NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in
U.S. dollars)
1. Organization and principal activities
QHY Group (the “Company”,
or “we”), formerly named Yakun International Investment and Holding Group (“Yakun International”), was incorporated
under the laws of the State of Nevada on October 16, 2007. Prior to the acquisition of PBG Water Solutions International
Inc. (“PBG Water Solutions”) on January 15, 2018, the Company was a development stage company that had not generated
any revenue from operations and maintained no essential assets since inception.
In November 2017,
Yakun International entered into a Share Exchange Agreement (the “PBG SEA”) with PBG Water Solutions International
Inc. (“PBG Water Solutions”) and its shareholders, pursuant to which Yakun International acquired 100% of the outstanding
shares of PBG Water Solutions in exchange for 46,839,439 shares of common stock of the Company and 19,000 shares of Series A Convertible
Preferred Stock (each Series A Convertible Preferred Stock was converted into 1,000 shares of common stock) of the Company, which
constituted approximately 83% of the Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately
after the consummation of the acquisition. PBG Water Solutions was incorporated under the law of the State of Delaware on August
4, 2016, and in October 2017, it merged into a company with the same name incorporated under the law of the State of Nevada. On
January 15, 2018, all parties to the SEA agreed to amend the original agreement and consummate the transaction. Shareholders of
PBG Water solutions took control of Yakun International on the same date. As of the issuance of these financial statements. PBG
Water Solutions has not generated revenue.
The transaction
was accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders
of PBG Water Solutions effectively controlled the post-combination Company. For accounting purposes, PBG Water Solutions was deemed
to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of PBG Water
Solutions (i.e., a capital transaction involving the issuance of shares by the Company for the shares of PBG Water Solutions).
Accordingly, the consolidated assets, liabilities and results of operations of PBG Water Solutions became the historical financial
statements of the Company, and assets, liabilities and results of operations of Yakun and its subsidiaries were consolidated with
PBG Water Solutions beginning on the acquisition date. No step-up in basis or intangible assets or goodwill were recorded in this
transaction.
On December 21,
2017, Yakun International incorporated QHY Water Solutions International Corp (“QHY Water Solutions”) under the law
of State of Nevada as its wholly owned subsidiary.
On July 31, 2018,
the Company filed an amendment to its articles of incorporation changing its corporate name to QHY Group. The amendment became
effective August 31, 2018.
In December 2018,
the Company issued 1,515,000 shares of common stock to certain consultants for services rendered or to be rendered (See Note 7).
In December 2018,
the Company entered into a series of securities purchase agreements with certain non-affiliate investors for the sale of 6,655,750
shares of the Company’s common stock for aggregate consideration of $2,196,500. Of the shares sold, 5,972,582 were issued
to six investors for $1,851,500 and the remaining 683,168 shares were sold to a single investor for $345,000.
2. Going concern
The Company’s
financial statements are prepared using accounting principles generally accepted in the United States of America (“U.S.
GAAP”) applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating
costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the
Company’s obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain
adequate capital, it could be forced to cease operations.
In order to continue
as a going concern, the Company will need, among other things, additional capital resources. Successful execution of the Company’s
plan to enter the water solutions business and its transition to attaining profitable operations, are dependent upon obtaining
additional financing. The Company plans to improve its future liquidity by obtaining additional financing through the issuance
of financial instruments such as equity and warrants or through credit loans. Additional financing may not be available on acceptable
terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of existing stockholders
would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock.
The ability of
the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the
preceding paragraph and eventually secure other sources of financing and attain profitable operations. The Company will continue
to rely on loans from our major shareholders and directors for payments of expenditures other than purchasing from manufacturers
in China. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
3. Summary of significant accounting policies
(a) Basis of presentation and principles of consolidation
The unaudited
consolidated interim financial statements are prepared and presented in accordance with U.S. GAAP.
The unaudited
consolidated interim financial information as of September 30, 2020 and for the three and nine months ended September 30, 2020
and 2019 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures, which are normally included in complete consolidated financial statements prepared
in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited consolidated interim financial
information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K
filed on March 30, 2020.
In the opinion
of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s
consolidated financial position as of September 30, 2020, its consolidated results of operations for the three and nine months
ended September 30, 2020 and 2019, and its consolidated cash flows for the nine months ended September 30, 2020 and 2019, as applicable,
have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal
year or any future periods.
(b) Use
of estimates
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could differ from those estimates.
(c) Loss per share
Basic loss per
share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share is
computed using the weighted average number of common shares and potential common shares outstanding during the period for options
and restricted shares under the treasury stock method and for convertible debts under if-convertible method, if dilutive. Potential
common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares
would be anti-dilutive, such as in a period in which a net loss is recorded.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Dilutive shares not included in loss per share
computation
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Warrants
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
(d) Recently issued accounting standards not yet
adopted
The company does not expect the adoption
of any recent accounting standards to have a material impact on its financial statements except for:
In December 2019, the FASB issued guidance
intended to simplify the accounting for income taxes. The guidance removes the following exceptions: 1) exception to the incremental
approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items,
2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary
becomes an equity method investment, 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary
when a foreign equity method investment becomes a subsidiary and 4) exception to the general methodology for calculating income
taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Additionally, the guidance simplifies
the accounting for income taxes by: 1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based
on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, 2) requiring that
an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which
the book goodwill was originally recognized and when it should be considered a separate transaction, 3) specifying that an entity
is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject
to tax in its separate financial statements (although the entity may elect to do so (on an entity-by-entity basis) for a legal
entity that is both not subject to tax and disregarded by the taxing authority), 4) requiring that an entity reflect the effect
of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the
enactment date and 5) making minor improvements for income tax accounting related to employee stock ownership plans and investments
in qualified affordable housing projects accounted for using the equity method. The guidance will be effective for fiscal years
and interim periods beginning after December 15, 2020. Different components of the guidance require retrospective, modified retrospective
or prospective adoption, and early adoption is permitted. We are currently assessing whether we will early adopt this guidance,
and the impact on our financial statements is not currently estimable.
4. Due from a related party
The Renminbi (the “RMB”) equivalent
to $2,196,500 received in December 2018 as proceeds from issuing 6,655,750 shares of the Company’s common stock (see Note
7) was collected by Beijing QHY on behalf of the Company because the Company cannot collect RMB due to the currency control on
RMB. The monies are considered held by Beijing QHY for the benefit of the Company and are to be used to pay manufacturers in China
for the wastewater treatment equipment the Company would purchase if the Company received an order. It is likely that the funds
will not be available to pay expenses incurred outside China.
5. Accounts payable
Accounts payables consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll
|
|
$
|
855,000
|
|
|
$
|
427,500
|
|
Professional fees
|
|
|
125,123
|
|
|
|
137,615
|
|
Lab and testing fees
|
|
|
-
|
|
|
|
1,611
|
|
Listing fees
|
|
|
2,075
|
|
|
|
3,749
|
|
Others
|
|
|
2,565
|
|
|
|
2,565
|
|
Total
|
|
$
|
984,763
|
|
|
$
|
573,040
|
|
6. Related party transactions and balances
a) Related
party transactions
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
6,564
|
|
|
$
|
25,103
|
|
|
$
|
42,697
|
|
|
$
|
71,369
|
|
Interest expense to a shareholder
|
|
|
10,459
|
|
|
|
8,842
|
|
|
|
30,132
|
|
|
|
23,455
|
|
Fee for professional services provided by related parties
|
|
|
28,500
|
|
|
|
28,500
|
|
|
|
85,500
|
|
|
|
85,500
|
|
License fee expense to a related party
|
|
$
|
12,500
|
|
|
$
|
12,500
|
|
|
$
|
37,500
|
|
|
$
|
37,500
|
|
b) Related party payables
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan from a shareholder
|
|
$
|
418,519
|
|
|
$
|
375,822
|
|
Interest payable to a shareholder
|
|
|
77,955
|
|
|
|
47,823
|
|
Payable to a related party for license fee
|
|
|
175,000
|
|
|
|
137,500
|
|
Professional fee payable to related parties
|
|
|
294,500
|
|
|
|
209,000
|
|
Due from a related party
|
|
$
|
2,196,500
|
|
|
$
|
2,196,500
|
|
On May 1, 2018,
PBG Water Solutions and the Company entered into a Credit Loan Agreement with a 28.29% shareholder of the Company (the “Lender”).
The Lender had provided operating capital to PBG Water Solutions since its inception, and to the Company since the consummation
of PBG SEA. Pursuant to the Credit Loan Agreement, the Lender will provide a loan of $500,000 to the Company for 2 years with
10% annual interest which shall be applied from the date of the Credit Loan Agreement. In compensation for the loan, the Company
issued to the Lender a 3-year cashless warrant, which entitles the Lender to purchase 50 million (50,000,000) shares of the Company’s
common stock at an exercise price of $0.01. The warrant cannot be exercised before June 1, 2019, and shall be void and non-exercisable
if the Company (i) raises more than $20 million in equity or (ii) has revenue in excess of $100 million in any fiscal year. As
of September 30, 2020 and December 31, 2019, the Lender has provided $418,519 and $375,822 to the Company, respectively. During
the three months ended September 30, 2020 and 2019 the Lender provided $6,564 and $25,103 to the Company, respectively. During
the nine months ended September 30, 2020 and 2019 the Lender provided $42,697 and $71,369 to the Company, respectively. During
the three months ended September 30, 2020 and 2019, the Company recorded $10,459 and $8,842 interest expense incurred from the
loan, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded $30,132 and $23,455 interest
expense incurred from the loan, respectively.
In February 2018,
PBG Water Solutions entered into a financial advisory agreement with Rebus Capital Group (the “Rebus”), an entity
affiliated with a shareholder of the Company, pursuant to which PBG Water Solutions will pay Rebus $30,000 per quarter. The agreement
has a term of five years from March 2018 but is cancellable by either party on sixty days’ notice. The service fee for the
first 3 months was waived by Rebus. Professional service expense related to this agreement was $28,500 and $28,500 for the three
months ended September 30, 2020 and 2019, respectively. Professional service expense related to this agreement was $85,500 and
$85,500 for the nine months ended September 30, 2020 and 2019, respectively.
In April 2017,
PBG Water Solutions entered into a License and Supply Agreement with an individual shareholder who owned 50% of PBG Water Solutions’
common stock and the shareholder’s majority owned company Beijing QHY Environment S & T Co., Ltd. (“Beijing QHY”).
Pursuant to the License and Supply Agreement and its Amendment entered into in June 2017, the individual shareholder and Beijing
QHY (the “Licensor”) granted PBG the exclusive use of 21 patents in any area outside the People’s Republic of
China (the “PRC”) for 20 years. A one-time fee of $1 million shall be paid before December 31, 2021, and royalties
of 1% of the net revenue received by PBG from the sale, license or other distribution of the licensed products shall be paid annually.
In addition, the Licensor shall supply PBG Water Solutions licensed products at prices agreed upon from time to time by the Licensor
and PBG Water Solutions. The Company, QHY Water Solutions and PBG Water Solutions didn’t generate any net revenue from the
licensed equipment or products during the nine months ended September 30, 2020 and 2019. The Company recorded a $12,500 and $12,500
license fee expense for the three months ended September 30, 2020 and 2019, respectively. The Company recorded a $37,500 and $37,500
license fee expense for the nine months ended September 30, 2020 and 2019, respectively, and made no payment of license fees as
of September 30, 2020. The shareholder/licensor owns 47.15% of the Company’s common stock as of September 30, 2020.
In December 2018, the Company issued 6,655,750
shares of the Company’s common stock for aggregate consideration of $2,196,500. Beijing QHY collected the subscription on
behalf of the Company in RMB. The monies are considered held by Beijing QHY for the benefit of the Company as of September 30,
2020, and are to be used to pay manufacturers in China for the wastewater treatment equipment the Company would purchase if the
Company received an order. It is likely that the funds will not be available to pay expenses incurred outside China.
7. Stockholder’s equity
Common stock
In April 2018,
the Company increased its authorized common stock from 70 million to 1 billion shares. The Company issued 46,839,439 shares of
common stock and 19,000 shares of Series A Convertible Preferred Stock to the shareholders of PBG Water Solutions pursuant to
PBG SEA. The 19,000 shares of Series A Convertible Preferred Stock were converted into 19,000,000 shares of common stock upon
increase in the number of shares of authorized common stock.
In October 2018, the Company hired certain
consultants to provide general advisory services relating to the Company operating as a publicly traded enterprise, strategic
planning and execution, corporate governance and financial reporting. Pursuant to each agreement, the service term is 12 months
and the Company shall pay the Consultants an aggregate of 1,500,000 shares of the Company’s common stock which was delivered
at inception of the Agreements. The shares were issued in December 2018. In November 2018, the Company hired a consultant for
investor relations and strategic planning, pursuant to an agreement whereby the Company shall issue to the consultant 20,000 shares
of the Company’s common stock each month. The service was terminated in February 2020. As of September 30, 2020, the Company
has issued 15,000 shares of common stock to the consultant. Cost for the consulting service was measured based on the fair value
of the Company’s common stock at the date of the consulting agreement since the common stock was vested and non-forfeitable
upon the entry into the agreement. The fair value of the common stock was estimated to be $0.4075, and resulted in $617,550 for
the fair value of the 1,515,000 common shares issued. $152,813 and $466,588 consulting expense was incurred during the three and
nine months ended September 30, 2019, respectively.
In December 2018,
the Company issued 6,655,750 shares of the Company’s common stock for aggregate consideration of $2,196,500.
Warrants
On May 1, 2018, the Company issued warrants
to a shareholder pursuant to the Credit Loan Agreement (See Note 6). The warrants issued by the Company are classified as equity.
The fair value of the warrants was recorded as additional-paid-in-capital, and no further adjustments are made.
A summary of the status of the Company’s
warrants as of September 30, 2020 is presented below:
|
|
Number of
|
|
|
|
warrants
|
|
|
|
(Unaudited)
|
|
Warrants as at December 31, 2019
|
|
|
50,000,000
|
|
Warrants granted
|
|
|
-
|
|
Exercised, forfeited or expired
|
|
|
-
|
|
Outstanding at September 30, 2020
|
|
|
50,000,000
|
|
Exercisable at September 30, 2020
|
|
|
50,000,000
|
|
The following table summarizes information
about the Company’s warrants as of September 30, 2020:
|
|
|
Warrants outstanding
|
|
|
Warrants exercisable
|
|
Exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average
remaining
contractual
life (in years)
|
|
|
Weighted average
exercise price
|
|
|
Number
exercisable
|
|
|
Weighted
average
exercise
price
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
$
|
0.01
|
|
|
|
50,000,000
|
|
|
|
1.67
|
|
|
$
|
0.01
|
|
|
|
50,000,000
|
|
|
$
|
0.01
|
|
Equity Incentive
Plan
In July 2018,
the Company adopted the 2018 Equity Incentive Plan (the “2018 Plan”) which provides for the grant of stock options,
stock appreciation rights, restricted stock, stock units, bonus stock, dividend equivalents, other stock related awards and performance
awards. The maximum aggregate number of shares that may be subject to awards under the 2018 Plan is 10,000,000.
Following is
a reconciliation of the shares available to be issued under the 2018 Plan as of September 30, 2020:
|
|
Shares
Available
for Grant
|
|
|
|
(Unaudited)
|
|
Balance as of December 31, 2019
|
|
|
8,485,000
|
|
Stock awards granted
|
|
|
-
|
|
Stock awards forfeited
|
|
|
-
|
|
|
|
|
|
|
Balance as of September 30, 2020
|
|
|
8,485,000
|
|
8. Income taxes
The Company did
not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because it has
experienced operating losses. When it is more likely than not that a tax asset cannot be realized through future income, the Company
must take a full valuation allowance for this future tax benefit. The Company provided a full valuation allowance on the net deferred
tax asset, consisting of net operating loss carryforwards, because management has determined that it is more likely than not that
the Company will not earn income sufficient to realize the deferred tax assets during the carryforward period.
The Company has
not taken a tax position that, if challenged, would have a material effect on the financial statements for the three and nine
months ended September 30, 2020, or during the prior three years applicable under FASB ASC 740. The Company did not recognize
any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance
of accumulated deficit on the balance sheet. All tax returns have been appropriately filed by the Company.
Income tax provision at the federal statutory rate
|
|
|
21
|
%
|
Effect of operating losses
|
|
|
(21
|
)%
|
|
|
|
-
|
%
|
Net deferred
tax assets consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
401,058
|
|
|
$
|
274,926
|
|
Valuation allowance
|
|
|
(401,058
|
)
|
|
|
(274,926
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation
of income taxes computed at the statutory rate is as follows:
|
|
Three Months ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Tax at statutory rate (21%)
|
|
$
|
42,027
|
|
|
$
|
86,880
|
|
|
$
|
126,132
|
|
|
$
|
208,277
|
|
Non-deductible expenses
|
|
|
-
|
|
|
|
(32,091
|
)
|
|
|
-
|
|
|
|
(97,984
|
)
|
Increase in valuation allowance
|
|
|
(42,027
|
)
|
|
|
(54,789
|
)
|
|
|
(126,132
|
)
|
|
|
(110,294
|
)
|
Income tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company did
not pay any income taxes during the three and nine months ended September 30, 2020 and 2019.
9. Other income
In April 2020,
PBG Water Solutions executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the Small
Business Association under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of
the coronavirus (“COVID-19”) pandemic on the Company’s business. In connection therewith, PBG Water Solutions
received a $7,000 advance, which does not have to be repaid.
10. Subsequent events
In accordance
with FASB standards, the Company evaluated subsequent events through the date it filed this report with the Securities and Exchange
Commission (“SEC”) and no subsequent events occurred that required disclosure in the accompanying consolidated financial
statements except below.
The impact of the COVID-19 outbreak on
the Company’s results of operations, financial position and cash flows will depend on future developments, including the
duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of COVID-19 on
the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the
overall economy are impacted for an extended period, the Company’s results of operations, financial position and cash flows
may be materially adversely affected. To date, the Company has been able to avoid layoffs and furloughs of employees. The Company
is not able to estimate the duration of the pandemic and potential impact on the business if disruptions or delays in business
developments and shipments of product occur. To date, the Company is not aware of any such disruptions. In addition, a severe
prolonged economic downturn could result in a variety of risks to the business, including weakened the Company’s ability
to develop potential businesses and a decreased ability to raise additional capital when needed on acceptable terms, if at all.
As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.