Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 19,
2017
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)
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Nevada
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333-177500
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45-2859440
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(State of Incorporation)
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(Commission
File Number)
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(IRS Employer
Identification No.)
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Level 4, 10 Yarra Street
South Yarra (Australia) VIC 3141
(Address of principal executive offices, including zip
code)
+61-3-98230361
(Registrant’s telephone number, including area
code)
Marconistraat 16
3029 AK Rotterdam, The Netherlands
(Former address, if changed since last report)
Check
the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant
under any of the following provisions:
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☐
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
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☐
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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☐
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
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☐
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
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Indicate
by check mark whether the registrant is an emerging growth company
as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of
1934 (§240.12b-2 of this chapter).
Emerging growth
company ☑
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☑
TABLE OF CONTENTS
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EXPLANATORY NOTE
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3
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FORWARD-LOOKING STATEMENTS
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6
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ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE
AGREEMENT.
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7
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ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF
ASSETS.
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7
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THE
ACQUISITION AND RELATED TRANSACTIONS
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7
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DESCRIPTION
OF BUSINESS
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11
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RISK
FACTORS
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18
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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33
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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43
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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45
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EXECUTIVE
COMPENSATION
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49
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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53
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MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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55
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DESCRIPTION
OF SECURITIES
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59
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LEGAL
PROCEEDINGS
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66
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ITEM 3.02 UNREGISTERED SALES OF EQUITY
SECURITIES
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66
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ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT.
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67
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ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS;
ELECTION OF DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS;
COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.
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67
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ITEM 5.03 AMENDMENTS TO ARTICLES OF INCORPORATION OR
BYLAWS; CHANGE IN FISCAL YEAR
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68
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ITEM 5.06 CHANGE IN SHELL COMPANY STATUS.
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68
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ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
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68
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2
EXPLANATORY NOTE
We were
incorporated as HapyKidz.com, Inc. in Nevada on July 28, 2011 with
the intention to become an e-commerce marketplace that connects
merchants to consumers by offering daily discounts on goods and
services through a proprietary website. We were not successful in
this endeavor.
On
September 4, 2013, we filed a Certificate of Amendment to our
Articles of Incorporation with the Nevada Secretary of State to
change our name from HapyKidz.com, Inc. to Symbid
Corp.
On
December 6, 2013, we closed a share exchange (the “Share
Exchange”) pursuant to which the 19 shareholders of Symbid
Holding B.V. sold all of their capital stock in Symbid Holding B.V.
to us in exchange for 352,834 shares of our common stock, $0.001
par value per share (the “Common Stock”). As a result
of the Share Exchange, Symbid Holding B.V. became a wholly owned
subsidiary of ours.
As the
result of the Share Exchange, we were engaged in the business of
creating and operating online, equity based crowdfunding platforms,
through our wholly owned subsidiary, Symbid Holding B.V. Commencing
in 2015, we expanded our operations to include an online platform
for small and medium sized enterprise funding, connecting new and
traditional sources of finance in one integrated network built
around our technology.
The
Share Exchange was treated as a recapitalization of the Company for
financial accounting purposes and Symbid Holding B.V. was
considered the acquiror for accounting purposes.
In
accordance with “reverse acquisition” accounting
treatment, our historical financial statements as of period ends,
and for periods ended, prior to the Share Exchange were replaced
with the historical financial statements of Symbid Holding B.V.
prior to the Share Exchange in our post Share Exchange filings with
the Securities and Exchange Commission (the
“SEC”).
Due to
cash flow problems, during the fourth quarter of 2016, we were
forced to restructure the Company, curtail certain business
operations and change our focus from the operation of online
funding platforms and the provision of software solutions for
alternative financing in the small and medium enterprise market to
the licensing of software packages for which we own or license the
intellectual property.
On June
8, 2017, we dissolved our direct, wholly owned subsidiary, Symbid
Holding B.V. and our indirect wholly owned subsidiaries, Symbid
B.V. and FAC B.V. At the time of dissolution, none of these
entities had any material assets or operations and none of these
entities were generating revenues. Following such dissolutions, we
had no subsidiaries.
On June
9, 2017, we filed a Certificate of Amendment to our Articles of
Incorporation with the Nevada Secretary of State to change our name
to Sincerity Applied Materials Holdings Corp. (the “Name
Change”) and effected a 60:1 reverse stock split (the
“Reverse Split”) on our Common Stock. The Name Change
and Revenue Stock Split took effect on the over-the-counter market
at the open of business on June 14, 2017, at which time our Common
Stock began to trade on a post-split basis under the symbol
“SBIDD”. Our Common Stock began trading under the
Symbol “SINC” on July 13, 2017. The Reverse Split and
the Name Change were approved by our board of directors on May 1,
2017 and by stockholders holding 80% of our outstanding voting
stock on May 1, 2017 as further described in our Definitive
Information Statement on Schedule 14C which we filed with the
Securities and Exchange Commission on May 4, 2017 and mailed to our
stockholders of record as of the close of business on May 1,
2017.
3
On
September 19, 2017 we acquired Sincerity Australia Pty Ltd., an
Australia corporation (“SAPL”) pursuant to the closing
under a June 5, 2017 Acquisition Agreement as amended on July 7,
2017, July 21, 2017, August 15, 2017, August 23, 2017, September 1,
2017 and September 15, 2017 (the “Acquisition
Agreement”) among the Company, SAPL and the sole
shareholder/member of SAPL (the “SAPL Shareholder”).
Pursuant to the Acquisition Agreement and the acquisition completed
thereunder (the “Acquisition”) acquired all of the
outstanding capital stock of SAPL consisting of 10,000 Ordinary
Shares (the “Ordinary Shares”) from the SAPL
Shareholder in exchange for 45,211,047 shares (the
“Acquisition Shares”) of our Common Stock making SAPL a
wholly owned subsidiary of ours. At the time of the closing under
the Acquisition Agreement, SAPL had no outstanding securities other
than the Ordinary Shares.
As a
result of the Acquisition, we acquired the business of SAPL and
will continue the existing business operations of SAPL as a
publicly-traded company under the name Sincerity Applied Materials
Holdings Corp.
On
September 19, 2017, in conjunction with the closing of the
Acquisition, we sold 15 units of securities (the
“Units”) in a private placement offering (the
“Offering”), at a purchase price of $10,000 per Unit
(the “Unit Offering Price”), each Unit consisting of
(i) one 12% senior secured convertible promissory note (the
“Note”) in the face (principal) amount of $10,000 and
(ii) one warrant (the “Warrant”) exercisable for a
period of five years representing the right to purchase Thirty
Three Thousand Three Hundred Thirty Four (33,334) shares of Common
Stock. Additional information concerning the Offering, the Notes
and the Warrants is presented below under Item 2.01,
“Acquisition and Related Transactionsóthe
Offering” and “Description of Securities,” and
Item 3.02, “Unregistered Sales of Equity
Securities.”
In
accordance with “reverse acquisition” accounting
treatment, our historical financial statements as of period ends,
and for periods ended, prior to the Acquisition will be replaced
with the historical financial statements of SAPL, prior to the
Acquisition, in all future filings with the SEC.
As used
in this Report henceforward, unless otherwise stated or the context
clearly indicates otherwise, the terms the “Company,”
the “Registrant,” “we,” “us”
and “our” refer to Sincerity Applied Materials Holdings
Corp., incorporated in Nevada, after giving effect to the
Acquisition.
Unless
otherwise indicated, references to share amounts in this report
give retroactive effect to the 60:1 Reverse Split.
This
Report contains summaries of the material terms of various
agreements executed in connection with the transactions described
herein. The summaries of these agreements are subject to, and are
qualified in their entirety by, reference to these agreements,
which are filed as exhibits hereto and incorporated herein by
reference.
This
Report is being filed in connection with a series of transactions
consummated by us and certain related events and actions taken by
us.
This
Report responds to the following Items in Form 8-K:
Item 1.01
Entry into a
Material Definitive Agreement
Item
2.01
Completion of
Acquisition or Disposition of Assets
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Item
3.02
Unregistered Sales
of Equity Securities
Item
5.01
Changes in Control
of Registrant
Item
5.02
Departure of
Directors or Certain Officers; Election of Directors; Appointment
of Certain Officers; Compensatory Arrangements of Certain
Officers
Item
5.03
Amendments to
Articles of Incorporation or Bylaws; Change in Fiscal
Year.
Item
5.06
Change in Shell
Company Status
Item
9.01
Financial
Statements and Exhibits
Prior
to the Acquisition, we were a “shell company” (as such
term is defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended, or the Exchange Act). As a result of the
Acquisition, we have ceased to be a “shell company”.
The information contained in this Report, together with the
information contained in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2016, and our subsequent
Quarterly Report on Form 10-Q and Current Reports on Form 8-K, as
filed with the SEC, constitute the current “Form 10
information” necessary to satisfy the conditions contained in
Rule 144(i)(2) under the Securities Act of 1933, as amended (the
“Securities Act”).
5
FORWARD-LOOKING STATEMENTS
This
Current Report on Form 8-K, including the sections entitled
“Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and “Business,” contains express or
implied forward-looking statements that are based on our
management’s belief and assumptions and on information
currently available to our management. Although we believe that the
expectations reflected in these forward-looking statements are
reasonable, these statements relate to future events or our future
operational or financial performance, and involve known and unknown
risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by these forward-looking statements. Forward-looking
statements in this Report include, but are not limited to,
statements about:
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the implementation
of our strategic plans for our business and products;
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our ability to
maintain and establish collaborations;
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our ability to
expand through strategic acquisitions and internal
growth;
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our financial
performance;
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developments
relating to our competitors and our industry, including the impact
of government regulation;
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estimates of our
expenses, future revenues, capital requirements and our needs for
additional financing; and
●
other risks and
uncertainties, including those listed under the caption “Risk
Factors.”
In some
cases, forward-looking statements can be identified by terminology
such as “may,” “should,”
“expects,” “intends,” “plans,”
“anticipates,” “believes,”
“estimates,” “predicts,”
“potential,” “continue” or the negative of
these terms or other comparable terminology. These statements are
only predictions. You should not place undue reliance on
forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are, in some cases,
beyond our control and which could materially affect results.
Factors that may cause actual results to differ materially from
current expectations include, among other things, those listed
under the section entitled “Risk Factors” and elsewhere
in this Report. If one or more of these risks or uncertainties
occur, or if our underlying assumptions prove to be incorrect,
actual events or results may vary significantly from those implied
or projected by the forward-looking statements. No forward-looking
statement is a guarantee of future performance. You should read
this Report and the documents that we reference in this Report and
have filed with the Securities and Exchange Commission as exhibits
hereto completely and with the understanding that our actual future
results may be materially different from any future results
expressed or implied by these forward-looking
statements.
6
The
forward-looking statements in this Report represent our views as of
the date of this Report. We anticipate that subsequent events and
developments will cause our views to change. However, while we may
elect to update these forward-looking statements at some point in
the future, we have no current intention of doing so except to the
extent required by applicable law. You should therefore not rely on
these forward-looking statements as representing our views as of
any date subsequent to the date of this Report.
This
Report includes statistical and other industry and market data that
we obtained from industry publications and research, surveys and
studies conducted by third parties. Industry publications and
third-party research, surveys and studies generally indicate that
their information has been obtained from sources believed to be
reliable, although they do not guarantee the accuracy or
completeness of such information. We are responsible for all of the
disclosure contained in this Report, and we believe these industry
publications and third-party research, surveys and studies are
reliable.
The
information contained in Item 2.01 below relating to the
various agreements described therein is incorporated herein by
reference.
Acquisition Agreement
On June
5, 2017, we entered into an Acquisition Agreement with SAPL and the
SAPL Shareholder. On July 7, 2017, July 21, 2017, August 15, 2017,
August 23, 2017, September 1, 2017 and September 15, 2017 we
executed amendments to the Acquisition Agreement to extend the date
by which the Acquisition contemplated thereunder could be completed
without terminating the Agreement. Pursuant to the terms of the
Acquisition Agreement, on September 19, 2017, (the “Closing
Date”), we acquired all of SAPL’s outstanding capital
stock and SAPL thus became our wholly-owned
subsidiary.
Pursuant
to the Acquisition, we acquired the business of SAPL. See
“Description of
Business” below.
At the
effective time of the Acquisition, or the Effective Time, we
acquired 10,000 Ordinary Shares of SAPL, the only capital stock or
securities of SAPL then outstanding, from the SAPL shareholder in
exchange for the 45,211,047 shares of our Common Stock constituting
the Acquisition Shares.
The
Acquisition Agreement contained customary representations and
warranties and pre- and post-closing covenants of each party and
customary closing conditions.
The
Acquisition was treated as a recapitalization and reverse
acquisition for our company for financial reporting purposes. SAPL
is considered the acquirer for accounting purposes, and our
historical financial statements before the Acquisition will be
replaced with the historical financial statements of SAPL before
the Acquisition in future filings with the SEC. The Acquisition is
intended to be treated as a tax-free reorganization under
Section 351(a) of the Internal Revenue Code of 1986, as
amended.
7
The
issuance of shares of our Common Stock to the SAPL Shareholder in
connection with the Acquisition was not registered under the
Securities Act, in reliance upon the exemption from registration
provided by Section 4(a)(2) of the Securities Act, which
exempts transactions by an issuer not involving any public
offering, and Regulation D promulgated by the Securities and
Exchange Commission, or the SEC, under that section. These
securities may not be offered or sold in the United States absent
registration or an applicable exemption from the registration
requirement, and are subject to further contractual restrictions on
transfer as described below.
The
form of the Acquisition Agreement is filed as an exhibit to this
Report. All descriptions of the Acquisition Agreement herein are
qualified in their entirety by reference to the text thereof filed
as an exhibit hereto, which is incorporated herein by
reference.
The Offering
In
conjunction with the closing of the Acquisition, we held a closing
of our Offering in which we sold 15 Units, at a purchase price of
$10,000 per Unit or an aggregate of $150,000. Each Unit consists of
(1) one 12% senior secured convertible promissory note (the
“Note”) of the Company in the face (principal) amount
of $10,000 and; (ii) one warrant (the “Warrant”)
exercisable for a period of five years representing the right to
purchase Thirty Three Thousand Three Hundred Thirty Four (33,334)
shares of Common Stock. For a more detailed discussion of the
principal term of the Notes and Warrants, see “Description of
Securities” below.
The
Offering was exempt from registration under Section 4(a)(2) of
the Securities Act and Rule 506 of Regulation D promulgated by the
SEC thereunder. The Units in the Offering were sold to
“accredited investors,” as defined in Regulation D, and
was conducted on a “reasonable best efforts”
basis.
The
closing under the Offering was conditioned on the closing of the
Acquisition.
Registration Rights
Registration Rights Agreement. In connection with the
Acquisition and the Offering, we entered into a Registration Rights
Agreement, pursuant to which we have agreed that promptly, but no
later than 60 calendar days from the closing of the Offering, we
will file a registration statement with the SEC (the
“Registration Statement”), covering (a) the shares
of Common Stock issuable upon conversion of the Notes and exercise
of the Warrants issued in the Offering and (b) 2,341,930 other
shares of Common Stock (the “Pre-Acquisition Registrable
Shares”) owned by the pre-Acquisition principal shareholder
of the Company, (collectively, the “Registrable Shares). We
will use our commercially reasonable efforts to ensure that such
Registration Statement is declared effective within 120 calendar
days after the closing of the Offering. If we are late in filing
the Registration Statement, if the Registration Statement is not
declared effective within 120 days after the closing of the
Offering, if we fail to maintain the Registration Statement
continuously effective as to all Registrable Shares included in
such Registration Statement or the holders of Registrable Shares
cannot use the Registration Statement to resell the Registrable
Shares for a period of more than 30 trading days (other than
suspension of the Registration Statement in connection with its
post-effective amendment in connection with filing our Annual
Report on Form 10-K for the time reasonably required to respond to
any comments from the SEC or during a permitted blackout period as
described in the Registration Rights Agreement) or trading of our
Common Stock is suspended for more than 3 consecutive trading days,
we will make payments to each holder of Registrable Shares as
monetary penalties at a per annum rate equal to 12% of (i) the Unit
Offering Price for each Unit purchased; or (ii) the assumed value
(the “Assumed Value”) of the Pre-Acquisition
Registrable Shares based upon a post-Acquisition valuation of the
Company of $15,000,000, as applicable; provided, however, that in
no event will the aggregate of any such penalties exceed 8% of the
Unit Offering price for each Unit purchased or the Assumed Value,
as applicable. No monetary penalties will accrue with respect to
any Registrable Shares removed from the Registration Statement in
response to a comment from the staff of the SEC limiting the number
of shares of Common Stock which may be included in the Registration
Statement (a “Cutback Comment”), or after the
Registrable Shares may be resold without volume or other
limitations under Rule 144 or another exemption from registration
under the Securities Act. Any cutback resulting from a Cutback
Comment shall be allocated pro rata based on the total number of
such shares held by or issuable to each holder.
8
We must
keep the Registration Statement effective for two years from the
date it is declared effective by the SEC or until (i) the
Registrable Shares have been sold in accordance with such effective
Registration Statement or (ii) the Registrable Shares have
been previously sold in accordance with Rule 144. We must comply
with the informational requirements of Rule 144 so long as any
shares of Common Stock issued in the Offering are subject to Rule
144, regardless of whether we are subject to filing requirements
under the Exchange Act.
We will
pay all expenses in connection with any registration obligation
provided in the Registration Rights Agreement, including, without
limitation, all registration, filing, stock exchange fees, printing
expenses, all fees and expenses of complying with applicable
securities laws, and the fees and disbursements of our counsel and
of our independent accountants. Each investor will be
responsible for its own sales commissions, if any, transfer taxes
and the expenses of any attorney or other advisor such investor
decides to employ.
Departure and Appointment of Directors and Officers
Our
board of directors is authorized to consist of, and currently
consists of, three members. Effective as of the Closing Date, Zhang
Yiwen (Chairman), Nils Ollquist and Zhang Leping were appointed to
our board of directors.
Also,
effective as of the Closing Date, Zhang Yiwen was appointed as our
President and Chief Executive Officer, Nils Ollquist was appointed
as our Chief Financial Officer and Secretary, Praba Ganeshan was
appointed as our Treasurer and Simon Rees was appointed as our
Chief Operating Officer by our board of directors. Zhang Yiwen will
be our principal executive officer and Nils Ollquist will be our
principal financial and accounting officer for SEC reporting
purposes.
See
“Management ñ Directors
and Executive Officers” below for information about
our new directors and executive officers.
Lock-up Agreements and Other Restrictions
In
connection with the Acquisition, each of our executive officers and
directors named above that own shares of our Common Stock and the
SAPL Shareholder (singly a “Restricted Holder” and
collectively the “Restricted Holders”), holding at the
Closing Date, an aggregate of 45,211,047 shares of our Common
Stock, entered into lock-up agreements, (the “Lock-Up
Agreements”), whereby they are restricted for a period of
twenty-four months after the Acquisition, (the “Restricted
Period”), from certain sales or dispositions (including
pledges) of all of our Common Stock held by (or issuable to) them,
such restrictions together referred to as the Lock-Up. The
foregoing restrictions will not apply to the resale of shares of
Common Stock by any Restricted Holder in any registered secondary
offering of equity securities by us (and, if such offering is
underwritten, with the written consent of the lead or managing
underwriter), or to certain other transfers customarily
excepted.
In
addition, each Restricted Holder agreed, for a period of 12 months
following the Closing Date, that it will not, directly or
indirectly, effect or agree to effect any short sale (as defined in
Rule 200 under Regulation SHO of the Exchange Act), whether or not
against the box, establish any “put equivalent
position” (as defined in Rule 16a-1(h) under the Exchange
Act) with respect to the Common Stock, borrow or pre-borrow any
shares of Common Stock, or grant any other right (including,
without limitation, any put or call option) with respect to the
Common Stock or with respect to any security that includes, relates
to or derives any significant part of its value from the Common
Stock or otherwise seek to hedge its position in the Common
Stock.
9
All
descriptions of the Lock Up Agreement herein are qualified in their
entirety by reference to the text thereof filed as Exhibit 10.1
hereto.
Pro Forma Ownership
Immediately
after giving effect to the Acquisition and the closing of the
Offering, there were 48,333,334 shares of our Common Stock issued
and outstanding as of the Closing Date, as follows:
●
the SAPL
Shareholder, the sole shareholder of SAPL prior to the Acquisition,
holds 45,211,047 shares of our Common Stock.
●
investors in the
Offering hold no shares of our Common Stock, but own Notes which
will become convertible into shares of our Common Stock in the
future and Warrants which will become exercisable for shares of our
Common Stock in the future; and
●
the remaining
3,122,287 shares are held by persons that were shareholders of the
Company immediately prior to the Acquisition.
Except
for the Notes and Warrants, no other securities convertible into or
exercisable or exchangeable for our Common Stock are
outstanding.
Our
Common Stock is presently quoted on the OTC Markets.
Accounting Treatment; Change of Control
The
Acquisition is being accounted for as a or “reverse
acquisition,” and SAPL is deemed to be the acquirer in the
reverse Acquisition. Consequently, the assets and liabilities and
the historical operations that will be reflected in the financial
statements prior to the acquisition will be those of SAPL, and will
be recorded at the historical cost basis of SAPL, and the
consolidated financial statements after completion of the
Acquisition will include the assets and liabilities of SAPL,
historical operations of SAPL, and operations of Sincerity Applied
Materials Holdings Corp. from the closing date of the Acquisition.
As a result of the issuance of the shares of our Common Stock
pursuant to the Acquisition, a change in control of Sincerity
Applied Materials Holdings Corp. occurred as of the date of
consummation of the Acquisition. Except as described in this
Report, no arrangements or understandings exist among present or
former controlling stockholders with respect to the election of
members of our board of directors and, to our knowledge, no other
arrangements exist that might result in a change of control of
Sincerity Applied Materials Holdings Corp.
We
expect to continue to be a “smaller reporting company,”
as defined under the Exchange Act, and an “emerging growth
company” under the Jumpstart Our Business Startups Act, or
the JOBS Act, immediately following the Acquisition. We believe
that as a result of the Acquisition we have ceased to be a
“shell company” (as such term is defined in Rule 12b-2
under the Exchange Act).
10
DESCRIPTION OF BUSINESS
Overview
We are
a supplier of technologically advanced plastics and other solutions
for the packaging industry and other industries primarily serving
major end users and distributors in Australia, Asia and the Middle
East. Our products have applications in the areas of packaging,
agriculture, automotive and transportation, paint and coating,
construction, personal care and hygiene, electronics,
pharmaceutical, energy and natural resources, plastics and rubber
and leather. Our principal products are high quality, breathable
plastic film and modified atmosphere packaging used in the
packaging of perishable foods.
In
2016, we established a relationship with the Visyboard Group
(“Visy”), a global manufacturer of a wide range of
packaging products including corrugated, plastic film and
containers and aluminum. Visy has annual sales in excess of US$ 6
billion and operations in the U.S., Europe, Asia and Australia.
Visy is Australia’s largest packaging reseller and
manufacturer and has 24 plants and facilities in Australia. Visy
has traditionally focused on converted packaging and extruded
plastics. With increasing consumer attention on fresh food and
durables as well as environmental impact of discarded packaging,
Visy is seeking to build its market share in the manufacture and
supply of fresh food packaging.
Our
platform whereby plastic film production lines utilize micro laser
technology to adjust the flow of oxygen and other gases to
correspond with the different requirements of fresh produce has a
significant impact in extending the shelf life of the product,
often by several weeks. Shelf life is becoming a critical issue for
exporters, wholesalers and most importantly, retailers
In
addition to the plastic film business, we expect to increase our
supply of extruded plastic pallets for aluminum cans to Visy which
operates the largest aluminum recycling business in Australia. We
have also agreed to serve as Visy’s selling agent in the
export of up to 100,000 tons per annum of PET plastics from
Australia to China for recycling, commencing mid 2017.
We
supply Visy with a wide range of products which they distribute
through their reseller network directly to end users. This
relationship has given us great visibility within the Australian
packaging market and is expected to enable us to gain access to the
global markets in which Visy currently operates, particularly Asia
and the United States. Recent initiatives with other leading
packaging distributors in Australia have reinforced our emergence
as a market force in this area. Currently, our sourcing,
manufacturing and innovative products are being used in many
applications. Consequently, we now have the opportunity to go
directly to other large customers in the market such as Coles,
Woolworth, Amazon USA and, later in 2017, Amazon
Australia.
We were
founded in Melbourne, Australia in 2005 by our Chairman and CEO,
Zhang Yiwen, whose family developed one of China’s leading
plastics and applied materials manufacturers, Changzhou Sincerity
Plastics and Chemicals Technology Ltd., hereinafter referred to as
“Sincerity China”. Neither we nor Zhang Yiwen have any
present ownership interests in Sincerity China and the owners of
Sincerity China have no present ownership interests in us, although
Zhang Leping, the mother of Zhang Yiwen, serves as one of our
directors and Sincerity China serves as the principal manufacturer
and technological agent for our products.
11
We
serve major end users and distributors in Australia, Asia and the
Middle East from a highly focused and competitively structured
operational base. Our ability to exclusively access the
manufacturing and technological capabilities of Sincerity China is
key in efficiently servicing our customer base. The scale and reach
of our distribution platform enables us to meet our
customers’ needs as they expand their business on a global
basis. We believe our exposure to a variety of end markets helps to
diversify our business, leverage our technology and our total
systems solution model and position us to capitalize on growth
opportunities in markets around the world. Our customer base is
diverse with key regional distributors covering each industry
sector of our distribution platform.
Through
our close relationship with Sincerity China, we believe we are a
leading innovator in material science, solution formulations, and
equipment systems manufacturing technologies, which deliver
performance enhancements in our customers’ operations. Our
solutions are differentiated by Sincerity China’s
proprietary, patented formulations and material technologies, as
well as their patents and trademarks. Sincerity China’s
research and development strategy is focused on delivering
innovative, sustainable solutions that enhance material performance
and improve profitability.
We work
closely with our customers to identify key performance metrics
required from our product platform to tailor individual solutions.
We believe this product mentoring approach generates lasting
customer loyalty and recurring revenue streams for us.
The
inherent stability of the plastics industry combined with our
consistent innovation and expansion supports our ability to
generate cash flow. We believe we are well positioned to benefit
from attractive long-term global growth trends such as an
increasing emphasis on material safety, health and hygiene,
sustainability, cost competitiveness and performance, to drive
additional cash flow generating capabilities.
We
utilize a cloud based data generation and storage platform covering
every aspect of our business from initiation of order to delivery
of product and generation of financial records. This platform
provides seamless operation and financial reporting under optimized
workflow conditions. By closely working with well-established
regional partners, we believe that we can deliver our value added
solutions without investing into duplicate distribution channels.
Supporting distribution partners instead of competing with them, is
a key DNA of our platform, i.e.: to be focused on product, instead
of investing into distribution.
Our Strategy
Our
objective is to be a leading distributor of high performance
plastics and other products across multiple industries. Our
business is based on the following principles;
●
Supply best value
products with high levels of quality, service and technological
support;
●
Maintain low
production costs;
●
Enhance the
recycling efficiency of plastic packaging materials to maintain
environmental integrity;
●
Develop and expand
strategic customer relationships; and
●
Expand through
strategic acquisitions and internal growth.
12
Our products are intended to enable our customers to improve
performance, cost competitiveness, sustainability and automation to
enhance productivity within their operations by focusing on the
following strategic priorities:
Creating, maintaining and extending technological leadership,
expertise and sustainability value.
We
continue to focus on becoming a knowledge-based, market-driven
company centered on offering innovative solutions that enable our
customers to meet their sustainability needs while growing their
businesses, reducing costs and mitigating risk, including enhancing
top line growth and conserving energy, water and other resources
while reducing waste in their operations. Our product solution
goals align with sustainable sourcing principles and new product
development innovation processes, while providing greater
transparency of our supply chain. We enhance our ability
to position our product features and benefits using a
sustainability lens and leverage these product strengths to
differentiate our solutions in the market, with a view to this
approach becoming the new business standard in the
future.
Better aligning ourselves with the customers, markets and global
mega-trends.
As
part of our ongoing business portfolio review, we are committed to
identifying those customers and markets that offer us the best
opportunity to deliver solutions and services that are sufficiently
differentiated and valued in the marketplace. In addition, we are
committed to aligning our business with key global mega-trends,
including e-commerce, infection control and the global movement of
food. In particular, we will leverage our strengths to enhance our
position with our food and beverage customers and, by doing so, we
improve access to a more secure food supply chain. Our
priorities are embodied in our four commitments: enhancing food
security, creating healthy and clean environments, conserving
natural resources, and driving livelihood programs in the
communities where we do business.
Accelerating our penetration and rate of growth in developing
regions.
With
an international focus and extensive geographic footprint aligned
to our growth opportunities, we intend to combine our local market
knowledge with our broad portfolio and strengths in innovation and
customer service to grow in developing regions. Urbanization,
global trade, increased protein consumption and the ongoing
conversion to safer and hygienically packaged foods and goods are
key secular trends that underpin our confidence in our ability to
grow rapidly in these parts of the world.
Focusing on cash flow generation and improved return on
assets.
We
are focused on generating substantial operating cash flow from our
existing business so that we can continue to invest in new products
and technologies, deleverage our balance sheet and support growth
in our share price. We believe our ongoing process of critically
analyzing our business portfolio and reallocating technical, human,
and capital resources to the most promising market sectors from
those sectors that are less strategic or have a lower level of
financial performance will enhance our free cash flow generation
performance and result in a higher return on assets, thus improving
shareholder value.
13
Optimizing our cost base and operations to maximize efficiency and
profitability.
The
size and scale of our global operations affords us a continuing
opportunity to derive greater supply chain efficiencies by
leveraging our purchasing power, optimizing our manufacturing and
logistics footprint, improving our internal operations and
processes, and reducing complexity and cost. In addition to
reducing the cost of our supply chain operations, we continue to
focus on adapting the cost structure of our customer facing and
back-office operations to the appropriate level required to
adequately support our external customer base and run the business
effectively. We also have sustainability goals to reduce the
environmental impact of our global operations and deliver
operational excellence while upholding the highest ethical
standards in our business practices.
Developing our people.
We
recognize that a core strength of our business will be our people.
Therefore, we intend to invest in the development of key skills in
a diverse workforce while improving our ability to attract and
retain new employees who are motivated by our company vision and
the positive impact they can have on the world.
Our Plan of Operation
During
the balance of 2017, our management will continue with the
strategic direction of further vertical integration which has
proven to deliver positive results. Management intends to develop
projects that will fit the business and dove tail into existing
business, strengthening product offerings and opening up new high
value markets. Our plan includes the following:
●
Engage in strategic
acquisitions. We intend to expand through internal growth and
strategic acquisitions. Among other acquisitions, we intend to
acquire Sincerity China with shares of our Common Stock. Sincerity
China has operated for more than 15 years and maintains onsite
laboratories with research and development relationships with
leading Chinese universities, including Sichuan University and
Nanjing University. At this time, there are no agreements between
us and Sincerity China respecting such an acquisition or the
specific terms thereof and no assurances can be given that we will
successfully negotiate and complete such acquisitions.
●
Leverage the value
adding packaging technologies of our products, such as breathable
film and ventilated stretch film. We believe that such products
provide an innovation edge over the competition, resulting in
higher margins and more demand for final products. Rapid growth in
demand from fresh fruit and vegetable packaging has already started
to manifest through our relationship with Visy and will also allow
us to push the benefits of these new products to the Asian
market.
●
Expand our
relationship with Visy. With a number of existing lines and joint
project development initiatives, we have already established a
solid base to work with Visy. Our short-term goal is providing
value added service within VBM Australia, and expanding to other
Visy divisions such as Visy Logistics, Visy Recycling, Visy
Plastics, Visy Aluminum etc. Our long-term goal is to seek further
opportunities with Visy’s parent, Pratt Industries, to
support Pratt’s significant position in the US
market.
14
●
Further develop and
expand our recycling capabilities. As the dominant player in the
Australian recycling market, Visy currently exports approximately
4,500 containers of recyclable paper, plastics and glass per month.
We have been offered the opportunity, through our extensive
relationships with China based recycling groups, to process all of
this recyclable materials
●
Setup focused and
dedicated operations in China and USA. This will enable us to
develop global market opportunities in our core
business.
Competition
Competition
for most of our packaging products is based primarily on packaging
performance characteristics, service and price. There are other
companies producing competing products that are well-established.
Since competition is also based upon innovations in packaging
technology, we rely on third party manufacturers such a Sincerity
China, which maintains ongoing research and development programs
that to enable us to achieve technological advantages.
There
are other manufacturers of packaging products, some of which are
companies offering similar products that operate across regions and
others that operate in a single region or single country. Competing
manufacturers produce a wide variety of food packaging based on
plastic, metals and other materials. We believe that we are a
competitive supplier of flexible food packaging materials and
related systems in the principal geographic areas in which we offer
those products.
The
global plastics industry is competitive in nature. However, the
vast majority of competition in the industry is in the distribution
and sale of generic plastics and commodity type packaging products.
Our product platform consists primarily of highly engineered
formulations or structures to differentiate our focus from our
competitors and, more importantly, to deliver innovative solutions
to our customers.
Marketing and Distribution
We
reach key markets via well established strategic partners. We also
maintain direct working relationships with a wide range of
customers, both in Australia and internationally. We maintain
certain marketing and new business development activities. However,
most of our new and existing customers are attracted to our
platform by our reputation for technological excellence and high
emphasis on research and development as reflected in the quality
and effectiveness of our products
Seasonality
Our
business operations are not materially impacted by seasonal
factors.
Manufacturing
We
outsource all of our manufacturing requirements to Sincerity China
and other third party manufacturers. To date, such manufacturers
have been able to provide us with products in required quantifies
in compliance with regulatory requirements, in accordance with
agreed upon specifications, at acceptable costs and on a timely
basis and we expect that to continue into the foreseeable
future.
15
Supplies and Suppliers
Suppliers
provide raw materials, packaging components, contract manufactured
goods, equipment and other direct materials. Our principal raw
materials are prime polymers and other petrochemical-based resins,
as well as chemicals such as caustic soda, solvents, waxes,
phosphates, surfactants, chelates, fragrances, paper and wood pulp
products. We also purchase corrugated materials, cores for rolls of
products such as films and Bubble Wrap ® brand cushioning,
inks for printed materials, bag-in-the-box containers, bottles,
drums, pails, totes, aerosol cans, caps, triggers, valves, and
blowing agents used in the expansion of foam packaging
products.
The
vast majority of the raw materials required for the manufacture of
our products and all components related to our equipment and
accessories generally have been readily available on the open
market, in most cases are available from several suppliers and are
available in amounts sufficient to meet our manufacturing
requirements. Natural disasters such as hurricanes, as well as
political instability and terrorist activities, may negatively
impact the production or delivery capabilities of refineries and
natural gas and petrochemical suppliers and suppliers of other raw
materials. Due to by-product/co-product chemical relationships to
the automotive and housing markets, several materials may become
difficult to source. These factors could lead to increased prices
for our raw materials, curtailment of supplies and allocation of
raw materials by our suppliers.
We have
a centralized supply chain organization, which includes centralized
management of purchasing and logistic activities. Our objective is
to leverage our global scale to achieve purchasing efficiencies and
reduce our total delivered cost across all our regions. We do this
while adhering to strategic performance metrics and stringent
purchasing practices. While we operate in close cooperation with
Sincerity China, we maintain a diversified supplier base and,
consequently, no single supplier accounts for more than 15% of our
throughput.
Government Regulation
Our
product manufacturers are subject to various laws, rules and
regulations in the countries, jurisdictions and localities in which
they operate. These cover the safe storage and use of raw materials
and production chemicals; the release of materials into the
environment; standards for the treatment, storage and disposal of
solid and hazardous wastes; or otherwise relate to the protection
of the environment. We believe that all of our product
manufacturers are in compliance with current environmental and
workplace health and safety laws and regulations.
In some
jurisdictions in which our products are sold or used or intended to
be sold or used, laws and regulations have been adopted or proposed
that seek to regulate, among other things, minimum levels of
recycled or reprocessed content and, more generally, the sale or
disposal of packaging materials. We together with our third party
manufacturers maintain programs designed to comply with these laws
and regulations and to monitor their evolution. Various federal,
state, local and foreign laws and regulations regulate or will
regulate some of our products and require the registration of
certain products and compliance with specified requirements. We do
not presently sell our products in the United States but expect to
do so in the future. In the United States, our sanitizing and
disinfecting products must be registered with the U.S.
Environmental Protection Agency (“EPA”). We and our
third party manufacturers are or will be also subject to various
federal, state, local and foreign laws and regulations that
regulate products manufactured and sold by us for controlling
microbial growth on humans, animals and processed foods. In the
U.S., these requirements are generally administered by the U.S.
Food and Drug Administration (“FDA”). To date, the cost
of complying with product registration requirements has not had a
material adverse effect on our business, consolidated financial
condition, results of operations or cash flows.
16
Our
emphasis on environmental, health and safety compliance provides us
with risk reduction opportunities and cost savings through asset
protection and protection of employees.
We also
maintain an active recycling presence, both individually and in
cooperation with our recycling partners.
Industry
According
to global research firm Markets & Markets, the global fresh
food packaging industry is currently worth US$ 85 billion and
expected to increase to US$ 95 billion by 2020. The global fresh
food packaging market is buyer oriented and driven largely by
improvements in the shelf life of fresh food. Increased demand for
convenience food, combined with increasing buyer awareness of
global warming and recyclability is increasingly driving consumer
purchase decisions. As a result, global packaging groups are
actively seeking improved technologies in plastic film and
container manufacturing to achieve extended shelf life to build and
improve supply relationships with their retail customers. In a
dynamic often associated with the technology industry, large scale
players in packaging are actively seeking collaboration and
technology transfer with small companies with highly targeted
technology to build and expand their product range.
The
Australian packaging market is valued at AUD10.5 billion
(approximately U.S.$8 billion) in terms of local production.
Imported packaging is estimated to be equal to local production,
fluctuating yearly based on demand, with an overall average growth
of 4.4% year on year. The Australian packaging industry employs
over 50,000 people and is dominated by local packaging
manufacturers. The two major packaging manufacturers in Australia
are Australian owned (Visy being the largest and close behind
Amcor, renamed Orora), as are a substantial proportion of small and
medium enterprises (SME). In contrast the value of the global
packaging industry is estimated to be worth US$300
billion.
Plastics
packaging has the second largest share in the Australian packaging
market and its production is valued at AUD3.3 billion
(approximately US$2.75 billion). Again, imports are close to this
number. Food products packaging constitute the largest share of
plastics packaging. Plastics have gained market share with
flexibles increasing at the expense of rigid plastics. (In the
early 1960s plastics had less than 10% of the share of the
packaging market.) Metal packaging has lost market share to
plastics, but still accounts for 20%, with glass at 10%. Other
types of packaging make up the remainder.
Paper
and Board holds the largest share of the Australian packaging
industry with production valued at AUD3.9 billion (approximately
US$3.2 billion).
Employees
As of
September 15, 2017 we have 5 full time employees consisting of our
4 executive officers and 1 administrative assistant.
Facilities
Our
executive offices are located at Level 4, 10 Yarra Street, South
Yarra (Australia), V1C 3141 where we occupy 1,000 square feet of
space provided to us on a rent for free basis by our principal
shareholder.
17
Legal Proceedings
We are
not currently subject to any material legal
proceedings.
Investing in our Common Stock involves a high degree of risk. In
addition to the other information set forth in this Current Report
on Form 8-K, you should carefully consider the factors discussed
below when considering an investment in our Common Stock. If any of
the events contemplated by the following discussion of risks should
occur, our business, results of operations and financial condition
could suffer significantly. As a result, you could lose some or all
of your investment in our Common Stock. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial may also impair our business.
RISKS RELATED TO OUR BUSINESS
Uncertain global economic conditions could to have an adverse
effect on our consolidated financial condition and results of
operations.
Uncertain global economic conditions may have an adverse impact on
our business in the form of lower net sales due to weakened demand,
unfavorable changes in product price/mix, or lower profit margins.
For example, global economic downturns may adversely impact some of
our end-users and customers, such as food processors, distributors,
supermarket retailers, other retailers, business service
contractors and other end-users that are particularly sensitive to
business and consumer spending. During economic downturns or
recessions, there can be a heightened competition for sales and
increased pressure to reduce selling prices as our customers may
reduce their volume of purchases from us. If we lose significant
sales volume or reduce selling prices significantly, then there
could be a negative impact on our consolidated financial condition
or results of operations, profitability and cash
flows.
The global nature of our operations exposes us to numerous risks
that could materially adversely affect our consolidated financial
condition and results of operations.
We manufacture and sell our products in several countries
subjecting us to the risks inherent in foreign operations. Economic
uncertainty in some of the geographic regions in which we operate,
including developing regions, could result in the disruption of
commerce and negatively impact cash flows from our product sales in
those areas.
Risks inherent in our international operations
include:
●
foreign currency
exchange controls and tax rates;
●
foreign currency
exchange rate fluctuations, including devaluations;
●
the potential for
changes in regional and local economic conditions, including local
inflationary pressures;
●
restrictive
governmental actions such as those on transfer or repatriation of
funds and trade protection matters, including antidumping duties,
tariffs, embargoes and prohibitions or restrictions on acquisitions
or joint ventures;
18
●
changes in laws and
regulations, including laws and policies affecting trade and
foreign investment;
●
the difficulty of
enforcing agreements and collecting receivables through certain
foreign legal systems;
●
more expansive
legal rights of foreign unions or works councils;
●
changes in labor
conditions and difficulties in staffing and managing international
operations;
●
import and export
delays caused, for example, by an extended strike at the port of
entry, could cause a delay in our supply chain
operations;
●
social plans that
prohibit or increase the cost of certain restructuring
actions;
●
the potential for
nationalization of enterprises or facilities; and
●
unsettled political
conditions and possible terrorist attacks
These
and other factors may have material adverse effect on our
operations and, consequently, on our consolidated financial
condition or results of operations.
Political and economic instability and risk of government actions
affecting our business and our customers or suppliers may adversely
impact our business, results of operations and cash
flows.
We are
exposed to risks inherent in doing business in each of the
countries or regions in which we or our customers or suppliers
operate including civil unrest, acts of terrorism, sabotage,
epidemics, force majeure, war or other armed conflict and related
government actions, including sanctions/embargoes, the deprivation
of contract rights, the inability to obtain or retain licenses or
permits required to operate facilities or import or export goods or
raw materials, the expropriation or nationalization of our assets,
and restrictions on travel, payments or the movement of
funds.
Raw material pricing, availability and allocation by suppliers as
well as energy-related costs may negatively impact our results of
operations, including our profit margins.
Our
third party manufacturers use petrochemical-based raw materials to
manufacture many of our products. The prices for these raw
materials are cyclical, and increases in market demand or
fluctuations in the global trade for petrochemical- based raw
materials and energy could increase our costs. In addition, the
prices of many of the other key raw materials used in our
businesses, such as phosphates, surfactants, polymers and resins
and fragrances, are cyclical based on numerous supply and demand
factors that are beyond our control. If we are unable to minimize
the effects of increased raw material costs our business,
consolidated financial condition or results of operations may be
materially adversely affected.
We experience competition in the markets for our products and
services and in the geographic areas in which we
operate.
Our packaging products compete with similar products made by
competitors and with a number of other types of materials or
products. We compete on the basis of performance characteristics of
our products, as well as service, price and innovations in
technology. A number of competing domestic and foreign companies
are well-established.
19
Our
inability to maintain a competitive advantage could result in lower
prices or lower sales volumes for our products. Additionally, we
may not successfully implement our pricing actions. These factors
may have an adverse impact on our consolidated financial condition
or results of operations.
Manufacturing risks, including risks related to manufacturing in
China, may adversely affect our ability to manufacture our products
and could reduce our gross margin and our
profitability.
Our business strategy depends on the ability of our third party
manufacturers to manufacture our current and future products in
sufficient quantities and on a timely basis so as to meet customer
demand, while adhering to product quality standards, complying with
regulatory requirements and managing manufacturing costs. We are
subject to numerous risks relating to the manufacturing
capabilities of such third parties manufacturers
including:
●
quality or
reliability defects in product components that are sourced from
third-party suppliers;
●
their inability to
secure product components in a timely manner, in sufficient
quantities or on commercially reasonable terms;
●
their failure to
increase production of products to meet demand;
●
their inability to
modify production lines to enable their to efficiently produce
future products or implement changes in current products in
response to regulatory requirements;
●
difficulty
identifying and qualifying alternative suppliers for components in
a timely manner; and
●
potential damage to
or destruction of manufacturing equipment or manufacturing
facilities.
In addition, we rely on our primary contract manufacturer,
Changzhou Sincerity Plastics and Chemicals Technology Ltd in
Changzhou China, as well as other Chinese manufacturers to
manufacture our products. As a result, our business is subject
to risks associated with doing business in China,
including:
●
trade protection
measures, such as tariff increases, and import and export licensing
and control requirements;
●
potentially
negative consequences from changes in tax laws;
●
difficulties
associated with the Chinese legal system, including increased costs
and uncertainties associated with enforcing contractual obligations
in China;
●
historically lower
protection of intellectual property rights;
●
unexpected or
unfavorable changes in regulatory requirements; and
●
changes and
volatility in currency exchange rates.
We may enter into strategic collaborations or alliances with third
parties that may not result in the development of commercially
viable products or the generation of significant future
revenue.
In the ordinary course of our business, we may enter into strategic
collaborations or alliances to develop product candidates and to
pursue new markets. Proposing, negotiating and implementing
strategic collaborations or alliances may be a lengthy and complex
process. Other companies, includingthose with substantially greater
financial, marketing, sales, technology or other business
resources, may compete with us for these opportunities or
arrangements. We may not identify, secure, or complete any such
transactions or arrangements in a timely manner, on a
cost-effective basis, on acceptable terms or at all. In particular,
these collaborations may not result in the development of products
that achieve commercial success or result in significant revenue
and could be terminated prior to developing any
products.
20
Additionally, we may not be in a position to exercise sole decision
making authority regarding the transaction or arrangement, which
could create the potential risk of creating impasses on decisions,
and our collaborators may have economic or business interests or
goals that are, or that may become, inconsistent with our business
interests or goals. We have limited control over the amount and
timing of resources that our current collaborators or any future
collaborators devote to our collaborators’ or our future
products. Disputes between us and our collaborators may result in
litigation or arbitration that would increase our expenses and
divert the attention of our management. Further, these transactions
and arrangements are contractual in nature and may be terminated or
dissolved under the terms of the applicable agreements and, in such
event, we may not continue to have rights to the products relating
to such transaction or arrangement or may need to purchase such
rights at a premium.
We may seek to grow our business through acquisitions of
complementary products or technologies, and the failure to manage
acquisitions, or the failure to integrate them with our existing
business, could impair our ability to execute our business
strategies.
From time to time, we may consider opportunities to acquire other
products or technologies that may enhance our product platform or
technology, expand the breadth of our markets or customer base, or
advance our business strategies. Potential acquisitions involve
numerous risks, including:
●
problems
assimilating the acquired products or technologies;
●
issues maintaining
uniform standards, procedures, controls and policies;
●
unanticipated costs
associated with acquisitions;
●
diversion of
management’s attention from our existing
business;
●
risks associated
with entering new markets in which we have limited or no
experience; and
●
increased legal and
accounting costs relating to the acquisitions or compliance with
regulatory matters.
We have no current commitments with respect to any acquisition. We
do not know if we will be able to identify acquisitions we deem
suitable, whether we will be able to successfully complete any such
acquisitions on favorable terms or at all, or whether we will be
able to successfully integrate any acquired products or
technologies. Our inability to integrate any acquired products or
technologies effectively could impair our ability to execute our
business strategies.
Our future capital needs are uncertain and we may need to raise
additional funds in the future, and these funds may not be
available on acceptable terms or at all.
We believe that our cash flow from operations and cash on hand,
together with the net proceeds from the Offering, will be
sufficient to satisfy our liquidity requirements for at least the
next 12 months from the date of this Report. The expected growth of
our business will significantly increase our expenses. In addition,
the amount of our future product sales is difficult to predict and
actual sales may not be in line with our forecasts. As a result, we
believe that we may need to raise additional capital, which may not
be available on reasonable terms, if at all. Our future capital
requirements will depend on many factors, including:
21
●
the revenue
generated by our current products and any future product
candidates that we may develop and commercialize;
●
the costs
associated with expanding our sales capabilities;
●
the cost associated
with developing and commercializing our proposed products or
technologies,
●
the cost of
obtaining and maintaining regulatory clearance or approval for our
current or future products;
●
the cost of ongoing
compliance and regulatory requirements;
●
expenses we incur
in connection with potential litigation or governmental
investigations;
●
anticipated or
unanticipated capital expenditures; and
●
unanticipated
general and administrative expenses.
As a result of these and other factors, we do not know the extent
to which we may be required to raise additional capital from public
or private offerings of our capital stock, borrowings under credit
lines or other sources. If we issue equity or debt securities to
raise additional funds, our existing stockholders may experience
dilution, and the new equity or debt securities may have rights,
preferences and privileges senior to those of our existing
stockholders.
If we are unable to raise additional capital, we may not be able to
expand our sales and marketing infrastructure, enhance our current
products or develop new products, take advantage of future
opportunities, or respond to competitive pressures, changes in
supplier relationships, or unanticipated changes in customer
demand. Any of these events could adversely affect our ability to
achieve our strategic objectives and impact our ability to continue
as a going concern.
We may not be able to develop new products to keep pace with our
industry’s rapidly changing technology and customer
requirements.
Our
industry is characterized by rapid technological changes, new
product introductions and enhancements and evolving industry
standards. Our business prospects depend on our ability to develop
new products and applications in new markets that develop as a
result of technological and scientific advances. New technologies,
techniques or products could emerge that might offer better
combinations of price and performance than ours. The market for our
products is characterized by innovation and advancement in
technology. It is important that we anticipate changes in
technology and market demand and successfully introduce new,
enhanced and competitive technologies to meet our customers’
needs on a timely and cost-effective basis. If we do not
successfully innovate and introduce new technology into our
anticipated product lines or effectively manage the transitions of
our technology to new product offerings, our business, financial
condition and results of operations could be harmed. If we do not
successfully innovate and introduce new technology into our
anticipated product lines or effectively manage the transitions of
our technology to new product offerings, our business, financial
condition and results of operations could be harmed. We work
closely with Sincerity China to provide the technological and
product support that drives our business. If, for any reason, we
were to become unable to access such technological and product
support from Sincerity China, our ability to innovate and provide
effective product solutions on behalf of our customers would be
negatively impacted, with a deleterious effect on our revenue and
profit from operations.
22
We face competition from numerous companies, many of whom have
greater resources than we do.
The
market for high performance synthetic polymer and other packaging
materials is characterized by intense competition and pricing
pressure. We compete with a number of existing packaging companies.
Many of these competitors are large, well-capitalized companies
with significantly greater market share and resources than we have.
As a result, these companies may be better positioned than we are
to spend more aggressively on marketing, sales, intellectual
property and other product initiatives and research and development
activities.
Our
current competitors or other potential competitors may develop new
products for the packaging industry at any time. In addition,
competitors may be able to respond more quickly and effectively
than we can to new or changing opportunities, technologies,
standards or customer requirements. If we are unable to develop
products that compete effectively against the products of existing
or future competitors, our future revenue could be negatively
impacted. Some of our competitors may compete by changing their
pricing model or by lowering the price of their products. If these
competitors’ pricing techniques are effective, it could
result in downward pressure on the price of all packaging products.
If we are unable to maintain or increase our selling prices in the
face of competition, we may not improve our gross
margins.
We may acquire other businesses, form joint ventures or make
investments in other companies or technologies that could
negatively affect our operating results, dilute our
stockholders’ ownership, increase our debt or cause us to
incur significant expense.
We may
pursue acquisitions of businesses and assets. We also may pursue
strategic alliances and joint ventures that leverage our industry
experience to expand our offerings or distribution. We have no
experience with acquiring other companies and limited experience
with forming strategic partnerships. We may not be able to find
suitable partners or acquisition candidates, and we may not be able
to complete such transactions on favorable terms, if at all. If we
make any acquisitions, we may not be able to integrate these
acquisitions successfully into our existing business, and we could
assume unknown or contingent liabilities. Any future acquisitions
could also result in the incurrence of debt, contingent liabilities
or future write-offs of intangible assets or goodwill, any of which
could have a negative impact on our cash flows, financial condition
and results of operations. Integration of an acquired company may
also disrupt ongoing operations and require management resources
that we would otherwise focus on developing our existing business.
We may experience losses related to investments in other companies,
which could harm our financial condition and results of operations.
We may not realize the anticipated benefits of any acquisition,
strategic alliance or joint venture.
Foreign
acquisitions involve unique risks in addition to those mentioned
above, including those related to integration of operations across
different cultures and languages, currency risks and the particular
economic, political and regulatory risks associated with specific
countries.
To
finance any acquisitions or joint ventures, we may choose to issue
Common Stock as consideration, which could dilute the ownership of
our stockholders. Additional funds may not be available on terms
that are favorable to us, or at all. If the price of our Common
Stock is low or volatile, we may not be able to acquire other
companies or fund a joint venture project using our stock as
consideration.
23
Our revenues are derived from the sale of our products to a small
number of customers. The loss of any such customers would adversely
affect our financial results.
During
the nine months ended March 31, 2017, our products were sold to
three customers, one of which accounted for approximately 85% of
our sales. The loss of any of these customers, particularly our
primary customer, without comparable replacements, would adversely
affect our financial results.
Risks Related to Our Reliance on Third Parties
We outsource the manufacturing of our products and rely on a
limited number of third-parties for the manufacture of our
products. We may not be able to find replacements or immediately
transition to alternative manufacturers.
We rely
on a limited number of parties for the manufacture of our products.
These manufacturers, and any of our other manufacturers, may be
unwilling or unable to supply product to us reliably and at the
levels we anticipate or are required by the market. For us to be
successful, our manufacturers must be able to provide us with
products and components in substantial quantities, in compliance
with regulatory requirements, in accordance with agreed upon
specifications, at acceptable costs and on a timely basis. An
interruption in our commercial operations could occur if we
encounter delays or difficulties in securing these components, and
if we cannot then obtain an acceptable substitute. Any such
interruption could harm our reputation, business, financial
condition and results of operations.
If we
are required to change the manufacturer of a particular product, we
will be required to verify that the new manufacturer maintains
facilities, procedures and operations that comply with our quality
and applicable regulatory requirements, which could further impede
our ability to manufacture our products in a timely manner.
Transition to a new manufacturer could be time-consuming and
expensive, may result in interruptions in our operations and
product delivery, and could affect the performance specifications
of our products.
We
cannot assure you that we will be able to secure alternative
manufacturers without experiencing interruptions in our workflow.
If we should encounter delays or difficulties in securing,
reconfiguring or revalidating the products we require our
reputation, business, financial condition and results of operations
could be negatively impacted.
The manufacturing operations of our third-party manufacturers are
dependent upon third-party suppliers, making us vulnerable to
supply shortages and price fluctuations, which could harm our
business.
The raw
materials needed for most of our products are generally available
to our third party manufacturers from multiple sources in
sufficient qualities. However, a
supply interruption or an increase in demand beyond a current
suppliers’ capabilities could harm their ability to
manufacture our products until new sources of supply are identified
and qualified. Their reliance on these suppliers subjects us to a
number of risks that could harm our business,
including:
●
interruption of
supply resulting from modifications to or discontinuation of a
supplier’s operations;
24
●
delays in product
shipments resulting from uncorrected defects, reliability issues,
or a supplier’s variation in a component;
●
a lack of long-term
supply arrangements for key components with suppliers;
●
inability to obtain
adequate supply in a timely manner, or to obtain adequate supply on
commercially reasonable terms;
●
difficulty and cost
associated with locating and qualifying alternative suppliers for
components in a timely manner;
●
production delays
related to the evaluation and testing of products from alternative
suppliers, and corresponding regulatory
qualifications;
●
delay in delivery
due to our suppliers prioritizing other customer orders over
ours;
●
damage to our brand
reputation caused by defective components produced by suppliers;
and
●
fluctuation in
delivery by our suppliers due to changes in demand from our or
their other customers.
Any interruption in the supply of components or materials, or our
third party manufacturers inability to obtain substitute components
or materials from alternate sources at acceptable prices in a
timely manner, could impair our ability to meet the demand of our
customers, which would have an adverse effect on our
business.
Risks Related to Administrative, Organizational and Commercial
Operations and Growth
We may be unable to manage our anticipated future growth
effectively, which could make it difficult to execute our business
strategy.
We
anticipate growth in our business operations. This future growth
could create a strain on our organizational, administrative and
operational infrastructure. We may not be able to maintain the
quality of our products or satisfy customer demand as it grows. Our
ability to manage our growth properly will require us to continue
to improve our operational, financial and management controls, as
well as our reporting systems and procedures. We may implement new
enterprise software systems in a number of areas affecting a broad
range of business processes and functional areas. The time and
resources required to implement these new systems is uncertain and
failure to complete this in a timely and efficient manner could
harm our business.
If we are unable to support demand for our existing products and
our future products, including ensuring that we have adequate
resources to meet increased demand our business could be
harmed.
As our
commercial operations and sales volume grow, we will need to
continue to increase our workflow capacity for manufacturing,
customer service, billing and general process improvements and
expand our internal quality assurance program, among other things.
We cannot assure you that any of these increases in scale,
expansion of personnel, purchase of equipment or process
enhancements will be successfully implemented.
25
The loss of our Chief Executive Officer, Chief Financial Officer or
Chief Operating Officer or our inability to attract and retain
highly skilled personnel could negatively impact our
business.
Our
success depends on the skills, experience and performance of our
President and Chief Executive Officer, Zhang Yiwen, our Secretary
and Chief Financial Officer, Nils Ollquist, and our Chief Operating
Officer, Simon Rees. The individual and collective efforts of these
employees will be important as we continue to develop our business
and as we expand our commercial activities. The loss or incapacity
of existing members of our executive management team could
negatively impact our operations if we experience difficulties in
hiring qualified successors. Our executive officers do not
presently have employment agreements.
Our
future operations will depend, in part, on our ability to attract
and retain highly skilled employees. We may not be able to attract
or retain qualified employees in the future due to the competition
for qualified personnel among our competitors. Recruiting and
retention difficulties can limit our ability to support our current
operations and anticipated future growth programs. All of our
employees are and will be at-will, which means that either we or
the employee may terminate his or her employment at any
time.
Risks Related to Ownership of Our Common Stock
There is currently a limited market for our Common Stock and there
can be no assurance that any market will ever develop. You may
therefore be unable to re-sell shares of our Common Stock at times
and prices that you believe are appropriate.
Our
Common Stock is not listed on a national securities exchange or any
other exchange, and is quoted on OTC Markets. There is no active
trading market for our Common Stock and our Common Stock may never
be included for trading on any stock exchange. Accordingly, our
Common Stock is highly illiquid and you may experience difficulty
in re-selling such shares at times and prices that you may
desire.
The designation of our Common Stock as a “penny stock”
may limit the liquidity of our Common Stock.
Our
Common Stock may be deemed a “penny stock” (as that
term is defined under Rule 3a51-1 of the Exchange Act) in any
market that may develop in the future. Generally, a “penny
stock” is a Common Stock that is not listed on a securities
exchange and trades for less than $5.00 a share. Prices often are
not available to buyers and sellers and the market may be very
limited. Broker-dealers who sell penny stocks must provide
purchasers of these stocks with a standardized risk-disclosure
document prepared by the SEC. The document provides information
about penny stocks and the nature and level of risks involved in
investing in the penny stock market. A broker must also provide
purchasers with bid and offer quotations and information regarding
broker and salesperson compensation and make a written
determination that the penny stock is a suitable investment for the
purchaser and obtain the purchaser’s written agreement to the
purchase. Many brokers choose not to participate in penny stock
transactions. Because of the penny stock rules, there may be less
trading activity in penny stocks in any market that develops for
our Common Stock in the future and stockholders may have difficulty
selling their shares.
26
FINRA sales practice requirements may limit a stockholder’s
ability to buy and sell our stock.
The
Financial Industry Regulatory Authority, or FINRA, has adopted
rules requiring that, in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending
speculative or low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax
status, investment objectives and other information. Under
interpretations of these rules, FINRA has indicated its belief that
there is a high probability that speculative or low-priced
securities will not be suitable for at least some customers. If
these FINRA requirements are applicable to us or our securities,
they may make it more difficult for broker-dealers to recommend
that at least some of their customers buy our Common Stock, which
may limit the ability of our stockholders to buy and sell our
Common Stock and could have an adverse effect on the market for and
price of our Common Stock.
The market price of our Common Stock may be highly volatile, and
may be influenced by numerous factors, some of which are beyond our
control.
If a
market for our Common Stock develops, its market price could
fluctuate substantially due to a variety of factors, including
market perception of our ability to meet our growth projections and
expectations, quarterly operating results of other companies in the
same industry, trading volume in our Common Stock, changes in
general conditions in the economy and the financial markets or
other developments affecting our business and the business of
others in our industry. In addition, the stock market itself is
subject to extreme price and volume fluctuations. This volatility
has had a significant effect on the market price of securities
issued by many companies for reasons related and unrelated to their
operating performance and could have the same effect on our Common
Stock. The market price of shares of our Common Stock could be
subject to wide fluctuations in response to many risk factors
listed in this section, and others beyond our control,
including:
●
regulatory actions
with respect to our products or our competitors’
products;
●
actual or
anticipated fluctuations in our financial condition and operating
results;
●
publication of
research reports by securities analysts about us or our competitors
or our industry;
●
our failure or the
failure of our competitors to meet analysts’ projections or
guidance that we or our competitors may give to the
market;
●
additions and
departures of key personnel;
●
strategic decisions
by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments or changes in
business strategy;
●
the passage of
legislation or other regulatory developments affecting us or our
industry;
●
fluctuations in the
valuation of companies perceived by investors to be comparable to
us;
●
sales of our Common
Stock by us, our insiders or our other stockholders;
●
speculation in the
press or investment community;
●
announcement or
expectation of additional financing efforts;
27
●
changes in
accounting principles;
●
terrorist acts,
acts of war or periods of widespread civil unrest;
●
natural disasters
and other calamities; and
●
changes in general
market and economic conditions.
Our principal stockholders and management own a significant
percentage of our stock and will be able to exercise significant
influence over matters subject to stockholder
approval.
As of
September 19, 2017, our executive officers, directors and principal
(5% or greater) stockholders, together with their respective
affiliates, owned approximately 98.7% of our Common Stock.
Accordingly, these stockholders will be able to exert a significant
degree of influence over our management and affairs and over
matters requiring stockholder approval, including the election of
our board of directors and approval of significant corporate
transactions. This concentration of ownership could have the effect
of entrenching our management and/or the board of directors,
delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control
of us, which in turn could have a material and adverse effect on
the fair market value of our Common Stock.
The shares of Common Stock issued in the Acquisition are and the
shares of Common Stock underlying the Notes and Warrants sold in
the Offering will be “restricted securities” and, as
such, may not be sold except in limited circumstances.
None of
the shares of Common Stock issued in the Acquisition or issuable
upon the exercise of the Warrants (the “Warrant
Shares”) or conversion of the Notes (the “Conversion
Shares”) sold in the Offering have been registered under the
Securities Act of 1933, as amended, or the Securities Act, or
registered or qualified under any state securities laws. The shares
of Common Stock issued in the Acquisition and the shares underlying
the Notes and Warrants sold in the Offering were sold and/or issued
pursuant to exemptions contained in and under those laws.
Accordingly, such shares of Common Stock are “restricted
securities” as defined in Rule 144 under the Securities Act
and must, therefore, be held indefinitely unless registered under
applicable federal and state securities laws, or an exemption is
available from the registration requirements of those laws. The
certificates representing the shares of Common Stock issued in the
Acquisition and issuable upon exercise of Warrants or conversion of
Notes sold in the Offering reflect or will reflect their restricted
status.
We have
agreed to register the shares of Common Stock underlying the Notes
and Warrants issued in the Offering and the shares of Common Stock
held by certain pre-Acquisition stockholders. There can be no
assurance, however, that the SEC will declare the registration
statement effective, thereby enabling such shares of Common Stock
to be freely tradable. In addition, Rule 144 under the Securities
Act, which permits the resale, subject to various terms and
conditions, of limited amounts of restricted securities after they
have been held for six months will not immediately apply to our
Common Stock because we were designated as a “shell
company” under SEC regulations immediately prior to the
Acquisition. Pursuant to Rule 144(i), securities issued by a
current or former shell company that otherwise meet the holding
period and other requirements of Rule 144 nevertheless cannot be
sold in reliance on Rule 144 until one year after the date on which
the issuer filed current “Form 10 information” (as
defined in Rule 144(i)) with the SEC reflecting that it ceased
being a shell company, and provided that at the time of a proposed
sale pursuant to Rule 144, the issuer has satisfied certain
reporting requirements under the Exchange Act. We believe this
requirement to file Form 10 information has been satisfied by the
filing of this report on Form 8-K. Because, as a former shell
company, the reporting requirements of Rule 144(i) will apply
regardless of holding period, the restrictive legends on
certificates for the shares of Common Stock issued in the
Acquisition and issuable pursuant to the Offering cannot be removed
except in connection with an actual sale that is subject to an
effective registration statement under, or an applicable exemption
from the registration requirements of, the Securities
Act.
28
If we are unable to register in a timely manner the shares of
Common Stock issuable pursuant to the Offering or the
pre-Acquisition shares required to be registered, then the
ability to re-sell shares of our Common Stock so issued will be
delayed.
We have
agreed, at our expense, to prepare a registration statement, and to
cause our Company to file a registration statement with the SEC
registering the resale of the shares underlying the Notes and
Warrants sold in the Offering and certain shares held by
pre-Acquisition stockholders. There are many reasons, including
some over which we have little or no control, which could keep the
registration statement from being declared effective by the SEC,
including delays resulting from the SEC review process and comments
raised by the SEC during that process. Accordingly, in the event
that the registration statement is not declared effective within
these timeframes, the shares of Common Stock proposed to be covered
by such registration statement will not be eligible for resale
until the registration statement is effective or an exemption from
registration, such as Rule 144, becomes available. If the
registration statement is not filed within 60 days of the closing
of the Acquisition, then we may be subject to certain liquidated
damages pursuant to the registration rights agreement we entered
into in connection with the Offering.
Because we became a reporting company under the Exchange Act by
means other than a traditional underwritten initial public
offering, we may not be able to attract the attention of research
analysts at major brokerage firms.
Because
we did not become a reporting company by conducting an underwritten
initial public offering of our Common Stock, and because we will
not be listed on a national securities exchange, security analysts
of brokerage firms may not provide coverage of our company. In
addition, investment banks may be less likely to agree to
underwrite secondary offerings on our behalf than they might if we
became a public reporting company by means of an underwritten
initial public offering, because they may be less familiar with our
company as a result of more limited coverage by analysts and the
media, and because we became public at a relatively early stage in
our development. The failure to receive research coverage or
support in the market for our shares will have an adverse effect on
our ability to develop a liquid market for our Common
Stock.
If we fail to implement and maintain proper and effective internal
controls, our ability to produce accurate and timely financial
statements could be impaired, which could harm our operating
results, our ability to operate our business and investors’
views of us.
We are
required to comply with Section 404 of the Sarbanes-Oxley Act of
2002, as amended (the “Sarbanes-Oxley Act”), subject to
certain exceptions. Section 404 of the Sarbanes-Oxley Act requires
public companies to conduct an annual review and evaluation of
their internal controls and to obtain attestations of the
effectiveness of internal controls by independent auditors.
However, as discussed in detail below, as an emerging growth
company and a smaller reporting company, we are not required to
obtain an auditor attestation. As a private company, Sincerity
Australia Pty Ltd. was not subject to requirements to establish,
and did not establish, internal control over financial reporting
and disclosure controls and procedures
consistent with those of a public company. Our management team and
board of directors will need to devote significant efforts to
implementing and maintaining adequate and effective disclosure
controls and procedures and internal control over financial
reporting in order to comply with applicable regulations, which may
include hiring additional legal, financial reporting and other
finance and accounting staff. Any of our efforts to improve our
internal controls and design, implement and maintain an adequate
system of disclosure controls may not be successful and will
require that we expend significant cash and other
resources.
29
Ensuring
that we have adequate internal financial and accounting controls
and procedures in place so that we can produce accurate financial
statements on a timely basis is a costly and time-consuming effort
that will need to be evaluated frequently. Our failure to maintain
the effectiveness of our internal controls in accordance with the
requirements of the Sarbanes-Oxley Act could have a material
adverse effect on the tradability of our Common Stock, which in
turn would negatively impact our business. We could lose investor
confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on the price of our
Common Stock. In addition, if our efforts to comply with new or
changed laws, regulations, and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities
related to practice, regulatory authorities may initiate legal
proceedings against us and our business may be harmed.
We
currently have a small team with primary responsibility for
performing most of our accounting and financial reporting duties.
As a result, certain aspects of internal accounting control which
require adequate segregation of duties are missing. We believe we
do not currently have sufficient accounting and supervisory
personnel with theappropriate level of technical accounting
experience and training necessary or adequate accounting policies,
processes and procedures, particularly in the areas of revenue
recognition, equity related transactions and other complex,
judgmental areas for U.S. generally accepted accounting principles,
or GAAP, financial reporting and SEC reporting purposes and
consequently, we must rely on third party consultants. These
deficiencies represent a material weakness (as defined under the
Exchange Act) in our internal control over financial reporting in
both design and operation. We may identify additional material
weaknesses in the future. Under the Exchange Act, a material
weakness is defined as a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company’s annual or interim financial statements will
not be prevented or detected on a timely basis by the
company’s internal controls. We are currently developing a
plan to design, review, implement and refine internal control over
financial reporting. However, we may identify deficiencies and
weaknesses or fail to remediate previously identified deficiencies
in our internal controls. If material weaknesses or deficiencies in
our internal controls exist and go undetected or unremediated, our
financial statements could contain material misstatements that,
when discovered in the future, could cause us to fail to meet our
future reporting obligations and cause the price of our common
stock to decline.
We are not subject to compliance with rules requiring the adoption
of certain corporate governance measures and as a result our
stockholders have limited protections against interested director
transactions, conflicts of interest and similar
matters.
The
Sarbanes-Oxley Act, as well as resulting rule changes enacted by
the SEC, the New York Stock Exchange and the NASDAQ Stock Market,
require the implementation of various measures relating to
corporate governance. These measures are designed to enhance the
integrity of corporate management and the securities markets and
apply to securities which are listed on those exchanges. Because we
are not listed on the NASDAQ Stock Market or the New York Stock
Exchange, we are not presently required to comply with many of the
corporate governance provisions and we have not yet adopted certain
of these measures. Until we comply with such corporate governance
measures, regardless of whether such compliance is required, the
absence of such standards of corporate governance may leave our
stockholders without protections against interested director
transactions, conflicts of interest and similar
matters.
30
We are a smaller reporting company, and we cannot be certain if the
reduced disclosure requirements applicable to smaller reporting
companies will make our common stock less attractive to
investors.
We are
currently a “smaller reporting company,” meaning that
we are not an investment company, an asset-backed issuer, or a
majority-owned subsidiary of a parent company that is not a smaller
reporting company and have a public float of less than
$75 million and annual revenues of less than $50 million
during the most recently completed fiscal year. “Smaller
reporting companies” are able to provide simplified executive
compensation disclosures in their filings; are exempt from the
provisions of Section 404(b) of the Sarbanes-Oxley Act requiring
that independent registered public accounting firms provide an
attestation report on the effectiveness of internal control over
financial reporting; and have certain other decreased disclosure
obligations in their SEC filings, including, among other things,
only being required to provide two years of audited financial
statements in annual reports and in a registration statement under
the Exchange Act on Form 10. Decreased disclosures in our SEC
filings due to our status as a “smaller reporting
company” may make it harder for investors to analyze our
results of operations and financial prospects.
Shares of our common stock that have not been registered under
federal securities laws are subject to resale restrictions imposed
by Rule 144, including those set forth in Rule 144(i)
which apply to a former “shell company.”
Prior
to the closing of the Acquisition, we were deemed a “shell
company” under applicable SEC rules and regulations because
we had no or nominal operations and either no or nominal assets,
assets consisting solely of cash and cash equivalents, or assets
consisting of any amount of cash and cash equivalents and nominal
other assets. Pursuant to Rule 144 promulgated under the
Securities Act, sales of the securities of a former shell company,
such as us, under that rule are not permitted (i) until at least 12
months have elapsed from the date on which our Current Report on
Form 8-K reflecting our status as a non-shell company, was
filed with the SEC; (ii) unless at the time of a proposed sale, we
are subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act and have filed all reports and other materials
required to be filed by Section 13 or 15(d) of the Exchange Act, as
applicable, during the preceding 12 months, other than
Form 8-K reports; or (iii) until the effectiveness of a
registration statement under the Securities Act relating to our
common stock. We are currently subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act and have
filed all reports and other materials required to be filed
thereunder. Unless we register their shares of common stock for
sale under the Securities Act, most of our stockholders will be
forced to hold their shares of our common stock for at least a
12-month period before they are eligible to sell those shares, and
even after a 12-month period, sales may not be made under
Rule 144 unless we and the stockholders who plan to sell such
shares are in compliance with other requirements of Rule 144.
Further, it will be more difficult for us to raise funding to
support our operations through the sale of debt or equity
securities unless we agree to register such securities under the
Securities Act, which could cause us to expend significant time and
cash resources. Additionally, our previous status as a shell
company could also limit our use of our securities to pay for any
acquisitions we may seek to pursue in the future (although none are
currently planned). The lack of liquidity of our securities as a
result of the inability to sell under Rule 144 for a longer
period of time than a non-former shell company could cause the
market price of our securities to decline.
31
Investors may experience dilution of their ownership interests
because of the future issuance of additional shares of our common
or preferred stock or other securities that are convertible into or
exercisable for our common or preferred stock.
In the
future, we may issue our authorized but previously unissued equity
securities, resulting in the dilution of the ownership interests of
our existing stockholders. We are authorized to issue an aggregate
of 290 million shares of common stock and 10 million shares of
“blank check” preferred stock. We may issue additional
shares of common stock or other securities that are convertible
into or exercisable for common stock in connection with hiring or
retaining employees, future acquisitions, future sales of our
securities for capital raising purposes, or for other business
purposes. The future issuance of any such additional shares of our
common stock may create downward pressure on the trading price of
the common stock. We may need to raise additional capital in the
near future to meet our working capital needs, and there can be no
assurance that we will not be required to issue additional shares,
warrants or other convertible securities in the future in
conjunction with these capital raising efforts.
Issuance of stock to fund our operations may dilute your investment
and reduce your equity interest.
We may
need to raise capital in the future to fund the development of our
products or for other purposes. Any equity financing may have a
significant dilutive effect to stockholders and a material decrease
in our stockholders’ equity interest in us. Equity financing,
if obtained, could result in substantial dilution to our existing
stockholders. At its sole discretion, our board of directors may
issue additional securities without seeking stockholder approval,
and we do not know when we will need additional capital or, if we
do, whether it will be available to us.
We have broad discretion in the use of our cash, including the net
proceeds from our private placement offering, and may not use them
effectively.
We
currently intend to use our cash resources, including the net
proceeds from our private placement offering, for working capital
and other general corporate purposes. Although we currently intend
to use the net proceeds from our private placement offering in such
a manner, we will have broad discretion in the application of the
net proceeds. Pending their use, we may invest the net proceeds
from our private placement offering in a manner that does not
produce income or loses value.
Because we do not anticipate paying any cash dividends on our
capital stock in the foreseeable future, capital appreciation, if
any, will be your sole source of gain.
You
should not rely on an investment in our Common Stock to provide
dividend income. We do not anticipate that we will pay any cash
dividends to holders of our Common Stock in the foreseeable future.
Instead, we plan to retain any earnings to maintain and expand our
operations. In addition,any future debt financing arrangement may
contain terms prohibiting or limiting the amount of dividends that
may be declared or paid on our Common Stock. Accordingly, investors
must rely on sales of their Common Stock after price appreciation,
which may never occur, as the only way to realize any return on
their investment. As a result, investors seeking cash dividends
should not purchase our Common Stock.
32
You should read the following discussion and analysis of our
financial condition and results of operations together with our
consolidated financial statements and the related notes and other
financial information included in this Current Report on Form 8-K.
Some of the information contained in this discussion and analysis
or set forth elsewhere in this Current Report on Form 8-K,
including information with respect to our plans and strategy for
our business, includes forward-looking statements that involve
risks and uncertainties as described under the heading
“Forward-Looking Statements” elsewhere in this Current
Report on Form 8-K. You should review the disclosure under the
heading “Risk Factors” in this Current Report on Form
8-K for a discussion of important factors that could cause actual
results to differ materially from the results described in or
implied by the forward-looking statements contained in the
following discussion and analysis.
As the
result of the Acquisition and the change in business and operations
of the Company, a discussion of the past financial results of the
Company is not pertinent, and under applicable accounting
principles the historical financial results of SAPL, the accounting
acquiror, prior to the Acquisition are considered the historical
financial results of the Company.
The
following discussion highlights SAPL’s results of operations
and the principal factors that have affected its financial
condition as well as its liquidity and capital resources for the
periods described, and provides information that management
believes is relevant for an assessment and understanding of the
statements of financial condition and results of operations
presented herein. The following discussion and analysis are based
on SAPL’s audited and unaudited financial statements
contained in this Report, which we have prepared in accordance with
United States generally accepted accounting principles. You should
read the discussion and analysis together with such financial
statements and the related notes thereto.
Basis of Presentation
The
audited consolidated financial statements of SAPL for the fiscal
years ended June 30, 2016 and 2015, and the unaudited consolidated
condensed financial statements of Sincerity for the nine months
ended March 31, 2017 and 2016, contained herein include a summary
of our significant accounting policies and should be read in
conjunction with the discussion below. In the opinion of
management, all material adjustments necessary to present fairly
the results of operations for such unaudited interim periods have
been included in these unaudited financial statements. All such
adjustments are of a normal recurring nature.
33
Company Overview
SAPL is
primarily a distributor and reseller of applied materials,
particularly plastics, with an extensive network in China of high
quality suppliers for a wide range of both basic and high
application polymer products ranging from generic construction
materials to high end breathable stretch film and antibacterial
sheeting. SAPL is based in Melbourne, Australia and distributes to
a number of larger resellers and end users, including Visy
Industries (trading as Pratt Group America in the USA), one of the
world's largest packaging and recycling groups.
SAPL’s
business was commenced in 2009 by James Zhang, son of the founder
of Sincerity China, a well-established plastics and applied
materials manufacturer with a 20-year operating history, based in
Changzhou, China. SAPL originally commenced operations by supplying
basic extruded plastic components (moldings, auto interior
components, kitchen splash backs etc.) to the Australian auto,
retail and construction industries. In 2015, SAPL began importing
specialty high quality plastic trays and film for use in fresh food
packaging and distribution. The first major customer for this
business was the Propac Group, leading supplier of plastic
packaging materials to Coles, one of Australia's 2 dominant
supermarket chains, Coles Group.
Over
the past 3 years SAPL has refocused its marketing efforts towards
larger resellers and distributors in Australia, allowing SAPL to
build strong relationships with key industry players who acquire
its products for their own distribution and reseller networks.
Research and investment in addressing the key fresh food issue of
plastic film "breathability" has created a unique technology
platform whereby air circulation in packaged foods can be adjusted
according to the type of food. This has the effect of prolonging
shelf life, key to building relationship metrics within the food
retailing industry. SAPL recently entered into an arrangement to
supply Visy Industries, with high technology, breathable plastic
film for use in Visy Industries’ packaging supply contract
with Woolworths Group, the other dominant player in Australia's
supermarket industry.
Presently
over 90% of SAPL’s revenue is derived from sales within the
Australian market, however, due to the strong international
presence of SAPL’s major customers such as Visy, particularly
in the US, combined with the technology metrics of SAPL’s
product range (breathable stretch film and antibacterial polymer
products), it is expected that SAPL’s products will be
increasingly utilized in global markets.
SAPL
will continue with the process of further vertical integration of
its product range. Value adding packaging technology, such as
breathable film, and ventilated stretch film, is expected to
provide an innovative edge over our competition. Rapid growth in
demand from fresh fruit and vegetable packaging is already
reflected through increasing sales to Visy Industries and will also
allow SAPL to transition these new products to the global
market.
Given
many existing lines and joint project development initiatives with
Visy Industries, SAPL’s short-term goal is providing value
adding service within Australian operations of the group, and build
expansion to other Visy Industries divisions, such as Visy Logistic
and, Visy Recycling. The long-term goal is to seek further
opportunities with Visy Industries’ parent Pratt Industries
to support Pratt's significant position in the US
market.
34
SAPL
plans to expand its operations into recycling. As the dominant
player in the Australian recycling market, Visy Industries
currently exports 4,500 containers of recyclable paper, plastics
and glass per month. In view of SAPL’s extensive network of
relationships with China based recycling groups, SAPL has an
opportunity to act as reselling agent for all of this recyclable
material.
SAPL is
a small business with most recent annual revenue of less than $2
million. Additionally, its future growth will rely largely on its
ability to continue to source innovative, custom packaging
solutions to its primary customers, including Visy Industries.
Whilst we see no reason for SAPL’s relationships with key
suppliers, such as Sincerity China to change, we cannot guarantee
this to be the case.
SAPL
generated revenue of $564,000 and $1.1 million, and had net loss of
$105,000 and net profit of $84,000, for the nine months ended March
31, 2017 and 2016, respectively.
SAPL
expects to generate significant increases in both sales and net
profits in the future as it:
●
Expands its
business with key customers;
●
Commences
operations with Visy Recycling;
●
Establishes a
marketing unit in Los Angeles to service requirements of Pratt
Industries US; and
●
Adds additional
business development personnel in Melbourne.
We may
seek to fund our operations through public or private equity or
debt financings or other sources. However, we may be unable to
raise additional funds or enter into such other arrangements when
needed on favorable terms or at all. Our failure to raise capital
or enter into such other arrangements as and when needed could have
a negative impact on our ability to significantly increase order
flow as our customers and suppliers typical credit terms are
asymmetric and we may require short term working capital inventory
financing from time to time. Such lack of working capital credit
may restrict ability to grow our business at an acceptable
rate.
Components of Statements of Operations
Revenue
Product
revenue consists of sales generated by a variety of polymer plastic
and related products, net of returns, discounts and allowances.
Once a sales order is negotiated and initial deposit of up to 30%
received, a purchase order will be generated with a selected
supplier, predominately in China. The product will generally be
shipped within 3 to 4 weeksof receipt of the purchase order with
the final invoice raised on the date of shipment and payment
shortly thereafter. In the case of Visy Industries, our main
customer going forward, final payment is carried out on a 30 day
cycle on the final day of each calendar month. All product
shipments carry full insurance in case of loss or
damage.
Cost of Revenue
Product
cost of revenue primarily consists of the invoice cost of specific
products delivered from suppliers.
35
Our
product margin, or difference between the cost of products sourced
and delivered, varies between type and customization of product,
from a minimum of 10% for basic plastic products such as splash
backs for the construction industry to upwards of 40% for
customized, engineered solutions such as microbial treated
coverings and highly engineered polymers. Our business strategy has
seen our product mix move steadily into the higher margin
engineered products with a corresponding reduction in the
percentage of lower margin "generic" products.
Operating Expenses
Research and Development. Whilst we have no direct
affiliation with Sincerity China, we are able to benefit from the
extensive research and development activities undertaken by
Sincerity China which operates state of the art R&D facilities
in conjunction with a number of leading universities and research
institutions. Sincerity China is a leading player in development of
polymer technology in China and our customized, technology based
solutions, particularly in the area of flexible packaging represent
a considerable advantage in our business development
profile.
Sales and Marketing. We do not incur and have not to date
incurred marketing expenses in generating sales. All of new
customers are introduced through industry relationships and
reputation. We will consider establishment of a marketing function
when we establish a US presence (Los Angeles office). This
marketing function will service the relationship with Pratt
Industries USA.
General and Administrative. Our general and administrative
expenses consist primarily of personnel costs, foreign currency
gains and loss together with legal, audit, accounting services. To
date we have not directly incurred rental costs as facilities have
been made available by our major shareholder. Following our
transition as a public company, we will secure individuals both in
Melbourne and Los Angeles, because of which, our SG&A costs
will increase following the closing of the
Acquisition.
Interest Income
Interest
income consists primarily of interest income received on our cash
and cash equivalents.
Interest Expense
Interest
expense consists primarily of interest and amortization of related
costs associated with a term "come and go" loan facility secured by
third party property mortgage. This term loan facility is operated
similar to an overdraft facility whereby drawings are made when
orders are placed and repaid with proceeds from settled
invoices.
36
Results of Operations
The
following tables set forth our results of operations for the
periods presented:
|
|
Nine Months
Ended March 31,
|
Years Ended June
30,
|
||
|
|
2017
|
2016
|
2016
|
2017
|
|
|
|
|
|
|
|
Revenue
|
$564,230
|
$1,081,159
|
$1,223,438
|
$1,407,878
|
|
Cost
of revenue:
|
516,388
|
797,267
|
882,553
|
1,160,272
|
|
Gross
margin
|
47,842
|
283,892
|
340,885
|
247,606
|
|
Operating
expenses:
|
|
|
|
|
|
Research and
development
|
-
|
-
|
-
|
-
|
|
Sales and
marketing
|
-
|
-
|
-
|
-
|
|
General and
administrative
|
156,797
|
141,879
|
150,720
|
167,221
|
|
Total operating
expenses:
|
156,797
|
141,879
|
150,720
|
167,221
|
|
Loss from
operations
|
108,955
|
142,013
|
190,165
|
80,385
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
Interest
expense
|
(10,406)
|
(29,866)
|
(36,988)
|
(20,558)
|
|
Other
income/(loss)
|
(18,209)
|
11,049
|
(39,300)
|
(83,784)
|
|
Net
income/loss before provision for income taxes
|
(137,570)
|
123,196
|
113,877
|
(23,957)
|
|
Provision for
income taxes
|
38,970
|
(39,080)
|
(39,080)
|
(9,731)
|
|
Net and
comprehensive loss
|
$(98,600)
|
$84,117
|
$74,797
|
$14,226
|
|
Net profit (loss)
attributable to common stockholders
|
$(98,600)
|
$84,117
|
$74,797
|
$14,226
|
|
Net profit (loss)
per share attributable to common stockholders, basic and
diluted
|
$(9.86)
|
$8.41
|
$7.47
|
$1.46
|
Comparison of the
nine months ended March 31, 2017 and 2016
Revenue
Total
revenue during the nine months ended March 31, 2017 was $564,230
compared to $1,081,159 during the nine months ended March 31, 2016.
The main reason for the decline was asymmetric order flow during
the nine months ended March 31, 2017, with a significant percentage
of annual revenue credited during the June quarter period. Revenue
for the three months ended June 30, 2017 was approximately USD
$662,200 compared to $175,691 compared to the comparable period in
2016.
Cost of Revenue/Gross Margin
The
percentage total cost of revenue increased substantially during the
nine months ended March 31, 2017 compared to the nine months ended
March 31, 2016. The decrease in the gross profit margin for the
nine months ended March 31, 2017 was primarily attributable to the
greater focus on value added packaging which is expected to
increase volume.
37
Operating Expenses
General and Administrative: General and administrative
expenses during the nine months ended March 31, 2017 were
essentially the same compared to the nine months ended March 31,
2016 with exception to a decrease in bad debt write off and
increase in professional fees due to PCAOB audit undertaking by the
company.
|
|
Nine Months
Ended
March
31,
|
|
|
|
|
2017
|
2016
|
Change
|
|
General and
administrative expenses
|
$156,797
|
$141,879
|
$14,918
|
General
and administrative expenses during the nine months ended March 31,
2017, increased due to additional professional fees
accrued.
Interest Expense
|
|
Nine Months
Ended
March
31,
|
|
|
|
|
2017
|
2016
|
Change
|
|
Interest
expense
|
$(10,406)
|
$(29,866)
|
$(19,460)
|
Interest
expense during the nine months ended March 31, 2017 decreased due
to the flexible line of credit facility where no interest is
charged when funds not utilized.
Comparison of the Years Ended June 30, 2015 and 2016
Revenue
|
|
Year End
June 30, |
|
|
|
|
2016
|
2015
|
Change
|
|
Revenue
|
$1,223,438
|
$1,407,878
|
$(184,440)
|
Total
revenue declined during the 2016 financial year primarily due to a
deliberate refocus from a generic product mix to higher end
applications. This refocus resulted in a short term decline in
orders which is expected to be offset in future
periods.
38
Cost of Revenue/Gross Margin
|
|
Year
Ended
June
30,
|
|
|
|
|
2016
|
2015
|
Change
|
|
Inventory
|
$(40,569)
|
|
$40,569
|
|
Purchases
|
$897,533
|
$1,134,065
|
$(236,532)
|
|
Freight
|
$25,588
|
$26,208
|
$(620)
|
|
Total
Cost of revenue
|
$882,553
|
$1,160,272
|
$(196,583)
|
|
Gross
Margin %
|
27.8%
|
17.5%
|
(10.2)%
|
Gross
margin was 27.8% and 17.5% for the years ended June 30, 2016 and
2015, respectively. The 10.2% improvement in gross margin was
primarily driven by product mix.
We
currently expect that cost of revenue on current orders will
continue this trend and show improvements from historic costs by
scaling of our operation closer to optimal levels.
Operating Expenses
|
|
Years
Ended
June
30,
|
|
|
|
|
2016
|
2015
|
Change
|
|
Research and
development
|
$-
|
$-
|
$-
|
|
Sales and
marketing
|
2,781
|
1,567
|
1,214
|
|
General and
administrative
|
184,927
|
186,212
|
(1,285)
|
|
Total operating
expenses
|
$187,708
|
$187,779
|
$(71)
|
Research and Development. The company had no research and
development costs incurred during period.
Sales and Marketing. Sales and marketing expenses were
negligible for the periods under review.
General and Administrative. General and administrative
expenses in 2016 were essentially unchanged as compared to 2015.
Bad debt expenses of $64,170 in 2016 arose from a delivery to a
Middle Eastern customer where only 50% of the shipment was
delivered and paid. The balance of the shipment is being held, on
our behalf, by Sincerity China and will be sold on a spot basis
which will claw back a proportion of the write off.
|
|
Year End
June 30, |
|
|
|
|
2016
|
2015
|
Change
|
|
General and
administrative expenses
|
$62,782
|
$309,560
|
$246,780
|
39
Interest Expense
|
|
Year Ended
June 30, |
|
|
|
|
2016
|
2015
|
Change
|
|
Interest
expense
|
$(36,988)
|
$(20,558)
|
$16,430
|
Interest
expense increased by 16,430 in 2016, which was primarily due to the
increase in working capital borrowing.
Liquidity and Capital Resources
From
Sincerity's inception in 2009 to 2015, we incurred significant net
losses and negative cash flows from operations. This primarily
reflected insufficient working capital availability, typical of a
start up operation and particularly because of the relatively low
margin generic products offered as part of our strategy to build
market presence and awareness. During the first nine months of 2016
and the first nine months of 2017, we generated net earnings of
$75,000 and incurred a net loss of $98,000 respectively. As at
March 31,2017 we had an accumulated deficit of
$205,000.
As at
March 31 2017 we had cash and cash equivalents of $16,109 To date
we have funded our operations principally through a combination of
cash flow and drawdowns under the loan facility secured by real
estate assets provided by our principal shareholder.
We
believe that cash flow from operations and cash on hand will be
sufficient to satisfy our liquidity requirements for the next 12
months. However, we could potentially need additional financial
resources sooner than we currently expect, and we may incur
additional indebtedness to meet future financing needs. Adequate
additional funding may not be available to us on acceptable terms
or at all. In addition, although we anticipate being able to obtain
additional financing through nondilutive means, we may be unable to
do so. Our failure to raise capital as and when needed could have
significant negative consequences for our business, financial
condition and results of operations. Our future capital
requirements and the adequacy of available funds will depend on
many factors, including those set forth in the section titled "Risk
Factors."
Loan and Security Agreement
On
December 12, 2016, we entered into a mortgage loan and security
agreement (the "Loan Agreement") with ANZ Banking Group Limited.
Property owned by our principal shareholder and director was
provided as security. Also, the loan was personally guaranteed by
our major shareholder and director.
The
Company was allocated $120,000 of the line of credit facility, and
the remaining balance $600,000 was on lent to our major shareholder
and director under commercial terms. The loan balance as at March
31,2017 was $120,000 and $500,000 to SAPL and our major shareholder
and director, respectively.
In
addition, SAPL had a chattel mortgage of $85,254 at March 31, 2017
secured by a motor vehicle owned by the SAPL. The loan is secured
by the motor vehicle and has been personally guaranteed by the
director.
40
Operating Activities
We have
historically experienced cash outflows as we were developing a
solid customer base. Our net cash used in operating activities
primarily results from our net loss adjusted for non-cash expenses
and changed in the working capital components and influenced by
timing of cash payments for imports and inventory. Our primary
source of cash flow from operating activities is cash receipts from
customers.
Our
primary uses of cash from operating activities amounts due to
vendors for purchase components. Our cash flows from operating
activities will continue to be affected principally by our working
capital requirements and the extent to which we build up our
inventory balances and increase spending on personnel and other
operating activities as our business grows.
During
the nine months ended March 31, 2017, operating activities used
$35,741 in cash (net), an increase of $168,597 from cash used in
the nine months ended March 31, 2016 of $48,739. During the year
ended June 30, 2016, operating activities used $167,593 in cash, a
decrease of $53,484 from cash used in the year ended June 30, 2015.
The reduction in cash used in operations was primarily due to
profit of $74,798 in the year ended June 30, 2016 as compared to a
loss of $14,226 for the year ended June 30, 2015 and lower cash
usage in accounts receivable and this is offset by cash usage in
accounts payable.
Investing Activities
There
was no cash flow used for investing activities for the year nine
months ended March 31, 2017 compared to $4,053 received as a result
of disposition of fixed assets for the nine month ended March 31,
2016. There was no cash flow used for investing activities for the
year ended June 30, 2016 compared to $4,053 received as a result of
disposition of fixed assets for the year ended March 31,
2016.
Financing Activities
During
the nine months ended March 31, 2017, $601,001 of cash provided by
financing activities was from a line of credit facility from ANZ
Banking Group Limited. The entire facility was secured by real
property owned by SAPL’s director. Essentially, the loan was
apportioned into a line of credit facility of approximately
$111,000 and the remaining $600,000 was used as a mortgage loan for
the property. This property is owned by our director and principal
shareholder and the entire facility has been personally
guaranteed.
OffBalance Sheet Arrangements
We do
not have any off-balance sheet arrangements.
41
Critical Accounting Policies and Estimates.
Our
financial statements are prepared in accordance with generally
accepted accounting principles in the United States, or GAAP. The
preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, expenses and related disclosures. We
evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the
circumstances. Our actual results could differ from these
estimates.
We
believe that the assumptions and estimates have the greatest
potential impact on our financial statements. Therefore, we
consider these to be our critical accounting policies and
estimates. For further information on all of our significant
accounting policies, see the notes to our financial
statements.
Inventories
Inventories
are stated at lower of cost or market value and consist of raw
materials, work in process, and finished goods. Cost is determined
using standard costs, which approximates actual cost on a
firstin, firstout basis. Market value is determined as
the lower of replacement cost or net realizable value. We write
down our inventory for estimated excess or obsolete inventory equal
to the difference between the cost and the estimated market value
based upon assumptions about future demands and market
conditions.
Revenue Recognition
Our
revenue is derived from the sale of the plastic materials in
wholesale. We recognize revenue in accordance with FASB Accounting
Standards Codification 605, Revenue Recognition, or ASC 605. Under
ASC 605, revenue is recognized when persuasive evidence of an
arrangement exists, title and risk of loss has transferred to the
customer, the sales price is fixed or determinable, and
collectability is reasonably assured.
Product Warranty
We do
not provide warranty coverage about most of its items, except for
Splash Backs, which carries a manufacturer's warranty of ten years.
This warranty is covered by the manufacturer.
Allowance for Doubtful Accounts
We
regularly review accounts receivable balances, including an
analysis of customers' payment history and information regarding
the customers' creditworthiness, and records an allowance for
doubtful accounts based upon this evaluation. We write off accounts
against the allowance when all attempts at collection have been
exhausted.
42
Income Taxes
We are
subject to the Australian small business company income tax
collected by the Australian Tax Office ("ATO"). This income tax is
provided for the tax effects of transactions reported in the
financial statements and consists of the tax currently due
(including any amended returns intended to be filed by management),
plus the deferred tax at June 30, 2015 related to the recognition
of the benefit of net operating losses (NOL's) carried forward, and
arising from deductible temporary differences between tax and U.S.
GAAP for accumulated depreciation. The deferred tax asset
represents the future deductible tax consequences of the use of the
NOL's and future settlement of the deductible temporary
differences. Further, the Company adopted and prospectively applied
Accounting Standards Update (ASU) 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes, which
requires that deferred tax liabilities and assets be classified as
noncurrent in a classified balance sheet.
Future
operations will require our accounts for income taxes under the
liability method, whereby deferred tax assets and liabilities are
recorded for the difference between the financial statement and tax
bases of assets and liabilities and for net operating loss and tax
credit carryforwards using the enacted tax rates in effect for the
year in which the differences are expected to affect taxable
income. A valuation allowance is established when necessary to
reduce deferred tax assets to the amounts expected to be
realized.
We will
be adhering to the provisions of FASB Accounting Standards
Codification (ASC 74010), "Accounting for Uncertainty in
Income Taxes." ASC 74010 prescribes a comprehensive model for
the recognition, measurement, presentation and disclosure in
financial statements of any uncertain tax positions that have been
taken or expected to be taken on a tax return.
It is
our policy to include penalties and interest expense related to
income taxes as a component of other expense, net, as
necessary.
The
following table sets forth information relating to the beneficial
ownership of our Common Stock at September 19, 2017,
by:
●
each person, or
group of affiliated persons, known by us to beneficially own more
than 5% of the outstanding shares of our Common Stock;
●
each of our
directors;
●
each of our named
executive officers; and
●
all current
directors and executive officers as a group.
43
The
number of shares beneficially owned by each entity, person,
director or executive officer is determined in accordance with the
rules of the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares over which the individual
has sole or shared voting power or investment power as well as any
shares that the individual has the right to acquire within
60 days of September 19, 2017 through the exercise of any
stock option, warrants or other rights. Except as otherwise
indicated, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power
with respect to all shares of Common Stock held by such
person.
The
percentage of shares beneficially owned is computed on the basis of
48,333,334 shares of Common Stock outstanding as of September 19,
2017, giving effect to the Acquisition and the Offering. Shares of
Common Stock that a person has the right to acquire within
60 days of September 19, 2017 are deemed outstanding for
purposes of computing the percentage ownership of the person
holding such rights, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person, except with
respect to the percentage ownership of all directors and executive
officers as a group. Unless otherwise indicated below, the address
for each beneficial owner listed in the table is c/o Sincerity
Applied Materials Holdings Corp., Level 4, 10 Yarra Street, South
Yarra VIC 3141.
|
|
Shares
Beneficially Owned
|
|
|
|
Number
|
Percentage
|
|
5%
Stockholders:
|
|
|
|
CKR Law
LLP
1330 Avenue of the
Americas
New York, NY
10019
|
2,341,930
|
5.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officers and Directors:
|
|
|
|
|
|
|
|
Zhang
Yiwen
|
45,211,047(1)
|
93.5%
|
|
Nils
Ollquist
|
0
|
0%
|
|
Simon
Rees
|
0
|
0%
|
|
Praba
Ganeshan
|
0
|
0%
|
|
Zhang
Leping
|
0
|
0%
|
|
All directors and
executive officers as a group (5 persons)
|
45,211,047
|
93.5%
|
|
|
|
|
(1) Represents 45,211,047 shares owned by the Zhang
Family Trust, a trust in which Zhang Yiwen and his wife are the
beneficial owners.
44
At the
Effective Time of the Acquisition, each of Zhang Yiwen, Nils
Ollquist and Zhang Leping was appointed to our board of directors
and constitute our board of directors as of the date of this
Report. Our executive management team was also reconstituted
immediately following the Effective Time by the appointment of
Zhang Yiwen as our President and Chief Executive Officer, Nils
Ollquist as our Secretary and Chief Financial Officer, Simon Rees
as our Chief Operating Officer and Praba Ganeshan as our Treasurer
and the resignations of Korstiaan Zandvliet and Maarten van der
Sanden from all of their positions as officers. The following table
sets forth the name and positions of each of our directors and
executive officers after the Acquisition.
Directors and Executive Officers
Below
are the names of and certain information regarding our current
executive officers and directors who were appointed effective as of
the closing of the Acquisition:
|
Name
|
|
Age
|
|
Position(s)
|
|
Executive
Officers
|
|
|
|
|
|
Zhang
Yiwen
|
|
30
|
|
Chief
Executive Officer, President and Director (Chairman)
|
|
Nils
Ollquist
|
|
60
|
|
Chief
Financial Officer, Secretary and Director
|
|
Simon
Rees
|
|
46
|
|
Chief
Operating Officer
|
|
Praba
Ganeshan
|
|
40
|
|
Treasurer
|
|
|
|
|
|
|
|
Non-Employee
Directors
|
|
|
|
|
|
Zhang
Leping
|
|
51
|
|
Director
|
Directors
hold office until the expiration of the term for which he or she
was elected and until a successor has been elected and
qualified.
A
majority of the authorized number of directors constitutes a quorum
of the Board of Directors for the transaction of business. The
directors must be present at the meeting to constitute a quorum.
However, any action required or permitted to be taken by the Board
of Directors may be taken without a meeting if all members of the
Board of Directors, individually or collectively consent in writing
to the action.
Executive
officers are appointed by the Board of Directors and serve at its
pleasure.
The
principal occupation and business experience during at least the
past five years for our executive officers and directors is set
forth below. In addition, for each director, set forth below is a
summary of the specific experience, qualifications, attributes or
skills that led to the conclusion that the person should serve as a
director of the Company.
Zhang
Leping is the mother of Zhang Ziwen. No other familial
relationships exist among our officers and directors.
45
Executive Officers
Zhang Yiwen has served as our President, Chief Executive
Officer and Chairman since the September 19, 2017 closing of the
Acquisition. He founded Sincerity Australia Pty Ltd in November
2005 and has served as its general manager since its inception. He
has more than 10 years of experience in the plastics and packaging
industries including well-developed relationships with significant
packaging groups. He is skilled in business negotiations,
operations management, strategic planning, business development and
matters involving plastics. He received a Bachelor of Commerce
Degree with a focus in accounting and finance from the Australia
National University. We believe that Zhang Yiwen is qualified to
serve on our board of directors based upon his industry and
management experience.
Nils Ollquist has served as
our Chief Financial Officer, Secretary and as a Director since the
September 19, 2017 closing of the Acquisition. He has more than 35
years of experience in banking and finance in Asia, the United
States, Europe and Australia in both the commercial and government
sectors. He has held senior management roles with major
institutions such as Barclays Bank PLC and Bank of America as well
as the Australian Federal Treasury in Canberra. Positions held
include Managing Director of OFS Capital Group, a Hong Kong Based
advisory and corporate finance firm (1993 – present),
Director and Head of Mergers and Acquisitions for Bank of America
in Asia (1990-92), Executive Director for Security Pacific Merchant
Bank in the US (1986-89) and Senior Executive Assistant to the
Australian Treasury Secretary (1978). He has extensive experience
in regulatory compliance, corporate governance, equity capital
markets and corporate finance. He holds degrees in Economics and
Law from the Australian National University. We believe that Nils
Ollquist is qualified to serve on our board of directors based upon
his financial and management experience.
Simon Rees has served as our Chief Operating Officer since
the September 19, 2017 closing of the Acquisition. He is a Senior
Manager with more than twenty years of experience in demanding
management roles across two industries, two countries and
considerable exposure to the Asia Pacific region. Experienced in
import export distribution businesses, predominately in the
Plastics and Packaging industries, he has close links and working
relationships with all major suppliers and customers within the
Australia/New Zealand market and Asia Pacific region. From 1993 to
2005, he held a number of senior management roles with Sealed
Cryovac, a world leader in vacuum packaging, high performance
laminates, and equipment manufacturing for the meat and food
industries globally. From 2005 to 2010, Mr. Rees worked as business
manager- packaging for Detmold Packaging (“Detmold”) a
large, privately owned business based in Adelaide Australia focused
on delivering paper and plastic packaging solutions for the New
Zealand, Australia and Asia regions. At Detmold, Mr. Rees was
responsible for operations and all manufacturing sites linked to
packaging in the Asia pacific region. During this period, he
developed extensive business networks in China and Indonesia. Mr.
Rees was employed as the CEO for Burnside Plastics from 2010 to
2015 and is currently the State Manager for Propac Packaging. Mr.
Rees holds a Degree in Strategic Management and Marketing from
Waikato University and a post -graduate diploma in Packaging
Technology from Massey University in New Zealand.
Praba Ganeshan has served as our Treasurer since the
September 19, 2017 closing of the Acquisition. Mr, Ganeshan is a
qualified accountant, Registered Tax Agent and Financial Planner as
well as a member of CPA Australia. From 2011 to date, he has
operated as a director of Ganrid Consultants based in Melbourne,
Australia. In this role, he oversees development and implementation
of financial, tax and management operating systems and acts as
financial controller for a number of medium sized local companies.
From 2008-2011, Mr. Ganeshan was Manager and senior accountant for
Waters Dace Partners, a Melbourne based accounting and fund
management firm and from 2003 to 2008, he served in senior
accounting roles for Banks Group and Dillon Partners, local
financial advisory and accounting firms. Mr. Ganeshan holds a
BComm. Degree from Deakin University and is a qualified
CPA.
46
Non-Employee Directors
Zhang Leping has served as a Director since the September
19, 2017 closing of the Acquisition. She founded Changzhou
Sincerity Plastics & Chemicals Technology Co Ltd in Sept, 2000
and has served as its general manager since its inception. She has
more than 30 years of experience in plastic materials engineering.
In addition to her extensive technical experience and knowledge,
she is skilled in business negotiations, operations management,
strategic planning and business development. We believe that Zhang
Leping is qualified to serve on our board of directors based upon
her industry and management experience.
Director Independence
Our
securities are not listed on a national securities exchange or on
any inter-dealer quotation system which has a requirement that a
majority of directors be independent. We evaluate independence by
the standards for director independence set forth in the NASDAQ
Marketplace Rules. Under such rules, our board of directors has
determined that none of our directors are independent. Zhang Yiwen
is not an independent director under these rules because he is an
executive officer and principal shareholder of our company. Nils
Ollquist is not an independent director because he is an executive
officer of our company. Zhang Leping is not an independent director
under these rules because Zhang Yiwen, her son, serves as an
executive officer of ours and because of her ownership of Sincerity
China, the principal manufacturer and technological agent for our
products. In making such independence determination, our board of
directors considered the relationships that each non-employee
director has with us and all other facts and circumstances that our
board of directors deemed relevant in determining their
independence, including the beneficial ownership of our capital
stock by each non-employee director. In considering the
independence of the directors listed above, our board of directors
considered the association of our directors with the holders of
more than 5% of our Common Stock.
Role of Board in Risk Oversight Process
Risk is
inherent with every business, and how well a business manages risk
can ultimately determine its success. We face a number of risks,
including risks relating to our financial condition, development
and commercialization activities, operations, strategic direction
and intellectual property as more fully discussed in the section
entitled “Risk Factors” appearing elsewhere in this
Report. Management is responsible for the day-to-day management of
risks we face, while our board of directors, as a whole, has
responsibility for the oversight of risk management. In its risk
oversight role, our board of directors has the responsibility to
satisfy itself that the risk management processes designed and
implemented by management are adequate and functioning as
designed.
The
full board of directors discusses with management our major risk
exposures, their potential impact on us, and the steps we take to
manage them. This enables the board of directors to coordinate the
risk oversight role, particularly with respect to risk
interrelationships.
47
Board Committees
As our
Common Stock is not presently listed for trading or quotation on a
national securities exchange, we are not presently required to have
board committees. However, we expect to establish an audit
committee, a compensation committee and a nominating and corporate
governance committee in the future in conjunction with the
anticipated growth of our business, each of which will operate
pursuant to a charter adopted by our board of directors. The
composition and functioning of all of our committee will comply
with all applicable requirements of the Sarbanes-Oxley Act of 2002
and SEC rules and regulations.
Code of Business Conduct and Ethics
We have
adopted a code of business conduct and ethics that applies to all
of our employees, officers and directors, including those officers
responsible for financial reporting. We will provide a copy of our
Code of Business Conduct and ethics to any person without change
upon request in writing to Sincerity Applied Materials Holdings
Corp., Level 4, 10 Yarra Street, South Yarra, Australia VIC 314,
Attn: Chief Executive Officer
Limitation on Liability and Indemnification Matters
Our
Articles of Incorporation contains provisions that limit the
liability of our directors for monetary damages to the fullest
extent permitted by Nevada law. Consequently, our directors and
officers will not be personally liable to us or our stockholders
for monetary damages for any breach of fiduciary duties as
directors or officers, except liability for:
●
any act or omission
not in good faith or that involves intentional misconduct or a
knowing violation of law;
●
unlawful payments
of dividends or unlawful stock repurchases or redemptions in
violation of the Nevada Revised Statue.
Our
Articles of Incorporation and ByLaws provide that we are required
to indemnify our directors and officers, in each case to the
fullest extent permitted by Nevada law. Our bylaws also provide
that we are obligated to advance expenses incurred by a director or
officer in advance of the final disposition of any action or
proceeding, and permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his, her or its actions in that capacity regardless
of whether we would otherwise be permitted to indemnify him, her or
it under Nevada law.
In
addition to the indemnification required in our Articles of
Incorporation and ByLaws, we intend to enter into indemnification
agreements with each of our directors, officers and certain other
employees. These agreements will provide for the indemnification of
our directors, officers and certain other employees for all
reasonable expenses and liabilities incurred in connection with any
action or proceeding brought against them by reason of the fact
that they are or were our agents. We believe that these provisions
in our Articles of Incorporation, ByLaws and indemnification
agreements are necessary to attract and retain qualified persons as
directors and officers. This description of the limitation of
liability and indemnification provisions of our Articles of
Incorporation, or ByLaws is qualified in its entirety by reference
to these documents, each of which is included as an exhibit to this
Report.
48
The
limitation of liability and indemnification provisions in our
Articles of Incorporation and ByLaws may discourage stockholders
from bringing a lawsuit against directors for breach of their
fiduciary duties. They may also reduce the likelihood of derivative
litigation against directors and officers, even though an action,
if successful, might benefit us and our stockholders. A
stockholder’s investment may be harmed to the extent we pay
the costs of settlement and damage awards against directors and
officers pursuant to these indemnification provisions. Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. There is no pending litigation or
proceeding naming any of our directors, officers or employees as to
which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for
indemnification by any director, officer or employee.
Director Compensation
SAPL
has not paid any compensation to its directors, in their capacities
as such, since its inception.
Involvement in Certain Legal Proceedings
None of
our directors or executive officers has been involved in any of the
following events during the past 10 years:
●
any bankruptcy
petition filed by or against any business of which such person was
a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
●
any conviction in a
criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offences);
●
being subject to
any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or
otherwise limiting his or her involvement in any type of business,
securities or banking activities;or
●
being found by a
court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment
has not been reversed, suspended, or vacated.
The
following summarizes the compensation earned by SAPL’s
executive officers named in the “Summary Compensation
Table” below (referred to herein as our “named
executive officers”) in SAPL’s two fiscal years ending
June 30, 2016.
SAPL
became our wholly-owned subsidiary upon the closing of the
Acquisition on September 19, 2017. The following section is
historical and has not been adjusted to give effect to the
Acquisition.
49
Overview
Sincerity
Australia Pty Ltd. (“SAPL”) became our wholly owned
subsidiary upon the closing of the Acquisition on September 19,
2017. The following summarizes the compensation earned in each of
SAPL’s fiscal years ended June 30, 2016 and 2015 and includes
disclosure for (i) all persons that served as SAPL’s
principal executive officer (the “PEO”) during the
fiscal year ended June 30, 2016 regardless of compensation level;
(ii) SAPL’s two most highly compensated executive officers
other than the PEO who were serving as executive officers of SAPL
on June 30, 2016; and (iii) up to two additional individuals for
whom disclosure would have been provided in (ii) above but for the
fact that the individual was not serving as an executive officer of
SAPL on June 30, 2016. Disclosure is not provided for any executive
officer of SAPL, other than the PEO, whose total compensation
during the fiscal year ended June 30, 2016, did not exceed
$100,000. Zhang Yiwen was the only person to serve as SAPL’s
PEO during the fiscal year ended June 30, 2016 and no person for
whom information would have otherwise been provided pursuant to
(ii) or (iii) above earned more than $100,000 during the fiscal
year ended June 30, 2017.
Summary Compensation Table
The
following table sets forth information regarding compensation
awarded to, earned by or paid to each of the named executive
officers for the fiscal years ending June 30, 2017 and
2016.
|
Name and
Principal Position
|
|
Year
|
|
Salary
($)
|
|
Non-Equity
Incentive Compensation ($)
|
|
Option Awards(
$)
|
|
All Other
Compensation ($) (3)
|
|
Total ($)
|
|||||
|
Zhang
Yiwen, CEO
|
|
2017
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
2016
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
Outstanding Equity Awards at Fiscal Year-End 2016
SAPL
has not adopted any equity incentive plans, employee stock plans or
any similar equity compensation plans since its inception and as
such the named executive held no equity plan awards as of June 30,
2016. No equity awards were granted to the named executive officer
under the Company’s 2013 Equity Incentive Plan, the sole
equity compensation plan of the Company, in connection with the
Acquisition or subsequent thereto.
Employment Agreements
Neither
the named executive, officer or any of our other executive officers
have employment agreements with the Company or SAPL and none of
them have ever had employment agreements with the Company or SAPL.
We intend to enter into written employment agreements with Zhang
Yiwen, Nils Ollquist or Simon Rees in the near future, each
providing for annual salaries of $125,000 and approximately $11,000
in pension benefits.
50
Employee Benefit Plans
The following table provides
information as of September 19, 2017, with respect to the shares of
common stock that may be issued under our existing equity
compensation plans:
|
Plan
category
|
|
Number of
securities to be issued upon exercise of outstanding options,
warrants, units and rights
|
|
Weighted-average
exercise price of outstanding options, warrants, units and
rights
|
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column)
|
|
Equity
compensation plans approved by security holders (1)
|
|
0
|
|
N/A
|
|
62,074
|
|
Equity
compensation plans not approved by security holders
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Total
|
|
0
|
|
N/A
|
|
0
|
(1)
2013 Equity
Incentive Plan
On
December 6, 2013, our Board of Directors adopted, and on December
6, 2013, our stockholders approved, the 2013 Equity Incentive Plan,
which reserved a total of 83,334 shares of our common stock for
issuance under the 2013 Plan. If an incentive award granted under
the 2013 Plan expires, terminates, is unexercised or is forfeited,
or if any shares are surrendered to us in connection with an
incentive award, the shares subject to such award and the
surrendered shares will become available for further awards under
the 2013 Plan.
In
addition, the number of shares of our common stock subject to the
2013 Plan, any number of shares subject to any numerical limit in
the 2013 Plan, and the number of shares and terms of any incentive
award are expected to be adjusted in the event of any change in our
outstanding our common stock by reason of any stock dividend,
spin-off, split-up, stock-split, reverse stock split,
recapitalization, reclassification, merger, consolidation,
liquidation, business combination or exchange of shares or similar
transaction.
Administration
The
compensation committee of the Board, or the Board in the absence of
such a committee, will administer the 2013 Plan. Subject to the
terms of the 2013 Plan, the compensation committee or the Board has
complete authority and discretion to determine the terms of awards
under the 2013 Plan.
51
Grants
The
2013 Plan authorizes the grant to participants of nonqualified
stock options incentive stock options, restricted stock awards,
restricted stock units, performance grants intended to comply with
Section 162(m) of the Internal Revenue Code (as amended, the
“Code”) and stock appreciation rights, as described
below:
●
Options granted
under the 2013 Plan entitle the grantee, upon exercise, to purchase
a specified number of shares from us at a specified exercise price
per share. The exercise price for shares of our Common Stock
covered by an option generally cannot be less than the fair market
value of our Common Stock on the date of grant unless agreed to
otherwise at the time of the grant. In addition, in the case of an
incentive stock option granted to an employee who, at the time the
incentive stock option is granted, owns stock representing more
than 10% of the voting power of all classes of stock of the Company
or any parent or subsidiary, the per share exercise price will be
no less than 110% of the firm market value of our Common Stock on
the date of the grant.
●
Restricted stock
awards and restricted stock units may be awarded on terms and
conditions established by the compensation committee, which may
include performance conditions for restricted stock awards and the
lapse of restrictions on the achievement of one or more performance
goals for restricted stock units.
●
The Board of
Directors may make performance grants, each of which will contain
performance goals for the award, including the performance
criteria, the target and maximum amounts payable, and other terms
and conditions.
●
The 2013 Plan
authorizes the granting of stock awards. The compensation committee
will establish the number of shares of our Common Stock to be
awarded and the terms applicable to each award, including
performance restrictions.
●
Stock appreciation
rights (“SARs”) entitle the participant to receive a
distribution in an amount not to exceed the number of shares of our
Common Stock subject to the portion of the SAR exercised multiplied
by the difference between the market price of a share of our Common
Stock on the date of exercise of the SAR and the market price of a
share of our Common Stock on the date of grant of the
SAR.
Duration, Amendment and Termination
The
Board has the power to amend, suspend or terminate the 2013 Plan
without stockholder approval or ratification at any time or from
time to time. No change may be made that increases the total number
of shares of our Common Stock reserved for issuance pursuant to
incentive awards or reduces the minimum exercise price for options
or exchange of options for other incentive awards, unless such
change is authorized by our stockholders within one year. Unless
sooner terminated, the 2013 Plan will terminate on December 6,
2023.
As of
September 19, 2017 no securities were issued and outstanding under
the 2013 Plan.
52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SEC
rules require us to disclose any transaction or currently proposed
transaction in which we were a participant and in which any related
person has or will have a direct or indirect material interest
involving the lesser of $120,000 or 1% of the average of our total
assets as of the end of last two completed fiscal years. A related
person is any executive officer, director, nominee for director, or
holder of 5% or more of our Common Stock, or an immediate family
member of any of those persons. The descriptions set forth above
under the captions “The Acquisition and Related
Transactions—Acquisition Agreement,” “—the
Offering,” “—Registration Rights,”
“—Lock-up Agreements and Other Restrictions” and
“Executive Compensation—Employment and Related
Agreements” and “—Director Compensation”
and below under “Description of Securities” are
incorporated herein by reference.
The
following is a description of transactions since July 1, 2014 to
which we have been a party, in which the amount involved exceeded
or will exceed $120,000, and in which any of our directors,
executive officers or holders of more than 5% of SAPL’s
pre-Acquisition capital stock, or an affiliate or immediate family
member thereof, had or will have a direct or indirect material
interest, other than compensation and other arrangements that are
described in the section titled “Executive
Compensation.” The following description is historical and
has not been adjusted to give effect to the Acquisition or the
share exchange pursuant to the Acquisition Agreement.
Sales and Purchases of Securities
On
October 4, 2005 SAPL issued 7,500 Ordinary Shares to Zhang Yiwen at
a price of $1.00 per share or an aggregate of $7,500 and issued
2,500 Ordinary Shares to Yin Ting, the wife of Zhary Yiwen at a
price of $1.00 per share or an aggregate of $2,500. On February 14,
2017 Zhang Yiwen and Yin Ting transferred all of their respective
Ordinary Shares to the Zhang Family Trust, a trust in which Zhang
Yiwen and Yin Ting are the beneficial owners. In conjunction with
the September 19, 2017 closing under the Acquisitions Agreement,
the 10,000 Ordinary Shares were exchanged with us in the
Acquisition for 45,211,047 shares of Common Stock.
Indemnification Agreements and Directors’ and Officers’
Liability Insurance
We do
not presently maintain Directors’ and Officers’
Liability Insurance for our post-Acquisition officers and directors
and do presently have indemnification agreements with our
post-Acquisition officers and directors. We intend to obtain
Directors’ and Officers’ Liability Insurance and enter
into indemnification agreements with our post-Acquisition officers
and directors in the near future.
Employment Agreements
As
described above under “Executive Compensation –
Employment Agreements” we intend to enter into employee
agreements in the near future with our post-Acquisition
officers.
53
Other Transactions
During
the years ended June 30, 2017 and 2016 SAPL purchased approximately
$14,144 and $358,000, respectively, in products from Sincerity
China. Sincerity China is owned by Zhang Leping and her
husband.
At
March 31, 2017, June 30, 2016 and June 30, 2015 SAPL had balances
due to its stockholder in the amounts of $541,565, $118,761 and
$343,003, respectively, which were subject to an unsecured loan
agreement that required interest payments at the rate of 7.8% per
annum on balances outstanding for at least an entire year, and
stipulated repayment within one year from the balance sheet date,
subject to the lender’s discretion. The agreement also
provided for future advances and payments at the discretion of the
parties. Interest expense on the stockholder loan approximated
$26,000 and $0 for the years ended June 30, 2016 and 2015,
respectively. No interest was charged during the nine month period
ending March 31, 2017 in accordance with the terms of the
agreement.
SAPL
has a total $950,000 (AUD) bank credit line (approximately $711,000
(USD) at March 31, 2017) personally guaranteed by certain SAPL
officers, and secured by real property owned by those officers,
available to be used for core business working capital
requirements, $800,000 (AUD) of which is designated as the
“mortgage loan” portion with the remaining balance of
$150,000 (AUD) designated as the “business loan”
portion. The mortgage loan portion of the credit line is subject to
the bank’s business mortgage index rate (5.94% per annum at
March 31, 2017) minus 2.23% per annum for a maximum term of 30
years from the first drawdown date, and the business loan portion
of the credit line is subject to the bank’s business mortgage
index rate minus 1.08% per annum for a maximum term of 15 years
from the first drawdown date. The business loan was first drawn
down on December 12, 2016, and at March 31, 2017, $114,565 (USD)
was drawn and payable on the business loan; no drawings had been
made on the mortgage loan as of the March 31, 2017 balance sheet
date. Interest only is due monthly in arrears for the first 3 years
from the first drawdown date for draws from the mortgage loan and
from the business loan.
54
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our
common stock has been quoted on the OTC Bulletin Board (OTCBB) and
the OTC Markets QB Tier (OTCQB), since September 25, 2013. Since
July 13, 2017 our common stock has been quoted under the symbol
“SINC”. From June 12, 2017 until July 31, 2017 our
common stock was quoted under the symbol “SBIDD”. From
September 25, 2013 until June 12, 2017 our common stock was quoted
under the symbol “SBID”. Prior to September 25, 2013
our common stock was quoted under the symbol “HKDZ”.
Presently, there is not an active trading market for our common
stock. Our common stock may never be included for trading on an
exchange.
As of
the date of this Report, we have 48,333,334 shares of Common Stock
outstanding (inclusive of the Acquisition Shares) held by 114
stockholders of record.
The
following table sets forth the high and low bid prices for our
common stock for the fiscal quarter indicated as reported on OTC
Markets. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions. Our common stock is very thinly traded and, thus,
pricing of our common stock on OTC Markets does not necessarily
represent its fair market value. Prices give retroactive effect to
the June 14, 2017 60:1 reverse stock split of our common
stock.
|
Period
|
High
|
Low
|
|
Quarter ended March
31, 2015
|
$20.40
|
$10.80
|
|
Quarter ended June
30, 2015
|
$19.80
|
$9.60
|
|
Quarter ended
September 30, 2015
|
$18.00
|
$9.00
|
|
Quarter ended
December 31, 2015
|
$22.20
|
$11.46
|
|
Quarter ended March
31, 2016
|
$30.00
|
$15.00
|
|
Quarter ended June
30, 2016
|
$15.06
|
$4.20
|
|
Quarter ended
September 30, 2016
|
$9.00
|
$2.40
|
|
Quarter ended
December 31, 2016
|
$2.40
|
$0.492
|
|
Quarter ended March
31, 2017
|
$0.90
|
$0.66
|
|
Quarter ended June
30, 2017
|
$1.56
|
$0.90
|
|
Quarter ending
September 30, 2017*
|
$1.70
|
$1.20
|
* Through September
20 , 2017
55
Dividend Policy
We have
never paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends on our Common Stock in the
foreseeable future. We intend to retain future earnings to fund
ongoing operations and future capital requirements. Any future
determination to pay cash dividends will be at the discretion of
our board of directors and will be dependent upon financial
condition, results of operations, capital requirements and such
other factors as the board of directors deems
relevant.
Shares Eligible for Future Sale
Prior
to the Acquisition, there has been a limited public market for our
Common Stock. Future sales of our Common Stock, including shares
issued upon the conversion of outstanding Notes or the exercise of
outstanding Warrants, in the public market after the Acquisition,
or the perception that those sales may occur, could cause the
prevailing price for our Common Stock to fall or impair our ability
to raise equity capital in the future. As described below, only a
limited number of shares of our Common Stock will be available for
sale in the public market for a period of several months after
consummation of the Acquisition due to contractual and legal
restrictions on resale described below. Future sales of our Common
Stock in the public market either before (to the extent permitted)
or after restrictions lapse, or the perception that those sales may
occur, could adversely affect the prevailing price of our Common
Stock at such time and our ability to raise equity capital at a
time and price we deem appropriate.
Upon
the closing of the Acquisition and completion of the Offering, we
had 48,333,334 shares of Common Stock outstanding, of which our
present directors and executive officers beneficially own an
aggregate of 45,211,047 shares. None of the outstanding shares of
Common Stock owned by such directors and executive officers are
freely tradable, without restriction, as of the date of this
Current Report on Form 8-K. No shares issued in connection
with the Acquisition or the Offering can be publicly sold under
Rule 144 promulgated under the Securities Act until 12 months after
the date of filing this Current Report on Form 8-K.
Sale of Restricted Shares
Of the
48,333,334 shares of Common Stock outstanding upon the closing of
the Acquisition and completion of the Offering, approximately
48,141,000 of such shares are “restricted securities”
as such term is defined in Rule 144. These restricted securities
were issued and sold by us, in private transactions and are
eligible for public sale only if registered under the Securities
Act or if they qualify for an exemption from registration under the
Securities Act, including the exemptions provided by Rule 144,
which rules are summarized below.
Lock-up Agreements
In
connection with the Acquisition, holders of 45,211,047 shares of
our Common Stock have agreed, subject to certain exceptions, not to
dispose of or hedge any shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock during
the period from the date of the lock-up agreement continuing
through the date 24 months after the date of the
Acquisition.
Following
the lock-up periods set forth in the agreements described above,
and assuming that no parties are released from these agreements and
that there is no extension of the lock-up period, certain of the
shares of Common Stock that are restricted securities or are held
by our affiliates as of the date of the Acquisition will be
eligible for sale in the public market in compliance with
Rule 144 under the Securities Act.
56
Rule 144
Pursuant
to Rule 144 promulgated under the Securities Act, sales of the
securities of a former shell company, such as us, under that rule
are not permitted (i) until at least 12 months have elapsed
from the date on which this Report, reflecting our status as a
non-shell company, is filed with the SEC and (ii) unless at
the time of a proposed sale, we are subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act and
have filed all reports and other materials required to be filed by
Section 13 or 15(d) of the Exchange Act, as applicable, during
the preceding 12 months, other than Form 8-K reports. We are
presently subject to the reporting requirements of Section 13
or Section 15(d) of the Exchange Act and have made all filings
required thereunder. As a result, unless we register such shares
for sale under the Securities Act, most of our stockholders will be
forced to hold their shares of our Common Stock for at least that
12-month period before they are eligible to sell those shares, and
even after that 12-month period, sales may not be made under Rule
144 unless we and the selling stockholders are in compliance with
other requirements of Rule 144.
In
general, Rule 144 provides that (i) any of our non-affiliates
that has held restricted Common Stock for at least 12 months is
thereafter entitled to sell its restricted stock freely and without
restriction, provided that we remain compliant and current with our
SEC reporting obligations, and (ii) any of our affiliates,
which includes our directors, executive officers and other person
in control of us, that has held restricted Common Stock for at
least 12 months is thereafter entitled to sell its restricted stock
subject to the following restrictions: (a) we are compliant
and current with our SEC reporting obligations, (b) certain
manner of sale provisions are satisfied, (c) a Form 144 is
filed with the SEC, and (d) certain volume limitations are
satisfied, which limit the sale of shares within any three-month
period to a number of shares that does not exceed 1% of the total
number of outstanding shares or, if our Common Stock is then listed
or quoted for trading on a national securities exchange, then the
greater of 1% of the total number of outstanding shares and the
average weekly trading volume of our Common Stock during the four
calendar weeks preceding the filing of the Form 144 with respect to
the sale. A person who has ceased to be an affiliate at least three
months immediately preceding the sale and who has owned such shares
of common stock for at least one year is entitled to sell the
shares under Rule 144 without regard to any of the limitations
described above.
Regulation S
Regulation
S under the Securities Act provides that shares owned by any person
may be sold without registration in the U.S., provided that the
sale is effected in an offshore transaction and no directed selling
efforts are made in the U.S. (as these terms are defined in
Regulation S), subject to certain other conditions. In general,
this means that our shares of Common Stock may be sold in some
other manner outside the U.S. without requiring registration in the
U.S.
57
Registration Rights
Registration Rights Agreement. In connection with the
Acquisition and the Offering, we entered into a Registration Rights
Agreement, pursuant to which we have agreed that promptly, but no
later than 60 calendar days from the closing of the Offering, we
will file a registration statement with the SEC, or the
Registration Statement, covering (a) the shares of Common
Stock issuable upon conversion of the Notes and exercise of the
Warrants in the Offering, and (b) 2,341,930 other shares (the
“Pre-Acquisition Registrable Shares”) of Common Stock
(collectively, the “Registrable Shares”). We will use
our commercially reasonable efforts to ensure that such
Registration Statement is declared effective within 120 calendar
days after the closing of the Offering. If we are late in filing
the Registration Statement, if the Registration Statement is not
declared effective within 120 days after the closing of the
Offering, if we fail to maintain the Registration Statement
continuously effective as to all Registrable Shares included in
such Registration Statement or the holders of Registrable Shares
cannot use the Registration Statement to resell the Registrable
Shares for a period of more than 30 trading days (other than
suspension of the Registration Statement in connection with its
post-effective amendment in connection with filing our Annual
Report on Form 10-K for the time reasonably required to respond to
any comments from the SEC or during a permitted blackout period as
described in the Registration Rights Agreement) or trading of the
Common Stock is suspended for more than 3 consecutive trading days,
we will make payments to each holder of Registrable Shares as
monetary penalties at a per annum rate equal to 12% of (i) the Unit
Offering Price for each Unit purchased, or (ii) the assumed value
(the “Assumed Value”) of the Pre-Acquisition
Registrable Shares based upon a post-Acquisition valuation of the
Company of $15,000,000 provided, however, that in no event will the
aggregate of any such penalties exceed 8% of the Unit Offering
Price for each Unit purchased or the Assumed Value, as applicable.
No monetary penalties will accrue with respect to any Registrable
Shares removed from the Registration Statement in response to a
comment from the staff of the SEC limiting the number of shares of
Common Stock which may be included in the Registration Statement,
or Cutback Comment, or after the Registrable Shares may be resold
without volume or other limitations under Rule 144 or another
exemption from registration under the Securities Act. Any cutback
resulting from a Cutback Comment shall be allocated pro rata based
on the total number of such shares held by or issuable to each
holder.
We must
keep the Registration Statement effective for two years from the
date it is declared effective by the SEC or until (i) the
Registrable Shares have been sold in accordance with such effective
Registration Statement or (ii) the Registrable Shares have
been previously sold in accordance with Rule 144. We must comply
with the informational requirements of Rule 144 so long as any
shares of Common Stock issued in the Offering are subject to Rule
144, regardless of whether we are subject to filing requirements
under the Exchange Act.
We will
pay all expenses in connection with any registration obligation
provided in the Registration Rights Agreement, including, without
limitation, all registration, filing, stock exchange fees, printing
expenses, all fees and expenses of complying with applicable
securities laws, and the fees and disbursements of our counsel and
of our independent accountants and reasonable fees and
disbursements of counsel to the investors. Each investor will
be responsible for its own sales commissions, if any, transfer
taxes and the expenses of any attorney or other advisor such
investor decides to employ.
58
All
descriptions of the Registration Rights Agreement herein are
qualified in their entirety by reference to the text thereof filed
as Exhibit 10.5 hereto.
We have
authorized capital stock consisting of 290,000,000 shares of Common
Stock and 10,000,000 shares of preferred stock. As of the date of
this Report, we had 48,333,334 shares of Common Stock issued and
outstanding, and no shares of preferred stock issued and
outstanding. Unless stated otherwise, the following discussion
summarizes the term and provisions of our amended and restated
certificate of incorporation and our amended and restated
bylaws.
Common Stock
The
holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets or funds legally available for the
payment of dividends of such times and in such amounts as the board
from time to time may determine. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted
to a vote of stockholders. There is no cumulative voting of the
election of directors then standing for election. The Common Stock
is not entitled to pre-emptive rights and is not subject to
conversion or redemption. Upon liquidation, dissolution or winding
up of our company, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the
Common Stock after payment of liquidation preferences, if any, on
any outstanding payment of other claims of creditors. Each
outstanding share of Common Stock is duly and validly issued, fully
paid and non-assessable.
Preferred Stock
Shares
of preferred stock may be issued from time to time in one or more
series, each of which will have such distinctive designation or
title as shall be determined by our board of directors prior to the
issuance of any shares thereof. Preferred stock will have such
voting powers, full or limited, or no voting powers, and such
preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions
thereof, as shall be stated in such resolution or resolutions
providing for the issue of such class or series of preferred stock
as may be adopted from time to time by the board of directors prior
to the issuance of any shares thereof.
While
we do not currently have any plans for the issuance of preferred
stock, the issuance of such preferred stock could adversely affect
the rights of the holders of Common Stock and, therefore, reduce
the value of the Common Stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock on
the rights of holders of the Common Stock until the board of
directors determines the specific rights of the holders of the
preferred stock; however, these effects may include:
●
Restricting
dividends on the Common Stock;
●
Diluting the voting
power of the Common Stock;
●
Impairing the
liquidation rights of the Common Stock; or
59
●
Delaying or
preventing a change in control of our company without further
action by the stockholders.
Warrants
The
Warrants comprising part of the PPO Units sold in the Offering on
September 19, 2017 entitle their holders to purchase an aggregate
of 500,010 shares of Common Stock, (33,334 shares of Common Stock
per Unit sold), and have a term of five years. Each Warrant is
exercisable upon the earlier of (i) a Qualified Financing (as
defined below) or (ii) one year from the effective date of the
Warrants both (i) and (ii) above being subject to acceleration in
the event a Non-Qualified Financing (as defined below) takes place
within one year of the effective date of the Warrants and prior to
a Qualified Financing. A Qualified Financing means a financing of
not less than $20,000,000 completed by the Company or a subsidiary
of the Company after the effective date of the Warrants involving
the sale of Common Stock or Common Stock Equivalents (as defined
below). A Non-Qualified Financing means a financing of less than
$20,000,000 completed by the Company or a subsidiary of the Company
after the effective date of the Warrants involving the sale of
Common Stock or Common Stock Equivalents.
In the
case of a Qualified Financing, the Warrants are exercisable at a
price per share equal to 80% of the lesser of (i) the price at
which Common Stock is sold in the Qualified Financing, or (ii) the
lowest price at which other securities sold in the Qualified
Financing may be converted into or exercised for Common Stock (such
other securities being hereafter referred to as “Common Stock
Equivalents”).
Subject
to the prior completion of a Non-Qualified Financing at a
Post-Acquisition Valuation (as defined below) of less than
$15,000,000, if a Qualified Financing is not completed within one
year of the Effective Date, the Warrants will be exercisable at a
price per share equal to 80% of the value weighted average price
per share of Common Stock (“VWAP”) of the Company
during the ten consecutive trading days ending on the trading day
immediately prior to the date on which a notice of exercise is
received by the Company from a holder of Warrants. The VWAP based
exercise price may not be less than $0.10 per share.
Except
in the case of a prior Non-Qualified Financing at a
Post-Acquisition Valuation of less than $15,000,000, in the event
the Company or a subsidiary of the Company shall issue Common Stock
or Common Stock Equivalents within one
year of the effective date of the Warrants in a Qualified Financing
at a price per share reflecting a Post-Acquisition Valuation (as
defined below) of less than $15,000,000, the exercise price and the
number of shares to be obtained upon exercise of the Warrants will
be adjusted proportionally. “Post-Acquisition
Valuation” means the post-Acquisition, pre-financing
valuation of the Company obtained by multiplying the 50,000,000
shares of Common Stock assumed to be issued and outstanding
immediately following the Acquisition and the Offering by the
lowest price at which Common Stock or Common Stock Equivalents are
to be sold in a post-Acquisition financing. By way of example, a
post-Acquisition financing in which Common Stock or Common Stock
Equivalents are sold at $0.30 per share would result in a
Post-Acquisition Valuation of $15,000,000, which represents the
number obtained when multiplying 50,000,000 by $0.30.
60
Except
in the case of a prior Non-Qualified Financing at a
Post-Acquisition Valuation of less than $15,000,000, in the event
the Company or subsidiary of the Company does not complete a
Qualified Financing within one year of the effective date of the
Warrants such that the Warrants becomes exercisable at a price per
share equal to 80% of the VWAP of the Common Stock and the Company
or a subsidiary of the Company thereafter completes a Qualified
Financing or other financing prior to the expiration date of the
Warrants at a price per share reflecting a Post-Acquisition
Valuation of less than $15,000,000, the VWAP exercise price formula
then in effect and the number of shares to be obtained upon
exercise of the Warrants shall be adjusted proportionally. In the
event the Company or a subsidiary of the Company shall thereafter
complete one or more additional Qualified Financings or other
financings at a valuation lower than a valuation which previously
triggered a VWAP and related share amount adjustment, the number of
shares issuable upon exercise of the Warrants and the VWAP % used
to determine the exercise price under such Warrants would be
further adjusted proportionately, in the same manner as provided
above.
Notwithstanding
the foregoing, in the event the Company or a subsidiary of the
Company shall complete a Non-Qualified Financing at a
Post-Acquisition Valuation of less than $15,000,000 within one year
of the effective date of a Warrant and prior to a Qualified
Financing, the Warrants shall become immediately exercisable at a
VWAP based price per share under the same terms and conditions set
forth in the paragraph immediately above, including those relating
to a proportional reduction to the VWAP % and an increase in the
number of shares issuable upon exercise of such Warrants. Any
subsequent Non-Qualified Financings or Qualified Financings taking
place while the Warrants remain outstanding shall be treated in the
same manner as set forth in the last sentence of the paragraph
immediately above. Certain issuances of securities defined in the
Warrant as Exempt Issuances do not trigger any of the foregoing
anti-dilution adjustments.
If the Company, at any time while the Warrants are outstanding and
the exercise price has been established, sells or grants any option
to purchase, or sells or grants any right to reprice, or otherwise
disposes of or issues (or announces any offer, sale, grant or any
option to purchase or other disposition) any Common Stock or Common
Stock Equivalents, at an effective price per share less than the
exercise price then in effect (such lower price, the
“New Issuance
Price” and such issuances
collectively, a “Dilutive
Issuance” (it being
understood and agreed that if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in
connection with such issuance, be entitled to receive shares of
Common Stock at an effective price per share that is less than the
exercise price, such issuance shall be deemed to have occurred for
less than the exercise price on such date of the Dilutive Issuance
at such effective price) then simultaneously with consummation of
each Dilutive Issuance the exercise price shall be reduced to an
amount equal to the New Issuance Price (the “Adjusted
Price”); (subject to adjustment for stock splits, reverse
splits and similar capital adjustments). Such adjustment shall be
made whenever such Common Stock or Common Stock Equivalents are
issued. Notwithstanding the foregoing, no adjustment shall be made,
paid or issued under this paragraph in the case of an Exempt
Issuance.
All descriptions of the Warrants herein are qualified in their
entirety by reference to the text thereof filed as Exhibit 10.3
hereto.
61
Notes
An
aggregate of $150,000 in face (principal) amount of Notes were sold
in the Offering. Interest at the rate of 12% per annum is payable
in shares of Common Stock in the event of conversion or in cash on
October 19, 2018 (the “Maturity Date”).
In the
event a holder of a Note has not converted their Note into Common
Stock prior to the Maturity Date and the Company is unable to pay
the Note in cash, the term of the Note shall automatically extend
for one additional month and shall automatically extend for
additional one month periods in the event that the Company remains
unable to pay the Note in cash on the Maturity Date, as such may be
extended. At least 30 days prior to the Maturity Date, including
all extensions thereof, the Company must give the holder written
notice of its ability to pay the Note in cash, during which period
holder shall retain the right to convert the Note, including
accrued interest due thereon, on the terms set forth therein.
Failure to provide such notice on a timely basis, or otherwise,
results in an automatic extension of the Maturity
Date.
From
and after the occurrence of an Event of Default (as defined in the
Notes), the interest rate will be increased to eighteen percent
(18%) per annum until cured.
All
outstanding principal and accrued interest then due on the Notes is
convertible at the option of each holder, in whole or in part, at
any time after the earlier of (i) the completion of a Qualified
Financing, subject to the limitations and qualifications set forth
below; or (ii) the one-year anniversary of the original issue date,
into such number of fully paid and non-assessable shares of Common
Stock as is determined by dividing the outstanding principal amount
of the Notes plus accrued and unpaid interest due thereon by the QF
Based Note Conversion Price (as defined below) or the VWAP Based
Note Conversion Price (as defined below), as applicable, in effect
at the time of conversion.
Except
as otherwise provided below, the Note conversion price per share of
Common Stock is (i) in the event of the completion of a Qualified
Financing prior to the one-year anniversary of the original issue
date, 80% of the lowest price at which Common Stock or Common Stock
Equivalents are sold in the Qualified Financing (the “QF
Based Note Conversion Price”); or (ii) in the event a
Qualified Financing is not completed prior to the one-year
anniversary of the original issue date, 80% of the VWAP for the
Common Stock during the ten consecutive trading days ending on the
trading day immediately prior to the date on which a notice of
conversion is received by the Company from the holder (the
“VWAP Based Note Conversion Price”), subject to a
minimum VWAP Based Note Conversion Price of $0.10 per share (the
“Note Floor Price”); provided, however, that the QF
Based Note Conversion Price, the VWAP Based Note Conversion Price,
the Note Floor Price and the rate at which Notes may be converted
into shares of Common Stock, is subject to adjustment as provided
below.
The
obligations of the Company to each holder under the Notes is
secured by a first priority security interest in all now owned or
hereafter acquired and owned assets of the Company and its
subsidiaries, pari passu
with the other holders of Notes as set forth in the Security
Agreement dated September 19, 2017 (the “Security
Agreement”) among the Company, each holder and the person
appointed by the purchasers of a majority of the Units sold in the
Offering to serve as the collateral agent thereunder. All
descriptions of the Security Agreement herein are qualified in
their entirety by reference to the text thereof filed as Exhibit
10.6 hereto.
62
While
any Notes remain in effect and until all outstanding principal and
interest and all fees and all other expenses or amounts payable
under any such Notes have been paid in full, unless the holders of
Notes representing more than 50% of the aggregate principal amount
of the Notes then outstanding otherwise consent in writing, the
Company will not (i) incur, create, assume, guaranty or permit to
exist any indebtedness that ranks senior in priority to, or pari
passu with, the obligations under the Notes (other than trade
payables and accrued liabilities incurred in the ordinary course of
business consistent with past practices); (ii) create, incur,
assume or permit to exist any lien on any Collateral (as such term
is defined in the Security Agreement) now owned or hereafter
acquired and owned by it or on any income or revenues or rights in
respect thereof, except existing liens, subject to customary
exceptions; (iii) declare or pay, directly or indirectly, any
divided or make any other distribution (by reduction of capital or
otherwise), whether in cash, property, securities or a combination
thereof, with respect to any shares of its capital stock or
directly or indirectly redeem, purchase, retire or otherwise
acquire for value any shares of any class of its capital stock or
set aside any amount for any such purpose; (iv) pay in cash any
amount in respect of any indebtedness or preferred stock that may
at the obligor’s option be paid in kind or in other
securities; or optionally prepay, repurchase or redeem or otherwise
defease or segregate funds with respect to any indebtedness of the
Company, other than indebtedness under the Notes; or (v) amend,
modify or limit any terms of the Notes or the Security Agreement or
assert the invalidity of the Notes or the Security
Agreement.
Except
as otherwise provided below, in the event the Company or a
subsidiary of the Company issues or sells Common Stock or Common
Stock Equivalents, within one year of the original issue date of
the Notes, in a Qualified Financing, at a price per share
reflecting a Post-Acquisition Valuation of less than $15,000,000,
the QF Based Note Conversion Price and the number of Conversion
Shares that can be acquired upon conversion of the Notes will be
adjusted proportionally.
In the
event the Company or a subsidiary of the Company does not complete
a Qualified Financing within one year of the original issue date of
the Notes such that the Notes become exercisable at a price per
share equal to 80% of the VWAP of the Common Stock as set forth
above, and the Company or a subsidiary of the Company thereafter,
while any Notes remain outstanding, complete a Qualified Financing
or other financing reflecting a Post-Acquisition Valuation of less
than $15,000,000, the VWAP Based Note Conversion Price then in
effect and the number of Conversion Shares to be obtained upon
conversion of each outstanding Note will be adjusted
proportionally. In the event the Company or a subsidiary of the
Company shall thereafter, while any Notes remain outstanding,
complete one or more additional Qualified Financings or other
financings at a valuation lower than a valuation which previously
triggered a VWAP and related share amount adjustment, the number of
shares issuable upon conversion of such outstanding Notes and the
VWAP % used to determine the VWAP Based Note Conversion Price under
such Notes will be further adjusted proportionately, in the same
manner as provided above.
Notwithstanding
the foregoing, in the event the Company or a subsidiary of the
Company completes a Non-Qualified Financing at a Post-Acquisition
Valuation of less than $15,000,000 within one year of the original
issue date of the Notes and prior to a Qualified Financing, each
Note will become immediately convertible at a VWAP based price per
share under the same terms and conditions set forth in the
paragraph immediately above, including those relating to a
proportional reduction to the VWAP % and an increase in the number
of shares issuable upon conversion of the Notes. Any subsequent
Non-Qualified Financings or Qualified Financings taking pace while
a Note remains outstanding will be treated in the same manner as
set forth in the last sentence of the paragraph immediately
above.
63
If the Company, at any time while any Notes are outstanding, and
the QF Based Note Conversion Price has been established, shall sell
or grant any option to purchase, or sell or grant any right to
reprice, or otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other disposition) any
Common Stock or Common Stock Equivalents, at an effective price per
share less than the QF Based Note Conversion Price then in effect
(such lower price, the “New Issuance Price” and such
issuances collectively, a “Dilutive Issuance” (it being
understood and agreed that if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in
connection with such issuance, be entitled to receive shares of
Common Stock at an effective price per share that is less than the
QF Based Note Conversion Price, such issuance shall be deemed to
have occurred for less than the QF Based Note Conversion Price on
such date of the Dilutive Issuance at such effective price) then
simultaneously with consummation of each Dilutive Issuance the QF
Based Note Conversion Price will be reduced to an amount equal to
the New Issuance Price (the “Adjusted Price”); (subject
to adjustment for stock splits, reverse splits and similar capital
adjustments). Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustment shall be made, paid or issued in the case
of an Exempt Issuance.
The calculation of the VWAP Based Note Conversion Price will be
adjusted consistent with the foregoing should any of the events
described above take place during the pricing period for the
determination of the VWAP Based Conversion Price.
All descriptions of the Notes herein are qualified in their
entirety by reference to the text thereof filed as Exhibit 10.4
hereto.
Other Convertible Securities
As of
the date hereof, other than the securities described above, we do
not have any outstanding convertible securities.
Anti-Takeover Effects of Provisions of our Articles of
Incorporation, Bylaws and Nevada Law
Anti-Takeover Effects of Provisions of Nevada State
Law
In the
future we may become subject to Nevada’s control share laws.
A corporation is subject to Nevada’s control share law if it
has more than 200 shareholders, at least 100 of whom are
shareholders of record and residents of Nevada, and if the
corporation does business in Nevada, including through an
affiliated corporation. This control share law may have the effect
of discouraging corporate takeovers. We currently have
approximately 114 holders of record of our Common Stock, none of
which are known to us to be residents of Nevada. The control share
law focuses on the acquisition of a “controlling
interest,” which means the ownership of outstanding voting
shares that would be sufficient, but for the operation of the
control share law, to enable the acquiring person to exercise the
following proportions of the voting power of the corporation in the
election of directors: (1) one-fifth or more but less than
one-third; (2) one-third or more but less than a majority; or (3) a
majority or more. The ability to exercise this voting power may be
direct or indirect, as well as individual or in association with
others.
64
The
effect of the control share law is that an acquiring person, and
those acting in association with that person, will obtain only such
voting rights in the control shares as are conferred by a
resolution of the shareholders of the corporation, approved at a
special or annual meeting of shareholders. The control share law
contemplates that voting rights will be considered only once by the
other shareholders. Thus, there is no authority to take away voting
rights from the control shares of an acquiring person once those
rights have been approved. If the shareholders do not grant voting
rights to the control shares acquired by an acquiring person, those
shares do not become permanent non-voting shares. The acquiring
person is free to sell the shares to others. If the buyer or buyers
of those shares themselves do not acquire a controlling interest,
the shares are not governed by the control share law.
If
control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the
voting power, any shareholder of record, other than the acquiring
person, who did not vote in favor of approval of voting rights, is
entitled to demand fair value for such shareholder’s
shares.
In
addition to the control share law, Nevada has a business
combination law, which prohibits certain business combinations
between Nevada corporations and “interested
shareholders” for three years after the interested
shareholder first becomes an interested shareholder, unless the
corporation’s Board of Directors approves the combination in
advance. For purposes of Nevada law, an interested shareholder is
any person who is: (a) the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the outstanding
voting shares of the corporation; or (b) an affiliate or associate
of the corporation and at any time within the previous three years
was the beneficial owner, directly or indirectly, of 10% or more of
the voting power of the then-outstanding shares of the corporation.
The definition of “business combination” contained in
the statute is sufficiently broad to cover virtually any kind of
transaction that would allow a potential acquirer to use the
corporation’s assets to finance the acquisition or otherwise
to benefit its own interests rather than the interests of the
corporation and its other shareholders.
The
effect of Nevada’s business combination law is to potentially
discourage parties interested in taking control of our Company from
doing so if it cannot obtain the approval of our Board of
Directors.
Undesignated Preferred Stock
The
ability to authorize undesignated preferred stock makes it possible
for our board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any
attempt to change control of our company. These and other
provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of our
company.
Special Stockholder Meetings
Our
bylaws provide that a special meeting of stockholders may be called
by the Chairman of the board of directors, by the President or
Secretary by resolution of the board of directors or at the request
in writing of one or more stockholders owning shares which in the
aggregate represent a majority of the votes entitled to be cast at
such meeting.
65
Limitations of Liability and Indemnification Matters
For a
discussion of liability and indemnification, please see the section
titled “Directors, Executive
Officers, Promoters and Control Persons—Limitation on
Liability and Indemnification Matters.”
Transfer Agent
The
transfer agent and registrar for our Common Stock is VStock
Transfer LLC (“VStock”). VStock’s address is 10
Lafayette Place, Woodmere, NY 11598 and its telephone number is
(646) 335-0311.
From
time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to
time that may harm business.
We are
currently not aware of any pending legal proceedings to which we
are a party or of which any of our property is the subject, nor are
we aware of any such proceedings that are contemplated by any
governmental authority.
The Offering
The
information regarding the Offering and Acquisition set forth in
Item 2.01, “Completion of Acquisition or Disposition of
Assets—The Acquisition and Related Transactions—The
Offering” and “Description of Securities” is
incorporated herein by reference.
On
September 19, 2017, in connection with the Offering, we issued an
aggregate of 15 Units at a price of $10,000 per Unit for aggregate
gross consideration of $150,000 to 1 accredited
investor.
Securities Issued in Connection with the Acquisition
On
September 19, 2017, pursuant to the terms of the Acquisition
Agreement, all of the shares of capital stock of SAPL consisting of
10,000 Ordinary Shares were exchanged for of 45,211,047 shares of
our Common Stock. This transaction was exempt from registration
under Section 4(a)(2) of the Securities Act as not involving
any public offering. None of the securities were sold through an
underwriter and, accordingly, there were no underwriting discounts
or commissions involved.
Sales of Unregistered Securities of SAPL
Set
forth below is information as to all securities SAPL sold from its
inception in October 4, 2005 through immediately prior to the
consummation of the Acquisition, which were not registered under
the Securities Act. The following description is historical and has
not been adjusted to give effect to the Acquisition or the share
exchange pursuant to the Acquisition Agreement.
(a)
Issuances of
Capital Stock
66
On
October 4, 2005, SAPL issued 7,500 Ordinary Shares to Zhang Yiwen
and 2,500 Ordinary Shares to Yin Ting at a price of $1.00 per
shares or an aggregate of $10,000. Such issuance were made pursuant
to Section 4(a)(2) under the Securities Act relating to
transactions by an issuer not involving any public offering, to the
extent an exemption from registration was required.
(b)
Stock Option Grants
and Other Equity Awards
SAPL
has not adopted any stock option, equity incentive or similar plans
since its inception and has never issued any stock options or other
equity awards.
The
information regarding change of control of Sincerity Applied
Materials Holdings Corp. in connection with the Acquisition set
forth in Item 2.01, “Completion of Acquisition or
Disposition of Assets—The Acquisition and Related
Transactions” is incorporated herein by
reference.
The
information regarding departure and election of directors and
appointment of principal officers in connection with the
Acquisition set forth in Item 2.01 “Completion of Acquisition
or Disposition of Assets—The Acquisition and Related
Transactions” is incorporated herein by
reference.
The
information regarding departure and election of our directors and
departure and appointment of our principal officers in connection
with the Acquisition set forth in Item 2.01, “Completion of Acquisition or
Disposition of Assets—The Acquisition and Related
Transactions” is incorporated herein by
reference.
For
information regarding the terms of employment of our newly
appointed executive officers, see “Executive Compensation”
and “Certain Relationships
and Related Transactions—Employment Agreements”
in Item 2.01 of this Current Report on Form 8-K, which
description is incorporated herein by reference.] For certain
biographical, related party and other information regarding our
newly appointed executive officers, see the disclosure under the
headings “Directors,
Executive Officers, Promoters and Control Persons” and
“Certain Relationships and Related Transactions”
in Item 2.01 of this Current Report on Form 8-K, which
disclosures are incorporated herein by reference.
For
information about compensation to our directors, see “Directors, Executive Officers,
Promoters and Control Persons—Director
Compensation” in Item 2.01 of this Current Report
on Form 8-K, which description is incorporated herein by reference.
There are no arrangements or understandings pursuant to which any
of our current directors was appointed as a director. For certain
biographical, related party and other information regarding our
newly appointed directors, see the disclosure under the headings
“Directors, Executive
Officers, Promoters and Control Persons” and
“Certain Relationships and
Related Transactions” in Item 2.01 of this
Current Report on Form 8-K, which disclosures are incorporated
herein by reference.
67
Amendments to Articles of Incorporation
On June
9, 2017, we amended our Articles of Incorporation to change our
name to Sincerity Applied Materials Holdings Corp. and to effect a
60:1 reverse stock split. The name change and the reverse stock
split were approved by our board of directors and by stockholders
holding 80% of our outstanding common stock on May 1,
2017.
Prior
to the Acquisition, we were a “shell company” (as such
term is defined in Rule 12b-2 under the Exchange Act). As a result
of the Acquisition, we have ceased to be a shell company. The
information contained in this Report, together with the information
contained in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2016, our subsequent Quarterly Report on Form
10-Q for the quarter ended March 31, 2017, and our subsequent
Current Reports on Form 8-K, as filed with the SEC, constitute the
current “Form 10 information” necessary to satisfy the
conditions contained in Rule 144(i)(2) under the Securities
Act.
(a) As
a result of its acquisition of SAPL as described in Item 2.01,
and in accordance with Item 9.01(a) the registrant is filing
herewith SAPL’s audited financial statements as of and for
the fiscal years ended June 30, 2016 and 2015 and SAPL’s
unaudited financial statements as of, and for the nine months ended
March 31, 2017, and the accompanying notes, in this Current Report
beginning on page F-1.
(b) In
accordance with Item 9.01(b), unaudited pro forma combined
financial information as of and for the fiscal years ended June 30,
2016 and 2015, and unaudited financial statements as of and for the
nine months ended March 31, 2017, and the accompanying notes, are
included in the Current Report beginning on page F-27.
68
SINCERITY
AUSTRALIA PTY LTD
FINANCIAL STATEMENTS
Table of
Contents
|
|
Page
Number
|
|
Audited Financial
Statements for the Years Ended June 30, 2016 and
2015
|
|
|
Report of Independent Registered Public Accounting
Firm
|
F-2
|
|
Balance
Sheets
|
F-3
|
|
Statements
of Income and Accumulated Deficit
|
F-4
|
|
Statements
of Comprehensive Income
|
F-5
|
|
Statements
of Cash Flows
|
F-6
|
|
Notes to Financial Statements
|
F-7
|
|
|
|
|
Unaudited Financial
Statements for the Nine Months Ended March 31, 2017 and
2016
|
|
|
Balance
Sheets
|
F-15
|
|
Statements
of Income and Accumulated Deficit
|
F-16
|
|
Statements
of Comprehensive Income
|
F-17
|
|
Statements
of Cash Flows
|
F-18
|
|
Notes to Financial Statements
|
F-19
|
|
|
|
|
Pro Forma Financial
Statements
|
F-27
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Sincerity Australia Pty
Ltd,
Melbourne,
Australia
We have
audited the accompanying balance sheets of Sincerity Australia Pty
Ltd (the “Company”) as of June 30, 2016 and 2015, and
the related statements of income and accumulated deficit,
comprehensive income, and cash flows for the years then ended.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sincerity
Australia Pty Ltd as of June 30, 2016 and 2015, and the results of
its’ operations and its’ cash flows for the years then
ended in conformity with accounting principles generally accepted
in the United States of America.
ShineWing
Australia
Melbourne,
Australia, August 15, 2017
F-2
SINCERITY AUSTRALIA PTY LTD
BALANCE SHEETS AT
|
|
JUNE 30,
|
|
|
ASSETS
|
2016
|
2015
|
|
Current
Assets
|
|
|
|
Cash
|
$3,590
|
$78,903
|
|
Accounts
receivable
|
76,176
|
290,690
|
|
Vendor
balance receivable
|
34,960
|
-
|
|
Inventory
|
40,569
|
-
|
|
Total
Current Assets
|
$155,295
|
$369,593
|
|
Deferred income
tax
|
-
|
26,567
|
|
Fixed assets - at
cost, less accumulated depreciation
|
83,596
|
120,052
|
|
Total
Assets
|
$238,891
|
$516,212
|
|
LIABILITIES AND
STOCKHOLDER'S DEFICIENCY
|
|
|
|
Current
Liabilities
|
|
|
|
Long-term debt -
current portion
|
$24,290
|
$23,102
|
|
Accounts
payable
|
-
|
103,562
|
|
Accrued
expenses
|
68,918
|
75,182
|
|
Income tax
payable
|
13,485
|
-
|
|
Due to
stockholder
|
118,761
|
343,003
|
|
Total Current
Liabilities
|
$225,454
|
$544,849
|
|
Long-term debt -
net of current portion
|
76,831
|
105,242
|
|
Total
Liabilities
|
$302,285
|
$650,091
|
|
Stockholder’s
Deficiency
|
|
|
|
Common
stock, $1 per share par value
|
|
|
|
10,000 shares
authorized, issued and outstanding
|
$9,426
|
$9,426
|
|
Accumulated
deficit
|
(105,569)
|
(171,434)
|
|
Accumulated other
comprehensive income-
|
|
|
|
Foreign currency
translation
|
32,749
|
28,129
|
|
Total Stockholder's
Deficiency
|
$(63,394)
|
$(133,879)
|
|
|
$238,891
|
$516,212
|
|
The
accompanying notes are an integral part of these financial
statements.
|
F-3
SINCERITY AUSTRALIA PTY LTD
STATEMENTS
OF INCOME AND ACCUMULATED DEFICIT FOR THE YEARS ENDED
|
|
JUNE 30
|
|
|
|
2016
|
2015
|
|
Sales
|
$1,223,438
|
$1,407,878
|
|
Cost
of goods sold
|
(882,553)
|
(1,160,272)
|
|
Gross
profit
|
$340,885
|
4247,606
|
|
Decline
in net realizable value of inventory
|
(46,794)
|
(-)
|
|
Income
before selling, general, and administrative expenses and other
income (loss)
|
$294,091
|
$247,606
|
|
Selling,
general and administrative expenses
(including
interest expense of $36,988 - 2016 and $20,558 - 2015)
|
(187,708)
|
(187,779)
|
|
Income
before other income (loss) and provision for (reduction of) income
taxes
|
$106,383
|
$59,827
|
|
Other
income (loss)
|
|
|
|
Foreign
currency transactions
|
6,415
|
(73,534)
|
|
Disposition
of equipment
|
1,079
|
(10,249)
|
|
Total
other income (loss)
|
$7,494
|
$(83,783)
|
|
|
|
|
|
Income
(loss) before provision for (reduction of) income
taxes
|
$113,877
|
$(23,956)
|
|
Provision
for (reduction of) income taxes
|
|
|
|
Current
|
13,454
|
(4,436)
|
|
Deferred
|
25,625
|
14,166
|
|
Total
provision for (reduction of) income taxes
|
$39,079
|
$9,730
|
|
Net
income (loss)
|
$74,798
|
$(14,226)
|
|
Accumulated
deficit – beginning
|
$(171,434)
|
$(157,208)
|
|
Distributions
to stockholder
|
(8,933)
|
-
|
|
Accumulated deficit - end
|
$(105,569)
|
$(171,434)
|
|
The
accompanying notes are an integral part of these financial
statements.
|
F-4
SINCERITY AUSTRALIA PTY LTD
STATEMENTS
OF COMPREHENSIVE INCOME FOR THE YEARS ENDED
|
|
JUNE 30,
|
|
|
|
2016
|
2015
|
|
Net
Income (loss)
|
$74,798
|
$(14,226)
|
|
Other
comprehensive income:
|
|
|
|
Foreign
currency translation adjustment
|
4,620
|
28,129
|
|
Total
comprehensive income
|
$79,418
|
$13,903
|
|
The
accompanying notes are an Integral part of these financial
statements.
|
F-5
SINCERITY AUSTRALIA PTY LTD
STATEMENTS
OF CASH FLOWS FOR THE YEARS ENDED
|
|
JUNE 30,
|
|
|
|
2016
|
2015
|
|
Cash Flows From
Operating
|
|
|
|
Activities Net
income (loss)
|
$74,798
|
$(14,226)
|
|
Adjustments To
Reconcile Net Income (Loss) To Net Cash Provided By Operating
Activities
|
|
|
|
Depreciation
|
29,416
|
33,878
|
|
(Gain) loss on
disposition of equipment
|
(1,079)
|
10,249
|
|
Bad debt
expense
|
64,170
|
-
|
|
Decline in net
realizable value of inventory
|
46,794
|
-
|
|
Provision for
(reduction of) deferred income taxes
|
25,625
|
(14,166)
|
|
(Increase) Decrease
In:
|
|
|
|
Accounts
receivable
|
105,334
|
(44,191)
|
|
Inventory
|
(87,272)
|
-
|
|
Increase (Decrease)
In:
|
|
|
|
Accounts
payable
|
(99,892)
|
90,146
|
|
Accrued
expenses
|
(3,755)
|
52,419
|
|
Income tax
payable
|
13,455
|
-
|
|
Total
Adjustments
|
92,796
|
128,335
|
|
Net Cash Provided
By Operating Activities
|
$167,594
|
$114,109
|
|
Cash Flows From
Investing Activities
|
|
|
|
Proceeds from
disposition of equipment
|
$4,053
|
$-
|
|
Cash Flows From
Financing Activities
|
|
|
|
Repayment of lines
of credit
|
-
|
(126,493)
|
|
Proceeds of
long-term debt
|
-
|
12,636
|
|
Repayments of
long-term debt
|
(22,902)
|
(16,416)
|
|
Proceeds on
(payments of) balance due to stockholder, at net
|
(221,269)
|
66,266
|
|
Net Cash Used in
Financing Activities
|
$(244,171)
|
$(64,007)
|
|
|
|
|
|
Effect of exchange
rate changes on cash
|
(2,789)
|
(11,107)
|
|
|
|
|
|
Net increase
(decrease) in cash
|
$(75,313)
|
$38,995
|
|
Cash -
beginning
|
$78,903
|
$39,908
|
|
|
|
|
|
Cash-end
|
$3,590
|
$78,903
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Interest paid
during period
|
$11,006
|
$20,291
|
|
Income taxes paid
during period
|
-
|
-
|
|
Supplementary
Schedule of Non-Cash Investing and Financing
Activities:
|
|
|
|
Acquisition of
motor vehicle directly financed by long-term debt
|
$-
|
$93,766
|
|
Deposit on purchase
of motor vehicle paid directly by stockholder
|
-
|
231,912
|
|
Proceeds from
trade-in of motor vehicle applied to long-term debt
|
-
|
50,214
|
|
Payment of line of
credit balance directly by stockholder
|
-
|
479,891
|
|
Distributions to
stockholder offset by balance due to stockholder
|
8,933
|
-
|
5
The
accompanying notes are an Integral part of these financial
statements.
F-6
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE 30, 2016 AND 2015
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The
accompanying financial statements include the accounts of Sincerity
Australia Pty Ltd which is a company domiciled in Australia. These
financial statements have been prepared in accordance with the
accounting principles generally accepted in the United States
(“GAAP”) and Regulation S-X published by the US
Securities and Exchange Commission (the “SEC”). Certain
prior period amounts have been reclassified to conform to the
current period presentation. Such reclassifications had no effect
on the prior period net income, accumulated deficit, net assets, or
total shareholders' deficit. The Company has evaluated events or
transactions through the date of issuance of this report in
conjunction with the preparation of these consolidated financial
statements. All amounts presented are in US dollars, unless
otherwise noted.
The
financial statements, except for cash flow information, have been
prepared on an accruals basis and are based on historical costs,
modified, where applicable, by the measurement at fair value of
selected non- current assets, financial assets and financial
liabilities. The amounts presented in the financial statements have
been rounded to the nearest dollar.
Going Concern Basis
The
financial statements have been prepared on the going concern basis,
which assumes continuity of normal business activities and the
realization of assets and the settlement of liabilities in the
ordinary course of business.
At
June 30, 2016, the Company had a current asset deficiency of
$70,159 and a stockholders deficiency of $63,394
(June 30, 2015 current asset deficiency of $175,526 and a stock
holders deficiency of $133,879). The Company reported an after-tax
income of $74,798 for the year ended June 30, 2016 (June 30, 2015
loss: $14,226).
Despite
the current asset deficiency, the Company has prepared the
financial statements on a going concern basis that contemplates the
continuity of normal business activity, realization of assets and
settlement of liabilities at the amounts recorded in the financial
statements in the ordinary course of business.
The
Company believes that there are reasonable grounds to support the
fact that it will be able to pay its debts as and when they become
due and payable. The company is a party to a transaction which will
lead a private placement offering of a minimum of $250,000 and a
maximum of $500,000. These funds will be used for working capital
purposes. Subsequent to deal close a further round of capital
raising is anticipated.
If
the Company is unable to continue as a going concern it may be
required to realise its assets and extinguish its liabilities other
than in the ordinary course of business at amounts different from
those stated in the financial statements.
The
financial statements do not include adjustments relating to the
recoverability and classification of recorded asset amounts or to
the amounts and classification of liabilities that might be
necessary should the company not continue as a going
concern.
F-7
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
Sincerity
Australia Pty Ltd (the "Company") is a specialized provider of
technologically advanced packing materials for the automotive,
packaging, building & construction, and engineering industries,
with headquarters located near Melbourne, Australia. The Company's
primary customer is an unrelated entity with global operations that
accounts for approximately 80% - 90% of the Company's revenue, and
the Company's primary suppliers are located in China and
Malaysia.
Foreign Currency
Translation &
Transactions:
The
functional currency of the Company is its local currency, the
Australian dollar (AUD). The financial statements of the Company
have been translated into U.S. dollars (USD). All balance sheet
accounts, other than those in stockholder's deficiency which are
translated based on historical rates accumulated over time, have
been translated using the exchange rates in effect at the balance
sheet dates. Income statement amounts have been translated using
the average exchange rates in effect for the years. Accumulated net
translation adjustments have been reported separately in other
comprehensive income in the financial statements. Foreign currency
translation adjustments resulted in gains of $4,620 and $28,129 for
the years ended June 30, 2016 and 2015, respectively; such
translation adjustments are not subject to income
taxes.
Foreign
currency transaction gains (losses) resulting from exchange rate
fluctuations on transactions denominated in a currency other than
the AUD, the functional currency, totaled $6,415 and $(73,534) for
the years ended June 30, 2016 and 2015, respectively, and are
included in other income (loss) in the accompanying statements of
income.
Cash and Cash Equivalents:
For
purposes of the statements of cash flows, cash consists of bank
checking accounts and cash equivalents may include time deposits,
certificates of deposit, and all highly liquid debt instruments
with original maturities of three months or less. At the balance
sheet dates, the Company has no cash equivalents.
Accounts Receivable:
The
Company carries its accounts receivable at cost less an allowance
for doubtful accounts. The Company evaluates its accounts
receivable on a regular basis and establishes an allowance for
doubtful accounts, when deemed necessary, based on a history of
past write-offs and collections and current credit conditions. A
receivable is considered past due based either on contractual terms
or payment history. Accounts are written off as uncollectible after
collection efforts have failed. In addition, the Company does not
generally charge interest on past-due accounts or require
collateral It is at least reasonably possible that changes may
occur in the near term that would affect management's estimate of
the allowance for doubtful accounts. At June 30, 2016 and 2015,
management determined that no allowance for doubtful accounts was
required.
F-8
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Use of Estimates:
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from
those estimates.
Revenue Recognition:
The
Company recognizes revenue when the goods are delivered at the port
of shipment by the supplier, the price is fixed or determinable,
and collectability is reasonably assured
Inventory:
Inventory
is carried at the lower of cost or net realizable value ("NRV'').
Cost is based on the first-in, first-out ("FIFO") cost method and
includes expenditures incurred in acquiring the inventory and
bringing it to its existing condition and location. NRV is based on
the selling price. During the year ended June 30, 2016 the
Company's inventory was written down by approximately $47,000
because of a decline in its net realizable value during the year,
and it is at least reasonably possible that the estimate of the
value of the inventory may change materially within the near
term.
Fixed Assets and Depreciation:
Fixed
assets are stated at cost. Additions, renewals, and betterments
that significantly extend the life of the asset are capitalized.
Expenditures for repairs and maintenance are charged to expense as
incurred. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets. For assets
sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any related gain or
loss is reflected in income for the period.
Impairment of Long-Lived Assets:
The Company reviews long-lived assets, including
fixed assets, for impairment whenever events or circumstances
indicate that the carrying value of such assets may not be fully
recoverable. Impairment is present when the sum of undiscounted
estimated future cash flows expected to result from use of the
asset is less than carrying value. H impairment is present, the carrying value of the
impaired asset is reduced to its fair value. Fair value is
determined based on discounted cash flows or appraised values,
depending on the nature of the asset. During the years ended June
30, 2016 and 2015, no impairment losses were recognized for long-
lived assets.
Debt Issuance Costs:
Borrowing
costs (debt issue costs} are subject to amortization over the
maturity period of the related chattel mortgage or five years,
whichever is shorter, using the straight-line method, which does
not differ materially from the effective interest method. The
Company presents debt issuance costs as a reduction of the carrying
amount of the debt rather than as an asset, and reports
amortization of debt issuance costs as interest
expense.
F-9
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE
1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Tax:
The Company is subject to the Australian small
business company income tax collected by the Australian Tax Office
("ATO"). This income tax is provided for the tax effects of
transactions reported in the financial statements and consists of
the tax currently due (including any amended returns intended to be
filed by management), plus the deferred tax at June 30, 2015
related to the recognition of the benefit of net operating losses
(NOL's) carried forward, and arising from deductible temporary
differences between tax and U.S. GAAP for accumulated depreciation.
The deferred tax asset represents the future deductible tax
consequences of the use of the NOL's and future settlement of the
aforementioned deductible temporary differences. Further, the
Company adopted and prospectively applied Accounting Standards
Update (ASU) 2015-17, Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes, which requires that deferred tax liabilities and
assets be classified as noncurrent in a classified balance
sheet.
Goods and Services Tax ("GST')
Transactions,
including revenue, are recognized by the Company net of GST, except
when the amount of GST is not recoverable from the ATO. Receivables
and payables are stated inclusive of the amount of GST receivable
or payable. The net amount of GST recoverable from, or payable to,
the ATO is included as a receivable or payable in the balance
sheets.
Shipping and Handling Costs:
Freight
costs are included in cost of sales and approximated $26,000 for
each of the years ended June 30, 2016 and 2015.
Advertising:
Advertising
is expensed as incurred and approximated $3,000 and $2,000 for the
years ended June 30, 2016 and 2015, respectively.
U.S. GAAP Recently Issued Accounting Standard Updates Not Presently
Effective:
On May 28, 2014, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with
Customers. The standard's core
principle is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. This standard
also includes expanded disclosure requirements that result in an
entity providing users of financial statements with comprehensive
information about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from the entity's contracts with
customers. This standard will be effective for fiscal year ending
June 30, 2020. The Company is currently in the process of
evaluating the impact of adoption of this ASU on the financial
statements.
F-10
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE
1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
U.S. GAAP Recently Issued Accounting Standard Updates Not Presently
Effective (Continued):
In June 2016, the FASB issued ASU 2016-13,
Financial
Instruments-Credit Losses. The
standard requires a financial asset (including trade receivables)
measured at amortized cost basis to be presented at the net amount
expected to be collected. Thus, the income statement will reflect
the measurement of credit losses for newly-recognized financial
assets as well as the expected increases or decreases of expected
credit losses that have taken place during the period. This
standard will be effective for fiscal year ending June 30, 2022.
The Company is currently in the process of evaluating the impact of
adoption of this ASU on the financial
statements.
Management
does not believe that any other recently issued, but not yet
effective, U.S. GAAP accounting standard if currently adopted would
have a material effect on the accompanying financial
statements.
Subsequent Events:
Management
has evaluated subsequent events through July 31, 2017, the date the
financial statements were available to be issued. No significant
subsequent events were identified by management.
NOTE
2 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Cash
maintained at commercial banks is either insured by the Australian
Government Guarantee up to $250,000
(AUD) or the U.S. Federal Deposit Insurance Corporation up to
$250,000 (USD) in total at each bank. At June 30, 2016 and 2015,
cash did not exceed insured limits.
At
June 30, 2016 and 2015, credit risk for trade accounts is
concentrated as well because 100% of the balances are receivable
from three customers. To reduce credit risk, the Company performs
ongoing credit evaluations of its customers' financial conditions,
but does not generally require collateral.
NOTE
3 -MAJOR CUSTOMERS
During
the years ended June 30, 2016 and 2015, 100% of the Company's sales
were to three customers, of which approximately 85% was to its
primary customer.
F-11
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE
4 - FIXED ASSETS
At
June 30, 2016 and 2015, fixed assets are comprised of the
following:
|
|
2016
|
2015
|
Estimated Useful Lives
|
|
Vehicles
|
$123,445
|
$137,422
|
5 years
|
|
Office
equipment and furniture and fixtures
|
19,332
|
20,004
|
5 years
|
|
|
142,777
|
157,426
|
|
|
Less:
accumulated depreciation
|
59,181
|
37,374
|
|
|
Total,
net of accumulated depreciation
|
$83,596
|
$120,052
|
|
NOTE
5-LONG TERM DEBT
The
Company has a chattel mortgage outstanding at June 30, 2016 and
2015 secured by a motor vehicle requiring monthly payments
approximating $2,700 (and a final payment approximating
$37,000)
that include interest approximating 8.4%, and maturing on January
28, 2019. The components of the balance due under the chattel
mortgage at June 30, 2016 and 2015 are as follows:
|
|
2016
|
2015
|
|
Note
payable
|
$101,221
|
$128,694
|
|
Less: unamortized
debt issuance costs Long-term debt, less unamortized
debt
|
(100)
|
(350)
|
|
issuance
costs
|
101,121
|
128,344
|
|
Less: current
portion
|
24,290
|
23,102
|
|
Total long-term
debt, less current portion
|
$76,831
|
$105,242
|
Maturities
of long-term debt at June 30, 2016 for each of the next five years
and in the aggregate, approximate the following:
|
June
30, 2017
|
$24,300
|
|
2018
|
26,400
|
|
2019
|
50,521
|
|
2020
|
-
|
|
2021
|
-
|
|
|
$101,221
|
F-12
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE
6-BALANCE DUE TO STOCKHOLDER
The
balance due to the stockholder at June 30, 2016 and 2015 amounts to
$118,761 and $343,003,
respectively, and is subject to an unsecured loan agreement that
requires interest at the rate of 7.8% per annum on balances
outstanding for at least an entire year, and stipulates repayment
within one year from the balance sheet date, subject to the
lender's discretion. The agreement also provides for future
advances and payments at the discretion of the parties. Interest
expense on the stockholder loan approximated $26,000 and $0 for the
years ended June 30, 2016 and 2015, respectively.
NOTE
7-DEFERRED INCOME TAX
The
balance of deferred income tax at June 30, 2016 and 2015 consists
of the following:
|
|
2016
|
2015
|
|
|
Attributable
to benefit of NOL's carried forward
|
$-
|
$17,326
|
(See
Note 110
|
|
Attributable
to deductible temporary differences regarding accumulated
depreciation
|
-
|
9,241
|
|
|
|
$-
|
$26,567
|
|
NOTE
8-ACCUMULATED OTHER COMPREHENSIVE INCOME
The
balance of accumulated other comprehensive income at June 30, 2016
and 2015 relates entirely to the foreign currency translation, as
follows:
|
|
2016
|
2015
|
|
Beginning
balance at July 1
|
$28,129
|
$-
|
|
Other
comprehensive income
|
4,620
|
28,129
|
|
Ending
balance at June 30
|
$32,749
|
$28,129
|
The
assets and liabilities of the Company have been translated from its
functional currency (AUD) into U.S. dollars (USD) using the current
exchange rate. Changes in exchange rates generally do not affect
cash flows; therefore, resulting translation adjustments are made
in stockholder's deficiency rather than in income.
NOTE 9
- OTHER RELATED
PARTY TRANSACTIONS
Rent
- The stockholder provides the Company its office facilities rent
free.
Supplier
- The Company purchases from a supplier related by common ownership
and management. Total purchases from the related party supplier
approximated $358,000 for the year ended June 30, 2016; no
purchases were made from the related party supplier during the year
ended June 30, 2015.
F-13
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS
AT
JUNE
30, 2016 AND 2015
NOTE
10 – LEGAL SETTLEMENT
During
the year ended June 30, 2015, the Company reached a legal
settlement in its favor for approximately $67,000 which was applied
directly to the balance due for related legal services at that
balance sheet date.
NOTE
11-NET OPERATING LOSSES AVAILABLE (SEE NOTE 7)
At
June 30, 2015 the Company had NOL's available for future years
approximating $61,000
that were applied towards taxable income for the year ended June
30, 2016.
NOTE
12 - PROVISION FOR (REDUCTION OF) DEFERRED INCOME
TAXES
The
provision for (reduction of) deferred income taxes consists of the
following components for the years ended June 30, 2016 and
2015:
|
|
2016
|
2015
|
|
Arising from
(increase) decrease in available NOL's
|
$16,725
|
$(833)
|
|
Arising from
decrease in taxable differences - accumulated
depreciation
|
|
(3,333)
|
|
Arising from
(increase) decrease in deductible differences - accumulated
depreciation
|
8,900
|
(10,000)
|
|
Total provision for
(reduction of) deferred income taxes
|
$25,625
|
$(14,166)
|
NOTE
13-SUBSEQUENTEVENT
On
June 5, 2017, the Company, along with its stockholder, entered into
an agreement to be acquired by Sincerity Applied Materials Holdings
Corp. (the "Parent"), a publicly traded Nevada, U.S. corporation,
under which the Company would continue its existing business
operations as the sole subsidiary of the Parent. The agreement is
subject to a termination deadline, presently August 15, 2017, and
may also be terminated by the parties under certain specified
circumstances.
A
legal claim which was in progress at balance date was subsequently
settled on 27 April 2017. The terms of the settlement were for the
company to pay an amount of $20,000 in full settlement of the
matter.
Post
balance date a mortgage loan of $639,000 (AUD) was drawn down by a
company officer. The draw down was effected by way of a
re-financing of existing company officer debt. It has been
personally guaranteed by the Company officer, and secured by real
property owned by the company officer. It is subject to the bank's
business mortgage index rate minus 2.23% per annum for a maximum
term of 30 years from the first drawdown date. Repayment of the
amount by the company officer to the company will be subject to the
terms of the shareholder loan agreement. The terms of the
shareholder agreement are outlined in Note 6
|
|
F-14
SINCERITY
AUSTRALIA PTY LTD
BALANCE
SHEETS AS AT
MARCH
31, 2017 AND JUNE 30, 2016
|
ASSETS
|
March
31,
2017
|
June
30,
2016
|
|
|
(Unaudited)
|
|
|
Cash
|
$16,109
|
$3,590
|
|
Accounts
receivable
|
70,340
|
76,176
|
|
Vendor balance
receivable
|
61,242
|
34,960
|
|
Inventory
|
41,622
|
40,569
|
|
Total Current
Assets
|
$189,313
|
$155,295
|
|
Deferred financing
costs
|
5,441
|
-
|
|
Deferred income tax
asset
|
38,970
|
-
|
|
Fixed assets - at
cost, less accumulated depreciation
|
56,484
|
83,596
|
|
|
100,895
|
83,596
|
|
Due from
Stockholder
|
412,235
|
-
|
|
Total Non-Current
Assets
|
$513,130
|
$83,596
|
|
Total
Assets
|
$702,443
|
$238,891
|
|
LIABILITIES AND
STOCKHOLDER'S DEFICIENCY
|
|
|
|
Current
Liabilities
|
|
|
|
Long-term debt -
current portion
|
50,523
|
24,290
|
|
Accrued
expenses
|
164,943
|
68,918
|
|
Income tax
payable
|
13,835
|
13,485
|
|
Due to
stockholder
|
-
|
118,761
|
|
Total Current
Liabilities
|
$229,301
|
$225,454
|
|
Long-term debt -
net of current portion
|
637,986
|
76,831
|
|
Total
Liabilities
|
$867,287
|
$302,285
|
|
Stockholder’s
Deficiency
|
|
|
|
Common stock, $1
per share par value
|
|
|
|
10,000 shares
authorized, issued and outstanding
|
9,426
|
9,426
|
|
Accumulated
deficit
|
(204,169)
|
(105,569)
|
|
Accumulated other
comprehensive income Foreign currency translation
|
29,899
|
32,749
|
|
Total Stockholder's
Deficiency
|
$(164,844)
|
$(63,394)
|
|
Total Liabilities
and Stockholder’s Deficiency
|
$702,443
|
$238,891
|
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-15
|
|
SINCERITY
AUSTRALIA PTY LTD
STATEMENTS OF
INCOME AND ACCUMULATED DEFICIT
FOR THE
NINE MONTH PERIODS ENDED
MARCH
31, 2017 AND MARCH 31, 2016
|
|
Nine
Month Period Ended March 31, 2017
|
Nine
Month Period Ended March 31, 2016
|
|
|
(Unaudited)
|
|
|
Sales
|
$564,230
|
$1,081,159
|
|
Cost of goods
sold
|
(516,388)
|
(797,267)
|
|
Gross
profit
|
47,842
|
283,892
|
|
Selling, general
and administrative expenses (including interest expense of $10,406
– 2017 and 29,866- 2016)
|
(167,203)
|
(171,745)
|
|
Profit/(loss)
before foreign currency transaction loss and reduction of income
taxes
|
(119,361)
|
112,147
|
|
Foreign currency
transaction (loss) / gain
|
(18,209)
|
8,391
|
|
Disposition of
equipment
|
-
|
2,658
|
|
Total other income
/ (loss)
|
(18,209)
|
11,049
|
|
Income (loss)
before reduction of income taxes reduction of income
taxes
|
(137,570)
|
123,196
|
|
Provision for
reduction of income taxes
|
|
|
|
Current
|
-
|
(13,454)
|
|
Deferred
|
38,970
|
(25,625)
|
|
Total reduction
(increment) of income taxes
|
38,970
|
(39,079)
|
|
Net Income
(loss)
|
(98,600)
|
84,117
|
|
Accumulated deficit
- beginning
|
(105,569)
|
(171,434)
|
|
Distributions to
stockholder
|
-
|
(8,933)
|
|
Accumulated deficit
- end
|
$(204,169)
|
$(96,250)
|
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-16
|
|
SINCERITY
AUSTRALIA PTY LTD
STATEMENTS OF
COMPREHENSIVE INCOME
FOR THE
NINE MONTH PERIODS ENDED
MARCH
31, 2017 AND MARCH 31, 2016
|
|
Nine Month Period Ended March 31,
2017
|
Nine Month Period Ended March 31, 2016
|
|
|
(Unaudited) | |
|
Net
loss
|
$(98,600)
|
$84,117
|
|
Other comprehensive
loss:
|
|
|
|
Foreign currency
translation adjustment
|
(2,850)
|
4,620
|
|
Total comprehensive
profit/(loss)
|
$(101,450)
|
$88,737
|
Unaudited. The
accompanying notes are an integral part of these financial
statements.
|
|
F-17
|
|
SINCERITY
AUSTRALIA PTY LTD
STATEMENTS OF CASH
FLOWS
FOR THE
NINE MONTHS ENDED
MARCH
31, 2017 AND MARCH 31, 2016
|
|
Nine
Month Period Ended March 31, 2017
|
Nine
Month Period Ended March 31, 2016
|
|
|
(Unaudited) | |
|
Cash Flows From
Operating Activities Net (loss) / gain
|
$(98,600)
|
$84,117
|
|
Adjustments To
Reconcile Net Loss To Net Cash
|
|
|
|
Used In Operating
Activities
|
|
|
|
Depreciation
|
28,706
|
22,881
|
|
(Gain) loss on disposition of
equipment
|
-
|
2,658
|
|
Bad debt
expense
|
10,874
|
66,529
|
|
Decline in net
realizable value of inventory
|
-
|
46,794
|
|
Reduction of
deferred income tax
|
(38,970)
|
25,625
|
|
(Increase) Decrease
In:
|
|
|
|
Accounts
receivable
|
(3,214)
|
(70,329)
|
|
Inventory
|
-
|
(87,272)
|
|
Vendor balance
receivable
|
(24,876)
|
|
|
Deferred financing
costs
|
(5,334)
|
|
|
Increase (Decrease)
In:
|
|
|
|
Accounts
Payable
|
-
|
32,154
|
|
Accrued
expenses
|
95,673
|
(3,755)
|
|
Income tax
payable
|
-
|
13,454
|
|
Total
Adjustments
|
62,859
|
48,739
|
|
Net Cash Provided
by / (Used In) Operating Activities
|
(35,741)
|
132,856
|
|
Cash Flows From
investing activities
|
|
|
|
Disposition of
equipment
|
-
|
4,053
|
|
Net cash provided
by investing activities
|
-
|
4,053
|
|
Cash Flows From
Financing Activities
|
|
|
|
Proceeds from note
payable - line of credit
|
601,001
|
-
|
|
Repayments of
long-term debt
|
(18,129)
|
(32,136)
|
|
Payments of balance
due to stockholder, at net
|
(534,950)
|
(183,888)
|
|
Net Cash Provided
By Financing Activities
|
47,922
|
(216,024)
|
|
Effect of exchange
rate changes on cash
|
338
|
2,789
|
|
Net increase in
cash
|
$12,519
|
$(76,326)
|
|
Cash -
beginning
|
3,590
|
81,293
|
|
Cash-
end
|
16,109
|
4,967
|
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-18
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE 1-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The
accompanying financial statements include the accounts of Sincerity
Australia Pty Ltd which is a company domiciled in Australia. These
financial statements have been prepared in accordance with the
accounting principles generally accepted in the United States
(“GAAP”) and Regulation S-X published by the US
Securities and Exchange Commission (the “SEC”). Certain
prior period amounts have been reclassified to conform to the
current period presentation. Such reclassifications had no effect
on the prior period net income, accumulated deficit, net assets, or
total shareholders' deficit. The Company has evaluated events or
transactions through the date of issuance of this report in
conjunction with the preparation of these consolidated financial
statements. All amounts presented are in US dollars, unless
otherwise noted.
The
financial statements, except for cash flow information, have been
prepared on an accruals basis and are based on historical costs,
modified, where applicable, by the measurement at fair value of
selected non-current assets, financial assets and financial
liabilities. The amounts presented in the financial statements have
been rounded to the nearest dollar.
Going Concern Basis
The
financial statements have been prepared on the going concern basis,
which assumes continuity of normal business activities and the
realization of assets and the settlement of liabilities in the
ordinary course of business.
At
March 31, 2017 the Company had a current asset deficiency of
$39,988 and net asset deficiency of
$164,844 (June 30,
2016 current asset deficiency of $70,159 and net asset deficiency
of $63,394). The Company reported an after tax loss of $98,600 for
the nine month period ended March 31, 2017 (March 31, 2016 income:
$84,117).
Despite
the current asset deficiency and the total stockholder’s
deficiency, the Company has prepared the financial statements on a
going concern basis that contemplates the continuity of normal
business activity, realisation of assets and settlement of
liabilities at the amounts recorded in the financial statements in
the ordinary course of business.
The
Company believes that there are reasonable grounds to support the
fact that it will be able to pay its debts as and when they become
due and payable. The company is a party to a transaction which will
lead a private placement offering of a minimum of $250,000 and a
maximum of $500,000. These funds will be used for working capital
purposes. Subsequent to deal close a further round of capital
raising is anticipated.
If the
Company is unable to continue as a going concern it may be required
to realise its assets and extinguish its liabilities other than in
the ordinary course of business at amounts different from those
stated in the financial statements.
The
financial statements do not include adjustments relating to the
recoverability and classification of recorded asset amounts or to
the amounts and classification of liabilities that might be
necessary should the company not continue as a going
concern.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-19
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE 1-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Nature of Operations:
Sincerity Australia
PTY LTD (the "Company'') is a specialized provider of
technologically advanced packing materials for the automotive,
packaging, building & construction, and engineering industries,
with headquarters located near Melbourne, Australia. The Company's
primary customer is an unrelated entity with global operations that
accounts for approximately 80% - 90% of the Company's revenue, and
the Company's primary suppliers are located in China and
Malaysia.
Foreign Currency Translation &
Transactions:
The
functional currency of the Company is its local currency, the
Australian dollar (AUD). The financial statements of the Company
have been translated into U.S. dollars (USD). All balance sheet
accounts, other than those in stockholder's deficiency which are
translated based on historical rates accumulated over time, have
been translated using the exchange rate in effect at the balance
sheet date. Income statement amounts have been translated using the
average exchange rate in effect for the nine months ended March 31,
2017. Accumulated net translation adjustments have been reported
separately in other comprehensive loss in the financial statements.
Foreign currency translation adjustments resulted in a loss of
$2,850 for the nine months ended March 31, 2017; such translation
adjustments are not subject to income taxes. Foreign currency
transaction losses resulting from exchange rate fluctuations on
transactions denominated in a currency other than the AUD, the
functional currency, totaled $18,209 for the nine months ended
March 31, 2017, and are included in the accompanying statement of
income for the period.
Cash and Cash Equivalents:
For
purposes of the statement of cash flows, cash consists of bank
checking accounts and cash equivalents may include time deposits,
certificates of deposit, and all highly liquid debt instruments
with original maturities of three months or less. At the balance
sheet date, the Company has no cash equivalents.
Accounts Receivable:
The
Company carries its accounts receivable at cost less an allowance
for doubtful accounts. The Company evaluates its accounts
receivable on a regular basis and establishes an allowance for
doubtful accounts, when deemed necessary, based on a history of
past write● offs and collections and current credit
conditions. A receivable is considered past due based either on
contractual terms or payment history. Accounts are written off as
uncollectible after collection efforts have failed. In addition,
the Company does not generally charge interest on past-due accounts
or require collateral. It is at least reasonably possible that
changes may occur in the near term that would affect management's
estimate of the allowance for doubtful accounts. At March 31, 2017,
management determined that no allowance for doubtful accounts was
required
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-20
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE 1- SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates:
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
("U.S. GAAP'') requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition:
The
Company recognizes revenue when the goods are delivered at the port
of shipment by the supplier, the price is fixed or determinable,
and collectability is reasonably assured.
Inventory:
Inventory is
carried at the lower of cost or net realizable value ("NRV''). Cost
is based on the first-in, first- out ("FIFO") cost method and
includes expenditures incurred in acquiring the inventory and
bringing it to its existing condition and location. NRV is based on
the selling price. It is at least reasonably possible that the
estimate of the net realizable value of the inventory may change
materially within the near term.
Fixed Assets and Depreciation:
Fixed
assets are stated at cost. Additions, renewals, and betterments
that significantly extend the life of the asset are capitalized.
Expenditures for repairs and maintenance are charged to expense as
incurred. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets. For assets
sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any related gain or
loss is reflected in income for the period.
Impairment of Long-Lived Assets:
The
Company reviews long-lived assets, including fixed assets, for
impairment whenever events or circumstances indicate that the
carrying value of such assets may not be fully recoverable.
Impairment is present when the sum of undiscounted estimated future
cash flows expected to result from use of the asset is less than
carrying value. H
impairment is present, the carrying value of the impaired asset is
reduced to its fair value. Fair value is determined based on
discounted cash flows or appraised values, depending on the nature
of the asset. During the nine months ended March 31, 2017, no
impairment losses were recognized for long-lived
assets.
Debt Issuance Costs:
Borrowing costs
(debt issue costs or deferred financing costs) are subject to
amortization over the maturity period of the related debt or five
years, whichever is shorter, using the straight-line method, which
does not differ materially from the effective interest method. The
Company presents such costs as a reduction of the carrying amount
of the debt rather than as an asset, except for deferred financing
costs related to a credit line which are presented as an asset.
Amortization of debt issuance costs and deferred financing costs
are classified as interest expense.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-21
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE
1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Tax:
The
Company is subject to the Australian small business company income
tax collected by the Australian Tax Office ("ATO"). This income tax
is provided for the tax effects of transactions reported in the
financial statements and consists of the tax currently due
(including any amended returns intended to be filed by management),
plus deferred tax, if any, related to the recognition of the
benefit of net operating losses (NOL's) carried forward, and
arising from deductible temporary differences between tax and U.S.
GAAP for accumulated depreciation. At March 31, 2017, the deferred
tax asset recognized of $38,970 arose entirely from the benefit of
the current period NOL, and accounts for the entire reduction of
deferred income taxes for the interim period
Goods and Services Tax ("GST''):
Transactions,
including revenue, are recognized by the Company net of GST, except
when the amount of GST is not recoverable from the ATO. Receivables
and payables are stated inclusive of the amount of GST receivable
or payable. The net amount of GST recoverable from, or payable to,
the ATO is included as a receivable or payable in the balance
sheet.
Shipping
and Handling Costs:
Freight
costs are included in cost of sales and amounted to $ 9,988 for the
nine months ended March 31, 2017.
Advertising:
Advertising is
expensed as incurred and amounted to $ 1,087 for the nine months
ended March 31, 2017.
U.S. GAAP Recently Issued Accounting Standard Updates Not Presently
Effective:
On May
28, 2014, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU'') 2014-09, Revenue from Contracts with Customers.
The standard's core principle is that a company will recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services.
This standard also includes expanded disclosure requirements that
result in an entity providing users of financial statements with
comprehensive information about the nature, amount, timing, and
uncertainty of revenue and cash flows arising from the entity's
contracts with customers. This standard will be effective for
fiscal year ending June 30, 2020. The Company is currently in the
process of evaluating the impact of adoption of this ASU on the
financial statements.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-22
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE 1- SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June
2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses.
The standard requires a financial asset (including trade
receivables) measured at amortized cost basis to be presented at
the net amount expected to be collected. Thus, the income statement
will reflect the measurement of credit losses for newly-recognized
financial assets as well as the expected increases or decreases of
expected credit losses that have taken place during the period.
This standard will be effective for fiscal year ending June 30,
2022. The Company is currently in the process of evaluating the
impact of adoption of this ASU on the financial
statements.
Management does not
believe that any other recently issued, but not yet effective, U.S.
GAAP accounting standard if currently adopted would have a material
effect on the accompanying financial statements.
Subsequent Events:
Management has
evaluated subsequent events through August 15, 2017, the date the
financial statements were available to be issued. No significant
subsequent events were identified by management.
NOTE 2
- SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Cash
maintained at commercial banks is either insured by the Australian
Government Guarantee up to $250,000 (AUD) or the U.S. Federal
Deposit Insurance Corporation up to $250,000 (USD) in total at each
bank. At March 31, 2017, cash did not exceed insured
limits.
At
March 31, 2017, credit risk for trade accounts is concentrated as
well because 100% of the balances are receivable from three
customers. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial conditions, but does
not generally require collateral.
NOTE 3
-MAJOR CUSTOMERS
During
the nine months ended March 31, 2017, 100% of the Company's sales
were to three customers, of which approximately 85% were to its
primary customer.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-23
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE 4
FIXED ASSETS
At
March 31, 2017 and June 30, 2016 fixed assets are comprised of the
following:
|
|
March 31, 2017
|
June 30, 2016
|
Estimated Useful Lives
|
|
Vehicles
|
$126,649
|
$123,445
|
5
years
|
|
Office equipment
and furniture and fixtures
|
19,834
|
19,332
|
5
years
|
|
|
$146,483
|
$142,777
|
|
|
Less: accumulated
depreciation
|
(89,999)
|
(59,181)
|
|
|
Total, net of
accumulated depreciation
|
$56,484
|
$83,596
|
|
NOTE 5
-NOTE PAYABLE- LINE OF CREDIT & LOAN GUARANTEE
The
Company has a total $950,000 (AUD) bank credit line (approximately
$711,000 (USD) at March 31, 2017) personally guaranteed by certain
Company officers, and secured by real property owned by those
officers, available to be used for core business working capital
requirements, $800,000 (AUD) of which is designated as the
"mortgage loan" portion with the remaining balance of $150,000
(AUD) designated as the "business loan" portion. The mortgage loan
portion of the credit line is subject to the bank's business
mortgage index rate (5.94% per annum at March 31, 2017) minus 2.23%
per annum for a maximum term of 30 years from the first drawdown
date, and the business loan portion of the credit line is subject
to the bank's business mortgage index rate minus 1.08% per annum
for a maximum term of 15 years from the first drawdown date. The
business loan was first drawn down on December 12, 2016, and at
March 31, 2017, $114,565 (USD) is drawn and payable on the business
loan; no drawings have been made on the mortgage loan as of the
balance sheet date. Interest only is due monthly in arrears for the
first 3 years from the first drawdown date for draws from the
mortgage loan and from the business loan.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-24
|
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
|
NOTE 6
- LONG-TERM DEBT
The
Company has a number of borrowings outstanding at 31 March 2017
including:
a)
Chattel mortgage
secured by a motor vehicle requiring monthly payments approximating
$2,700 (and a final payment approximating $37,000) that include
interest approximating 8.4%, and maturing on January 28,
2019.
b)
A business loan in
the amount of $114,660 maturing on 12 December, 2021. Interest rate
applicable is 6.02%
c)
A mortgage loan in
the amount of $488,690 secured against office holder property and
maturing on 12 December 2046. Interest rate applicable is
4.87%.
The
components of borrowings due at March 31, 2017 are as
follows:
|
|
March 31, 2017
|
June 30, 2016
|
|
Borrowings
|
$688,509
|
$101,121
|
|
Less: current
portion
|
(50,523)
|
(24,290)
|
|
Total long-term
debt, less current portion
|
$637,986
|
$76,831
|
Maturities of
long-term debt at March 31, 2017 for each of the next five years
and in the aggregate, are as follows:
|
|
March 31, 2017
|
June 30, 2016
|
|
Next 12
months
|
$50,523
|
$24,300
|
|
2
years
|
83,967
|
26,400
|
|
3
years
|
26,520
|
50,521
|
|
4
years
|
27,903
|
-
|
|
5
years
|
499,596
|
-
|
|
|
$688,509
|
$101,221
|
NOTE7-BALANCE DUE
FROM STOCKHOLDER
The
balance due from the stockholder at March 31, 2017 amounts to
$412,235, and is subject to an unsecured loan agreement that
requires interest at the rate of 7.8% per annum on balances
outstanding for at least an entire year, and stipulates repayment
within one year from the balance sheet date, subject to the
lender's discretion. The agreement also provides for future
advances and payments at the discretion of the parties. No interest
has been charged during the interim period in accordance with the
terms of the agreement.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-25
SINCERITY AUSTRALIA PTY LTD
NOTES
TO FINANCIAL STATEMENTS AT
MARCH
31, 2017
NOTE
8-ACCUMULATED OTHER COMPREHENSIVE INCOME
The
balance of accumulated other comprehensive income at March 31, 2017
relates entirely to the foreign currency translation, as
follows:
|
Beginning balance
at July 1, 2016
|
$32,749
|
|
Other comprehensive
loss
|
(2,850)
|
|
Ending balance at
March 31, 2017
|
$29,899
|
The
assets and liabilities of the Company have been translated from its
functional currency (AUD) into U.S. dollars (USD)
using the current exchange rate. Changes in exchange rates
generally do not affect cash flows; therefore, resulting
translation adjustments are made in stockholder's deficiency rather
than in income.
NOTE 9
- OTHER RELATED PARTY TRANSACTIONS
Rent -
The stockholder provides the Company its office facilities rent
free. NOTE 10 - FOREIGN CURRENCY GAINS AND LOSSES
Foreign
currency transaction gains or losses result from exchange rate
fluctuations on transactions denominated in a currency other than
the AUD functional currency, and are included in the statement of
income during the period the fluctuations occur. A foreign currency
loss of $18,209 was recognized for the nine months ended March 31,
2017.
NOTE 11
– SUBSEQUENT EVENT
On June 5, 2017, the Company, along with its
stockholder, entered into an agreement to be acquired by Sincerity
Applied Materials Holdings Corp. (the "Parent"), a publicly traded
Nevada, U.S. corporation, under which the Company would continue
its existing business operations as the sole subsidiary of the
Parent. The agreement is subject to a termination deadline,
presently August 15, 2017, and may also be terminated by the
parties under certain specified circumstances.
Unaudited. The
accompanying notes are an integral part of these financial
statements.
F-26
SINCERITY
APPLIED MATERIALS HOLDINGS CORP. AND CONSOLIDATED SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL
STATEMENTS
The
following unaudited condensed consolidated pro forma financial
statements are based upon the historical financial statements of
Sincerity Applied Materials Holdings (SAMHC) and its consolidated
subsidiaries, adjusted to reflect the purchase of Sincerity
Australia Pty Ltd (SAPL). The following unaudited condensed
consolidated pro forma financial statements of Sincerity Applied
Materials Holdings should be read in conjunction with the related
notes and with the historical consolidated financial statements of
Sincerity Applied Materials Holdings and the related notes included
in previous filings with the Securities and Exchange Commission.
The unaudited condensed pro forma consolidated balance sheet
reflects the purchase of Sincerity Australia Pty Ltd as if it
occurred on March 31, 2017. The pro forma adjustments, described in
the related notes, are based on the best available information and
certain assumptions that Sincerity Applied Materials Holdings
believes are reasonable.
The
unaudited condensed consolidated pro forma financial statements are
provided for illustrative purposes only and are not necessarily
indicative of the operating results or financial position that
would have occurred had the acquisition of Sincerity Australia Pty
Ltd closed on March 31, 2017 for the unaudited condensed pro forma
consolidated balance sheet or at the beginning of each fiscal
period presented for the unaudited condensed pro forma statements
of consolidated income. For example, these financial statements do
not reflect any potential earnings or other impacts from the use of
the proceeds from the purchase or cost reductions of previously
allocated corporate costs and potential subsequent restructuring
charges. Readers should not rely on the unaudited condensed
consolidated pro forma financial statements as being indicative of
the historical operating results that Sincerity Applied Materials
Holdings would have achieved or any future operating results or
financial position that it will experience after the transaction
closes.
Sincerity
Applied Materials Holdings Corp and Consolidated Subsidiaries
Unaudited Condensed Pro Forma Consolidated Balance Sheets March 31,
2017
|
|
SAMHC
|
SAPL
|
Pro
Forma
|
|
|
Historical
|
Historical
|
Combined
|
|
Assets
|
|
|
|
|
Current
Assets
|
|
|
|
|
Cash
|
16,158
|
16,109
|
32,267
|
|
Prepaid
expenses
|
2,438
|
-
|
2,438
|
|
Accounts
receivable
|
-
|
70,340
|
70,340
|
|
Vendor
receivable
|
-
|
61,242
|
61,242
|
|
Inventory
|
-
|
41,622
|
41,622
|
|
Total
Current Assets
|
18,596
|
189,313
|
207,909
|
|
Deferred financing
costs
|
-
|
5,441
|
5,441
|
|
Deferred income tax
asset
|
-
|
38,970
|
38,970
|
|
Investments in
associated companies
|
-
|
-
|
-
|
|
Fixed assets - at
cost, less accumulated depreciation
|
-
|
56,484
|
56,484
|
|
Non-current
Assets
|
-
|
100,895
|
100,895
|
|
|
|
|
|
|
Due from
stockholders
|
|
412,235
|
412,235
|
|
Total
Non-Current Assets
|
|
412,235
|
412,235
|
|
Total
Assets
|
18,596
|
702,443
|
721,039
|
F-27
|
Liabilities
|
|
||
|
Current
Liabilities
|
|
||
|
Note payable - line
of credit
|
-
|
114,565
|
114,565
|
|
Long-term debt
current position
|
-
|
26,542
|
26,542
|
|
Accounts
payable
|
4,241
|
|
4,241
|
|
Accrued
expenses
|
32,501
|
166,743
|
199,244
|
|
Income tax
payable
|
-
|
13,835
|
13,835
|
|
Total
Current Liabilities
|
36,742
|
321,685
|
358,427
|
|
Non-Current
Liabilities
|
|
|
|
|
Chattel mortgage
(NC)
|
-
|
58,712
|
58,712
|
|
Loan - Home Loan
Refinance
|
-
|
488,690
|
488,690
|
|
Total
Non-Current Liabilities
|
-
|
547,402
|
547,402
|
|
Total
Liabilities
|
36,742
|
869,087
|
905,829
|
|
Net
Assets (Liabilities)
|
(18,146)
|
(166,644)
|
(184,790)
|
|
Equity
|
|
|
|
|
Authorised: .0.001
par value, 290,000,00 and 10,000 at AUD $1 shares respectively
authorised
Issued and
outstanding: 187,329,355 and 10,000 respectively
|
187,329
|
9,426
|
196,755
|
|
Additional paid-in
capital
|
8,368,582
|
-
|
8,368,582
|
|
Accumulated
deficit
|
-
|
-
|
|
|
|
8,574,057
|
205,969
|
8,780,026
|
|
Accumulated other
comprehensive income
|
-
|
-
|
|
|
Foreign currency
translation
|
-
|
29,899
|
29,899
|
|
Total
Stockholder's Deficiency
|
(18,146)
|
(166,644)
|
(184,790)
|
|
Total
liabilities and stockholder's deficiency
|
(18,146)
|
(166,644)
|
(184,790)
|
See
Notes to Unaudited Condensed Consolidated Pro Forma Financial
Statements.
F-28
Sincerity
Applied Materials Holdings Corp. and Consolidated Subsidiaries
Unaudited Condensed Pro Forma Statement of Consolidated Income For
Nine Months Ended March 31, 2017
|
|
SAMHC
|
SAPL
|
Pro Forma
|
|
|
Historical
|
Historical
|
Combined
|
|
Revenue
|
|
|
|
|
Sales
|
-
|
564,230
|
564,230
|
|
Total
Revenue
|
-
|
564,230
|
564,230
|
|
Cost
of goods sold
|
-
|
516,388
|
516,388
|
|
Gross
Profit
|
-
|
47,842
|
47,842
|
|
Operating expenses
|
|
|
|
|
Selling,
general and administrative
|
10,476
|
45,997
|
56,473
|
|
Professional
fees
|
86,574
|
81,626
|
168,200
|
|
Depreciation
and amortization
|
-
|
28,706
|
28,706
|
|
Bad
debt recoveries
|
-
|
10,874
|
10,874
|
|
Total
operating expenses
|
-
|
167,203
|
264,253
|
|
|
|
|
|
|
Total
operating loss
|
97,050
|
|
(216,411)
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
Reduction
of income taxes - deferred
|
|
(38,970)
|
(38,970)
|
|
Foreign
currency transaction loss
|
-
|
18,209
|
18,209
|
|
Gain
on sale of Equidam Holdings B.V
|
14,799
|
-
|
14,799
|
|
Other
expenses
|
(6,909)
|
-
|
(6,909)
|
|
|
7,890
|
(20,761)
|
(12,871)
|
|
|
|
|
|
|
Net profit (loss)
|
(89,160)
|
(98,600)
|
(203,540)
|
See
Notes to Unaudited Condensed Consolidated Pro Forma Financial
Statements.
F-29
Sincerity
Applied Materials Holdings Corp. and Consolidated Subsidiaries
Unaudited Condensed Pro Forma Statement of Consolidated Cash Flows
For Nine Months Ended March 31, 2017
|
|
SAMHC
|
SAPL
|
Pro Forma
|
|
|
Historical
|
Historical
|
Combined
|
|
Net
loss
|
(89,160)
|
(98,600)
|
(187,760)
|
|
Adjustment
to reconcile net loss to cash used in operating
activites
|
|
|
|
|
Expenses
paid by CKR under SPA
|
81,290
|
-
|
81,290
|
|
Gain
on sale of Equidam Holdings B.V
|
(14,799)
|
-
|
(14,799)
|
|
Reduction
of deferred income tax
|
-
|
(38,970)
|
(38,970)
|
|
Depreciation
and amortization
|
-
|
28,706
|
28,706
|
|
Provision
for doubtful debts
|
-
|
10,874
|
10,874
|
|
Changes in assets and liabilities
|
|
|
|
|
Accounts
receivables
|
-
|
(3,214)
|
(3,214)
|
|
Deferred
financing costs
|
-
|
(5,334)
|
(5,334)
|
|
Prepaid
expenses and other current assets
|
26,874
|
|
26,874
|
|
Accounts
payable
|
(12,436)
|
(24,876)
|
(37,312)
|
|
Accrued
expenses and other current liabilities
|
(1,502)
|
95,673
|
94,171
|
|
Net
cash used in operating activities
|
(9,733)
|
(35,741)
|
(45,474)
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
Proceeds
from ANZ loan
|
-
|
601,001
|
601,001
|
|
Repayment
of long term debt
|
-
|
(18,129)
|
(18,129)
|
|
Net cash provided by (used in) financing activities
|
-
|
(582,872)
|
(582,872)
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
Proceeds
from sale of Equidam Holdings BV
|
15,902
|
-
|
15,902
|
|
Loan
to stockholder, at net
|
-
|
(534,951)
|
(534,951)
|
|
Net cash provided by (used in) investing activities
|
15,902
|
(534,951)
|
(519,049)
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
312
|
338
|
650
|
|
Net
income/ (decrease) in cash
|
6,481
|
12,518
|
18,999
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
9,677
|
3,591
|
13,268
|
|
Cash and cash equivalents, end of period
|
16,158
|
16,109
|
32,267
|
|
|
6,481
|
12,518
|
18,999
|
See
Notes to Unaudited Condensed Consolidated Pro Forma Financial
Statements.
F-30
Sincerity
Applied Materials Holdings Corp. and Consolidated Subsidiaries
Unaudited Condensed Pro Forma Statement of Consolidated Income For
the Year Ended December 31, 2016
|
|
SAMHC
|
SAPL
|
Pro Forma
|
|
|
Historical
|
Historical
|
Combined
|
|
Revenue
|
|
|
|
|
Sales
|
-
|
1,298,137
|
1,298,137
|
|
Other
Revenue
|
89,267
|
-
|
89,267
|
|
Total
Revenue
|
89,267
|
1,298,137
|
1,387,404
|
|
Cost
of goods sold
|
-
|
917,142
|
917,142
|
|
|
|
|
|
|
Gross
Profit
|
89,267
|
380,995
|
470,262
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Selling,
general and administrative
|
514,911
|
51,216
|
566,127
|
|
Professional
fees
|
137,035
|
55,164
|
192,199
|
|
Research
and development
|
17,118
|
-
|
17,118
|
|
Depreciation
and amortization
|
36,819
|
34,155
|
70,974
|
|
Bad
debt recoveries
|
19,591
|
86,394
|
66,803
|
|
Total
operating expenses
|
686,292
|
226,929
|
913,221
|
|
|
|
|
|
|
Total
operating loss
|
597,025
|
154,066
|
442,959
|
|
Other
income (expenses)
|
-
|
-
|
-
|
|
Reduction
of income taxes - deferred
|
-
|
-
|
-
|
|
Foreign
currency transaction loss
|
-
|
39,480
|
39,480
|
|
|
|
|
|
|
Other
income
|
-
|
27,409
|
27,409
|
|
Interest
expenses amortization of debt discount
|
73,266
|
83
|
73,183
|
|
Other
expenses
|
7,623
|
-
|
7,623
|
|
|
(65,643)
|
(11,988)
|
(77,631)
|
|
|
|
|
|
|
Net profit (loss
|
(662,668)
|
142,078
|
(520,590)
|
See
Notes to Unaudited Condensed Consolidated Pro Forma Financial
Statements.
F-31
SINCERITY
APPLIED MATERIALS HOLDINGS CORP. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL
STATEMENTS
Note
1 — Basis of presentation
The
unaudited pro forma condensed combined financial statements are
based on Sincerity Applied Materials Holdings Corp and Sincerity
Australia Pty Ltd Company’s historical consolidated financial
statements as adjusted to give effect to the acquisition of
Sincerity Australia Pty Ltd. The unaudited pro forma combined
statements of operations for the nine months ended March 31, 2017
and the 12 months ended 31 December 2016 give effect to the
Sincerity Australia Pty Ltd Company acquisition as if it had
occurred on March 31, 2017.
Note
2 – Adjustments
The pro
forma financial statements have been prepared on an amalgamated
basis by combining the trial balances of Sincerity Applied
Materials Holdings Corp and Sincerity Australia Pty Ltd. No
adjustments have been made to these numbers for the purposes of
preparing this pro forma.
F-32
(d)
Exhibits.
|
Exhibit
|
|
|
Description
|
|
|
|
Acquisition
Agreement dated June 5, 2017 by and among the Registrant, Sincerity
Australia Pty Ltd. (“SAPL”), and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.1 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 9,
2017)
|
|
|
|
|
|
|
|
|
|
Amendment
No. 1 dated July 7, 2017 to the Acquisition Agreement dated June 5,
2017 by and among the Registrant, SAPL and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.2 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 12,
2017)
|
|
|
|
|
|
|
|
|
|
Amendment
No. 2 dated July 21, 2017 to the Acquisition Agreement dated June
5, 2017 by and among the Registrant, SAPL and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.8 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 27,
2017.
|
|
|
|
|
|
|
|
|
|
Amendment
No. 3 dated August 15, 2017 to the Acquisition Agreement dated June
5, 2017 by and among the Registrant, SAPL and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.4 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 21,
2017.
|
|
|
|
|
|
|
|
|
|
Amendment
No. 4 dated August 23, 2017 to the Acquisition Agreement dated June
5, 2017 by and among the Registrant, SAPL and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.5 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 28,
2017.
|
|
|
|
|
|
|
|
|
|
Amendment
No. 5 dated September 1, 2017 to the Acquisition Agreement dated
June 5, 2017 by and among the Registrant, SAPL and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.5 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 8,
2017.
|
|
|
|
|
|
|
|
|
|
Amendment
No. 6 dated September 15, 2017 to the Acquisition Agreement dated
June 5, 2017 by and among the Registrant, SAPL and the sole
shareholder/member of SAPL (incorporated by reference to Exhibit
2.6 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 19,
2017)
|
|
|
|
|
|
|
|
|
|
Articles
of Incorporation of Registrant (incorporated by reference to
Exhibit 3.1 to the Company’s Registration Statement on Form
S-1 (File No. 333-177500) filed with the Securities and Exchange
Commission on October 25, 2011)
|
|
|
|
|
Certificate
of Amendment of Articles of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 9, 2013)
|
|
|
|
|
|
|
|
|
|
Certificate
of Amendment of Articles of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 13, 2017)
|
|
|
|
|
|
|
|
|
By-Laws
of the Registrant (incorporated by reference to Exhibit 3.2 to the
Company’s Registration Statement on Form S-1 (File No.
333-177500) filed with the Securities and Exchange Commission on
October 25, 2011
|
||
|
|
|
|
|
|
10.1*
|
|
|
Form of
2017 Lock-Up and No Short Selling Agreement
|
|
|
|
|
|
|
10.2*
|
|
|
Form of
2017 Subscription Agreement between the Registrant and the
investors party thereto
|
|
|
|
|
|
|
10.3*
|
|
|
Form of
2017 PPO Warrant for Common Stock of Registrant
|
|
|
|
|
|
|
10.4*
|
|
|
Form of
2017 12% Senior Secured Convertible Note of the
Registrant
|
|
|
|
|
|
|
10.5*
|
|
|
Form of
2017 Registration Rights Agreement
|
|
|
|
|
|
|
10.6*
|
|
|
Form of
2017 Security Agreement
|
|
|
|
|
|
|
10.7*
|
|
|
Unsecured
Loan Agreement dated March 31, 2017 between Zhang Yiwen (James
Zhang) and Sincerity Australia Pty. Ltd.
|
|
|
|
|
|
|
10.8*
|
|
|
Sincerity
Australia Pty. Ltd. Credit Line Letter Agreement dated November 24,
2016
|
|
|
|
|
|
*
Filed
herewith
69
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
|
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
|
|
|
|
|
|
|
|
|
Dated: September
25, 2017
|
By:
|
/s/
Zhang
Yiwen
|
|
|
|
Name:
|
Zhang
Yiwen
|
|
|
|
Title:
|
President and Chief
Executive Officer
|
|
70