Merida Industry Co., Ltd. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016 and Independent Auditors’ Report DECLARATION OF CONSOLIDATION OF FINANCIAL STATEMENTS OF AFFILIATES The companies required to be included in the consolidated financial statements of affiliates in accordance with the “Criteria Governing Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises” for the year ended December 31, 2017 are all the same as the companies required to be included in the consolidated financial statements of parent and subsidiary companies as provided in International Financial Reporting Standard 10 “Consolidated Financial Statements”. Relevant information that should be disclosed in the consolidated financial statements of affiliates has all been disclosed in the consolidated financial statements of parent and subsidiary companies. Hence, we do not prepare a separate set of consolidated financial statements of affiliates. Very truly yours, MERIDA INDUSTRY CO., LTD. By: Michael S. T. Tseng President March 27, 2018 - 1 - Key audit matters for the Group’s consolidated financial statements for the year ended December 31, 2017 are as follows: Impairment assessment of trade receivables As of December 31, 2017, the of the Group’s total trade receivables, in New Taiwan dollar (“NT$”), was NT$1,700,548 in thousands. Refer to Notes 4, 5 and 8 to the accompanying consolidated financial statements for disclosures related to receivables. The Group sells its products through a distributor from each country of operation. The recovery of trade receivables is dependent on the financial situation of the respective distributors. The impairment assessment of trade receivables is based on objective evidence, like delayed payments from distributors, and also involves the estimation of future cash flows by management. The impairment assessment is subject to judgment by management, which has a significant level of uncertainty, and the result of the assessment could also affect the consolidated financial statements. Thus, it is identified as a key audit matter. Our main audit procedures performed in respect of the above area included the followings: 1. Understood the policy of the impairment assessment of trade receivables. 2. Evaluated the major distributor’s credit policy and the rationality of the credit line as well as the historical payment situation. 3. Sampled and verified the reasonableness for the aging of amounts due at the balance sheet date and confirmed the accuracy of the impairment of trade receivables. 4. Compared the aging of receivables in the current year and prior years and reviewed the level of bad debt write-offs in the current year and the prior year to assess the reasonableness of the provision. Inventory valuation As of December 31, 2017, the Group’s inventory was NT$3,496,676 thousand. Refer to Notes 4, 5 and 9 to the consolidated financial statements for disclosures related to inventory. The inventory is stated at the lower of cost or net realizable value. Determining the net realizable value inputs and estimating the consumption of inventory aging is subject to judgment. As a result, inventory valuation is identified as a key audit matter. Our main audit procedures performed in respect of the above area included the followings: 1. Understood the process and evidence that the management used in estimating the net realizable value and the inventory obsolescence aging ratio. 2. Assessed the reasonableness of estimated selling prices, the variable sales to expense ratio and the inventory obsolescence aging ratio. 3. Checked the accuracy of inventory aging and the calculation of the net realizable value. 4. Observed the year-end inventory counts and evaluated the condition of the inventory to assess the adequacy of the provision for damaged stock. - 3 - Other Matter We did not audit the financial statements of a partial-investee accounted for by using the equity method as of and for the years ended December 31, 2017 and 2016, but such financial statements were audited by other auditors, whose reports have been furnished to us. The balance of the investments accounted for by using the equity method was 40% (NT$8,423,339 thousand) and 41% (NT$8,931,463 thousand) of the Group’s consolidated total assets as of December 31, 2017 and 2016, respectively. The share of profit (loss) of associates was (43)% (NT$(86,042) thousand) and 57% (NT$757,871 thousand) of the Group’s consolidated comprehensive income for the years ended December 31, 2017 and 2016, respectively. We have also audited the parent company only financial statements of Merida Industry Co., Ltd. as of and for the years ended December 31, 2017 and 2016 on which we have issued an unmodified opinion. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and the IFRS, IAS, IFRIC, and SIC endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance, including the supervisors, are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with the auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: 1. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - 4 - 2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. 3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. 5. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 6. Obtain sufficient and appropriate audit evidence regarding the financial information of entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those