UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
One)
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☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
fiscal year ended: December 31, 2017
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period
from ________________________ to _________________________
Commission
file number: 333-177500
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SINCERITY APPLIED MATERIALS HOLDINGS CORP.
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(Exact
name of registrant as specified in its charter)
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Nevada
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45-2859440
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(State
or other jurisdiction of incorporation or
organization)
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(IRS
Employer Identification No.)
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4 Avoca Street
South Yarra, Victoria, Australia 3141
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(Address of
principal executive offices)
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+61-4-2100-7277
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the
Act:
None
Securities
registered pursuant to Section 12(g) of the
Act:
Common Stock, par
value $0.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 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 Website, 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form
10-K. ☐
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 the
“large accelerated filer,” “accelerated
filer,” “non-accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
Accelerated Filer ☐
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Accelerated
Filer ☐
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Non-Accelerated
Filer ☐
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Smaller
reporting company ☒
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Emerging growth company ☒
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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 or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act.
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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
June 30, 2017, there were 3,122,287 shares of the
registrant's common stock, par value $0.001 per share, issued and
outstanding. Of these, 733,738 shares were held by
non-affiliates of the registrant. The market value of
securities held by non-affiliates on June 30, 2017 was $880,486
based upon a closing price of $1.20 per share on June 30,
2017.
As of
April 16, 2018, there were 49,633,334 shares of the
registrant’s common stock, $0.001 par value per share, issued
and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Not
Applicable.
TABLE OF CONTENTS
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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1
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PART
I
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2
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ITEM
1.
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BUSINESS
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2
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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24
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ITEM
2.
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PROPERTIES
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24
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ITEM
3.
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LEGAL
PROCEEDINGS
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24
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ITEM
4.
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MINE
SAFETY DISCLOSURES
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25
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PART
II
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25
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER
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MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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25
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ITEM
6.
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SELECTED
FINANCIAL DATA
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28
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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28
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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41
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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35
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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35
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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35
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ITEM
9B.
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OTHER
INFORMATION
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37
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PART
III
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37
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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37
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ITEM
11.
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EXECUTIVE
COMPENSATION
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41
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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AND
RELATED STOCKHOLDER MATTERS
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42
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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43
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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45
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PART
IV
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46
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ITEM
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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46
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SIGNATURES
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50
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This
Current Report contains forward-looking statements, including,
without limitation, in the sections captioned “Description of
Business,” “Risk Factors,” and
“Management’s Discussion and Analysis of Financial
Condition and Plan of Operations,” and
elsewhere. Any and all statements contained in this
Report that are not statements of historical fact may be deemed
forward-looking statements. Terms such as “may,”
“might,” “would,” “should,”
“could,” “project,” “estimate,”
“pro-forma,” “predict,”
“potential,” “strategy,”
“anticipate,” “attempt,”
“develop,” “plan,” “help,”
“believe,” “continue,”
“intend,” “expect,” “future,”
and terms of similar import (including the negative of any of the
foregoing) may be intended to identify forward-looking
statements. However, not all forward-looking statements
may contain one or more of these identifying
terms. Forward-looking statements in this Report may
include, without limitation, statements regarding (i) the plans and
objectives of management for future operations, (ii) a projection
of income (including income/loss), earnings (including
earnings/loss) per share, capital expenditures, dividends, capital
structure or other financial items, (iii) our future financial
performance, including any such statement contained in a discussion
and analysis of financial condition by management or in the results
of operations included pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”), and
(iv) the assumptions underlying or relating to any statement
described in points (i), (ii) or (iii) above.
The
forward-looking statements are not meant to predict or guarantee
actual results, performance, events or circumstances and may not be
realized because they are based upon our current projections,
plans, objectives, beliefs, expectations, estimates and assumptions
and are subject to a number of risks and uncertainties and other
influences, many of which we have no control over. Actual results
and the timing of certain events and circumstances may differ
materially from those described by the forward-looking statements
as a result of these risks and uncertainties. Factors that may
influence or contribute to the inaccuracy of the forward-looking
statements or cause actual results to differ materially from
expected or desired results may include, without limitation, our
inability to obtain adequate financing, existing or increased
competition, results of arbitration and litigation, stock
volatility and illiquidity, and our failure to implement our
business plans or strategies. A description of some of
the risks and uncertainties that could cause our actual results to
differ materially from those described by the forward-looking
statements in this Report appears in the section captioned
“Risk Factors” and elsewhere in this
Report.
Readers
are cautioned not to place undue reliance on forward-looking
statements because of the risks and uncertainties related to them
and to the risk factors. We disclaim any obligation to
update the forward-looking statements contained in this Report to
reflect any new information or future events or circumstances or
otherwise.
Readers
should read this Report in conjunction with the discussion under
the caption “Risk Factors,” our financial statements
and the related notes thereto in this Report, and other documents
which we may file from time to time with the SEC.
1
Unless
the context indicates otherwise, all references in this Annual
Report to the “Company,” “we,”
“us” and “our” refer to Sincerity Applied
Materials Holdings Corp. and its wholly owned subsidiaries,
Sincerity Australia Pty Ltd. and Prana Hong Kong Holdings
Limited
DESCRIPTION OF OUR BUSINESS
Organizational History
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.
2
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
“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.
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 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
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 September 19, 2017, November 9,
2017, December 19, 2017 and January 9, 2018 offerings are described
in greater detail below under the heading “The September
2017, November 2017, December 2017 and January 2018
Offerings.”
3
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 4 Avoca Street, Melbourne,
Victoria, Australia 3141 and our telephone number is
+61-4-2100-7277. Our filings with the Securities Exchange
Commission, or SEC, are available free of charge through the SEC
website.
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.
4
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.
Directors and Officers
Our
board of directors currently consists of three members, Zhang Yiwen
(Chairman), Zhang Leping and Fan Yang. Zhang Yiwen and Zhang Leping
were each appointed upon the closing of the September 19, 2017
Acquisition. Fan Yang was appointed on February 5, 2018. Nils
Ollquist resigned as a director on March 23, 2018 due to
differences with other members of management on how to grow the
Company and move it forward.
Zhang
Yiwen serves as our President and Chief Executive Officer, Chris
Lim as our Chief Financial Officer, Eter Huang as our Treasurer and
Simon Rees as Chief Operating Officer. Zhang Yiwen is our principal
executive officer and Chris Lim is our principal financial and
accounting officer for SEC reporting purposes. Praba Ganeshan was
terminated as our Treasurer on January 1, 2018 and Nils Ollquist
was terminated as our Chief Financial Officer and Secretary on
March 2, 2018. We terminated Mr. Ganeshan as an executive officer
due to our dissatisfaction with his performance. We terminated Mr.
Ollquist as an executive officer due to our dissatisfaction with
his performance. 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.
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.
5
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.
The
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.
6
Notwithstanding
the foregoing, in the event the Company or a subsidiary of the
Company shall complete a Non-Qualified Financing at a
Post-Acquisition Valuation of less than $15,000,000 within one year
of the effective date of a Warrant and prior to a Qualified
Financing, the Warrants shall become immediately exercisable at a
VWAP based price per share under the same terms and conditions set
forth in the paragraph immediately above, including those relating
to a proportional reduction to the VWAP % and an increase in the
number of shares issuable upon exercise of such Warrants. Any
subsequent Non-Qualified Financings or Qualified Financings taking
place while the Warrants remain outstanding shall be treated in the
same manner as set forth in the last sentence of the paragraph
immediately above. Certain issuances of securities defined in the
Warrant as Exempt Issuances do not trigger any of the foregoing
anti-dilution adjustments.
If the
Company, at any time while the Warrants are outstanding and the
exercise price has been established, sells or grants any option to
purchase, or sells or grants any right to reprice, or otherwise
disposes of or issues (or announces any offer, sale, grant or any
option to purchase or other disposition) any Common Stock or Common
Stock Equivalents, at an effective price per share less than the
exercise price then in effect (such lower price, the “New
Issuance Price” and such issuances collectively, a
“Dilutive Issuance” (it being understood and agreed
that if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights
per share which are issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price
per share that is less than the exercise price, such issuance shall
be deemed to have occurred for less than the exercise price on such
date of the Dilutive Issuance at such effective price) then
simultaneously with consummation of each Dilutive Issuance the
exercise price shall be reduced to an amount equal to the New
Issuance Price (the “Adjusted Price”); (subject to
adjustment for stock splits, reverse splits and similar capital
adjustments). Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustment shall be made, paid or issued under this
paragraph in the case of an Exempt Issuance.
An
aggregate of $150,000 in face (principal) amount of 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.
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.
7
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 September 2017 Offering to
serve as the collateral agent thereunder.
While
any Notes remain in effect and until all outstanding principal and
interest and all fees and all other expenses or amounts payable
under any such Notes have been paid in full, unless the holders of
Notes representing more than 50% of the aggregate principal amount
of the Notes then outstanding otherwise consent in writing, the
Company will not (i) incur, create, assume, guaranty or permit to
exist any indebtedness that ranks senior in priority to, or
pari passu
with, the
obligations under the Notes (other than trade payables and accrued
liabilities incurred in the ordinary course of business consistent
with past practices); (ii) create, incur, assume or permit to exist
any lien on any Collateral (as such term is defined in the Security
Agreement) now owned or hereafter acquired and owned by it or on
any income or revenues or rights in respect thereof, except
existing liens, subject to customary exceptions; (iii) declare or
pay, directly or indirectly, any divided or make any other
distribution (by reduction of capital or otherwise), whether in
cash, property, securities or a combination thereof, with respect
to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for value any shares
of any class of its capital stock or set aside any amount for any
such purpose; (iv) pay in cash any amount in respect of any
indebtedness or preferred stock that may at the obligor's option be
paid in kind or in other securities; or optionally prepay,
repurchase or redeem or otherwise defease or segregate funds with
respect to any indebtedness of the Company, other than indebtedness
under the Notes; or (v) amend, modify or limit any terms of the
Notes or the Security Agreement or assert the invalidity of the
Notes or the Security Agreement.
Except
as otherwise provided below, in the event the Company or a
subsidiary of the Company issues or sells Common Stock or Common
Stock Equivalents, within one year of the original issue date of
the Notes, in a Qualified Financing, at a price per share
reflecting a Post Acquisition Valuation of less than
$15,000,000, the QF Based Note Conversion Price and the number of
Conversion Shares that can be acquired upon conversion of the Notes
will be adjusted proportionally.
In the
event the Company or a subsidiary of the Company does not complete
a Qualified Financing within one year of the original issue date of
the Notes such that the Notes become exercisable at a price per
share equal to 80% of the VWAP of the Common Stock as set forth
above, and the Company or a subsidiary of the Company thereafter,
while any Notes remain outstanding, complete a Qualified Financing
or other financing reflecting a Post-Acquisition Valuation of less
than $15,000,000, the VWAP Based Note Conversion Price then in
effect and the number of Conversion Shares to be obtained upon
conversion of each outstanding Note will be adjusted
proportionally. In the event the Company or a subsidiary of the
Company shall thereafter, while any Notes remain outstanding,
complete one or more additional Qualified Financings or other
financings at a valuation lower than a valuation which previously
triggered a VWAP and related share amount adjustment, the number of
shares issuable upon conversion of such outstanding Notes and the
VWAP % used to determine the VWAP Based Note Conversion Price under
such Notes will be further adjusted proportionately, in the same
manner as provided above.
Notwithstanding
the foregoing, in the event the Company or a subsidiary of the
Company completes a Non-Qualified Financing at a Post
Acquisition Valuation of less than $15,000,000 within one year of
the original issue date of the Notes and prior to a Qualified
Financing, each Note will become immediately convertible at a VWAP
based price per share under the same terms and conditions set forth
in the paragraph immediately above, including those relating to a
proportional reduction to the VWAP % and an increase in the number
of shares issuable upon conversion of the Notes. Any subsequent
Non-Qualified Financings or Qualified Financings taking pace while
a Note remains outstanding will be treated in the same manner as
set forth in the last sentence of the paragraph immediately
above.
8
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 orcommon 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.
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 16
th
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 16
th
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.
9
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 andall 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.
On
February 28, 2018 we entered into a Second Waiver Agreement with
Emunah and Fourth Man pursuant to which we paid an aggregate of an
additional $5,000 to them to extend the terms of the January 2,
2018 Waiver Agreement through March 30, 2018 and issued 2,500
warrants to each of them (the “Waiver Warrants”), such
warrants being similar in form to the Class A
Warrants.
In
April 2018, we agreed in principle with Emunah and Fourth Man on an
agreement pursuant to which we will buy back all of the Notes and
Warrants that we issued to them in exchange for an aggregate of
$150,000 and 30,000 shares of our common stock.
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.
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.
10
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 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
are in default of our obligation under certain of the Offerings to
timely file the registration statement.
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.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN STATEMENTS
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF
OUR COMPANY. YOU ARE CAUTIONED THAT SUCH STATEMENTS ARE
ONLY PREDICTIONS AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN
EVALUATING SUCH STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER THE
VARIOUS FACTORS IDENTIFIED IN THIS ANNUAL REPORT ON FORM 10-K,
INCLUDING THE MATTERS SET FORTH BELOW, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.
11
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST IN OUR COMPANY. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS FOR GROWTH WOULD
LIKELY SUFFER. AS A RESULT, YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT IN OUR COMPANY.
Risks Related to our Business and Financial Condition
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, otherretailers, 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;
12
● the
potential for nationalization of enterprises or facilities;
and
● unsettled
political conditions and possible terrorist attacks
These
and other factors may have material adverse effect on our
operations and, consequently, on our consolidated financial
condition or results of operations.
Political and economic instability and risk of government actions
affecting our business and our customers or suppliers may adversely
impact our business, results of operations and cash
flows.
We are
exposed to risks inherent in doing business in each of the
countries or regions in which we or our customers or suppliers
operate including civil unrest, acts of terrorism, sabotage,
epidemics, force majeure, war or other armed conflict and related
government actions, including sanctions/embargoes, the deprivation
of contract rights, the inability to obtain or retain licenses or
permits required to operate facilities or import or export goods or
raw materials, the expropriation or nationalization of our assets,
and restrictions on travel, payments or the movement of
funds.
Raw material pricing, availability and allocation by suppliers as
well as energy-related costs may negatively impact our results of
operations, including our profit margins.
Our
third party manufacturers use petrochemical-based raw materials to
manufacture many of our products. The prices for these raw
materials are cyclical, and increases in market demand or
fluctuations in the global trade for petrochemical- based raw
materials and energy could increase our costs. In addition, the
prices of many of the other key raw materials used in our
businesses, such as phosphates, surfactants, polymers and resins
and fragrances, are cyclicalbased 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;
13
● 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.
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.
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;
14
● 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 independent registered public accounting firm has expressed
doubt about our ability to continue as a going
concern.
Our
financial statements have been prepared under the assumption that
we will continue as a going concern. Our independent registered
public accounting firm has issued a report that includes an
explanatory paragraph referring to our net losses for the year
ended December 31, 2017 and expressing substantial doubt in our
ability to continue as a going concern. Our ability to continue as
a going concern is dependent upon our ability to obtain additional
financing or other capital, attain operating efficiencies, reduce
expenditures, and to generate net revenues. Our financial
statements do not include any adjustments that might result from
the outcome of this uncertainty. However, if adequate funds are not
available to us when we need it, and we are unable to enter into
some form of strategic relationship that will give us access to
additional cash resources, we may be required to curtail our
operations which would, in turn, further raise substantial doubt
about our ability to continue as a going concern.
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 3 months from the date of this Report. The expected growth of
our business will significantly increase our expenses. In addition,
the amount of our future product sales is difficult to predict and
actual sales may not be in line with our forecasts. As a result, we
believe that we may need to raise additional capital, which may not
be available on reasonable terms, if at all. Our future capital
requirements will depend on many factors, including:
● 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
15
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 and its sister company, Shanghai
Sincerity Co. Ltd., 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
and Shanghai
Sincerity Co. Ltd.
, 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. Ifwe are unable to develop
products that compete effectively against the products of existing
or future competitors, our future revenue could be negatively
impacted. Some of our competitors may compete by changing their
pricing model or by lowering the price of their products. If these
competitors’ pricing techniques are effective, it could
result in downward pressure on the price of all packaging products.
If we are unable to maintain or increase our selling prices in the
face of competition, we may not improve our gross
margins.
We may acquire other businesses, form joint ventures or make
investments in other companies or technologies that could
negatively affect our operating results, dilute our
stockholders’ ownership, increase our debt or cause us to
incur significant expense.
16
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 90% of our
sales. The loss of any of these customers, particularly our primary
customer, without comparable replacements, would adversely affect
our financial results.
Risks Related to Our Reliance on Third Parties
We outsource the manufacturing of our products and rely on a
limited number of third-parties for the manufacture of our
products. We may not be able to find replacements or immediately
transition to alternative manufacturers.
We rely
on a limited number of parties for the manufacture of our products.
These manufacturers, and any of our other manufacturers, may be
unwilling or unable to supply product to us reliably and at the
levels we anticipate or are required by the market. For us to be
successful, our manufacturers must be able to provide us with
products and components in substantial quantities, in compliance
with regulatory requirements, in accordance with agreed upon
specifications, at acceptable costs and on a timely basis. An
interruption in our commercial operations could occur if we
encounter delays or difficulties in securing these components, and
if we cannot then obtain an acceptable substitute. Any such
interruption could harm our reputation, business, financial
condition and results of operations.
If we
are required to change the manufacturer of a particular product, we
will be required to verify that the new manufacturer maintains
facilities, procedures and operations that comply with our quality
and applicable regulatory requirements, which could further impede
our ability to manufacture our products in a timely manner.
Transition to a new manufacturer could be time-consuming and
expensive, may result in interruptions in our operations and
product delivery, and could affect the performance specifications
of our products.
We
cannot assure you that we will be able to secure alternative
manufacturers without experiencing interruptions in our workflow.
If we should encounter delays or difficulties in securing,
reconfiguring or revalidating the products we require our
reputation, business, financial condition and results of operations
could be negatively impacted.
The manufacturing operations of our third-party manufacturers are
dependent upon third-party suppliers, making us vulnerable to
supply shortages and price fluctuations, which could harm our
business.
The raw
materials needed for most of our products are generally available
to our third party manufacturers from multiple sources in
sufficient qualities. However,
a
supply interruption or an increase in demand beyond a current
suppliers’ capabilities could harm their ability to
manufacture our products until new sources of supply are identified
and qualified. Their reliance on these suppliers subjects us to a
number of risks that could harm our business,
including:
17
● 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.
18
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.
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 Chief
Financial Officer, Chris Lim, and our Chief Operating Officer,
Simon Rees, although none of them have experience serving as an
officer or director of a publicly-traded U.S. company. 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 witha 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.
The
issuance of shares under our outstanding convertible promissory
notes may have a significant dilutive effect. We presently have
convertible promissory notes outstanding that contain full-ratchet
anti-dilution provisions. Although we intend to repurchase such
notes prior to any conversions thereof, no assurance can be given
that this will prove to be the case. The conversion of any of these
notes would be expected to have a significant dilutive effect upon
our existing shareholders and the sale of the stock issuable upon
any conversion would be expected to result in a decline in the
market price for our common stock.
19
FINRA sales practice requirements may limit a stockholder’s
ability to buy and sell our stock.
The
Financial Industry Regulatory Authority, or FINRA, has adopted
rules requiring that, in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending
speculative or low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax
status, investment objectives and other information. Under
interpretations of these rules, FINRA has indicated its belief that
there is a high probability that speculative or low-priced
securities will not be suitable for at least some customers. If
these FINRA requirements are applicable to us or our securities,
they may make it more difficult for broker-dealers to recommend
that at least some of their customers buy our Common Stock, which
may limit the ability of our stockholders to buy and sell our
Common Stock and could have an adverse effect on the market for and
price of our Common Stock.
The market price of our Common Stock may be highly volatile, and
may be influenced by numerous factors, some of which are beyond our
control.
If 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 priceof 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
20
● 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
April 16, 2018, our executive officers, directors and principal (5%
or greater) stockholders, together with their respective
affiliates, owned approximately 90.57% 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.
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 144under 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
certificates 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.
21
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.
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 ourefforts 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, particularlyin 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.
22
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 wecomply 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.
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.
23
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.
None.
Our executive office is located
at 4 Avoca Street, South Yarra, Victoria, Australia 3141 which
space is provided to us on a rent-free basis by an unaffiliated
third party.
ITEM
3.
LEGAL
PROCEEDINGS
We know
of no material, active or pending, legal proceedings against us,
nor are we involved as a plaintiff in any material proceedings or
pending litigation. There are no proceedings in which any of our
directors, officers or affiliates, or any beneficial shareholder
are an adverse party or has a material interest adverse to
us.
24
Not
applicable.
Market Information
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
April 16, 2018, we had 49,633,334 shares of Common Stock
outstanding held by approximately 124 stockholders of
record.
The
following table sets forth the high and low bid prices for our
common stock for the fiscal quarter indicated as reported on OTC
Markets. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions. Our common stock is very thinly traded and, thus,
pricing of our common stock on OTC Markets does not necessarily
represent its fair market value. Prices give retroactive effect to
the June 14, 2017 60:1 reverse stock split of our common
stock.
|
Period
|
High
|
Low
|
|
Quarter ended March
31, 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 ended
December 31, 2017
|
$
2.61
|
$
1.00
|
|
Quarter ended March
31, 2018
|
$
3.65
|
$
1.90
|
Dividends
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. Other than
provisions of the Nevada Revised Statutes requiring post-dividend
solvency according to certain measures, there are no material
restrictions limiting, or that are likely to limit, our ability to
pay dividends on our common stock.
25
Recent Sale of Unregistered Securities
Securities issued in the September 2017, November 2017, December
2017 and January 2018 Offerings
The
information regarding the notes and warrants issued in our
September 2017, November 2017. December 2017 and January 2018
Offerings, set forth above under “BUSINESS – The
September 2017, November 2017, December 2017 and January 2018
Offerings” is incorporated herein by reference.
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.
In
April 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.
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.
Securities Authorized for Issuance under Equity Compensation
Plans
The
following table provides information as of December 31, 2017, with
respect to the shares of common stock that may be issued under our
existing equity compensation plans:
26
Equity Compensation Plan Information
|
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
|
62,074
|
(1)
2013 Equity Incentive Plan
On
December 6, 2013, our Board of Directors adopted, and on December
6, 2013, our stockholders approved, the 2013 Equity Incentive Plan,
which reserves 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 fair market value of our Common Stock on
the date of grant.
27
●
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
December 31, 2016 and December 31, 2017, no restricted stock units
or other securities were outstanding under the 2013 plan, which
numbers reflect the forfeiture and cancellation of 6,132 restricted
stock units during the year ended December 31, 2016.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
None.
We are
a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the
information under this item.
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, including those
under “Risk Factors” in this Form 10-K, 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.
28
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 audited financial statements contained in
this Annual 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.
Basis of Presentation
The
audited financial statements for our fiscal years ended December
31, 2017 and 2016 include a summary of our significant accounting
policies and should be read in conjunction with the discussion
below.
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.
Subsequent
to the period covered by the Report, 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.
29
Subsequent
to the period covered by the Report, 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.
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 fundnation 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.
Going Concern
Our financial statements for the fiscal year ended December 31,
2017 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 December 31, 2017, the Company had a working capital deficiency
of $2,160,980 compared to a working capital deficiency of $252,102
at December 31, 2016. The Company reported an after tax loss of
$3,989,922 for the year ended December 31, 2017 compared to after
tax income of $65,476 for the year ended December 31, 2016. These
factors raise substantial doubt about the Company’s ability
to continue as a going concern.
30
The Company 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 Company has
considered the following factors:
●
On
January 9, 2018 the Company entered into a Securities Purchase
Agreement dated December 19, 2017 with one person pursuant to which
the company sold a convertible promissory note in the principal
amount of $83,500 due on December 19, 2018;
●
The
Company is in the process of arranging for a financial facility in
the amount of $1,500,000, although no assurance can be given that
it will be able to do so;
●
The
Company is seeking private placements for up to $4,500,000 with
private and institutional investors in Australia and China,
although no assurance can be given that it will be able to do so;
and
●
The
outstanding convertible promissory notes of the Company can be
converted to equity.
In the event that 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.
Highlights
During the year ended December 31, 2017, the Company secured and
reinforced the relationships with its distribution network in
Australia, which is expected to enable it to generate stable growth
and explore more opportunities. The Company was able to generate
increased sales in fiscal year ended December 31, 2017 with its key
customers.
The Company has identified new products that enable it to generate
higher margin compared to some of its traditional product
lines.
Strategy
In
order to continue to grow its revenue, the Company is planning at
expanding its product lines with its key customers. The Company
continuously looks at innovating its product lines in order to
create value for its customers and generate higher margin. The
Company is currently looking at expanding to other markets outside
of Australia.
The
Company is constantly looking for value accretive merger and
acquisition opportunities in order to increase its size to generate
increase sales and opportunities for vertical and horizontal
integration to improve business efficiency.
Critical Accounting 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.
31
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
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.
Results of Operations
Fiscal Years Ended December 31, 2017 and 2016
The
following table summarizes our historical consolidated financial
statements for the fiscal years ended December 31, 2017 and
December 31, 2016:
|
|
2017
|
2016
|
|
Revenue
|
|
|
|
Sales
|
$
2,150,977
|
$
914,614
|
|
Cost of
sales
|
(1,951,022
)
|
(639,478
)
|
|
Gross
profit
|
199,955
|
275,136
|
|
|
|
|
|
Operating
expenses
|
|
|
|
Depreciation and
amortization
|
40,857
|
30,692
|
|
Selling, general
and administrative expenses
|
109,425
|
38,119
|
|
Employee
expenses
|
1,972,262
|
-
|
|
Professional
service fees
|
624,891
|
12,376
|
|
Bad debt
expenses
|
42,424
|
64,299
|
|
Total operating
expenses
|
2,789,859
|
145,486
|
|
|
|
|
|
(Loss)/Income from
operations
|
(2,589,904
)
|
129,650
|
|
|
|
|
|
Other
income/(expenses)
|
|
|
|
Other
income
|
33,142
|
18,973
|
|
Interest
expense
|
(91,077
)
|
(28,681
)
|
|
Discount on
Convertible note
|
(366,203
)
|
-
|
|
Loss on issue of
Warrant
|
(444,546
)
|
-
|
|
Gain on derivative
financial instrument
|
19,867
|
-
|
|
Fair value
adjustment of Warrant liabilities
|
(555,877
)
|
-
|
|
Foreign currency
transaction loss
|
(51,165
)
|
(29,384
)
|
|
Total other
expenses
|
(1,455,859
)
|
(39,092
)
|
|
Income/(Loss)
from continuing operations before income tax expenses
|
(4,045,763
)
|
90,558
|
|
|
|
|
|
Income tax
benefit/(expense)
|
55,841
|
(25,082
)
|
|
|
|
|
|
Net
income/(loss) after income tax expense for the period
|
(3,989,922
)
|
65,476
|
|
|
|
|
|
Other
comprehensive income/(loss)
|
|
|
|
Exchange
differences arising on translation of foreign
operations
|
(25,281
)
|
(12,851
)
|
|
Other comprehensive
income/(loss)
|
(25,281
)
|
(12,851
)
|
|
|
|
|
|
Total
comprehensive income/(Loss) for the period
|
(4,015,203
)
|
52,625
|
32
Revenues
Revenue
was approximately $2,150,000 for the year ended December 31, 2017,
compared to approximately $915,000 for the year ended December 31,
2016, an increase of approximately $1,240,000. The increase was the
result of the increased volume of products sold to our key
customers during 2017.
Selling, general and administrative expenses
Selling,
general and administrative expenses were approximately $109,000 for
the year ended December 31, 2017, compared to approximately $38,000
for the year ended December 31, 2016. The increase was primarily
due to our expanded sales activities.
Employee expenses
Employee
expenses were approximately $1,972,000 for the year ended December
31, 2017, compared to $0 for the year ended December 31, 2016. The
increase was due to salary payments to the Chief Executive Officer
and Chief Financial Officer in 2017. Additionally, the Chief
Financial Officer received 1,000,000 shares with a value of
$1,900,000 as a bonus.
Professional service fees
Professional
service fees were approximately $625,000 for the year ended
December 31, 2017, compared to approximately $12,000 for the year
ended December 31, 2016. The increase was due to payments related
to the September 2017 reverse acquisition and the expenses of being
a public company. Of the approximately $625,000 of professional
service fees, approximately $285,000 of such amount was due to
share-based payments.
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 and expenses was approximately $1,456,000 for the year ended
December 31, 2017, compared to approximately $39,000 for the year
ended December 31, 2016. The increase was due to the recognition of
convertible notes and warrants at fair value at issuance and fair
value re-measurement at reporting date
33
Financial Condition, Liquidity and Capital Resources
As at
December 31, 2017, we had a working capital deficit of $2,160,980
compared with a working capital deficit of $252,102 as at December
31, 2016. The deterioration in working capital is primarily a
result of our issuance of convertible notes and our increased
business activity.
Our
primary uses of cash have been for operations and payments for
costs relating to the September 2017 reverse acquisition. The main
sources of cash have been from operational revenues and issuance of
convertible notes.
The
Company believes that cash flow from operations together with
planned private placements and debtor financing currently being
negotiated will be sufficient to sustain its current level of
operations for at least the next three months of operations. In
addition, the convertible notes can be converted into
equity.
As of December 31, 2017, we had cash and cash equivalents of
approximately $63,000 which might not be sufficient to fund our
operating and capital needs in the short term. The Company has been
seeking funding from various sources as discussed
below:
●
On
January 9, 2018 the Company entered into a Securities Purchase
Agreement dated December 19, 2017 with one person pursuant to which
the Company sold a convertible promissory note in the principal
amount of $83,500 due on December 19, 2018.
●
The
Company is in the process of arranging debtor financing with a
financial institution. The facility is for $1,500,000, but no
assurance can be given that this will be achieved;
●
The
Company is seeking private placements for up to $4,500,000 with
private and institutional investors in Australia and China. The
Company has managed to raise $100,000 as part of this private
placement to date.
Net
cash used for operating activities was approximately $62,000 and
$12,000 in 2017 and 2016 respectively. In 2017, the net cash used
for operating activities primarily reflects the loss from
operations of approximately $3,990,000 with approximately $98,000
used for changes in operating assets and liabilities, offset by
non-cash items of approximately $3,779,000 and amortization and
depreciation of approximately $41,000 that had no effect on cash
flows.
In
2016, the net cash used for operating activities primarily reflects
income from operations of approximately $65,000 with approximately
$184,000 in changes in operating assets and liabilities, offset by
non-cash items of approximately $93,000 and amortization and
depreciation of approximately $31,000 that had no effect on cash
flows.
Net
cash used for investing activities of approximately $5,000 and $300
relates to purchase of office equipment in 2017 and 2016,
respectively.
Net
cash provided by financing activities was approximately $183,000
and $75,000 in 2017 and 2016, respectively. In 2017, the Company
issued convertible notes for approximately $230,000 and the
proceeds were used to fund operations and repayments of some
borrowings. In 2016, the Company borrowed approximately $104,000
from financial institutions and these borrowings had been used to
fund operations.
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 December 31, 2017 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.
34
We are
a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the
information under this item.
Our
consolidated financial statements are included beginning
immediately following the signature page to this
report. See Item 15 for a list of the consolidated
financial statements included herein.
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 our 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 adecision 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).
ITEM
9A.
CONTROLS
AND PROCEDURES
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, as defined in Rule
13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act
that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to our principal
executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required
disclosure.
We
carried out an evaluation, under the supervision and with the
participation of our principal executive officer and principal
financial officer of the effectiveness of the design and operation
of our disclosure controls and procedures as of December 31,
2017. Based on the evaluation of these disclosure
controls and procedures, and in light of the material weaknesses
found in our internal controls over financial reporting, our senior
management concluded that our disclosure controls and procedures
were not effective.
35
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Exchange Act as a process designed
by, or under the supervision of, our principal executive and
principal financial officers and effected by our Board, management
and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and
includes those policies and procedures that:
●
Pertain to the
maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
●
Provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and
●
Provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect
misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate. All internal control systems, no matter how
well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material
misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting
process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this
risk.
As of
December 31, 2017, our senior management assessed the effectiveness
of our internal control over financial reporting based on the
criteria for effective internal control over financial reporting
established in Internal Control-Integrated 2013 Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) and SEC guidance on conducting such
assessments. Based on that evaluation, we believe that, during the
period covered by this report, such internal controls and
procedures were not effective to detect the inappropriate
application of US GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of
our internal controls over financial reporting that adversely
affected our internal controls and that may be considered to be
material weaknesses.
The
matters involving internal controls and procedures that our
management considered to be material weaknesses under the standards
of the Public Company Accounting Oversight Board were: (1) lack of
a functioning audit committee, resulting in ineffective oversight
in the establishment and monitoring of required internal controls
and procedures; (2) inadequate segregation of duties consistent
with control objectives;and (3) ineffective controls over period
end financial disclosure and reporting processes. The
aforementioned material weaknesses were identified by our senior
management in connection with the review of our financial
statements as of December 31, 2017.
36
Management’s Remediation Initiatives
In an
effort to remediate the identified material weaknesses and other
deficiencies and enhance our internal controls, we plan to initiate
the following series of measures:
●
Assuming we are
able to secure additional working capital and grow our business,
(i) we will create a position to segregate duties consistent with
control objectives and will increase our personnel resources and
technical accounting expertise within the accounting function when
funds are available to us; (ii) we will create an audit committee
which will undertake the oversight in the establishment and
monitoring of required internal controls and procedures such as
reviewing and approving estimates and assumptions made by
management.
Changes in Internal Control over Financial Reporting
There
has been no change in our internal control over financial reporting
identified in connection with our evaluation we conducted of the
effectiveness of our internal control over financial reporting as
of December 31, 2017, that occurred during our fourth quarter that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
None.
Directors and Executive Officers
Below
are the names of and certain information regarding our current
executive officers and directors:
|
Name
|
|
Age |
|
Position
|
|
Date
Named to Board of Directors
|
|
|
|
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
|
|
|
Zhang
Yiwen
|
|
30
|
|
Chief
Executive Officer, President and
Director
(Chairman)
|
|
September 19,
2017
|
|
Chris
Lim
|
|
45
|
|
Chief
Financial Officer
|
|
N/A
|
|
Simon
Rees
|
|
46
|
|
Chief
Operating Officer
|
|
N/A
|
|
Eter
Huang
|
|
35
|
|
Treasurer
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Non-Employee
Directors
|
|
|
|
|
|
|
|
Zhang
Leping
|
|
51
|
|
Director
|
|
September 19,
2017
|
|
Fan
Yang
|
|
33
|
|
Director
|
|
February 5,
2018
|
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.
37
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.
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.
Chris Lim
has served as our Chief Financial Officer since
March 2, 2018. He has close to 20 years of professional Chartered
Accounting experience. He holds a Bachelor of Commerce Degree from
the University of Melbourne. Chris has held a number of positions
throughout his career including Associate Director with Big 4 and
Mid-Tier accounting firms. Chris has worked with many audit clients
across public and private companies and not-for-profit
organizations which covered a diverse range of industries including
energy and resources, agriculture, manufacturing, distribution,
financial services and not-for-profit. Chris started as an auditor
with a mid-tier accounting firm, BDO Melbourne, in January 1999.
When BDO Melbourne was merged into Deloitte, Chris continued his
role at Deloitte until February 2010 holding the position of Client
Director. Chris spent a year as the Group Finance Manager for a
listed ASX Company, Q Limited, from March 2010 to February 2011.
From March 2011 until December 2016 he worked for ShineWing
Australia and held the position of Associate Director in their
Assurance & Advisory Division. Chris started his own accounting
practice, Chris Lim Accounting Solutions, in January
2017.
38
Eter Huang
has served as our Treasurer since January 15,
2018. Eter is a Certified Practicing Accountant and received a
Master Degree of Applied Commerce in Accounting from the University
from the University of Melbourne. Eter has extensive working
experience with public accounting firms in Australia and China and
specializes in global supply chain services and mining industry
companies. From October 2015 to January 2018, Eter was one of the
core founders and appointed as a directory by New Venture Pty Ltd
in Melbourne where she was in charge of daily business operations
as well as account maintenance and financial reporting. From
January 2012 until December 2015, Eter worked for ShineWing
Australia in Melbourne as a senior consultant where she provided
auditing and accounting services and worked with a broad spectrum
of clients including non-profit entities, small to medium private
organizations, small to medium US listed companies and large ASX
listed enterprises. From August 2010 until November 2011, Eter was
an auditor for ShineWing Shanghai in China and participated in
various projects, including, but not limited to, IPOs, M&A due
diligence and listed companies financial audits.
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. Zhang Leping is not an independent director under
these rules because Zhang Yiwen, her son, serves as an executive
officer of ours and because of her ownership of Sincerity China,
the principal manufacturer and technological agent for our
products. In making such independence determination, our board of
directors considered the relationships that each non-employee
director has with us and all other facts and circumstances that our
board of directors deemed relevant in determining their
independence, including the beneficial ownership of our capital
stock by each non-employee director. In considering the
independence of the directors listed above, our board of directors
considered the association of our directors with the holders of
more than 5% of our Common Stock.
Role of Board in Risk Oversight Process
Risk is
inherent with every business, and how well a business manages risk
can ultimately determine its success. We face a number of risks,
including risks relating to our financial condition, development
and commercialization activities, operations, strategic direction
and intellectual property as more fully discussed in the section
entitled “Risk Factors” appearing elsewhere in this
Report. Management is responsible for the day-to-day management of
risks we face, while our board of directors, as a whole, has
responsibility for the oversight of risk management. In its risk
oversight role, our board of directors has the responsibility to
satisfy itself that the risk management processes designed and
implemented by management are adequate and functioning as
designed.
The
full board of directors discusses with management our major risk
exposures, their potential impact on us, and the steps we take to
manage them. This enables the board of directors to coordinate the
risk oversight role, particularly with respect to risk
interrelationships.
39
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., 4 Avoca Street, South Yarra, Victoria 3141, Australia,
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.
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);
40
●
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.
Audit Committee Financial Expert
We have
no separate audit committee at this time. Our full board
oversees our audits and auditing procedures. At this time none of
our directors are an “audit committee financial expert”
within the meaning of Item 407(d)(5) for SEC regulation
S-K.
Compliance with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires our directors, officers and
persons who own more than 10% of a registered class of our equity
securities to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Directors, officers
and greater than 10% stockholders are required by SEC regulations
to furnish us with copies of all Section 16(a) forms they file.
Based solely upon our review of the copies of such forms that we
received with respect to the year ended December 31, 2017, we
believe that each person who at any time during the year was a
director, officer or beneficial owner of more than 10% of our
Common Stock satisfied their Section 16(a) filing requirements,
although (i) certain reports were filed on a late basis, and (ii)
Nils Ollquist and Praba Ganeshan did not make required
filings.
Currently,
we do not have a policy with regard to the consideration of any
director candidates recommended by security holders. To date, no
security holders have made any such recommendations.
The
following table sets forth information concerning the total
compensation paid or accrued by us during the fiscal year ended
December 31, 2017 to (i) all individuals that served as our
principal executive officer or acted in a similar capacity for us
at any time during the fiscal year ended December 31, 2017 and (ii)
all individuals that served as executive officers of ours at any
time during the fiscal year ended December 31, 2017 that received
annual compensation during the fiscal year ended December 31, 2017
in excess of $100,000. None of our executive officers received
annual compensation during the fiscal year ended December 31, 2017
in excess of $100,000.
Summary Compensation Table
|
Name &
Principal Position
|
Fiscal Year
ended December 31,
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non-Equity
Incentive Plan Compensation
|
Non-Qualified
Deferred Compensation Earnings ($)
|
All Other
Compensation ($)
|
Total
($)
|
|
James
Zhang
|
2017
|
36,131
|
-
|
-
|
-
|
-
|
-
|
-
|
36,131
|
|
|
2016
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Nils
Ollquist
|
2017
|
36,131
|
-
|
1,900,000
|
-
|
-
|
-
|
-
|
1,936,131
|
|
|
2016
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
41
Outstanding Equity Awards at Fiscal Year-End
We have
one compensation plan approved by our stockholders, the 2013 Plan.
As of December 31, 2017, we had no restricted stock units issued
and outstanding. We have no plans in place and have never
maintained any plans that provide for the payment of retirement
benefits or benefits that will be paid primarily following
retirement including, but not limited to, tax qualified deferred
benefit plans, supplemental executive retirement plans,
tax-qualified deferred contribution plans and nonqualified deferred
contribution plans.
Employment Agreements
The
Company entered into an employment services agreement with Zhang
Yiwen in October 2017 effective for an indefinite period. It
provides for a base salary of $125,000 per annum and the payment of
an annual bonus, if and when determined by the Board, in its sole
discretion. Zhang Yiwen is eligible to participate in any other
bonus or incentive programs established by the Company for
executives of the Company. Zhang Yiwen is also entitled to receive
stock options under the Company’s Equity Incentive Plans at
the option of the Board.
The
Company entered into an employment services agreement with Nils
Ollquist in October 2017 effective for an indefinite period. The
agreement was terminated in March 2018 in connection with
Mr. Ollquist’s termination as an executive officer. It
provided for a base salary of $125,000 per annum and the payment of
an annual bonus, if and when determined by the Board, in its sole
discretion. Nils Ollquist was also eligible to participate in any
other bonus or incentive programs established by the Company for
executives of the Company and was entitled to receive stock options
under the Company’s Equity Incentive Plans at the option of
the Board. In December 2017, the Company issued 1,000,000 shares of
restricted common stock to a trust beneficially owned by the family
of Nils Ollquist, as a bonus under the employment
agreement.
Director Compensation
We
currently do not pay any cash compensation to members of our board
of directors for their services as directors of the Company.
However, we reimburse our directors for all reasonable
out-of-pocket expenses incurred in connection with their attendance
at meetings of the board of directors. We may also determine to
grant to each non-employee director, awards under our equity
incentive plans.
The
following table sets forth information with respect to the
beneficial ownership of our Common Stock as of April 16, 2018,
by (i) each stockholder known by us to be the beneficial owner of
more than 5% of our Common Stock (our only class of voting
securities), (ii) each of our directors and executive officers, and
(iii) all of our directors and executive officers as a group. To
the best of our knowledge, except as otherwise indicated, each of
the persons named in the table has sole voting and investment power
with respect to the shares of our Common Stock beneficially owned
by such person, except to the extent such power may be shared with
a spouse. To our knowledge, none of the shares listed below are
held under a voting trust or similar agreement, except as noted. To
our knowledge, there is no arrangement, including any pledge by any
person of securities of the Company or any of its parents, the
operation of which may at a subsequent date result in a change in
control of the Company.
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 April 16, 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
49,633,334 shares of Common Stock outstanding as of April 16,
2018. Shares of Common Stock that a person has the right to acquire
within 60 days of April 16, 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., 4 Avoca Street, South Yarra,
Victoria, Australia 3141.
42
|
|
Shares Beneficially
Owned
|
|
|
|
Number
|
Percentage
|
|
5% Owners
CKR Law LLP
1330 Avenue of the
Americas
New York, NY
10019
|
3,840,565
|
7.74
%
|
|
|
|
|
|
|
|
|
|
Executive
Officers and Directors:
|
|
|
|
|
|
|
|
Zhang
Yiwen
|
39,462,412
1
|
79.51
%
|
|
Simon
Rees
|
0
|
0
%
|
|
Chris
Lim
|
0
|
0
%
|
|
Eter
Huang
|
0
|
0
%
|
|
Zhang
Leping
|
0
|
0
%
|
|
Fan
Yang
|
1,650,000
2
|
3.32
%
|
|
|
|
|
|
All directors and
executive officers as a group (6 persons)
|
41,112,412
|
82.83
%
|
1
Represents 39,462,412 shares owned by the Zhang
Family Trust, a trust in which Zhang Yiwen and his wife are the
beneficial owners.
2
Represents 150,000 shares owned by Pure Boba Family
Trust, Pure Boba Pty Ltd., Trustee, a trust beneficially owned by
Fan Yang and 1,500,000 shares owned by Lina Liu, the wife of Fan
Yang.
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.
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.
43
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.
(“Elysium”) in consideration of financial advisory
services. The beneficial owner of Elysium is Chengdu Holdings Pty
Ltd which is the Trustee for the Avoca Trust, a trust beneficially
owned by the family of Nils Ollquist. In April 2017, Elysium
transferred 1,500,000 of these shares to Lina Liu.
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.
In
April 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.
Loans
from shareholders
The net
loan balance due from the stockholder at December 31, 2017 amounts
to $12,564 as compared to $93,671 and is subject to an unsecured
loan agreement that requires interest at the rate of 5.8% 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.
Bank credit line
The
Company has a total $950,000 (AUD) bank credit line (approximately
$740,000 (USD) at December 31, 2017) personally guaranteed by
certain Company officers, and secured by real property owned by
those officers, available to be used for core business working
capital requirements, $800,000 (AUD) of which is designated as the
“mortgage loan” portion with the remaining balance of
$150,000 (AUD) designated as the “business loan”
portion. The mortgage loan portion of the credit line is subject to
the bank’s business mortgage index rate (5.94% per annum at
December 31, 2017) minus 2.23% per annum for a maximum term of 30
years from the first drawdown date, and the business loan portion
of the credit line is subject to the bank’s business mortgage
index rate minus 1.08% per annum for a maximum term of 15 years
from the first drawdown date. The business loan at December 31,
2017, $117,211 (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.
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 future.
Employment Agreements
The
discussion above under “Executive Compensation –
Employment Agreements” is incorporated herein by
reference.
44
Other Transactions
During
the years ended December 31, 2017 and 2016 SAPL purchased
approximately $839 and $50,820, respectively, in products from
Sincerity China. Sincerity China is owned by Zhang Leping and her
husband.
During
the years ended December 31, 2017 and 2016 SAPL purchased
approximately $962,640 and $0, respectively, in products from
Shanghai Sincerity Co. Ltd. Shanghai Sincerity Co. Ltd. is owned by
Zhang Leping and her husband.
During
the year ended December 31, 2017, we paid $38,353 in financial
consulting fees to OFS Capital Group, an entity in which Nils
Ollquist is a co-owner.
Director Independence
We are
not currently subject to listing requirements of any national
securities exchange or inter-dealer quotation system which has
requirements that a majority of the board of directors be
“independent” and, as a result, we are not at this time
required to have our Board of Directors comprised of a majority of
“independent directors.”
Audit Fees
The
aggregate fees billed to us by our principal accountants for
professional services rendered during the years ended December 31,
2017 and December 31, 2016 are set forth in the table
below:
|
Fee
Category
|
Year
ended
December 31,
2017
|
Year
ended
December 31,
2016
|
|
|
|
|
|
Audit fees
(1)
|
$
70,487
|
$
21,831
|
|
Audit-related fees
(2)
|
|
|
|
Tax fees
(3)
|
|
|
|
All other fees
(4)
|
|
|
|
Total
fees
|
$
70,487
|
$
21,831
|
(1)
Audit fees consist
of fees incurred for professional services rendered for the audit
of consolidated financial statements, for reviews of our interim
consolidated financial statements included in our quarterly reports
on Form 10-Q and for services that are normally provided in
connection with statutory or regulatory filings or
engagements.
(2)
Audit-related
fees consist of fees billed for professional services that are
reasonably related to the performance of the audit or review of our
consolidated financial statements, but are not reported under
“Audit fees.”
(3)
Tax fees
consist of fees billed for professional services relating to tax
compliance, tax planning, and tax advice.
(4)
All other
fees consist of fees billed for all other services.
45
Audit Committee’s Pre-Approval Practice
Prior
to our engagement of our independent auditor, such engagement was
approved by our board of directors. The services
provided under this engagement may include audit services,
audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category
of services and is generally subject to a specific budget. Pursuant
our requirements, the independent auditors and management are
required to report to our board of directors at least quarterly
regarding the extent of services provided by the independent
auditors in accordance with this pre-approval, and the fees for the
services performed to date. Our board of directors may also
pre-approve particular services on a case-by-case basis. All
audit-related fees, tax fees and other fees incurred by us for the
year ended December 31, 2017, were approved by our board of
directors.
Financial Statements
See
Index to Financial Statements immediately following the signature
page of this report.
Financial Statement Schedules
All
financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
Exhibits
In
reviewing the agreements included as exhibits to this Form 10-K,
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 the Company 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.
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 the Company may be found
elsewhere in this Form 10-K and the Company’s other public
filings, which are available without charge through the SEC’s
website at http://www.sec.gov.
46
The
following exhibits are included as part of this
report:
|
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)
|
|
|
|
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
|
|
|
|
|
|
|
47
|
|
|
Form
of September 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)
|
|
|
|
|
|
|
|
10.2
|
|
|
Form
of September 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 September 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 September 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)
|
|
|
|
|
|
|
|
|
|
Form
of September 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)
|
|
|
|
|
|
|
|
|
|
Form
of September 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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
48
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
21.1
*
|
|
|
Subsidiaries of
the Registrant
|
|
|
|
|
|
|
31.1
*
|
|
|
Certification of
Principal Executive Officer pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**
|
|
|
|
|
|
|
31.2
*
|
|
|
Certification of
Principal Financial Officer pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**
|
|
|
|
|
|
|
32.1
*
|
|
|
Certifications
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
|
|
|
|
|
|
|
32.2
*
|
|
|
Certifications
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
|
|
|
|
|
|
|
101.INS*
|
|
|
XBRL
Instance Document***
|
|
|
|
|
|
|
101.SCH*
|
|
|
XBRL
Taxonomy Extension Schema Document***
|
|
|
|
|
|
|
101.CAL*
|
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document***
|
|
|
|
|
|
|
101.DEF*
|
|
|
XBRL
Taxonomy Extension Definition Linkbase Document***
|
|
|
|
|
|
|
101.LAB*
|
|
|
XBRL
Taxonomy Extension Label Linkbase Document***
|
* Filed
herewith
** This
certification is being furnished and shall not be deemed
“filed” with the SEC for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that
section, and shall not be deemed to be incorporated by reference
into any filing under the Securities Act or the Exchange Act,
except to the extent that the Registrant specifically incorporates
it by reference.
*** Furnished
herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive
Data Files on Exhibit 101 hereto are deemed not filed or part of
any registration statement or prospectus for purposes of Sections
11 or 12 of the Securities Act of 1933, are deemed not filed for
purposes of Section 18 of the Securities and Exchange Act of 1934,
and otherwise are not subject to liability under those
sections.
49
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
SINCERITY APPLIED MATERIALS HOLDINGS CORP.
|
|
|
|
|
|
|
|
|
Dated:
April 17, 2018
|
By:
|
/s/ Zhang Yiwen
|
|
|
|
Name:
|
Zhang
Yiwen
|
|
|
|
Title:
|
Chief
Executive Officer and President
|
|
|
|
|
(Principal
Executive Officer)
|
|
Pursuant
to the requirements of the Security Exchange Act of 1934, as
amended, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
Dated:
April 17, 2018
|
By:
|
/s/ Zhang Yiwen
|
|
|
|
Name:
|
Zhang
Yiwen
|
|
|
|
Title:
|
President,
Chief Executive Officer and Director
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
Dated:
April 17, 2018
|
By:
|
/s/ Chris Lim
|
|
|
|
Name:
|
Chris
Lim
|
|
|
|
Title:
|
Chief
Financial Officer
|
|
|
|
|
(Principal
Financial Officer and Accounting Officer)
|
|
|
|
|
|
|
|
Dated:
April 17, 2018
|
By:
|
/s/
Zhang Leping
|
|
|
|
Name:
|
Zhang
Leping
|
|
|
|
Title:
|
Director
|
|
|
|
|
|
|
|
Dated:
April 17, 2018
|
By:
|
/s/ Fan Yang
|
|
|
|
Name:
|
Fan
Yang
|
|
|
|
Title:
|
Director
|
|
|
|
|
|
|
50
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2017 and 2016
|
F-3
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2017 and
2016
|
F-4
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years
ended December 31, 2017 and 2016
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2017 and
2016
|
F-6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
Report of Independent Registered Public Accounting
Firm
To the
shareholders and the board of directors of Sincerity Applied
Materials Holdings Corp.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Sincerity
Applied Materials Holdings Corp. (the "Company") as of December 31,
2017 and 2016, the related consolidated statements of operations,
changes in
stockholders’
equity / (deficit) and cash flows, for each of the three years in
the period ended December 31, 2017, and the related notes
(collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as at December 31,
2017 and 2016, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2017,
in conformity 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”).
Substantial doubt related to going concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1.3 to the financial statements, the Company has incurred a
significant loss during the year and has current and net asset
deficiencies. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1.3. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
ShineWing Australia
Chartered
Accountants
We have
served as the Company's auditor since 2017. Melbourne,
Australia
April
13, 2018
F-2
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
As
at December 31, 2017 and 2016
|
|
Note
|
2017
$
|
2016
$
|
|
Assets
|
|
|
|
|
Cash and cash
equivalents
|
4
|
63,649
|
32,979
|
|
Other
assets
|
5
|
73,258
|
789
|
|
Accounts
receivables
|
5
|
48,066
|
11,674
|
|
Total current
assets
|
|
184,973
|
45,442
|
|
|
|
|
|
|
Property, plant and
equipment, net of accumulated
depreciation and
amortization
|
6
|
52,302
|
77,483
|
|
Intangible assets,
net
|
|
-
|
5,547
|
|
Deferred tax
asset
|
11
|
56,892
|
-
|
|
Total non-current
assets
|
|
109,194
|
83,030
|
|
Total
assets
|
|
294,167
|
128,472
|
|
Liabilities
and Stockholders’ Equity/(Deficit)
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts
payables
|
|
176,046
|
5,617
|
|
Accrued and other
liabilities
|
7
|
216,947
|
68,616
|
|
Long-term debt
– current position
|
8
|
33,482
|
6,183
|
|
Line of
credit
|
9
|
118,667
|
111,021
|
|
Related party
loan
|
|
26,862
|
93,671
|
|
Convertible
notes
|
10
|
435,190
|
-
|
|
Derivate
liabilities
|
10
|
1,338,759
|
-
|
|
Income tax
liabilities
|
11
|
-
|
12,436
|
|
Total current
liabilities
|
|
2,345,953
|
297,544
|
|
|
|
|
|
|
Long-term debt
– non-current position
|
8
|
38,795
|
76,402
|
|
Total non-current
liabilities
|
|
38,795
|
76,402
|
|
Total
liabilities
|
|
2,384,748
|
373,946
|
|
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: 49,483,334 and 45,211,027, respectively
|
|
49,483
|
45,211
|
|
Additional paid in
capital
|
|
2,183,850
|
-
|
|
Adjustments to
equity to reflect retroactive application of reverse acquisition of
accounting
|
|
(53,511
)
|
(35,785
)
|
|
Accumulated
losses
|
|
(4,262,212
)
|
(272,290
)
|
|
Foreign currency
translation differences
|
12
|
(8,191
)
|
17,390
|
|
Total
stockholders’ deficit
|
|
(2,090,581
)
|
(245,474
)
|
|
Total liabilities
and stockholders’ equity
|
|
294,167
|
128,472
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
For
the Year ended December 31, 2017 and 2016
|
|
Note
|
2017
$
|
2016
$
|
|
Revenue
|
|
|
|
|
Sales
|
|
2,150,977
|
914,614
|
|
Cost of
sales
|
|
(1,951,022
)
|
(639,478
)
|
|
Gross
profit
|
|
199,955
|
275,136
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
Depreciation and
amortization
|
|
40,857
|
30,692
|
|
Selling, general
and administrative expenses
|
|
109,425
|
38,119
|
|
Employee
expenses
|
|
1,972,262
|
-
|
|
Professional
service fees
|
|
624,891
|
12,376
|
|
Bad debt
expenses
|
|
42,424
|
64,299
|
|
Total operating
expenses
|
|
2,789,859
|
145,486
|
|
|
|
|
|
|
(Loss)/Income from
operations
|
|
(2,589,904
)
|
129,650
|
|
|
|
|
|
|
Other
income/(expenses)
|
|
|
|
|
Other
income
|
|
33,142
|
18,973
|
|
Interest
expense
|
|
(91,077
)
|
(28,681
)
|
|
Discount on
Convertible note
|
|
(366,203
)
|
-
|
|
Loss on issue of
Warrant
|
|
(444,546
)
|
-
|
|
Gain on derivative
financial instrument
|
|
19,867
|
-
|
|
Fair value
adjustment of Warrant liabilities
|
|
(555,877
)
|
-
|
|
Foreign currency
transaction loss
|
|
(51,165
)
|
(29,384
)
|
|
Total other
expenses
|
|
(1,455,859
)
|
(39,092
)
|
|
Income/(Loss)
from continuing operations before income tax expenses
|
|
(4,045,763
)
|
90,558
|
|
|
|
|
|
|
Income tax
benefit/(expense)
|
11
|
55,841
|
(25,082
)
|
|
|
|
|
|
|
Net
income/(loss) after income tax expense for the period
|
|
(3,989,922
)
|
65,476
|
|
|
|
|
|
|
Other
comprehensive income /(loss)
|
|
|
|
|
Exchange
differences arising on translation of foreign
operations
|
|
(25,281
)
|
(12,851
)
|
|
Other comprehensive
income/(loss)
|
|
(25,281
)
|
(12,851
)
|
|
|
|
|
|
|
Total
comprehensive income/(loss) for the period
|
|
(4,015,203
)
|
52,625
|
|
|
|
|
|
|
Net
(loss)/gain per share
|
|
|
|
|
Basic and
diluted
|
|
(0.08
)
|
-
|
|
Weighted
average number of common stock outstanding
|
|
|
|
|
Basic and
diluted
|
|
46,428,342
|
45,211,027
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Consolidated Statement of Changes in Stockholders’ Equity /
(Deficit)
For the Year ended December 31, 2017 and 2016
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Shares
|
Amount
|
Additional Paid in Capital
|
Other Comprehensive Earnings
|
Accumulated Losses
|
Adjustments to equity to reflect retroactive application of reverse
acquisition accounting
|
Total (Deficit)/Equity
|
|
Balance
at
|
|
|
|
|
|
|
|
|
December
31, 2015
|
45,211,047
|
$
45,211
|
-
|
$
30,241
|
$
(337,766
)
|
$
(35,785
)
|
$
(298,099
)
|
|
Income after income
tax
|
|
|
|
|
|
|
|
|
expense for the
year
|
-
|
-
|
-
|
-
|
$
65,476
|
-
|
$
65,476
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
loss for the
year
|
-
|
-
|
-
|
$
(12,851
)
|
-
|
|
$
(12,851
)
|
|
Total
comprehensive
|
|
|
|
|
|
|
|
|
Income /(loss) for
the year
|
-
|
-
|
-
|
$
(12,851
)
|
$
65,476
|
-
|
$
52,625
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
December
31, 2016
|
45,211,047
|
$
45,211
|
-
|
$
17,390
|
$
(272,290
)
|
$
(35,785
)
|
$
(245,474
)
|
|
Loss after income
tax
|
|
|
|
|
|
|
|
|
expense for the
year
|
-
|
-
|
-
|
-
|
$
(3,989,922
)
|
-
|
$
(3,989,922
)
|
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
loss for the
year
|
|
|
-
|
$
(25,581
)
|
-
|
-
|
$
(25,581
)
|
|
Recapitalization on
September 19, 2017
|
3,122,287
|
$
3,122
|
-
|
-
|
-
|
-
|
$
3,122
|
|
Adjustments to equity
to reflect retroactive application of reverse acquisition
accounting
|
-
|
-
|
-
|
-
|
-
|
$
(17,726
)
|
$
(17,726
)
|
|
Share based payment -
Cheasapeak
|
150,000
|
$
150
|
$
284,850
|
-
|
-
|
-
|
$
285,000
|
|
Share based payment
– Chendu Holdings Pty Ltd
|
1,000,000
|
$
1,000
|
$
1,899,000
|
-
|
-
|
-
|
$
1,900,000
|
|
Total
comprehensive
|
|
|
|
|
|
|
|
|
Income /(loss) for
the year
|
4,272,287
|
$
4,272
|
$
2,183,850
|
$
(25,581
)
|
$
(3,989,922
)
|
$
(17,726
)
|
$
(1,845,107
)
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
December
31, 2017
|
49,483,334
|
$
49,483
|
$
2,183,850
|
$
(8,191
)
|
$
(4,262,212
)
|
$
(53,511
)
|
$
(2,090,581
)
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-5
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
For
the Year ended December 31, 2017 and 2016
|
|
2017
|
2016
|
|
|
$
|
$
|
|
Cash
flows from operating activities:
|
|
|
|
Net
income/(loss)
|
(3,989,922
)
|
65,476
|
|
Adjustments to
reconcile net income/(loss) to net cash provided by
|
|
|
|
operating
activities:
|
|
|
|
Depreciation
|
35,310
|
30,453
|
|
Amortization of
intangible assets
|
5,547
|
239
|
|
(Gain)/loss on
assets disposal
|
(1,614
)
|
1,734
|
|
FBT employee
contribution
|
(31,528
)
|
(20,399
)
|
|
Bad debt
expenses
|
42,424
|
64,299
|
|
Expenses paid by
share issued
|
2,185,000
|
-
|
|
Expenses incurred
by convertible notes issued
|
204,847
|
-
|
|
Expenses incurred
by warrant issued
|
1,338,759
|
-
|
|
Net difference on
foreign exchange
|
51,165
|
29,384
|
|
Net changes
in operating assets and liabilities
|
|
|
|
Increase in trade
and other receivables
|
(78,816
)
|
(43,136
)
|
|
Increase in other
assets
|
(72,469
)
|
-
|
|
Increase/(decrease)
in trade and other payables
|
174,765
|
(178,631
)
|
|
Increase in other
liabilities
|
143,995
|
-
|
|
(Increase)/decrease
in deferred tax asset
|
(56,892
)
|
25,244
|
|
Increase/(decrease)
in tax provision
|
(12,436
)
|
12,436
|
|
Net cash used in
operating activities
|
(61,865
)
|
(12,901
)
|
|
Cash
flows from investing activities
|
|
|
|
Payments
for property, plant and equipment
|
(5,216
)
|
(304
)
|
|
Net cash used in
investing activities
|
(5,216
)
|
(304
)
|
|
Cash
flows from financing activities
|
|
|
|
Proceeds
from Convertible notes
|
230,343
|
-
|
|
Proceeds
from borrowings
|
-
|
104,360
|
|
Repayment
of borrowings
|
(1,414
)
|
-
|
|
Repayment of advances from
related entities
|
(35,280
)
|
(4,868
)
|
|
Payment of
finance lease liabilities
|
(10,309
)
|
(24,024
)
|
|
Net cash provide by
financing activities
|
183,340
|
75,468
|
|
Net increase in
cash and cash equivalents
|
116,259
|
62,263
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
(70,985
)
|
(41,631
)
|
|
Adjustment to
equity to reflect retroactive application of reverse acquisition
accounting
|
(14,604
)
|
-
|
|
Cash and cash
equivalents at the beginning of period
|
32,979
|
12,347
|
|
Cash
and cash equivalents at the end of period
|
$
63,649
|
$
32,979
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-6
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.1
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.
1.2
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.
1.3
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
December 31,2017, the company had a current asset deficiency of
$2,160,980 and net asset deficiency of $2,090,581 (December 31,
2016 current asset deficiency of $252,102 and net asset deficiency
$245,474). The Company reported an after tax loss of $3,989,922 for
the year (2016 after tax income: $65,476). These factors raise
substantial doubt about the Company’s ability to continue as
a going concern.
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)
On January 9, 2018
the company entered into a Securities Purchase Agreement dated
December 19, 2017 with one person pursuant to which the company
sold a convertible promissory note in the principal amount of
$83,500 due on December 19,2018
.
(ii)
The company is in
the process of arranging debtor financing with Scottish Pacific.
The facility is for $1,500,000;
(iii)
The company is
seeking private placements for USD 4.5 million with private and
institutional investors in Australian and China; and
(iv)
The outstanding
convertible promissory notes issued can be converted to
equity.
In the
event that 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.
F-7
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
1.4
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.
1.5
Foreign 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 year ended December 31,
2017. Accumulated net translation adjustments have been reported
separately in other comprehensive loss in the financial statements.
Foreign currency translation adjustments resulted in a loss of
$51,165 for the year ended December 31, 2017; such translation
adjustments are not subject to income taxes. Foreign currency
transaction losses resulting from exchange rate fluctuations on
transactions denominated in a currency other than the AUD, the
functional currency, totaled $25,281 for the year ended December
31, 2017, and is included in the accompanying statement of income
for the period.
1.6
Cash 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.
1.7
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 December 31,
2017, management determined that no allowance for doubtful accounts
was required.
1.8
Property 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.
F-8
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
1.9
Payables
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.
1.10
Provisions
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.
1.11
Leases
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.
1.12
Loans 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.
1.13
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.
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.
F-9
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
1.14
Income 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 December 31, 2017.
1.15
Goods 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.
1.16
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. 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 year ended December
31, 2017, no impairment losses were recognized for long-lived
assets.
F-10
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
1.17
Stock-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.
1.18
Earnings (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).
1.19
Accumulated 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).
F-11
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
1.20
Recently 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.
1.21
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 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.
F-12
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
(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 year ended 31 December 2017. 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.
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.
F-13
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
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:
|
|
2017
|
2016
|
|
Cash at
bank
|
$
61,587
|
$
32,258
|
|
Petty
Cash
|
2,062
|
721
|
|
|
$
63,649
|
$
32,979
|
5.
Account Receivables and Other Assets
|
|
2017
|
2016
|
|
Current
|
|
|
|
Account
Receivables
|
$
48,066
|
$
11,674
|
|
Deferred
Expenditure
|
73,258
|
789
|
|
|
$
121,324
|
$
12,463
|
Deferred
expenditure represented deposits paid to supplier for order
processing.
6.
Property, Plant and Equipment
|
|
2017
|
2016
|
Estimated
Useful Lives
|
|
Vehicles
|
$
115,698
|
$
119,560
|
5
years
|
|
Office equipment
and furniture and fixtures
|
25,565
|
18,723
|
5
years
|
|
|
141,263
|
138,283
|
|
|
Less: accumulated
depreciation
|
88,961
|
60,800
|
|
|
Total, net of
accumulated depreciation
|
$
52,302
|
$
77,483
|
|
7.
Accrued and Other Liabilities
|
|
2017
|
2016
|
|
Current
|
|
|
|
Accrued
expenses
|
$
72,952
|
$
68,616
|
|
Wages
Payable
|
14,298
|
-
|
|
Superannuation
Liability
|
5,932
|
-
|
|
PAYG Withholding
Tax
|
19,546
|
-
|
|
Annual Leave
Liability
|
5,259
|
-
|
|
Deferred
Income
|
98,960
|
-
|
|
|
$
216,947
|
$
68,616
|
Deferred Income
represented deposits received from customers for order
processing.
F-14
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
8.
The
Company has a chattel mortgage outstanding at December 31, 2017
secured by a motor vehicle requiring monthly payments approximating
$2,700 (and a final payment approximating $38,795) that includes
interest approximating 8.4%, and maturing on January 28, 2019. The
components of the balance due under the chattel mortgage at
December 31, 2017 are as follows:
|
|
2017
|
2016
|
|
Chattel
mortgage
|
$
72,277
|
$
82,585
|
|
Less: current
portion
|
(33,482
)
|
(6,183
)
|
|
|
$
38,795
|
$
76,402
|
Maturities of
long-term debt at December 31, 2017 for each of the next five years
and in the aggregate, are as follows:
|
|
2017
|
2016
|
|
Next 12
months
|
$
33,482
|
$
32,400
|
|
2
years
|
38,795
|
32,400
|
|
3
years
|
-
|
17,785
|
|
|
$
72,277
|
$
82,585
|
9.
Line of credit
|
|
2017
|
2016
|
|
Business
Loan
|
$
117,211
|
$
108,151
|
|
Business Credit
Card
|
1,456
|
2,870
|
|
|
$
118,667
|
$
111,021
|
The
Company has a total $950,000 (AUD) bank credit line (approximately
$740,000 (USD) at December 31, 2017) personally guaranteed by
certain Company officers, and secured by real property owned by
those officers, available to be used for core business working
capital requirements, $800,000 (AUD) of which is designated as the
“mortgage loan” portion with the remaining balance of
$150,000 (AUD) designated as the “business loan”
portion. The mortgage loan portion of the credit line is subject to
the bank’s business mortgage index rate (5.94% per annum at
December 31, 2017) minus 2.23% per annum for a maximum term of 30
years from the first drawdown date, and the business loan portion
of the credit line is subject to the bank’s business mortgage
index rate minus 1.08% per annum for a maximum term of 15 years
from the first drawdown date. The business loan at December 31,
2017, $117,211 (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.
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:
F-15
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
●
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
|
$
435,190
|
|
Warrant to purchase
common stock
|
$
1,338,759
|
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;
(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); and
(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.
|
|
Convertible
Notes Payable
$
|
Warrant To
Purchase Common Stock
$
|
|
Fair
Value on Issuance Date
|
|
|
|
–
September 19,
2017
|
37,676
|
186,957
|
|
–
November 19,
2017
|
200,991
|
257,589
|
|
–
December 19,
2017
|
119,536
|
-
|
|
Total
|
358,203
|
444,546
|
|
Fair Value change
at Balance Date
|
(19,867
)
|
555,877
|
|
Fair
Value balance at December 31, 2017
|
338,336
|
1,000,423
|
F-16
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
The
fair values of these liabilities as of their issuance date and the
subsequent measurement date of December 31, 2017 were determined
utilizing a Black-Scholes valuation model, which requires use of
unobservable inputs. The inputs are determined by management, with
the assistance of independent experts; they represent our best
estimates, but involve certain inherent uncertainties. We used the
market value of the underlying stock, a life equal to the
contractual life of the financial instrument, incremental borrowing
rates and bond yields that correspond to instruments of similar
credit worthiness and the instrument’s remaining life, an
estimate of volatility based on the historical prices of our
trading securities, and we made 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
our Notes. A summary of the assumptions used to value the Notes and
warrants at each valuation date in 2017 is as follows:
Convertible
Notes
|
|
September
19,
2017
|
December
31,
2017
|
November
19,
2017
|
December
31,
2017
|
December
19,
2017
|
December
31,
2017
|
|
Market price per
share of common stock
|
$
1.50
|
$
1.90
|
$
3.00
|
$
1.90
|
$
2.00
|
$
1.90
|
|
Expected
volatility of common stock
|
8
%
|
39
%
|
46
%
|
55
%
|
64
%
|
69
%
|
|
Expected life
(year)
|
1
|
0.72
|
1
|
0.85
|
1
|
0.96
|
|
Bond yield of
equivalent securities
|
11
%
|
11
%
|
11
%
|
11
%
|
11
%
|
11
%
|
Warrants
|
|
September
19,
2017
|
December
31,
2017
|
November
19,
2017
|
December
31,
2017
|
|
Market price per
share of common stock
|
$
1.50
|
$
1.90
|
$
3.00
|
$
1.90
|
|
Expected
volatility of common stock
|
15
%
|
69
%
|
49
%
|
69
%
|
|
Expected life
(year)
|
5
|
4.75
|
3
|
2.92
|
|
Bond yield of
equivalent securities
|
11
%
|
11
%
|
11
%
|
11
%
|
A
significant change in the market price per share, expected
volatility, or bond yield of equivalent securities, in isolation,
would result in significantly higher or lower fair value
measurements. In combination, changes in these inputs could result
in a significantly higher or lower fair value measurement if the
input changes were to be aligned, or could result in a minimally
higher or lower fair value measurement if the input changes were of
a compensating nature.
F-17
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
11.
Income Tax Expense
(a)
The components of tax (expense)/income comprise:
|
|
2017
|
2016
|
|
Current
tax
|
|
|
|
-
Australia
|
$
55,387
|
$
(25,082
)
|
|
-
US
|
-
|
-
|
|
-
HK
|
454
|
-
|
|
Total
|
$
55,841
|
$
(25,082
)
|
(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
|
$
(204,912
)
|
$
90,559
|
|
-
US
|
(3,839,199
)
|
-
|
|
-
HK
|
(1,652
)
|
-
|
|
Total
|
$
(4,045,763
)
|
$
90,559
|
|
Income
tax expense/(credit) at statutory rate:
|
|
|
|
-
Australia
|
$
(56,351
)
|
$
24,904
|
|
-
US
|
(806,232
)
|
-
|
|
-
HK
|
(454
)
|
-
|
|
Total
|
$
(863,037
)
|
$
24,904
|
|
Tax
effect amounts which are not deductible/(taxable) in
calculating
taxable income:
|
|
|
|
Valuation
allowance
|
806,232
|
-
|
|
Other
non-allowable items
|
964
|
178
|
|
Consolidated
income tax expense/(income)
|
$
(55,841
)
|
$
25,082
|
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 December 31, 2017, 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 related to the
remeasurement of our deferred tax balance was $806,232 that is
fully offset by a corresponding decrease to our valuation
allowance.
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.
As of
December 31, 2017, we had deferred tax assets of $863,037 and have
established a valuation allowance of $806,232 against those
deferred tax assets due to the uncertainty surrounding our ability
to generate future taxable income to realize those
assets.
F-18
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
12.
Other Comprehensive Earnings
|
|
2017
|
2016
|
|
Foreign currency
translation reserve
|
$
(8,191
)
|
$
17,390
|
13.
Auditors’ Remuneration
|
|
2017
|
2016
|
|
Auditors
of the Company
|
|
|
|
|
|
|
|
Review and Audit of
financial reports
|
$
70,487
|
21,831
|
14.
Capital and Leasing Commitments
There
was no capital or leasing expenditure at December 31,
2017.
15.
Contingencies
From
time to time, the Company is involved in routine litigation that
arises in the ordinary course of business. There are no pending
significant legal proceedings to which the Company is a party for
which management believes the ultimate outcome would have a
material adverse effect on the Company’s financial
position.
16.
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.
(b)
Outstanding
balances with related parties
The
following balances are outstanding at reporting date in relation to
transactions with related parties:
|
|
2017
|
2016
|
|
Loan from
Stockholder
|
$
12,564
|
$
93,671
|
The
following transactions occurred with related parties:
|
Purchase from
Changzhou Sincerity Plastics and Chemicals Technology
Ltd
|
$
839
|
$
50,820
|
|
|
|
|
|
Purchase from
Shanghai Sincerity Co Ltd
|
$
962,640
|
-
|
|
|
|
|
|
Shares issued to
Chengdu Holdings Pty Ltd (i)
|
$
1,900,000
|
-
|
|
|
|
|
|
Consultant fee paid
to OFS Capital Group(ii)
|
$
38,353
|
-
|
|
|
|
|
F-19
|
SINCERITY
APPLIED MATERIALS HOLDINGS CORP.
Notes
to Consolidated Statements
|
(i)
The company has
issued 1,000,000 shares of restricted common stock at $1.90 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 the
company.
(ii)
The company paid
consultant fees to OFS Capital Group, a company that Mr. Ollquist
is associated with.
17.
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 except for:
(i)
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;
(ii)
In April 2018, an
investor subscribed for 75,000 of shares in the company at $1.33333
per share; and
(iii)
In April 2018, the
Company has reached an agreement with the holders of the
convertible notes and warrants, Emumah Funding, LLC and Fourth Man,
LLC, issued in November 19, 2017. These convertible notes were
issued for $108,000. The Company also issued three year warrants to
the holders 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 Company has agreed to pay the holders $150,000
in cash to redeem the convertible notes and has offered to 15,000
shares to each warrant holder.
F-20
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Person TransactionsItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules