SUMMIT NETWORKS INC. ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
VIE Agreement
OnJanuary 20, 2021 , Beijing ALW, a wholly foreign-owned enterprise in the PRC and our indirect, wholly owned subsidiary, entered into the VIE Agreements with Hengshui Jingzhen, whereby Beijing ALW gained control over Hengshui Jingzhen, a company provides services on hazardous waste collection, transfer, disposal
and recycling.
Contractual Arrangements that Give Us Effective Control of the Variable Interest Entity
We are structured to conduct our business operations through Beijing ALW and Hengshui Jingzhen and Hengshui Bicheng. Hengshui Jingzhen is 75% directly owned byShuhua Liu , our Chief Executive Officer, and 25% directly owned byBeijing Chuang Jia Lian Consulting Co., Ltd. , a PRC company incorporated onJune 1, 2020 , which is in turn wholly owned by Ms.Shuhua Liu . The following contractual arrangements enable us to exercise effective control over Hengshui Jingzhen and realize substantially all of the economic risks and benefits arising from Hengshui Jingzhen. As a result, we will include the financial results of Hengshui Jingzhen in our consolidated financial statements in accordance withU.S. GAAP as if it were our wholly owned subsidiary. The following is a summary of the common contractual arrangements that provide us with effective control of our variable interest entity and that enable us to receive substantially all of the economic benefits from its operations. Exclusive Option Agreement.Pursuant to the Exclusive Option Agreement, the shareholders of Hengshui Jingzhen granted Beijing ALW an exclusive call option to purchase their equity interests in Hengshui Jingzhen at an exercise price equal to the base price ofRMB100 or at a minimum price permitted by applicable PRC laws. The option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the equity interest pursuant to the option. Beijing ALW can require Hengshui Jingzhen to distribute all distributable profits to its shareholders, and the shareholders of Hengshui Jingzhen have agreed to promptly donate any profit, interest, dividend or proceeds of liquidation to Beijing ALW. The exclusive option agreement remains in effect until the equity interest that is the subject of such agreement is transferred to Beijing ALW. The parties to the exclusive option agreement areShuhua Liu , Beijing ALW,Beijing Chuang Jia Lian Consulting Co., Ltd. and Hengshui Jingzhen. 1 Power of Attorney. Pursuant to the power of attorney,Shuhua Liu andBeijing Chuang Jia Lian Consulting Co., Ltd. irrevocably authorize Beijing ALW, or any person designated by Beijing ALW, to exercise their rights as equity holders of Hengshui Jingzhen, including the right to attend and vote at equity holders' meetings and to appoint directors, supervisors, the chief executive officer and other senior management members. Spousal Consent Letters. The spouse of Ms.Shuhua Liu unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, the Exclusive Option Agreement and the Power of Attorney and the disposal of the equity interest registered in the name of the respective nominee shareholder. In addition, the spouse of Ms.Shuhua Liu agreed not to make any assertions in connection with the equity interests held by Ms.Shuhua Liu and Ms.Shuhua Liu can perform the contractual arrangements without the authorization or consent from the spouse. Equity Pledge Agreement.Pursuant to the equity interest pledge agreement, the VIE equity holder has pledged all of her interests in the equity of Hengshui Jingzhen as a continuing first priority security interest in favor ofBeijing ALW to secure the performance of obligations by the variable interest entity and/or its equity holder under the other structure contracts. Beijing ALW is entitled to be paid in priority with the equity interest of the variable interest entity equity holder based on the monetary valuation that such equity interest is converted into or from the proceeds from the auction or sale of the . . .
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSET
On
Hengshui Jingzhen is 100% beneficially owned by a citizen of the PRC,Shuhua Liu , who also serves as our Chief Executive Officer. The contractual arrangements between Hengshui Jingzhen and Beijing ALW enable us to exercise effective control over, and realize substantially all of the economic risks and benefits arising from the activities of Hengshui Jingzhen. As a result, we include the financial results of Hengshui Jingzhen in our consolidated financial statements in accordance with generally accepted accounting principles inthe United States , orU.S. GAAP, as if Hengshui Jingzhen were a wholly-owned subsidiary. However, the contractual arrangements may not be as effective in providing operational control as direct ownership. See "Risk Factors - Risk Related to Our VIE Structure." 2 For accounting purposes, the Reverse Merger was treated as a reverse acquisition with Hengshui Jingzhen as the acquirer andSummit Network Inc. as the acquired party. When we refer in this report to business and financial information for periods prior to the consummation of the Reverse Merger, we are referring to the business and financial information of Hengshui Jingzhen unless the context suggests otherwise. Without issuing any new shares in connection with the Reverse Merger,Shuhua Liu beneficially owns 70% of the Company's outstanding shares of common stock before and following the closing. She also beneficially holds 100% of Hengshui Jingzhen's outstanding equity interests. FORM 10 DISCLOSURE As disclosed elsewhere in this report, onJanuary 20, 2021 , we acquired Hengshui Jingzhen in the Reverse Merger. Item 2.01(f) of Form 8-K states that if we were a shell company immediately before the Reverse Merger as disclosed under Item 2.01 of this Current Report, then we must disclose the information that would be required if we were filing a general form for registration of securities on
Form 10.
Accordingly, we are providing below the information that would be included in a
Form 10 if we were to file a Form 10. Please note that the information provided
below relates to the combined enterprises after our combination with Hengshui
Jingzhen, except that information relating to periods prior to the date of the
Reverse Merger only relates to Hengshui Jingzhen and its subsidiaries and
consolidated entities unless otherwise specifically indicated.
BUSINESS
History of
We were incorporated onJuly 8, 2014 under the name "Summit Networks Inc. " under the laws of the state ofNevada . We originally specialized in the development and operation of a business engaged in the distribution of glass craft products produced inChina . OnMay 8, 2018 , we acquiredReal Capital Limited , aHong Kong company ("Real Capital "), to seek opportunities in the food and beverage industry. OnMarch 31, 2019 , the Company entered into a Share Purchase Agreement (the "Real Capital SPA") pursuant to which it sold its interests inReal Capital . The closing of the Real Capital SPA occurred onApril 10, 2019 . OnApril 9, 2019 , the Company entered into a Share Exchange Agreement (the "MoralArrival Share Exchange Agreement") withMoralArrival Environmental and Blockchain Technology Services Limited , aBritish Virgin Islands company ("MoralArrival"), and the beneficial owner of MoralArrival, which wasShuhua Liu . The acquisition of MoralArrival was with a related party asMs. Liu , who controls the shares of MoralArrival, also controlsThe Hass Group, Inc. , the Company's largest stockholder, and it was accounted for as acquisition of entity under common control. Under the terms of the MoralArrival Share Exchange Agreement, the Company agreed to exchange 3,000,000 shares of its common stock . . .
ITEM 5.02. DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS.
In connection with the consummation of the Reverse Merger, as of immediately prior to the Effective Date, the following individuals were appointed to the officers of the Company set forth opposite their names:
?
?
Biographical information for the executive officers and a description of the Company's executive compensation program can be found in the sections entitled "Directors and Executive Officers" and "Executive Compensation," respectively, which are incorporated in this Item 5.02 by reference. OnJanuary 20, 2021 , the Company entered into employment agreements with (1)Ms. Liu (the "Employment Agreement") with respect to her continued service as Chief Executive Officer and Chairwoman of the Board of the Company; (2)Ms. Huang with respect to her continued service as Chief Financial Officer, Treasurer, Secretary and Director of the Company; (3)Mr. Du with respect to his service as Chief Operation Officer of the Company; and (4)Mr. Hiroshi with respect to his service as Chief Technology officer of the Company, effective as ofFebruary 1, 2021 , following the Reverse Merger. A summary of the material terms of the Employment Agreement can be found in Exhibit 10.7. 44
ITEM 5.03. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL YEAR.
Change in Fiscal Year As described in Items 1.01 and 2.01, the Company acquired Hengshui Jingzhen in a Reverse Merger onJanuary 20, 2021 . Hengshui Jingzhen is treated as the acquirer for financial accounting purposes. OnJanuary 20, 2021 , therefore, our board of directors approved a change in our fiscal year end fromJuly 31st to September 30th , the fiscal year end of Hengshui Jingzhen, effective immediately.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS
Prior to the Reverse Merger, we were a "shell company" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act). As a result of the Reverse Merger, we have ceased to be a "shell company". The information contained in this Report, together with the information contained in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2020 , and our subsequent Quarterly Reports on Form 10-Q and Current Report on Form 8-K, as filed with theSEC , will constitute the current "Form 10 information" necessary to satisfy the conditions contained in Rule 144(i)(2) under the Securities Act of 1933, as amended, or the Securities Act. ITEM 8.01. OTHER EVENTS. Adoption of Code of Ethics
OnJanuary 20, 2021 , our Board of Directors approved and adopted a code of ethics (the "Code of Ethics"). The Code of Ethics is applicable to all directors, officers and employees of the Company, including the Company's principal executive officer and principal financial officer. The Code of Ethics addresses such individuals' conduct with respect to, among other things, conflicts of interests; compliance with applicable laws, rules and regulations; rules to promote full, fair, accurate, timely and understandable disclosure; use of Company assets and corporate opportunities; confidentiality; fair dealing; and reporting and enforcement. The foregoing description of the Code of Ethics set forth above is a summary only, and is qualified in all respects by the provisions of the Code of Ethics, a copy of which is attached hereto as Exhibit 14.1 and is incorporated by reference herein. 45
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of September 30, 2020 and 2019 F-2
Consolidated Statements of Comprehensive Income for the Years Ended
September 30, 2020 and 2019 F-3
Consolidated Statements of Changes In Shareholders' Equity for the
Years Ended September 30, 2020 and 2019 F-4
Consolidated Statements of Cash Flows for the Years Ended September
30, 2020 and 2019 F-5
Notes to Consolidated Financial Statements F-6 - F-13
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofHengshui Jingzhen Environmental Technology Co., Ltd. and subsidiaries ("the Company") as ofSeptember 30, 2020 and 2019, and the related consolidated statements of comprehensive income, changes in shareholders' equity and cash flows for each of the years in the two-year period endedSeptember 30, 2020 and related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofSeptember 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period endedSeptember 30, 2020 , in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Prager Metis CPAs, LLC
We have served as the Company's auditor since 2020.
Hackensack, New Jersey January 26, 2021 F-1 HENGSHUI JINGZHEN ENVIRONMENTAL TECHNOLOGY COMPANY LIMITED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, SEPTEMBER 30, 2020 2019 ASSETS Current assets: Cash and cash equivalents$ 3,539,966 $ 1,751,707 Notes receivable 185,486 270,045 Accounts receivable 5,739,488 1,946,041 Prepaid VAT 515,594 1,152,476 Advances to supplier 126,293 237,758 Amounts due from related parties 1,738,452 1,129,527 Other receivable and current assets 99,880 124,030 Total current assets 11,945,159 6,611,584 Property, plant, and equipment, net 10,700,471 10,598,256 Intangible assets, net 3,890,160 3,311,399 Deferred tax assets 220,299 126,168 Goodwill - 219,953 TOTAL ASSETS$ 26,756,089 $ 20,867,360 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable$ 2,460,851 $ 2,287,179 Deferred revenue 4,066,748 1,905,910 Amounts due to related parties
- 37,892 Tax payable 241,484 - Dividends payable 1,908,929 - Other payable and current liabilities 176,378 134,357 Total current liabilities 8,854,390 4,365,338 Shareholders' equity: Paid in capital 13,497,240 13,497,240 Retained earnings 4,687,754 3,790,189 Accumulated other comprehensive income (loss) (283,295 ) (939,417 ) Total shareholders' equity attributable to the Company 17,901,699 16,348,012 Noncontrolling interests - 154,010 Total shareholders' equity 17,901,699 16,502,022 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$ 26,756,089 $ 20,867,360
The accompanying Notes are an integral part of the Financial Statements.
F-2
HENGSHUI JINGZHEN ENVIRONMENTAL TECHNOLOGY COMPANY LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED
SEPTEMBER 30,
2020 2019
Revenues $ 9,454,431 $ 9,023,947
Cost of revenues 4,214,046 4,564,959
Gross profit 5,240,385 4,458,988
Selling expenses 867,351 825,781General and administrative expenses 1,405,610
1,201,718
Income from operations 2,967,424 2,431,489
Other income, net 34,671 221,338
Interest income 5,494 5,457Income before income tax provision (benefit) 3,007,589
2,658,284
Income tax provision (benefit) 246,993 (95,813 ) NET INCOME 2,760,596
2,754,097
Net income (loss) attributable to noncontrolling interests 6,339 (3,279 ) Net income attributable to the Company 2,754,257
2,757,376
OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustment 656,122
(472,649 )
COMPREHENSIVE INCOME $ 3,416,718 $ 2,281,448 The accompanying Notes are an integral part of the Financial Statements.
F-3
HENGSHUI JINGZHEN ENVIRONMENTAL TECHNOLOGY COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Other Non
Paid-in Retained Comprehensive controlling
Capital Earnings Income (Loss) Interests Total Equity
Balance - September 30, 2018 $ 13,497,240 $ 1,032,813 $ (475,170 ) $ - $ 14,054,883
Acquisition of subsidiaries 165,691 165,691
Net income 2,757,376 (3,279 ) 2,754,097
Foreign currency translation
adjustment (464,247 ) (8,402 ) (472,649 )
Balance - September 30, 2019 13,497,240 3,790,189 (939,417 ) 154,010 16,502,022
Disposal of subsidiaries (160,349 ) (160,349 )
Dividends declared (1,856,692 ) (1,856,692 )
Net income 2,754,257 6,339 2,760,596
Foreign currency translation
adjustment 656,122 656,122
Balance - September 30, 2020 $ 13,497,240 $ 4,687,754 $ (283,295 ) $ - $ 17,901,699 The accompanying Notes are an integral part of the Financial Statements.
F-4
HENGSHUI JINGZHEN ENVIRONMENTAL TECHNOLOGY COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
SEPTEMBER 30,
2020 2019
Cash Flows From Operating Activities:
Net income $ 2,760,596 $ 2,754,097
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on disposal of subsidiaries 2,834
-
Bad debt 641,557 488,701
Depreciation and amortization 1,091,088 1,056,938
Deferred taxes (86,820 ) (95,813 )
Changes in operating assets and liabilities:
Accounts receivable (4,280,454 ) (410,485 )
Notes receivable 92,381 69,354
Advances to supplier 106,577 (119,495 )
Prepaid VAT 662,710 41,426Other receivable and current assets 23,231
(57,564 )
Accounts payable 83,113 525,570
Deferred revenue 2,031,599 (729,200 )
Tax payable 237,070 (4,817 )Other payable and current liabilities 74,249 (277,792 ) Net cash provided by operating activities 3,439,731
3,240,920
Cash Flows From Investing Activities: Proceeds from disposal of subsidiaries 209,949 - Cash paid for acquisition of subsidiaries - (126,649 ) Acquisition of fixed assets (738,578 ) (1,163,683 ) Acquisition of intangible assets (533,750 ) - Net cash used in investing activities (1,062,379
) (1,290,332 )
Cash Flows From Financing Activities: Advances to related parties (549,866 ) (583,919 ) Repayments of amounts due to related parties - (67,364 ) Capital contribution from non-controlling shareholders -
58,229
Net cash used in financing activities (549,866
) (593,054 )
Effect of exchange rate changes on cash and cash equivalents (39,227 ) (22,787 ) Net increase in cash and cash equivalents
1,788,259 1,334,747
Cash and cash equivalents at beginning of year 1,751,707
416,960
Cash and cash equivalents at end of year$ 3,539,966
- -
Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest
$ - $ -
Income taxes $ 98,564 $ -
Noncash Financing and Investment Activities:
Dividends declared $ 1,856,692 $ -
The accompanying Notes are an integral part of the Financial Statements.
F-5
HENGSHUI JINGZHEN ENVIRONMENTAL TECHNOLOGY COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
NOTE 1. NATURE OF BUSINESS
Hengshui Jingzhen Environmental Technology Company Limited (the "Company" or
"Hengshui Jingzhen") was formed under the laws of the People's Republic of China
(the "PRC") on July 31, 2015 . Hengshui Jingzhen provides integrated hazardous
waste management services, including collecting, transferring, disposing, and
recycling of hazardous waste, primarily in Hebei, China . The Company aims at
providing technology solutions for environmental protection, especially on
recycling and exploitation of industrial waste, and possesses an advanced
technology in efficiently disposing and utilizing hazardous waste.
On July 25, 2020 , the Company, Shenzhen Biological Technology Company Ltd.
("Shenzhen Biological Technology"), an unrelated party, and Guanghui Wei , a
shareholder of the Company, formed Hengshui Bicheng Environmental Technology
Company Limited ("Hengshui Bicheng") under the laws of PRC. In accordance with
Hengshui Bicheng's Articles of Organization, the Company owns 59.1% of the
equity interest in Hengshui Bicheng, and Shenzhen Biological Technology and
Guanghui Wei own 39.4% and 1.5%, respectively, of the equity interest in
Hengshui Bicheng. The Company possesses control over Hengshui Bicheng as a
majority shareholder of Hengshui Bicheng, and Shenzhen Biological Technology and
Guanghui Wei are the minority shareholders of Hengshui Bicheng. As a result,
Hengshui Bicheng became the Company's subsidiary and Hengshui Bicheng's
financials are consolidated by the Company. Hengshui Bicheng aims at providing
sewage treatment related services in the PRC. As of September 30, 2020 , Hengshui
Bicheng has not commenced any of its service operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in
Consolidation The audited consolidated financial statements were prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"), and include the accounts of Hengshui Jingzhen and its subsidiaries. All . . .
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