Attached files
As filed with the Securities and Exchange Commission on February
21, 2018
Registration No.
333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Sincerity Applied Materials Holdings Corp.
Nevada
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45-2859440
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(State or other jurisdiction of
incorporation or organization)
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3080
(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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Level 27, Rialto Tower, 525 Collins Street
Melbourne, Victoria, Australia 3000
+ 61-3-98230361
(Address, including zip code, and telephone number, including area
code, of registrant’s principal executive
offices)
Zhang Yiwen
Level 27, Rialto Tower, 525 Collins Street
Melbourne, Victoria, Australia 3000
+ 61-3-2859440
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Scott Rapfogel, Esq.
CKR Law LLP
1330 Avenue of the Americas
New York, NY 10019
Telephone: (212) 259-7300
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration
Statement.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following
box. ☒
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
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☐
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Accelerated filer
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Non-accelerated filer
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☐ (Do not check if a smaller reporting
company)
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Smaller reporting company
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☒
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Emerging growth company
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☒
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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 7(a)(2)(B) of the Securities
Act. ☒
CALCULATION OF REGISTRATION FEE
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Title of Each
Class of
Securities To
be Registered
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Amount
to
be
Registered(1)
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Proposed
Maximum
Offering
Price
Per
Unit(2)
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Proposed
Maximum
Aggregate
Offering Price(2)
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Amount
of
Registration Fee
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Common
Stock, par value $0.001 per share
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12,441,726
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$2.25
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$27,993,883
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$3,486
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(1)
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Consists of (a)
5,365,565 outstanding shares of the registrant’s common
stock, (b) 1,402,868 shares of the registrant’s common stock
which may become issuable upon exercise of common stock purchase
warrants, (c) 378,616 shares of the registrant’s common stock
which may become issuable upon conversion of convertible promissory
notes and (d) up to 5,294,677 shares of common stock issuable
pursuant to the anti-dilution provisions applicable to the shares
which my become issuable pursuant to (b) and (c) above. Pursuant to
Rule 416 under the Securities Act of 1933, as amended, to the
extent that such outstanding shares, warrants and notes provide for
an increase in amounts issuable, exercisable or convertible to
prevent dilution resulting from stock splits, dividends or similar
transactions, this registration statement shall be deemed to cover
such additional shares of common stock issuable in connection with
any such provision.
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(2)
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Estimated
solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act
of 1933, as amended, based upon the average of the high and low
prices of the registrant’s common stock as reported by OTC
Markets on February 12, 2018. The shares offered hereunder maybe
sold by the selling stockholders from time to time in the open
market, through privately negotiable transactions or a combination
of these methods, at market prices prevailing at the time of sale
or at negotiated prices.
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The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities
Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and
may be changed. The selling stockholders named in this preliminary
prospectus may not sell these securities until this registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and the selling stockholders named in this
preliminary prospectus are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated February 21, 2018
PRELIMINARY PROSPECTUS
SINCERITY APPLIED MATERIALS HOLDINGS CORP.
12,441,726 Shares of Common
Stock
This
prospectus relates to the offering and resale by the selling
stockholders identified herein of up to 12,441,726 shares of common
stock of Sincerity Applied Materials Holdings Corp., par value
$0.001 per share. Of the shares being offered, 5,365,565 are
presently issued and outstanding, 1,402,868 are issuable upon
exercise of common stock purchase warrants, 378,616 are issuable
upon conversion of promissory notes and 5,294,677 represent a good
faith estimate of the number of shares which may become issuable
pursuant to the anti-dilution provisions applicable to the common
stock purchase warrants and promissory notes referenced above (See
– “Description of Capital Stock” for the terms of
the anti-dilution provisions). We will not receive any proceeds
from the sale of these shares by the selling stockholders. The
selling stockholders may sell the shares as set forth herein under
“Plan of Distribution.” For a list of the selling
stockholders, see the section entitled “Selling
Stockholders” on page 49. We have borne and will continue to
bear the costs relating to the registration of these
shares.
Our
common stock is traded on the OTC Pink Market under the symbol
“SINC.” On February 12, 2018, the last reported sale
price for our common stock was $2.25 per share. The selling
stockholders may sell all or a portion of their shares through
public or private transactions at prevailing market prices or at
privately negotiated prices.
We may
amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire
prospectus and any amendments or supplements carefully before you
make your investment decision.
We are an “emerging growth company” as defined under
the federal securities laws, and, as such, are eligible for reduced
public company reporting requirements. See “Prospectus
Summary—Implications of Being an Emerging Growth
Company.”
Investment
in our common stock involves risks. See “Risk Factors”
beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is
, 2018
TABLE
OF CONTENTS
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Page
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ABOUT
THIS PROSPECTUS
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3
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PROSPECTUS
SUMMARY
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3
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THE
OFFERING
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8
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RISK
FACTORS
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9
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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21
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DESCRIPTION
OF THE ACQUISITION, THE OFFERING AND RELATED
TRANSACTIONS
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DESCRIPTION
OF OUR BUSINESS
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26
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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32
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DIRECTORS
AND EXECUTIVE OFFICERS
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39
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EXECUTIVE
COMPENSATION
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43
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CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
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45
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USE
OF PROCEEDS
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47
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DIVIDEND
POLICY
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47
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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47
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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48
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SELLING
STOCKHOLDERS
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49
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PLAN
OF DISTRIBUTION
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51
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DESCRIPTION
OF CAPITAL STOCK
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53
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SHARES
ELIGIBLE FOR FUTURE SALE
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60
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
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62
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LEGAL
MATTERS
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63
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EXPERTS
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63
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WHERE
YOU CAN FIND MORE INFORMATION
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63
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2
You
should rely only on the information contained in this prospectus or
contained in any prospectus supplement or free writing prospectus
filed with the Securities and Exchange Commission. Neither we nor
the selling stockholders have authorized anyone to provide you with
additional information or information different from that contained
in this prospectus filed with the Securities and Exchange
Commission. The selling stockholders are offering to sell, and
seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this
prospectus or of any sale of shares of our common stock. Our
business, financial condition, results of operations and prospects
may have changed since that date.
For
investors outside the United States: Neither we nor the selling
stockholders have done anything that would permit this offering or
possession or distribution of this prospectus in any jurisdiction
where action for that purpose is required, other than in the United
States. Persons outside the United States who come into possession
of this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of common
stock and the distribution of this prospectus outside the United
States.
PROSPECTUS SUMMARY
The following summary highlights selected information contained
elsewhere in this prospectus. This summary is not complete and does
not contain all the information that should be considered before
investing in our common stock. Before making an investment
decision, investors should carefully read the entire prospectus,
paying particular attention to the risks referred to under the
headings “Risk Factors” and “Cautionary Statement
Regarding Forward-Looking Statements” and our financial
statements and the notes to those financial
statements.
As used in this prospectus, unless the context requires otherwise,
the terms “Company,” “we,”
“our” and “us” refer to Sincerity Applied
Materials Holdings Corp., and its wholly owned subsidiaries,
Sincerity Australia Pty Ltd. and Prana Hong Kong Holdings
Ltd.
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 addition to the plastic film
business, we expect to increase our supply of extruded plastic
pallets for aluminum cans.
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., which serves as the
principal manufacturer and technological agent for our
products.
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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:
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Supply best value
products with high levels of quality, service and technological
support;
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Maintain low
production costs;
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Enhance the
recycling efficiency of plastic packaging materials to maintain
environmental integrity;
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Develop and expand
strategic customer relationships; and
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Expand through
strategic acquisitions and internal growth.
Risks Associated with Our Business
Our
business is subject to a number of risks of which you should be
aware before making an investment decision. These risks are
discussed more fully in the “Risk Factors” section of
this prospectus immediately following this prospectus summary.
These risks include the following:
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the potential for
changes in regional and local economic conditions, including local
inflationary pressures;
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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;
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changes in laws and
regulations, including laws and policies affecting trade and
foreign investment;
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the difficulty of
enforcing agreements and collecting receivables through certain
foreign legal systems;
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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;
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quality or
reliability defects in product components that are sourced from
third-party suppliers;
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the inability of
third party manufacturers to secure product components in a timely
manner, in sufficient quantities or on commercially reasonable
terms;
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the failure of
third party manufacturers to increase production of products to
meet demand;
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the inability of
third party manufacturers to modify production lines to enable them
to efficiently produce future products or implement changes in
current products in response to regulatory
requirements;
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difficulty
identifying and qualifying alternative suppliers for components in
a timely manner;
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risks associated
with doing business in China;
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issues maintaining
uniform standards, procedures, controls and policies;
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unanticipated costs
associated with acquisitions;
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risks associated
with entering new markets in which we have limited or no
experience;
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increased costs
associated with expanding our sales capabilities;
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the cost associated
with developing and commercializing our proposed products or
technologies;
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our reliance on a
limited number of customers;
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the uncertainly of
our future capital needs which may require us to seek future
financing;
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the cost of
obtaining and maintaining regulatory clearance or approval for our
current or future products;
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the lack of U.S.
public company experience of our management team;
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the potential
impact of our recent loan transactions in terms of share dilution
and the market price for our common stock;
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the cost of ongoing
compliance and regulatory requirements; and
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a lack of long-term
supply arrangements for key components with suppliers.
Reverse Acquisition, Private Placement Offerings and the Selling
Stockholders
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.
5
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”) we 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
“September 2017 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.
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.
Unless
otherwise indicated, references to share amounts in this report
give retroactive effect to the 60:1 Reverse Split.
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 ceased to be a “shell
company”.
The
issuance of shares of our common stock in the Acquisition was
exempt from registration under Section 4(a)(2) of the Securities
Act of 1933, as amended, or the Securities Act.
On
November 9, 2017 we entered into a Securities Purchase Agreement
with two persons, pursuant to which be sold (i) convertible
promissory notes dated November 9, 2017 in the aggregate principal
amount of $108,000 due on November 9, 2018, (ii) three-year Class A
Warrants to purchase up to an aggregate of 102,858 shares of our
common stock (subject to adjustment) at an initial exercise price
of $6.00 per share (subject to adjustment), and (iii) three-year
Class B Warrants to purchase up to an aggregate of 800,000 shares
of our common stock (subject to adjustment) at an initial exercise
price of $7.50 per share (subject to adjustment).
On
December 19, 2017 we entered into a Securities Purchase Agreement
with one person pursuant to which we sold a convertible promissory
note in the principal amount of $112,500 due on August 20,
2018.
On
January 9, 2018 we entered into a Securities Purchase Agreement
dated December 19, 2017 with one person pursuant to which we sold a
convertible promissory note in the principal amount of $83,500 due
on December 19,2018.
The
terms of the securities sold in our November 9, 2017, December 19,
2017, and January 9, 2018, offerings, including the anti-dilution
provisions applicable thereto, are described in greater detail
under the headings “Description of Capital Stock” and
“Description of the Acquisition, the Offerings and Related
Transactions.”
Implications of Being an Emerging Growth Company
We
qualify as an “emerging growth company” as defined in
the Jumpstart Our Business Startups Act, or JOBS Act, enacted in
April 2012. An emerging growth company may take advantage of
reduced reporting requirements that are otherwise applicable to
public companies. These provisions include, but are not limited
to:
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not
being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes- Oxley Act of 2002, or
Sarbanes-Oxley Act;
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reduced
disclosure obligations regarding executive compensation in our
periodic reports, proxy statements and registration statements;
and
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exemptions
from the requirements of holding a nonbinding advisory vote on
executive compensation and stockholder approval of any golden
parachute payments not previously approved.
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We may
take advantage of these provisions through December 31, 2018. If
certain events occur prior to December 31, 2018, including if we
become a “large accelerated filer,” our annual gross
revenues exceed $1 billion or we issue more than $1 billion of
non-convertible debt in any three-year period, we would cease to be
an emerging growth company prior to December 31 2018.
We may
choose to take advantage of some but not all of these reduced
burdens. We have taken advantage of certain of the reduced
disclosure obligations regarding executive compensation in this
registration statement and may elect to take advantage of other
reduced burdens in future filings. As a result, the information
that we provide to our stockholders may be different than you might
receive from other public reporting companies in which you hold
equity interests.
Under
the JOBS Act, emerging growth companies can delay adopting new or
revised accounting standards until such time as those standards
apply to private companies. However, we have irrevocably elected
not to avail ourselves of this extended transition period for
complying with new or revised accounting standards and, therefore,
we will be subject to the same new or revised accounting standards
as other public companies that are not emerging growth
companies.
We are
also a “smaller reporting company” as defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and have elected to take advantage of certain of the
scaled disclosure available to smaller reporting
companies.
Our Corporate Information
Our
corporate headquarters are located at Level 27, Rialto Tower, 525
Collins Street, Melbourne, Victoria, Australia 3000 and our
telephone number is +61-3-2859440. Our filings with the Securities
Exchange Commission, or SEC, are available free of charge through
the SEC website.
7
THE OFFERING
Common
stock offered by selling stockholders
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12,441,726
shares (including 1,402,868 shares of common stock issuable upon
the exercise of warrants to purchase common stock held by certain
selling stockholders, 378,616 shares of common stock issuable upon
the conversion of promissory notes held by certain selling
stockholders and up to 5.294.677 shares of common stock issuable
pursuant to the anti-dilution provisions applicable to the shares
which may become issuable in connection with the warrants and
promissory notes referenced above.)
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Common stock outstanding
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49,558,334
shares
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Use of
proceeds
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We will
not receive any proceeds from the sale of the shares of common
stock offered by the selling stockholders.
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Offering
price
OTC
Pink market symbol
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The
selling stockholders may sell all or a portion of their shares
through public or private transactions at prevailing market prices
or at privately negotiated prices.
SINC
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Risk
factors
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You
should read the “Risk Factors” section of this
prospectus for a discussion of factors to consider carefully before
deciding to invest in shares of our common stock.
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Market
for our shares
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There
is a limited market for our securities and an active market may
never develop.
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The
number of shares of common stock outstanding is based on an
aggregate of 49,558,334 shares outstanding as of February 21, 2018,
and excludes:
●
1,402,868 shares
of common stock issuable upon the exercise of warrants to purchase
common stock outstanding as of February 21, 2018;
●
Approximately
378,616 shares of common stock presently issuable upon the
conversion of $454,000 in principal amount of promissory notes
together with any shares of common stock issuable upon the
conversion of accrued interest dueon for notes;
●
shares of common
stock which may become issuable in the future pursuant to the
anti-dilution provisions applicable to the warrants and notes
described above; and
●
62,074 shares of
common stock reserved for future issuance under our 2013 Equity
Incentive Plan, or the 2013 Plan.
8
RISK FACTORS
Investing in our Common Stock involves a high degree of risk. In
addition to the other information set forth in this Prospectus, 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, 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;
●
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.
9
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.
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 them 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.
10
In addition, we rely on our primary contract manufacturer,
Changzhou Sincerity Plastics and Chemicals Technology Ltd.
(“Sincerity China”), 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, including those 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.
11
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 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 recent financings, will be
sufficient to satisfy our liquidity requirements for at least the
next six months from the date of this Prospectus. 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:
●
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 costs
associated with developing and commercializing our proposed
products or technologies,
●
the costs of
obtaining and maintaining regulatory clearance or approval for our
current or future products;
●
the costs 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.
12
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.
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.
13
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.
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 year ended December 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.
14
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;
●
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.
15
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 presently quoted on the OTC Pink Market.
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 shares of our Common Stock
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.
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.
16
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 an
active 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;
●
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
February 21, 2018, our executive officers, directors and principal
(5% or greater) stockholders, together with their respective
affiliates, owned approximately 95% 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
our September 2017, November 2017, December 2017 and January 2018
Offerings 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 our September 2017, November 2017, December
2017 and January 2018 Offerings 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 our September 2017, November 2017,
December 2017 and January 2018 Offerings 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 our September 2017, November 2017, December 2017 and
January 2018 Offerings reflect or will reflect their restricted
status.
17
We have
agreed to register the shares of Common Stock underlying the Notes
and Warrants issued in our September 2017, November 2017, December
2017 and January 2018 Offerings, the shares of Common Stock held by
certain pre-Acquisition stockholders and certain other shares.
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 the
requirement to file Form 10 information was satisfied by our filing
of a Current Report on Form 8-K on September 25, 2017. Because, as
a former shell company, the reporting requirements of Rule 144(i)
will apply regardless of holding period, the restrictive legends on
crtificates for the shares of Common Stock issued in the
Acquisition and issuable pursuant to our September 2017, November
2017, December 2017 and January 2018 Offerings 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.
We are registering an aggregate of 12,441,726 shares of common
stock for resale including 378,616 shares issuable upon the
conversion of outstanding notes, 1,402,868 shares issuable upon the
exercise of outstanding warrants and up to 5,294,677 shares that
may become issuable pursuant to the anti-dilution provisions
contained in such notes and warrants. The sale of such shares could
depress the market price for our common stock.
We are
registering the resale of an aggregate of 12,441,726 shares of
common stock under the Registration Statement of which this
prospectus forms a part including 1,402,868 shares issuable upon
the exercise of outstanding warrants, 378,616 shares issuable upon
the conversion of outstanding notes and up to 5,294,677 shares that
may become issuable pursuant to the anti-dilution provisions
contained in such notes and warrants. We intend to repay all of
such notes prior to any conversions thereunder but no assurance can
be given that this will prove to be the case. The sale of these
shares into the public market by the selling stockholders could
depress the market price for our common stock.
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 our Common
Stock is not 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. 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.
18
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.
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 the appropriate 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 most 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.
19
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 September 25, 2017 date on which our
Current Report on Form 8-K reflecting our status as a
non-shell company, was 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
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 until September 25, 2018 before they are eligible to sell
those shares, and even after Sept 25, 2018, 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. 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.
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. The shares
underlying the Notes and Warrants issued in our September 2017,
November 2017, December 2017 and January 2018 Offerings are subject
to anti-dilution protection which could further dilute our existing
stockholders.
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.
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.
20
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This
prospectus and the documents incorporated by reference in this
prospectus, including the sections entitled “Risk
Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and
“Description of Our Business,” contains express or
implied forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Exchange Act 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
prospectus include, but are not limited to, statements
about:
●
the implementation
of our strategic plans for our business and products;
●
our ability to
maintain and establish collaborations;
●
our ability to
expand through strategic acquisitions and internal
growth;
●
our financial
performance;
●
developments
relating to our competitors and our industry, including the impact
of government regulations;
●
estimates of our
expenses, future revenues, capital requirements and or 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 prospectus. 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 prospectus and the documents that we reference in this
prospectus 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.
The
forward-looking statements in this prospectus represent our views
as of the date of this prospectus. 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 prospectus.
This
prospectus 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 prospectus, and we believe these
industry publications and third-party research, surveys and studies
are reliable.
21
DESCRIPTION OF THE ACQUISITION, THE OFFERINGS AND RELATED
TRANSACTIONS
The Acquisition
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.
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
Acquisition Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. 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 September 2017, November 2017, December 2017 and January 2018
Offerings
September 2017 Offering
In
conjunction with the closing of the Acquisition, we held a closing
of our September 2017 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
issued in the September 2017 Offering, see “Description of
Securities” below.
22
The
September 2017 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
2017 Offering were sold to “accredited investors,” as
defined in Regulation D, and was conducted on a “reasonable
best efforts” basis.
The
closing under the September 2017 Offering was conditioned on the
closing of the Acquisition.
November 2017 Offering
On
November 9, 2017 we entered into a Securities Purchase Agreement
(“SPA”) with Emunah Funding, LLC (“Emunah”)
and Fourth Man, LLC (“Fourth Man”), Emunah and Fourth
Man hereinafter being collectively referred to as the
“Purchasers,” pursuant to which we issued and sold to
the Purchasers convertible promissory notes, dated November 9,
2017, in the aggregate principal amount of $108,000 (the
“Notes”). The Notes were subject to an 8% original
issue discount resulting in an aggregate purchase price to the
Purchasers of $100,000. Pursuant to the SPA, we also issued three
year warrants (the “Warrants) to the Purchasers, dated
November 9, 2017, consisting of Class A Warrants to purchase up to
an aggregate of 102,858 shares (subject to adjustment) of our
common stock at an initial exercise price of $6.00 per share and
Class B Warrants to purchase up to an aggregate of 800,000 shares
(subject to adjustment) of our common stock at an initial exercise
price of $7.50 per share. The Class A Warrants and Class B Warrants
are hereinafter referred to as the “Warrants”. The SPA
provides for us to register the shares issuable upon conversion of
the Notes and the exercise of the Warrants.
The
outstanding principal balance of the Notes, including accrued
interest then due thereon, can be prepaid by us, in whole or in
part, at any time during the 179-day period following November 9,
2017, upon five business days prior written notice, at a premium of
118%. Commencing on February 9, 2018 and monthly thereafter we are
required to pay all accrued interest then due on the Notes together
with 15% of the original principal amount of the Notes. The Notes
are convertible at any time commencing 170 days after November 9,
2017 at 75% of the lowest trading price for our common stock during
the 20 trading days ending on the last trading day prior to the
conversion date. We are required to initially reserve 2,000,000
shares of our common stock to cover Note conversions and Warrant
exercises. We are also required to cause our transfer agent to
issue and transfer shares to the holders of the Notes within five
trading days of our receipt of a conversation notice. If we fail to
deliver certificates within the required delivery period, the
converting holder has the right to rescind such conversion and we
will be required to pay liquidated damages to such holders. Such
delivery failure may also subject us to the buy-in liability. The
conversion price of the Notes is subject to customary adjustments
for stock splits and stock dividends, subsequent rights offerings,
pro rata shareholder distributions and fundamental transactions.
The conversion price is also subject to full ratchet anti-dilution
protection triggered by sales of our common stock or common stock
equivalents, excluding Exempt Issuances, as such term is defined
therein, during the term of the Notes, at a price below the
conversion price in effect at the time of issuance. The Notes also
contain negative covenants which restrict our ability to enter into
certain transactions or take certain actions while the Notes are
outstanding without the prior written consent of the holders of the
Notes. If an Event of Default, Fundamental Transaction or Change of
Control Transaction, as such terms are defined in the Notes,
occurs, the outstanding principal amount of the Notes, liquidated
damages, and other amounts owing in respect thereof through the
date of acceleration, becomes, at the holder’s election,
immediately due and payable in cash at the Mandatory Default
Amount, as such term is defined in the Notes. Commencing on the
maturity date of the Notes, if the Notes have not been repaid by
such date, or five days after the occurrence of an Event of
Default, interest on the Notes accrues at the rate of 24% per annum
or the maximum rate permitted under applicable law. The Notes
contain customary Events of Default including, but not limited to,
(i) the failure to pay principal, interest or liquidated damages
when due; (ii) breach of Note covenants or agreements; (iii) breach
of representation or warranties made in the Notes or other
transaction documents; (iv) bankruptcy events; (v) Change of
Control or Fundamental Transactions; (vi) failure to satisfy
current public information requirements under Rule 144; (vii)
certificate delivery failures; (viii) breaches of material terms of
the SPA; (ix) the entry of a monetary judgment, writ or similar
final process involving more than $50,000 which remains unvacated,
unbonded or unstayed for a period of 90 days; (x) any dissolution,
liquidation or winding up of our business; (xi) failure to maintain
the listing of our common stock on a trading market; (xii) our
effectuation of a reverse stock split without 10 days prior written
notice to the holders; (xiii) the required restatement of our
financial statements; or (xiv) our default under any of the other
Notes.
23
The
Class A Warrants are exercisable on a cashless basis. We are
required to deliver certificates upon exercise within 3 trading
days of our receipt of all holder deliverables. Failure to do so
requires us to pay liquidated damages to the holders and subjects
us to potential buy-in liability. The Class A Warrants contain
adjustment provisions, including full ratchet anti-dilution rights,
which are identical, in all material respects, to those contained
in the Notes. The Class B Warrants are identical to the Class A
Warrants in all material respects except that they are not
exercisable on a cashless basis, they have a higher initial
exercise price, are exercisable for more shares than the Class A
Warrants and have exercise limitations. The Class B Warrants cannot
be exercised absent a default under the Notes. They are not
exercisable prior to the 16th day after an Event
of Default under the Notes. For every $27 of principal repaid on
the Notes prior to an Event of Default or within 15 day of an Event
of Default, 200 Warrants exercisable under the holder’s Class
B Warrants will be cancelled such that if the entire principal
amount and all accrued interest due on a holder’s Note is
repaid prior to the 16th day after an Event
of Default, all of the Warrants exercisable under the
holder’s Class B Warrants will be cancelled and will no
longer be exercisable.
Effective
January 2, 2018 we entered into a Waiver Agreement with Emunah and
Fourth Man pursuant to which we paid an aggregate of $5,000 to
Emunah and Fourth Man and agreed to redeem their respective notes
dated November 20, 2017 on or before February 28, 2018, and Emunah
and Fourth Man agreed to (i) waive any and all reset, ratchet and
most favored nation rights that they may have resulting from our
December 19, 2017 loan transactions with them; and (ii) to waive
any defaults arising under such loan transaction documents, with
respect to any action or inaction by us during the period ending
February 28, 2018. In the event we default on our obligations under
the Waiver Agreement, the waiver shall be null and void and all
rights waived by Emunah and Fourth Man shall be reinstated. In all
events, the waiver does not impact the consequences of actions
taken by us subsequent to February 28, 2018.
December 2017 Offering
On
December 19, 2017 we entered into a Securities Purchase Agreement
(“SPA”) with Auctus Fund, LLC, a Delaware limited
liability company (“Purchaser”), pursuant to which we
issued and sold to the Purchaser a convertible promissory note,
dated November 20, 2017, in the principal amount of $112,500 (the
“Note”). In connection with the foregoing, we also
entered into a Registration Rights Agreement with the Purchaser
dated November 20, 2017 (the “Registration Rights
Agreement”). Effective as of December 19, 2017 we also
entered into Amendment No. 1 to the SPA which provides that the
SPA, Note and Registration Rights Agreement shall each be deemed to
be dated December 19, 2017, the closing date of the
transaction.
The Note, which is due on August 20, 2018, bears interest at the
rate of 12% per annum. All principal and accrued interest on the
Note is convertible into shares of our common stock at the election
of the Purchaser at any time at a conversion price equal to the
lesser of (i) the lowest trading price for our common stock during
the 25 trading days prior to the issuance date of the Note, or (ii)
a 50% discount to the lowest trading price for our common stock
during the 25 trading day period immediately prior to
conversion.
The conversion price discount will increase by 10% should we no
longer be DWAC eligible; increased by 15% if we experience a DTC
"chill" on our shares; and if both no longer DWAC eligible and a
DTC chill the discount will be increased by 25%. The discount
increases an additional 30% if we cease to be a reporting company
pursuant to the Securities Exchange Act of 1934, as amended, or if
we fail to deliver free trading stock to the Purchaser upon a
conversion of the Note after 181 days from the issuance date of the
Note. Further, our failure to timely deliver shares to the
Purchaser upon conversion will result in a payment to Purchaser of
$2,000 in cash per day.
We have the right to prepay the Note within 90 days of the issuance
date at a premium of 135% of all amounts owed to Purchaser and at a
premium of 150% if prepaid more than 90 but less than 180 days
following the issuance date. We have no right to prepay the Note
more than 180 days after the issuance date.
24
The Note contains customary default events which, if triggered and
not timely cured, will result in default interest and penalties.
The Note also contains a right of first refusal provision with
respect to future financings by us. Pursuant to the Registration
Rights Agreement, we are required to register the shares into which
the Note is converted.
January 2018 Offering
On
January 9, 2018 we entered into a Securities Purchase Agreement
(“SPA”) dated December 19,2017 with EMA Financial, LLC,
a Delaware limited liability company (“Purchaser”),
pursuant to which we issued and sold to the Purchaser a convertible
promissory note, dated December 19,2017 in the principal amount of
$83,500 (the “Note”). In connection with the foregoing,
we also entered into a Registration Rights Agreement with the
Purchaser dated December 19, 2017 (the “Registration Rights
Agreement”).On January 17,2018 we received an acknowledgement
letter from Purchaser confirming that all timelines within the
transaction documents , to the extent not already providing for
such, would run from the January 9,2018 closing date.
The Note, which is due on December 19,2018, bears interest at the
rate of 12% per annum. All principal and accrued interest on the
Note is convertible into shares of our common stock at the election
of the Purchaser at any time at a conversion price equal to the
lesser of (i) the trading price for our common stock on the trading
day prior to the closing date of the Note, or (ii) a 50% discount
to the lowest trading or lowest closing bid price for our common
stock during the 25 trading day period immediately prior to
conversion.
The conversion price discount will increase should we not be DWAC
eligible; if we experience a DTC "chill" on our shares; if our
market price falls below $1.00 per share; if we cease to be a
reporting company pursuant to the Securities Exchange Act of 1934,
as amended, or if we fail to deliver free trading stock to the
Purchaser upon a conversion of the Note after 181 days from the
issuance date of the Note. Further, our failure to timely deliver
shares to the Purchaser upon conversion will result in a payment to
Purchaser of $1,000 in cash per day.
We have the right to prepay the Note within 90 days of the closing
date at a premium of 135% of all amounts owed to Purchaser and at a
premium of 150% if prepaid more than 90 but less than 180 days
following the closing date. We have no right to prepay the Note
more than 180 days after the closing date.
The Note contains customary default events which, if triggered and
not timely cured, will result in default interest and penalties.
The Note also contains a right of first refusal provision with
respect to future financings by us.
Registration Rights
In
connection with the Acquisition and the September 2017, November
2017, December 2017 and January 2018 Offerings, we granted
registration rights to the purchasers of our securities in such
Offerings and certain of our pre-Acquisition Stockholders. The
registration rights subject us to penalties and damages, in varying
degrees, if we fail to file the registration statement, have it
declared effective and maintain its effectiveness under certain
timelines and conditions. Certain of the conditions have been
waived, to some extent, by certain beneficiaries of such
provisions. Certain of the registration obligations require that
the registration statement be kept effective until the earlier of
the date on which (i) the selling stockholders can sell all of
their securities covered by the registration statement under Rule
144, without restriction; or (ii) all of the securities registered
on behalf of the seller stockholder have been sold.
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 our registration obligations,
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.
25
Directors and Officers
Our
board of directors is authorized to consist of, and currently
consists of, four members. Zhang Yiwen (Chairman), Nils Ollquist,
Zhang Leping and Fan Yang. Zhang Yiwen, Zhang Leping and Nils
Ollquist were each appointed upon the closing of the Acquisition.
Fan Yang was appointed on February 5, 2018.
Zhang
Yiwen serves as our President and Chief Executive Officer, Nils
Ollquist as our Chief Financial Officer and Secretary, Praba
Ganeshan as our Treasurer and Simon Rees as our Chief Operating
Officer, each of whom as appointed upon the closing of the
Acquisition. Zhang Yiwen is our principal executive officer and
Nils Ollquist is our principal financial and accounting officer for
SEC reporting purposes. See “Management-Directors and Executive
Officers” below for information about our directors
and executive officers.
Lock-up Agreements and Other Restrictions
In
connection with the Acquisition, the SAPL Shareholder (the
“Restricted Holder”), entered into a lock-up agreement,
(the “Lock-Up Agreements”), whereby it is 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) it, such restrictions together referred to as the
Lock-Up. The foregoing restrictions do not apply to the resale of
shares of Common Stock by the 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, the 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.
DESCRIPTION OF OUR 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
are also serving Visy’s selling agent in the export of up to
100,000 tons per annum of PET plastics from Australia to China for
recycling.
26
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, to 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, who is the co-owner of
Sincerity China, serves as one of our directors. Sincerity China
serves as the principal manufacturer and technological agent for
our products.
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.
27
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.
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.
28
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
2018, our management intends to continue with the strategic
direction of further vertical integration. Management intends to
develop projects that will fit our 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. We also
intend to acquire Xiangli Anti-Static Decorative Material Co., Ltd.
(“Xiangli”), a Chinese manufacturer of specialty raised
flooring systems, through a combination of cash and stock. We
entered into a non-binding Letter of Intent with Xiangli in
February 2018, but no assurances can be given as to whether such
acquisition will be completed.
●
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.
●
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.
29
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.
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.
30
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.
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
February 21, 2018, we had six employees, including our four
executive officers. None of our employees are represented by labor
unions or covered by collective bargaining agreements. We consider
the relationship with our employees to be good.
Facilities
Our
executive offices are located at Level 27, Rialto Tower, 525
Collins Street, Melbourne, Victoria, Australia, 3000. We entered into a
six month lease in January 2018 pursuant to which we pay rent of
approximately $3,000 per month.
Legal Proceedings
We are
not currently subject to any material legal
proceedings.
31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Sincerity Applied Materials Holdings Corp. should be
read in conjunction with the financial statements and the notes to
those statements appearing at the end of this prospectus. Some of
the information contained in this discussion and analysis or set
forth elsewhere in this prospectus, including information with
respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties.
You should read the “Risk Factors” section of this
prospectus 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.
Overview
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”) we 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
have continued 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.
Through
our wholly owned subsidiary, Sincerity Australia Pty Ltd.
(“SAPL”), we primarily operate as 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.
32
SAPL’s
business was commenced in 2009 by James Zhang, our Chairman,
President and Chief Executive Officer and the son of the founder of
Changzhou Sincerity Plastics and Chemicals Technology Ltd., 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.
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.
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 weeks of 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.
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.
33
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.
Results of Operations
Three and Nine Months Ended September 30, 2017 and
2016
The
following tables set forth our condensed statements of income data
for the three and nine months ended September 30, 2017 and
2016:
34
|
Three months
ended
|
Nine months
ended
|
||
|
September 30,
|
September 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Sales
|
$1,141,026
|
$284,706
|
$1,996,918
|
$856,451
|
Other
|
-
|
-
|
-
|
-
|
|
1,141,026
|
48,583
|
1,996,918
|
193,163
|
Cost
of sales
|
|
|
|
|
Purchases
|
(1,009,563)
|
(253,389)
|
(1,475,854)
|
(762,241)
|
|
131,463
|
31,317
|
521,064
|
94,210
|
Operating
expenses
|
|
|
|
|
Selling, general
and administrative
|
19,843
|
7,801
|
41,544
|
21,491
|
Professional
fees
|
7,325
|
83
|
171,375
|
10,091
|
Research and
development
|
-
|
-
|
-
|
-
|
Depreciation and
amortization
|
5,934
|
1,844
|
37,790
|
29,101
|
Bad
debts
|
-
|
-
|
11,381
|
66,021
|
Impairment
|
-
|
-
|
-
|
245
|
|
33,102
|
9,728
|
262,090
|
126,949
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
Interest expense
and amortization of debt discount
|
(5,832)
|
(1,444)
|
(23,818)
|
(41,633)
|
Other
income
|
5,370
|
-
|
28,498
|
21,008
|
Other
expense
|
-
|
-
|
-
|
(1,528)
|
|
(462)
|
(1,444)
|
4,680
|
(22,153)
|
Income
tax provision
|
|
|
|
|
Current
|
-
|
-
|
(14,276)
|
-
|
Deferred
|
-
|
-
|
(29,018)
|
-
|
|
-
|
-
|
(43,294)
|
-
|
Comprehensive
income (loss)
|
-
|
-
|
|
|
Foreign currency
translation income (loss)
|
(2,936)
|
(6,591)
|
(22,376)
|
(20,276)
|
|
|
|
|
|
Net
(profit/loss)
|
94,963
|
(13,554)
|
(197,984)
|
(75,168)
|
Revenues
Revenue
for the three and nine months periods ended September 30, 2017
increased by $856,320 and $1,140,467 to $1,141,026 and $1,996,918,
respectively. This increase reflects the impact of significantly
higher order flow from the Company’s key customer as part of
a broader relationship strategy with the customer.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses for the three and nine month
periods ended September 30, 2017 increased by approximately $12,039
and $20,054 to $19,841 and $41,545 compared to $7,802 and $21,491
for the prior year periods. The increase is primarily attributable
to expenses arising from the acquisition transaction effected in
September 2017
Professional Fees
Professional
fees for the three and nine month periods ended September 30, 2017
increased by approximately $7,242 and $161,284_ compared to $ 83
and $ 10,091 for the prior year period. The increase is primarily
attributable to the impact of legal and accounting fees arising
from the aforementioned acquisition.
Research and Development
There
was no expense on R&D related activities during the periods
under review.
Other Income (Expense)
Other
income (expense) was a net $(462) for the three months to September
30, 2017, and $4,680 for the nine month period, compared with
$(1,444) and $(22,153) for the prior periods,
respectively.
35
Years Ended June 30, 2017 and 2016
The
following tables set forth our results of operations for the years
ended June 30, 2017 and 2016:
|
Years Ended June
30,
|
|
|
2017
|
2016
|
Revenue
|
$1,281,816
|
$1,223,438
|
|
|
|
Cost
of revenue:
|
1,027,579
|
882,553
|
Gross
margin
|
254,237
|
340,885
|
Decline in net
realizable value of inventory
|
-
|
46,794
|
Operating
expenses:
|
|
|
Research and
development
|
-
|
-
|
Sales and
marketing
|
-
|
-
|
General and
administrative
|
248,583
|
150,710
|
Total operating
expenses:
|
248,583
|
150,710
|
Income/(loss) from
operations
|
5,654
|
143,381
|
Interest
expense
|
(14,907)
|
(36,988)
|
Other
income/(loss)
|
(49,384)
|
7,494
|
Net
income/loss before provision for income taxes
|
(58,637)
|
113,887
|
Provision for
income taxes
|
$28,934
|
$(39,079)
|
Net and
comprehensive income (loss)
|
$(29,703)
|
$74,798
|
Comparison of the Years Ended June 30, 2017 and 2016
Revenue
|
Year End June 30,
|
|
|
|
2017
|
2016
|
Change
|
Revenue
|
$1,281,816
|
$1,223,438
|
$58,738
|
Total
revenue increased during the 2017 fiscal year primarily due to the
impact of a significantly increased order flow beginning in April
2017.
Cost of Revenue/Gross Margin
|
Year Ended June 30,
|
|
|
2017
|
2016
|
Cost of
revenue
|
$1,027,529
|
882,553
|
Gross Margin
%
|
19.83%
|
27.8%
|
Cost of
sales increased substantially during the fiscal year ended June 30,
2017 to 80% from 72% in the prior year. This reduction in gross
margin reflects our sales strategy of building volume in generic
product range whilst increasing focus on value added
packaging.
Operating Expenses
|
Years Ended June 30,
|
|
|
2017
|
2016
|
Research and
development
|
$-
|
$-
|
Selling, general
and administrative (exclusive of interest expense)
|
248,583
|
184,927
|
Total operating
expenses
|
$248,583
|
$150,710
|
Research and Development. The company had no research and
development costs incurred during period.
36
Selling, general and Administrative. Selling, general and
administrative expenses increased during the year ended June 30,
2017 due to an increase in professional fees related to the
Company's audit and an increase in order flow during the last
quarter of the fiscal year.
Interest Expense
|
Year Ended June 30,
|
|
|
2017
|
2016
|
Interest
expense
|
$(14,907)
|
$(36,988)
|
Interest
expense decreased by 22,081 in fiscal 2017 compared to fiscal 2016,
which was due to the reduction in the amounts outstanding under
SAPL's business loan facility.
Other Income/(Loss)
|
Year Ended
June 30,
|
|
|
2017
|
2016
|
Other
income/(loss)
|
$(49,384)
|
7,494
|
Other
income/(loss) consists primarily of foreign currency exchange gains
and losses. Other loss for the year ended June 30, 2017 increased
by approximately $56,000 over the prior year.
Financial Condition, Liquidity and Capital Resources
We
expect to need additional capital to implement and expand our
current strategies. There is no assurance that we will be able to
raise the amount of capital that we seek for acquisitions or for
future growth plans. Even if financing is available, it may not be
on terms that are acceptable to us. In addition, we do not have any
determined sources for any future funding. If we are unable to
raise the necessary capital at the times we require such funding,
we may have to materially change our business plan, including
delaying implementation of aspects of our business plan or
curtailing or abandoning our business plan. We represent a
speculative investment and investors may lose all of their
investment. In order to be able to achieve our strategic goals, we
need to further expand our business and financing
activities.
Our
principal sources of liquidity have been cash generated from sales
of our securities and cash generated from operations.
At
September 30, 2017, cash was $35,875, other current assets
excluding cash were approximately $1,285,921, accounts receivable
were $1,243,216 and we had a working capital surplus of $128,329 At
the same time, we had current liabilities of approximately
$1,193,467 which consisted principally of accounts payable totaling
$958,167. At December 31, 2016, cash was $32,979 and we had other
current assets excluding cash of approximately $61,593. At the same
time, we had current liabilities of approximately $339,140 which
consisted principally of lines of credit totaling $108,151 and
accrued expenses of $71,840. Our working capital deficit at
December 31, 2016 was approximately $244,568. The improvement in
our liquidity position at September 30, 2017 compared to December
31, 2016 is primarily attributable to the impact of the sales and
operating metrics of the Sincerity Applied Materials business
acquired through the acquisition.
37
Net Cash Used in Operating Activities
Net
cash used in operating activities for the period to September 30,
2017 was ($57,420) compared with the prior year period of
($129,307). This difference reflected significant increases in
accounts receivable over the period, combined with offsetting
adjustments in accounts payable.
Net Cash Used in Investing Activities
There
was no cash used in investing activities during the
period.
Net Cash Provided by Financing Activities
Net
cash used in financing activities for the period to September 30,
2017 was $82,893, compared with $93,362 for the comparable period.
This reflects primarily the impact of proceeds of the $150,000
convertible note issued in September 2017 which was offset by
capitalized professional and legal expense of $69,442.
General
We will
only commit to capital expenditures for any future projects
requiring us to raise additional capital as and when adequate
capital or new lines of finance are made available to us. There is
no assurance that we will be able to obtain any financing or enter
into any form of credit arrangement. Although we may be offered
such financing, the terms may not be acceptable to us. If we are
not able to secure financing or it is offered on unacceptable
terms, then our business plan may have to be modified or curtailed
or certain aspects terminated. There is no assurance that even with
financing we will be able to achieve our goals.
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 first-in,
first-out 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.
38
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.
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.
Off-Balance Sheet Arrangements
None.
JOBS Act Accounting Election
We are
an “emerging growth company” within the meaning of the
JOBS Act. Section 107 of the JOBS Act provides that an
emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the
Securities Act for complying with new or revised accounting
standards. Thus, an emerging growth company can delay the adoption
of certain accounting standards until those standards would
otherwise apply to private companies. We have irrevocably elected
not to avail ourselves of this extended transition period and, as a
result, we will adopt new or revised accounting standards on the
relevant dates on which adoption of such standards is required for
other public companies that are not emerging growth
companies.
DIRECTORS AND EXECUTIVE OFFICERS
The
following table sets forth certain information concerning our
executive officers and directors as of February 21,
2018:
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
|
Fan Yang |
|
33
|
|
Director
|
39
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 Yiwen. No other familial
relationships exist among our officers and directors.
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.
40
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.
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.
Fan Yang has served as a Director since February 5, 2018. He
has extensive sales and marketing experience in the power energy
industry where he has demonstrated significant leadership and
business development skills. He is a certified project manager
professional. From October 2011 through the present he has worked
for the International Business Unit of Sieyuan Electric Co. Ltd. as
a Vice President. From March 2008 through September 2011 he worked
as the Purchasing Manager for SIIC Group Russian Branch. From
November 2006 through September 2007 he worked for Motorola China
Research Center as an engineering intern. He received a
Bachelor’s Degree in Russian and International Trade from
Shanghai International Studies University. We believe that Fan Yang
is qualified to serve on our Board of Directors based upon his
management and marketing 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 except for
Fan Yang. 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.
41
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.
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 27, Rialto Tower, Melbourne, Victoria, Australia,
3000, 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.
Director Compensation
Sincerity
Australia Pty Ltd. became our wholly owned subsidiary upon the
closing of the Acquisition on September 19, 2017. No compensation
was paid to the directors of Sincerity Australia Pty Ltd. during
the fiscal year ending June 30, 2017. Subsequent to the
Acquisition, no compensation has been paid to our directors or the
directors of Sincerity Australia Pty Ltd.
42
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.
EXECUTIVE COMPENSATION
Sincerity
Australia Pty Ltd. became our wholly owned subsidiary upon the
closing of the Acquisition on September 19, 2017. The following
summarizes the compensation earned by Sincerity Australia Pty
Ltd.’s executive officers named in the “Summary
Compensation Table” below (referred to herein as our
“named executive officers”) in Sincerity Australia Pty
Ltd.’s fiscal years ending June 30, 2017 and 2016. No
compensation was paid to any executive officers of Sincerity
Australia Pty Ltd. during its fiscal years ended June 30, 2017 and
2016.
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
Pricipal Position
|
|
Year
|
Salary
($)
|
Non-Equity Incentive Compensation
($)
|
Option Awards
($)
|
Al 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 2017
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,
2017 or 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. In December 2017 we issued 1,000,000 shares of
our restricted common stock to an entity beneficially owned by Nils
Ollquist as part of his employment compensation.
43
Employee Benefit Plans
The
following table provides information as of the date of the
Prospectus, 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
|
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.
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.
44
●
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
the date of the Prospectus no securities are issued and outstanding
under the 2013 Plan.
Indemnification of Officers and Directors
We have
agreed to indemnify our directors and executive officers in certain
circumstances. See “Directors, Executive Officers,
Promoters and Control Persons—Limitation on Liability and
Indemnification Matters.”
CERTAIN RELATIONSHIPS AND RELATED PERSON 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.
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.
45
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 Zhang 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. In December
2017, the Zhang Family Trust transferred an aggregate of 4,748,635
shares to unrelated third parties in consideration of cash payments
and/or services and transferred an additional 1,000,000 shares in
February 2018.
On
December 9, 2016 we entered into a Securities Purchase Agreement
with CKR Law LLP (“CKR”) pursuant to which we issued
2,4987,724 shares of our restricted common stock to CKR and its
designees in consideration of (i) the cancellation of an aggregate
of $86,456.41 due from us to CKR for legal services and expense
reimbursements; (ii) a cash payment of $43,614; and (iii) the
commitment of CKR to fund certain of our future operating
expenses.
In
December 2017 Zhang Family Trust transferred 1,498,635 share of
common stock to CKR in consideration of (i) certain legal fees due
to CKR related to the Acquisition Agreement among us, Sincerity
Australia Pty Ltd. and Zhang Family Trust; and (ii) CKR’s
agreement to defer payment of certain other legal fees and expenses
due to is by us.
In
December 2017 Zhang Family Trust transferred 2,750,000 shares of
common stock to Elysium Investment Holdings Pty Ltd. in
consideration of financial advisory services.
In
December 2017 we issued 1,000,000 shares of our restricted common
stock to Chengdu Holdings Pty Ltd., as Trustee for the Avoca Trust,
a trust beneficially owned by the family of Nils Ollquist, as a
bonus under Mr. Ollquist’s employment arrangement with
us.
On
February 5, 2018 we issued 75,000 shares to Pure Boba Family Trust,
a trust beneficially owned by Fan Yang at a price of $1.33333 per
share or an aggregate of $100,000.
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 executive
officers.
Other Transactions
During
the years ended June 30, 2017 and 2016 SAPL purchased approximately
$40,000 and $358,000, respectively, in products from Sincerity
China. Sincerity China is owned by Zhang Leping and her
husband.
46
The
balance due from a stockholder at September 30, 2017 amounts to
$477,422, 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.
SAPL
has a total $950,000 (AUD) bank credit line (approximately $711,000
(USD) at September 30, 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
September 30, 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. At September 30, 2017, $117,546(USD)
was drawn and payable on the business loan, but no drawings had
been made on the mortgage loan. 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.
Policies and Procedures for Related-Person
Transactions
Our
board of directors intends to adopt a written related-person
transaction policy setting forth the policies and procedures for
the review and approval or ratification of related-person
transactions. This policy will cover, with certain exceptions set
forth in Item 404 of Regulation S-K under the Securities
Act, any transaction, arrangement or relationship, or any series of
similar transactions, arrangements or relationships in which we
were or are to be a participant, where the amount involved exceeds
$120,000 and a related person had or will have a direct or indirect
material interest, including, without limitation, purchases of
goods or services by or from the related person or entities in
which the related person has a material interest, indebtedness,
guarantees of indebtedness and employment by us of a related
person. In reviewing and approving any such transactions, our board
will be tasked to consider all relevant facts and circumstances,
including, but not limited to, whether the transaction is on terms
comparable to those that could be obtained in an arm’s-length
transaction and the extent of the related person’s interest
in the transaction.
USE OF PROCEEDS
We are
filing this registration statement of which this prospectus forms a
part to permit holders of the shares of our common stock described
in the section entitled “Selling Stockholders” to
resell such shares. We will not receive any proceeds from the
resale of any shares offered by this prospectus by the selling
stockholders.
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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
common stock has been quoted on the OTC Pink Market since October
13, 2017. Our common stock was quoted on the OTC Bulletin Board
(OTCBB) and the OTC Markets QB Tier (OTCQB), from September 25,
2013 through October 12, 2017. 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 Prospectus, we have 49,558,334 shares of Common
Stock outstanding held by 123 stockholders of record.
47
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 ended
September 30, 2017
|
$1.70
|
$1.20
|
Quarter ending
December 31, 2017
|
$2.61
|
$1.00
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth information relating to the beneficial
ownership of our Common Stock at February 21, 2018,
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.
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 February 21, 2018 through the exercise or
conversion of any stock option, warrant, note 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
49,558,334 shares of Common Stock outstanding as of February 21,
2018. Shares of Common Stock that a person has the right to acquire
within 60 days of February 21, 2018 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 27, Rialto Tower,
Melbourne, Victoria, Australia, 3000.
48
|
Shares
Beneficially Owned
|
|
|
Number
|
Percentage
|
S%
Stockholders:
|
|
|
CKR Law
LLP
1330 Avenue of the
Americas
New York, NY
10019
|
3,840,565
|
7.75%
|
|
|
|
Elysium Investment
Holdings Pty Ltd.
4 Avoca
Street
South Yarra
(Australia), VIC 3141
|
2,750,000
|
5.55%
|
|
|
|
|
|
|
Executive
Officers and Directors:
|
|
|
|
|
|
Zhang
Yiwen
|
39,462,4121
|
79.63%
|
Nils
Ollquist
|
1,000,0002
|
2.02%
|
Simon
Rees
|
0
|
0%
|
Praba
Ganeshan
|
0
|
0%
|
Zhang
Leping
|
0
|
0%
|
Fan
Yang
|
75,0003
|
0.15%
|
All directors and
executive officers as a group (6 persons)
|
40,537,412
|
81.8%
|
SELLING STOCKHOLDERS
This
prospectus covers the resale by the selling stockholders identified
below of up to 12,441,726 shares of our common stock. We will not
receive any proceeds from the resale of the common stock by the
selling stockholders.
Except
as disclosed in the footnotes below, none of the selling
stockholders has been an officer or director of ours or any of our
predecessors or affiliates within the past three years. Except as
disclosed in the footnotes below, no selling stockholder had a
material relationship with us or any of our affiliates within the
last three years.
The
following table and the accompanying footnotes are based in part on
information supplied to us by the selling stockholders. The table
and footnotes assume that the selling stockholders will sell all of
the shares listed. However, because the selling stockholders may
sell all or some of their shares under this prospectus from time to
time, or in another permitted manner, we cannot assure you as to
the actual number of shares that will be sold by the selling
stockholders or that will be held by the selling stockholders after
completion of any sales. We do not know how long the selling
stockholders will hold the shares before selling them.
The
inclusion of any shares in this table does not constitute an
admission of beneficial ownership by the persons named below. None
of the selling stockholders are broker-dealers or affiliates of
broker-dealers
49
|
Shares Beneficially Owned Before the Offering
|
Shares Being Offeried
|
Shares Beneficially Owned After the Offering
|
||
Name of Selling Stockholders
|
(#)
|
(%) (1)(2)
|
(#)
|
(#(1)(2)
|
(%)(1)(2)
|
CKR
Law LLP (3)
|
3,840,565
|
7.75%
|
3,840,565
|
0
|
N/A
|
Bang
Bo Enterprise Management
|
|
|
|
|
|
Consulting
Co. Ltd. (4)
|
575,010(4)
|
1.16%
|
575,010(4)
|
0
|
N/A
|
Emunah
Funding LLC (5)
|
51,429(5)
|
0.10%
|
499,429(5)
|
0
|
N/A
|
Fourth
Man, LLC (6)
|
51,429(6)
|
0.10%
|
499,429(6)
|
0
|
N/A
|
Auctus
Fund, LLC (7)
|
118,421(7)
|
0.23%
|
118,421(7)
|
0
|
N/A
|
EMA
Financial, LLC (8)
|
89,195(8)
|
0.17%
|
89,195(8)
|
0
|
N/A
|
Chesapeake
Group Inc. (9)
|
150,000
|
0.30%
|
75,000
|
75,000
|
0.15%
|
Pure
Boba Family Trust,
|
|
|
|
|
|
Pure
Boba Pty Ltd., Trustee (10)
|
75,000
|
0.15%
|
75,000
|
0
|
N/A
|
Elysium
Investment Holdings
|
|
|
|
|
|
Pty
Ltd. (11)
|
2,750,000
|
5.50%
|
1,375,000
|
1,375,000
|
2.77%
|
TOTAL
|
|
|
7,147,052
|
|
|
(1)
Assumes all of the
shares of common stock to be registered in the registration
statement of which this prospectus is a part, including all shares
of common stock underlying common stock purchase warrants and notes
held by the selling stockholders, are sold in the offering and that
shares of common stock beneficially owned by such selling
stockholder but not being registered by this prospectus (if any)
are not sold.
(2)
Percentages are
based on the 49,558,334 shares of common stock issued and
outstanding as of February 21, 2018. Beneficial ownership is
determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.
Shares of common stock underlying common stock purchase warrants or
convertible notes exercisable or converted within 60 days after
February 21, 2018 are deemed outstanding for computing the
percentage of the person holding such warrants or notes but are not
deemed outstanding for computing the percentage of any other
person.
(3)
Jeffrey A. Rinde,
the managing partner of CKR Law LLP, has voting and investment
power over the shares owned by CKR Law LLP. CKR Law LLP serves as
the Company’s corporate and securities counsel.
(4)
Zhang Ling has
voting and investment power over the shares owned by Bang Bo
Enterprise Management Consulting Co. Ltd. Includes 500,010 shares
underlying warrants exercisable within 60 days of February 21, 2018
and 75,000 shares underlying notes convertible within 60 days of
February 21, 2018. Excludes an additional 2,424,990 shares being
registered for resale to address potential anti-dilution resets
under the notes and warrants and the conversion of note
interest.
(5)
Gabriel Berkowitz
has voting and investment power over the shares owned by Emunah
Funding LLC. The number of shares beneficially owned before the
offering includes 51,429 shares underlying warrants exercisable
within 60 days of February 21, 2018. The number of shares being
offered includes 51,429 shares underlying warrants exercisable
within 60 days of February, 16, 2018, 400,000 shares underlying
warrants not exercisable within 60 days of February 21, 2018 and
48,000 shares underlying notes not convertible within 60 days of
February 21, 2018. Excludes an additional 500,571 shares being
registered for resale to address potential anti-dilution resets
under the notes and warrants and the conversion of note
interest.
(6)
Kenneth Hall and
Edward Deese have voting and investment power over the shares owned
by Fourth Man LLC. The number of shares beneficially owned before
the offering includes 51,429 shares underlying warrants exercisable
within 60 days of February 21, 2018. The number of shares being
offered includes 51,429 shares underlying warrants exercisable
within 60 days of February 21, 2018, 400,000 shares underlying
warrants not exercisable within 60 days of February 21, 2018 and
48,000 shares underlying notes not convertible within 60 days of
February 21, 2018. Excludes an additional 500,571 shares being
registered for resale to address potential anti-dilution resets
under the notes and warrants and the conversion of note
interest.
50
(7)
Alfred Sollami and
Louis Posner of Auctus Fund LLC, have voting and investment power
over the shares owned by Auctus Fund LLC. Includes 118,421 shares
underlying notes convertible within 60 days of February 21, 2018.
Excludes an additional 1,065,789 shares being registered for resale
to address potential anti-dilution resets under the notes and the
conversion of note interest.
(8)
EMA Group, LLC, the
investment manager of EMA Financial LLC and Felicia Preston, the
managing member of EMA Group, LLC, have voting and investment power
over the shares owned by EMA Financial, LLC. Each of EMA Group, LLC
and Felicia Preston expressly disclaim any equitable or beneficial
ownership of such securities. Includes 89,195 shares underlying
notes convertible within 60 days of February 21, 2018. Excludes an
additional 802,756 shares being registered for resale to address
potential anti-dilution resets under the notes, and the conversion
of additional note interest.
(9)
Tim Rieu has voting
and investment power over the shares owned by Chesapeake Group
Inc.
(10)
Fan Yang has voting
and investment power over the shares owned by Pure Boba Family
Trust. Fan Yang is a director of the Company.
(11)
Simon Wilson has
voting and investment power over the shares owned by Elysium
Investment Holdings Pty Ltd.
PLAN OF DISTRIBUTION
The
selling stockholders, which as used herein includes donees,
pledgees, transferees or other successors-in-interest selling
shares of common stock or interests in shares of common stock
received after the date of this prospectus from a selling
stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise
dispose of any or all of their shares of common stock or interests
in shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions.
These dispositions may be at fixed prices, at prevailing market
prices at the time of sale, at prices related to the prevailing
market price, at varying prices determined at the time of sale, or
at negotiated prices.
The
selling stockholders may use any one or more of the following
methods when disposing of shares or interests therein:
●
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
●
block trades in
which the broker-dealer will attempt to sell the shares as agent,
but may position and resell a portion of the block as principal to
facilitate the transaction;
●
purchases by a
broker-dealer as principal and resale by the broker-dealer for its
account;
●
an
exchange distribution in accordance with the rules of the
applicable exchange;
●
privately
negotiated transactions;
●
short
sales;
●
through the
writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
●
broker-dealers
may agree with the selling stockholders to sell a specified number
of such shares at a stipulated price per share;
●
a
combination of any such methods of sale; and
●
any
other method permitted pursuant to applicable law.
51
The
selling stockholders may, from time to time, pledge or grant a
security interest in some or all of the shares of common stock
owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and
sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act
amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders
under this prospectus. The selling stockholders also may transfer
the shares of common stock in other circumstances, in which case
the transferees, pledgees or other successors in interest will be
the selling beneficial owners for purposes of this
prospectus.
In
connection with the sale of our common stock or interests therein,
the selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn
engage in short sales of the common stock in the course of hedging
the positions they assume. The selling stockholders may also sell
shares of our common stock short and deliver these securities to
close out their short positions, or loan or pledge the common stock
to broker-dealers that in turn may sell these securities. The
selling stockholders may also enter into option or other
transactions with broker-dealers or other financial institutions or
the creation of one or more derivative securities which require the
delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer
or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of the
common stock offered by them will be the purchase price of the
common stock less discounts or commissions, if any. Each of the
selling stockholders reserves the right to accept and, together
with their agents from time to time, to reject, in whole or in
part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this
offering.
The
selling stockholders and any underwriters, broker-dealers or agents
that participate in the sale of the common stock or interests
therein may be “underwriters” within the meaning of
Section 2(11) of the Securities Act. Any discounts,
commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the
Securities Act. Selling stockholders who are
“underwriters” within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act.
To the
extent required, the shares of our common stock to be sold, the
names of the selling stockholders, the respective purchase prices
and public offering prices, the names of any agents, dealer or
underwriter, any applicable commissions or discounts with respect
to a particular offer will be set forth in an accompanying
prospectus supplement or, if appropriate, a post-effective
amendment to this registration statement that includes this
prospectus.
In
order to comply with the securities laws of some states, if
applicable, the common stock may be sold in these jurisdictions
only through registered or licensed brokers or dealers. In
addition, in some states the common stock may not be sold unless it
has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is
complied with.
We have
advised the selling stockholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares
in the market and to the activities of the selling stockholders and
their affiliates. In addition, we will make copies of this
prospectus (as it may be supplemented or amended from time to time)
available to the selling stockholders for the purpose of satisfying
the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares
against certain liabilities, including liabilities arising under
the Securities Act.
We have
agreed to indemnify the selling stockholders against liabilities,
including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this
prospectus.
We have
agreed with certain selling stockholders to keep the registration
statement of which this prospectus constitutes a part effective
until the earlier of (i) the date on which all of such selling
stockholders’ shares which are covered by the prospectus are
eligible to be sold under Rule 144, without restriction, or (ii)
such time as all of such shares have been disposed of pursuant to
and in accordance with the registration statement. See the section
of this prospectus captioned “Shares Eligible for Future
Sale—Registration Rights.”
52
DESCRIPTION OF CAPITAL STOCK
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 prospectus, we had 49,333,334 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. Subject to the terms of any
preferred stock designation that we may adopt from time to time,
the number of authorized shares of preferred stock may be decreased
(but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the voting
power of all the then outstanding shares of our capital stock
entitled to vote generally in the election of the directors,
without a separate vote of the holders of the preferred stock or
any series 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
●
Delaying or
preventing a change in control of our company without further
action by the stockholders.
Other
than in connection with shares of preferred stock (as explained
above), which preferred stock is not currently designated nor
contemplated by us, we do not believe that any provision of our
articles of incorporation or bylaws would delay, defer or prevent a
change in control.
53
Warrants
September 2017 Warrants
The 15
Warrants comprising part of the PPO Units sold in the September
2017 Offering 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.
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.
54
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.
November 2017 Warrants
On
November 9, 2017 we issued (i) three-year Class A warrants to
purchase up to an aggregate of 102,858 shares of our common stock
(subject to adjustment) at an initial exercise price of $6.00 per
share (subject to adjustments); and (ii) three-year Class B
warrants to purchase up to an aggregate of 800,000 shares of our
common stock (subject to adjustment) at an initial exercise price
of $7.00 per share (subject to adjustment).
The
Class A Warrants are exercisable on a cashless basis. We are
required to deliver certificates upon exercise within 3 trading
days of our receipt of all holder deliverables. Failure to do so
requires us to pay liquidated damages to the holders and subjects
us to potential buy-in liability. The Class A Warrants contain
adjustment provisions, including full ratchet anti-dilution rights,
which are identical, in all material respects to those contained in
the November 9, 2017 promissory notes (the “Notes”).
The Class B Warrants are identical to the Class A Warrants in all
material respects except that they are not exercisable on a
cashless basis, they have a higher initial exercise price, are
exercisable for more shares than the Class A Warrants and have
exercise limitations. The Class B Warrants cannot be exercised
absent a default under the Notes. They are not exercisable prior to
the 16th
day after an event of default under the Notes. For every $427 of
principal repaid on the Notes prior to an event of default or
within 15 day of an event of default, 200 Warrants exercisable
under the holder’s Class B Warrants will be cancelled such
that if the entire principal amount and all accrued interest due on
a holder’s Notes is repaid prior to the 16th day after an event
of default, all of the Warrants exercisable under the
holder’s Class B Warrants will be cancelled and will no
longer be exercisable.
Notes
September 2017 Notes
An
aggregate of $150,000 in face (principal) amount of promissory
notes (“Notes”) were sold in the September 2017
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.
55
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 an Exhibit
hereto.
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.
56
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.
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.
November 2017 Notes
On
November 9, 2017 we issued and sold convertible promissory notes,
dated November 9, 2017, in the aggregate principal amount of
$108,000 (the “Notes”). The Notes were subject to an 8%
original issue discount resulting in an aggregate purchase price to
the purchasers of $100,000. The outstanding principal balance of
the Notes, including accrued interest then due thereon, can be
prepaid by us, in whole or in part, at any time during the 179 day
period following November 9, 2017, upon five business days prior
written notice, at a premium of 118%. Commencing on February 9,
2018 and monthly thereafter we are required to pay all accrued
interest then due on the Notes together with 15% of the original
principal amount of the Notes. The Notes are convertible at any
time commencing 170 days after November 9, 2017 at 75% of the
lowest trading price for our common stock during the 20 trading
days ending on the last trading day prior to the conversion date.
We are required to cause our transfer agent to issue and transfer
shares to the holders of the Notes within five trading days of our
receipt of a conversation notice. If we fail to deliver
certificates within the required delivery period, the converting
holder has the right to rescind such conversion and we will be
required to pay liquidated damages to such holders. Such delivery
failure may also subject us to the buy-in liability. The conversion
price of the Notes is subject to customary adjustments for stock
splits and stock dividends, subsequent rights offerings, pro rata
shareholder distributions and fundamental transactions. The
conversion price is also subject to full ratchet anti-dilution
protection triggered by sales of our common stock or common stock
equivalents, excluding Exempt Issuances, as such term is defined
therein, during the term of the Notes, at a price below the
conversion price in effect at the time of issuance. The Notes also
contain negative covenants which restrict our ability to enter into
certain transactions or take certain actions while the Notes are
outstanding without the prior written consent of the holders of the
Notes. If an Event of Default, Fundamental Transaction or Change of
Control Transaction, as such terms are defined in the Notes,
occurs, the outstanding principal amount of the Notes, liquidated
damages, and other amounts owing in respect thereof through the
date of acceleration, becomes, at the holder’s election,
immediately due and payable in cash at the Mandatory Default
Amount, as such term is defined in the Notes. Commencing on the
maturity date of the Notes, if the Notes have not been repaid by
such date, or five days after the occurrence of an Event of
Default, interest on the Notes accrues at the rate of 24% per annum
or the maximum rate permitted under applicable law. The Notes
contain customary Events of Default including, but not limited to,
(i) the failure to pay principal, interest or liquidated damages
when due; (ii) breach of Note covenants or agreements; (iii) breach
of representation or warranties made in the Notes or other
transaction documents; (iv) bankruptcy events; (v) Change of
Control or Fundamental Transactions; (vi) failure to satisfy
current public information requirements under Rule 144; (vii)
certificate delivery failures; (viii) breaches of material terms of
the SPA; (ix) the entry of a monetary judgment, writ or similar
final process involving more than $50,000 which remains unvacated,
unbonded or unstayed for a period of 90 days; (x) any dissolution,
liquidation or winding up of our business; (xi) failure to maintain
the listing of our common stock on a trading market; (xii) our
effectuation of a reverse stock split without 10 days prior written
notice to the holders; (xiii) the required restatement of our
financial statements; or (xiv) our default under any of the other
Notes.
57
Effective January 2,2018 we entered into a Waiver Agreement with
the holders of the Notes pursuant to which we paid them an
aggregate of $5,000 and agreed to redeem their Notes on or before
February 28,2018, and the holders agreed to (i)waive any and all
reset, ratchet and most favored nation rights that they may have
resulting from our December 19,2017 loan transactions with them;
and (ii) to waive any defaults arising under such loan transaction
documents, with respect to any action or inaction by us during the
period ending February 28,2018.In the event we default on our
obligations under the Waiver Agreement, the waiver shall be null
and void and all rights waived by shall be reinstated.
December 2017 Notes
On
December 19, 2017 we issued and sold a convertible promissory note
in the principal amount of $112,500 (the “Note”).
The Note, which is due on August 20,
2018, bears interest at the rate of 12% per annum. All principal
and accrued interest on the Note is convertible into shares of our
common stock at the election of the Purchaser at any time at a
conversion price equal to the lesser of (i) the lowest trading
price for our common stock during the 25 trading days prior to the
issuance date of the Note, or (ii) a 50% discount to the lowest
trading price for our common stock during the 25 trading day period
immediately prior to conversion. The conversion price discount will
increase by 10% should we no longer be DWAC eligible; increased by
15% if we experience a DTC "chill" on our shares; and if both no
longer DWAC eligible and a DTC chill the discount will be increased
by 25%. The discount increases an additional 30% if we cease to be
a reporting company pursuant to the Securities Exchange Act of
1934, as amended, or if we fail to deliver free trading stock to
the holder upon a conversion of the Note after 181 days from the
issuance date of the Note. Further, our failure to timely deliver
shares to the holder upon conversion will result in a payment to
holder of $2,000 in cash per day. We have the right to prepay the
Note within 90 days of the issuance date at a premium of 135% of
all amounts owed to the holder and at a premium of 150% if prepaid
more than 90 but less than 180 days following the issuance date. We
have no right to prepay the Note more than 180 days after the
issuance date. The Note contains customary default events which, if
triggered and not timely cured, will result in default interest and
penalties. The Note also contains a right of first refusal
provision with respect to future financings by
us.
January 2018 Notes
On
January 9, 2018 we issued and sold a convertible promissory note
dated December 19,2017 in the principal amount of $83,500 (the
“Note”). The Note, which
is due on December 19,2018, bears interest at the rate of 12% per
annum. All principal and accrued interest on the Note is
convertible into shares of our common stock at the election of the
holder at any time at a conversion price equal to the lesser of (i)
the trading price for our common stock on the trading day prior to
the closing date of the Note, or (ii) a 50% discount to the lowest
trading or lowest closing bid price for our common stock during the
25 trading day period immediately prior to conversion. The
conversion price discount will increase should we not be DWAC
eligible; if we experience a DTC "chill" on our shares; if our
market price falls below $1.00 per share; if we cease to be a
reporting company pursuant to the Securities Exchange Act of 1934,
as amended, or if we fail to deliver free trading stock to the
holder upon a conversion of the Note after 181 days from the
issuance date of the Note. Further, our failure to timely deliver
shares to the holder upon conversion will result in a payment to
the holder of $1,000 in cash per day. We have the right to prepay
the Note within 90 days of January 9, 2018 at a premium of 135% of
all amounts owed to the holder and at a premium of 150% if prepaid
more than 90 but less than 180 days following January 9, 2018. We
have no right to prepay the Note more than 180 days after January
9, 2018. The Note contains customary default events which, if
triggered and not timely cured, will result in default interest and
penalties. The Note also contains a right of first refusal
provision with respect to future financings by
us.
58
Other Convertible Securities
As of
the date hereof, other than the securities described above, we do
not have any outstanding convertible securities.
Lock-up Agreements
In
connection with the Acquisition, the SAPL shareholder entered into
a Lock-Up Agreement. See “Shares Eligible for Future
Sale—Lock-Up Agreements” below for more
information.
Registration Rights
In
connection with the Acquisition and the September 2017, November
2017, December 2017 and January 2018 Offerings, we entered into
Registration Rights Agreements with our investors. See “Shares Eligible for Future
Sale—Registration Rights” below for more
information.
Anti-Takeover Effects of Provisions of our Articles of
Incorporation, our Bylaws and Nevada Law
These
provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control
of us to first negotiate with our board of directors. We believe
that the benefits of increased protection of our potential ability
to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of
discouraging these proposals because negotiation of these proposals
could result in an improvement of their terms.
Nevada Anti-Takeover Statute
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 123 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.
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.
59
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
only by the Chairman of our board of directors, by our President or
Secretary, by a majority of our board of directors then in office
or by stockholders owning shares in the aggregate entitled to cast
at least a majority of the votes at the meeting.
Amendment of Charter and Bylaw Provisions
The
amendment of our Articles of Incorporation requires majority board
and stockholder approval. The amendment of our by-laws requires
majority board approval.
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 V Stock
Transfer, LLC or V Stock. V Stock’s address is 18 Lafayette
Place, Woodmere, New York 11598 and its telephone number is
212-828-8436.
SHARES ELIGIBLE FOR FUTURE SALE
Since
our Common Stock commenced trading there has been a limited public
market for our Common Stock. Future sales of our Common Stock,
including shares issued upon the exercise of outstanding warrants
or the conversion of outstanding promissory notes, in the public
market, 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 due to, in part, 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.
60
Presently,
we have 49,558,334 shares of Common Stock outstanding, of which our
directors and executive officers beneficially own an aggregate of
40,537,412 shares. Of those outstanding shares, approximately
192,330 shares of our Common Stock are freely tradable, without
restriction, as of the date of this Prospectus. No shares issued in
connection with the Acquisition, can be publicly sold under Rule
144 promulgated under the Securities Act until 12 months after the
date of the filing of our current report on Form 8-K filed on
September 25, 2017.
Sale of Restricted Shares
Of the
49,558,334 shares of Common Stock outstanding, 49,366,004 of such
shares are “restricted securities” as such term is
defined in Rule 144. Further, the shares issuable upon exercise of
outstanding warrants or conversion of outstanding notes will be
restricted securities. These restricted securities were issued and
sold by us, or will be 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, certain holders of our Common
Stock agreed 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, except with our prior written consent.
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.
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 our current report on Form 8-K, reflecting
our status as a non-shell company, was filed with the SEC, which
occurred on September 25, 2017 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.
In
general, Rule 144 provides that (i) any of our non-affiliates
that has held restricted Common Stock for at least 6 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 6 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 affiliate
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.
61
Registration Rights
In
connection with the Acquisition and the September 2017, November
2017, December 2017 and January 2018 Offerings, we granted
registration rights to the purchasers of our securities in such
Offerings and certain of our pre-Acquisition Stockholders. The
registration rights subject us to penalties and damages in varying
degrees if we fail to file the registration statement, have it
declared effective and maintain its effectiveness under certain
timelines and conditions. Certain of the conditions have been
waived, to some extent, by certain beneficiaries of such
provisions. Certain of the registration obligations require that
the registration statement be kept effective until the earlier of
(i) the date on which the selling stockholders can sell all of
their securities covered by the registration statement under Rule
144, without restriction; or (ii) all of the securities registered
on behalf of the seller stockholder have been sold.
We must
comply with the informational requirements of Rule 144 so long as
any shares of Common Stock issued in the Offerings 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 our registration obligations,
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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Effective
as of October 4, 2017, we dismissed Friedman LLP
(“Friedman”) as our independent registered public
accounting firm. Our Board of Directors approved the dismissal of
Friedman on October 4, 2017, and on the same date, approved the
engagement of ShineWing Australia (“ShineWing”) as our
independent registered public accounting firm. The reports of
Friedman on the financial statements for the fiscal years ended
December 31, 2016 and 2015 did not contain an adverse opinion, and
they were not qualified or modified as to uncertainty, audit scope
or accounting principles, except that such reports included a going
concern qualification.
During
our fiscal years ended December 31, 2016 and 2015 and the
subsequent interim period preceding their dismissal, there were no
disagreements with Friedman, whether or not resolved, on any matter
of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved
to the satisfaction of Friedman, would have caused them to make
reference to the subject matter of the disagreement in connection
with their report on our financial statements.
During
our fiscal years ended December 31, 2016 and 2015 and the interim
periods preceding their engagement, and through October 4, 2017,
neither we nor anyone on our behalf consulted with ShineWing
regarding either (a) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of
audit opinion that might be rendered on our financial statements,
and neither a written report was provided nor oral advice was
provided to us that ShineWing concluded was an important factor
considered by us in reaching a decision as to the accounting,
auditing or financial reporting issue; or (b) any matter that was
either the subject of a disagreement (as defined in paragraph
304(a)(1)(iv) of Regulation S-K and the related instructions
thereto) or a reportable event (as described in paragraph
304(a)(1)(v) of Regulation S-K).
62
LEGAL MATTERS
The
validity of the shares of common stock being offered by this
prospectus will be passed upon for us by CKR Law LLP
(“CKR”), New York, New York. CKR owns shares of our
common stock (see “Security Ownership of Certain Beneficial
Owners and Management”). CKR also serves as our legal counsel
and receives legal fees in accordance with executed retainer
agreements.
EXPERTS
ShineWing
Australia, independent registered public accounting firm, has
audited the financial statements of Sincerity Australia Pty Ltd. at
June 30, 2017 and 2016, and for each of the two years in the period
ended June 30, 2017, as set forth in their report. We have included
the financial statements of Sincerity Australia Pty Ltd. in the
prospectus and elsewhere in this registration statement in reliance
on ShineWing Australia’s report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have
filed with the SEC this registration statement on Form S-1 under
the Securities Act with respect to the shares of common stock being
offered by this prospectus. This prospectus, which constitutes a
part of this registration statement, does not contain all of the
information in this registration statement and its exhibits. For
further information with respect to us and the common stock offered
by this prospectus, you should refer to this registration statement
and the exhibits filed as part of that document. Statements
contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in
each instance, we refer you to the copy of the contract or other
document filed as an exhibit to this registration statement. Each
of these statements is qualified in all respects by this
reference.
We are
subject to the informational requirements of the Exchange Act and
file annual, quarterly and current reports, proxy statements and
other information with the SEC. You can read our SEC filings,
including this registration statement, over the Internet at the
SEC’s website at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference
facilities at 100 F Street, N.E., Washington, D.C. 20549. You may
also obtain copies of these documents at prescribed rates by
writing to the Public Reference Section of the SEC at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference
facilities. You may also request a copy of these filings, at no
cost, by writing or telephoning us at: Level 27, Rialto Tower, 525
Collins Street, Melbourne, Victoria, Australia 3000 telephone:
+61-3-98230361. In addition, all documents subsequently filed by us
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
prior to the termination of the offering (excluding any information
furnished rather than filed) shall be deemed to be incorporated by
reference into this prospectus.
63
SINCERITY APPLIED MATERIALS HOLDINGS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
Number
|
Unaudited Condensed Consolidated Financial Statements
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2017 and December
31, 2016 (unaudited)
|
F-2
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2017 and 2016 (unaudited)
|
F-3
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2017 and 2016 (unaudited)
|
F-4
|
|
|
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
F-5
|
Audited Consolidated Financial Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-13
|
|
|
Consolidated
Balance Sheets as of June 30, 2017 and 2016
|
F-14
|
|
|
Consolidated
Statements of Income and Accumulated Deficit for the years ended
June 30, 2017 and 2016
|
F-15
|
|
|
Consolidated Statements of Comprehensive Income
for the years ended June 30, 2017 and 2016
|
F-16
|
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2017 and
2016
|
F-17
|
|
|
Notes
to Consolidated Financial Statements
|
F-18
|
Unaudited Pro Forma Consolidated Financial
Statements
Unaudited Pro Forma Consolidated Financial
Statements
|
F-27
|
|
|
Notes to Unaudited Pro Forma Consolidated
Financial Statements
|
F-31
|
F-1
SINCERITY APPLIED MATERIALS HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
|
September
30,
2017
|
December
31,
2016
|
ASSETS
|
|
|
Current
Assets
|
|
|
Cash
|
$35,875
|
$32,979
|
Accounts
receivable
|
1,243,216
|
61,593
|
Inventories
|
42,705
|
-
|
Prepaid
expenses
|
-
|
________-
|
Total
current assets
|
1,321,796
|
94,572
|
Property
and equipment
|
53,669
|
77,483
|
Intangible
assets, net
|
69,175
|
5,547
|
Due
from stockholder
|
477,422
|
-
|
Total
assets
|
$1,922,064
|
$177,602
|
LIABILITIES AND
STOCKHOLDERS’ (DEFICIENCY) EQUITY
|
|
|
Current
liabilities
|
|
|
Line
of credit
|
$117,546
|
$108,151
|
Accounts
payable
|
958,167
|
46,589
|
Accrued
expenses
|
48,558
|
71,486
|
Current
maturities of notes payable
|
-
|
-
|
Deferred
tax liabilities
|
26,324
|
-
|
Income
tax liabilities
|
14,529
|
13,060
|
Long-term
debt – current position
|
28,343
|
6,183
|
Related
party loan
|
-
|
93,671
|
Total
current liabilities
|
1,193,467
|
339,140
|
Notes
payable, less current maturities
|
672,476
|
76,402
|
Long
term debt – net of current position
|
|
|
Total
Liabilities
|
$1,865,943
|
$415,542
|
Stockholders’
(Deficiency) Equity
|
|
|
Preferred
stock
|
|
|
Authorized:
$0.001 par value, 10,000,000 shares authorized
|
|
|
Issued
and outstanding: nil preferred shares
|
|
|
Common
stock
|
|
|
Authorized:
$0.001 par value, 290,000,000 shares authorized
|
|
|
Issued
and outstanding: 48,333,334 and 3,122,287,
respectively
|
$48,333
|
$3,122
|
Additional
paid-in capital
|
8,567,576
|
8,471,499
|
Accumulated
deficit
|
(8,286,913)
|
(8,484,897)
|
Adjustments
to equity to reflect retroactive application of
reverse
acquisition of accounting
|
(272,870)
|
(227,464)
|
Total
stockholders’ (deficiency) equity
|
56,126
|
( 237,740)
|
Total
liabilities and stockholders’ (deficiency)
equity
|
$1,922,064
|
$177,602
|
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-2
SINCERITY APPLIED MATERIALS HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN US DOLLARS) FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2017 (UNAUDITED)
|
Three Months
Ended
September
September
|
Nine Months
Ended
September
September
|
||
|
30,
2017
|
30,
2016
|
30,
2017
|
30,
2016
|
Revenue
|
|
|
|
|
Sales
|
$1,141,026
|
$284,706
|
$1,996,918
|
$856,451
|
Cost of
sales
|
(1,009,563)
|
(253,389)
|
(1,475,851)
|
(762,241)
|
|
|
|
|
|
Gross
profit
|
131,463
|
31,317
|
521,064
|
94,210
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
Selling,
general and administrative
|
19,843
|
7,801
|
41,544
|
21,491
|
Professional
fees
|
7,325
|
83
|
171,375
|
10,091
|
Research
and development costs
|
-
|
-
|
-
|
-
|
Depreciation
and amortization
|
5,934
|
1,844
|
37,790
|
29,101
|
Bad
debt expenses (recoveries)
|
-
|
-
|
11,381
|
66,021
|
Impairment
|
-
|
-
|
-
|
245
|
Total
operating expenses
|
33,102
|
9,728
|
262,090
|
126,949
|
Operating
income (loss)
|
98,361
|
21,589
|
258,974
|
(32,739)
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
Interest
expense and amortization of
debt discount
|
(5,832)
|
(1,444)
|
(23,818)
|
(41,633)
|
Other income
|
5,370
|
-
|
28,498
|
21,008
|
Other
expense
|
-
|
-
|
-
|
(1,528)
|
Total
other income (expenses)
|
(462)
|
(1,444)
|
4,680
|
(22,153)
|
|
|
|
|
|
Net income (loss)
|
97,899
|
20,145
|
263,654
|
(54,892)
|
Current
|
-
|
-
|
(14,276)
|
-
|
Deferred
|
-
|
-
|
(29,018)
|
-
|
Total
provision for (reduction of) income taxes
|
-
|
-
|
(43,294)
|
-
|
|
|
|
|
|
Net income (loss) after tax
|
$97,899
|
$20,145
|
$220,360
|
$(54,892)
|
Net
income (loss) attributable to
|
|
|
|
|
foreign
currency translation income (loss)
|
(2,936)
|
(6,591)
|
(22,376)
|
(20,276)
|
Comprehensive
income (loss)
|
(2,936)
|
(6,591)
|
(22,376)
|
(20,276)
|
Comprehensive
loss attributable to Sincerity Applied Materials Corp
stockholders
|
94,963
|
13,554
|
197,984
|
(75,168)
|
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-3
SINCERITY APPLIED MATERIAL HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2017
Cash
flow from operating activities
|
Nine months
ended September 30
|
|
|
2017
|
2016
|
|
|
|
Cash flow from
operating activities net loss
|
220,360
|
(54,892)
|
|
|
|
Adjustment
to reconcile net loss to net cash used in operating
activities
|
|
|
Depreciation
and amortization
|
37,790
|
29,101
|
Gain/(loss)
on disposition of equipment
|
(13,976)
|
-
|
Bad
debt expenses
|
-
|
66,021
|
Increase
of deferred income tax
|
26,324
|
-
|
Inventory
adjustments
|
(42,705)
|
-
|
Impairment
of intangible asset
|
5,814
|
217
|
|
|
|
(Increase)
Decrease in:
|
|
|
Accounts
receivables
|
(1,181,142)
|
(17,630)
|
|
|
|
(Increase)
Decrease in:
|
|
|
Accounts
payable
|
911,578
|
(129,809)
|
Accrued
expenses and other current liabilities
|
(22,932)
|
(10,913)
|
Taxation
|
1,469
|
(11,402)
|
Prepaid
expenses and other current assets
|
-
|
-
|
|
|
|
Net
cash used in operating activities
|
(57,420)
|
(129,307)
|
|
|
|
Cash
flows from financing activities
|
|
|
Proceeds
from line of credit
|
9,395
|
-
|
- Payment of
borrowing expenses
|
(69,442)
|
|
Repayment
of long term debt
|
-
|
(7,212)
|
Proceeds
from long term debt
|
622,417
|
-
|
Proceeds
from convertible notes/offerings
|
150,000
|
-
|
Payment
of balance due to stockholder
|
(629,677)
|
100,844
|
|
|
|
Net
cash provided by (used in) financing activities
|
82,693
|
93,632
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
-
|
-
|
|
|
|
Effect of exchange
rate changes on cash
|
(22,376)
|
26,533
|
|
|
|
Net
income/ (decrease) in cash
|
2,897
|
(9,142)
|
|
|
|
Cash and cash
equivalents, beginning of period
|
32,979
|
12,347
|
|
|
|
Cash
and cash equivalents, end of period
|
35,876
|
(3,205)
|
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-4
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 2017
NOTE 1-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The
accompanying financial statements include the accounts of Sincerity
Applied Material Holdings Corp 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
September 30, 2017 The Company had a current asset surplus of
$128,332 and net asset surplus of $56,121 (December 31, 2016
current asset deficiency of $244,568 and net asset deficiency of
($237,940). The Company reported an after-tax income of $220,360
for the nine months ended September 30, 2017 (Nine months ended
September 30, 2016 losses: $54,892).
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.
Nature of Operations:
Sincerity
Applied Material Holdings Corp (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 in China
and Malaysia.
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-5
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 2017
NOTE 1-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 September
30, 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 $326 for the nine months ended September 30, 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 $22,050 for the nine
months ended September 30, 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 term 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 September 30,
2017, management determined that no allowance for doubtful accounts
was required
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-6
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 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 September 30, 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-7
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 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
September 30, 2017, the deferred tax liabilities recognized of
$26,324 arose as 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 Australian
Taxation Office (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:
No
Freight costs included in cost of sales. All freight costs relating
to the period are fully reimbursed by the client and these items
are recognized in the period which the reimbursements received, and
payments remitted.
Advertising:
There
were no advertising costs for the period.
Travel Costs
Travel
expenses included under Selling,
general and administrative and accumulates to $15,219. The expenses
predominantly consisted of travel to China and Hong Kong by company
associates.
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.
Reverse Acquisition Accounting
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. Consequently,
retroactive adjustments have been made to the equity balances of
SAPL to reflect the equity balances of the legal parent company
Sincerity Applied Materials Holdings Corp as required under ASC 805
and the application of reverse acquisition accounting.
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-8
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 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 November 20, 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 September 30, 2017, cash did not exceed insured
limits.
At
September 30, 2017, credit risk for trade accounts is concentrated
as well because 100% of the balances are receivable from one
customer. 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 September 30, 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-9
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 2017
NOTE 4
FIXED ASSETS
At
September 30, 2017 and December 31, 2016 fixed assets are comprised
of the following:
|
September
2017
|
December
2016
|
Estimated
Useful Lives
|
Vehicles
|
115,698
|
119,559
|
5
years
|
Office equipment
and furniture and fixtures
|
20,349
|
18,723
|
5
years
|
|
136,047
|
138,282
|
|
Less: accumulated
depreciation
|
82,378
|
60,799
|
|
Total, net of
accumulated depreciation
|
53,669
|
77,483
|
|
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-10
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 2017
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 September 30, 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
September 30, 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 at September 30,
2017, $117,546 (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.
NOTE 6
– LONG-TERM DEBT
The
Company has a chattel mortgage outstanding at September 30, 2017
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
September 30, 2017 are as follows:
|
September
2017
|
December
2016
|
Secured
loan
|
$626,376
|
$-
|
Note
payable
|
74,444
|
82,585
|
Less: current
portion
|
(28,343)
|
(6,183)
|
Total long-term
debt, less current portion
|
672,477
|
76,402
|
Maturities
of long-term debt at September 30, 2017 for each of the next five
years and in the aggregate, are as follows:
|
September
2017
|
December
2016
|
Next 12
months
|
$32,400
|
$32,400
|
2
years
|
42,043
|
32,400
|
3
years
|
626,376
|
17,785
|
|
700,819
|
82,585
|
NOTE
7-BALANCE DUE FROM STOCKHOLDER
The
balance due from the stockholder at September 30, 2017 amounts to
$477,422, 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-11
SINCERITY APPLIED MATERIAL HOLDINGS CORP
NOTES
TO FINANCIAL STATEMENTS AT
SEPTEMBER
30, 2017
NOTE 8
- ACCUMULATED OTHER COMPREHENSIVE INCOME
The
balance of accumulated other comprehensive income at September 30,
2017 relates entirely to the foreign currency translation, as
follows:
Other
comprehensive loss
|
(326)
|
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 $22,050 was recognized for the three months ended September
30, 2017.
Unaudited.
The accompanying notes are an integral part of these financial
statements.
F-12
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, 2017 and June 30
2016, 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, 2017 and June 30, 2016, 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, September 29, 2017
F-13
SINCERITY AUSTRALIA PTY LTD
BALANCE SHEETS
AT
|
JUNE 30,
|
|
ASSETS
|
2017
|
2016
|
|
|
|
Current
Assets
|
|
|
Cash
|
$5,536
|
$3,590
|
Accounts
receivable
|
545,096
|
76,176
|
Vendor
balance receivable
|
-
|
34,960
|
Inventory
|
41,839
|
40,569
|
Due
from stockholder
|
29,500
|
-
|
Deferred
Tax Assets
|
28,934
|
-
|
Total
Current Assets
|
650,905
|
155,295
|
Due
from stockholder
|
373,047
|
-
|
Fixed
assets - at cost, less accumulated depreciation
|
58,395
|
83,596
|
Total
Assets
|
1,082,347
|
238,891
|
LIABILITIES
AND STOCKHOLDER'S DEFICIENCY
|
|
|
Current
Liabilities
|
|
|
Long-term
debt - current portion
|
$142,350
|
$24,290
|
Accounts
payable
|
217,778
|
-
|
Accrued
expenses
|
170,537
|
68,918
|
Income
tax payable
|
-
|
13,485
|
Due
to stockholder
|
-
|
118,761
|
Total
Current Liabilities
|
530,665
|
225,454
|
Long-term
debt - net of current portion
|
666,005
|
76,831
|
Total
Liabilities
|
1,196,670
|
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
|
(138,656)
|
(105,569)
|
Accumulated
other comprehensive income
|
|
|
Foreign
currency translation
|
14,907
|
32,749
|
Total
Stockholder's Deficiency
|
(114,323)
|
(63,394)
|
|
|
|
|
$1,082,347
|
$238,891
|
The
accompanying notes are an integral part of these financial
statements.
F-14
SINCERITY AUSTRALIA PTY LTD
STATEMENTS OF INCOME AND ACCUMULATED
DEFICIT FOR THE YEARS ENDED
|
JUNE 30,
|
|
|
2017
|
2016
|
Sales
|
$1,281,816
|
$1,223,438
|
|
|
|
Cost
of goods sold
|
(1,027,579)
|
(882,553)
|
|
|
|
Gross
profit
|
254,237
|
340,885
|
|
|
|
Decline
in net realizable value of inventory
|
-
|
(46,794)
|
|
|
|
Income
before selling, general, and administrative expenses and other
income (loss)
|
254,237
|
294,091
|
|
|
|
Selling,
general and administrative expenses(including interest expense of
$14,907 - 2017 and $36,998 - 2016)
|
(263,490)
|
(187,708)
|
|
|
|
Income
before other income (loss) and provision for(reduction of) income
taxes
|
(9,253)
|
106,383
|
Other
income (loss)
|
|
|
Foreign
currency transactions
|
(51,000)
|
6,415
|
Disposition
of equipment
|
1,616
|
1,079
|
Total
other income (loss)
|
(49,384)
|
7,494
|
|
|
|
Income
(loss) before provision for (reduction of) income
taxes
|
$(58,637)
|
$113,877
|
Provision
for (reduction of) income taxes
|
|
|
|
|
|
Current
|
-
|
13,454
|
Deferred
|
28,934
|
25,625
|
Total
provision for (reduction of) income taxes
|
28,934
|
39,079
|
|
|
|
Net
income (loss)
|
$(29,703)
|
$74,798
|
Accumulated
deficit – beginning
|
$(105,569)
|
$(171,434)
|
|
|
|
Foreign
currency translation adjustment
|
(3,384)
|
-
|
|
|
|
Distributions
to stockholder
|
-
|
(8,933)
|
|
|
|
Accumulated deficit - end
|
$(138,656)
|
$(105,569)
|
The accompanying notes are an integral part of these financial
statements.
F-15
SINCERITY AUSTRALIA PTY LTD
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED
|
JUNE 30,
|
|
|
2017
|
2016
|
|
|
|
Net
Income (loss)
|
$(29,703)
|
$74,798
|
Other
comprehensive income:
|
|
|
Foreign
currency translation adjustmen
|
(17,842)
|
4,620
|
|
|
|
Total
comprehensive income
|
$(47,545)
|
$79,418
|
The
accompanying notes are an integral part of these financial
statements.
F-16
SINCERITY AUSTRALIA PTY LTD
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
|
JUNE
30,
|
|
|
2017
|
2016
|
Cash
Flows From Operating
|
|
|
Activities
Net income (loss)
|
$(47,545)
|
$74,798
|
|
|
|
Adjustments
To Reconcile Net Income (Loss) To Net Cash Provided
By Operating Activities
|
|
|
Depreciation
|
29,434
|
29,416
|
Deferred
financing costs
|
(3,075)
|
-
|
(Gain)
loss on disposition of equipment/asset write down
|
(13,457)
|
(1,079)
|
Bad
debt expense
|
10,874
|
64,170
|
Decline
in net realizable value of inventory
|
-
|
46,794
|
Provision
for (reduction of) deferred income taxes
|
(28,903)
|
25,625
|
(Increase)
Decrease In:
|
|
|
Accounts
receivable
|
(477,800)
|
105,334
|
Inventory
|
-
|
(87,272)
|
Increase
(Decrease) In:
|
|
|
Accounts
payable
|
253,837
|
(99,892)
|
Accrued
expenses
|
100,778
|
(3,755)
|
Income
tax payable
|
-
|
13,455
|
Total
Adjustments
|
(128,312)
|
92,796
|
Net
Cash Provided By Operating Activities
|
(175,857)
|
167,594
|
Cash
Flows From Investing Activities
|
|
|
Proceeds
from disposition of equipment
|
-
|
4,053
|
Cash
Flows From Financing Activities
|
|
|
Repayment
of lines of credit
|
-
|
-
|
Proceeds
of long-term debt
|
725,774
|
-
|
Repayments
of long-term debt
|
(24,584)
|
(22,902)
|
Proceeds
on (payments of) balance due to stockholder, at net
|
(523,428)
|
(221,269)
|
Net
Cash Used in Financing Activities
|
177,762
|
(244,171)
|
Effect
of exchange rate changes on cash
|
41
|
(2,789)
|
Net
increase (decrease) in cash
|
1,946
|
(75,313)
|
Cash
- beginning
|
3,590
|
78,903
|
Cash-end
|
5,536
|
3,590
|
Supplemental
Information:
|
|
|
Interest
paid during period
|
14,907
|
11,006
|
Income
taxes paid during period
|
-
|
-
|
Supplementary
Schedule of Non-Cash Investing and Financing
Activities:
|
|
|
Acquisition
of motor vehicle directly financed by long-term debt
|
-
|
-
|
Deposit
on purchase of motor vehicle paid directly by
stockholder
|
-
|
-
|
Proceeds
from trade-in of motor vehicle applied to long-term
debt
|
-
|
-
|
Payment
of line of credit balance directly by stockholder
|
-
|
-
|
Distributions
to stockholder offset by balance due to stockholder
|
-
|
8,933
|
The
accompanying notes are an Integral part of these financial
statements.
F-17
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
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, 2017, the Company had a current asset surplus of
$120,240 and a stock holder’s deficiency of $114,323 (June
30, 2016 current asset deficiency of $70,159 and a stock
holder’s deficiency of $63,394). The Company reported a loss
of $29,703 for the year ended June 30, 2017 (June 30, 2016 profit:
$74,798).
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 lead to a private placement offering $250,000. These funds
will be used for working capital purposes. Subsequent to deal close
a further round of capital raising is anticipated and this is
expected to be raise additional $150,000 and used towards working
capital.
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-18
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
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 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 losses of $17,842 and gains of
$4,620 for the years ended June 30, 2017 and 2016, 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 $(51,000) and $6,415
for the years ended June 30, 2017 and 2016, 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, 2017 and 2016,
management determined that no allowance for doubtful accounts was
required.
F-19
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
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, 2017 and 2016, 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-20
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
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, 2017 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
$22,000 for each of the years ended June 30, 2017 and
2016.
Advertising:
Advertising is expensed as incurred and $1,812 and $2,781 for the
years ended June 30, 2017 and 2016, 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-21
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
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.
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, 2017 and 2016, cash did not exceed
insured limits.
At June 30, 2017 and 2016, 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, 2017 and 2016, 100% of the
Company's sales were to three customers, of which approximately 85%
was to its primary customer.
F-22
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
NOTE 4 – FIXED ASSETS
At
June 30, 2017, fixed assets are comprised of the
following:
|
June 30, 2017
|
June 30, 2016
|
Estimated Useful Lives
|
Vehicles
|
$113,352
|
$123,445
|
5
years
|
Office
equipment and furniture and fixtures
|
19,937
|
19,332
|
5
years
|
|
133,289
|
142,777
|
|
Less:
accumulated depreciation
|
74,894
|
59,181
|
|
Total,
net of accumulated depreciation
|
$58,395
|
$83,596
|
|
NOTE 5 – LONG TERM DEBT
The
Company has a chattel mortgage outstanding at June 30, 2017 and
2016 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, 2017 and 2016 are as follows:
|
June 30, 2017
|
June 30, 2016
|
Note
payable
|
$79,517
|
$101,221
|
Less:
unamortized debt issuance costs Long-term
debt, less unamortized debt
|
-
|
(100)
|
issuance
costs
|
79,517
|
101,121
|
Less:
current portion
|
27,187
|
24,290
|
Total
long-term debt, less current portion
|
$52,330
|
$76,831
|
Maturities
of long-term debt at June 30, 2017 for each of the next five years
and in the aggregate, approximate the following:
June
30, 2018
|
$27,117
|
2019
|
$52,400
|
2020
|
-
|
2021
|
-
|
2022
|
-
|
|
$52,330
|
F-23
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
The company is also liable to pay $613,674 to ANZ Banking Group
Limited, loan secured by real estate owned by the company officer
and partner. The loan is also personally guaranteed by the company
officer and partner. This is loan is expected to be restructured
and settled in due course. The loan is currently interest only and
expected to accrue around $30,000.00 in interest
payable.
There is an additional $115,000 obtained as a segregated facility
over the above property. This is an interest only loan and the
interest expenses are expected to be around $6,000.00
Both loans are on a variable interest approximating
5%.
F-24
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
NOTE 6 – BALANCE DUE FROM/TO STOCKHOLDER
The balance due from the stockholder at June 30, 2017 and due to
stockholder at June 30, 2016 amounts to $402,547 and $118,761,
respectively, and is subject to an unsecured loan agreement that
requires interest at the rate of 5.4% 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 $20,000 and Company
received $9,000 for the years ended June 30, 2017 and 2016,
respectively.
NOTE 7 – DEFERRED INCOME TAX
The
balance of deferred income tax at June 30, 2017 consists of the
following:
|
June
30, 2017
|
June
30, 2016
|
See
note
|
Attributable
to benefit of NOL's carried forward
|
$-
|
$-
|
11
|
Attributable
to deductible temporary differences regarding accumulated
depreciation
|
28,934
|
-
|
|
|
|
|
|
|
$28,934
|
$-
|
|
NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The balance of accumulated other comprehensive income at June 30,
2017 and 2016 relates entirely to the foreign currency translation,
as follows:
|
June 30,
2017
|
June
30, 2016
|
Beginning
balance at July 1
|
$32,749
|
$28,129
|
Other
comprehensive income
|
(17,842)
|
4,620
|
Ending
balance at June 30
|
$14,907
|
$32,749
|
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 $40,000 and $358,000 for the years ended June
30, 2017 and June 30, 2016, respectively.
F-25
SINCERITY AUSTRALIA PTY LTD
NOTES TO FINANCIAL STATEMENTS
AT
JUNE 30, 2017 AND 2016
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. The final settlement amount $20,000 was owed
until June 30, 2017 and subsequently settled in July.
NOTE 11 – NET OPERATING LOSSES AVAILABLE (SEE NOTE
7)
At June 30, 2017 the Company had NOL’s available for future
approximating $61,000 and can
be offset against future income tax liability.
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, 2017 and
2016:
|
2017
|
2016
|
Arising from (increase) decrease in
available NOL's
|
$18,769
|
$16,725
|
Arising
from decrease in taxable differences - accumulated
depreciation
|
-
|
-
|
Arising from (increase) decrease in
deductible differences -
accumulated depreciation
|
10,165
|
8,900
|
Total provision for (reduction of) deferred
income taxes
|
$28,934
|
$25,625
|
NOTE 13 – 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.
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 June 30, 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 June 30, 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.
F-27
Sincerity Applied Materials Holdings Corp and Consolidated
Subsidiaries Unaudited Condensed Pro Forma Consolidated Balance
Sheets June 30, 2017
|
SAMHC
Historical
|
SAPL
Historical
|
Pro Forma
Combined
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
$-
|
$5,536
|
$5,536
|
Prepaid
expenses
|
-
|
-
|
-
|
Accounts
receivable
|
-
|
545,096
|
545,096
|
Due
from stockholders
|
-
|
29,500
|
29,500
|
Inventory
|
-
|
41,839
|
41,839
|
Total
Current Assets
|
-
|
621,971
|
621,971
|
|
|
|
|
Deferred
financing costs
|
-
|
-
|
-
|
Deferred
income tax asset
|
-
|
28,934
|
28,934
|
Investments
in associated companies
|
-
|
-
|
-
|
Fixed
assets - at cost, less accumulated depreciation
|
-
|
58,395
|
58,395
|
|
-
|
87,329
|
87,329
|
|
|
|
|
Non-current
Assets
|
|
|
|
Due
from stockholders
|
-
|
373,047
|
373,047
|
Total
Non-Current Assets
|
-
|
373,047
|
373,047
|
Total
Assets
|
-
|
1,082,347
|
1,082,347
|
|
|||
Current
Liabilities
|
|
|
|
Note
payable - line of credit
|
-
|
115,163
|
115,163
|
Long-term
debt current position
|
-
|
27,187
|
27,187
|
Accounts
payable
|
-
|
217,778
|
217,778
|
Accrued
expenses
|
14,633
|
170,537
|
185,170
|
Income
tax payable
|
-
|
-
|
-
|
Total
Current Liabilities
|
14,633
|
530,665
|
545,298
|
Non-Current
Liabilities
|
|
|
|
Chattel
mortgage (NC)
|
-
|
52,330
|
52,330
|
Loan
- Home Loan Refinance
|
-
|
613,675
|
613,675
|
Total
Non-Current Liabilities
|
-
|
666,005
|
666,005
|
Total
Liabilities
|
14,633
|
1,196,670
|
1,211,303
|
Net
Assets (Liabilities)
|
(14,633)
|
(114,323)
|
(128,956)
|
Equity
|
|
|
|
Authorized: .0.001
par value, 290,000,00 and 10,000 at AUD $1 shares respectively
authorized
|
|
||
Issued and
outstanding: 3,122,287 and 10,000 respectively
|
3,122
|
9,426
|
12,548
|
Additional paid-in
capital
|
8,567,576
|
-
|
8,567,576
|
Accumulated
deficit
|
8,585,331
|
(138,656)
|
(8,723,987)
|
|
|
|
|
Accumulated other
comprehensive income
|
-
|
-
|
-
|
Foreign
currency translation
|
-
|
14,907
|
14,907
|
Total
Stockholder's Deficiency
|
(14,633)
|
(114,323)
|
(128,956)
|
Total
liabilities and stockholder's deficiency
|
-
|
1,082,347
|
1,082,347
|
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 the Fiscal Year Ended June 30,
2017
|
SAMHC
Historical
|
SAPL
Historical
|
Pro Forma
Combined
|
Revenue
|
|
|
|
Sales
|
$-
|
$1,281,816
|
$1,281,816
|
Total
Revenue
|
|
1,281,816
|
1,281,816
|
Cost of goods
sold
|
-
|
1,027,579
|
1,027,579
|
Gross
Profit
|
-
|
254,237
|
254,237
|
|
|
|
|
Operating
expenses
|
|
|
|
Selling,
general and administrative
|
14,876
|
52,134
|
67,010
|
Professional
fees
|
93,334
|
164,966
|
258,300
|
Depreciation
and amortization
|
-
|
35,240
|
35,240
|
Bad
debt recoveries
|
-
|
11,150
|
11,150
|
Total operating
expenses
|
108,210
|
263,490
|
371,700
|
|
|
|
|
Total operating
loss
|
(108,210)
|
(9,253)
|
(117,463)
|
|
|
|
|
Other income
(expenses)
|
|
|
|
Reduction of income
taxes - deferred
|
-
|
28,934
|
28,934
|
Foreign currency
transaction loss
|
-
|
(51,000)
|
(51,000)
|
Gain on sale of
non-current asset
|
14,799
|
1,616
|
16,415
|
Other
expenses
|
(7,023)
|
-
|
(7,023)
|
|
7,776
|
(20,450)
|
(12,674)
|
|
|
|
|
Net
profit (loss)
|
(100,434)
|
(29,703)
|
(130,137)
|
|
|
|
|
Net
income/(loss)
|
(100,434)
|
(29,703)
|
(130,137)
|
Foreign currency
transaction loss
|
-
|
(17,842)
|
(17,842)
|
Net
profit (loss)
|
(100,434)
|
(47,545)
|
(147,979)
|
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 the Fiscal Year Ended June 30,
2017
|
SAMHC
Historical
|
SAPL
Historical
|
Pro Forma
Combined
|
Net
loss
|
$(100,434)
|
$(47,545)
|
$(147,979)
|
Adjustment to
reconcile net loss to cash used in operating
activities
|
|||
Expenses
paid by CKR under SPA
|
96,078
|
-
|
96,078
|
Gain
on sale of Equidam Holdings B.V
|
(14,799)
|
-
|
(14,799)
|
Reduction
of deferred income tax
|
-
|
(28,903)
|
(28,903)
|
Depreciation
and amortization
|
-
|
29,434
|
29,434
|
Non-current
asset write down
|
|
(13,457)
|
(13,457)
|
Provision
for doubtful debts
|
-
|
10,874
|
10,874
|
Changes
in assets and liabilities
|
|
|
|
Accounts
receivables
|
-
|
(477,800)
|
(477,800)
|
Deferred
financing costs
|
-
|
(3,075)
|
(3,075)
|
Prepaid
expenses and other current assets
|
29,769
|
|
29,769
|
Accounts
payable
|
(16,879)
|
253,837
|
236,958
|
Accrued
expenses and other current liabilities
|
(19,522)
|
100,778
|
81,256
|
Net
cash used in operating activities
|
(25,787)
|
(175,857)
|
(201,644)
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
Proceeds
from ANZ loan
|
-
|
725,774
|
725,774
|
Repayment
of long term debt
|
-
|
(24,584)
|
(24,584)
|
Loan
to stockholder, at net
|
-
|
(523,428)
|
(523,428)
|
Net
cash provided by (used in) financing activities
|
-
|
177,762
|
177,762
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
Proceeds
from sale of Equidam Holdings BV
|
15,902
|
-
|
15,902
|
Net
cash provided by (used in) investing activities
|
15,902
|
-
|
15,902
|
|
|
|
|
Effect of exchange
rate changes on cash
|
208
|
41
|
249
|
Net
income/ (decrease) in cash
|
(9,677)
|
1,946
|
(7,731)
|
|
|
|
|
Cash and cash
equivalents, beginning of period
|
9,677
|
3,590
|
13,267
|
Cash
and cash equivalents, end of period
|
-
|
5,536
|
5,536
|
See Notes to Unaudited Condensed Consolidated Pro Forma Financial
Statements.
F-30
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 6 months ended June 30, 2017 for
Sincerity Applied Materials Holdings Corp and the 12 months ended
30 June 2017 for Sincerity Australia Pty Ltd give effect to the
Sincerity Australia Pty Ltd Company acquisition as if it had
occurred on June 30, 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-31
sincerity applied materials holdings
corp.
12,441,726 Shares of Common Stock
________________________
PROSPECTUS
________________________
,
2018
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution
The
following table sets forth the fees and expenses to be incurred in
connection with the registration of the securities being registered
hereby, all of which will be borne by us. Except for the SEC
registration fee, all amounts are estimates.
Description
|
Amount
|
SEC registration
fee
|
$3,486
|
Legal fees and
expenses
|
40,000
|
Total
expenses
|
$43,486
|
Item 14. Indemnification of Directors and
Officers.
Nevada
Revised Statutes (NRS) Sections 78.7502 and 78.751 provide us with
the power to indemnify any of our directors, officers, employees
and agents. The person entitled to indemnification must
have conducted himself in good faith, and must reasonably believe
that his conduct was in, or not opposed to, our best
interests. In a criminal action, the director, officer,
employee or agent must not have had reasonable cause to believe
that his conduct was unlawful.
Under
NRS Section 78.751, advances for expenses may be made by agreement
if the director or officer affirms in writing that he has met the
standards for indemnification and will personally repay the
expenses if it is determined that such officer or director did not
meet those standards.
Our
Articles of Incorporation and By-Laws state that we shall indemnify
every (i) present or former director or officer, and (ii) any
person who served at our request as a director or officer of
another corporation, or other enterprise (each an
“Indemnitee”), to the fullest extent permissible under
the laws of the State of Nevada against all expenses, liability and
loss (including attorney’s fees, judgments, fines and amounts
paid or to be paid in settlement) reasonably incurred or suffered
by an Indemnitee in connection therewith.
In
addition to the rights to indemnification afforded to our officers
and directors under our Articles of Incorporation and By-Laws, we
intend to enter into Indemnification Agreements with each of our
officers and directors pursuant to which we will be required to
indemnify, and to advance expenses on behalf of, such persons to
the fullest extent permitted by applicable law and our governing
documents. We believe that entering into these agreements helps us
to attract and retain highly competent and qualified persons to
serve the Company.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or persons controlling
us 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.
Item 15. Recent Sales of Unregistered Securities
Securities issues in the September 2017, November 2017, December
2017 and January 2018 Offerings
The
information regarding our notes and warrants issued in our
September 2017, November 2017. December 2017 and January 2018
Offerings, set forth above under “Description of Capital
Stock-Warrants” and “Description of Capital
Stock-Notes” is incorporated herein by
reference.
II-1
Shares Issued in Connection with the Acquisition
On
September 19, 2017, pursuant to the terms of the Acquisition
Agreement, all of the shares of stock of Sincerity Australia Pty
Ltd. were exchanged for 45,211,047 restricted shares of our Common
Stock. The issuance of the shares to Sincerity Australia Pty Ltd.
In the Acquisition 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.
Shares Issued after the Acquisition
In
December 2017 we issued 1,000,000 shares of our restricted common
stock to Chengdu Holdings Pty Ltd., as Trustee for the Avoca Trust,
a trust beneficially owned by the family of Nils Ollquist, as a
bonus under Mr. Ollquist’s employment arrangement with
us.
On
February 5, 2018 we issued 75,000 shares of our restricted common
stock to pure Boba Family Trust, a trust beneficially owned by Fan
Yang at a price of $1.33333 per share or an aggregate of
$100,000.
In
December 2017 we issued 150,000 shares of our restricted common
stock to a consultant under an Investor Relations
Agreement.
All of
the foregoing issuances were made in reliance on Section 4(a)(2) of
the Securities Act of 1933, as amended.
Sales of Unregistered Securities of Sincerity Australia Pty
Ltd.
No
unregistered securities were issued by Sincerity Australia Pty Ltd.
within the past three years.
Item 16. Exhibits and Financial Statement
Schedules
(a) See
the Exhibit Index on the page immediately following the signature
page for a list of exhibits filed as part of this registration
statement on Form S-1, which Exhibit Index is incorporated herein
by reference.
(b)
Financial Statement Schedules
Financial Statement
Schedules are omitted because the information is included in our
financial statements or notes to those financial
statements.
Item 16. Exhibits and Financial Statement
Schedules.
The
following exhibits are filed as part of this registration
statement.
In reviewing the agreements included (or incorporated by reference)
as exhibits to this registration statement, please remember that
they are included to provide you with information regarding their
terms and are not intended to provide any other factual or
disclosure information about us or the other parties to the
agreements. The agreements may contain representations
and warranties by each of the parties to the applicable
agreement. These representations and warranties have
been made solely for the benefit of the parties to the applicable
agreement and:
●
should not in all instances be treated as categorical statements of
fact, but rather as a way of allocating the risk to one of the
parties if those statements prove to be inaccurate;
●
have been qualified by disclosures that were made to the other
party in connection with the negotiation of the applicable
agreement, which disclosures are not necessarily reflected in the
agreement;
●
may apply standards of materiality in a way that is different from
what may be viewed as material to you or other investors;
and
●
were made only as of the date of the applicable agreement or such
other date or dates as may be specified in the agreement and are
subject to more recent developments.
II-2
Accordingly, these representations and warranties may not describe
the actual state of affairs as of the date they were made or at any
other time. Additional information about us may be found
elsewhere in this registration statement and our other public
filings, which are available without charge through the SEC’s
website at http://www.sec.gov.
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 Registrant’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 Registrant’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 Registrant’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 Registrant’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 Registrant’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 Registrant’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 Registrant’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 Registrant’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 Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 9, 2013)
|
II-3
|
|
Certificate
of Amendment of Articles of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant’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
Registrant’s Registration Statement on Form S-1 (File No.
333-177500) filed with the Securities and Exchange Commission on
October 25, 2011
|
|
|
|
|
|
5.1*
|
|
|
Legal
Opinion of CKR Law LLP
|
|
|
|
|
|
|
Form of
2017 Lock-Up and No Short Selling Agreement (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
September 25, 2017)
|
|
|
|
|
|
|
|
Form of
2017 Subscription Agreement between the Registrant and the
investors party thereto (incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 25,
2017)
|
|
|
|
|
|
|
|
Form of
2017 PPO Warrant for Common Stock of Registrant (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
September 25, 2017)
|
|
|
|
|
|
|
|
Form of
2017 12% Senior Secured Convertible Note of the Registrant
(incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 25,
2017)
|
|
|
|
|
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Form of
2017 Registration Rights Agreement (incorporated by reference to
Exhibit 10.5 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 25,
2017)
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Form of
2017 Security Agreement (incorporated by reference to Exhibit 10.6
to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 25,
2017)
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Unsecured
Loan Agreement dated March 31, 2017 between Zhang Yiwen (James
Zhang) and Sincerity Australia Pty. Ltd. (incorporated by reference
to Exhibit 10.7 to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 25,
2017)
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Sincerity
Australia Pty. Ltd. Credit Line Letter Agreement dated November 24,
2016 (incorporated by reference to Exhibit 10.8 to the
Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 25,
2017)
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Securities
Purchase Agreement dated November 9, 2017 (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
November 20, 2017)
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Form of
12% Convertible Promissory Note Dated November 9, 2017
(incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 20,
2017)
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Form of
Class A Warrant dated November 9, 2017 (incorporated by reference
to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on November
20, 2017)
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II-4
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Form of
Class B Warrant dated November 9, 2017 (incorporated by reference
to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on November
20, 2017)
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Securities
Purchase Agreement dated November 20, 2017 (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
December 27, 2017)
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12%
Convertible Promissory Note dated November 20, 2017 (incorporated
by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on December 27, 2017)
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Registration
Rights Agreement dated November 20, 2017 (incorporated by reference
to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on December
27, 2017)
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Amendment
No. 1 to Securities Purchase Agreement dated November 20, 2017
(incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 27,
2017)
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Securities
Purchase Agreement dated November 20, 2017 (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
January 18, 2018)
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12%
Convertible Promissory Note dated December 19, 2107(incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
January 18, 2018)
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Registration
Rights Agreement dated December 19, 2017 (incorporated by reference
to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on January
18, 2018)
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Registrant’s
2013 Equity Incentive Plan (incorporated by reference to Exhibit
10.15 to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 12,
2013)
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Letter
from Friedman LLP to the Securities and Exchange Commission
(incorporated by reference to Exhibit 16.1 to the
Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 5, 2017)
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21.1*
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Subsidiaries
of the Registrant
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23.1*
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Consent
of Independent Registered Public Accounting Firm
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23.3*
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Consent
of CKR Law LLP (included in Exhibit 5.1)
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Item 17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration
Statement:
(i) To
include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the
foregoing, any increase or any decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
end or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective Registration
Statement;
II-5
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
(2)
That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities to be
offered therein, and the offering of such securities at that time
shall be deemed to be an initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any
of the securities being registered which shall remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability under the Securities
Act to any purchaser: each prospectus filed pursuant to Rule 424(b)
as part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date
it is first used after effectiveness; provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such
document immediately prior to such date of first use.
(5)
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act, and will be governed by the final adjudication
of such issue.
(6) The
undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set
forth the results of the subscription offer, the transactions by
the underwriters during the subscription period, the amount of
unsubscribed securities to be purchased by the underwriters, and
the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from
those set forth on the cover page of the prospectus, a
post-effective amendment will be filed to set forth the terms of
such offering.
II-6
SIGNATURES
Pursuant to the
requirements of the Securities Act, the registrant has duly caused
this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Melbourne
(Australia) on February 21, 2018.
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SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
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Date
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By:
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/s/
Zhang Yiwen
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Zhang Yiwen |
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President and Chief Executive Officer |
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Pursuant to the
requirements of the Securities Act, this Registration Statement has
been signed below by the following persons in their capacities and
on the dates indicated.
Signature
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Title
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Date
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/s/
Zhang Yiwen
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President, Chief
Executor Officer and
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February
21, 2018
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Zhang
Yiwen
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Director (Principal
Executive Officer)
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/s/ Nils Ollquist
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Secretary, Chief
Financial Officer and
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February
21, 2018
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Nils
Ollquist
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Director (Principal
Financial and
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Principal
Accounting Officer)
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/s/ Zhang Leping
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Director
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February
21, 2018
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Zhang
Leping
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/s/
Fan Yang
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Director
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February
21, 2018
|
Fan
Yang
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II-7