UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 8-K/A

(Amendment No. 1)

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of report (date of earliest event reported): January 31, 2017

 

 

 

H/CELL ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada   333-212315   47-4823945

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

97 River Road, Flemington, NJ 08822

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (908) 837-9097

 

Copy of correspondence to:

 

James M. Turner, Esq.

Marc J. Ross, Esq.

Sichenzia Ross Ference Kesner LLP

61 Broadway

New York, New York 10006

Tel: (212) 930-9700 Fax: (212) 930-9725

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

[  ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

[  ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

[  ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

[  ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

 

 

 

EXPLANATORY NOTE

 

On February 6, 2017, H/Cell Energy Corporation, a Nevada corporation (“H/Cell Energy” or the “Company”), filed a Current Report on Form 8-K to report the completion of its acquisition of The Pride Group (QLD) Pty Ltd. , an Australian corporation (“Pride”), which was completed on January 31, 2017. This Current Report on Form 8-K/A is filed as an amendment to the Current Report on Form 8-K filed by H/Cell Energy on February 6, 2017 solely to include the financial information described in Item 9.01 below that was previously omitted in accordance with Item 9.01(a) and Item 9.01(b) of Form 8-K.

 

Item 9.01 Financial Statements and Exhibits.

 

(a)       Financial statements of businesses acquired.

 

The audited consolidated financial statements of The Pride Group (QLD) Pty Ltd. as of June 30, 2016 and 2015 and for each of the two years in the period ended December 31, 2016 are filed as Exhibit 99.02 hereto and incorporated herein by reference.

 

The unaudited condensed consolidated financial statements of The Pride Group (QLD) Pty Ltd. for the six months ended December 31, 2016 are filed as Exhibit 99.03 hereto and incorporated herein by reference.

 

(b)       Pro forma financial information.

 

The unaudited pro forma condensed combined financial information with respect to the transaction described in Item 2.01 is filed as Exhibit 99.04 hereto and incorporated herein by reference.

 

(d)       Exhibits.

 

10.01 Form of Share Exchange Agreement, by and among H/Cell Energy Corporation, The Pride Group (QLD) Pty Ltd., Turquino Equity LLC and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust, dated January 31, 2017, filed as an exhibit to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 6, 2017 and incorporated herein by reference.
   
10.02 Form of Escrow Agreement, by and among H/Cell Energy Corporation, Turquino Equity LLC, Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust, and Sichenzia Ross Ference Kesner LLP, dated January 31, 2017, filed as an exhibit to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 6, 2017 and incorporated herein by reference.
   
99.01 Press Release, dated February 6, 2017, issued by H/Cell Energy Corporation, filed as an exhibit to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 6, 2017 and incorporated herein by reference.
   
99.02 Audited consolidated financial statements of The Pride Group (QLD) Pty Ltd. as of December 31, 2016 and 2015 and for each of the two fiscal years in the period ended December 31, 2016.
   
99.03 Unaudited condensed consolidated financial statements of The Pride Group (QLD) Pty Ltd. for the six months ended December 31, 2016.
   
99.04 Unaudited pro forma condensed combined consolidated financial information of H/Cell Energy Corporation.

 

2  

 

 

SIGNATURE

 

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  H/CELL ENERGY CORPORATION
                          
Date: April 18, 2017 By: /s/ MATTHEW HIDALGO
    Matthew Hidalgo
    Chief Financial Officer

 

3  

 

 

 

 

Exhibit 99.02

 

The Pride Group Pty Ltd.

 

Financial Statements

 

June 30, 2016 and 2015

 

 
 

 

The Pride Group Pty Ltd.

Table of Contents

 

    Page
     
Financial Statements  
     
  Independent Auditor’s Report 1
     
  Balance Sheets as of June 30, 2016 and 2015 2
     
  Statements of Operations, Comprehensive Income, and Shareholders’ Equity for the years ended June 30, 2016 and 2015 3
     
  Statements of Cash Flows for the years ended June 30, 2016 and 2015 4
     
  Notes to Financial Statements 5-9

 

 
 

 

Independent Auditors’ Report

 

To the Shareholders of

The Pride Group Pty Ltd.

 

We have audited the accompanying financial statements of The Pride Group Pty Ltd, which comprise the balance sheets as of June 30, 2016 and 2015, and the related statements of income, shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Pride Group Pty Ltd. as of June 30, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Rosenberg Rich Baker Berman & Company

 

Somerset, New Jersey

April 17, 2017

 

  1

 

 

The Pride Group Pty Ltd.

Balance Sheets

 

    June 30,  
    2016     2015  
ASSETS            
Current assets:                
Cash and cash equivalents   $ 250,196     $ 277,522  
Accounts and retainage receivable, net     780,876       1,140,928  
Costs and earnings in excess of billings     108,099       20,087  
Prepaid expenses and other current assets     8,483       8,864  
                 
Total current assets     1,147,654       1,447,401  
                 
Property and equipment, net of accumulated depreciation     51,512       17,971  
Security deposits and other non-current assets     6,303       13,144  
                 
    $ 1,205,469     $ 1,478,516  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued expenses   $ 670,261     $ 792,338  
Accounts payable to related party     39,083       40,554  
Sales tax payable     158,852       81,187  
Billings in excess of costs and earnings     88,082       141,217  
                 
Total current liabilities     956,278       1,055,296  
                 
Shareholders’ equity:                
Common stock, no par value, 1,000,000 shares authorized,
97,939 shares issued and outstanding
    504,484       504,484  
Retained earnings (deficit)     (206,119 )     (49,778 )
Accumulated other comprehensive loss     (49,174 )     (31,486 )
                 
Total shareholders’ equity     249,191       423,220  
                 
Total liabilities and shareholders’ equity   $ 1,205,469     $ 1,478,516  

 

See accompanying notes to financial statements.

 

  2

 

 

The Pride Group Pty Ltd.

Statements of Operations, Comprehensive Income

and Shareholders’ Equity

 

    Year Ended June 30,
    2016     2015  
             
Construction income   $ 6,152,627     $ 5,655,285  
Direct costs     4,252,730       3,788,099  
                 
Gross profit     1,899,897       1,867,186  
                 
General and administrative expenses     2,069,835       1,942,665  
                 
Loss before other income and expense     (169,938 )     (75,479 )
                 
Other income (expense):                
Gain on disposition of equipment     12,421       8,535  
Interest expense     (2,027 )     (2,146 )
Other income     3,204       90,279  
                 
Total other income     13,598       96,668  
                 
Net income (loss)     (156,340 )     21,189  
                 
Other comprehensive loss:                
Foreign currency translation difference     (17,689 )     (31,486 )
Total comprehensive loss     (174,029 )     (10,297 )
                 
Shareholders’ equity, beginning of year     423,220       851,425  
                 
Distributions     -       417,908  
                 
Shareholders’ equity, end of year   $ 249,191     $ 423,220  

 

See accompanying notes to financial statements.

 

  3

 

 

The Pride Group Pty Ltd.

Statements of Cash Flows

 

    June 30,  
    2016     2015  
Cash flows from operating activities:                
Net (loss) income   $

(156,340

)   $ 21,189  
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
               
Depreciation     12,958       58,043  
Gain on disposition of property and equipment     (12,421 )     (8,535 )
(Increase) decrease in:                
Accounts and retainage receivable     322,108       (453,119 )
Costs and earnings in excess of billings     (88,680 )     21,307  
Prepaid expenses and other current assets     85       29,504  
Security deposits and other non-current assets     6,404       -  
Increase (decrease) in:                
Accounts payable and accrued expenses     (94,376 )     339,935  
Accounts payable to related party     (1,471 )     40,554  
Billings in excess of costs and earnings     (48,438 )     138,039  
Sales tax payable     80,365       53,398  
                 
Net cash provided by operating activities     20,195       240,315  
                 
Cash flows from investing activities:                
Purchase of property and equipment     (47,214 )     (23,315 )
Proceeds from disposition of property and equipment     13,309       63,857  
                 
Net cash provided by (used in) investing activities     (33,905 )     40,542  
                 
Cash flows from financing activities:                
Distributions     -       (417,908 )
                 
Net cash used in financing activities     -       (417,908 )
                 
Net decrease in cash and cash equivalents     (13,710 )     (137,051 )
                 
Effect of foreign currency translation on cash     (13,616 )     (66,443 )
                 
Cash and cash equivalents, beginning of year     277,522       481,016  
                 
Cash and cash equivalents, end of year   $ 250,196     $ 277,522  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 2,027     $ 2,146  
Cash paid for taxes   $ -     $ -  

 

See accompanying notes to financial statements.

 

  4

 

 

The Pride Group Pty Ltd.

Notes to Financial Statements

June 30, 2016 and 2015

 

Note 1 - Nature of Operations

 

Formed under the laws of the Australian State of Queensland in 1997, The Pride Group Pty Ltd (the “Company”) is a leading provider of a variety of technology based products and services in the commercial security systems space and in the renewable energy space, including, but not limited to, alarm systems, access control, video surveillance, closed circuit television, audio and visual systems and public announcement systems. During the years ended June 30, 2016 and 2015, the Company’s operations were primarily in the Australian state of Queensland.

 

Note 2 - Summary Of Significant Accounting Policies

 

Use of estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts and retainage receivable:

 

Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. 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. At June 30, 2016 and 2015, there was no allowance for doubtful accounts required.

 

Property and Equipment, and Depreciation :

 

Property and equipment are stated at cost. Depreciation is generally provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining term of the lease or the estimated useful life of the improvement.

 

Repairs and maintenance that do not improve or extend the lives of the property and equipment are charged to expense as incurred.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that are recorded as an element of stockholder’s equity but are excluded from net income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.

 

Foreign Currency Translation

 

Assets, liabilities, revenue and expenses denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the date of the balance sheet. Gains (losses) on translation of the financial statements are from the Company’s operations where the functional currency is not the U.S. dollar. Translation gains (losses) are reflected as a component of accumulated other comprehensive income (loss). Gains (losses) on foreign currency transactions are included in the statements of Operations.

 

  5

 

 

The Pride Group Pty Ltd.

Notes to Financial Statements

June 30, 2016 and 2015

 

Note 2 - Summary Of Significant Accounting Policies (continued)

 

Revenue and Cost Recognition:

 

The Company recognizes revenue from construction contracts over the contractual period under the percentage-of-completion (POC) method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded in “Costs and earnings in excess of billings”. Likewise, contracts where billings to date have exceeded recognized revenues are recorded in “Billings in excess of costs and earnings”. Construction costs of projects under contract include all direct material and labor costs and other direct costs related to contract performance. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed periodically. Changes in job performance, job conditions, estimated profitability and final contract settlements might result in revisions to costs and income that are recognized in the period in which the changes are disregarded. Estimated losses are recorded when identified.

 

The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. The Company continually evaluates all of the assumptions, risks and uncertainties inherent with the application of the POC method of accounting. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near-term.

 

Revenue from service or short term contracts is recognized currently as the work is performed.

 

Cash and Cash Equivalents:

 

For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.

 

Fair value of financial instruments:

 

The carrying value of the Company’s financial instruments, consisting principally of cash, receivables and accounts payable approximates fair value due to either the short-term maturity of the instruments or borrowings with similar interest rates or maturities.

 

Income taxes:

 

The Company accounts for uncertainty in income taxes using a recognition threshold of more-likely-than-not to be sustained upon examination by the appropriate taxing authority. Measurement of the tax uncertainty occurs if the recognition threshold is met. Management has determined that there were no tax uncertainties that met the recognition threshold at the balance sheet dates, and no interest and penalties related to unrecognized tax benefits have been recognized in the Company’s financial statements.

 

The Company files tax returns in the Australia federal jurisdiction and has no open tax years for 2012 and prior.

 

Compensated Absences :

 

The Company provides for employees to annually accrue up to five weeks of unused vacation beyond the calendar year as required by Australian law. At June 30, 2016 and 2015 the balance of accrued unused vacation time approximated $97,000 and $103,000, respectively.

 

  6

 

 

The Pride Group Pty Ltd.

Notes to Financial Statements

June 30, 2016 and 2015

 

Note 2 - Summary Of Significant Accounting Policies (continued)

 

Advertising:

 

The Company expenses advertising costs as they are incurred. Advertising expense for the years ended June 30, 2016 and 2015 were $3,820 and $6,362, respectively.

 

Operating Loss and Tax Credit Carryforwards:

 

At June 30, 2016, the Company has loss carryforwards totaling approximately $92,000 that may be offset against future taxable income. The carryforwards are available indefinitely.

 

Note 3 – Significant Concentrations of Credit Risk

 

Cash maintained at an authorized deposit-taking institution (bank) incorporated in Australia is insured by the Australian Securities & Investments Commission (“ASIC”) up to approximately $186,000 USD in total. At June 30, 2016 and 2015, cash balances, in USD exceeded ASIC insured limits by approximately $70,000 and $87,000, respectively.

 

Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at June 30, 2015, approximately 26% of the Company’s accounts receivable is due from two unrelated customers, 12% and 14%, respectively; and, at June 30, 2015, approximately 25% of the Company’s accounts receivable is due from two unrelated customers, 12% and 13%.

 

Note 4 – Major Customers

 

During the year ended June 30, 2016, there were no customers with a concentration of 10% or higher. During the year ended June 30, 2015, approximately 17% of the Company’s revenue was earned from one customer.

 

Note 5 – Property and Equipment

 

At June 30, property and equipment are comprised of the following:

 

    2016     2015  
Furniture and fixtures (5 to 7 years)   $ 6,533     $ 6,757  
Machinery and equipment (5 to 7 years)     35,643       36,869  
Computer and software (3 to 5 years)     78,957       78,530  
Auto and truck (5 to 7 years)     256,088       262,163  
Leasehold improvements (life of lease)     38,685       36,508  
      415,906       420,827  
Less: accumulated depreciation     (364,394 )     (402,856 )
    $ 51,512     $ 17,971  

 

Depreciation expense for the years ended June 30, 2016 and 2015 amounted to $12,958 and $58,043, respectively.

 

  7

 

 

The Pride Group Pty Ltd.

Notes to Financial Statements

June 30, 2016 and 2015

 

Note 6 - Related Party Transactions

 

At June 30, 2016 and 2015, the balance due to Turquino Equity LLC, a significant shareholder, amounted to approximately $39,000 and $41,000, respectively. These balances represent expenses for management services. For the years ended June 30, 2016 and 2015, expenses for management services approximated $153,000 and $98,000, respectively.

 

Note 7 - Uncompleted Contracts

 

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at June 30:

 

    2016     2015  
Costs incurred on uncompleted contracts   $ 2,382,693     $ 319,353  
Estimated earnings     541,066       369,868  
Costs and estimated earnings earned on uncompleted contracts     2,923,759       689,221  
Billings to date     2,383,492       512,095  
Costs and estimated earnings in excess of billings on uncompleted contracts     540,267       177,126  
Costs and earnings in excess of billings on completed contracts     520,250       298,256  
    $ 20,017     $ (121,130 )

 

Included in the amounts in the accompanying balance sheets under the following captions at June 30:

 

    2016     2015  
Costs and earnings in excess of billings   $ 108,099     $ 20,087  
Billings in excess of costs and earnings     (88,082 )     (141,217 )
    $ 20,017     $ (121,130 )

 

Note 8 - Leases

 

The Company entered into two operating leases for office space in Woombye and Brisbane, Queensland, Australia, both expiring in April 2018. The future minimum payments on the leases for each of the next two years and in the aggregate amount to the following:

 

2017   $ 84,284  
2018     68,005  
    $ 152,289  

 

Rent expense for the years ended June 30, 2016 and 2015 amounted to approximately $90,000 and $96,000, respectively, and is included in “General and Administrative” expenses on the related statements of operations.

 

Note 9 - Contract Backlog

 

As of June 30, 2016, the Company had a contract backlog approximating $1,484,000 with anticipated direct costs to complete approximating $1,276,000. And, at June 30, 2015, the Company had a contract backlog approximating $2,083,000 with anticipated direct costs to complete approximating $1,794,000.

 

  8

 

 

The Pride Group Pty Ltd.

Notes to Financial Statements

June 30, 2016 and 2015

 

Note 10 - Subsequent Events

 

Date of Management’s Review:

 

The Company has evaluated subsequent events for the period from June 30, 2016, the date of these Financial Statements, through April 17, 2017, which represents the date these Financial Statements were available to be issued.

 

Sale of business:

 

On January 31, 2017, the shareholders of the Company entered into a Share Exchange Agreement with H/Cell Energy Corporation (“H/Cell”), an entity affiliated by common ownership, whereby H/Cell agreed to acquire all outstanding shares of the Company in exchange for shares of stock in H/Cell.

 

  9

 

 

 

Exhibit 99.03

 

Table of Contents

 

    Page
     
Financial Statements  
     
  Balance Sheets as of December 31, 2016 (unaudited) 1
     
  Statements of Operations, Comprehensive (Loss) Income, and Shareholders’ Equity for the six months ended December 31, 2016 and 2015 (unaudited) 2
     
  Statements of Cash Flows for the six months ended December 31, 2016 and 2015 (unaudited) 3
     
  Notes to Financial Statements (unaudited) 4-8

 

 

 

 

Balance Sheets

December 31, 2016

(Unaudited)

 

ASSETS      
Current assets:        
Cash and cash equivalents   $ 244,980  
Accounts and retainage receivable, net     650,886  
Costs and earnings in excess of billings     91,657  
Prepaid expenses     839  
         
Total current assets     988,362  
         
Property and equipment, net of accumulated depreciation     99,816  
Security deposits and other non-current assets     6,097  
         
    $ 1,094,275  
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses   $ 655,026  
Accounts payable to related party     52,211  
Sales tax payable     114,085  
Billings in excess of costs and earnings     75,691  
         
Total current liabilities     897,013  
         
Shareholders’ equity:        
Common stock, no par value, 1,000,000 shares authorized,
97,939 shares issued and outstanding
    504,484  
Retained earnings (deficit)     (256,416 )
Accumulated other comprehensive loss     (50,806 )
         
Total shareholders’ equity     197,262  
         
Total liabilities and shareholders’ equity   $ 1,094,275  

 

See accompanying notes to financial statements .

 

  1

 

 

Statements of Operations, Comprehensive Operations

and Shareholders’ Equity

(Unaudited)

 

    Six Months Ended  
    December 31,  
    2016     2015  
             
Construction income   $ 2,207,238     $ 3,373,775  
Direct costs     1,408,406       2,326,160  
                 
Gross profit     798,832       1,047,615  
                 
General and administrative expenses     862,524       1,030,929  
                 
(Loss) income before other income and expense     (63,692 )     16,686  
                 
Other income (expense):                
Loss on disposition of equipment     17,651       4,722  
Interest expense     -       (1,142 )
Other income     453       2,267  
                 
Total other income     18,104       5,847  
                 
Net income (loss)     (45,588 )     22,533  
                 
Other comprehensive (loss) income:                
Foreign currency translation difference     (6,343 )     (21,998 )
Total comprehensive (loss) income     (51,931 )     535  
                 
Shareholders’ equity, beginning of period     249,193       423,220  
                 
Shareholders’ equity, end of period   $ 197,262     $ 423,755  

 

See accompanying notes to financial statements .  

 

  2

 

 

Statements of Cash Flows

(Unaudited)

 

    December 31,  
    2016     2015  
Cash flows from operating activities:                
Net (loss) income   $ (45,588 )   $ 22,533  
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
               
Depreciation     13,402       5,407  
(Increase) decrease in:                
Accounts and retainage receivable     104,511       (247,511 )
Costs and earnings in excess of billings     12,914       (137,708 )
Prepaid expenses and other current assets     7,368       (683 )
Security deposits and other non-current assets     -       6,274  
Increase (decrease) in:                
Accounts payable and accrued expenses     6,634       162,968  
Accounts payable to related party     14,403       (121 )
Billings in excess of costs and earnings     (9,517 )     49,393  
Sales tax payable     (39,583 )     3,415  
                 
Net cash provided by (used in) operating activities     64,544       (136,033 )
                 
Cash flows from investing activities:                
Purchase of property and equipment     (63,279 )     (32,641 )
                 
Net cash used in investing activities     (63,279 )     (32,641 )
                 
                 
Net increase (decrease) in cash     1,265       (168,674 )
                 
Effect of foreign currency translation on cash     (6,481 )     (16,716 )
                 
Cash and cash equivalents, beginning of year     250,196       277,522  
                 
Cash and cash equivalents, end of year   $ 244,980     $ 92,132  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ -     $ -  
Cash paid for taxes   $ -     $ -  

 

See accompanying notes to financial statements .  

 

  3

 

 

Notes to Financial Statements

 

Note 1 - Nature of Operations

 

Formed under the laws of the Australian State of Queensland in 1997, The Pride Group Pty Ltd (the “Company”) is a leading provider of a variety of technology based products and services in the commercial security systems space and in the renewable energy space, including, but not limited to, alarm systems, access control, video surveillance, closed circuit television, audio and visual systems and public announcement systems.

 

Note 2 - Summary Of Significant Accounting Policies

 

Use of estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts and retainage receivable:

 

Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. 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. At December 31, 2016, there was no allowance for doubtful accounts required.

 

Property and Equipment, and Depreciation :

 

Property and equipment are stated at cost. Depreciation is generally provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining term of the lease or the estimated useful life of the improvement.

 

Repairs and maintenance that do not improve or extend the lives of the property and equipment are charged to expense as incurred.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that are recorded as an element of stockholder’s equity but are excluded from net income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.

 

Foreign Currency Translation

 

Assets, liabilities, revenue and expenses denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the date of the balance sheet. Gains (losses) on translation of the financial statements are from the Company’s operations where the functional currency is not the U.S. dollar. Translation gains (losses) are reflected as a component of accumulated other comprehensive income (loss). Gains (losses) on foreign currency transactions are included in the statements of Income.

 

  4

 

 

Notes to Financial Statements

 

Note 2 - Summary Of Significant Accounting Policies (continued)

 

Revenue and Cost Recognition:

 

The Company recognizes revenue from construction contracts over the contractual period under the percentage-of-completion (POC) method of accounting. This method of accounting recognizes sales and gross profit as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded in “Costs and earnings in excess of billings”. Likewise, contracts where billings to date have exceeded recognized revenues are recorded in “Billings in excess of costs and earnings”. Construction costs of projects under contract include all direct material and labor costs and other direct costs related to contract performance. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed periodically. Changes in job performance, job conditions, estimated profitability and final contract settlements might result in revisions to costs and income that are recognized in the period in which the changes are disregarded. Estimated losses are recorded when identified and material.

 

The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. The Company continually evaluates all of the assumptions, risks and uncertainties inherent with the application of the POC method of accounting. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near-term.

 

Revenue from service or short term contracts is recognized currently as the work is performed.

 

Cash and Cash Equivalents:

 

For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.

 

Fair value of financial instruments:

 

The carrying value of the Company’s financial instruments, consisting principally of cash, receivables and accounts payable approximates fair value due to either the short-term maturity of the instruments or borrowings with similar interest rates or maturities.

 

Income taxes:

 

The Company accounts for uncertainty in income taxes using a recognition threshold of more-likely-than-not to be sustained upon examination by the appropriate taxing authority. Measurement of the tax uncertainty occurs if the recognition threshold is met. Management has determined that there were no tax uncertainties that met the recognition threshold at the balance sheet dates, and no interest and penalties related to unrecognized tax benefits have been recognized in the Company’s financial statements.

 

The Company files tax returns in the Australia federal jurisdiction and has no open tax years for 2012 and prior.

 

Compensated Absences :

 

The Company provides for employees to annually accrue up to five weeks of unused vacation beyond the calendar year as required by Australian law. At December 31, 2016, the Company had a balance of accrued unused vacation time of approximately $110,000.

 

  5

 

 

Notes to Financial Statements

 

Note 2 - Summary Of Significant Accounting Policies (continued)

 

Advertising:

 

The Company expenses advertising costs as they are incurred. Advertising expense for the six months ended December 31, 2016 and 2015 were $1,073 and $2,297, respectively.

 

Operating Loss and Tax Credit Carryforwards:

 

At December 31, 2016, the Company has loss carryforwards totaling approximately $95,000 that may be offset against future taxable income. The carryforwards are available indefinitely.

 

Note 3 – Significant Concentrations of Credit Risk

 

Cash maintained at an authorized deposit-taking institution (bank) incorporated in Australia is insured by the Australian Securities & Investments Commission (“ASIC”) up to approximately $180,000 USD in total. At December 31, 2016, cash balances, in USD exceeded ASIC insured limits by approximately $72,000.

 

Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at December 31, 2016, approximately 25% of the Company’s accounts receivable is due from one unrelated customer; and, at December 31, 2015, approximately 37% of the Company’s accounts receivable is due from two unrelated customers, 22% and 15%, respectively.

 

Note 4 – Major Customers

 

During the six months ended December 31, 2016, there were no customers with a concentration of 10% or higher. During the six months ended December 31, 2015, approximately 17% of the Company’s revenue was earned from one customer.

 

Note 5 – Property and Equipment

 

At December 31, 2016, property and equipment are comprised of the following:

 

Furniture and fixtures (5 to 7 years)   $ 6,320  
Machinery and equipment (5 to 7 years)     34,480  
Computer and software (3 to 5 years)     79,098  
Auto and truck (5 to 7 years)     227,456  
Leasehold improvements (life of lease)     37,425  
      384,779  
Less: accumulated depreciation     (284,963 )
    $ 99,816  

 

Depreciation expense for the six months ended December 31, 2016 and 2015 amounted to $13,402 and $5,407, respectively.

 

  6

 

 

Notes to Financial Statements

 

Note 6 - Related Party Transactions

 

At December 31, 2016, the balance due to Turquino Equity LLC, an entity affiliated by common ownership and management, amounted to approximately $52,000. During the six months ended December 31, 2016 and 2015, the Company paid $81,000 and $75,000, respectively, to Turquino Equity, LLC, for management services.

 

Note 7 - Uncompleted Contracts

 

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at December 31, 2016:

 

Costs incurred on uncompleted contracts   $ 1,548,420  
Estimated earnings     985,986  
Costs and estimated earnings earned on uncompleted contracts     2,534,406  
Billings to date     1,948,585  
Costs and estimated earnings in excess of billings on uncompleted contracts     585,821  
Costs and earnings in excess of billings on completed contracts     569,855  
    $ 15,966  

 

Included in the amounts in the accompanying balance sheets under the following captions at December 31, 2016:

 

Costs and earnings in excess of billings   $ 91,657  
Billings in excess of costs and earnings     (75,691 )
    $ 15,966  

 

Note 8 - Leases

 

The Company entered into two operating leases for office space in Woombye and Brisbane, Queensland, Australia, both expiring in April 2018. The future minimum payments on the lease, net of charges to affiliated company, for each of the next two years and in the aggregate amount to the following:

 

2017 (remaining)   $ 43,476  
2018     93,461  
    $ 136,937  

 

Rent expense for the six months ended December 31, 2016 and 2015 amounted to approximately $90,000 and $96,000, respectively, and is included in “General and Administrative” expenses on the related statements of income.

 

Note 9 - Contract Backlog

 

As of December 31, 2016, the Company had a contract backlog of approximately $2,218,000 with anticipated direct costs to complete of approximately $1,795,463.

 

  7

 

 

Notes to Financial Statements

 

Note 10 - Subsequent Events

 

Date of Management’s Review:

 

The Company has evaluated subsequent events for the period from December 31, 2016, the date of these Financial Statements, through April 17, 2017, which represents the date these Financial Statements were available to be issued.

 

Sale of business:

 

On January 31, 2017, the shareholders of the Company entered into a Share Exchange Agreement with H/Cell Energy Corporation (“H/Cell”), an entity affiliated by common ownership, whereby H/Cell agreed to acquire all outstanding shares of the Company in exchange for shares of stock in H/Cell.

 

  8

 

 

 

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

On January 31, 2017 (the “Closing Date”), we entered into a share exchange agreement (the “Exchange Agreement”) by and among us, The Pride Group (QLD) Pty Ltd., an Australian corporation (“Pride”), Turquino Equity LLC (“Turquino”) and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (the “Mullane Trust” and together with Turquino, the “Pride Shareholders”). Andrew Hidalgo and Matthew Hidalgo, our Chief Executive Officer and Chief Financial Officer, respectively, are each a managing partner of Turquino.

 

Pursuant to the exchange agreement, we acquired all of the issued and outstanding capital stock of Pride from the Pride Shareholders in exchange for an aggregate of 3,800,000 shares of our common stock (the “Acquisition Shares”).

 

The unaudited pro forma combined balance sheet as of December 31, 2016 giving effect to the contribution transactions as if they had occurred on the balance sheet date, and statements of operations for the year ended December 31, 2016 include the historical statements of operations of the combined companies, giving effect to the contribution transactions as if they had occurred at the beginning of the period. This information is only a summary, and you should read it in conjunction with the company’s historical financial statements and related notes and management’s discussion and analysis of financial condition and results of operations contained in H/Cell’s annual reports, quarterly reports and other information on file with the SEC. As a result, the combination of H/Cell and Pride pursuant to the exchange agreement is considered a business combination of companies under common control and will be accounted for in a manner similar to a pooling-of-interests.

 

We have prepared the unaudited pro forma combined financial statements based on available information, using assumptions that we believe are reasonable. These unaudited pro forma combined financial statements are being provided for informational purposes only. They do not purport to represent our actual financial position or results of operations had the exchange agreement occurred on the dates specified, nor do they project our results of operations or financial position for any future period or date.

 

The unaudited pro forma condensed combined statements of operations do not reflect any adjustments for non-recurring items or anticipated synergies resulting from the combination. Pro forma adjustments are based on certain assumptions and other information that are subject to change as additional information becomes available. Accordingly, the adjustments included in our financial statements published after the completion of the combination may vary from the adjustments included in these unaudited pro forma condensed combined financial statements below.

 

 
 

 

H/CELL ENERGY CORPORATION

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

AS OF DECEMBER 31, 2016

 

  H/Cell     Pride     Pro Forma Adjustment     Pro Forma Combined  
    December 31, 2016              
ASSETS                                
                                 
Current Assets                                
                                 
Cash and Cash Equivalents   $ 292,887     $ 244,980     $ -     $ 537,867  
Accounts and retainage receivable, net     -       650,886       -       650,886  
Prepaid Expenses     13,329       839       -       14,168  
Costs in Excess of Billings     247       91,657       -       91,904  
                                 
Total Current Assets     306,463       988,362       -       1,294,825  
                                 
Property and equipment, net of accumulated depreciation     -       99,816       -       99,816  
Security deposits, and other non-current assets     2,400       6,097       -       8,497  
                                 
TOTAL ASSETS   $ 308,863     $ 1,094,275     $ -     $ 1,403,138  
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                                
                                 
Current Liabilities                                
                                 
Accounts Payable and Accrued Expenses   $ 6,000     $ 707,237     $ -     $ 713,237  
Billings in Excess of Costs     7,847       75,691       -       83,538  
Sales Tax Payable     -       114,086       -       114,086  
Due to Stockholders     -       -       -       -  
                                 
Total Current Liabilities     13,847       897,014       -       910,861  
                                 
Stockholders’ Equity                                
                                 
Common Stock     313       -       380 (a)     693  
Preferred Stock     -       -       -       -  
Paid-in-Capital     778,938       504,484       (380 ) (a)     1,283,042  
Retained Earnings     (484,235 )     (307,223 )     -       (791,458 )
Total Stockholders’ Equity     295,016       197,261       -       492,277  
                                 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY   $ 308,863     $ 1,094,275     $ -     $ 1,403,138  

 

(a) To reflect 3,800,000 common shares issued as consideration in the share exchange agreement.

 

 
   

 

H/CELL ENERGY CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2016

 

    H/Cell     Pride (AUD to USD)     Pro Forma Adjustment     Pro Forma Combined  
    December 31, 2016              
Revenue                                
Contracts   $ 8,553     $ 5,060,904     $ -     $ 5,069,457  
Related Party     12,374       -       -       12,374  
                                 
Total Revenue     20,927       5,060,904       -       5,081,831  
                                 
Cost of Goods Sold                                
Contracts     9,882       3,334,976       -       3,344,858  
Related Party     10,627       -       -       10,627  
                                 
Total Cost of Goods Sold     20,509       3,334,976       -       3,355,485  
                                 
Gross Profit   $ 418     $ 1,725,928     $ -     $ 1,726,346  
                                 
Operating Expenses                                
Research and Development     2,000       -       -       2,000  
General and Administrative Expenses     476,833       1,901,430       -       2,378,263  
                                 
Total Operating Expenses     478,833       1,901,430       -       2,380,263  
                                 
Loss before other income and expense   $ (478,415 )   $ (175,502 )   $ -     $ (653,917 )
Income Tax Provision (Benefit)     -       -       -       -  
                                 
Other Income                                
Gain on disposition of equipment     -       (25,350 )     -       (25,350 )
Other income     -       1,391       -       1,391  
                                 
Total Other Income     -       (23,959 )     -       (23,959 )
                                 
Net Income (Loss)   $ (478,415 )   $ (199,461 )   $ -     $ (677,876 )
                                 
Other Comprehensive Loss                                
Foreign currency translation difference     -       (25,695 )     -     $ (25,695 )
Total Comprehensive Gain (Loss)     -       (225,156 )     -       (225,156 )
                                 
Stockholders Equity, Beginning of Year     453,581       249,193       -       702,774  
Stockholders Equity, End of Year   $ 295,016     $ 197,261     $ -     $ 492,277