2016.09 BIRMINGHAM INTL

Company Name: Birmingham International Holdings Limited
Stock Code: 02309
Year end: June 30, 2017

Basis for Disclaimer of Opinion

  1. Corresponding figures

Our audit opinion on the consolidated financial statements of the Group for the year ended 30 June 2015 was qualified because of the significance of possible effect of the limitations on the scope of our audit and fundamental uncertainty relating to the going concern basis, details of which are set out in our auditor’s report dated 30 September 2015.

There were no satisfactory audit procedures to ascertain the existence, accuracy, presentation and completeness of certain opening balances and corresponding figures (as further details explained in the following paragraphs) shown in the current year’s consolidated financial statements.

  1. Amounts due to former directors

At 30 June 2015 and 30 June 2016, the Group recorded amounts due to former directors of approximately HK$10,769,000 and HK$10,769,000, respectively. We were unable to obtain sufficient and satisfactory audit evidence to verify the amounts and the repayment terms of these amounts. There was no other satisfactory audit procedures including direct confirmation that we could perform to satisfy ourselves as to whether these amounts were fairly stated in the consolidated statements of financial position as at 30 June 2015 and 30 June 2016.

  1. Other payables

We have not obtained sufficient and satisfactory audit evidence to satisfy ourselves as to the existence and amounts of other payables of approximately HK$5,353,000 and HK$5,353,000 as at 30 June 2015 and 30 June 2016, respectively. There are no other satisfactory audit procedures including direct confirmation that we could perform to satisfy ourselves as to whether these amounts were fairly stated in the consolidated statements of financial position as at 30 June 2015 and 30 June 2016.

  1. Suspected misappropriation of funds and administrative expenses

During our audit on the consolidated financial statements of the Group for the year ended 30 June 2015, we have not obtained sufficient and satisfactory audit evidence to satisfy ourselves as to the nature of the suspected misappropriation of funds of HK$9,643,000 and certain administrative expenses amounted to approximately HK$5,663,000 included in the consolidated profit of loss for the year ended 30 June 2015. Furthermore, there may be a cut-off effect in connection with the suspected misappropriation of funds on the consolidated loss for the year ended 30 June 2015 or on the financial years prior to that. We have not been provided with sufficient and satisfactory audit evidence of whether the amounts are fairly stated and should be recorded in the year ended 30 June 2015 or prior years. Details of which are set out in points 4 and 6 under the heading “Basis for Disclaimer of Opinion” in our auditor’s report dated 30 September 2015.

Accordingly, our opinion on the current year’s consolidated financial statements is also qualified because of the possible effects of this matter on the comparability of the current year’s figures and the corresponding figures.

  1. Convertible notes

(a) The U-Continent convertible notes

On 5 February 2014, the Company issued a zero coupon convertible notes (the “First CN”) of principal amount of HK$50,000,000 to U-Continent Holdings Limited (“U-Continent”). On 21 February 2014, HK$10,000,000 of the First CN was converted into 333,333,333 ordinary shares of the Company.

In 2014, the Company issued a zero coupon convertible note in two tranches to the principal amount of HK$125,000,000 (as to HK$105,000,000 under the first tranche and HK$20,000,000 under the second tranche) (the “Second CN”) to U-Continent. On 9 October 2014, HK$45,000,000 of the Second CN was converted into 1,500,000,000 ordinary shares of the Company.

Subsequently, the Company rescinded the First CN and Second CN agreements (the “Agreements”) by way of a letter dated 20 July 2015 to U-Continent and filed a writ of summons against U-Continent in the High Court of Hong Kong (the “High Court”) on 21 July 2015 claiming for loss and damages suffered by the Company as a result of the alleged misrepresentations made by U-Continent, details of which are set out in the announcement of the Company dated 21 July 2015. As a result of the above legal action, the Company has classified the remaining balance of the First CN of HK$40,000,000 and the Second CN of HK$80,000,000, totaling HK$120,000,000 as at 30 June 2015 and 30 June 2016, as an amount due to U-Continent, and included in borrowings.

On 12 April 2016, the Company entered into a settlement agreement with U-Continent to extend the maturity dates of the remaining unconverted First CN and Second CN to 31 December 2016 or such other date as the parties to the settlement agreement may agree in writing (with all the other terms and conditions of the remaining unconverted First CN and Second CN remain unchanged) subject to the terms and conditions of the settlement agreement. Up to the date of these consolidated financial statements, the conditions of the settlement agreement entered into with U-Continent have not been fulfilled.

We were unable to obtain sufficient appropriate audit evidence on the accounting treatment of the First CN and the Second CN, including whether the First CN and the Second CN constitute equity instruments which should be classified under convertible notes reserve, or whether the recognition of the remaining balances of the First CN of HK$40,000,000 and the Second CN of HK$80,000,000 as at 30 June 2015 and 30 June 2016 to borrowings is appropriate. In addition, we were unable to determine whether the conversion of the First CN during the year ended 30 June 2015 constituted a transaction within the scope of HK(IFRIC) Interpretation 19 “Extinguishing Financial Liabilities with Equity Instruments” which would require the determination of the fair value of the equity or loss for the year ended 30 June 2015

(b)  The debt convertible notes

On 20 December 2013, the Company and Mr. Yeung Ka Sing, Carson (“Mr. Yeung”) agreed to capitalise the debt owed by the Company of HK$193,500,000 to Mr. Yeung by issuing a zero coupon convertible note (the “Debt CN”). The Debt CN could be converted to a total of approximately 6,450,000,000 ordinary shares of the Company at a conversion price HK$0.03 per share.

The Company recorded the initial value of the Debt CN of HK$193,500,000, which was the carrying value of the debt owed by the Company as at the completion date of the subscription agreement entered into between the Company and Mr. Yeung (i.e. 5 February 2014). However, in accordance with HK(IFRIC) Interpretation 19 “Extinguishing Financial Liabilities with Equity Instruments”, when equity instruments issued to a creditor to extinguish all or part of a financial liability are recognised initially, an entity shall measure them at the fair value of the equity instruments issued. We have not obtained sufficient and satisfactory audit evidence to satisfy ourselves as to the fair value of the Debt CN. Any adjustment to the fair value of the Debt CN at the time of issuance will affect classification of the accumulated losses and convertible notes reserve as at 30 June 2015 and 30 June 2016.

  1. Material uncertainty relating to the going concern basis

We draw attention to note 2(b) to the consolidated financial statements. The Group recorded a loss attributable to the owners of the Company of approximately HK$58,574,000 for the year ended 30 June 2016, and net current liabilities and net liabilities of approximately HK$141,155,000 and HK$54,106,000 respectively as at 30 June 2016. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern, the validity of which is dependent upon future funding available at a level sufficient to finance the working capital requirements of the Company and completion of the proposed restructuring as fully detailed in note 2(b) to the consolidated financial statements. The consolidated financial statements do not include any adjustments that would result from the failure to obtain the financial support.

We consider that the material uncertainty has been adequately disclosed in the consolidated financial statements. However, in view of the extent of the uncertainty relating to the availability of future funding, we disclaim our opinion in respect of the material uncertainty relating to the going concern basis.

Any significant consequential effect in connection with the above matters would affect the net assets and net liabilities of the Group as at 30 June 2015 and 30 June 2016 respectively, and the Group’s loss for the years ended 30 June 2015 and 30 June 2016, and the related disclosures in the consolidated financial statements.

Disclaimer of Opinion

Because of the significance of the matters as described in the basis for disclaimer of opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the consolidated financial statements. In all other respects, in our opinion, the consolidated financial statements have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.