UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

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

For the fiscal year ended

 

OR

 

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

For the transition period from ___________ to ___________

 

OR

 

x   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report: August 1, 2014

  

Commission file number: 001-35715

 

Aquasition Corp.

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(Exact Name of Registrant as Specified in Its Charter)

 

Not Applicable

(Translation of Registrant’s Name Into English)

 

Republic of the Marshall Islands

(Jurisdiction of Incorporation or Organization)

 

Xin Fengge Building

Yupu Industrial Park

Shishi City, Fujian Province 362700

People’s Republic of China

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(Address of Principal Executive Offices)

 

Mr. Keyan Yan, Chief Executive Officer

Xin Fengge Building

Yupu Industrial Park

Shishi City, Fujian Province 362700

People’s Republic of China

Tel: + (86) 595 8889 6198

Fax: (86) 595 8850 5328
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(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Units

(Title of Class)

 

Common Stock, $0.0001 par value

(Title of Class)

 

Common Stock Purchase Warrants

(Title of Class)

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

(Title of Class)

 

On August 7, 2014, the issuer had 25,417,329 shares of common stock outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large Accelerated Filer o Accelerated Filer    o Non-Accelerated Filer x

  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o International Financial Reporting x Other o
  Standards as issued by the International  
  Accounting Standards Board    

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
     
PART I  
   
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 2
     
A. Directors and Senior Management 2
C. Auditors 2
     
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 2
     
A. Offer Statistics 2
B. Method and Expected Timetable 2
     
ITEM 3. KEY INFORMATION 2
     
A. Selected Financial Data 2
Selected Financial Data of Hongri 2
B. Capitalization and Indebtedness 3
C. Reasons for the Offer and Use of Proceeds 3
D. Risk Factors 3
     
ITEM 4. INFORMATION ON THE COMPANY 3
     
A. History and Development of the Company 3
B. Business Overview 3
C. Organizational Structure 4
D. Property, Plants and Equipment 4
     
ITEM 4A. UNRESOLVED STAFF COMMENTS 4
     
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 4
     
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 4
     
A. Directors and Senior Management 4
B. Compensation 4
C. Board Practices 5
D. Employees 5
E. Share Ownership 5
     
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7
     
A. Major Shareholders 7
B. Related Party Transactions 7
C. Interests of Experts and Counsel 8
     
ITEM 8. FINANCIAL INFORMATION 8
     
A. Consolidated Statements and Other Financial Information 8
B. Significant Changes 8
     
ITEM 9. THE OFFER AND LISTING 8
     
A. Offer and Listing Details 8
B. Plan of Distribution 8
C. Markets 8
D. Selling Shareholders 8
E. Dilution 9
F. Expenses of the Issue 9

 

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ITEM 10. ADDITIONAL INFORMATION 9
     
A. Share Capital 9
B. Memorandum and Articles of Association 9
C. Material Contracts 11
D. Exchange Controls 11
E. Taxation 12
F. Dividends and Paying Agents 12
G. Statement by Experts 13
H. Documents on Display 13
I. Subsidiary Information 13
     
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
     
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 14
     
PART II  
   
PART III  
   
ITEM 17. FINANCIAL STATEMENTS 15
     
ITEM 18. FINANCIAL STATEMENTS 15
     
ITEM 19. EXHIBITS 15

 

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INTRODUCTORY NOTES

 

Use of Certain Defined Terms

 

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

 

· ““AQU,” “we,” “us,” “our” and the “Company” are to Aquasition Corp., a company organized in the Republic of the Marshall Islands;

 

· “Hongri” are to Hongri International Holdings Limited, which is our wholly owned subsidiary and a company organized in the BVI;

 

· “Business Combination” refers to our acquisition of Hongri on August 1, 2014, pursuant to a share exchange transaction among us, KBS International Holdings, Inc. (“KBS”), Hongri and two individual shareholders of KBS;

 

· “Offer Letter” refers to the Offer Letter filed as exhibit (a)(1)(A) to Amendment No. 5 to the Schedule TO we filed with the Securities and Exchange Commission on July 18, 2014;

 

· “Tender Offer” means our tender offer for our common stock described in the Offer Letter, which was completed on July 29, 2014.

 

· “BVI” are to the British Virgin Islands;

 

· “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;

 

· “PRC” and “China” are to the People’s Republic of China;

 

· “SEC” are to the Securities and Exchange Commission;

 

· “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

 

· “Securities Act” are to the Securities Act of 1933, as amended;

 

· “Renminbi” and “RMB” are to the legal currency of China; and

 

· “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.

 

Forward-Looking Information

 

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, the possibility that we may not be able to maintain or increase our net revenues and profits due to our failure to anticipate consumer preferences and develop new menswear products, our failure to execute our business expansion plan, changes in domestic and foreign laws, regulations and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic, political and social events in China, a general economic downturn, a downturn in the securities markets, and other risks and uncertainties which are generally set forth under Item 3 “Key information—D. Risk Factors” and elsewhere in this report.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

A. Directors and Senior Management

 

Our directors and executive officers immediately following the consummation of the Business Combination are described in the Offer Letter under the heading “Management—Post-Acquisition Management” beginning on page 92, which description is incorporated herein by reference.

 

B. Advisors

 

Reeder & Simpson P.C. acts as the Republic of the Marshall Islands counsel to us. Pillsbury Winthrop Shaw Pittman LLP acts as United States counsel to us.

 

C. Auditors

 

From the Company’s inception through the consummation of the Business Combination, Marcum LLP, an independent registered public accounting firm, 750 Third Avenue, New York, NY 10017, has acted as the Company’s independent registered public accounting firm.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

A. Offer Statistics

 

Not applicable.

 

B. Method and Expected Timetable

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

Selected Financial Data of AQU

 

Selected financial information regarding AQU is included under the heading “Item 3. Key Information –A. Selected Financial Data” of the Company’s annual report on Form 20-F filed on May 15, 2014, and is incorporated herein by reference.

 

Selected Financial Data of Hongri

 

Following the Business Combination, Hongri is considered to be our predecessor for accounting purposes, as further described in Item 18 of this report. The following table presents selected financial data regarding Hongri’s business. It should be read in conjunction with its consolidated financial statements and related notes contained elsewhere in this report and the information under Item 5 “Operating and Financial Review and Prospects.” The selected consolidated statement income data for the fiscal years ended December 31, 2013 and 2012, and the selected consolidated balance sheet data as of December 31, 2013 and 2012 have been derived from Hongri’s audited consolidated financial statements that are included in this report beginning on page F-1.

 

Hongri’s consolidated financial statements were prepared and presented in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.

 

2
 

 

    Years ended December 31,  
    2013     2012  
Statement of Income Data            
Total revenue   $ 99,559,814     $ 71,059,678  
Total cost of sales     (57,363,839 )     (35,791,977 )
Gross profit     42,195,975       35,267,701  
Profit for the year     25,795,357       19,536,762  
Total comprehensive income for the year   $ 28,392,616     $ 19,727,054  
Balance Sheet Data                
Cash and cash equivalents   $ 39,818,799     $ 32,148,309  
Working capital   $ 56,155,259     $ 37,807,621  
Total assets   $ 109,456,732     $ 79,274,717  
Total liabilities   $ 15,994,628     $ 14,205,229  
Equity   $ 93,462,104     $ 65,069,488  

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

The risks associated with our business are described in the Offer Letter under the heading “Risk Factors” beginning on page 15, which descriptions incorporated herein by reference.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

The history and development of AQU are described in the Offer Letter under the heading “Summary—Background Information” beginning on page 8, the heading “Information About Aquasition” beginning on page 46, and the heading “KBS Corporate History and Background” beginning on page 47, which descriptions are incorporated herein by reference.

 

On March 24, 2014, a Share Exchange Agreement and Plan of Liquidation (the “Exchange Agreement”) was entered into by and among AQU, KBS International Holdings, Inc., a Nevada corporation (“KBS”), Hongri International Holdings Ltd., a company organized and existing under the laws of the British Virgin Islands and wholly owned subsidiary of KBS (“Hongri”), and Cheung So Wa and Chan Sun Keung, each an individual and shareholder of KBS (each, a “Principal Stockholder”). Upon the closing of the transactions contemplated in the Exchange Agreement on August 1, 2014, the Company acquired 100% of the issued and outstanding equity interest in Hongri from KBS in exchange for the transaction consideration consisting of 22,957,455 shares of AQU common stock.

 

In addition, on July 29, 2014, AQU completed the Tender Offer related to the Business Combination and redeemed the 4,981,736 shares of common stock validly tendered and not withdrawn, and on August 1, 2014, it consummated the Business Combination by acquiring Hongri and issuing 22,957,455 shares of common stock to KBS. As a result, following consummation of the Business Combination, AQU had a total of 25,417,329 shares of common stock outstanding.

 

B. Business Overview

 

As a result of the Business Combination, all of our business is conducted through Hongri. The business of Hongri is described in the Offer Letter under the heading “Target’s Business” beginning on page 51, which description is incorporated herein by reference.

 

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C. Organizational Structure

 

The chart below presents our corporate structure as of the date of this report.  

 

 

 

Aquasition Corp. (Republic of the Marshall Islands) Roller Rome Limited (British Virgin Islands) Vast Billion Investment Limited (Hong Kong) France Cock (China) Limited (Hong Kong) Hongri International Holdings Limited (British Virgin Islands) Hongri (Fujian) Sports Goods Co., Ltd. (People’s Republic of China) Anhui Kai Xin Apparel Co. Ltd. (People’s Republic of China) 100% 100% 100% 100% 100 % 100% Shishi Hongri Brand Management Limited ( People’s Republic of China) 100 %

 

  

 

D. Property, Plants and Equipment

 

Information regarding our property, plants and equipment is described in the Offer Letter under the heading “Target’s Business” beginning on page 51, which description is incorporated herein by reference.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not required.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Reference is made to the disclosure contained in the Offer Letter under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Target Company” beginning on page 81 and that information is incorporated herein by reference.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

Our directors and executive officers immediately following the consummation of the Business Combination are described in the Offer Letter under the heading “Management—Post-Acquisition Management” beginning on page 92, which description is incorporated herein by reference.

 

4
 

 

B. Compensation

 

The compensation of our executive officers and directors is described in the Offer Letter under the heading “Director and Executive Compensation” beginning on page 95, which description is incorporated herein by reference.

 

C. Board Practices

 

The Company’s board of directors consist of seven members, Keyan Yan, Stanley Wong, Stylianos Stergios Sougioultzoglou,, Y. Tristan Kuo, John Sano, Meng Zhou and Chi Yee Gaw, who were elected to serve until their successors are duly elected and qualified. Our directors may be elected by the holders of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled to vote generally in the election of directors. Each director so elected holds office for the term, if any, as may be specified in the resolution appointing him or until his earlier death, disqualification, resignation or removal. The directors may appoint one or more directors to fill a vacancy on the Board of Directors.

 

The Board has established three standing committees: the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. Each of the Audit Committee, Compensation Committee and Governance and Nominating Committee are comprised entirely of independent directors. From time to time, the Board may establish other committees.

 

Audit Committee

 

Our Audit Committee is currently composed of three members: Y. Tristan Kuo, Meng Zhou and Chi Yee Gaw. Our Board of Directors determined that each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an “independent” director within the meaning of the NASDAQ Marketplace Rules. Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Mr. Kuo serves as Chair of the Audit Committee.

 

Our Board of Directors has determined that Mr. Kuo is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.

 

Compensation Committee

 

Our Compensation Committee is currently composed of three members: Meng Zhou, John Sano and Y. Tristan Kuo, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Zhou serves as Chair of the Compensation Committee.

 

Our Compensation Committee assists the Board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers.

 

Governance and Nominating Committee

 

Our Governance and Nominating Committee is currently composed of three members: John Sano, Y. Tristan Kuo and Meng Zhou, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Sano serves as Chair of the Governance and Nominating Committee.

 

The Governance and Nominating Committee assists the Board in identifying individuals qualified to become our directors and in determining the composition of the Board and its committees.

 

D. Employees

 

As of the closing of the Business Combination, we have approximately 350 full-time employees. The information in the Offer Letter under the heading “Target’s Business—Employees” on page 61 is incorporated herein by reference.

 

E. Share Ownership

 

The following table sets forth information regarding beneficial ownership of each class of our voting securities as of August 7, 2014 (i) by each person who is known by us to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group.

 

5
 

 

Name

 

Office, If Any

Title of Class Amount and Nature of Beneficial Ownership (1) Percent of Class (2)
Officers and Directors
Keyan Yan (3) Chairman, CEO and President Common Stock 13,364,796 52.6%
Stanley Wong Chief Financial Officer Common Stock 219,465 *
Stylianos Stergios Sougioultzoglou (4) Director, Head of Investor Relations and Chief Strategic Officer Common Stock 2,081,500 8.1%
Y. Tristan Kuo Director Common Stock 0 *
John Sano Director Common Stock 0 *
Meng Zhou Director Common Stock 0 *
Chi Yee Gaw Director Common Stock 0 *

All officers and directors as a group

(7 persons named above)

    15,665,761 60.8%
5% Security Holders
Chan Sun Keung (3)   Common Stock 13,364,796 52.6%
Aqua Investments Corp. (4)   Common Stock 2,081,500 8.1%
Leonidas S. Polemis (4)   Common Stock 2,081,500 8.1%
Matthew C. Los (4)   Common Stock 2,081,500 8.1%
Nicholas John Frangos (4)   Common Stock 2,081,500 8.1%
Themistoklis Kalapotharakos (4)   Common Stock 2,081,500 8.1%
Bay Peak, LLC (5)   Common Stock 1,369,725 5.4%
Cory Roberts (5)   Common Stock 1,369,725 5.4%
China Canadian Opportunity, L.P. (6)   Common Stock 1,440,667 5.7%
Ground Floor Capital (China) Inc. (6)   Common Stock 1,440,667 5.7%
David Steele (6)(7)   Common Stock 2,704,505 10.6%

* Less than 1%

 

(1) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our ordinary shares.

 

(2) As of August 7, 2014, a total of 25,417,329 shares of commons stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the denominator.

 

(3) On March 9, 2011, Keyan Yan entered into an option agreement with Mr. Chan Sun Keung, which was amended on August 1, 2014. Pursuant tot the option agreement, as amended, Mr. Yan has the option to acquire all of the shares of common stock of the Company that Chan Sun Keung acquired. As a result, Mr. Yan may be deemed to be a beneficial owner of the shares held by Chan Sun Keung.

 

(4) Including 368,000 shares underlying warrants owned by Aqua Investments Corp., control of which is shared by the indicated persons.

 

(5) Mr. Cory Roberts is the principal of Bay Peak, LLC and has voting and investment control over the securities held by it.

 

(6) China Canadian Opportunity, L.P.’s voting and dispositive decisions with regard to its partnership interests are made by Ground Floor Capital (China) Inc., its general partner. Ground Floor Capital (China) Inc.’s voting and dispositive decisions with regard to its shares are made by Mr. David Steele, its President and Director. Therefore, both Ground Floor Capital (China) Inc. and Mr. Steele may be deemed to have voting and dispositive power with respect to the shares held by China Canadian Opportunity, L.P.

 

(7) Includes 244,630 shares of our common stock held by China - Ground Floor Holdings, L.P, 84,543 shares of our common stock held by China – Ground Floor Holdings VI, L.P., 1,440,667 shares of our common stock held by China Canadian Opportunity, L.P., 837,169 shares of our common stock held by China Canadian Opportunity VI, L.P., 96,047 shares of our common stock held by Kema Management (USA), Inc., 181 shares of our common stock held by Kema Management LTD, and 1,268 shares of our common stock held by Mr. David Steele. China - Ground Floor Holdings, L.P and China – Ground Floor Holdings VI, L.P.’s voting and dispositive decisions with regard to each entity’s partnership interests are made by Ground Floor Capital, LLC ("Ground Floor LLC"), its general partner. Ground Floor LLC’s voting and dispositive decisions with regard to its membership interests are made by Mr. David Steele, its sole member. China Canadian Opportunity, L.P.’s voting and dispositive decisions with regard to its partnership interests are made by Ground Floor Capital (China) Inc. (“Ground Floor Inc.”), its general partner. Ground Floor Inc.’s voting and dispositive decisions with regard to its shares are made by Mr. David Steele, its President and Director. China Canadian Opportunity VI, L.P.’s voting and dispositive decisions with regard to its membership interests are made by Ground Floor Capital (China 88) Inc. (“China 88”), its general partner. China 88’s voting and dispositive decisions with regard to its shares are made by Mr. David Steele, its President and Director. Each of Kema Management (USA), Inc. and Kema Management LTD’s voting and dispositive decisions with regard to its stock are made by David Steele, each entity’s President. Therefore, Mr. Steele may be deemed to share voting and dispositive power with Ground Floor LLC with respect to the shares of our common stock held by China - Ground Floor Holdings, L.P and China – Ground Floor Holdings VI, L.P.; Mr. Steele may be deemed to share voting and dispositive power with Ground Floor Inc. with respect to the shares of our common stock held by China Canadian Opportunity, L.P.; Mr. Steele may be deemed to share voting and dispositive power with China 88 with respect to the shares of our common stock held by China Canadian Opportunity VI, L.P.; and Mr. Steele may be deemed to have voting and dispositive power with respect to the shares of our common stock held by each of Kema Management (USA), Inc. and Kema Management LTD.

 

6
 

 

None of our major shareholders have different voting rights from other shareholders.

 

On August 1, 2014, the Company, Aquasition Investments Corp. (“AQU Investments”), Cheung So Wa and Chan Sun Keung (the “Principal Stockholders”) entered into a voting agreement (the “Voting Agreement”), under which, during the term of the agreement, AQU Investments and the Principal Stockholders agree to vote or cause to be voted all of their respective shares of the Company to ensure that the number of directors constituting the Board will be set and remain at seven directors. In addition, AQU Investments and the Principal Stockholders agreed to vote or cause to be voted, whether at a meeting of stockholders or by written consent, all of their respective shares to ensure that the following persons are elected to the Board: (i) three persons nominated by a majority of the shares held by the Principal Stockholders; (ii) one person nominated by AQU Investments; and (iii) three persons nominated by agreement between the Principal Stockholders and AQU Investments. Any vacancy among the members of the Board will be filled by the appointment or election of a person nominated by the persons or groups entitled under the Voting Agreement to designate the vacating member. The Voting Agreement also provides that any acquisition by the Company or any subsidiary of any entity owned of record or beneficially more than five percent by either of the Principal Stockholders will require the approval of the director designed by AQU Investments, which approval will not be unreasonably delayed or withheld.

 

The Voting Agreement will terminate upon as to any shareholder party to the Voting Agreement in the event such shareholder party holds less than one-half of the shares held by it on August 1, 2014.

 

On August 1, 2014, the Company, AQU Investments, the Principal Stockholders and certain key personnel of the Company and KBS entered into a resale lock-up agreement (the “Resale Lock-Up Agreement”). According to the Resale Lock-Up Agreement, for a period of 180 days (for AQU Investments) or one year (for other shareholder parties to the Resale Lock-Up Agreement) from the date of this Resale Lock-Up Agreement, all of the shareholder parties to this agreement will not, directly or indirectly, offer, sell, contract to sell, pledge, grant any option for the sale of, or otherwise dispose of any shares, securities convertible into or exchangeable for shares, options or rights to acquire shares or publicly announce the intention to do any of the foregoing.

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

Please refer to Item 6 “Directors, Senior Management and Employees—E. Share Ownership.”

 

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B. Related Party Transactions

 

Related party transactions are described in the Offer Letter under the heading “Certain Relationships and Related Transactions” beginning on page 110, which description is incorporated herein by reference.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

Financial Statements

 

We have appended consolidated financial statements filed as part of this report. See Item 18 “Financial Statements.”

 

Legal Proceedings 

 

We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.  We are currently not party to any legal or arbitration proceedings, including those relating to bankruptcy, receivership or similar proceedings and those involving any third party, which may have, or have had in the recent past, significant effects on our financial position or profitability.

 

Dividend Policy

 

As required by the Exchange Agreement, promptly following the consummation of the Business Combination, the Board of Directors will adopt a dividend policy for the payment of an annual dividend for the first two fiscal years post-closing in an amount equal to at least twenty percent (20%) of our distributable profits after tax and after compulsory statutory reserves, which can be no less than 10% of after-tax income in China. After the first two years, the Board of Directors may elect to modify the dividend policy.

 

B. Significant Changes

 

The historical financial statements of Hongri which are included elsewhere in this report have been prepared in accordance with IFRS as issued by the IASB and presented in US Dollars. The historical financial statements of Aquasition which are included elsewhere in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and presented in US Dollars.

 

ITEM 9. THE OFFER AND LISTING

 

A. Offer and Listing Details

 

The price history for our securities is described in the Offer Letter under the heading “Market Price Information” beginning on page 14, which description is incorporated herein by reference. A description of the rights of our securities other than equity securities is included under the heading “Description of Securities” in our registration statement on Form F-1 (File No. 333-180571), initially filed with the Securities and Exchange Commission on April 4, 2012, as amended, which description is incorporated herein by reference.

 

B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

See our disclosures above under “A. Offer and Listing Details.”

 

D. Selling Shareholders

 

Not applicable.

 

8
 

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Our amended and restated articles of incorporation authorize the issuance of up to 155,000,000 shares with a par value of $0.0001, consisting of 150,000,000 shares of common stock and 5,000,000 shares of preferred stock.

 

On August 7, 2014 and December 31, 2013, there were 25,417,329 shares of common stock and 7,305,500 (including 4,995,000 shares that were subject to redemption) shares of common stock issued and outstanding. We have never issued any preferred stock.

 

On August 7, 2014 and December 31, 2013, we had 5,918,000 redeemable warrants outstanding, including 368,000 warrants underlying the placement units. Each redeemable warrant entitles the holder to purchase one share of common stock at a price of $11.50 and became exercisable on the consummation of the Business Combination. The warrants included in the placement units are identical to those redeemable warrants sold as part of the units in our IPO except that such warrants may be exercised on a cashless basis at any time after an acquisition transaction and even if there is not an effective registration statement relating to the shares underlying the warrants and the placement units and underlying securities are subject to certain transfer restrictions. We also issued to the representative of the underwriters, concurrently with our IPO, for a purchase price of $100, an option to purchase 250,000 units, each unit representing one share of common stock and one redeemable warrant.

 

B. Memorandum and Articles of Association

 

The following represents a summary of certain key provisions of our articles of incorporation and bylaws. The summary does not purport to be a summary of all of the provisions of our articles of incorporation and bylaws. For more complete information you should read our amended and restated articles of incorporation and bylaws, each listed as an exhibit to this report.

 

We were incorporated in the Marshall Islands on January 26, 2012 under the Marshall Islands Business Corporations Act (“BCA”). The purpose of the Company is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the BCA. Our amended and restated articles of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.

 

Description of Common Stock

 

Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Upon our dissolution, liquidation or winding up of the affairs of the Company, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders or our common stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities.

 

Blank Check Preferred Stock.  

 

Our Board of Directors is authorized, without any further vote or action by our stockholders, to issue up to 5,000,000 shares of preferred stock in different classes and series and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the ordinary shares, at such times and on such other terms as they think proper. Our Board of Directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

 

9
 

 

Directors

 

The business and affairs of the Company are managed by or under the direction of our Board of Directors.

 

Our directors are elected by the holders of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled to vote generally in the election of directors (“Voting Stock”). Our amended and restated articles of incorporation provide that cumulative voting shall not be used to elect directors. Each director will be elected to serve until the next annual meeting of shareholders and until his/her successor shall have been duly elected and qualified, except in the event of his/her death, resignation, removal or the earlier termination of his/her term of office.

 

Any director or the entire Board of Directors may be removed at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the total voting power of the Voting Stock entitled to vote thereon or with cause by directors constituting at least two-thirds of the entire Board.

 

Vacancies in the Board of Directors occurring by death, resignation, the creation of new directorships, the failure of the shareholders to elect the whole board at any annual election of directors, or, except as herein provided, for any other reason, including removal of directors for cause, may be filled either by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, at any special meeting called for that purpose or at any regular meeting of the Board. Vacancies occurring by removal of directors without cause may be filled only by vote of the shareholders.

 

Shareholder Meetings

 

Annual stockholder meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands.

 

Under our amended and restated articles of incorporation, special meetings may be called by the board of directors, or by the secretary of the Company requested by stockholders representing certain amount of voting power. Our board of directors shall give not less than 15 days and not more than 60 days prior written notice of a shareholders’ meeting to each shareholder of record entitled to vote thereat and to each shareholder of record who, by reason of any action proposed at such meeting would be entitled to have his/her shares appraised if such action were taken, and the notice shall include a statement of that purpose and to that effect.

 

Our bylaws provide that a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are shareholders present in person or by proxy representing not less than a majority of the votes of the shares issued and outstanding and entitled to vote on resolutions of shareholders to be considered at the meeting.

 

If a quorum is present, the affirmative vote of a majority of the shares of stock represented at the meeting will be the act of the shareholders. At any meeting of shareholders, each shareholder entitled to vote any shares on any manner to be voted upon at such meeting shall be entitled to one vote on such matter for each such share. Any action required or permitted to be taken at a meeting, may be taken without a meeting if a consent in writing setting forth the action so taken, is signed by all the shareholders entitled to vote with respect to the subject matter thereof.

 

Dissenters’ Rights of Appraisal and Payment.

 

Under the BCA, our stockholders have the right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation. In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed appraiser.

 

10
 

 

Stockholders' Derivative Actions

 

Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.

 

Indemnification of Officers and Directors

 

The BCA authorizes corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties. Our amended and restated articles of incorporation include a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest extent permitted by law. We must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain employees for some liabilities. 

 

The limitation of liability and indemnification provisions in our amended and restated articles of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty.  These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders.  In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

 

C. Material Contracts

 

Information concerning our material contracts governing the business of the Company is included elsewhere in this report or in the information incorporated by reference herein.

 

On August 1, 2014, the Company entered into an employment agreement with Keyan Yan, pursuant to which Mr. Yan agreed to act as the Chief Executive Officer of the Company. The employment agreement has a term of three years which term may be extended by agreement between Mr. Yan and the Company. The initial annual base salary of Mr. Yan will be determined by the Board within 30 days following the date of the employment agreement. His compensation will be reviewed from time to time according to the Company’s policies. Mr. Yan is eligible to participate in annual performance bonus plans as may be established by the Company from time to time as well as the Company’s equity incentive plan when and if such a plan is adopted by the Board.

 

On August 1, 2014, the Company also entered into an employment agreement with Stanley Wong, pursuant to which Mr. Wong agreed to act as the Chief Financial Officer of the Company. The employment agreement has a term of three years which term may be extended by agreement between Mr. Wong and the Company. Same as Mr. Yan, Mr. Wong’s initial annual base salary will be determined by the Board within 30 days following the date of the employment agreement. He is eligible to participate in annual performance bonus plans as may be established by the Company from time to time as well as the Company’s equity incentive plan when and if such a plan is adopted by the Board.

 

See the description of the Voting Agreement and the Resale Lock-Up Agreement under Item 6E of this report, which is incorporated herein by reference.

 

D. Exchange Controls

 

Marshall Islands Exchange Controls

 

Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.

 

BVI Exchange Controls

 

There are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary shares or on the conduct of our operations in the BVI. There are no material BVI laws that impose any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of Hongri ordinary shares. BVI law and Hongri’s memorandum and articles of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote its ordinary shares.

 

11
 

 

PRC Exchange Controls

 

Under the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office. Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local office.  Unless otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.

 

On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange administration regulations.

 

On August 29, 2008, SAFE promulgated Notice 142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted RMB may be used. Notice 142 requires that RMB funds converted from the foreign currency capital of a foreign-funded enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its supervision over the flow and use of RMB funds converted from the foreign currency capital of a foreign-funded enterprise. The use of such RMB capital may not be changed without SAFE’s approval, and may not, in any case, be used to repay or prepay RMB loans if such loans are outstanding. Violations of Notice 142 will result in severe penalties, such as heavy fines as set out in the relevant foreign exchange control regulations.

 

E. Taxation

 

The material United States federal income tax consequences of the Business Combination and of owning and disposing of our securities following the Business Combination are described in the Offer Letter under the heading “Material U.S. Federal Income Tax Consequences” beginning on page 113, which description is incorporated herein by reference.

 

F. Dividends and Paying Agents

 

As required by the Exchange Agreement, promptly following the consummation of the Business Combination, the Board of Directors will adopt a dividend policy for the payment of an annual dividend for the first two fiscal years post-closing in an amount equal to at least twenty percent (20%) of our distributable profits after tax and after compulsory statutory reserves, which can be no less than 10% of after-tax income in China. After the first two years, the Board of Directors may elect to modify the dividend policy.

 

12
 

 

G. Statement by Experts

 

Not applicable.

 

H. Documents on Display

 

We have filed this report on Form 20-F with the SEC under the Exchange Act. Statements made in this report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

 

We are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed by us with the SEC, including this report, may be inspected and copied at the public reference room of the SEC at 100 F Street, N.E., Washington D.C. 20549. You can also obtain copies of this report by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330.

 

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

 

I. Subsidiary Information

 

Not applicable.

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

 

Foreign Exchange Risk

 

While our reporting currency is the U.S. dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $4.7 million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2013. As of December 31, 2013, our accumulated other comprehensive income was $4.6 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

The value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.

 

13
 

 

Inflation

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A description of the rights of our securities other than equity securities is included under the heading “Description of Securities” in our registration statement on Form F-1 (File No. 333-180571), initially filed with the Securities and Exchange Commission on April 4, 2012, as amended, which description is incorporated herein by reference.

 

14
 

 

PART II

 

Not Required.

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

Not applicable.

 

ITEM 18. FINANCIAL STATEMENTS

 

The financial statements are filed as part of this annual report beginning on page F-1.

 

ITEM 19. EXHIBITS

 

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

 

15
 

 

SIGNATURE

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this report on its behalf.

 

 Date: August 7, 2014 AQUASITION CORP.
   
  /s/ Keyan Yan
  Keyan Yan
  Chief Executive Officer

 

16
 

 

Index to FINANCIAL STATEMENTS

 

  Page
   
Aquasition Corp.  
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets as of December 31, 2013 and 2012 F-3
Statements of Operations for the year ended December 31, 2013, the period from January 26, 2012 (inception) through December 31, 2012 and the period from January 26, 2012 (inception) through December 31, 2013 F-4
Statements of Changes in Stockholders’ Equity for the period from January 26, 2012 (inception) through December 31, 2013 F-5
Statements of Cash Flows for the year ended December 31, 2013, the period from January 26, 2012 (inception) through December 31, 2012 and the period from January 26, 2012 (inception) through December 31, 2013 F-6
Notes to Financial Statements F-7 - F-15
   
Hongri International Holdings Limited  
Independent Auditor’s Report F-18
Consolidated Statements of Comprehensive Income F-19
Consolidated Statements of Financial Position F-20
Consolidated Statements of Changes in Equity F-21
Consolidated Statements of Cash Flows F-22
Notes to the Consolidated Financial Statements F-24 - F-53
   
Unaudited Pro Forma Condensed Combined Financial Statements  
Pro Forma Condensed Combined Balance Sheet F-56
Pro Forma Condensed Combined Income Statement F-58

 

F- 1
 

   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Audit Committee of the

Board of Directors and Shareholders of

Aquasition Corp.

 

We have audited the accompanying balance sheets of Aquasition Corp. (a company in the development stage) (the “Company”) as of December 31, 2013 and 2012, and the related statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2013, the period from January 26, 2012 (inception) through December 31, 2012 and for the period from January 26, 2012 (inception) through December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aquasition Corp. (a company in the development stage) as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the year ended December 31, 2013, for the period from January 26, 2012 (inception) through December 31, 2012 and for the period from January 26, 2012 (inception) through December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has no present revenue, and the Company’s cash and working capital as of December 31, 2013 are not sufficient to complete its planned activities for the upcoming year. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also included in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/Marcum llp

 

Marcum LLP

New York, NY

May 15, 2014

 

F- 2
 

 

Aquasition Corp.

(A Company in the Development Stage)

 

BALANCE SHEETS

 

    December 31,  
    2013     2012  
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 27,918     $ 328,235  
Prepaid expenses     14,732       -  
Interest on cash held in trust account     7,972       -  
Total Current Assets     50,622       328,235  
Investments held in trust     57,168,785       57,168,785  
Total Assets   $ 57,219,407     $ 57,497,020  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities:                
Accounts payable and accrued expenses (includes related party payable of $105,000 and $15,000 at December 31, 2013 and 2012, respectively)   $ 131,763     $ 21,722  
Accrued offering costs     -       72,105  
Loan payable - related party     -       35,650  
Advances from related party     69,904       19,254  
Total Current Liabilities     201,667       148,731  
Warrant liability     3,432,440       3,386,998  
Total Liabilities     3,634,107       3,535,729  
                 
Commitment and Contingencies                
                 
Common stock subject to possible redemption or tender: 4,995,000 shares at redemption value     51,448,500       51,448,500  
                 
Stockholders' Equity:                
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding     -       -  
Common stock, $0.0001 par value; 150,000,000 shares authorized; 2,310,500 shares issued and outstanding at December 31, 2013 and 2012, excluding 4,995,000 shares subject to redemption     231       231  
Additional paid-in capital     5,621,277       5,621,277  
Deficit accumulated during the development stage     (3,484,708 )     (3,108,717 )
Total Stockholders' Equity     2,136,800       2,512,791  
Total Liabilities and Stockholders' Equity   $ 57,219,407     $ 57,497,020  

 

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

 

F- 3
 

  

Aquasition Corp.

(A Company in the Development Stage)

 

STATEMENTS OF OPERATIONS

 

          Period from     Period from  
          January 26, 2012     January 26, 2012  
    Year Ended     (inception) through     (inception) through  
    December 31, 2013     December 31, 2012     December 31, 2013  
Operating expenses:                  
General and administrative expenses (1)   $ 338,521     $ 48,388     $ 386,909  
Loss from operations     (338,521 )     (48,388 )     (386,909 )
                         
Other income (expense):                        
Interest income     7,972       3,785       11,757  
Change in fair value of warrants     (45,442 )     (3,064,114 )     (3,109,556 )
Total other expense, net     (37,470 )     (3,060,329 )     (3,097,799 )
                         
Net loss   $ (375,991 )   $ (3,108,717 )   $ (3,484,708 )
                         
Weighted average number of common shares outstanding, basic and diluted     2,310,500       1,548,405          
Net loss per common share outstanding, basic and diluted   $ (0.16 )   $ (2.01 )        

 

(1) Includes related party expenses of $90,000, $15,000 and $105,000 for the year ended December 31, 2013, the period from January 26, 2012 (inception) through December 31, 2012 and the period from January 26, 2012 (inception) through December 31, 2013, respectively.

 

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

 

F- 4
 

 

Aquasition Corp.

(A Company in the Development Stage)

 

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Period from January 26, 2012 (Inception) to December 31, 2013

 

    Common Stock     Additional Paid-     Deficit
Accumulated
During the
Development
    Total
Stockholders'
 
    Shares     Amount     in Capital     Stage     Equity  
Sale on March 15, 2012 of common stock to Founders at $0.02 per share     1,437,500     $ 144     $ 24,856     $ -     $ 25,000  
Sale on November 1, 2012 of 5,000,000 units at $10.00 per unit     5,000,000       500       49,999,500       -       50,000,000  
Proceeds from private placement of 337,750 units on November 1, 2012 at $10.00 per unit     337,750       34       3,377,466       -       3,377,500  
Sale on November 7, 2012 of 550,000 units at $10.00 per unit     550,000       55       5,499,945       -       5,500,000  
Warrant liability recorded on November 7, 2012     -       -       (322,884 )     -       (322,884 )
Underwriters' discount and offering expenses     -       -       (1,812,208 )     -       (1,812,208 )
Sale on November 1, 2012 of underwriters unit purchase option     -       -       100       -       100  
Proceeds from private placement of 30,250 units on November 7, 2012 at $10.00 per unit     30,250       3       302,497       -       302,500  
Proceeds subject to possible redemption of 4,500,000 shares on November 1, 2012     (4,500,000 )     (450 )     (46,349,550 )     -       (46,350,000 )
Proceeds subject to possible redemption of 495,000 shares on November 7, 2012     (495,000 )     (50 )     (5,098,450 )     -       (5,098,500 )
Forfeiture of common stock issued to Founders on December 15, 2012     (50,000 )     (5 )     5       -       -  
Net loss for the period from January 26, 2012 to December 31, 2012     -       -       -       (3,108,717 )     (3,108,717 )
Balance as of December 31, 2012     2,310,500       231       5,621,277       (3,108,717 )     2,512,791  
Net loss                             (375,991 )     (375,991 )
Balance as of December 31, 2013     2,310,500     $ 231     $ 5,621,277     $ (3,484,708 )   $ 2,136,800  

 

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

 

F- 5
 

  

Aquasition Corp.

(A Company in the Development Stage)

 

STATEMENTS OF CASH FLOWS

 

          Period from     Period from  
          January 26, 2012     January 26, 2012  
    Year Ended     (inception) through     (inception) through  
    December 31, 2013     December 31, 2012     December 31, 2013  
                   
Cash Flows from operating activities:                        
Net loss   $ (375,991 )   $ (3,108,717 )   $ (3,484,708 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Change in fair value of warrant liability     45,442       3,064,114       3,109,556  
Interest reinvested into Trust Account     (7,972 )     (3,785 )     (11,757 )
Changes in operating assets and liabilities:                        
Prepaid expenses     (14,732 )             (14,732 )
Accounts payable and accrued expenses     110,041       21,722       131,763  
Net cash used in operating activities     (243,212 )     (26,666 )     (269,878 )
                         
Cash flows from investing activities:                        
Principal deposited in Trust Account     -       (57,165,000 )     (57,165,000 )
Net cash used in investing activities     -       (57,165,000 )     (57,165,000 )
                         
Cash flows from financing activities:                        
Proceeds from sale of common stock to sponsor     -       25,000       25,000  
Proceeds from loan payable - related party     -       85,650       85,650  
Repayment of loan payable - related party     (35,650 )     (50,000 )     (85,650 )
Advance from related party     50,650       95,934       146,584  
Repayment of advance from related party     -       (76,680 )     (76,680 )
Net proceeds from public offering     -       53,759,897       53,759,897  
Proceeds from underwriters unit purchase option     -       100       100  
Gross proceeds from private placement     -       3,680,000       3,680,000  
Payment of offering costs     (72,105 )     -       (72,105 )
Net cash (used in) provided by financing activities     (57,105 )     57,519,901       57,462,796  
                         
Increase in cash during period     (300,317 )     328,235       27,918  
Cash at beginning of period     328,235       -       -  
Cash at end of period   $ 27,918     $ 328,235     $ 27,918  
                         
Supplemental disclosure of non-cash financing activities:                        
Accrued offering cost   $ -     $ 72,105     $ 72,105  

 

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

 

F- 6
 

  

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

Note 1 - Organization, Plan of Business Operations and Liquidity

 

Aquasition Corp. (a development stage company) (the “Company”) was incorporated in the Marshall Islands on January 26, 2012 as a blank check company whose objective is to acquire, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar acquisition transaction, one or more operating businesses or assets (an “Acquisition Transaction”). The Company’s initial Acquisition Transaction is not limited to any specific geographic region or industry. However, the Company intends to focus on operating businesses and assets in the international maritime transportation, offshore and related maritime services industries, especially those requiring energy, commodity, and transportation of logistics expertise. See Note 8 for a discussion of the share exchange agreement entered into on March 24, 2014.

 

The accompanying financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The Company is a foreign private issuer (“FPI”), as defined by the rules and regulations of the SEC.

 

As of December 31, 2013, the Company had not yet commenced operations. All activity through November 1, 2012 relates to the Company’s formation and the public offering as described below. Subsequent to November 1, 2012, the Company is seeking to identify acquisition targets.

 

The Company is considered to be a development stage company and, as such, the Company’s financial statements are prepared in accordance with the Accounting Standards Codification (“ASC”) Topic 915 “Development Stage Entities.” The Company is subject to the risks associated with development stage companies.

 

The registration statement for the Company’s initial public offering (“Public Offering”) was declared effective on October 25, 2012. On November 1, 2012, the Company consummated the Public Offering and received proceeds, net of underwriter’s discount and offering expenses, of $48,187,792 and simultaneously received $3,377,500 from the issuance of 337,750 units (“Placement Units”) in a private placement (the “Private Placement”) (See Note 3).

 

The Company granted the underwriter in the Public Offering a 45-day option to purchase up to an additional 750,000 units (“Units”) solely to cover over-allotments, if any. On November 7, 2012, the underwriters exercised a portion of their option and the Company sold an additional 550,000 Units at a price of $10.00 per Unit, generating gross proceeds of $5,500,000. In addition, the Company sold an additional 30,250 Private Placement Units, generating gross proceeds of $302,500.

 

The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering and the Private Placement, although substantially all of the net proceeds are intended to be applied generally toward consummating an Acquisition Transaction. There is no assurance that the Company will be able to affect an Acquisition Transaction successfully. Upon the closing of the Public Offering, $57,165,000 ($10.30 per public share sold), including the proceeds of the Private Placement, was placed in a trust account (the “Trust Account”) and will be invested in United States government treasury bills having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended, that invest solely in U.S. treasuries until the earlier of the consummation of the Company’s initial Acquisition Transaction and the Company’s failure to consummate an Acquisition Transaction within the prescribed time.

 

Placing funds in the Trust Account may not protect those funds from third party claims against the Company. Although the Company will seek to have all vendors, service providers, prospective target businesses or other entities it engages, execute agreements with the Company waiving any claim of any kind in or to any monies held in the Trust Account, there is no guarantee that such persons will execute such agreements. The Company’s sponsor, officers and director’s (collectively referred to as the “Founders”) have agreed that they will be jointly and severally liable under certain circumstances to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or vendors or other entities that are owed money by the Company for services rendered, contracted for or products sold to the Company. However, they may not be able to satisfy those obligations should they arise. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. In addition, (1) interest income on the funds held in the Trust Account can be released to the Company to pay its income and other tax obligations and (2) interest income on the funds held in the Trust Account can be released to the Company to pay for its working capital requirements in connection with searching for an Acquisition Transaction.

 

F- 7
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

The Company’s units are listed on the Nasdaq Capital Market (“Nasdaq”). Pursuant to the Nasdaq listing rules, the target business or businesses that the Company completes an Acquisition Transaction with must collectively have a fair market value equal to at least 80% of the balance of the funds in the Trust Account (less deferred underwriting discounts and taxes) at the time of the execution of a definitive agreement for its initial Acquisition Transaction, although the Company may acquire a target business whose fair market value significantly exceeds 80% of the Trust Account balance.

 

The Company was required to determine if it was a FPI under Rule 3b4(d) of the Exchange Act, as of a date within 30 days of the filing of the Registration Statement with the SEC for the Public Offering. The Company determined it was a FPI prior to the filing of the Registration Statement. As a FPI, the Company will be required to comply with the tender offer rules in connection with its initial Acquisition Transaction. The Company is required to determine its status as a FPI on an ongoing basis for all subsequent fiscal years as of the last day of its most recently completed second fiscal quarter. On such date, if the Company no longer qualifies as a FPI (as set forth in Rule 3b4 of the Exchange Act), the Company will then become subject to the U.S. domestic issuer rules as of the first day of its fiscal year following the determination date.

 

The Company, after signing a definitive agreement for the acquisition of a target business, is required to provide shareholders who acquired shares in the Public Offering (“Public Shareholders”) with the opportunity to sell their public shares to the Company for a pro rata share of the Trust Account by means of a tender offer (or it may have the option of conducting redemptions in conjunction with a proxy solicitation pursuant to the proxy rules if the Company is no longer a FPI). Each Public Shareholder will be entitled to receive a full pro rata portion of the amount then in the Trust Account ($10.30 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company or necessary to pay its taxes). The Company will consummate an initial Acquisition Transaction only if holders of no more than 90% of the public shares elect to convert (in the case of a shareholder meeting) or sell their shares to the Company (in the case of a tender offer) and, solely if the Company seeks shareholder approval, a majority of the outstanding shares of common stock voted are voted in favor of the Acquisition Transaction. Notwithstanding the foregoing, the Amended and Restated Articles of Incorporation of the Company provides that a Public Shareholder, together with any other person with whom such Public Shareholder is acting in concert or as a “group” (within the meaning of Section 13 of the Securities Act of 1934, as amended), will be restricted from seeking conversion rights with respect to an aggregate of more than 20% of the shares of common stock sold in the Public Offering. A group will be deemed to exist if the Public Shareholder (i) files a Schedule 13D or 13G indicating the presence of a group or (ii) acknowledge to the Company that they are acting, or intend to act as a group. In connection with any stockholder vote required to approve an Acquisition Transaction, the Founders agreed (1) to vote any of their shares in the same manner as a majority of the Public Shareholders who vote at a meeting called for such purpose and (2) not to redeem any of their shares. In connection with a tender offer, the Founders will not sell any of their shares to the Company pursuant to any tender offer described above. In addition, the Founders or any of their affiliates have agreed that if they acquire any shares of common stock in or after the Public Offering, they will vote all such shares in favor of any Acquisition Transaction presented to the Company’s stockholders by the board of directors, and not to exercise any redemption rights in connection with any shares of common stock held by such person.

 

The Company’s Amended and Restated Articles of Incorporation provide that the Company will continue in existence only until May 1, 2014 (or August 1, 2014 if certain extension criteria are satisfied). If the Company has not completed an Acquisition Transaction by such date, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible release to the Public Shareholders, the aggregate amount then on deposit in the Trust Account, including any interest and the deferred underwriters discount but net of any taxes payable and any remaining net assets, and (iii) as promptly as possible dissolve and liquidate, subject (in the case of (ii) and (iii) above) to the Company’s obligations under Marshall Islands law to provide for claims of creditors and requirements of other applicable law. In such event, the Public Shareholders will be entitled to receive a pro rata portion of the Trust Account (initially $10.30 per share, plus any pro rata interest earned on the funds held in the Trust Account not previously released to the Company) .

 

The Company anticipates that in order to fund its working capital requirements, the Company will need to use all of the remaining funds not held in the Trust Account, the interest earned on the funds held in the Trust Account, as well as entering into contingent fee arrangements with its vendors. The Company will need to raise additional capital through loans or additional investments from its Founders or third parties. None of the Founders are under any obligation to advance funds to, or to invest in, the Company. Accordingly, the Company may not be able to obtain additional financing. If the Company is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of its business plan, and reducing overhead expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

F- 8
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

Note 2 - Significant Accounting Policies

 

Cash and Cash Equivalents

 

The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents.

 

Investment Held in Trust

 

The amounts held in the Trust Account represent substantially all of the proceeds of the Public Offering and are classified as restricted assets since such amounts can only be used by the Company in connection with the consummation of an Acquisition Transaction. The funds held in the Trust Account are invested primarily in highly liquid treasury bills.

 

Loss Per Share

 

Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Shares of common stock subject to possible redemption at December 31, 2013 and 2012 of 4,995,000 have been excluded from the calculation of basic loss per share since such shares, if redeemed, only participate in their pro rata share of the trust earnings. Loss per share assuming dilution would give effect to dilutive options, warrants, and other potential shares of common stock outstanding during the period. The Company has not considered the effect of warrants to purchase 5,918,000 shares of common stock and an option to purchase 250,000 units in the calculation of diluted loss per share, since the exercise of the warrants and the option is contingent upon the occurrence of future events.

 

Use of Estimates

 

The preparation of financial statements in conformity with 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 the reported amounts of revenue and expenses during the reporting period.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates. Significant estimates include the valuation of the warrant liability and the value of the common stock subject to possible redemption or tender.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times may exceed the Federal depository insurance coverage of $250,000. As of December 31, 2013, the Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

 

Income Taxes

 

The Company accounts for income taxes under ASC 740, “Income Taxes” (‘‘ASC 740’’). ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

 

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition. The Company has identified the Marshall Islands as its only ‘‘major’’ tax jurisdiction, as defined. Based on the Company’s evaluation, it has been concluded that there are not significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material changes to its financial position.

 

F- 9
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

The Company’s policy for recording interest and penalties associated with audits is to record them at such times as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the year ended December 31, 2013 and the period from January 26, 2012 (inception) through December 31, 2012. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

 

The Company’s tax returns from inception are open and subject to examination.

  

Common Stock subject to possible Redemption or Tender

 

There are 4,995,000 shares of common stock sold as part of units (the “Units”) issued in the Public Offering, which shares contained a redemption feature which allowed for the redemption of shares of common stock under the Company's Liquidation or Tender Offer/Stockholder Approval provisions. In accordance with ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of ASC 480. Although the Company did not specify a maximum redemption threshold, its Amended and Restated Articles of Incorporation provides that in no event will they redeem its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001. The Company will consummate an initial Acquisition Transaction only if holders of no more than 90% of the public shares elect to convert (in the case of a shareholder meeting) or sell their shares to the Company (in the case of a tender offer) and, solely if the Company seeks shareholder approval, a majority of the outstanding shares of common stock voted are voted in favor of the Acquisition Transaction.

 

Accordingly, at December 31, 2013 and 2012, 4,995,000 of the 5,500,000 public shares were classified outside of permanent equity at its redemption value because the redemption rights are subject to the occurrence of uncertain events that are outside of the Company’s control. The redemption value at December 31, 2013 was equal to approximately the pro rata share of the aggregate amount then on deposit in the Trust Account ($10.30 per share at December 31, 2013 and 2012).

 

Fair Value of Financial Instruments

 

Unless otherwise disclosed, the fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), approximates the carrying amounts represented in the accompanying balance sheets.

 

Recent Accounting Pronouncements

 

Management does not believe that any other recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.

 

Subsequent Events

 

Management has evaluated subsequent events that have occurred after the balance sheet date through the date the financial statements were publically available to determine if events or transactions occurring after the balance sheet date require potential adjustment to or disclosure in the financial statements and has concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements, except as described in Note 8.  

 

Warrant Liability

 

The Company accounts for the 5,550,000 warrants issued in connection with the Public Offering and the 368,000 warrants issued in connection with the Private Placement in accordance with the guidance contained in ASC 815, “Derivatives and Hedging,” whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instruments as a liability at its fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations.

 

F- 10
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

Note 3 - Initial Public Offering

 

On November 1, 2012, the Company sold 5,000,000 Units at an offering price of $10.00 per Unit generating gross proceeds of $50,000,000 in the Public Offering. Each Unit consists of one share of common stock of the Company and one warrant to purchase one share of common stock of the Company (“Redeemable Warrants”). Each Redeemable Warrant entitles the holder to purchase one share of common stock at a price of $11.50 commencing on the later of the completion of an initial Acquisition Transaction and October 24, 2013 and expiring five years from the completion of an initial Acquisition Transaction, provided that there is an effective registration statement covering the shares of common stock underlying the Redeemable Warrants. The Company may redeem the Redeemable Warrants at a price of $0.01 per Redeemable Warrant upon 30 days’ notice, only in the event that the last sale price of the common stock is at least $17.50 per share for any 20 trading days within a 30-trading day period (“30-Day Trading Period”) ending on the third day prior to the date on which notice of redemption is given, provided that there is a current registration statement in effect with respect to the shares of common stock underlying such Redeemable Warrants commencing ten days prior to the 30-Day Trading Period and continuing each day thereafter until the date of redemption. The Company is required to use its best efforts to maintain the effectiveness of the registration statement covering the Redeemable Warrants. However, there are no contractual penalties for failure to deliver securities if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such Redeemable Warrant shall not be entitled to exercise such Redeemable Warrant for cash and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the Redeemable Warrant exercise.

 

Simultaneously with the consummation of the Public Offering, the Company consummated the Private Placement with the sale of 337,750 Placement Units to its Founders at a price of $10.00 per share, generating total proceeds of $3,377,500. The Placement Units are identical to the Units sold in the Public Offering except that the warrants included in the Placement Units (i) will not be redeemable by the Company and (ii) may be exercised for cash or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees. Additionally, the Placement Units have been placed in escrow and the purchasers have agreed not to transfer, assign or sell any of the Placement Units, including the underlying securities (except to certain permitted transferees) until 30 days following the completion of an initial Acquisition Transaction. The securities held in the escrow account will only be released prior to the end of the escrow period if following the initial Acquisition Transaction, the Company consummates a subsequent transaction that results in all stockholders having a right to exchange their shares for cash or other consideration.

 

The Company sold to the underwriter, for $100, an option to purchase up to 250,000 units at $12.50 per unit. The units issuable upon exercise of this option are identical to those sold in the Public Offering except that the underlying warrants will expire on October 25, 2017. The underwriter’s unit purchase option will be exercisable starting on the later of the completion of an initial Acquisition Transaction and October 24, 2013 and expiring on October 24, 2017. The Company accounted for the fair value of the unit purchase option, inclusive of the receipt of $100 cash payment, as an expense of the Public Offering resulting in a charge directly to stockholders’ equity. The Company estimated that the fair value of this unit purchase option is approximately $617,960 (or $2.47 per unit) using a Black-Scholes option-pricing model. The fair value of the unit purchase option granted to the underwriter was estimated as of the date of grant using the following assumptions: (1) expected volatility of 35%, (2) risk-free interest rate of 1.05% and (3) expected life of five years. The unit purchase option may be exercised for cash or on a cashless basis, at the holder’s option, such that the holder may use the appreciated value of the unit purchase option (the difference between the exercise prices of the unit purchase option and the underlying Redeemable Warrants and the market price of the Units and underlying shares of common stock) to exercise the unit purchase option without the payment of any cash. The Company has the right to redeem the unit purchase option, in whole but not in part, in the event the Company’s shares of common stock trade in excess of $18.00 for any 20 trading days in a 30-day period following the completion of an initial Acquisition Transaction. If upon completion of an Acquisition Transaction, the Founders are required to cancel any Founder’s shares or Placement Units, and such securities are not replaced following the Acquisition Transaction, the number of units that may be purchased upon the exercise of the unit purchase option will be reduced on a pro-rata basis with the reduction in Founder’s shares and Placement Units.

 

The Company granted the underwriter in the Public Offering a 45-day option to purchase up to an additional 750,000 Units solely to cover over-allotments, if any. On November 7, 2012, the underwriters exercised a portion of their option and the Company sold an additional 550,000 Units at a price of $10.00 per Unit generating gross proceeds of $5,500,000. In addition, the Company sold an additional 30,250 Private Placement Units generating gross proceeds of $302,500.

 

Note 4 - Commitments

 

The Founder and holders of the Private Placement Units (or underlying shares of common stock) are entitled to demand certain registration rights with respect to the Founders’ shares and the Private Placement Units (or underlying shares of common stock) as well as any other warrants that may be issued to them (or underlying shares of common stock) pursuant to an agreement signed on the October 25, 2012.

 

F- 11
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

The Company entered into an underwriting agreement with the underwriter of the Public Offering (the “Underwriting Agreement”). Pursuant to the Underwriting Agreement, the Company paid 2.5% of the gross proceeds of the Public Offering or $1,387,500 as underwriting discounts and commissions upon closing of the Public Offering. The Company will also pay the underwriter in the Public Offering a deferred underwriting discount of 2.5% of the gross proceeds of the Public Offering which is held in the Trust Account. The Underwriters will not receive their portion of their deferred underwriting discount related to redeemed or converted shares in connection with an Acquisition Transaction.

 

The Company presently occupies office space provided by Seacrest Shipping Co. Ltd., an affiliate of the Founders. Such affiliate has agreed that, until the Company consummates an Acquisition Transaction, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $7,500 per month for such services commencing on November 1, 2012, provided however, that such affiliate has agreed that after four months the monthly fee will begin to accrue and will only be payable thereafter upon completion of an Acquisition Transaction. The Company incurred rent expense of $90,000 and $15,000 under this arrangement for the year ended December 31, 2013 and for the period from January 26, 2012 (inception) through December 31, 2012, respectively, which is included in general and administrative expenses in the accompanying statements of operations. The Company had an accrued related party expense balance under this arrangement of $105,000 and $15,000 as of December 31, 2013 and 2012, respectively, which is included in accounts payable and accrued expenses in the accompanying balance sheets.

 

Finder’s and Financial Services Agreements

 

On September 10, 2013, Aquasition entered into a Master Finder’s Fee Agreement (as amended from time to time, the “Finder’s Agreement”) with SNV Global Ltd. (“SNV”), pursuant to which SNV agreed to provide introductions to potential target companies to Aquasition, including KBS, among other services. Pursuant to an addendum to the Finder’s Agreement, dated February 26, 2014, the parties agreed that SNV would be entitled to a finder’s fee equal to 1.5% of the pre-closing equity value of Target to be paid in newly issued shares of the combined company, payable if, and only if, an acquisition transaction with an introduced target is completed.

 

On May 8, 2014, Aquasition entered into an agreement (the “STRH Agreement”) with SunTrust Robinson Humphery, Inc. (“STRH”), pursuant to which STRH will provide Aquasition certain financial advisory services in connection with the Acquisition. Pursuant to the STRH Agreement, STRH will be entitled to a cash fee equal to $1,250,000 upon completion of an acquisition transaction prior to August 1, 2014 or during the term of STRH’s engagement. If an acquisition transaction is not completed within such period, then for a period of 24 months thereafter, if Aquasition is entitled to a breakup fee related to an acquisition transaction, then STRH will be entitled to 10% of any such breakup fee. In addition, Aquasition will reimburse STRH its out-of-pocket expenses related to the STRH Agreement, up to a maximum of $50,000.

 

On May 12, 2014, Aquasition entered into an agreement (the “EBC Agreement”) with Early Bird Capital, Inc. (“EBC”), pursuant to which EBC will provide Aquasition certain financial advisory services in connection with the Acquisition. Pursuant to the EBC Agreement, EBC will be entitled to a cash fee equal to $200,000, equity fee in the amount of 35,000 newly issued shares of the combined company, and an additional fee equal to 4% of the amount of the gross proceeds held in the trust account at closing of the Acquisition (excluding amounts attributable to Aquasition’s sponsors or investors introduced by such sponsors), all payable upon closing of the Acquisition. In addition, Aquasition will reimburse EBC its out-of-pocket expenses related to the EBC Agreement.

 

Note 5 - Stockholders Equity

 

Preferred Stock

 

The Company is authorized to issue 5,000,000 preferred shares with a par value of $0.0001 per share with such designation, rights and preferences as may be determined by the Company’s board of directors. No preferred shares are currently issued or outstanding.

 

Common Stock

 

The Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.0001 per share.

 

In connection with the organization of the Company on March 15, 2012, a total of 1,437,500 shares of common stock were sold to the Founders at a price of approximately $0.02 per share for an aggregate of $25,000 (the “Initial Shares”). All of these shares were placed into an escrow account. Subject to certain limited exceptions, these shares will not be released from escrow until one year after the date of the consummation of an initial Acquisition Transaction or earlier if, subsequent to the Company’s initial Acquisition Transaction, the Company consummates a subsequent liquidation, merger, share exchange or other similar transaction which results in all of the Company’s shareholders having the right to exchange their shares of common stock for cash, securities or other property. The securities held in the escrow account will only be released prior to the end of the escrow period if following an Acquisition Transaction the Company consummates a subsequent transaction that results in all stockholders having a right to exchange their shares for cash or other consideration.

 

On December 15, 2012, 50,000 shares of common stock were forfeited because the underwriter’s over-allotment option was not fully exercised.  

 

F- 12
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

Note 6 - Loan Payable – Related Party and Advance from Related Party

 

On February 27, 2012, the Company issued an aggregate of $85,650 unsecured promissory notes to its officers and directors. The notes were non-interest bearing and payable on December 31, 2012. In addition, an officer advanced to the Company an additional $95,934. Due to the short-term nature of the notes and advances, the fair value of the notes and advances approximates the carrying amount. Such advances are non-interest bearing and are due on demand. During 2012, the Company repaid $50,000 of the unsecured promissory note and $76,680 of the advance. During the year ended December 31, 2013, the Company repaid $35,650 of the unsecured promissory note. During the year ended December 31, 2013, an affiliate advanced the Company $50,650. The advance is non-interest bearing and is due on demand. As of December 31, 2013 and 2012, amounts owed under the promissory notes are $0 and $35,650, respectively, and amounts owed under the advances are $69,904 and $19,254, respectively.

 

Note 7 - Fair Value Measurements

 

The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.

 

The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:

 

  Level 1: Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

  Level 2: Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.

 

  Level 3: Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.

 

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 and 2012, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

        December 31,  
Description   Level   2013     2012  
Assets:                    
Investment held in trust   1   $ 57,168,785     $ 57,168,785  
                     
Liabilities:                    
Warrant liability   3   $ 3,432,440     $ 3,386,998  

 

The table below provides a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs (Level 3):  

 

Balance – January 26, 2012 (inception)   $ -  
Correction of an error     3,109,339  
Issuance of warrants as part of Units on November 7, 2012     322,884  
Change in fair value     (45,225 )
Balance – December 31, 2012   $ 3,386,998  
Change in fair value     (45,442 )
Balance – December 31, 2013   $ 3,432,440  

 

The fair value of warrants was determined using a binomial-lattice model. This model requires the input of highly subjective assumptions, including price volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value of the warrants and the Company’s results of operations could be impacted. This model is dependent upon several variables such as the instrument's expected term, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend yield rate over the expected instrument term and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result of the down round protection.  The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of valuation.  Expected dividend yield is based on historical trends.  The Company measures volatility using a blended weighted average of the volatility rates for a number of similar publicly-traded companies. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company's accounting and finance department determine valuation policies and procedures. Their determinations are approved by the Chief Financial Officer.

 

F- 13
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

The inputs to the model were as follows:

 

    December 31,  
    2013     2012  
             
Stock Price   $ 10.20     $ 10.00  
Dividend Yield     N/A       N/A  
Risk-free Rate     1.75 %     1.18 %
Expected Term (in years)     5.0       5.0  
Expected Volatility     20.5 %     21.3 %

 

Note 8 – Subsequent Events

 

NASDAQ Notification

 

On March 20, 2014, the Company received a written notice (“Notice”) from the Listing Qualifications Department of The NASDAQ Stock Market LLC (“Nasdaq”) indicating that the Company was not in compliance with Listing Rule 5550(a)(3) (the “Rule”), which requires that the Company maintain a minimum of 300 public holders for the continued listing of its securities on Nasdaq. Pursuant to the Notice, the Company had until May 5, 2014 to submit a plan to regain compliance with the Rule. If the Staff accepts the Company’s plan to regain compliance, the Staff can grant an extension of up to 180 calendar days from March 20, 2014 for the Company to demonstrate compliance.

 

On May 5, 2014, the Company submitted to Nasdaq the Company’s plan to regain compliance. The Company plans to include a tender offer as part of its plan to regain compliance and while the tender offer will reduce the number of currently public shares outstanding, the Company believes that the acquisition described below will increase the total number of shares outstanding. The Company has not yet received a letter from Nasdaq indicating that it has accepted the Company’s plan to regain compliance.

 

Share Exchange Agreement and Plan of Liquidation

 

On March 24, 2014, the Company entered into a Share Exchange Agreement and Plan of Liquidation (the “Agreement”), with KBS International Holdings, Inc., a Nevada corporation (“KBS”), Hongri International Holdings Ltd., a company organized and existing under the laws of the British Virgin Islands and wholly owned subsidiary of KBS (“Hongri” or the “Target”); and (d) Cheung So Wa and Chan Sun Keung, each an individual and shareholder of KBS (each, a “Principal Stockholder”). The aquisition is expected to be accounted for as a reverse merger and recapitalization where KBS will be the acquirer and the Company will be the acquired company.

 

Upon the closing of the transactions contemplated in the Agreement, the Company will acquire 100% of the issued and outstanding equity interest in Target from KBS in exchange for the transaction consideration consisting of shares of the Company’s common stock (the “Acquisition”). The number of shares comprising the transaction consideration will be (a) (i) EBITDA multiplied by 6, less (ii) the Long Term Debt less cash held by Target; divided by (b) $10.30; provided, however, that in no event will the transaction consideration be less than 80%, by vote or value, of the outstanding capital stock of the Company immediately following the Closing (the “Transaction Consideration”). The Agreement defines EBITDA as Target’s 2013 standalone and adjusted earnings before interest, taxes, depreciation and amortization, as calculated based upon the audited Target financial statements for the year ended December 31, 2013, and defines “Long Term Debt” Target’s existing net long-term debt as of one business day before the closing date of the Acquisition. Upon consummation of the Acquisition, KBS will dissolve and distribute all its assets to its shareholders in liquidation.

 

The Agreement provides that immediately after closing, the Company’s board of directors will consist of seven directors, two of whom will be designated by the Principal Stockholders, and one of which will be designated by Aquasition Investments Corp., a company incorporated in the Republic of the Marshall Islands (“AQU Invest”). The remaining four directors will be “independent” and have experience with public companies listed in the United States. Three of the independent directors will be designated by KBS, and the remaining independent director will be designated by AQU Invest. Concurrently with the closing, the Company, AQU Invest and the Principal Stockholders will enter into a voting agreement regarding the election of director designees following the closing, and the Company will purchase director’s and officer’s insurance.

 

F- 14
 

 

Aquasition Corp.

(A Company in the Development Stage)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

 

Prior to closing the Company will conduct a tender offer (the “Tender Offer”) for any and all of the shares of common stock underlying the units issued in the Company’s initial public offering in accordance with the requirements of its Amended and Restated Articles of Incorporation and bylaws. The Company agreed provide the KBS and the Principal Stockholders (the “Warrantors”) notice of any event or development that would require amendment of the Tender Offer documents. The Company is required to obtain all necessary consents and authorization to complete the Acquisition including completion of the tender offer with not more than 90% of such shares tendered in the Tender Offer. Upon closing, the Company will issue the shares representing the Transaction Consideration, and will take all steps necessary to distribute the funds held in the Trust Account established in connection with the Company’s IPO in accordance with the Investment Management Trust Agreement governing the Trust Account. The Company will ensure that at least $10 million is available to the combined companies, excluding the cash and assets of the Target, as of immediately following the Closing.

 

Consummation of the Agreement and the acquisition is conditioned on (a) KBS holding at least 80%, by vote or value, of the outstanding capital stock of the Company immediately following the closing; (b) no conflict with any applicable law or order; (c) no pending third-party action enjoining or otherwise restricting the closing; (d) the Tender Offer having been duly completed; and (e) there being one or more valid exemptions to registration of the issuance of the Transaction Consideration, and dissolution and liquidation of KBS following the closing.

  

F- 15
 

 

Hongri International Holdings Limited

 

Consolidated Financial Statements

 

For the years ended December 31, 2013 and 2012

(Stated in US dollars)

 

F- 16
 

 

CONTENTS   PAGES
     
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME   F-19
     
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION   F-20
     
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY   F-21
     
CONSOLIDATED STATEMENTS OF CASH FLOWS   F-22 - F-23
     
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS   F-24– F-53

 

F- 17
 

 

Independent Auditor’s Report

 

To: the Board of Directors and Shareholders of Hongri International Holdings Limited

 

We have audited the accompanying consolidated statements of financial position of Hongri International Holdings Limited and its subsidiaries (the “Company”), as of December 31, 2013 and 2012 and the related consolidated statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States), Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hongri International Holdings Limited and its subsidiaries at December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

April 25,2014

 

/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
BDO China Shu Lun Pan Certified Public Accountants LLP
Shanghai China

 

F- 18
 

 

Hongri International Holdings Limited

Consolidated statements of comprehensive income

For the years ended December 31, 2012 and 2013

(Stated in US dollars)

  

          Year ended December 31,  
    Notes     2013     2012  
                   
Revenue     8       99,559,814       71,059,678  
Cost of sales     9       (57,363,839 )     (35,791,977 )
                         
Gross profit             42,195,975       35,267,701  
                         
Other income     10       359,924       342,953  
Other gains and losses     11       96,806       80,947  
Distribution and selling expenses     12       (6,238,995 )     (7,964,770 )
Administrative expenses     13       (1,872,910 )     (1,618,714 )
                         
Profit from operations             34,540,800       26,108,117  
                         
Finance costs     14       (116,421 )     (11,329 )
                         
Profit before tax             34,424,379       26,096,788  
Income tax expense     15       (8,629,022 )     (6,560,026 )
                         
Profit for the year     16       25,795,357       19,536,762  
                         
Other comprehensive income                        
                         
-currency translation differences             2,597,259       190,292  
                         
Total comprehensive income for the year             28,392,616       19,727,054  

 

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

 

The consolidated financial statements on pages F-19 to F-50 were approved and authorized for issue by the Board of Directors on April 25, 2014 and are signed on its behalf by:

  

   
DIRECTOR  

 

F- 19
 

 

Hongri International Holdings Limited

Consolidated statements of financial position

For the year ended December 31, 2012 and 2013

(Stated in US dollars)

 

          As of December 31,  
    Notes     2013     2012  
                   
Non-current assets                        
Property, plant and equipment     20       27,039,977       10,660,910  
Prepayments and premiums under operating leases     21       3,086,792       3,253,545  
Prepayment for construction of new plant     22       -       6,363,853  
Prepayment for acquisition of land use right     23       6,432,923       6,239,899  
Prepaid lease payments     24       747,153       743,660  
              37,306,845       27,261,867  
                         
Current assets                        
Inventories     25       665,083       1,835,292  
Trade and other receivables     26       30,476,111       14,238,065  
Subsidies prepaid to distributors     27       636,258       759,293  
Prepayments and premiums                        
under operating leases     21       534,124       2,598,912  
Prepaid lease payments     24       19,512       18,927  
Related parties receivables     28       -       414,052  
Cash and cash equivalents     29       39,818,799       32,148,309  
              72,149,887       52,012,850  
                         
Total assets             109,456,732       79,274,717  
                         
Current liabilities                        
Trade and other payables     30       4,262,535       4,172,368  
Related parties payables     31       5,789,042       5,367,877  
Income tax payable             3,974,838       3,869,502  
Short-term loans     32       1,968,213       795,482  
              15,994,628       14,205,229  
                         
Non-current liability             -       -  
Total liabilities             15,994,628       14,205,229  
                         
Equity                        
Share capital     33       20,000       20,000  
Share premium     33       760,000       760,000  
Statutory surplus reserve     34       5,063,906       2,438,536  
Retained profits     34       82,982,989       59,813,002  
Foreign currency translation reserve     34       4,635,209       2,037,950  
              93,462,104       65,069,488  
                         
Total liabilities and equity             109,456,732       79,274,717  

 

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

 

F- 20
 

 

Hongri International Holdings Limited

Consolidated statements of changes in equity

For the year ended December 31, 2012 and 2013

(Stated in US dollars)

 

                Statutory                    
                surplus     Retained     Foreign currency        
    Share capital     Share premium     reserve     profits     translation reserve     Total  
    (Note 33)     (Note 33)     (Note 34)     (Note 34)     (Note 34)        
                                     
Balance at January 1, 2012     20,000       760,000       469,362       42,245,414       1,847,658       45,342,434  
Profit for the year     -       -       -       19,536,762       -       19,536,762  
Other comprehensive income for the year     -       -       -       -       190,292       190,292  
Appropriation to statutory surplus reserve     -       -       1,969,174       (1,969,174 )     -       -  
Balance at December 31, 2012     20,000       760,000       2,438,536       59,813,002       2,037,950       65,069,488  
Profit for the year     -       -       -       25,795,357       -       25,795,357  
Other comprehensive income for the year     -       -       -       -       2,597,259       2,597,259  
Appropriation to statutory surplus reserve     -       -       2,625,370       (2,625,370 )     -       -  
Balance at December 31, 2013     20,000       760,000       5,063,906       82,982,989       4,635,209       93,462,104  

 

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

 

F- 21
 

 

Hongri International Holdings Limited

Consolidated statements of cash flow

For the year ended December 31, 2012 and 2013

(Stated in US dollars)

 

    Year ended December 31,  
    2013     2012  
             
OPERATING ACTIVITIES                

Profit for the year

    25,795,357       19,536,762  
                 
Adjustments for:                
Finance cost     116,421       11,329  
Interest income     (134,267 )     (92,420 )
Depreciation of property, plant and equipment     1,875,812       1,951,223  
Amortization of prepaid lease payments     15,585       15,768  
Amortization of subsidies prepaid to distributors     1,397,789       824,955  
Amortization of prepayments and premiums under operating leases     1,892,254       4,129,335  
Provision/ (Reversal) of inventory obsolescence     1,994       (44,944 )
Loss on disposal of property, plant and equipment     10,132       -  
                 
Operating cash flows before movements in working capital     3 0,971,077       2 6,332,008  
                 
Increase in trade and other receivables     (16,238,046 )     (13,333,778 )
Decrease /(Increase)  in related parties receivables     414,052       (414,052 )
Decrease in inventories     1,170,209       6,234,416  
Increase in trade and other payables     90,167       683,157  
Increase / (Decrease) in related parties payables     421,165       (124,625 )

Increase in income tax payable

   

105 ,336

     

1,735,941

 
                 
Prepayments and premiums paid under operating leases     (725,943 )     (3,634,643 )
Withdraw the prepayments and premiums paid under operating leases     1,246,270       -  
Subsidies prepaid to distributors     (1,253,461 )     (824,955 )
                 
NET CASH FROM OPERATING ACTIVITIES    

1 6,200,826

     

16,653,469

 
                 
INVESTING ACTIVITIES                

Interest received

   

134,267

     

92,420

 
Prepayment for construction of new plant     -       (6,338,006 )
Prepayment for acquisition of land use right     -       -  
Purchase of property, plant and equipment     (11,288,129 )     (3,415,585 )
                 
NET CASH USED IN INVESTING ACTIVITIES     (11,153,862 )     (9,661,171 )

 

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

 

F- 22
 

 

Hongri International Holdings Limited

Consolidated statements of cash flow (continued)

For the year ended December 31, 2012 and 2013

(Stated in US dollars)

 

    Year ended December 31,  
    2013     2012  
             
FINANCING ACTIVITIES                
Interest paid     (116,421 )     (11,329 )
New bank loans raised     1,968,213       795,482  
Repayment of borrowings     (807,809 )     -  
                 
NET CASH USED IN FINANCING ACTIVITIES     1,043,983       784,153  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS     6 ,090,947       7,776,451  
Effects of currency translation     1,579,543       119,405  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR     32,148,309       24,252,453  
                 
CASH AND CASH EQUIVALENTS AT END OF YEAR, represented by cash and bank balances     39,818,799       32,148,309  

 

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

 

F- 23
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

1. GENERAL INFORMATION

 

(1) Hongri International Holdings Limited (the "Company") formerly known as Wah Ying International Investment Inc. was incorporated in the British Virgin Islands (the "BVI") on July 8, 2008 as a limited liability company with authorized share capital of $50,000, divided into 50,000 common shares of $1 per value each of which 10,000 common shares were issued at par as of December 31, 2010. On January 27, 2011, the Company issued additional 10,000 common shares at a cash consideration of $77 per share. The principal activity of the Company is investment holding. Wong Chi Hung, Stanley, is the sole director of Hongri International. Before the acquisition by KBS International Holding Inc. (“KBS International”), the 20,000 common shares were held as to 30% by Cheung So Wa and 70% by Chan Sun Keung. On November 16, 2009, Yan Keyan entered into an option agreement with Cheung So Wa and Chan Sun Keung of which Yan Keyan is entitled an exclusive right to purchase the 100% equity interest in the Company at a cash consideration equivalent to the nominal value of issued share capital. Before the execution of the exclusive right by Yan Keyan, the rights and obligations as a stockholder of the 100% equity interest in the Company are still vested in Yan Keyan and the appointment of the board of directors and management is controlled by Yan Keyan. This option agreement was replaced by a new option agreement on March 9, 2011.

 

(2) France Cock (China) Limited ("France Cock") was incorporated in Hong Kong on September 21, 2005 as a limited liability company with authorized issued and paid up capital of HK$10,000, divided into 10,000 common shares of HK$1 par value each. The principal activity of France Cock is trademark holding. The directors of France Cock are Yan Keyan and Wong Chi Hung, Stanley. Before the acquisition by the Company, the 10,000 common shares were held by Yan Keyan.

 

Pursuant to a trademark transfer agreement dated October 4, 2009, Hongri Fujian agreed to transfer a trademark "KBS" to France Cock for a consideration of RMB100,000 (approximately $15,250). The trademark transfer procedure has been completed on October 20, 2010 and the Trademark Authority in the People's Republic of China (the "PRC") issued a trademark registration certificate to France Cock on March 21, 2011.

 

Pursuant to a trademark licensing agreement dated December 1, 2005, France Cock agreed to license a trademark "Kabiniao" to Hongri Fujian for 10 years commencing from January 1, 2006 at a fee of RMB1,000,000 (approximately $152,500) per annum.

 

Pursuant to a trademark licensing agreement executed in 2009, France Cock agreed to license a trademark "KBS" to Hongri Fujian for 5 years commencing from January 1, 2009 at a fee of RMB40,000,000 (approximately $6.1million) per annum. The trademark licensing agreement was updated on August 1, 2012. In the new agreement, France Cock agreed to waive the license fee from January 1, 2012.

 

(3) Roller Rome Limited ("Roller Rome") was incorporated in the BVI on March 28, 2006 as a limited liability company with authorized share capital of $50,000, divided into 50,000 common shares of $1 par value each of which 1 share was issued at par. The principal activity of Roller Rome is the provision of design and development services for sports apparel. The directors of Roller Rome are Yan Keyan and Wong Chi Hung, Stanley. Before the acquisition by the Company, the only one issued common share was held by Chen Bizhen.

 

F- 24
 

 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

1. GENERAL INFORMATION-continued

 

(4) Vast Billion Investment Limited ("Vast Billion") was incorporated in Hong Kong on November 25, 2010 as a limited liability company with authorized share capital of HK$10,000 divided into 10,000 ordinary share of HK$1 each of which 1 ordinary share was issued at par. Vast Billion was a dormant company until the completion of acquisition of 100% equity interest in Hongri Fujian on February 15, 2011. The directors of Vast Billion are Wong Chi Hung, Stanley and Chan Sun Keung, the father of Chen Bizhen. Before the acquisition by Hongri International, 1 ordinary share was held by Chan Sun Keung.

 

(5) Hongri (Fujian) Sports Goods Co. Ltd. ("Hongri Fujian") was established in the People's Republic of China (the "PRC") on November 17, 2005 with a registered and paid up capital of RMB 5,000,000 (which are not divided into shares). On March 24, 2011, Hongri Fujian increased registered capital from RMB 70,000,000 to RMB75,000,000. As of September 30, 2011, the paid up capital was RMB 39,551,860. Hongri Fujian is engaged in the design manufacture marketing and sale of apparel in the PRC. On August 10, 2011, Chen Bizhen replaced Wang Feiya as legal representative of Hongri Fujian. Before the acquisition by Vast Billion, the paid up capital of RMB 5,000,000 was held as to 50% by Yan Keyan and 50% by Chen Bizhen. On December 18, 2006, Roller Rome entered into a buy back agreement with Yan Keyan and his wife Chen Bizhen of which Roller Rome is entitled the exclusive right to acquire all of Yan Keyan's and Chen Bizhen's 100% equity interest in Hongri Fujian at a consideration equivalent to the paid up capital of Hongri Fujian. Before the execution of the exclusive right by Roller Rome, i) 100% equity interest in Hongri Fujian is pledged to Roller Rome as collateral for the annual fee due to Roller Rome; ii) Roller Rome is entitled the exclusive right to receive all of dividend declared by Hongri Fujian; and iii) the appointment of the board of directors and management of Hongri Fujian are controlled by Roller Rome. This buy back agreement was mutually terminated upon the completion of acquisition of Hongri Fujian by Vast Billion.

 

(6) Anhui Kai Xin Apparel Company Limited ("Anhui Kai Xin") was established in the PRC on March 16, 2011 with a registered and paid up capital of RMB 1,000,000. Anhui Kai Xin is a wholly owned subsidiary of Hongri Fujian. Anhui Kai Xin provides sub-contracting service for the manufacture of sports apparel to Hongri Fujian and other brand name owners in the PRC. Yan Keyan is the director and legal representative of Anhui Kai Xin.

 

(7) Shishi Hongri Brand Management Company Limited ("Brand Management”) was established in the PRC on October 17, 2011 with a registered and paid up capital of RMB 100,000, Brand Management is a wholly owned subsidiary of Hongri Fujian and a dormant company in the PRC. Chen Bizhen is the director and legal representative of Brand Management.

 

(8) According to a Design and Development Agreement entered into between Roller Rome and Hongri Fujian on December 18, 2006, Roller Rome provides design and development services, including market research, product development, design technical consulting and staff training to Hongri Fujian for an annual fee ranging from 90% to 99% of Hongri Fujian's net income before tax. The Design and Development Agreement expired on December 31, 2011.

 

F- 25
 

 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

2. GROUP REORGANISATION AND BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

 

To rationalize the group structure, the Company, KBS International, France Cock, Roller Rome, Vast Billion and Hongri Fujian reorganized their group structure (the "Reorganization") as follows:

 

(1) On January 4, 2010, Yan Keyan's 100% equity interest in France Cock were transferred to Hongri International at a cash consideration of HK$10, 000, which is the nominal value of issued and paid up capital of France Cock.

 

(2) On January 4, 2010, Chen Bizhen's 100% equity interest in Roller Rome were transferred to Hongri International at a cash consideration of $1, which is the nominal value of issued and paid up capital of Roller Rome.

 

(3) On February 14, 2011, Hongri International acquired 100% equity interest in Vast Billion from Chan Sun Keung at a cash consideration of HK$1, which is the nominal value of issued and paid up capital of Vast Billion.

 

(4) On February 15, 2011, Yan Keyan and Chen Bizhen transferred 100% equity interest in Hongri Fujian to Vast Billion at a cash consideration $756,950 (equivalent to Hongri Fujian's paid up capital of RMB 5 million).

 

(5) On March 11, 2011, KBS International entered into a share exchange agreement with the shareholders of the Company to acquire their 100% of the issued and outstanding common shares in the Company by issuance of the Company's 15,936,820 common shares with par value of $0.0001 each.

 

(6) In connection with the share exchange transaction, Yan Keyan entered into a new option agreement with Chan Sun Keung on March 9, 2011 pursuant to which Yan Keyan was granted an option to purchase all of Chan Sun Keung's equity interest in KBS International at a cash consideration of RMB91,986. Such option will be effective during the period commencing on the date which is six months after the date on which the first registration statement is filed by KBS International under the United States Securities Act of 1933, as amended but before the fifth anniversary of the registration statement effective date.

 

Upon the completion of the Reorganization on March 11, 2011, the Company became the immediate holding company of the Roller Rome, France Cock, Vast Billion, Hongri Fujian, Anhui Kai Xin and Brand Management.

 

Before and immediately after the completion of Reorganization, the Company, Roller Rome, France Cock, Vast Billion and Hongri Fujian are under the common control of Yan Keyan, Chen Bizhen (the wife of Yan Keyan) and Chan Sun Keung (the father of Chen Bizhen). Upon the completion of reorganization, the Company has controlling interest on all consolidated subsidiaries. Accordingly, accounting for recapitalization is adopted for the preparation of consolidated financial statements to present the combined results of operations and financial position of the Company, Roller Rome, France Cock, Vast Billion, Hongri Fujian, Anhui Kai Xin and Brand Management as if the current group structure had been in existence at the beginning of the reporting period.

 

F- 26
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

2 GROUP REORGANISATION AND BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS-continued

 

The Group structure as at the reporting date is as follows:

 

 

The consolidated financial statements have been prepared in accordance with international financial reporting standards ("IFRS") as issued by the International Accounting Standards Board.

 

F- 27
 

 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs")

 

Except as described below, for the year ended December 31, 2013 the Company has consistently adopted all the new and revised standards, amendments and interpretations (collectively IFRSs) issued by the International Accounting Standards Board ("IASB") and the IFRS Interpretations Committee (formerly known as "International Financial Reporting Interpretations Committee" ("IFRIC")) of the IASB that are effective as of December 31, 2013 in the preparation of the consolidated financial statements throughout the year.

 

The Company has applied the following new and revised standards, amendments or interpretations that have been issued and effective during the reporting period:

 

IAS 1 (Amendments) Presentation of Items of Other Comprehensive Income

 

IFRS 7 (Amendments) Disclosures – Offsetting Financial Assets and Financial Liabilities

 

IFRS 13 Fair Value Measurement

 

IAS 19 (Revised 2011) Employee Benefits

 

Annual Improvements 2009-2011 cycle

 

Its application has had no impact on the consolidated financial statements.

 

At the date these consolidated financial statements are authorized for issuance, the IASB has issued the following new and revised International Accounting Standards ("IASs"), IFRSs, amendments and IFRICs which are not yet effective in respect of the years. The Company has not early applied the following new and revised standards, amendments or interpretations that have been issued but are not yet effective:

 

IAS 27 (Revised 2011) Separate Financial Statements

 

IAS 28 (Revised 2011) Investments in Associates and Joint Ventures

 

IFRS 10 Consolidated Financial Statements

 

IFRS 11 Joint Arrangements

 

IFRS 12 Disclosure of Interests in Other Entities

 

IAS 32 (Amendments) Offsetting Financial Assets and Financial Liabilities

 

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

 

The directors of the Company anticipate that the application of the new and revised standards, amendments or interpretations will have no material impact on the consolidated financial statements of the Company.

 

F- 28
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

4. SIGNIFICANT ACCOUNTINGPOLICIES

 

The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated.

 

Basis of preparation

 

The consolidated financial statements have been prepared on the historical cost basis and in accordance with IFRS as issued by the IASB. The principal accounting policies are set out below.

 

Basis of consolidation

 

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

 

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

 

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

 

Foreign currencies

 

Functional and presentation currency

 

Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the "functional currency").

 

The Group conducts its business predominately in the PRC and hence its functional currency is the Renminbi (RMB).

 

Translation from RMB to USD found place at the following rates:

 

  Period end rates Average rates
     
December 31, 2012 USD 1.00= RMB 6.2855 USD 1.00=RMB 6.3111
     
December 31, 2013 USD 1.00= RMB 6.0969 USD 1.00=RMB 6.1896

 

The results and financial positions in functional currency are translated into the presentation currency of its intended ultimate legal parent as follows:

 

(1)      Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

 

(2)      Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);

 

(3)      Share equity, share premium and dividends are translated at historical exchange rates; and

 

(4)      All resulting exchange differences are recognized in foreign currency translation reserve, a separate component of equity.

 

F- 29
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

4. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Segment reporting

 

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.

 

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria. The Group’s three segments are wholesale, retail and subcontracting.

 

Revenue recognition

 

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold in the normal course of business, net of discounts and sales related taxes.

 

The Group’s revenue originating (i) from corporate owned stores, (ii) distributors and (iii) the services performed as an original design manufacturer. Revenue from the all above categories is recognized when all the following conditions are satisfied:

 

l the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

 

l the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

l the amount of revenue can be measured reliably;

 

l it is probable that the economic benefits associated with the transaction will flow to the Group; and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

Specifically, revenue from sale of goods is recognized when the goods are delivered and title has passed.

 

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

 

Value added tax (VAT)

 

Output VAT is 17% of product sales and taxable services revenue, according to tax laws. The remaining balance of output VAT, after subtracting the deductible input VAT of the period, is VAT payable.

 

Borrowing costs

 

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale.

 

All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

 

F- 30
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

4. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Retirement benefit costs

 

Pursuant to the relevant regulations of the PRC government, the Group participates in a local municipal government retirement benefits scheme (the "Scheme"), whereby the subsidiaries located in the PRC are required to contribute a certain percentage of the basic salaries of its employees to the Scheme to fund their retirement benefits. The local municipal government undertakes to assume the retirement benefits obligations of all existing and future retired employees of the subsidiaries located in the PRC. The only obligation of the Group with respect to the Scheme is to pay the on-going required contributions under the Scheme mentioned above. Contributions under the Scheme are charged to the profit or loss as incurred. There are no provisions under the Scheme whereby forfeited contributions may be used to reduce future contributions. These plans are considered defined contribution plans. The Group has no legal or constructive obligations to pay further contributions after its payment of the fixed contributions into the national pension schemes. Contributions to national pension schemes are recognized as an expense in the period in which the related service is performed.

 

Taxation

 

Income tax expense represents the sum of the tax currently payable and deferred tax.

 

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statements of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

 

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

 

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

 

F- 31
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

4. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Taxation-continued

 

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

 

Store pre-opening cost

 

Store pre-opening cost was the start-up activity costs incurred prior to opening a new store, mainly including leasing, leasehold improvements, payroll and supplies. The accounting policies for leasing and leasehold improvements were as below. Other store pre-opening costs were directly charged to expenses when occurred.

 

Leasing

 

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

 

Leasehold improvements

 

Leasehold improvements, principally comprising costs of office buildings and shops renovation, are held for administrative and selling purposes. Leasehold improvements are initially measured at cost and amortized systematically over its useful life.

 

Property, plant and equipment

 

Property, plant and equipment ("PPE") including buildings held for use in the production or supply of goods or services, or for administrative purposes other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

 

Depreciation is provided to write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.

 

Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

 

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is derecognized.

 

Leasing

 

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

 

The Group as lessor

 

Rental income from operating leases is recognized in profit or loss on a straight-line basis over the term of the relevant lease.

 

F- 32
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

4. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Leasehold land

 

When a lease includes both land and building elements, the Group assesses the classification of each element as a finance or an operating lease separately based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Group. Specifically, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease at the inception of the lease.

 

To the extent the allocation of the lease payments can be made reliably, interest in leasehold land that is accounted for as an operating lease is presented as "prepaid lease payments" in the consolidated statement of financial position and is amortized over the lease term on a straight-line basis.

 

Inventories

 

Inventories are stated at the lower of cost and net realizable value. Costs of inventories are determined using the weighted average method. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

 

Financial instruments

 

Financial assets and financial liabilities are recognized on the consolidated statements of financial position when a group entity becomes a party to the contractual provisions of the instrument.

 

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

 

Financial assets

 

The Group's financial assets are classified as receivables.

 

Effective interest method

 

The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

 

Interest income is recognized on an effective interest basis for debt instruments.

 

Receivables

 

Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables (including trade and other receivables, related parties receivables, and cash and cash equivalents) are measured at amortized cost using the effective interest method, less any impairment (see accounting policy on impairment loss on receivables below).

 

F- 33
 

 

4.   SIGNIFICANT ACCOUNTING POLICIES - continued

 

Financial instruments-continued

 

Financial assets-continued

 

Impairments of receivables

 

Receivables are assessed for indicators of impairment at the end of the reporting period. Receivables are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the receivables, the estimated future cash flows of the receivables have been affected.

 

Objective evidence of impairment could include:

 

l     significant financial difficulty of the issuer or counterparty;

 

l     default or delinquency in interest or principal payments;

 

l     it becoming probable that the borrower will enter bankruptcy or financial reorganization.

 

For certain categories of financial asset, such as trade and other receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, and increase in the number of delayed payments in the portfolio past the average credit period, observable changes in national or local economic conditions that correlate with default on receivables.

 

An impairment loss is recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

 

The carrying amount of the receivables is reduced by the impairment loss directly for all financial assets with exception of trade and other receivables, where the carrying amount is reduced through the use of an allowance account. Changes in carrying amount of the allowance account are recognized in profit or loss. When a trade and other receivable are considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

 

If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

 

Cash and cash equivalents

 

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

 

F- 34
 

 

4.      SIGNIFICANT ACCOUNTING POLICIES - continued

 

Financial instruments-continued

 

Financial liabilities and equity

 

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

 

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

 

Effective interest method

 

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

 

Interest expense is recognized on an effective interest basis.

 

Financial liabilities

 

Financial liabilities including trade and other payables, related parties payables and short-term loans are subsequently measured at amortized cost, using the effective interest method.

 

Equity instruments

 

Equity instruments issued by the group entities are recorded at the proceeds received, net of direct issue costs.

 

Derecognition

 

Financial assets are derecognized when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognized in profit or loss.

 

Financial liabilities are derecognized when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

 

Subsidies prepaid to distributors

 

Subsidies were paid to major distributors for compensating their rental expenses. Such subsidies would vest to distributors when they met the sales targets predetermined by the Company. Subsidies prepaid to distributors were recognized when payments were made and amortized over the agreement term on a straight-line basis in selling expenses.

 

F- 35
 

  

4.     SIGNIFICANT ACCOUNTING POLICIES - continued

 

Capital and Reserves

 

Share capital represents the nominal value of shares that have been issued by the Group. Share capital is determined using the nominal value of shares that have been issued.

 

Retained profits include all current and prior period results as determined in the combined statement of comprehensive income.

 

Foreign currency translation reserve arising on the translation are included in the currency translation reserve.

 

In accordance with the relevant laws and regulations of PRC, the subsidiaries of the Group established in PRC are required to transfer 10% of its annual statutory net profit (after offsetting any prior years’ losses) to the statutory reserve. When the balance of such reserve reaches 50% of the subsidiary’s share capital, any further transfer of its annual statutory net profit is optional. Such reserve may be used to offset accumulated losses or to increase the registered capital of the subsidiary subject to the approval of the relevant authorities. However, except for offsetting prior years’ losses, such statutory reserve must be maintained at a minimum of 25% of the share capital after such usage. The statutory reserves are not available for dividend distribution to the shareholders.

 

All transactions with owners of the Group are recorded separately within equity.

 

The preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying the Group’s accounting policies and requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and reported amount of revenue and expenses during the reporting period. The following estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are disclosed below:

 

F- 36
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

5. SIGNIFICANT MANAGEMENT JUDGMENT IN APPLYING ACCOUNTING POLICIES

 

Allowance for Bad and Doubtful debts

 

Allowances for bad and doubtful debts are based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of bad and doubtful debts requires the use of judgment and estimates, where the expected outcome is different from the original estimate, such difference will impact carrying value of trade and other receivables and doubtful debt expenses in the period in which such estimate has been charged.

 

Income Tax

 

The Group has exposure to income taxes in numerous jurisdictions. Significant judgment is involved in determining the Group’s provision for income taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and differed tax provisions in the period in which such determination is made. The carrying amount of the Group’s income tax payable as at December 31, 2012 and 2013 amounted to USD 3,869,502 and USD 3,974,838 respectively.

 

6. KEY SOURCES OF ESTIMATION UNCERTAINTY

 

In the application of the Group's accounting policies, which are described in Note 4, management is required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

 

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year.

 

Depreciation of building, machinery and equipment

 

As described in Note 4, the Group reviews the estimated useful lives and residual values of property, plant and equipment at the end of each reporting period. The cost of building, machinery and equipment is depreciated on a straight-line basis over the assets' estimated useful lives. Management estimates the useful lives of these buildings, machinery and equipment to be within 5 to 20 years. These are the common life expectancies applied in the same industry. Changes in the expected level of usage and technological developments could impact the economic useful lives and the residual values of these assets, therefore future depreciation charges could be revised.

 

F- 37
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

7. SEGMENT REPORTING

 

Management currently identifies the Group’s three sales models as operating segments, which are wholesale, retail and subcontracting. The segment presentation is in accordance with management’s expectation of future business developments. These operating segments are monitored and strategic decisions are made on the basis of segmental gross margins.

 

By business   Wholesale     Retail     Subcontracting     Consolidated  
    Year ended
December
31, 2013
    Year ended
December
31, 2012
    Year ended
December
31, 2013
    Year ended
December
31, 2012
    Year ended
December
31, 2013
    Year ended
December
31, 2012
    Year ended
December
31, 2013
    Year ended
December
31, 2012
 
Sales to external customers     78,111,563       37,272,635       19,093,669       31,024,552       2,354,582       2,762,491       99,559,814       71,059,678  
Segment revenue     78,111,563       37,272,635       19,093,669       31,024,552       2,354,582       2,762,491       99,559,814       71,059,678  
Segment gross margins     28,162,776       13,495,905       13,277,404       20,832,864       755,795       938,932       42,195,975       35,267,701  
Reconciling items                                         (7,771,596 )     (9,170,913 )
Profit before tax                                         34,424,379       26,096,788  
Income tax expense                                         (8,629,022 )     (6,560,026 )
Profit for the year                                                     25,795,357       19,536,762  

 

The Group does not allocate the assets because they are shared by the three segments and can not be split.

 

Geographical information

 

The Group’s operations are located in the PRC and all of the Group’s revenue is derived from sales to customers in the PRC. Hence, no analysis by geographical area of operations is provided.

  

F- 38
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

7. SEGMENT REPORTING - continued

 

Information about major customers

 

Major distributors that make up 10% or more of wholesale revenue are as below:

 

    Year ended December 31,  
    2013     2012  
Distributor A     15,967,077       6,620,482  
Distributor B     14,869,975       3,966,164  
Distributor C     11,438,483       -  
Other distributors     35,836,028       26,685,989  
      78,111,563       37,272,635  

 

8. REVENUE

 

    Year ended December 31,  
    2013     2012  
             
Apparel                
-Wholesale     78,111,563       37,272,635  
-Retail     19,093,669       31,024,552  
Subtotal     97,205,232       68,297,187  
Subcontracting     2,354,582       2,762,491  
      99,559,814       71,059,678  

 

9. COST OF SALES

 

Cost of sales comprises of purchasing materials, labor costs for personnel employed in production, depreciation of non-current assets used for production purpose, outsourced manufacturing cost, taxes and surcharges and water and electricity. The following table shows a breakdown of cost of sales for the period under review for each category:

 

    Year ended December 31,  
    2013     2012  
Changes in inventories of finished goods and work in progress     1,168,215       971,228  
Materials consumed in production     63,541       485,387  
Purchases of finished goods     53,846,922       31,670,326  
Labor     934,457       1,214,098  
Depreciation     252,759       146,282  
Rental     145,082       184,061  
Outsourced manufacturing cost     26,679       241,242  
Taxes and surcharges *     754,593       751,039  
Water and electricity     79,850       89,480  
Inventory provision     1,994       (44,944 )
Others     17,039       80,876  
Foreign currency translation difference     72,708       2,902  
      57,363,839       35,791,977  

 

* Tax and surcharges are mainly Urban Maintenance and Construction Tax (7% of Valued Added Tax payment amount), Extra Charges of Education Fund (3% of Valued Added Tax payment amount) and Local Surcharge for Education Fund (2% of Valued Added Tax payment amount).

 

10. OTHER INCOME

 

    Year ended December 31,  
    2013     2012  
             
Sales of raw material     9,875       246,477  
Government grant     215,782       4,056  
Interest income on bank deposits     134,267       92,420  
      359,924       342,953  

 

F- 39
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

11. OTHER GAINS AND LOSSES

 

    Year ended December 31,  
    2013     2012  
             
Gain on disposals of property, plant and equipment     10,132       -  
Foreign exchange gain     79,968       3,653  
Impairment losses     (1,994)       -  
Others     8,700       77,294  
      96,806       80,947  

 

12. DISTRIBUTION AND SELLING EXPENSES

 

    Year ended December 31,  
    2013     2012  
             
Rental     1,665,836       3,865,504  
Depreciation     1,178,209       1,667,245  
Labor     603,013       927,239  
Subsidy to distributors     1,397,789       824,955  
Promotion     1,092,238       409,135  
Advertisement     -       50,847  
Others     301,910       219,845  
      6,238,995       7,964,770  

 

13. ADMINISTRATIVE EXPENSES

 

    Year ended December 31,  
    2013     2012  
             
Labor     742,797       777,677  
Audit fee     182,620       177,631  
Depreciation and amortization charges     460,429       153,464  
Bank charges     69,146       101,731  
Rental     81,336       79,769  
Travelling and entertainment     78,366       102,544  
Others     213,216       225,898  
      1,872,910       1,618,714  

 

14. FINANCE COSTS

 

    Year ended December 31,  
    2013     2012  
             
Interest expenses on bank borrowings wholly repayable within one year     116,421       11,329  

 

Bank borrowings interests are charged on interest rates of 6.60% and 7.80%, per annum during the years ended December 31, 2013 and 2012 respectively.

 

F- 40
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

14. FINANCE COSTS-continued

 

December 31, 2013

    Amount                      
Bank loans   USD     Period   Interest rate     Interest  
#1     1,968,213     2013-2-26   2014-2-25     6.60 %     116,421  

 

December 31, 2012

    Amount                      
Bank loans   USD     Period   Interest rate     Interest  
#2     795,482     2012-10-15   2013-2-18     7.80 %     11,329  

 

The detailed information of the short - term loans is set out in Note 32.

 

15. INCOME TAX EXPENSE
    Year ended December 31,  
    2013     2012  
             
Current tax:                
PRC enterprise income tax     8,629,022       6,560,026  
      8,629,022       6,560,026  

 

Hongri Fujian, Anhui Kai Xin and Brand Management subject to the applicable enterprise income tax rate of 25%. As of December 31, 2012 and 2013, the Company had no unrecognized tax benefits.

 

France Cock and Vast Billion were incorporated in Hong Kong and subject to Hong Kong profits tax at a tax rate of 16.5%. No provision for Hong Kong profits tax has been made as France Cock and Vast Billion has no taxable income during the reporting period.

 

The Company and Roller Rome were incorporated in the BVI and under the current laws of the BVI, are not subject to income taxes.

 

The tax charge for the year can be reconciled to the profit per the consolidated statements of comprehensive income as follows:

 

    Year ended December 31,  
    2013     2012  
             
Profit before tax     34,424,379       26,096,788  
Tax calculated at domestic tax rates applicable to profits in PRC (2012 and 2013: 25%)     8,606,095       6,524,197  
Tax effect of expenses not deductible for tax purpose     6,133       8,321  
Tax effect of tax loss of Hongri International, Roller Rome, Vast Billion and France Cock for which no deferred Income tax asset was recognized     16,303       38,744  
Tax effect of provision for diminution in value of inventories     491       (11,236 )
Tax charge for the year     8,629,022       6,560,026  

 

F- 41
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

16. PROFIT FOR THE YEAR

 

Profit for the year has been arrived at after charging:

 

    Year ended December 31,  
    2013     2012  
Cost of inventories recognized as expenses     56,609,246       35,040,938  

Taxes and surcharges

   

754,593

     

751,039

 
      57,363,839       35,791,977  
Depreciation of property, plant and equipment     1,875,812       1,951,223  
Amortization of prepaid lease payments     15,585       15,768  
Amortization of subsidies prepaid to distributors     1,397,789       824,955  
Amortization of prepayments and premiums under operating leases     1,892,254       4,129,335  
Provision (Reversal) of inventory obsolescence     1,944       (44,944 )
      5,183,384       6,876,337  

 

17. EMPLOYEES' EMOLUMENTS

 

    Year ended December 31,  
    2013     2012  
             
Salaries and other short-term benefits     2,187,866       2,766,145  
Defined contribution benefit schemes     92,401       152,869  
Total employee benefits expense (including directors’ emoluments)     2,280,267       2,919,014  

 

The employees of the Group’s PRC subsidiaries are members of state-managed retirement benefit schemes operated by the local government. The subsidiaries are required to contribute a specified percentage of its payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect to the retirement benefit schemes is to make the specified contributions.

 

18. DIRECTORS' EMOLUMENTS

 

The emoluments paid or payable to the directors of the Company were as follows:

 

    Year ended December 31,  
    2013     2012  
             
Directors' emoluments                
- Salaries     105,015       102,993  
Yan Keyan     105,015       102,993  
Chen Bizhen     126,018       123,456  
Stanley Wong     336,048       329,442  
- Social Welfare     758       990  
Yan Keyan     758       990  
Chen Bizhen     1,516       1,980  

 

F- 42
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

19. EARNINGS PER SHARE

 

    Year ended December 31,  
    2013     2012  
             
Basic earnings per share                
                 
From continuing operations     1,290       977  
Total basic earnings per share     1,290       977  

 

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

 

    Year ended December 31,  
    2013     2012  
             
Profit for the year attributable to owners of the Company for the purpose of basic earnings per share     25,795,357       19,536,762  

 

    Year ended December 31,  
    2013     2012  
             
Weighted average number of ordinary shares for the purpose of basic earnings per share     20,000       20,000  

 

No diluted earnings per share have been presented because no dilutive potential ordinary shares existed during the Periods.

 

F- 43
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

20. PROPERTY, PLANT AND EQUIPMENT

 

    Plant     Machinery     Office
equipment
    Motor
vehicles
    Furniture
and
fixtures
    Leasehold
improvements
-factories and
offices
    Leasehold
improvements-
shops
    Distributor
shops'
furniture and
fixtures
    Construction
in progress
    Total  
                                                             
COST                                                                                
At January 1, 2012     -       699,504       134,828       133,957       51,048       267,774       1,712,378       1,436,303       -       4,435,792  
Additions     8,659,241       351,800       42,123       -       7,647               657,774       -       34,925       9,753,510  
Disposals     -       -       -       -       -       -       -       -       -       -  
Translation adjustment     35,313       3,149       502       328       156       656       6,878       3,519       -       50,501  
At December 31, 2012     8,694,554       1,054,453       177,453       134,285       58,851       268,430       2,377,030       1,439,822       34,925       14,239,803  
Additions     -       785       39,149       1,205       9,825       -       210,648       1,287,610       16,421,867       17,971,089  
Disposals     -       (33,881 )     (55,749 )     -       (21,440 )     -       -       -               (111,070 )
Translation adjustment     268,956       32,618       5,490       4,153       1,820       8,303       73,530       44,539               439,409  
At December 31, 2013     8,963,510       1,053,975       166,343       139,643       49,056       276,733       2,661,208       2,771,971       16,456,792       32,539,231  
                                                                                 
DEPRECIATION                                                                                
At January 1, 2012     -       (144,086 )     (61,203 )     (49,824 )     (21,713 )     (174,803 )     (1,164,083 )     -       -       (1,615,712 )
Provided for the year     (64,944 )     (140,622 )     (21,585 )     (16,096 )     (6,156 )     (48,121 )     (697,716 )     (955,983 )     -       (1,951,223 )
Eliminated on disposals of assets     -       -       -       -       -       -       -       -       -       -  
Translation adjustment     (265 )     (927 )     (238 )     (188 )     (78 )     (625 )     (5,739 )     (3,898 )     -       (11,958 )
At December 31, 2012     (65,209 )     (285,635 )     (83,026 )     (66,108 )     (27,947 )     (223,549 )     (1,867,538 )     (959,881 )     -       (3,578,893 )
Provided for the year     (400,005 )     (26,913 )     (24,639 )     (16,776 )     (7,816 )     (11,145 )     (536,062 )     (852,456 )     -       (1,875,812 )
Eliminated on disposals of assets     -       -       50,174       -       19,296       -       -       -       -       69,470  
Translation adjustment     (5,370 )     (8,836 )     (2,568 )     (2,045 )     (864 )     (6,915 )     (57,728 )     (29,693 )     -       (114,019 )
At December 31, 2013     (470,584 )     (321,384 )     (60,059 )     (84,929 )     (17,331 )     (241,609 )     (2,461,328 )     (1,842,030 )     -       (5,499,254 )
                                                                                 
CARRYING AMOUNT                                                                                
At December 31, 2012     8,629,345       768,818       94,427       68,177       30,904       44,881       509,492       479,941       34,925       10,660,910  
At December 31, 2013     8,492,926       732,591       106,284       54,714       31,725       35,124       199,880       929,941       16,456,792       27,039,977  

 

F- 44
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

20. PROPERTY, PLANT AND EQUIPMENT-continued

 

Depreciation is provided on straight-line basis for all property, plant and equipment over their estimated useful lives of the assets as follows:

 

    Useful life   Residual value  
           
Plant   20 years     10 %
Machinery   5 years     10 %
Office equipment   5 years     10 %
Motor vehicles   5 years     10 %
Furniture and fixtures   5 years     10 %
Leasehold improvements-factories and offices   Shorter of estimated     10 %
    useful life of 5 years        
    or lease term        
             
Leasehold improvements-shops   Shorter of estimated     Nil  
    useful life of 1.5 years        
    or lease term        
             
Distributor shops' furniture and fixtures   1.5 years     Nil  

 

All the plant mentioned above were owned by Anhui Kaxin.

 

Buildings on leasehold land comprise:

 

    Location   Description   Gross area (m 2 )  
               
*   Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC   Dormitory     8,573  

 

* Items pledged to secure bank borrowings

 

The Group pledged buildings having a carrying amount of USD 8,492,926 as at December 31, 2013 to secure general banking facilities granted to the Group (December 31, 2012: 8,629,345).

 

The gross carrying amount of the fully depreciated property, plant and equipment that is still in use is USD 9,440 as at December 31, 2013 (December 31, 2012:USD 31,179).

 

21. PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES

 

    Amount  
       
Cost        
At January 1, 2012     6,333,650  
additions for the year     3,634,643  
charge for the year     (4,129,335 )
translation adjustment     13,499  
At December 31, 2012     5,852,457  
additions for the year     725,943  
charge for the year     (1,892,254 )
withdraw during the year     (1,246,270 )
translation adjustment     181,040  
At December 31, 2013     3,620,916  

 

F- 45
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

21. PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES-continued

 

Analyzed for reporting purposes as:

 

 

    As at December 31,  
    2013     2012  
             
Current asset     534,124       2,598,912  
Non-current asset     3,086,792       3,253,545  
      3,620,916       5,852,457  

 

22. PREPAYMENT FOR CONSTRUCTION OF NEW PLANT

 

On November 20, 2010, Hongri Fujian entered into an agreement with a third party, Anqing Zhongfang Construction and Installation Co., Ltd., for the construction of the new plant in Anhui at a consideration of USD 17,826,251. In 2012, Kaixin Anhui has made another prepayment of USD 6,363,853 for the second phase project. In 2013, Kaixin Anhui has made another prepayment of USD 9,747,897 for the second phase project and USD 16,401,778 was recognized in Construction in progress.

 

23. PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT

 

On September 2, 2010, Hongri Fujian entered into an agreement with a third party, Taihu Weiqi Sports Apparel Co., Ltd., to acquire a land use right in relation to the development of factories of Anhui Kaixin, at a total consideration of USD6,340,456.

 

24. PREPAID LEASE PAYMENTS

 

    Amount  
       
Cost        
At January 1, 2012     31,741  
additions for the year     760,205  
translation adjustment     3,179  
At December 31, 2012     795,125  
additions for the year     -  
translation adjustment     24,596  
At December 31, 2013     819,721  
         
AMORTISATION        
At January 1, 2012     (16,664 )
charge for the year     (15,768 )
translation adjustment     (106 )
At December 31, 2012     (32,538 )
charge for the year     (15,585 )
translation adjustment     (4,933 )
At December 31, 2013     (53,056 )
         
CARRYING AMOUNTS        
At December 31, 2012     762,587  
At December 31, 2013     766,665  

 

F- 46
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

24. PREPAID LEASE PAYMENTS-continued

 

Analyzed for reporting purposes as:

 

    As at December 31,  
    2013     2012  
             
Current asset     19,512       18,927  
Non-current asset     747,153       743,660  
      766,665       762,587  

 

The amounts represent the prepayment of rentals for land use right (industrial use) situated in the PRC. The leasehold lands have the term of 50 years.

 

All the leasehold lands mentioned above were owned by Anhui Kaixin.

 

The Group has pledged leasehold land having a carrying amount of approximately USD 195,037 at December 31, 2013 to secure general banking facilities granted to the Group (2012: USD 185,392).

 

The leasehold land comprises:

 

    Location   Expiry date of tenure   Land area (m 2 )  
*   Longshan Road, Economic development District, Taihu County   2062-05-23     2,440  

 

* Items pledged to secure bank borrowings

 

25. INVENTORIES

 

 

    As at December 31,  
    2013     2012  
             
Work in progress     42,658       91,055  
Finished goods     624,419       1,744,237  
Provision for obsolete inventories     (1,994 )     -  
      665,083       1,835,292  

 

26. TRADE AND OTHER RECEIVABLES

 

    As at December 31,  
    2013     2012  
             
Trade receivables     30,401,177       14,188,429  
Other receivables     74,934       44,863  
Subtotal financial assets     30,476,111       14,233,292  
Prepayments     -       4,773  
      30,476,111       14,238,065  

 

F- 47
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

26. TRADE AND OTHER RECEIVABLES-continued

 

The fair value of trade and other receivables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the consolidated statements of financial position to be reasonable approximation of their fair values.

 

Before accepting any new customer, the Group assesses the potential customer's credit quality and defined credit limits by customer. Limits attributed to customers are reviewed once a year. The aging analysis of trade receivables is as follows:

 

 

    As at December 31,  
    2013     2012  
             
Current     20,436,960       10,090,315  
Past due for less than 4 months     9,964,217       4,098,114  
      30,401,177       14,188,429  

 

The Group allows an average credit period of 90 days to its trade customers. There are no trade receivables that are past due and impaired.

 

Among the amounts of trade receivables, USD 4,417,265 and USD 2,061,567 Output VAT was included as of December 31, 2013 and 2012, respectively.

 

27. SUBSIDIES PREPAID TO DISTRIBUTORS

 

    Amount  
       
Cost        
At January 1, 2012     757,437  
additions for the year     824,955  
charge for the year     (824,955 )
translation adjustment     1,856  
At December 31, 2012     759,293  
additions for the year     1,253,461  
charge for the year     (1,397,789 )
translation adjustment     21,293  
At December 31, 2013     636,258  

 

Subsidies were paid to major distributors for compensating their rental expenses. Such subsidies would vest to distributors when they met the sales targets predetermined by the Company. Subsidies prepaid to distributors were recognized when payments were made and amortized over the agreement term on a straight-line basis in selling expenses. The amortization for 2012 and 2013 were USD 824,955 and USD 1,397,789 respectively.

 

F- 48
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

28. RELATED PARTIES RECEIVABLES

 

(1) Nature of relationship with related parties:

 

Name   Relationship with the Group
     
Yan Keyan   Actual controller

 

(2) Significant balances between the Group and the above related parties:

 

        As at December 31,  
Name   Nature   2013     2012  
        Unit:USD     Unit:USD  
                 
Yan Keyan   Borrowing of funds     -       414,052  
          -       414,052  

 

Related parties receivables were unsecured, non-interest bearing and repayment on demand.

 

29. CASH AND CASH EQUIVALENTS

 

    As at December 31,  
    2013     2012  
             
Cash on hand     16,519       44,373  
Bank deposits     39,802,280       32,103,936  
      39,818,799       32,148,309  

 

    As at December 31,  
    2013     2012  
             
Renminbi     39,798,525       32,127,812  
Hong Kong Dollars     19,457       7,470  
United States Dollars     817       13,027  
      39,818,799       32,148,309  

 

Cash and cash equivalents comprise cash held by the Group and short-term deposits with an original maturity of three months or less. Bank deposits as at December 31, 2013 carry interest at market rates which ranged from 0.35% to 0.50% (2012: 0.35%-0.50%) per annum

 

F- 49
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

30. TRADE AND OTHER PAYABLES

 

 

    As at December 31,  
    2013     2012  
             
Trade payables     166,049       249,731  
Employee benefits payable     1,178,682       1,221,437  
Other payables     876,738       479,928  
Subtotal financial liabilities     2,221,469       1,951,096  
                 
Other taxes payable     2,041,066       2,221,272  
      4,262,535       4,172,368  

 

The fair value of trade and other payables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the consolidated statements of financial position to be reasonable approximation of their fair values.

 

Trade payables comprise amounts outstanding for trade purchase. The average credit period is 30 days from the time when the services are rendered by or goods received from suppliers. The aging analysis of trade payables is as follows:

 

    As at December 31,  
    2013     2012  
             
Current     166,049       24,275  
Past due for less than 4 months     -       225,456  
      166,049       249,731  

 

The Company was granted a credit term of 30 days. The balances past due were mainly for the Company's high bargaining power.

 

31. RELATED PARTIES PAYABLES

 

(1) Nature of relationship with related parties:

 

Name   Relationship with the Group
     
Yan Keyan   Actual controller
     
Chen Bizhen   Wife of Yan Keyan
     
KBS International   Parent company of the Company

 

(2) Significant balances between the Group and the above related parties:

 

        As at December 31,  
Name   Nature   2013     2012  
                 
Yan Keyan   Borrowing of funds     209,116       -  
                     
Chen Bizhen   Borrowing of funds     214,028       -  
                     
KBS International   Borrowing of funds     5,365,898       5,367,877  
          5,789,042       5,367,877  

 

Related parties payables were unsecured, non-interest bearing and repayment on demand.

 

The highest amount the Group borrowed from Mr. Keyan Yan was USD 529,962 and USD 477,912 for the years ended December 31, 2013 and 2012 respectively.

 

F- 50
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

32. SHORT-TERM LOANS

 

 

    As at December 31,  
    2013     2012  
             
Secured bank borrowings     1,968,213       795,482  
Carrying amount repayable within 1 year     1,968,213       795,482  

 

The borrowings are fixed-rate and denominated in RMB.

 

December 31, 2013

Bank
loans
  Amount
USD
    Period       Interest
rate
    Mortgage   Personal
guarantee
#1     1,968,213     2013-2-26   2014-2-25     6.60 %   Land use right and buildings   Yan Keyan/
Chen Bizhen
      1,968,213                          

 

December 31, 2012

Bank
loans
  Amount
USD
    Period       Interest
rate
    Mortgage   Personal
guarantee
#2     795,482     2012-10-15   2013-2-18     7.80 %   Land use right and buildings   Yan Keyan/
Chen Bizhen
      795,482                          

 

Assets with the following carrying amounts have been pledged to secure bank borrowings:

 

    As at December 31,  
    2013     2012  
             
Land use right     758,464       751,053  
Plant     8,492,926       8,629,345  
      9,251,390       9,380,398  

 

A personal guarantee was provided by director of the Company, Yan Keyan and Chen Bizhen for USD 1,968,213 among the balances at December 31, 2013 (December 31, 2012:USD 795,482).

 

33. SHARE CAPITAL AND SHARE PREMIUM

 

Share capital shown in the consolidated statements of financial position is as follows:

 

The details of the Company's share capital are as follows:

 

    Numbers of     Share capital     Share premium  
    shares     USD     USD  
                   
Issue of shares at December 31, 2010(a)     10,000       10,000       -  
                         
Issue of shares at January 27, 2011(b)     10,000       10,000       760,000  
                         
Cost of issue of shares     20,000       20,000       760,000  
                         
Authorized and issued and fully paid                        
                         
Ordinary shares of $1USD at December 31, 2012 and December 31, 2013     20,000       20,000       760,000  

 

F- 51
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

33. PAID-IN CAPITAL & CAPITAL RESERVE-continued

 

The share capital shown on the consolidated statement of financial position as at December 31, 2012 and 2013 represents the share capital of the Company issued and fully paid on the date of incorporation.

 

(a) As of December, 31, 2010, the Company issued 10,000 common shares were issued at a cash consideration of USD 1 per share .

 

(b) As of January, 27, 2011, the Company issued additional 10,000 common shares at a cash consideration of USD 77 per share.

 

34. RESERVES

 

Statutory surplus reserve

 

As stipulated by the relevant laws and regulations applicable to China’s foreign investment enterprises, the Company’s PRC subsidiaries are required to maintain a statutory surplus reserve which is non-distributable. Appropriations to such reserve are made out of net profit after tax of the statutory financial statements of the PRC subsidiaries at the amounts determined by their respective boards of directors annually up to 50% of authorized capital, but must not be less than 10% of the net profit after tax.

 

The statutory surplus reserve can be used for making up losses of the group entities in Mainland China, if any. The statutory surplus reserve may also be used to increase capital or to meet unexpected or future losses. The statutory surplus reserve is non-distributable other than upon liquidation.

 

The statutory surplus reserve of the Group amounts to USD 5,063,906 at December 31, 2013 (2012: USD 2,438,536). The statutory surplus reserve of the Group is related to Hongri Fujian and Anhui Kaixin.

 

Retained profits

 

The retained profits comprise the cumulative net gains and losses recognized in the Company's income statement.

 

Foreign currency translation reserve (other comprehensive income)

 

Foreign currency translation reserve represents the foreign currency translation difference arising from the translation of the financial statements of companies within the Group from their functional currency to the Group's presentation currency.

 

F- 52
 

 

Hongri International Holdings Limited

Notes to consolidated financial statements

 

35. COMMITMENTS AND CONTINGENCIES

 

(1) The Company had the following capital commitments in respect of the construction of plant and equipment which were contracted but not provided for in the financial statements:

 

    As at December 31,  
    2013     2012  
             
Contracted and authorized     1,631,331       11,462,398  

 

(2) As at December 31, 2013, the Company had lease commitment as follows

 

 

    As at December 31,  
    2013     2012  
             
Contracted and authorized     76,364       95,458  

 

(3) As at 31 December, 2013, the Company had no contingencies that needed to be disclosed.

 

36. SUBSEQUENT EVENTS

 

On March 24, 2014, its holding company, KBS International Holdings Inc, the Company together with the principal stockholders have entered into a Shares Exchange Agreement with Aquasition Corporation, a company incorporated in the Republic of the Marshall Islands and currently listed in the Nasdaq with the intention to effect an alternative listing in the Nasdaq. The expected date of completion of the Share Exchange would be in early July 2014.

 

* * * * *

 

F- 53
 

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Aquasition is providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the Business Combination.

 

The following unaudited pro forma condensed combined balance sheet combines the audited consolidated historical statement of financial position of Hongri as of December 31, 2013 with the audited historical balance sheet of Aquasition as of December 31, 2013, giving effect to the Business Combination as if it had been consummated as of that date.

 

The following unaudited pro forma condensed combined income statement combines the audited historical statement of comprehensive income of Hongri for the year ended December 31, 2013 with the audited historical statement of operations of Aquasition for the year ended December 31, 2013, giving effect to the Business Combination as if it had occurred on January 1, 2013.

 

The historical financial information has been adjusted to give effect to the final events that are related and/or directly attributable to the Business Combination, are factually supportable and are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Business Combination.

 

The historical financial statements of Hongri have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and presented in US Dollars. The historical financial statements of Aquasition have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and presented in US Dollars and for these pro formas have been converted into IFRS. No material adjustments were made to Aquasition’s financial statements prepared under US GAAP when converting them to IFRS. The unaudited pro forma condensed combined financial statements included herein are prepared under IFRS and presented in US Dollars. Following the consummation of the Business Combination, the combined entity intends to prepare its consolidated financial statements under IFRS and present such consolidated financial statements in US Dollars.

 

The historical financial information of Hongri was derived from the audited financial statements of Hongri for the years ended December 31, 2013 and 2012 included elsewhere in this Shell Company Report. The historical financial information of Aquasition was derived from the audited financial statements of Aquasition for the year ended December 31, 2013, for the period from January 26, 2012 (inception) through December 31, 2012 and for the period from January 26, 2012 (inception) through December 31, 2013 included elsewhere in this Shell Company Report. This information should be read together with Hongri’s and Aquasition’s audited financial statements and related notes, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Target Companies ,” Management’s Discussion and Analysis of Financial Condition and Results of Operations of Aquasition ” and other financial information included elsewhere in this Shell Company Report.

 

The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience.

 

In the Business Combination, Aquasition acquired 100% of the issued and outstanding equity interest in Hongri from KBS in exchange for the transaction consideration consisting of 22,957,455 shares of Aquasition’s common stock. Upon issuance of its shares of common stock to KBS, KBS liquidated immediately thereafter, distributing all of its assets to its stockholders in proportion to their ownership. The number of shares comprising the transaction consideration was calculated as follows: (a) (i) EBITDA multiplied by 5, less (ii) the difference of Long Term Debt minus cash held by Hongri; divided by (b) $10.30.

 

F- 54
 

 

As a result of the Business Combination, after 4,981,736 public shares were converted to cash at the conversion price of approximately $10.30 per share (which is a full pro rata share of the trust account as of August 1, 2014), KBS owns approximately 90.3% of Aquasition’s common stock outstanding immediately after the Business Combination, and the other Aquasition stockholders own approximately 9.7% of Aquasition’s outstanding common stock.

 

The Business Combination will be accounted for as a reverse acquisition in accordance with IFRS. Under this method of accounting, Aquasition will be treated as the “acquired” company for financial reporting purposes. This determination was primarily based on Hongri comprising the ongoing operations of the combined entity, Hongri senior management comprising the senior management of the combined company, and KBS having a majority of the voting power of the combined entity. In accordance with guidance applicable to these circumstances, the Business Combination will be considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Hongri issuing stock for the net assets of Aquasition, accompanied by a recapitalization. The net assets of Aquasition will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of Hongri.

 

Included in the shares outstanding and weighted average shares outstanding as presented in the pro forma condensed combined financial statements are 22,957,455 shares of Aquasition common stock issued to KBS in exchange for their shares in Hongri.

 

F- 55
 

 

AQUASITION CORP.

PRO FORMA CONDENSED COMBINED BALANCE SHEET

(Unaudited)

As of December 31, 2013

 

    (A)     (B)              
    Hongri     Aquasition     Pro Forma
Adjustments
    Pro Forma
Condensed
Combined
 
Assets                                
Current assets:                                
Cash and cash equivalents   $ 39,818,799     $ 27,918     $ 57,178,034 (1)        
                      (312,500 )(3)        
                      (478,003 )(7)        
                      (51,314,888 )(8)        
                      (1,219,273 )(11)   $ 43,700,087  
Inventories     665,083       -       -       665,083  
Trade and other receivables     30,476,111       -       -       30,476,111  
Interest on cash held in trust     -       7,972       (7,972 )(1)     -  
Other current assets     1,189,894       14,732       -       1,204,626  
Total Current Assets     72,149,887       50,622       3,845,398       76,045,907  
Long term assets:                                
Investments held in trust     -       57,168,785       (57,168,785 )(1)     -  
Property, plant and equipment     27,039,977       -       -       27,039,977  
Other assets     10,266,868       -       -       10,266,868  
Total Long Term Assets     37,306,845       57,168,785       (57,168,785 )     37,306,845  
Total Assets   $ 109,456,732     $ 57,219,407     $ (53,323,387 )   $ 113,352,752  
                                 
Liabilities                                
Current liabilities:                                
Accounts payable and accrued expenses   $ 4,262,535     $ 131,763     $ 929 (4)        
                      52,500 (5)        
                      66,421 (6)        
                      (58,022 )(7)   $ 4,456,126  
Short-term loans     1,968,213       -       -       1,968,213  
Other current liabilities     9,763,880       69,904       350,077 (6)        
                      (419,981 )(7)     9,763,880  
Total Current Liabilities     15,994,628       201,667       (8,076 )     16,188,219  
Long term liabilities:                                
Warrant liability     -       3,432,440       -       3,432,440  
Total Liabilities     15,994,628       3,634,107       (8,076 )     19,620,659  
                                 
Commitments and Contingencies                                
Common stock subject to possible redemption or tender     -       51,448,500       (51,448,500 )(8)     -  
                                 
Stockholders’ Equity                                
Share capital     20,000       -       (20,000 )(9)     -  
Share premium     760,000       -       (760,000 )(9)     -  
Common stock     -       231       (4 )(2)        
                      18 (3)        
                      1 (8)        
                      2,296 (9)     2,542  
Additional paid-in capital     -       5,621,277       1,277 (1)        
                      4 (2)        
                      (312,518 )(3)        
                      (929) (4)        
                      (52,500 )(5)        
                      (416,498 )(6)        
                      133,611 (8)        
                      777,704 (9)        
                      (3,484,708 )(10)        
                      (1,219,273 )(11)     1,047,447  
Legal reserves     5,063,906       -       -       5,063,906  
Cumulative translation adjustments     4,635,209       -       -       4,635,209  
Retained earnings (accumulated deficit)     82,982,989       (3,484,708 )     3,484,708 (10)     82,982,989  
Total Stockholders’ Equity     93,462,104       2,136,800       (1,866,811 )     93,732,093  
Total Liabilities and Stockholders’ Equity   $ 109,456,732     $ 57,219,407     $ (53,323,387 )   $ 113,352,752  

 

F- 56
 

 

Pro Forma Adjustments to the Unaudited December 31, 2013 Audited Condensed Combined Balance Sheet

 

(A) Derived from the audited balance sheet of Hongri as of December 31, 2013.
(B) Derived from the audited balance sheet of Aquasition Corp. as of December 31, 2013.

 

(1) To record interest earned on the investments held in trust and to subsequently liquidate investments held in trust by Aquasition.
(2) To record cancellation of 42,000 founder shares in order to reissue such shares to an advisor (see Note 3).
(3) To record payment of costs related to the Business Combination. Aquasition engaged SNV Global Ltd. (“SNV”) pursuant to which SNV agreed to provide introductions to potential target companies to Aquasition, including KBS, among other services. Aquasition paid SNV a finder’s fee equal to 1.5% of the pre-closing equity of Hongri in newly issued shares of the combined company, amounting to 136,110 shares of Aquasition’s common stock, valued at $1,367,906, or $10.05 per share (based on the closing price of Aquasition’s common stock on August 1, 2014). Aquasition also engaged SunTrust Robinson Humphery, Inc. (“STRH”) pursuant to which Aquasition paid STRH a cash fee equal to $312,500 upon completion of the Business Combination. Additionally, Aquasition engaged Early Bird Capital, Inc. (“EBC”), pursuant to which EBC provided Aquasition certain financial advisory services in connection with the Business Combination. Aquasition paid EBC an equity fee in the amount of 42,000 shares, valued at $422,100, or $10.05 per share (based on the closing price of Aquasition’s common stock on August 1, 2014).
(4) To record $929 of deferred underwriters’ fee payable from Aquasition’s IPO.
(5) To record related party amounts due to Seacrest Shipping Co. Ltd.
(6) To record advances from related parties.
(7) To record payment of advances from related party.
(8) To reflect (a) the cancellation of 4,981,736 shares of common stock for stockholders who elected cash conversion for cash payment of $51,314,888 and (b) the reclassification of 13,264 shares of common stock subject to redemption to permanent equity for those stockholders who did not exercise their conversion rights.
(9) To reflect the recapitalization of Hongri through the issuance of 22,957,455 shares of Aquasition’s common stock to KBS
(10) To eliminate the historical accumulated deficit of Aquasition of $3,484,708, the accounting acquiree.
(11) To reflect the payment of legal, financial advisory, accounting, printing and other professional fees and expenses incurred in connection with the Business Combination.

 

F- 57
 

 

AQUASITION CORP.

PRO FORMA CONDENSED COMBINED INCOME STATEMENT

(Unaudited)

Year Ended December 31, 2013

 

    (A)     (B)              
    Hongri     Aquasition     Pro Forma
Adjustments
    Pro Forma
Condensed
Combined
 
                         
Revenue   $ 99,559,814     $ -     $ -     $ 99,559,814  
Cost of sales     57,363,839       -       -       57,363,839  
Gross profit     42,195,975       -       -       42,195,975  
                                 
Operating expenses:                                
Distribution and selling expenses     6,238,995       -       -       6,238,995  
General and administrative expenses     1,872,910       338,521       -       2,211,431  
Total operating expenses     8,111,905       338,521       -       8,450,426  
                                 
Other income:                                
Change in fair value of warrants     -       (45,442 )     -       (45,442 )
Interest income     -       7,972       -       7,972  
Finance costs     (116,421 )     -       -       (116,421 )
Other income     456,730       -       -       456,730  
                                 
Income (loss) before income taxes     34,424,379       (375,991 )     -       34,048,388  
Provision for income taxes     8,629,022       -       -       8,629,022  
Net income (loss)   $ 25,795,357     $ (375,991 )   $ -     $ 25,419,366  
                                 
Weighted average shares outstanding, basic             2,310,500       23,106,829 (1)     25,417,329  
Basic net income (loss) per share           $ (0.16 )           $ 1.00  
                                 
Weighted average shares outstanding, diluted             2,310,500       23,106,829 (1)     25,417,329  
Diluted net income (loss) per share           $ (0.16 )           $ 1.00  

 

F- 58
 

 

Pro Forma Adjustments to the Unaudited Condensed Combined Income Statement

 

(A) Derived from the audited statement of comprehensive income of Hongri for the year ended December 31, 2013.
(B) Derived from the audited statement of operations of Aquasition Corp. for the year ended December 31, 2013.

 

(1) As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income (loss) per share assumes that the shares issued and redeemed relating to the Business Combination have been outstanding for the entire period presented. The Aquasition shares used in the weighted average shares calculation is computed as the sum of the shares outstanding, plus the shares issued to advisors, less the shares redeemed. Weighted average common shares outstanding – basic and diluted is calculated as follows:

 

Aquasition public shares electing cash conversion     (4,981,736 )
Aquasition shares issued to advisors     178,110  
Aquasition shares outstanding     7,263,500  
Aquasition shares issued in merger     22,957,455  
Shares outstanding     25,417,329  
Percent of shares owned by KBS     90.3 %
Percent of shares owned by other Aquasition stockholders and advisors     9.7 %
         
Weighted average shares calculation, basic and diluted        
KBS     22,957,455  
Aquasition and advisors shares     2,459,874  
Weighted average shares, basic and diluted     25,417,329  

 

The computation of diluted income per share excludes the effect of Unit Purchase Options to purchase 250,000 units (consisting of one warrant and one share of common stock) and warrants to purchase 5,918,000 shares of common stock because their exercise price is greater than the average market price in the period.

 

F- 59
 

 

EXHIBIT INDEX

 

Exhibit No.   Description
1.1   Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.3 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).
     
1.2   By-laws (incorporated by reference to Exhibit 3.2 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
2.1   Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to the Amendment No. 3 to the registrant’s Registration Statement on Form F-1 filed on October 15, 2012 (Commission File No. 333-180571)).
     
2.2   Specimen of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
2.3   Specimen Public Redeemable Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
2.4   Specimen Placement Unit Certificate (incorporated by reference to Exhibit 4.4 to the Amendment No. 3 to the registrant’s Registration Statement on Form F-1 filed on October 15, 2012 (Commission File No. 333-180571)).
     
2.5   Specimen Placement Warrant Certificate (incorporated by reference to Exhibit 4.5 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
2.6   Form of Warrant Agreement (incorporated by reference to Exhibit 4.6 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).
     
2.7   Form of Unit Purchase Option (incorporated by reference to Exhibit 4.7 to the Amendment No. 3 to the registrant’s Registration Statement on Form F-1 filed on October 15, 2012 (Commission File No. 333-180571)).
     
4.1   Form of Underwriting Agreement (incorporated by reference to Exhibit 1.1 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).
     
4.2   Form of Letter Agreement by and among the registrant, Lazard Capital Markets LLC and the founders (incorporated by reference to Exhibit 10.1 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)). (1)
     
4.3   Form of Investment Management Trust Agreement between American Stock Transfer & Trust Company and the registrant (incorporated by reference to Exhibit 10.2 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).
     
4.4   Form of Securities Escrow Agreement between the registrant, American Stock Transfer & Trust Company and the Founders (incorporated by reference to Exhibit 10.2 to the Amendment No. 2 to the registrant’s Registration Statement on Form F-1 filed on August 31, 2012 (Commission File No. 333-180571)).
     
4.5   Form of Services Agreement between the registrant and Seacrest Shipping Co. Ltd. (incorporated by reference to Exhibit 10.4 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
4.6   Form of Registration Rights Agreement among the Registrant and the founders (incorporated by reference to Exhibit 10.5 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
4.7   Form of Placement Unit Purchase Agreement between the registrant and the founders (incorporated by reference to Exhibit 10.6 to the Amendment No. 4 to the Registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).

 

 
 

 

Exhibit No.   Description
4.8   Promissory Note, dated as of February 27, 2012, issued to Aqua Investments Corp. (incorporated by reference to Exhibit 10.7 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).
     
4.9   Share Exchange Agreement and Plan of Liquidation, dated March 24, 2014, by and among Aquasition Corp., KBS International Holdings, Inc., Hongri International Holdings Limited, Cheung So Wa and Chan Sun Keung (incorporated by reference to Exhibit 10.1 to the Registration Report on Form 6-K filed by the registrant on April 4, 2014)
     
4.10   Frist Amendment to Share Exchange Agreement and Plan of Liquidation, dated June 21, 2014 by and among Aquasition Corp., KBS International Holdings, Inc., Hongri International Holdings Limited, Cheung So Wa and Chan Sun Keung (incorporated by reference to Exhibit (D)(3) to Amendment No.4 to the Schedule TO filed by the registrant on July 9, 2014)
     
4.11*   Voting Agreement , dated August 1, 2014, by and among Aquasition Corp., Aquasition Investments Corp., Cheung So Wa and Chan Sun Keung
     
4.12*   Form of Resale Lock-Up Agreement, dated August 1, 2014, by and among Aquasition Corp., Aquasition Investments Corp., Cheung So Wa, Chan Sun Keung and other named parties.
     
4.13*   Employee Agreement with Keyan Yan, dated August 1, 2014
     
4.14*   Employee Agreement with Stanley Wong, dated August 1, 2014
     
8.1*   List of the registrant’s subsidiaries

______________________

 

*Filed herewith.

 

 

 

Exhibit 4.11

 

AQUASITION CORP.

 

VOTING AGREEMENT

 

THIS VOTING AGREEMENT (this “ Agreement ”) is made as of August 1, 2014 between and among (a) Aquasition Corp., a company organized and existing under the laws of the Republic of the Marshall Islands (the “ Company ”); (b) Aquasition Investments Corp., a company incorporated in the Republic of the Marshall Islands (“ AQU Invest ”); and (c) Cheung So Wa, an individual, and Chan Sun Keung, an individual (the “ Principal Stockholders ”). Each of the foregoing is referred to as a “ party ” and collectively as the “ parties .” Capitalized terms not otherwise defined will have the meanings assigned to them in the Share Exchange Agreement.

 

RECITALS

 

WHEREAS, the Company, KBS International Holdings, Inc. (“ KBS ”), Hongri International Holdings, Ltd. (“ Hongri ”), and the Principal Stockholders have entered into that certain Share Exchange Agreement and Plan of Liquidation dated as of March 24, 2014 (the “ Share Exchange Agreement ”); and

 

WHEREAS, AQU Invest and the Principal Stockholders (collectively, the “ Stockholders ”) are or will be significant stockholders of the Company after the closing of the transactions contemplated by the Share Exchange Agreement; and

 

WHEREAS, Article IV(1) of the Company’s Amended and Restated Articles of Incorporation, as currently in effect, provides that the number of directors comprising the Company’s Board of Directors (the “ Board ”) shall be not less than two (2); and

 

WHEREAS, the Stockholders believe it is in their best interests to provide for the future voting of their shares of the Company’s capital stock with respect to the election of Board members and certain other matters as set forth below; and

 

WHEREAS, the obligations of the parties to the Share Exchange Agreement are conditioned upon the execution and delivery of this Agreement, as set forth in Section 2.6(b) of that Agreement;

 

NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants set forth in this Agreement, the parties agree as follows:

 

AGREEMENT

 

1.                   Board Matters . During the term of this Agreement, to the extent they are entitled under the Company’s Restated Charter or applicable law to vote on any matter described herein, the Stockholders will vote all of the shares of the Company’s voting securities now or hereafter owned by them, whether beneficially or otherwise, or with respect to which they exercise voting power (collectively, the “ Shares ”), as follows:

 

1.1               Board Size . The Stockholders will vote or cause to be voted, whether at a meeting of stockholders or by written consent, all of their respective Shares to ensure that the number of directors constituting the Board will be set and remain at seven (7) directors.

 

- 1 -
 

 

1.2               Election of Directors .

 

(a)                 The Stockholders will vote or cause to be voted, whether at a meeting of stockholders or by written consent, all of their respective Shares to ensure that the following persons are elected to the Board: (i) three (3) persons nominated by a majority of the Shares held by the Principal Stockholders (“ Principal Stockholders’ Directors ”); (ii) one (1) person nominated by AQU Invest (the “ AQU Director ”); and (iii) three (3) persons nominated by agreement between the Principal Stockholders and AQU Invest.

 

(b)                One of the persons nominated by the Principal Stockholders pursuant to Section 1.2(a)(i), and each person nominated by agreement between the Principal Stockholders and AQU Invest under Section 1.2(a)(iii), must be an “independent director” under applicable laws, regulations and rules, and having experience with public companies listed in the United States and with the NASDAQ Rules.

 

1.3               Initial Directors .

 

(a)                 The initial two persons nominated by the Principal Stockholders pursuant to Section 1.2(a)(i) will be Yan Ke Yan, Stanley Wong and Tristan Kuo.

 

(b)                The initial person nominated by AQU pursuant to Section 1.2(a)(ii) will be Stylianos Stergios Souyoutzoglou.

 

(c)                 The initial three persons nominated by agreement between the Principal Stockholders and AQU Invest pursuant to Section 1.2(a)(iii) will be John Sano, Max Zhou, and Andrew Gaw.

 

(d)                Each of Tristan Kuo, John Sano, Max Zhou, and Andrew Gaw will be an “independent director” under applicable laws, regulations and rules, having experience with public companies listed in the United States and with the NASDAQ Rules, as contemplated by Section 1.2(b).

 

1.4               Vacancies . Any vacancy among the members of the Board will be filled by the appointment or election of a person nominated by the persons or groups entitled under Section 1.2 hereof to designate the vacating member. In the absence of any designation from the persons or groups with the right to designate a person for election to the Board pursuant to this Section 1.4 hereof, the member of the Board previously designated by such persons or groups and then serving will be re-elected if still eligible to serve as provided herein.

 

1.5               Removal of Directors . The Stockholders will vote or cause to be voted, whether at a meeting of stockholders or by written consent, all of their respective Shares to ensure that:

 

(a)                 no member of the Board elected pursuant to Section 1.2 hereof will be removed from office unless such removal is directed or approved by the affirmative vote of the persons or groups entitled under Section 1.2 hereof to designate such member of the Board, or (ii) the persons or groups entitled to designate such member of the Board pursuant to Section 1.2 hereof are no longer entitled hereof to designate such member of the Board; and

 

(b)                upon the direction or affirmative vote of the persons or groups entitled under Section 1.2 hereof to designate a member of the Board, such member of the Board will be removed from office.

 

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2.                   Special Voting Matters . Any acquisition by the Company or any subsidiary of any entity owned of record or beneficially more than five percent (5%) by either of the Principal Stockholders will require the approval of the AQU Director, which approval will not be unreasonably delayed or withheld.

 

3.                   Operational Cooperation . Unless determined otherwise by the AQU Director, the parties will cause the Directors nominated by them to ensure that:

 

3.1               Management of the Company will hold conference calls at least monthly with the Board of Directors.

 

3.2               The Company will implement enterprise resource planning (ERP) during 2014.

 

4.                   Successors in Interest of the Stockholders . The provisions of this Agreement will be binding upon the successors in interest of the Stockholders to any of the Stockholders’ Shares. The Company will not permit the transfer of any Stockholders’ Shares on its books or issue a new certificate representing any Stockholders’ Shares unless and until the person to whom such security is to be transferred will have executed a written agreement, satisfactory in form and substance to the Company, pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person was a Shareholder hereunder (and in such event, such person will be deemed a Shareholder hereunder). Any signed accession agreement to this Agreement by such successor will satisfy such purpose and, in such instance, no other signatory hereto (except the Company) will be required.

 

5.                   Covenants of the Company . The Company will use reasonable efforts to take all actions required to ensure that the rights given to the Stockholders hereunder are effective and that the Stockholders enjoy the benefits thereof. Such actions include, without limitation, the use of the Company’s reasonable efforts to cause the nomination of the designees, as provided herein, for election as directors of the Company. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Stockholders against impairment.

 

6.                   No Liability for Election of Recommended Directors . Neither the Company, the Stockholders, nor any officer, director, shareholder, partner, employee or agent of such party, makes any representation or warranty as to the fitness or competence of the nominee of any party hereunder to serve on the Board by virtue of such party’s execution of this Agreement or by the act of such party in voting for such nominee pursuant to this Agreement.

 

7.                   Grant of Proxy; Power of Attorney . If a Shareholder fails to vote such Shareholder’s Shares or take such other action as may be required by the terms and conditions of this Agreement, such Shareholder, by execution of this Agreement, will be deemed to have granted to the Company a proxy and/or special power of attorney, and appointed the Company as such Shareholder’s attorney-in-fact, for the sole purpose of voting the Shares held by such Shareholder and executing and delivering, in the name and on behalf of such Shareholder, all consents, waivers, agreements and other documents required to be executed and delivered by such Shareholder pursuant to this Agreement. If the provisions of this Agreement be construed to constitute the granting of a proxy, such proxy will be deemed coupled with an interest and will be irrevocable for the term of this Agreement.

 

8.                   Specific Enforcement . It is agreed and understood that monetary damages would not adequately compensate an injured party for the breach of this Agreement by any party, that this Agreement will be specifically enforceable, and that any breach or threatened breach of this Agreement will be the proper subject of a temporary or permanent injunction or restraining order. Further, each party hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach.

 

- 3 -
 

 

9.                   Termination . This Agreement will terminate upon as to any shareholder of the Company in the event such shareholder holds less than one-half of the Shares held by it on the date hereof.

 

10.               Amendments and Waivers . Any term hereof may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the parties affected thereby. Any amendment or waiver so effected will be binding upon the parties and their respective successors and assigns.

 

11.               Stock Splits, Stock Dividends, etc. In the event of any stock split, stock dividend, recapitalization, reorganization, or the like, any securities issued with respect to the Shares will become “Shares” for purposes of this Agreement, and will be endorsed with any legend required by this Agreement.

 

12.               Legends on Share Certificates . Each certificate representing any Shares will be endorsed by the Company with a legend reading substantially as follows:

 

THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING AGREEMENT (A COPY OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST WILL BE DEEMED TO AGREE TO AND WILL BECOME BOUND BY ALL THE PROVISIONS OF SUCH VOTING AGREEMENT.

 

13.               Severability . If any provision of this Agreement is held to be illegal or unenforceable under applicable law, (a) such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms, and (b) the parties will, to the extent permissible by applicable law, amend this Agreement, or enter into a voting trust agreement under which the Shares will be transferred to the voting trust created thereby, so as to make effective and enforceable the intent of this Agreement.

 

14.               Titles and Subtitles . The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

 

15.               Delays or Omissions . No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement upon any breach or default of any other party under this Agreement will impair any such right, power or remedy of such non-defaulting party, nor will it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor will any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. All remedies, either under this Agreement or by law or otherwise afforded to any party, will be cumulative and not alternative.

 

16.               Governing Law . This Agreement will be governed by and construed under the laws of New York, without regard to the conflict of laws provisions thereof.

 

17.               Dispute Resolution . Article X of the Share Exchange Agreement, regarding arbitration of disputes, is incorporated by reference herein to apply with full force to any disputes arising under this Agreement.

 

- 4 -
 

 

18.               Counterparts; Facsimile Signatures . This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This Agreement may be executed and delivered by facsimile and upon such delivery the facsimile signature will be deemed to have the same effect as if the original signature had been delivered to the other party.

 

19.               Attorney’s Fees . If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party will be entitled to reasonable attorneys’ fees, costs and disbursements in addition to any other relief to which such party may be entitled.

 

20.               Successors and Assigns . The provisions hereof will inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto.

 

21.               Entire Agreement . This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof, and no party will be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein.

 

22.               Notices . Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing, addressed to the parties at the addresses set forth below their signatures hereto or such other address as a party may have designated in writing to all other parties. All such notices and other written communications will be deemed effectively given upon personal delivery to the party to be notified (or upon the date of attempted delivery where delivery is refused) or, if sent by facsimile, upon receipt of appropriate written confirmation of receipt, or, if sent by mail, five (5) days after deposit with the United States Postal Service, or, if sent by air courier, one (1) day after deposit with a next day air courier, with postage and fees prepaid and addressed to the party entitled to such notice.

 

[Remainder of Page Intentionally Left Blank]

 

- 5 -
 

 

IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the day and year hereinabove first written.

 

Company    
         
Aquasition Corp. , a Marshall Islands company   Principal Stockholders
         
By: /s/ Matthew Los   /s/ Cheung So Wa
  Print Name:    Matthew Los   Cheung So Wa, an individual
  Its: Chief Executive Officer    
         
        /s/ Chan Sun Keung
Aqua   Chan Sun Keung, an individual
         
Aquasition Investments Corp, a Marshall Islands company    
         
By: /s/ Matthew Los    
  Print Name: Matthew Los    
  Its: Director    

  

[ Signature Page to Voting Agreement ]

 

 

 

 

Exhibit 4.12

  

FORM OF RESALE LOCK-UP AGREEMENT

 

THIS RESALE LOCK-UP AGREEMENT (this “ Agreement ”) is dated as of August 1, 2014, by and between the shareholder(s) set forth on the signature page to this Agreement (each a “ Holder ”) and Aquasition Corp., a company organized and existing under the laws of the Republic of the Marshall Islands, or its successor company (“ AQU ”). Capitalized terms used and not otherwise defined herein that are defined in the Share Exchange Agreement (as defined below) will have the meanings given such terms in the Share Exchange Agreement.

 

BACKGROUND

 

A.          AQU has entered into that certain Share Exchange Agreement and Plan of Liquidation dated as of March 24, 2014 (the “ Share Exchange Agreement ”), between and among AQU, KBS International Holdings, Inc. (“ KBS ”), Hongri International Holdings, Ltd. (“ Hongri ”), and Cheung So Wa and Chan Sun Keung. Pursuant to the Share Exchange Agreement, KBS will transfer 100% of the issued and outstanding capital stock of Hongri to AQU in exchange for a number of shares of common stock of AQU to be determined in accordance with the Share Exchange Agreement. Immediately thereafter, KBS will distribute the common stock of AQU received in the transaction (the “ AQU Shares ”) to its stockholders and liquidate.

 

B.           Each Holder is the record and/or beneficial owner of shares of (i) common stock, or securities convertible into or exchangeable for shares of common stock of AQU, or (ii) shares of common stock of KBS and is therefore entitled to receive AQU Shares in accordance with the planned distribution and liquidation of KBS (the “ Plan of Liquidation ”).

 

C.           As a condition of, and as a material inducement for AQU to enter into and consummate the transactions contemplated by the Share Exchange Agreement, Holder has agreed to execute and deliver this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, agree as follows:

 

1.             Holders . The Holders include at least the following: (a) Chan Sun Keung and Cheung So Wa, the “Principal Stockholders” as defined in the Share Exchange Agreement; (b) Yan Ke Yan and Stanley Wong, the “Key Personnel” as defined in the Share Exchange Agreement; (c) Leonidas S. Polemis, Matthew C. Los, Stylianos Stergios Sougioutzoglou, Nicholas John Frangos, and Themistoklis Kalapotharakosthe “Key AQU Personnel” as defined in the Share Exchange Agreement; and (d) each holder of five percent (5%) or more of the outstanding stock of AQU who is not included in the foregoing categories, including those persons or entities listed on Schedule A (the “ 5% Stockholders ”). This Agreement shall be binding on each Holder upon execution by that Holder.

 

2.             Representations and Warranties . Each of the parties hereto, by their respective execution and delivery of this Agreement, hereby represents and warrants to the others and to all third party beneficiaries of this Agreement that (a) such party has the full right, capacity and authority to enter into, deliver and perform its respective obligations under this Agreement, (b) this Agreement has been duly executed and delivered by such party and is the binding and enforceable obligation of such party, enforceable against such party in accordance with the terms of this Agreement, and (c) the execution, delivery and performance of such party’s obligations under this Agreement will not conflict with or breach the terms of any other agreement, contract, commitment or understanding to which such party is a party or to which the assets or securities of such party are bound. The Holder has independently evaluated the merits of its decision to enter into and deliver this Agreement, and such Holder confirms that it has not relied on the advice of AQU, AQU’s legal counsel, KBS, KBS’s legal counsel, or any other person.

 

 
 

 

3.             Beneficial Ownership . The Holder hereby represents and warrants that it does not beneficially own, directly or through its nominees (as determined in accordance with Section 13(d) of the Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder), any shares of capital stock of KBS (“KBS Shares”), any shares of capital stock of AQU (“AQU Shares”), or any economic interest in or derivative of either, other than those KBS Shares or AQU Shares specified on the signature page hereto. For purposes of this Agreement, the AQU Shares beneficially owned by such Holder as specified on the signature hereto, together with any AQU Shares received by Holder pursuant to the Plan of Liquidation and any AQU Shares acquired during the Lock-Up Period (as defined below), if any, are collectively referred to as the “Lock-up Shares.”

 

4.             Lock-Up .

 

(a)           During the Lock-up Period (as defined below), the Holder irrevocably agrees that it will not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of the Lock-up Shares (including any securities convertible into, or exchangeable for, or representing the rights to receive, Lock-up Shares), enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of such Lock-up Shares, whether any of these transactions are to be settled by delivery of any such Lock-up Shares, in cash or otherwise, publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, or engage in any Short Sales (as defined below) with respect to any security of AQU.

 

(b)           In furtherance of the foregoing, AQU will (i) place an irrevocable stop order on all AQU Shares which are Lock-up Shares, including those which may be covered by a registration statement, and (ii) notify AQU’s transfer agent in writing of the stop order and the restrictions on such Lock-up Shares under this Agreement and direct AQU’s transfer agent not to process any attempts by the Holder to resell or transfer any Lock-up Shares, except in compliance with this Agreement.

 

(c)           For purposes hereof, “ Short Sales ” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, swaps and similar arrangements (including on a total return basis), and sales and other transactions through non-US broker dealers or foreign regulated brokers.

 

(d)           For purpose of this agreement, Lock-up Period means a period of 180 calendar days from the Closing Date under the Share Exchange Agreement with regard to all 5% Stockholders, and one year from the Closing Date under the Share Exchange Agreement for all other Holders.

 

(e)           The provisions of Section 3(a) hereof will apply equally to shares of common stock of KBS held at any time during the Lock-Up Period by the Holder, except that nothing herein shall be deemed to interfere with, constrain or prevent the consummation of the Plan of Liquidation.

 

2
 

 

5.             No Additional Fees/Payment . Other than the consideration specifically referenced herein, the parties hereto agree that no fee, payment or additional consideration in any form has been or will be paid to the Holder in connection with this Agreement.

 

6.             Notices . Any notices required or permitted to be sent hereunder shall be delivered personally or by courier service to the following addresses, or such other address as any party hereto designates by written notice to the other party. Provided, however, a transmission per telefax or email shall be sufficient and shall be deemed to be properly served when the telefax or email is received if the signed original notice is received by the recipient within three (3) calendar days thereafter.

 

  (a) If to AQU:

 

AQU Corp.

C/o Seacrest Shipping Co. Ltd.

8-10 Paul Street

London EC2A 4JH, England

Attention: Matthew Los

Email: management@aquasitioncorp.com

 

    With copies (which shall not constitute notice) to:

 

    Loeb & Loeb LLP

    345 Park Aveneue

New York, NY 10154

Attention: Giovanni Caruso

Email: gcaruso@loeb.com

 

    Pillsbury Winthrop Shaw Pittman, LLP

    2550 Hanover Street

    Palo Alto, CA 94304

    Attn: Thomas M. Shoesmith
    Email: tom.shoesmith@pillsburylaw.com

 

  (b) If to Holder, to the address set forth on the Holder’s signature page hereto, with a copy, which shall not constitute notice, to:

 

Pillsbury Winthrop Shaw Pittman, LLP

    2550 Hanover Street

    Palo Alto, CA 94304

    Attn: Thomas M. Shoesmith
    Email: tom.shoesmith@pillsburylaw.com

  

or to such other address as any party may have furnished to the others in writing in accordance herewith.

 

7.             Enumeration and Headings . The enumeration and headings contained in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of any of the provisions of this Agreement.

 

8.             Counterparts . This Agreement may be executed in facsimile and in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all of which shall together constitute one and the same agreement.

 

3
 

 

9.             Successors and Assigns . This Agreement and the terms, covenants, provisions and conditions hereof shall be binding upon, and shall inure to the benefit of, the respective heirs, successors and assigns of the parties hereto. The Holder hereby acknowledges and agrees that this Agreement is entered into for the benefit of and is enforceable by AQU and its successors and assigns.

 

10.           Severability . If any provision of this Agreement is held to be invalid or unenforceable for any reason, such provision will be conformed to prevailing law rather than voided, if possible, in order to achieve the intent of the parties and, in any event, the remaining provisions of this Agreement shall remain in full force and effect and shall be binding upon the parties hereto.

 

11.           Amendment . This Agreement may be amended or modified by written agreement executed by each of the parties hereto.

 

12.           Further Assurances . Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

13.           No Strict Construction . The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

14.          Dispute Resolution . Article X of the Share Exchange Agreement, regarding arbitration of disputes, is incorporated by reference herein to apply with full force to any disputes arising under this Agreement.

 

15.          Governing Law . The terms and provisions of this Agreement shall be construed in accordance with the laws of the State of New York.

 

16.          Controlling Agreement . To the extent the terms of this Agreement (as amended, supplemented, restated or otherwise modified from time to time) directly conflicts with a provision in the Share Exchange Agreement, the terms of this Agreement shall control.

 

[ Signature Page Follows ]

 

4
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Resale Lock-Up Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  AQUASITION CORP.
     
  By:  
  Name:  
  Title:  

 

5
 

  

IN WITNESS WHEREOF, the parties hereto have caused this Resale Lock-Up Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  HOLDER
   
  By:  
  Name:  Cheung So Wa
   
  Address:
   
  c/o KBS INTERNATIONAL HOLDINGS, INC.
  Xin Fengge Building
  Yupu Industrial Park
  Shishi City, Fujian Province 362700
  CHINA

   

  NUMBER OF Lock-up Shares:  
     
  _____   shares of KBS International Holdings, Inc., or  
     
  _____   shares of Aquasition Corp.  

 

6
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Resale Lock-Up Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  HOLDER
   
  By:  
  Name:   Chan Sun Keung
   
  Address:
   
  c/o KBS INTERNATIONAL HOLDINGS, INC.
  Xin Fengge Building
  Yupu Industrial Park
  Shishi City, Fujian Province 362700
  CHINA

 

  NUMBER OF Lock-up Shares:  
     
  _____   shares of KBS International Holdings, Inc., or  
     
  _____   shares of Aquasition Corp.  

  

7
 

  

IN WITNESS WHEREOF, the parties hereto have caused this Resale Lock-Up Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  HOLDER
   
  By:  
  Name:   Yan Ke-Yan
   
  Address:
   
  c/o KBS INTERNATIONAL HOLDINGS, INC.
  Xin Fengge Building
  Yupu Industrial Park
  Shishi City, Fujian Province 362700
  CHINA

 

  NUMBER OF Lock-up Shares:  
     
  _____   shares of KBS International Holdings, Inc., or  
     
  _____   shares of Aquasition Corp.  

  

8
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Resale Lock-Up Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

  

  HOLDER
   
  By:  
  Name:   Stanley Wong
   
  Address:
   
  c/o KBS INTERNATIONAL HOLDINGS, INC.
  Xin Fengge Building
  Yupu Industrial Park
  Shishi City, Fujian Province 362700
  CHINA

 

  NUMBER OF Lock-up Shares:  
     
  _____   shares of KBS International Holdings, Inc., or  
     
  _____   shares of Aquasition Corp.  

  

9
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Resale Lock-Up Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  HOLDER
   
  By:  
  Name:
  Title:

 

  Address:
   
   
   
   

 

  NUMBER OF Lock-up Shares:  
     
  _____   shares of KBS International Holdings, Inc., or  
     
  _____   shares of Aquasition Corp.  

     

10
 

 

SCHEDULE A

  

The following persons or entities are included within the definition of “5% Stockholder” for purposes of this Resale Lock-Up Agreement:

 

Aqua Investments Corp.

Bay Peak, LLC

Cory Roberts

China Canadian Opportunity, L.P.

Ground Floor Capital (China) Inc.

David Steele

 

11

 

 

Exhibit 4.13

 

AQUASITION CORP.

Xin Fengge Building

Yupu Industrial Park

Shishi City, Fujian Province 362700

CHINA

 

August 1, 2014

 

Keyan Yan

[Address]

 

Dear Mr. Yan:

 

This will confirm the terms of your employment with Aquasition Corp., (the “ Company ”) as of the date hereof.

 

1.       Duties . Your job title will be Chief Executive Officer of the Company, reporting to the Board of Directors of the Company (the “ Board ”). Your duties will include the general management of the affairs of the Company, together with the powers and duties usually incident to the office of Chief Executive Officer, except as specifically limited by appropriate written resolution of the Board and will have such other powers and perform such other duties as may be assigned to you by the Board. This is a full-time position.

 

2.                   Term . The initial term of your employment is three (3) years, which term may be extended by agreement between you and the Company (the “ Term ”).

 

3.                   Compensation . You initial annual base salary will be determined by the Compensation Committee of the Board within 30 days following the date hereof. Your compensation will be reviewed from time to time according to the Company’s policies. All reasonable business expenses that are documented by you and incurred in the ordinary course of business will be reimbursed in accordance with the Company’s standard policies and procedures.

 

4.                   Incentive Compensation . You will be eligible to participate in such annual performance bonus plans as may be established by the Company from time to time for similarly situated employees, subject to the terms and conditions established by the Company for such bonus plans. Any such bonuses will be based on the achievement of goals and milestones established by the Company in its sole discretion, and the Company in its sole discretion may amend or terminate any such bonus plans at any time.

 

5.                   Equity Awards . You will be entitled to participate in the Company’s Equity Incentive Plan when and if such a Plan is adopted by the Board.

 

6.                   Employee Benefits . You are eligible to participate in such Company-sponsored benefits, including health benefits, vacation (annual leave), sick leave, holidays and other benefits that the Company may offer to similarly situated employees from time to time. Your eligibility to receive such benefits will be subject in each case to the generally applicable terms and conditions for the benefits in question and to the determinations of any person or committee administering such benefits. The Company may from time to time, in its sole discretion, amend or terminate the benefits available to you and the Company’s other employees. You will be covered by worker’s compensation insurance, disability insurance and other governmental benefit programs as required by applicable laws.

 

 
 

 

7.                   Adjustments and Changes in Employment Status . The Company reserves the right to make personnel decisions regarding your employment, including but not limited to decisions regarding any transfers or other changes in duties or assignments, changes in your salary and other compensation, changes in benefits and changes in Company policies or procedures.

 

8.                   At-Will Employment . Your employment with the Company is “at-will.” In other words, either you or the Company can terminate your employment at any time for any reason, with or without cause and with or without notice, without liability except as expressly set forth in this letter. This term of employment is not subject to change or modification of any kind except if in writing and signed by you and an authorized representative of the Company.

 

9.                   Non-competition . During your employment with the Company, you will devote full time to the duties of your position. You will not engage in any activities in competition with the business of the Company.

 

10.               Confidentiality . At all times during your employment with the Company, you will maintain the confidentiality of all information and materials which are confidential or proprietary to the Company.

 

11.               Taxes . All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes and all other deductions required by law. You acknowledge that the Company does not have a duty to design its compensation policies in a manner that minimizes your tax liabilities, and you will not make any claim against the Company or the Board related to tax liabilities arising from your compensation.

 

12.               No Conflicting Obligations . By execution of this letter, you represent and warrant that your performance of this letter does not and will not breach any agreement you have entered into, or will enter into, with any other party. You agree not to enter into any written or oral agreement that conflicts with this letter.

 

13.               Integrated Agreement . This letter supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to its subject matter. Likewise, this letter will constitute the full, complete and exclusive agreement between you and the Company with respect to its subject matter. This Agreement may only be changed by a writing, signed by you and an authorized representative of the Company.

 

14.               Severability . If any term of this letter is held to be invalid, void or unenforceable, the remainder of the terms herein will remain in full force and effect and will in no way be affected, and the parties will use their best efforts to find an alternative way to achieve the same result.

 

15.               Governing Law . The terms of this letter and the resolution of any dispute as to the meaning, effect, performance or validity of this letter or arising out of, related to, or in any way connected with, this letter, your employment with the Company or any other relationship between you and the Company (a “ Dispute ”) will be governed by the laws of Hong Kong, S.A.R., China, without giving effect to the principles of conflict of laws.

 

[ Signature Page Follows ]

 

2
 

 

To confirm your agreement with and acceptance of these terms, please sign one copy of this letter and return it to me. The other copy is for your records.

 

Sincerely,  
     
AQUASITION CORP.  
     
By: /s/ Stanley Wong  
  Stanley Wong  
     
Its: Chief Financial Officer  
     
    Agreed and accepted as
    of the date written above:
     
    /s/ Keyan Yan
    Keyan Yan

 

3

 

 

Exhibit 4.14

 

AQUASITION CORP.

Xin Fengge Building

Yupu Industrial Park

Shishi City, Fujian Province 362700

CHINA

 

August 1, 2014

 

Stanley Wong

[Address]

 

Dear Mr. Wong:

 

This will confirm the terms of your employment with Aquasition Corp., (the “ Company ”) as of the date hereof.

 

1.                   Duties . Your job title will be Chief Financial Officer of the Company, reporting to the Company’s Chief Executive Officer. Your duties will be commensurate with those typical for such a position as determined by the CEO from time to time. This is a full-time position.

 

2.                   Term . The initial term of your employment is three (3) years, which term may be extended by agreement between you and the Company (the “ Term ”).

 

3.                   Compensation . You initial annual base salary will be determined by the Board of Directors of the Company (the “Board”) or the Compensation Committee of the Board, if applicable, within 30 days following the date hereof. Your compensation will be reviewed from time to time according to the Company’s policies. All reasonable business expenses that are documented by you and incurred in the ordinary course of business will be reimbursed in accordance with the Company’s standard policies and procedures.

 

4.                   Incentive Compensation . You will be eligible to participate in such annual performance bonus plans as may be established by the Company from time to time for similarly situated employees, subject to the terms and conditions established by the Company for such bonus plans. Any such bonuses will be based on the achievement of goals and milestones established by the Company in its sole discretion, and the Company in its sole discretion may amend or terminate any such bonus plans at any time.

 

5.                   Equity Awards . You will be entitled to participate in the Company’s Equity Incentive Plan when and if such a Plan is adopted by the Board.

 

6.                   Employee Benefits . You are eligible to participate in such Company-sponsored benefits, including health benefits, vacation (annual leave), sick leave, holidays and other benefits that the Company may offer to similarly situated employees from time to time. Your eligibility to receive such benefits will be subject in each case to the generally applicable terms and conditions for the benefits in question and to the determinations of any person or committee administering such benefits. The Company may from time to time, in its sole discretion, amend or terminate the benefits available to you and the Company’s other employees. You will be covered by worker’s compensation insurance, disability insurance and other governmental benefit programs as required by applicable laws.

 

 
 

 

7.                   Adjustments and Changes in Employment Status . The Company reserves the right to make personnel decisions regarding your employment, including but not limited to decisions regarding any transfers or other changes in duties or assignments, changes in your salary and other compensation, changes in benefits and changes in Company policies or procedures.

 

8.                   At-Will Employment . Your employment with the Company is “at-will.” In other words, either you or the Company can terminate your employment at any time for any reason, with or without cause and with or without notice, without liability except as expressly set forth in this letter. This term of employment is not subject to change or modification of any kind except if in writing and signed by you and an authorized representative of the Company.

 

9.                   Non-competition . During your employment with the Company, you will devote full time to the duties of your position. You will not engage in any activities in competition with the business of the Company.

 

10.               Confidentiality . At all times during your employment with the Company, you will maintain the confidentiality of all information and materials which are confidential or proprietary to the Company.

 

11.               Taxes . All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes and all other deductions required by law. You acknowledge that the Company does not have a duty to design its compensation policies in a manner that minimizes your tax liabilities, and you will not make any claim against the Company or the Board related to tax liabilities arising from your compensation.

 

12.               No Conflicting Obligations . By execution of this letter, you represent and warrant that your performance of this letter does not and will not breach any agreement you have entered into, or will enter into, with any other party. You agree not to enter into any written or oral agreement that conflicts with this letter.

 

13.               Integrated Agreement . This letter supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to its subject matter. Likewise, this letter will constitute the full, complete and exclusive agreement between you and the Company with respect to its subject matter. This Agreement may only be changed by a writing, signed by you and an authorized representative of the Company.

 

14.               Severability . If any term of this letter is held to be invalid, void or unenforceable, the remainder of the terms herein will remain in full force and effect and will in no way be affected, and the parties will use their best efforts to find an alternative way to achieve the same result.

 

15.               Governing Law . The terms of this letter and the resolution of any dispute as to the meaning, effect, performance or validity of this letter or arising out of, related to, or in any way connected with, this letter, your employment with the Company or any other relationship between you and the Company (a “ Dispute ”) will be governed by the laws of Hong Kong, S.A.R., China, without giving effect to the principles of conflict of laws.

 

[ Signature Page Follows ]

 

2
 

 

To confirm your agreement with and acceptance of these terms, please sign one copy of this letter and return it to me. The other copy is for your records.

 

Sincerely,  
     
AQUASITION CORP.  
     
By: /s/ Keyan Yan  
  Keyan Yan  
     
Its: Chief Executive Officer  
     
    Agreed and accepted as
    of the date written above:
     
    /s/ Stanley Wong
    Stanley Wong

 

3

 

  

Exhibit 8.1

 

LIST OF SUBSIDIARIES

 

  Jurisdiction   of  
  Incorporation   or Percentage   of
Name of Subsidiary Organization Ownership
Hongri International Holdings Limited British Virgin Islands 100%
Roller Rome Limited British Virgin Islands 100%
Vast Billion Investment Limited Hong Kong 100%
France Cock (China) Limited Hong Kong 100%
Hongri (Fujian) Sports Goods Co., Ltd. PRC 100%
Anhui Kai Xin Apparel Co. Ltd. PRC 100%
Shishi Hongri Brand Management Limited PRC 100%