NOTES
TO 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 Vast Glory Holdings Limited (“Vast Glory”) on September 13, 2011, the Company was a development stage company that
had not generated any revenue from operations and maintained no essential assets since inception.
On
September 13, 2011, the Company consummated a Share Exchange Agreement with the shareholders of Vast Glory, pursuant
to which it acquired 100% of the outstanding capital stock of Vast Glory in exchange for 8,250,000 shares of the Company’s
common stock, which constituted approximately 68% of its issued and outstanding capital stock on a fully-diluted basis as of and
immediately after the consummation of the acquisition pursuant to the Exchange Agreement (the “Acquisition”). The
Acquisition was accounted for as a reorganization of entities under common control.
On
July 23, 2014, the Company entered into a Share Transfer Agreement with a third party and sold all shares of Vast Glory for consideration
of $1. In consequence of the agreements,
Yakun International
disposed of all of its
operations, assets and liabilities, and became a dormant company.
In
November 2017, Yakun International entered into a Share Exchange Agreement (the “PBG SEA”) with PBG Water Solutions
International Inc. (the “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 is convertible 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 forthwith. Shareholders of PBG Water solutions took control
of Yakun International on the same date, and completed Yakun International’s registry of new officers and directors as of
the issuance of these financial statements. PBG Water Solutions has not generated revenue as of today.
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 and Yakun International
became the historical financial statements of Yakun International and its subsidiaries, and the Company’s assets, liabilities
and results of operations 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 March 8, 2018,
QHY Water Solutions incorporated QHY Environmental Science & Technologies Oceania Limited (“QHY Oceania”) under
the law of New Zealand. QHY Oceania was 51% owned by QHY Water Solutions, and 49% owned by a New Zealand company. On April 17,
2018, QHY Water Solutions incorporated QHY New Zealand LLC (“QHY NZ”) under the law of the State of Nevada as a Limited
Liability Company. QHY NZ was 51% owned by QHY Water Solutions, and 49% owned by a third party.
QHY
Water Solutions, QHY Oceania and QHY NZ have not generated any revenue since their inception.
On
July 31, 2018, the Company filed an amendment to articles of incorporation changing its corporate name to QHY Group. The amendment
became effective August 31, 2018.
In
October 2018, QHY Water solutions transferred all of the outstanding shares of QHY Oceania and QHY NZ it owned to a non-affiliate
for $100. Since both QHY Oceania and QHY NZ had no business or asset as of the disposal date, the transaction was accounted as
an asset disposal, and an investment income of $100 was recorded.
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 9).
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
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 completion
of the Company’s engagement in water solutions business and its transition to attaining profitable operations, is 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 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 accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
The
unaudited consolidated interim financial information as of March 31, 2019 and for the three months ended March 31, 2019 and 2018
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
April 1, 2019.
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 March 31, 2019, its consolidated results of operations for the three
months ended March 31, 2019 and 2018, and its consolidated cash flows for the three months ended March 31, 2019 and 2018, 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.
The
consolidated interim financial statements include the financial statements of all the subsidiaries of the Company. All accounts
and balances between the Company and its subsidiaries have been eliminated upon consolidation.
(b)
Use of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles 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 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
|
|
|
|
March 31,
|
|
Dilutive shares not included in loss per share
computation
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Warrants
|
|
|
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
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement (ASU 2018-13) (“ASU 2018-13”). ASU 2018-13 modifies certain disclosure requirements
on fair value measurements, including (i) clarifying narrative disclosure regarding measurement uncertainty from the use of unobservable
inputs, if those inputs reasonably could have been different as of the reporting date, (ii) adding certain quantitative disclosures,
including (a) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level
3 fair value measurements held at the end of the reporting period and (b) the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and (iii) removing certain fair value measurement disclosure requirements,
including (a) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (b) the policy
for timing of transfers between levels of the fair value hierarchy and (c) the valuation processes for Level 3 fair value measurements.
The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The Company is permitted to early adopt any removed or modified disclosures and delay adoption
of the additional disclosures until their effective date. Management does not plan to early adopt this guidance and is currently
evaluating the impact of adopting ASU No. 2018-13 on its consolidated financial statements.
4.
Inventories
Inventories
of $292,500 as of March 31, 2019 and December 31, 2018 represented an integrated wastewater treatment module PBG Water Solutions
purchased from Beijing QHY Environment S & T Co., Ltd. (“Beijing QHY”), a related party of the Company. As of
March 31, 2019, the Company had not transferred title to the equipment to its customer. (See Note 8)
5.
Due from a related party
Renminbi
(the “RMB”) equivalent to $2,196,500 as proceeds from issuing 6,655,750 shares of the Company’s common stock
(see Note 9) was collected by Beijing QHY on behalf of the Company. The monies are considered held by Beijing QHY for the benefit
of the Company.
6.
Prepaid expenses and other current assets
The
balance mainly consisted of $305,725 prepaid to several consultants to the Company in form of the Company’s common stock
(see Note 9) pursuant to agreements with remaining services terms of less than 12-months as of March 31, 2019.
7.
Advance from a customer
$292,500
advance from a customer represented the amount QHY Water Solutions received from QHY Oceania for a portion of the full price for
a wastewater treatment module QHY Oceania purchased from QHY Water Solutions.
8.
Related party transactions and balances
a)
Related party transactions
|
|
The Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
18,174
|
|
|
$
|
14,992
|
|
Interest expense to a shareholder
|
|
|
7,030
|
|
|
|
-
|
|
Fee for professional services provided by related parties
|
|
|
28,500
|
|
|
|
9,500
|
|
License fee expense to a related party
|
|
$
|
12,500
|
|
|
$
|
12,500
|
|
b)
Related party payables
|
|
March 31, 2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Long-term loan from a shareholder
|
|
$
|
301,894
|
|
|
$
|
283,720
|
|
Interest payable to a shareholder
|
|
|
22,026
|
|
|
|
14,996
|
|
Payable to a related party for license fee
|
|
|
100,000
|
|
|
|
87,500
|
|
Professional fee payable to related parties
|
|
|
123,500
|
|
|
|
95,000
|
|
Due from a related party
|
|
|
2,196,500
|
|
|
|
2,196,500
|
|
Advance from a related party
|
|
$
|
292,500
|
|
|
$
|
292,500
|
|
On
May 1, 2018, PBG Water Solutions and Yakun International (subsequently renamed “QHY Group”), entered into a Credit
Loan Agreement with a 20.8% shareholder of QHY Group (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 credit, 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 March 31, 2019 and
December 31, 2018, the Lender has provided $301,894 and $283,720 to the Company, respectively. During the three months ended March
31, 2019 and 2018 the Lender provided $18,174 and $14,992 to the Company, respective. During the three months ended March 31,
2019 and 2018, the Company recorded $7,030 and $0 interest expenses incurred from the loan.
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 $9,500
for the three months ended March 31, 2019 and 2018, 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. During the year ended December 31, 2018, QHY Water Solutions purchased an integrated
wastewater treatment equipment from Beijing QHY for $292,500. The Company, QHY Water Solutions and PBG Water Solutions didn’t
generate any net revenue from the licensed equipment or products yet during the year ended December 31, 2018. The Company recorded
a $12,500 license fee expense for the three months ended March 31, 2019 and made no payment of license fees as of March 31, 2019.
The shareholder/licensor owned 41.6% of the Company’s common stocks after giving effect to the PBG SEA and owns 47.15% of
the Company’s common stocks as of March 31, 2019.
QHY
Oceania which was 51% owned by QHY Water Solutions from its inception until QHY Water Solutions sold all of the outstanding shares
it owned to a non-affiliate party in October 2018. During the year ended December 31, 2018, QHY Oceania issued a purchase order
to QHY Water Solutions for an integrated wastewater treatment module and paid $292,500 in advance, a portion of the purchase price.
The equipment had not been transferred to QHY Oceania as of March 31, 2019.
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 March 31, 2019.
9.
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 services related but not limited to: 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. As
of March 31, 2019, 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. $160,963 consulting expense was incurred
during the three months ended March 31, 2019.
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 8). 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.
The
fair value of the stock warrants granted was estimated at $4,540,000 on the date granted using the Black-Scholes pricing model,
with the following assumptions used for the valuation: exercise price of $ 0.01 per share, average risk-free interest rate
of 2.66%, expected dividend yield of zero, expected lives of 3 years and an average expected volatility of 35%.
A
summary of the status of the Company’s warrants as of March 31, 2019 is presented below:
|
|
Number of
|
|
|
|
warrants
|
|
|
|
(Unaudited)
|
|
Warrants as at December 31, 2018
|
|
|
-
|
|
Warrants granted
|
|
|
50,000,000
|
|
Exercised, forfeited or expired
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
50,000,000
|
|
Exercisable at March 31, 2019
|
|
|
-
|
|
The
following table summarizes information about the Company’s warrants as of
March
31, 2019
:
|
|
|
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
|
|
|
|
3
|
|
|
$
|
0.01
|
|
|
|
0
|
|
|
$
|
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 March 31, 2019:
|
|
Shares
Available
for Grant
|
|
|
|
(Unaudited)
|
|
Balance as of December 31, 2018
|
|
|
8,485,000
|
|
Stock awards granted
|
|
|
-
|
|
Stock awards forfeited
|
|
|
-
|
|
|
|
|
|
|
Balance as of March 31, 2019
|
|
|
8,485,000
|
|
10.
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
months ended March 31, 2019, 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:
|
|
March 31, 2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
126,246
|
|
|
$
|
115,077
|
|
Valuation allowance
|
|
|
(126,246
|
)
|
|
|
(115,077
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation of income taxes computed at the statutory rate is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Tax at statutory rate (21%)
|
|
$
|
44,971
|
|
|
$
|
6,040
|
|
Non-deductible expenses
|
|
|
(33,802
|
)
|
|
|
-
|
|
Increase in valuation allowance
|
|
|
(11,169
|
)
|
|
|
(6,040
|
)
|
Income tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company did not pay any income taxes during the three months ended March 31, 2019 and 2018.
11.
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.