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 assets 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 June 30, 2019 and for the three and six months ended June 30, 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 June 30, 2019, its consolidated results of operations for the three and six months ended
June 30, 2019 and 2018, and its consolidated cash flows for the six months ended June 30, 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
|
|
|
Three Months Ended
|
|
Dilutive shares not included June 30,
|
|
June 30,
|
|
|
June 30,
|
|
in loss per share computation
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Warrants
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
(k) 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 June 30,
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 June 30, 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 $152,913
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 June 30, 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
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
28,092
|
|
|
$
|
24,489
|
|
|
$
|
46,266
|
|
|
$
|
39,480
|
|
Interest expense to a shareholder
|
|
|
7,583
|
|
|
|
3,324
|
|
|
|
14,613
|
|
|
|
3,324
|
|
Fair value of warrants issued to a shareholder
|
|
|
-
|
|
|
|
4,540,000
|
|
|
|
-
|
|
|
|
4,540,000
|
|
Fee for professional services provided by related parties
|
|
|
28,500
|
|
|
|
84,260
|
|
|
|
57,000
|
|
|
|
93,760
|
|
License fee expense to a related party
|
|
$
|
12,500
|
|
|
$
|
12,500
|
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
b) Related party payables
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan from a shareholder
|
|
$
|
329,986
|
|
|
$
|
283,720
|
|
Interest payable to a shareholder
|
|
|
29,608
|
|
|
|
14,996
|
|
Payable to a related party for license fee
|
|
|
112,500
|
|
|
|
87,500
|
|
Professional fee payable to related parties
|
|
|
152,000
|
|
|
|
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 June 30, 2019 and December 31, 2018, the
Lender has provided $329,986 and $283,720 to the Company, respectively. During the three months ended June 30, 2019 and 2018 the
Lender provided $28,092 and $24,489 to the Company, respective. During the six months ended June 30, 2019 and 2018 the Lender provided
$46,266 and $39,480 to the Company, respective. During the three months ended June 30, 2019 and 2018, the Company recorded $7,583
and $3,324 interest expenses incurred from the loan. During the six months ended June 30, 2019 and 2018, the Company recorded $14,613
and $3,324 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 $38,000 for the three and
six months ended June 30, 2018, respectively. Professional service expense related to this agreement was $28,500 and $57,000 for
the three and six months ended June 30, 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. 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 and $25,000 license
fee expense for the three and six months ended June 30, 2019, respectively, and made no payment of license fees as of June 30,
2019. The Company recorded a $12,500 and $25,000 license fee expense for the three and six months ended June 30, 2018, respectively.
The shareholder/licensor owned 41.6% of the Company’s common stock after giving effect to the PBG SEA and owns 47.15% of
the Company’s common stock as of June 30, 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 June 30, 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 June 30, 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 June 30, 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. $152,813 and $160,963 consulting expense was incurred during the three and six months ended June
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 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 June 30, 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 June 30, 2019
|
|
|
50,000,000
|
|
Exercisable at June 30, 2019
|
|
|
-
|
|
The
following table summarizes information about the Company’s warrants as of June
30, 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
|
|
|
|
2.92
|
|
|
$
|
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 June 30, 2019:
|
|
Shares
Available
for Grant
|
|
|
|
(Unaudited)
|
|
Balance as of December 31, 2018
|
|
|
8,485,000
|
|
Stock awards granted
|
|
|
-
|
|
Stock awards forfeited
|
|
|
-
|
|
|
|
|
|
|
Balance as of June 30, 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 six months ended
June 30, 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.
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(4,652,117
|
)
|
|
$
|
(363,937
|
)
|
|
$
|
(4,680,880
|
)
|
|
$
|
(578,084
|
)
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The effective
income tax rates for the three and six months ended June 30, 2018 and 2019 were 0% and 0%, respectively. The effective income tax
rate for the three and six months ended June 30, 2018 and 2019 differs from the U.S. Federal statutory corporate income tax rate
of 21% is primarily due to the increase in valuation allowance
The Company did
not pay any income taxes during the six months ended June 30, 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.