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EX-32.2 - CERTIFICATION - Sincerity Applied Materials Holdings Corp.f10q0918ex32-2_sincerityapp.htm
EX-32.1 - CERTIFICATION - Sincerity Applied Materials Holdings Corp.f10q0918ex32-1_sincerityapp.htm
EX-31.2 - CERTIFICATION - Sincerity Applied Materials Holdings Corp.f10q0918ex31-2_sincerityapp.htm
EX-31.1 - CERTIFICATION - Sincerity Applied Materials Holdings Corp.f10q0918ex31-1_sincerityapp.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number: 000-55475

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   45-2859440
(State or other jurisdiction of incorporation)   (I.R.S. Employer Identification No.)
     

4 Avoca Street, South Yarra,

VIC, 3141, Australia

 

 

VIC 3141

(Address of principal executive offices)   (Zip Code)

 

+61-421-007-277

(Registrant’s telephone number, including area code)

 

N/A

 (Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company ☒
        (Do not check if a smaller Reporting company)   Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 12, 2018, there were 50,413,334 shares of the registrant’s common stock, $0.001 par value per share, issued and outstanding.

   

 

 

 

 

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

    PAGE
     
PART I - FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
     
Item 4. Controls and Procedures 22
     
PART II - OTHER INFORMATION 23
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults Upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 23
     
SIGNATURES 24

  

i

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

  

 

 

 

 

 

 

 

 

 

 

 

 

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.

CONSOLIDATED FINANCIAL STATEMENTS FOR

THE QUARTERLY PERIOD ENDED

SEPTEMBER 30, 2018 and 2017

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.

 

Consolidated Balance Sheets

As at September 30, 2018 and December 31, 2017

 

   Note  September 30,
2018
$
   December 31,
2017
$
 
            
Assets           
Cash and cash equivalents  4   200,009    63,649 
Other assets  5   47,538    73,258 
Accounts receivables  5   27,836    48,066 
Related party loan      33,644    - 
Total current assets      309,027    184,973 
              
Property, plant and equipment, net of accumulated depreciation and amortization  6   136,924    52,302 
Deferred tax asset  11   55,095    56,892 
Total non-current assets      192,019    109,194 
Total assets      501,046    294,167 
              
Liabilities and Stockholders’ Equity/(Deficit)             
              
Liabilities             
Accounts payables      81,836    176,046 
Accrued and other liabilities  7   77,384    216,947 
Long-term debt – current position  8   20,525    33,482 
Line of credit  9   188,930    118,667 
Related party loan      -    26,862 
Convertible notes  10   -    435,190 
Derivate liabilities  10   -    1,338,759 
Income tax liabilities  11   -    - 
Total current liabilities      368,675    2,345,953 
              
Long-term debt – non-current position  8   118,747    38,795 
Total non-current liabilities      

118,747

    38,795 
Total liabilities      487,422    2,384,748 
              
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: 50,413,334 and 49,483,334, respectively      50,413    49,483 
Additional paid in capital      3,442,920    2,183,850 
Adjustments to equity to reflect retroactive application of reverse acquisition of accounting      (53,511)   (53,511)
Accumulated losses      (3,488,098)   (4,262,212)
Foreign currency translation differences  12   61,900    (8,191)
Total stockholders’ deficit      13,624    (2,090,581)
Total liabilities and stockholders’ equity      501,046    294,167 

 

The accompanying notes are an integral part of these consolidated financial statements.

  

2

 

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.

 

Consolidated Statement of Operations

For the three months and the nine months ended September 30, 2018 and 2017

   

      Three months ended
September 30,
   Nine months ended
 September 30,
 
   Note  2018
$
   2017
$
   2018
$
   2017
$
 
Revenue                   
Sales      442,431    1,149,408    1,177,032    2,023,145 
Cost of sales      (416,910)   (1,019,916)   (1,104,072)   (1,464,995)
Gross profit      25,521    129,492    72,960    558,150 
                        
Operating expenses                       
Depreciation and amortization      4,630    5,978    17,403    33,966 
Selling, general and administrative expenses      23,821    20,736    91,826    40,276 
Employee expenses      (10,267)   -    14,430    - 
Professional service fees      69,718    8,814    242,941    171,337 
Bad debt expenses      -    -    -    11,014 
Chattel Mortgage charges      661    -    661    - 
Repairs and maintenance      -    -    31    90 
Total operating expenses      88,563    35,528    367,292    256,683 
                        
Income / (Loss) from operations      (63,042)   93,964    (294,332)   301,467 
                        
Other income/(expenses)                       
Other income      19,326    5,409    30,455    27,558 
Interest expense      (2,772)   (3,707)   (236,523)   (18,009)
Other Finance Gain      -    -    614,679    - 
Discount on Convertible note      -    -    320,527    - 
Loss on derivative financial instrument      -    -    (23,469)   - 
Fair value adjustment of Warrant liabilities      -    -    409,173    - 
Foreign currency transaction loss      (20,337)   (5,002)   (46,994)   (51,650)
Total other income/ (expenses)      (3,783)   (3,300)   1,067,848    (42,101)
Income/(Loss) from continuing operations before income tax expenses      (66,825)   90,664    773,516    259,366 
                        
Income tax benefit/(expense)  11   8,414    (70,904)   598    (42,219)
                        
Net income/(loss) after income tax expense for the period      (58,411)   19,760    774,114    217,147 
                        
Other comprehensive income /(loss)                       
Exchange differences arising on translation of foreign operations      33,718    (1,528)   70,091    (13,812)
Other comprehensive income/(loss)      33,718    (1,528)   70,091    (13,812)
                        
Total comprehensive income for the period      (24,693)   18,232    844,205    203,335 
                        
Net (loss)/gain per share                       
Basic and diluted      -    -    0.02    - 
Weighted average number of common stock outstanding                       
Basic and diluted      50,413,334    45,768,284    49,961,411    45,398,821 

 

The accompanying notes are an integral part of these consolidated financial statements

  

3

 

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.

 

Consolidated Statement of Cash Flows

For the nine months ended September 30, 2018 and 2017

  

   Nine months ended
 September 30,
 
   2018   2017 
   $   $ 
Cash flows from operating activities:        
Net income   774,114    217,147 
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:          
Depreciation   17,403    28,419 
Amortization of intangible assets   -    5,547 
FBT employee contribution   (15,586)   (25,978)
Gain on disposal of fixed assets   (14,314)   (1,580)
Bad debt expenses   -    11,014 
Interest accrued on shareholder loan   59,438    - 
Derivate liability   (1,356,424)   - 
Net difference on foreign exchange   44,599    51,651 
Convertible notes settlement   (57,025)   - 
Other Finance and interest cost   149,493    - 
Other Selling, general and administrative Adj   5,372    - 
Net changes in operating assets and liabilities          
(Increase)/Decrease in trade and other receivables   20,230    (1,239,348)
(Increase)/Decrease in other assets   25,720    (41,916)
Increase/(Decrease) in trade and other payables   (110,405)   888,311 
Increase/(Decrease) in other liabilities   (123,368)   - 
(Increase)/Decrease in deferred tax asset   1,797    - 
Increase in deferred tax liability   -    26,324 
Increase in tax provision   -    2,093 
Net cash used in operating activities   (578,956)   (78,316)
Cash flows from investing activities          
Payments for property, plant and equipment   -    - 
Net cash used in investing activities   -    - 
Cash flows from financing activities          
Proceeds from Convertible notes   83,500    - 
Proceeds from issue of common stock   1,200,000    3,122 
Settlement of Convertible notes   (304,000)   - 
Other Finance cost and interest paid   (149,493)   - 
Proceeds from borrowings   -    87,398 
Repayment of borrowings   (9,737)   - 
Repayment of advances from related entities   (104,358)   - 
Advances from related entities   -    89,302 
Payment of finance lease liabilities   (27,719)   (8,141)

Net cash provided by financing activities

   688,193    171,681 
Net increase in cash and cash equivalents   109,237    93,365 
Effect of exchange rate changes on cash and cash equivalents   27,123    (71,445)
Adjustment to equity to reflect retroactive application of reverse acquisition accounting   -    (17,726)
Cash and cash equivalents at the beginning of period   63,649    32,979 
Cash and cash equivalents at the end of period  $200,009   $37,173 

 

The accompanying notes are an integral part of these consolidated financial statements

  

4

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

1.1Nature 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.

 

1.2Basis 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.

 

1.3Going 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 30,2018, the company had a current asset deficiency of $59,648 and net asset surplus of $13,624 (December 31, 2017 current asset deficiency of $2,160,980 and net asset deficiency $2,090,581). The Company reported an after tax profit of $774,114 for the nine months ended September 30,2018 (September 30, 2017 after tax income: $217,147).

 

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. In forming this opinion, the Group has considered the following factors:

 

(i)The company has the ability to raise fund through private placements and has successfully raised $1 million in this quarter;

 

(ii)The company has paid down its convertible notes reducing its financing costs which would improve its financial performance;

 

(iii)The company is expected to increase its revenue by launching new products line in the next quarter; and

 

(iv)The company incurred significant non-recurring professional fees relating to the reverse acquisition in the 6 months of 2018.

 

If the Company is unable to continue as a going concern it may be required to realize 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.

  

5

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.4Use 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.

 

1.5Foreign Currency Translation

 

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, 2018. Accumulated net translation adjustments have been reported separately in other comprehensive loss in the financial statements. Foreign currency translation adjustments resulted in a gain of $70,091 for the nine months ended September 30, 2018; 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 $46,994 for the nine months ended September 30, 2018, and is included in the accompanying statement of income for the period.

 

1.6Cash and Cash Equivalents and Concentration of Credit Risk

 

The Company considers all highly liquid short term investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short term nature of these instruments.

 

The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are held in several Australian bank accounts. The Company regularly assesses the level of credit risk we are exposed to and whether there are better ways of managing credit risk. The Company invests its cash and cash equivalents with reputable financial institutions. The Company has not incurred any losses related to these deposits.

 

1.7Accounts Receivable

 

The Company carries its accounts receivable at cost less an allowance for doubtful accounts. The Company evaluates its accounts receivable on a regular basis and establishes an allowance for doubtful accounts, when deemed necessary, based on a history of past write- offs and collections and current credit conditions. A receivable is considered past-due based either on contractual terms or payment history. Accounts are written off as uncollectible after collection efforts have failed. In addition, The Company does not generally charge interest on past-due accounts or require collateral. It is at least reasonably possible that changes may occur in the near term that would affect management’s estimate of the allowance for doubtful accounts. At March 31, 2018, management determined that no allowance for doubtful accounts was required.

 

1.8Property and Equipment

 

Property and equipment are recorded at cost. Costs of renewal and improvements that substantially extend the useful lives of assets are capitalized. Maintenance and repair costs are expensed when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally five years.

 

Derecognition

 

An item of plant and equipment is derecognized upon disposal or when no further economic benefits are expected from its use or disposal.

  

6

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.9Payables

 

Payables are carried at amortized cost and, due to their short-term nature, they are not discounted. They represent liabilities for goods and services provided to the Company prior to the end of the financial period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition.

 

1.10Provisions

 

Provisions are recognized when the Company has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period.

 

1.11Leases

 

Leases of fixed assets, where substantially all the risks and benefits incidental to the ownership of the asset – but not the legal ownership – are transferred to entities in the consolidated group, are classified as finance leases.

 

Finance leases are capitalized by recognizing an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

 

Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term.

 

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognized as expenses on a straight-line basis over the lease term.

 

1.12Loans and Borrowings

 

All loans and borrowings are initially recognized at cost, being the fair value of the consideration received net of issue costs associated with the borrowing.

 

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

  

1.13Revenue 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.

 

Interest revenue is recognized using the effective interest method, which for floating rate financial assets is the rate inherent in the instrument.

 

All revenue is stated net of the amount of goods and services tax.

  

7

 

   

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.14Income Tax

 

We account for income taxes using the asset and liability method, under which the current income tax expense or benefit is the amount of income tax expected to be payable or refundable in the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled.

 

We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of our deferred tax assets will not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

 

We account for the uncertainty in income tax components based on tax positions taken or expected to be taken in a tax return. To recognize a benefit, a tax position must be more likely than not to be sustained upon examination by taxing authorities. We do not recognize tax benefits that have a less than 50 percent likelihood of being sustained. Our policy is to recognize interest and tax penalties related to unrecognized tax benefits in income tax expense; no interest or tax penalties on uncertain tax benefits have been recorded through September 30, 2018.

 

1.15Goods and Services Tax (GST)

 

Revenues, expenses and assets are recognized net of the amount of GST, except where the amount of GST incurred 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 with other receivables or payables in the statement of financial position.

 

Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities, which are recoverable from or payable to the ATO, are presented as operating cash flows included in receipts from customers or payments to suppliers.

 

1.16Impairment 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. If 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 three months ended September 30, 2018, no impairment losses were recognized for long-lived assets.

  

8

 

 

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.17Stock-Based Compensation

 

The Company recognizes all employee share-based compensation as a cost in the consolidated financial statements. Equity-classified awards principally related to stock options, restricted stock units (“RSUs”) and performance stock units (“PSU”), are measured at the grant date fair value of the award. The Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of restricted stock awards is determined using the closing price of the Company’s common stock on the grant date. For service based vesting grants, expense is recognized over the requisite service period based on the number of options or shares expected to ultimately vest. For performance based vesting grants, expense is recognized over the requisite period until the performance obligation is met, assuming that it is probable. No expense is recognized for performance-based grants until it is probable the vesting criteria will be satisfied. Forfeitures are estimated at the date of grant and revised when actual or expected forfeiture activity differs materially from original estimates.

 

Stock-based payments to non-employees are re-measured at each reporting date and recognized as services are rendered, generally on a straight-line basis. The Company believes that the fair values of these awards are more reliably measurable than the fair values of the services rendered.

 

1.18Earnings (Loss) per Common Share

 

Basic earnings (loss) per common share is computed by dividing income or losses available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed similar to basic net income or losses per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and of the additional common shares were dilutive. Diluted earnings (loss) per common share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and the if-converted method for the outstanding convertible preferred shares. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under if –converted method, convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).

  

1.19Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) is presented net of applicable income taxes in the accompanying consolidated statements of stockholders’ equity and comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of stockholders’ equity instead of net income (loss).

  

9

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.20Recently Issued Accounting Standards

 

In February 2018, FASB issued Accounting Standards Update 2018-01; Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 which clarifies the application of the new leases guidance to land easements and eases adoption efforts for some land easements. This guidance in ASU 2018-01 is effective for annual periods ending after December 15, 2016, including interim period within those fiscal years and interim periods within annual periods beginning after December 15, 2016. An entity that early adopted Topic 842 should apply the amendments in this Update upon issuance. We do not expect that the adoption will have a material impact on our consolidated financial statements.

 

In February 2018, FASB issued Accounting Standards Update 2018-02; Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in the ASU addresses the accounting issue pertaining to the deferred tax amounts that are “stranded” in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the Act). We do not expect that the adoption will have a material impact on our consolidated financial statements. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We do not expect that the adoption will have a material impact on our consolidated financial statements.

 

In February 2018, FASB issued Accounting Standards Update 2018-03; Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The technical corrections and improvements intended to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities in ASU 2016-01. This includes equity securities without a readily determinable fair value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in foreign currency and transition guidance for equity securities without a readily determinable fair value. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017. Early application is permitted in any interim period after issuance of the amendments as long as ASU 2016-01 is also adopted. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.

 

In July 2018, FASB issued Update 2018-10—Codification Improvements to Topic 842, Leases. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this Update, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842.

 

In July 2018, FASB issued Update 2018-11—Leases (Topic 842): Targeted Improvements. The amendments in this Update related to separating components of a contract affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. All entities, including early adopters, that elect the practical expedient related to separating components of a contract in this Update must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected.

 

In August 2018, FASB issued Update 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We do not expect that the adoption will have a material impact on our consolidated financial statements.

  

10

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

1.21Reverse 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 Sincerity Australia Pty Ltd (“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.

  

2.Critical Accounting Estimates and Judgements

 

The Directors evaluate estimates and judgements incorporated into the financial statements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Company.

 

Key Estimates

 

(i)Useful lives

 

The Company determines the estimated useful lives and related depreciation and amortization charges for its property and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortization charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down.

 

(ii)Income tax

 

The Company is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

 

(iii)Fair value measure of shares issued, convertible notes payable and common stock warrants

 

The calculation of the fair value of shares issued requires significant estimate to be made in regards to several variables. The estimations made are subject to variability that may alter the overall fair value determined.

 

Convertible notes payable are analyzed at issue date to determine balance sheet classification, issue discounts or premiums, and embedded or derivative features. Embedded or derivative features are evaluated in accordance with accounting guidance for derivative securities and, if the features give rise to separate accounting, we make an election to account for the notes at cost or at fair value. If fair value accounting is elected, on the issue date we record the difference between the issue price of the notes and their fair value as a gain or loss in the consolidated statement of operations. We re-measure the fair value at each reporting date and record again (upon a decrease in fair value) or loss (upon an increase in fair value) for the change in fair value. Fair value is determined using a black scholes valuation model with; inputs to the model include the market value of the underlying stock, a life equal to the contractual life of the notes, incremental borrowing rates that correspond to debt with similar credit worthiness, estimated volatility based on the historical prices of our trading securities, and we make assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of the notes. Following an analysis of their embedded and derivative features and a projection of the volatility of their effective interest rates under the cost method, we elected to utilize fair value accounting for the convertible notes payable we issued on during the three months ended 30 June 2018. Management believes the fair value method of accounting provides a more appropriate presentation of these liabilities than would be provided under the cost method.

  

11

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

In accordance with ASC 480 “Distinguishing Liabilities from Equity,” we record the fair value of warrants issued for the purchase of common stock as a liability since the warrants call for issuance of registered shares upon exercise, a condition that we may not be able to accommodate and which would then result in a net settlement of the warrants. Until the time the warrants are exercised or expire, the fair value is assessed at each reporting date utilizing a black scholes valuation model and any change in value is recorded as a gain or loss component of other income (expense) in our consolidated statement of operations. Inputs to the valuation model are of the same nature as those used for our convertible notes payable.

 

Key Judgements

 

(i)Provision for impairment of receivables

 

The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtors’ financial position.

 

(ii)Impairment

 

The Company assessed that no indicators of impairment existed at the reporting date and as such no impairment testing was performed.

 

3.Segment Information

 

The consolidated entity operates predominantly in one industry and one geographical segment, those being sales of technical advanced plastics materials in Australia, respectively.

  

4.Cash and Cash Equivalents

 

Cash at the end of the financial periods as shown in the statement of cash flows is reconciled to items in the balance sheets as follows:

 

     September 30,
2018
   December 31,
2017
 
           
  Cash at bank  $198,009   $61,587 
  Petty Cash   2,000    2,062 
     $200,009   $63,649 

  

5.Account Receivables and Other Assets

  

     September 30,
2018
   December 31,
2017
 
  Current        
  Account Receivables  $27,836   $48,066 
  Deferred Expenditure   47,538    73,258 
     $75,374   $121,324 

  

Deferred expenditure represented deposits paid to supplier for order processing.

  

6.Property, Plant and Equipment

 

     September 30,
2018
   December 31,
2017
   Estimated Useful Lives
  Vehicles  $131,242   $115,698   5 years
  Office equipment and furniture and fixtures   25,565    25,565   5 years
      156,807    141,263    
  Less: accumulated depreciation   19,883    88,961    
  Total, net of accumulated depreciation  $136,924   $52,302    

 

12

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

7.Accrued and Other Liabilities

  

     September 30,
2018
   December 31,
2017
 
  Current        
  Accrued expenses  $56,757   $72,952 
  Wages Payable   -    14,298 
  Superannuation Liability   -    5,932 
  PAYG Withholding Tax   -    19,546 
  Annual Leave Liability   -    5,259 
  Deferred Income   20,627    98,960 
     $77,384   $216,947 

 

Deferred Income represented deposits received from customers for order processing.

  

8.Long-term debt

 

The Company entered a chattel mortgage on August 22, 2018 and early terminated the previous one. The chattel mortgage was secured by a motor vehicle requiring monthly payments approximating $2,719 (and a final payment approximating $46,769) that includes interest approximating 6.2%, and maturing on August 22, 2022. The components of the balance due under the chattel mortgage at September 30, 2018 are as follows:

 

     September 30,
2018
   December 31,
2017
 
           
  Chattel mortgage  $139,272   $72,277 
  Less: current portion   (20,525)   (33,482)
      118,747   $38,795 

 

Maturities of long-term debt at September 30, 2018 for each of the next five years and in the aggregate, are as follows:

 

     September 30,
2018
   December 31,
2017
 
           
  Next 12 months  $20,525   $33,482 
  2 years   22,519    38,795 
  3 years   24,708    - 
  4 years   71,520    - 
     $139,272   $72,277 

 

9.Line of credit

 

     September 30,
2018
   December 31,
2017
 
           
  Business Loan  $108,363   $117,211 
  Business Credit Card   567    1,456 
  Short-term borrowing   80,000    - 
     $188,930   $118,667 

 

The Company has a total $950,000 (AUD) bank credit line (approximately $686,297 (USD) at September 30, 2018) 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 (7.10% per annum at September 30, 2018) 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, 2018, $108,363 (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.

  

13

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

10.Convertible notes payable and Common stock warrant liability

 

Fair Value Measurements: We measure the fair value of our financial and non-financial assets and liabilities at each reporting date. Fair value is defined as the exchange price at which an asset or liability would be transferred in the principal or most advantageous market in an orderly transaction between market participants as of a measurement date. Accounting guidance provides an established hierarchy to be used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs; observable inputs are required to be used when available. Observable inputs are those used by market participants to value an asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are those that reflect our assumptions about factors that market participants would use to value an asset or liability. Fair value measurements are classified and disclosed in one of the following three categories:

 

Level 1 – Quoted market prices for identical assets or liabilities in active markets at the measurement date;

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active or non-active markets, or other inputs that can be corroborated by observable market data for substantially the full term of an asset or liability; and,

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of an asset or liability, including management’s best estimate of the factors that market participants would use in pricing an asset or liability at the measurement date.

 

We carry our convertible notes payable and common stock warrant liability at fair value. We carry our other financial instruments at amortized cost; these items include cash, accounts payable, and accrued expenses. The carrying amounts of our cash and cash equivalents, accounts payable, and accrued expenses are considered to be reasonable estimates of their respective fair values due to their short-term nature and, therefore, fair value information is not provided in the following table.

 

Utilizing the lowest level inputs available under the measurement hierarchy, the fair values of our measured financial instruments comprise the following (we had no Level 1 and 2 financial instruments):

 

Liabilities:

 

Convertible notes payable and Common stock warrant liability

 

Level 3

 

  Convertible Notes Payable -
     
  Warrant to purchase common stock -

 

Our Level 3 financial liabilities consist of convertible notes payable (the “Notes”) and warrants for the purchase of common stock, all of which were issued as detailed below:

 

(i)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 June 2018, the company has cancelled the Note and Warrant due to the fact that

 

(a)the company did not received the full amount of $150,000 from the noteholder and had only received $80,000;

 

(b)the $80,000 that the company received was not remitted directly by the noteholder instead it came via a third party; and

 

(c)instead of the full amount being received, the balance of $70,000 was used to pay for consultant services through the third party that the company did not receive any invoice for.

 

(ii)On November 9, 2017 we entered into a Securities Purchase Agreement with two persons, pursuant to which we 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). This convertible note was paid off on April 26, 2018; and

  

14

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

(iii)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. This convertible note was paid off on June 12, 2018; and

 

(iv)On January 9,2018, we entered into a Securities Purchase Agreement with one person pursuant to which we sold a convertible promissory note in the principal amount of $83,500 due on January 9, 2019. This convertible note was paid off on June 12, 2018.

 

11.Income Tax Expense

 

(a)The components of tax (expense)/income comprise:

 

     September 30,
2018
   December 31,
2017
 
  Current tax        
  - Australia  $54,306   $55,387 
  - US   -    - 
  - HK   789    454 
  Total  $55,095   $55,841 

 

(b)The prima facie tax on profit from ordinary activities before income tax is reconciled to income tax as follows:

 

Profit/(loss) from continuing operations before income tax expense:

 

  - Australia  $(207,626)  $(204,912)
  - US   982,359    (3,839,199)
  - HK   (1,217)   (1,652)
  Total   773,516   ($4,045,763)
             
  Income tax expense/(credit) at statutory rate:          
  - Australia  $(57,097)  $(56,351)
  - US   206,295    (806,232)
  - HK   (335)   (454)
  Total   148,863   $(863,037)
             
  Tax effect amounts which are not deductible/(taxable) in calculating taxable income:          
  Valuation allowance   -    806,232 
  Other adjustments   (203,958)   964 
  Consolidated income tax expense/(income)  $(55,095)  $(55,841)

  

On December 22, 2017, new tax reform legislation in the U.S., known as the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. At September 30, 2018, the Company has not yet completed its accounting assessment for the tax effects of the enactment of the Act; however, as described below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances.

 

As a result of the lower enacted corporate tax rate, the Company has remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded of our tax balance was $206,295 that is fully offset by accumulated losses from earlier periods.

 

Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has provisionally determined that there is no deferred tax benefit or expense with respect to the remeasurement of certain deferred tax assets and liabilities due to the full valuation allowance against net deferred tax assets. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Additional analysis of the law and the impact to the Company will be performed and any impact will be recorded in the respective quarter in 2018.

  

15

 

  

SINCERITY APPLIED MATERIALS HOLDINGS CORP.
Notes to Consolidated Statements

 

12.Other Comprehensive Earnings

 

     September 30,
2018
   December 31,
2017
 
  Foreign currency translation reserve  $61,900   $(8,191)

 

13.Capital and Leasing Commitments

 

There was no capital or leasing expenditure at September 30, 2018.

 

14.Related Party Transactions

 

(a)Subsidiary

 

Sincerity Australia Pty Ltd which is incorporated in Australia and Prana Hong Kong Limited which is incorporated in Hong Kong are wholly owned subsidiaries of Sincerity Applied Materials Holdings Corp. Prana Hong Kong Limited is under process of de-registration.

 

(b)Outstanding balances with related parties

 

The following balances are outstanding at reporting date in relation to transactions with related parties:

  

     September 30,
2018
   December 31,
2017
 
           
  Loan to Stockholder  $33,644    - 
  Loan from Stockholder   -   $12,564 

 

     Three months ended
September 30,
 
     2018   2017 
             
  Purchase from Shanghai Sincerity Co Ltd  $118,936   $24,788 

   

15.Contingent Liabilities

 

The Zhang Family Trust has lodged a claim against the company to be reimbursed for their shares that were transferred to various advisers for services relating to the reverse acquisition that they believed were not delivered to them as the majority shareholder of the company. The claim amount to $7,664,827 based on 5,748,635 shares transferred.

 

16.Events After the Reporting Period

 

There has not arisen in the interval between the end of the financial period and the date of these financial statements any other item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operation of the company, the results of those operations, or the state of affairs of the company, in future financial years.

  

16

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

The following management’s discussion and analysis should be read in conjunction with the historical financial statements and the related notes thereto contained in this report. The management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. The Company’s actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

 

The following discussion highlights the Company’s results of operations and the principal factors that have affected our financial condition, as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on the Company’s unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.

 

Company 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.  

 

On November 9, 2017, we entered into a Securities Purchase Agreement with two persons, pursuant to which we 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 with one person pursuant to which we sold a convertible promissory note in the principal amount of $83,500 due on December 19, 2018.

    

In April 2018, we reached an agreement in principle to repurchase all of the notes and warrants issued on November 9, 2017, together with the Waiver Warrants issued to the same persons, for an aggregate of $150,000 and 30,000 shares of our common stock.

 

In June 2018, we reached an agreement in principle to repurchase all of the notes and warrants issued on December 19, 2017 for an aggregate of $132,456.16. The payment was made in full and we have no further obligations and liabilities thereunder.

  

17

 

 

In June 2018, we reached an agreement in principle to repurchase all of the notes and warrants issued on January 9, 2018 for an aggregate of $178,458.90. The payment was made in full and we have no further obligations and liabilities thereunder.

  

In June 2018, we cancelled the Note and Warrant that was sold in the Offering on September 19, 2017 due to the fact that

 

  the Company did not receive the full amount of $150,000 from the noteholder and had only received $80,000;
     
  the $80,000 that the Company received was not remitted directly by the noteholder instead it came via a third party; and
     
  instead of the full amount being received, the balance of $70,000 was used to pay for consultant services through the third party that the Company did not receive any invoice for.

 

In August 2018, our Board of Directors adopted a resolution authorizing a reverse stock split of the outstanding common stock at a ratio of 1000:1 (the “Reverse Stock Split”). Stockholders holding 78.28% of the voting rights related to our outstanding common stock, have also approved the Reverse Stock Split by written consent. The Reverse Stock Split will take effect on November 13, 2018.

 

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.

 

SAPL’s business was commenced in 2009 by James Zhang, our Chairman, President and Chief Executive Officer and the son of the founder of (i) Changzhou Sincerity Plastics and Chemicals Technology Ltd. (“Sincerity China”), a well-established plastics and applied materials manufacturer with a 20-year operating history, based in Changzhou, China, and (ii) Shanghai Sincerity Co. Ltd., a Shanghai, China based company through which most of the products we purchase from Sincerity China are sourced and sold to us. 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 started to supply Visy Industries, with high technology, breathable plastic film for use in Visy Industries’ packaging supply contract with the other dominant player in Australia’s supermarket industry.

   

Presently all 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.

 

SAPL supplies Australian market with a well-diversified product range, while commodity type provides a strong foundation of business grow, the value adding innovations on each product will bring SAPL to the next level and expand for beyond Australia.

 

SAPL is expanding very fast but still in mid early stage of growing, in short term the proceeds generated out of the business is not sufficient to cover the expense of a full SEC reporting public company, also the fast organic growth business needs more working capital. Therefore, SINC initiated a private placement offering of 3million shares at USD1.5/share to fellow investors, which should be sufficient to cover business growth and following acquisitions. 

  

18

 

 

Results of Operations 

 

   Three months ended 
September 30,
   Nine months ended 
September 30,
 
   2018
$
   2017
$
   2018
$
   2017
$
 
Revenue                
Sales   442,431    1,149,408    1,177,032    2,023,145 
Cost of sales   (416,910)   (1,019,916)   (1,104,072)   (1,464,995)
Gross profit   25,521    129,492    72,960    558,150 
                     
Operating expenses                    
Depreciation and amortization   4,630    5,978    17,403    33,966 
Selling, general and administrative expenses   23,821    20,736    91,826    40,276 
Employee expenses   (10,267)   -    14,430    - 
Professional service fees   69,718    8,814    242,941    171,337 
Bad debt expenses   -    -    -    11,014 
Chattel Mortgage charges   661    -    661    - 
Repairs and maintenance   -    -    31    90 
Total operating expenses   88,563    35,528    367,292    256,683 
                     
Income / (Loss) from operations   (63,042)   93,964    (294,332)   301,467 
                     
Other income/(expenses)                    
Other income   19,326    5,409    30,455    27,558 
Interest expense   (2,772)   (3,707)   (236,523)   (18,009)
Other Finance Gain   -    -    614,679    - 
Discount on Convertible note   -    -    320,527    - 
Loss on derivative financial instrument   -    -    (23,469)   - 
Fair value adjustment of Warrant liabilities   -    -    409,173    - 
Foreign currency transaction loss   (20,337)   (5,002)   (46,994)   (51,650)
Total other income/ (expenses)   (3,783)   (3,300)   1,067,848    (42,101)
Income/(Loss) from continuing operations before income tax expenses   (66,825)   90,664    773,516    259,366 
                     
Income tax benefit/(expense)   8,414    (70,904)   598    (42,219)
                     
Net income/(loss) after income tax expense for the period   (58,411)   19,760    774,114    217,147 
                     
Other comprehensive income /(loss)                    
Exchange differences arising on translation of foreign operations   33,718    (1,528)   70,091    (13,812)
Other comprehensive income/(loss)   33,718    (1,528)   70,091    (13,812)
                     
Total comprehensive income for the period   (24,693)   18,232    844,205    203,335 

 

Revenues

 

Revenue was $1.177 million for the nine months ended September 30, 2018, compared to $2.023 million for the nine months ended June 30, 2017, a decrease of $846k. The decrease can be attributed to timing and quantity of orders by our customers and the type of products they purchase, which can vary in margin. Revenue was $442k for the three months ended September 30, 2018 compared to $1.149million for the three months ended September 30, 2017, a decrease of $707k due to lower volume of products sold.

  

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Selling, general and administrative expenses

 

Selling, general and administrative expenses was $92k for the nine months ended September 30, 2018, compared to $40k for the nine months ended September30, 2017. The increase was primarily due to increase in filing and listing fees paid as a public company and increase in advertising expenditures. Selling, general and administrative expenses for the three months ended September 30, 2018 of $24k compared to $21k for the three months ended September 30, 2017 which is comparable to the same 3 months period in 2017.

 

Employee expenses

 

Employee expenses was a credit of $10k for the nine months ended September 30, 2018, compared to an expense of $14k for the nine months ended September 30, 2017. The credit was due to overprovisioning of employee entitlements that is no longer required. This reversal was adjusted in the three months period ended September 30, 2018.

 

Professional service fees

 

Professional service fees were $243k for the nine months ended September30, 2018, compared to $171k for the nine months ended September 30, 2017. The increase was due to increase in accounting fees, payments to consultants and attorney relating to the fund raising and the recently completed reverse acquisition. In addition, the company is disputing invoices from previous consultants for invoices that the company believed to have been paid via stock based payment. As such, an amount of $203k has been de-recognized as liability in the previous 2nd quarter of 2018. Professional service fees for the three months ended September 30, 2018 was $70k compared an expense of $9k for the three months ended September 30, 2018 was due to payments of accounting fees, consultant fees and attorney incurred as a public company which were not previously required as a private entity.

 

Other Income and Expenses

 

Prior to the reverse acquisition that took place on September 19, 2017, other income and expense were relatively immaterial and primarily comprised of employee contribution to fringe benefits, interest income and freight income.

 

Following our issuance of convertible notes and warrants, the components of other income and expense also include interest expense on the notes and losses related to the changes in fair value of both the notes and warrants. This is due to the recording of the convertible notes at fair value upon issuance, which resulted in a non-recurring loss on issuance because their values exceeded the cash proceeds from issuance. We will remeasure the fair values of the notes and warrants at each future reporting date, and if those fair values change, will record a corresponding gain or loss. Accordingly, we expect other income and expense to fluctuate, and possibly fluctuate by a significant amount, in future periods by the gains or losses on changes in fair value until such time as the notes are either converted into common stock or repaid and the warrants are either exercised or expire. Also, we will accrue and record interest expense on the notes until they are either converted or repaid.

 

Other income was $1.068m for the nine months ended September,30, 2018, compared to other expense of $42k for the nine months ended September, 2017. The increase was due to the recognition of de-recognition of fair value of convertible notes and warrants as a result of early repurchase of convertible notes and warrants. Other expense was $3.8k for the three months ended September 30, 2018 compared to other expenses of $3.3k for the three months ended June 30, 2018, which is comparable to the same 3 months period in 2017.

  

Liquidity and Capital Resources 

 

As at September 30, 2018, we had a working capital deficit of $59,648 compared with a working capital deficit of $2,160,980 as at December 31, 2017. The improvement in working capital is primarily a result of funds received from private placements and early payment of convertible notes.

 

Our primary uses of cash have been for operations and payments for cancelation of convertible notes. The main sources of cash have been from issuance of common stock.

 

The Company believes that cash flow from operations will be sufficient to sustain its current level of operations for at least the next twelve months of operations.

  

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Critical Accounting Policies and Estimates

 

The Directors evaluate estimates and judgements incorporated into the financial statements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Company.

 

Key Estimates

 

(i)       Useful lives

 

The Company determines the estimated useful lives and related depreciation and amortization charges for its property and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortization charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down.

 

(ii)       Income tax

 

The Company is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

 

(iii)       Fair value measure of shares issued, convertible notes payable and common stock warrants

 

The calculation of the fair value of shares issued requires significant estimate to be made in regards to several variables. The estimations made are subject to variability that may alter the overall fair value determined.

 

Convertible notes payable are analyzed at issue date to determine balance sheet classification, issue discounts or premiums, and embedded or derivative features. Embedded or derivative features are evaluated in accordance with accounting guidance for derivative securities and, if the features give rise to separate accounting, we make an election to account for the notes at cost or at fair value. If fair value accounting is elected, on the issue date we record the difference between the issue price of the notes and their fair value as a gain or loss in the consolidated statement of operations. We re-measure the fair value at each reporting date and record again (upon a decrease in fair value) or loss (upon an increase in fair value) for the change in fair value. Fair value is determined using a black scholes valuation model with; inputs to the model include the market value of the underlying stock, a life equal to the contractual life of the notes, incremental borrowing rates that correspond to debt with similar credit worthiness, estimated volatility based on the historical prices of our trading securities, and we make assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of the notes. Following an analysis of their embedded and derivative features and a projection of the volatility of their effective interest rates under the cost method, we elected to utilize fair value accounting for the convertible notes payable we issued on during the three months ended 30 June 2018. Management believes the fair value method of accounting provides a more appropriate presentation of these liabilities than would be provided under the cost method.

 

In accordance with ASC 480 “Distinguishing Liabilities from Equity,” we record the fair value of warrants issued for the purchase of common stock as a liability since the warrants call for issuance of registered shares upon exercise, a condition that we may not be able to accommodate and which would then result in a net settlement of the warrants. Until the time the warrants are exercised or expire, the fair value is assessed at each reporting date utilizing a black scholes valuation model and any change in value is recorded as a gain or loss component of other income (expense) in our consolidated statement of operations. Inputs to the valuation model are of the same nature as those used for our convertible notes payable.

  

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Key Judgements

 

(i)       Provision for impairment of receivables

 

The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtors’ financial position.

 

(ii)       Impairment

 

The Company assessed that no indicators of impairment existed at the reporting date and as such no impairment testing was performed.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of September 30, 2018 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. At the end of the quarter ended September 30, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) and Rule 15d-15(e) under the 1934 Act. Based on this evaluation, management concluded that as of September 30, 2018 our disclosure controls and procedures were not effective due to material weaknesses resulting from our internal controls  and procedures including (1) lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) lack of an audit committee financial expert (as such term is defined in Item 407(d)(5)(ii) of Regulation S-K) on our board of directors; (3) inadequate segregation of duties consistent with control objectives; and (4) ineffective controls over period end financial disclosure and reporting processes.

 

Changes in Internal Controls

 

During the quarter ended September 30, 2018, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

  

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, we are not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Furthermore, as of the date of this Quarterly Report, our management is not aware of any proceedings to which any of our directors, officers, or affiliates, or any associate of any such director, officer, affiliate, or security holder is a party adverse to our company or has a material interest adverse to us.

 

Item 1A. Risk Factors.

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

There are no unregistered sales of equity securities during the period covered by this report that were not previously reported in a Current Report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable. 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

  

Exhibit Number   Exhibit Description
31.1   Certification of Principal Executive Officer Pursuant to Rule 13a-14
31.2   Certification of Principal Financial Officer Pursuant to Rule 13a-14
32.1*   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2*   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

* Furnished herewith.

   

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SINCERITY APPLIED MATERIALS HOLDINGS CORP.
   
November 12, 2018 By: /s/ Yiwen Zhang
   

Yiwen Zhang

Chief Executive Officer

(Principal Executive Officer)

   
November 12, 2018 By: /s/ Chris Lim
   

Chris Lim

Chief Financial Officer

(Principal Financial and Accounting Officer)

  

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