences | Trademarks | Software | Customer relationships | Total
| US$ | US$ | US$ | US$ | US$
31 December 2019 |  |  |  |  |
At 1 January 2019: |  |  |  |  |
Cost | 240,669 | 24,056 | 279,367 | 2,114,492 | 2,658,584
Accumulated amortisation and impairment | (95,252) | (24,056) | (120,322) | (249,925) | (489,555)
Net carrying amount | 145,417 | – | 159,045 | 1,864,567 | 2,169,029
Cost at 1 January 2019, net of accumulated amortisation and impairment | 145,417 | – | 159,045 | 1,864,567 | 2,169,029
Additions | – | – | 184,647 | – | 184,647
Disposals | (52,536) | – | (1,068) | – | (53,604)
Disposal of subsidiaries and businesses (Note 34) | – | – | (13,501) | – | (13,501)
Amortisation provided during the year | (23,085) | – | (92,924) | (190,520) | (306,529)
Impairment | – | – | (24,630) | – | (24,630)
Exchange realignment | 1,289 | – | 2,415 | 24,630 | 28,334
At 31 December 2019 | 71,085 | – | 213,984 | 1,698,677 | 1,983,746
At 31 December 2019: |  |  |  |  |
Cost | 172,063 | 24,056 | 452,914 | 2,114,492 | 2,763,525
Accumulated amortisation and impairment | (100,978) | (24,056) | (238,930) | (415,815) | (779,779)
Net carrying amount | 71,085 | – | 213,984 | 1,698,677 | 1,983,746

For the financial year ended 31 December 2020, an impairment of US$16,369 (2019: US$24,630) was recognised for the patents and licences and software with a carrying amount before provision of US$16,369 (2019: US$24,630) because the business of the internet media services had been loss-making in recent years.

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

15. | INVESTMENT IN A JOINT VENTURE

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Share of net assets | – | – | –

Particulars of the joint venture which is held by the Company is as follows:

Name | Particulars of issued shares held | Place of incorporation | Percentage of ownership interest | Principal activities
Musashino Gobyo K.K. (“Musashino Gobyo”) | Ordinary shares | Japan | 50.0 | Provision of supporting services for graveyard

The Group has discontinued the recognition of its share of losses of Musashino Gobyo K.K. because the accumulated share of losses of the joint venture exceeded the Group's interest in the joint venture and the Group has no obligation to take up further losses. The Group's unrecognised share of profits of this joint venture for the current year and cumulatively unrecognised share of losses amounted to US$146,655 (2019: losses of US$523,337) and US$810,995 (2019: US$957,650), respectively.

16. | INVESTMENTS IN ASSOCIATES

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Share of net (liabilities)/assets | (63,356) | 199,798 | 211,334
Goodwill on acquisition | 346,473 | 327,402 | 323,387
| 283,117 | 527,200 | 534,721

Particulars of the principal associates which are held by the Company are as follows:

Name | Particulars of issued shares held | Place of incorporation | Percentage of ownership interest | Principal activities
ARUKI Co. Ltd. | Ordinary shares | Japan | 25.0 | Operation of restaurants in the food and beverage industry
Held through Aruki.Co. Ltd: |  |  |
BARC Co. Ltd. | Ordinary shares | Japan | 25.0 | Operation of restaurants in the food and beverage industry

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

16. | INVESTMENTS IN ASSOCIATES (continued)

The following table illustrates the aggregate financial information of the Group's associates that is not individually material:

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Share of the associates' (loss)/profit for the year | (219,476) | 77,470 | 66,636
Share of the associates' other comprehensive income | 22,197 | 6,704 | 8,286
Share of the associates' total comprehensive (loss)/income | (197,279) | 84,174 | 74,922
Aggregate carrying amount of the Group's investments in associates | 283,117 | 527,200 | 534,721

17. | EQUITY INVESTMENT AT FAIR VALUE THROUGH PROFIT OR LOSS

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Equity investment at fair value through profit or loss |  |  |
Listed equity investment, at fair value Ipet Holdings, Inc. | 9,954,946 | 8,599,580 | 7,384,366

The above equity investment at 31 December 2020 was classified as equity investment at fair value through profit or loss as the Group had not irrevocably elected to classify at fair value through other comprehensive income.

The fair value information related to FVTPL – equity instrument is disclosed in note 38.

As at 31 December 2020, the Group's listed equity investments with a carrying value of US$9,954,946 (2019: US$8,599,580) were pledged as security for the Group's bank loans, as further detailed in note 26 to the financial statements.

18. | INVENTORIES

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Raw materials | 200,468 | 123,203 | 34,239
Finished goods | 1,760,388 | 957,633 | 1,279,228
| 1,960,856 | 1,080,836 | 1,313,467

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

19. | TRADE RECEIVABLES AND CONTRACT ASSETS

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Trade receivables | 7,060,380 | 6,838,143 | 5,285,859
Impairment losses | (95,837) | (145,550) | (13,419)
| 6,964,543 | 6,692,593 | 5,272,440
Contract assets# | 698,571 | – | –
| 7,663,114 | 6,692,593 | 5,272,440

# Contract assets relate to revenue earned from ongoing advisory services. As such, the balance varies and depends on the number of ongoing advisory services at the end of the year. The expected credit losses of contract assets as at 31 December 2020 were considered to be minimal. The expected timing of recovery or settlement for contract assets as at 31 December 2020 is within one year.

The Group's trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally one month. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Group's trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. The Group does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest-bearing.

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

19. | TRADE RECEIVABLES AND CONTRACT ASSETS (continued)

The movements in provision of impairment of trade receivables are as follows:

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
At 1 January | 145,550 | 13,419 | 9,691
(Reversal of)/provision for impairment (Note 6) | (40,202) | 220,019 | 104,897
Amounts written off as uncollectible | (9,511) | (87,888) | (101,169)
At 31 December | 95,837 | 145,550 | 13,419

An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., customer type and rating). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written off if uncollectable for more than one year and are not subject to enforcement activity.

As at 31 December 2020

|  | Past due |
| Current | Less than 1 month | 1 to 3 months | Over 3 months | Total
Expected credit loss rate | 0.13% | 0.21% | 1.52% | 28.29% | 1.36%
Trade receivables (US$) | 5,336,258 | 1,074,949 | 363,991 | 285,182 | 7,060,380
Expected credit losses (US$) | 7,118 | 2,247 | 5,515 | 80,957 | 95,837

As at 31 December 2019

|  | Past due |
| Current | Less than 1 month | 1 to 3 months | Over 3 months | Total
Expected credit loss rate | 0.04% | 0.04% | 8.00% | 52.49% | 2.13%
Trade receivables (US$) | 5,597,507 | 842,640 | 147,748 | 250,248 | 6,838,143
Expected credit losses (US$) | 2,008 | 375 | 11,817 | 131,350 | 145,550

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

19. | TRADE RECEIVABLES AND CONTRACT ASSETS (continued)

As at 1 January 2019

|  | Past due |
| Current | Less than 1 month | 1 to 3 months | Over 3 months | Total
Expected credit loss rate | 0.06% | 0.17% | 0.61% | 5.35% | 0.25%
Trade receivables (US$) | 4,262,821 | 764,866 | 84,742 | 171,430 | 5,285,859
Expected credit losses (US$) | 2,445 | 1,282 | 517 | 9,175 | 13,419

20. | PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Prepayments | 1,012,243 | 493,079 | 476,097
Deposits and other receivables | 2,995,384 | 2,510,320 | 2,290,584
| 4,007,627 | 3,003,399 | 2,766,681
Prepayments, deposits and other receivables classified as non-current assets | (1,170,597) | (870,495) | (988,661)
Current portion | 2,837,030 | 2,132,904 | 1,778,020

The carrying amount other receivables approximate fair value at 31 December 2020 and 2019. Their recoverability was assessed with reference to the credit status of the debtors, and the expected credit losses as at 31 December 2020 and 2019 were considered to be minimal.

21. | CASH AND BANK BALANCES

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Cash and bank balances | 9,763,255 | 8,346,894 | 7,811,675
Time deposits | 143,450 | 147,987 | –
| 9,906,705 | 8,494,881 | 7,811,675
Less: Pledged time deposits (Note a) | (143,450) | (147,987) | –
Cash and cash equivalents | 9,763,255 | 8,346,894 | 7,811,675

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

21. | CASH AND BANK BALANCES (continued)

Notes:

(a) At 31 December 2020, the Group’s time deposits of US$143,450 (2019: US$147,987) were pledged to secure certain banking facilities granted to the Group (Note 26).

At the end of the reporting period, the cash and bank balances of the Group denominated in RMB amounted to US$525,353 (2019: US$319,962). The RMB is not freely convertible into other currencies, however, under Mainland China's Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

22. | TRADE PAYABLES

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Trade payables | 2,012,490 | 1,654,769 | 1,491,761

The trade payables are non-interest-bearing and are normally settled on 30-day terms.

23. | OTHER PAYABLES AND ACCRUALS

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Contract liabilities (Note a) | 7,563 | 365,871 | 108,912
Other payables (Note b) | 4,206,704 | 4,878,809 | 4,202,081
Accruals (Note b) | 5,084,329 | 3,806,609 | 3,109,765
Provisions (Note c) | 579,642 | 381,791 | 445,239
| 9,878,238 | 9,433,080 | 7,757,085
Other payables and accruals classified as non-current liabilities | (664,467) | (390,273) | (537,108)
Current portion | 9,213,771 | 9,042,807 | 7,219,977

Notes:

(a) Contract liabilities include short-term advances received to deliver advisory services. The changes in contract liabilities mainly vary and depend on the number of short-term advances received from customers at the end of the year.

(b) Other payables and accruals are non-interest-bearing and have an average term of one month.

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

23. | OTHER PAYABLES AND ACCRUALS (continued)

Notes (continued):

(c) Provisions pertain to the estimated costs of restoring the Group’s leased assets, expected to be utilized at the end of the respective lease terms. Movement in the provisions as at 31 December is as follows:

| 2020 | 2019
| US$ | US$
At 1 January | 381,791 | 445,239
Additions | 179,112 | –
Disposal of subsidiaries | (14) | (8,972)
Utilisation | – | (60,242)
Exchange realignment | 18,753 | 5,766
31 December | 579,642 | 381,791

24. | OTHER LIABILITIES

| 2020 | 2019 | 1 January 2019
| US$ | US$ | US$
Put option liabilities from business combination (Note a) | 5,198,955 | 6,444,150 | 6,023,850
Put option liabilities from share allotment (Note b) | 921,321 | – | –
| 6,120,276 | 6,444,150 | 6,023,850
Other liabilities classified as non-current liabilities | (921,321) | – | (2,913,300)
Current portion | 5,198,955 | 6,444,150 | 3,110,550

Note:

(a) Pursuant to the Acquisition Agreement of Solidiance Group (further detailed in Note 25), YCP Holdings Limited granted Put Options which entities Ex- Solidiance Shareholders to sell the Issued Shares to YCP Holdings Limited at the exercise price of US$5 per share after Share Split. The put option liabilities are initially recognised at the present value of the redemption amount and subsequently remeasured at amortised cost.

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

24. | OTHER LIABILITIES (continued)

Note:

Movements of carrying amounts of put option liabilities during the year are as follows:

| 2020 | 2019
| US$ | US$
At 1 January | 6,444,150 | 6,023,850
Derecognition of Put Options (Note 31b) | (1,105,125) | –
Exercise of Put Options (Note 31b) | (344,295) | –
Interest expense (Note 8) | 204,225 | 420,300
Liability component classified as non-current portion at 31 December | 5,198,955 | 6,444,150

(b) On 13 November 2020, YCP Holdings Limited entered into share subscription agreements ("Subscription Agreements") with independent third parties and certain directors of the Company (the "Subscribers") to allot 234,000 ordinary shares at US$5 per share. The purpose of the allotment is to provide additional working capital for YCP Holdings Limited. Pursuant to the Subscription Agreements dated on 13 November 2020 ("Subscription Date"), the Subscribers are entitled to a conditional right which allows them to request YCP Holdings Limited to acquire the subscribed shares at US$5 per share, exercisable 2 years from the Subscription Date.

The fair value of the liability component was estimated at US$894,625 at Subscription Date using an equivalent market interest rate for a similar loan. The residual amount is assigned as the equity component and is included in the shareholders equity.

The put option liabilities are initially recognised at the present value of the redemption amount and subsequently remeasured at amortised cost.

The total subscription amount have been split into liability and equity component as follows:

| 2020
| US$
Nominal value of ordinary shares issued | 1,170,000
Equity component at Subscription Date | (275,375)
Liability component at Subscription Date | 894,625
Interest expense (Note 8) | 11,214
Exchange realignment | 15,482
Liability component classified as non-current portion at 31 December | 921,321

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

25. | DERIVATIVE FINANCIAL INSTRUMENTS

On 11 October 2018 ("Acquisition Date"), YCP Holdings Limited entered into a sales and purchase agreement ("Acquisition Agreement") to acquire 100% equity interest in the Solidiance Group from third parties ("Ex-Solidiance Shareholders").

Pursuant to the Acquisition Agreement, the total purchase consideration was settled in cash and issuance of 467 shares (equivalent to 1,401,000 shares after Share Split) of YCP Holdings Limited (the "Issued Shares"). Apart from that, YCP Holdings Limited also granted (i) "Call Options" which entitled it to purchase the Issued Shares, from Ex-Solidiance Shareholders at the exercise price of HK$0.0003 per share after Share Split, if Solidiance Group fails to meet the designated earnout conditions; and (ii) "Put Options" which entitled Ex-Solidiance Shareholders to sell the Issued Shares to YCP Holdings Limited at the exercise price of US$5 per share after Share Split. In the instance when the designated earnout conditions were not met by Solidiance Group, the number of Put Options that are exercisable by Ex-Solidiance Shareholders are limited to the number of Issued Shares that were not exercised by YCP Holdings Limited under the Call Options.

The exercise prices and exercise periods of the Call Options and Put Options granted at the Acquisition Date are as follows:

| Exercise price per share after Share Split | Maximum number of options exercisable
Exercise period |  |
Call Options |  |
Within ninety days after the first anniversary of the Acquisition Date | HK$0.0003 | 233
Within ninety days after the second anniversary of the Acquisition Date | HK$0.0003 | 234
Put Options – earnout conditions were met by Solidiance Group |  |
From the first anniversary of the Acquisition Date to the day immediately preceding the second anniversary of the Acquisition Date (both days inclusive) | US$5 | 233
From the second anniversary of the Acquisition Date to the day immediately preceding the third anniversary of the Acquisition Date (both days inclusive) | US$5 | 467
Put Options – earnout conditions were not met by Solidiance Group |  |
Ninety days after the first anniversary of the Acquisition Date | US$5 | Note 1
Ninety days after the second anniversary of the Acquisition Date | US$5 | Note 2

Note 1: Lower of 233 options and the number of options that were not exercised by YCP Holdings Limited under the Call Options.

Note 2: Lower of 467 options and the number of options that were not exercised by YCP Holdings Limited under the Call Options.

YCP Holdings (Global) Limited

Notes to Combined Financial Statements

For the financial years ended 31 December 2019 and 2020

25. | DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Movements of carrying amounts of Call Options during the year are as follows:

| 2020 | 2019
| US$ | US$
At 1 January | 1,117,217 | 2,110,175
Exercise of Call Options (note 31b) | (1,135,986) | –
Derecognition of Call Options (Note a) | – | (1,093,151)
Fair value gain | 18,769 | 100,193
At 31 December | – | 1,117,217

These Call Options are measured at fair value through profit or loss. Changes in the fair value of derivatives amounting to US$18,769 were credited (2019: US$100,193) to profit or loss during the year.

Note:

(a) On 31 December 2019, YCP Holdings Limited entered into an amendment agreement with the Ex-Solidiance Shareholders ("Amendment Agreement") to (a) mutually acknowledge and confirm that Solidiance Group failed to meet the first year earnout conditions whereby giving YCP Holdings Limited the right to exercise 78 Call Options; (b) irrevocably and unconditionally waive YCP Holdings Limited's right to exercise the remaining 389 Call Options and to allow the Ex-Solidiance Shareholders to retain such remaining 389 Put Options irrespective of whether Solidiance Group can achieve the second year earn out conditions; (c) agree to take into consideration of the Share Split (Note 31(a)) in dealing with and effecting all rights, obligations and liabilities imposed under the Call Option and Put Option, thereby revising the option entitlement from 1 share per option to 3,000 shares per option; and (d) terminate and cancel the charge over YCP Holdings Limited's equity investment at fair value through profit or loss, in replacement one of the directors of YCP Holdings Limited provides personal guarantee as the security in relation to the Put Option.

In 2019, as a result of the Amendment Agreement, the derivative financial asset in relation to the Call Options waived were derecognised. Accordingly, the Group recorded a loss of US$1,093,151 to the statement of profit or loss and other comprehensive income.

At 31 December 2020, the Group had no (2019: 78) Call Options and 366 (2019: 389) Put Options outstanding, which represented the maximum number of options exercisable by YCP Holdings Limited subject to the terms and conditions stipulated in the Acquisition Agreement and Amendment Agreement.

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