Exhibit 99.03
Table of Contents
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.
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.
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.
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.
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.
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.
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.
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.
