NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S.
dollars)
1.
Organization and principal activities
Yakun
International Investment and Holding Group (the “Company”, “Yakun International”, or “we”)
formerly named Rhino Productions, Inc. (“Rhino Productions”) 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 Holdings Limited
(“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.
Vast Glory was
incorporated on February 26, 2009 in the British Virgin Islands (“BVI”), and through its wholly owned subsidiary HK
Food Logistics, Limited (“HK Food”, incorporated under the laws of the Hong Kong Special Administrative Region of the
People’s Republic of China (“Hong Kong”, or “HK”) on June 28, 2010) and HK Food’s wholly owned
subsidiary Changchun Yaqiao Business Consulting Co., Ltd. (“WFOE”, incorporated in China on October 28, 2010), Vast
Glory indirectly controlled Changchun Decens Foods Co., Ltd. (“Decens”). Decens is located in Changchun
City, Jilin Province, the People’s Republic of China (“PRC”). It was established in September 2003
under the law of PRC and is principally engaged in the production of cakes and Chinese traditional foods which it distributes through
its outlets and distribution network throughout Jilin Province. In December 2010, WFOE entered into a series of variable interest
entity contractual agreements (the “VIE Agreements”) with Decens and its shareholders (the “Decens Shareholders”).
WFOE effectively assumed management of the business activities of Decens and had the right to appoint all executive and senior
management and the members of the board of the directors of Decens.
On July 23, 2014,
WFOE, Decens and Decens Shareholders entered into a Termination Agreement (the “Termination Agreement”) that all parties
agreed to terminate all the VIE Agreements, and waived all interests or liabilities under the VIE Agreements. On the same day,
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 pursuant to the PBG SEA.
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 (the “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 (the “QHY Oceania”) under the law of New
Zealand. QHY Oceania is 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 (the “QHY NZ”) under the law of the State of Nevada as a Limited Liability
Company. QHY NZ is 51% owned by QHY Water Solutions, and 49% owned by a third party.
Currently,
QHY Water Solutions, QHY Oceania and QHY NZ have not generated any revenue.
2.
Going concern
The Company’s
unaudited 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, 2018 and for the three and six months ended June 30, 2018 and 2017 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 filed on May
14, 2018.
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, 2018, its consolidated results of operations for the three and six months ended
June 30, 2018 and 2017, and its consolidated cash flows for the six months ended June 30, 2018 and 2017, 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 revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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)
Income Taxes
Current income
taxes are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial
statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company
accounts for income taxes using the assets and liability method. Under this method, deferred income taxes are recognized for tax
consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the financial
statements at each year-end. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences
that are expected to affect taxable income.
The Company adopts
a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition.
Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals
or litigation process, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon settlement. As of June 30, 2018, the Company did not have any uncertain tax positions.
(d)
Share Based Expenses
FASB ASC 718 “Compensation
- Stock Compensation” prescribes accounting and reporting standards for all stock-based payments awarded to employees, including
employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, and may be classified as
either equity or liabilities. The Company determines if a present obligation to settle the share-based payment transaction in cash
or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity
instruments lacks commercial substance or (b) the present obligation is implied because of an entity’s past practices or
stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction
should be recognized as equity. The Company accounts for stock-based compensation issued to non-employees and consultants in accordance
with the provisions of FASB ASC 505-50 “Equity - Based Payments to Non-Employees.” Measurement of share-based payment
transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services
received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier
of performance commitment date or performance completion date.
(e)
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
|
|
|
Six months ended
|
|
Dilutive shares not included
|
|
June 30,
|
|
|
June 30,
|
|
in loss per share computation
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Warrants
|
|
|
50,000,000
|
|
|
|
-
|
|
|
|
50,000,000
|
|
|
|
-
|
|
(f)
Related parties
Parties are considered
to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence
over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject
to common control or significant influence, such as a family member or relative, stockholder, or a related corporation.
(g)
Functional currency and foreign currency translation and transactions
The Company’s functional and reporting
currency is the U.S. dollar (“US$”). Transactions denominated in currencies other than the functional currency are
translated into the functional currency at the exchange rates prevailing at the last date of the months the transactions occurred.
The Company had no monetary assets and liabilities denominated in foreign currencies at the balance sheet dates.
(h)
Non-controlling Interests in Consolidated Financial Statements
Accounting guidance on non-controlling
interests in consolidated financial statements requires that a non-controlling interest in the equity of a subsidiary be accounted
for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the non-controlling
interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between
the interests of the controlling and non-controlling owners. Net loss attributable to the non-controlling interests totalled $281
for the three and six months ended June 30, 2018.
(i)
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 February 2016, the FASB issued an ASU
amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases
with terms of more than 12 months, in addition to those currently recorded, on the company’s consolidated balance sheets.
Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally
consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15,
2018, with early adoption permitted. The company plans to adopt this ASU beginning in the quarter ending March 31, 2019. The company
is currently evaluating the impact on its consolidated financial statements, primarily to the consolidated balance sheets and related
disclosures.
In February 2018, the FASB issued guidance
to address the income tax accounting treatment of the tax effects within other comprehensive income due to the enactment of the
Tax Cuts and Jobs Act (the “Act”). This guidance allows entities to elect to reclassify the tax effects of the change
in the income tax rates from other comprehensive income to retained earnings. The guidance is effective for periods beginning after
December 15, 2018 although early adoption is permitted.
In March 2018, the FASB issued ASU
2018-05: “Income Taxes (Topic 740)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.
118”. The amendments in this ASU add various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin
No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that
includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act was signed into law. The Company is in the process
of evaluating the impact of these amendments on its consolidated financial position and results of operations.
4.
Related party transactions and balances
a)
Related party transactions
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
24,489
|
|
|
$
|
33,502
|
|
|
$
|
39,480
|
|
|
$
|
48,999
|
|
Interest expense to a shareholder
|
|
|
3,324
|
|
|
$
|
-
|
|
|
|
3,324
|
|
|
$
|
|
|
Fair value of warrants issued to a shareholder
|
|
|
4,540,000
|
|
|
|
-
|
|
|
|
4,540,000
|
|
|
|
-
|
|
Fee for professional services provided by related parties
|
|
|
84,260
|
|
|
|
-
|
|
|
|
93,760
|
|
|
|
10,000
|
|
License fee expense to a related party
|
|
|
12,500
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
b)
Related party payables
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Long-term loan from a shareholder
|
|
$
|
210,951
|
|
|
$
|
170,716
|
|
Interest payable to a shareholder
|
|
|
3,324
|
|
|
|
-
|
|
Payable to a related party for license fee
|
|
|
62,500
|
|
|
|
-
|
|
Professional fee payable to related parties
|
|
|
93,760
|
|
|
|
-
|
|
On May 1, 2018,
PBG Water Solutions and Yakun International, entered into a Credit Loan Agreement with a 20.8% shareholder of Yakun International
(the “Lender”). The Lender had provided operating capital to PBG Water Solutions since its inception, and to Yakun
International 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
April 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, 2018 and December 31, 2017, the Lender has provided $210,951
and $170,716 to the Company, respectively. During the three and six months ended June 30, 2018, the Lender provided $24,489 and
$39,480 to the Company, respectively. During the three and six months ended June 30, 2017, the Lender provided $33,502 and $48,999
to the Company, respectively. During the three and six months ended June 30, 2018, the Company recorded $3,324 interest expense
incurred from the loan. During the three and six months ended June 30, 2018, the Company recorded $4,540,000 cost for issuing
the warrant to the shareholder (see Note 5).
PBG Water Solutions’
sole director from inception to December 31, 2017 is an attorney and provided legal services to PBG Water Solutions during the
six months ended June 30, 2017 with a service fee of $10,000. During the three and six months ended June 30, 2018, service of
$55,760 was provided.
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.
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 and PBG Water Solutions didn’t generate any net revenue from or make any purchases of licensed
products during the three and six months ended June 30, 2018. The Company recorded a $12,500 and $25,000 license fee expense for
the three and six months ended June 30, 2018, respectively and made no payment of license fees as of June 30, 2018. The shareholder/licensor
owns 41.6% of the Company’s common stocks after giving effect to the PBG SEA.
5.
Common stock and warrants
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.
Warrants
On May 1, 2018, the Company issued warrants
to a shareholder pursuant to the Credit Loan Agreement (See Note 4). 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, 2018 is presented below:
|
|
Number of
|
|
|
|
warrants
|
|
Warrants as at December 31, 2017
|
|
-
|
|
Warrants granted
|
|
|
50,000,000
|
|
Exercised, forfeited or expired
|
|
|
-
|
|
Outstanding at June 30, 2018
|
|
|
50,000,000
|
|
Exercisable at June 30, 2018
|
|
|
-
|
|
The
following table summarizes information about the Company’s warrants as of June 30, 2018:
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
50,000,000
|
|
|
|
3
|
|
|
$
|
0.01
|
|
|
|
0
|
|
|
$
|
0.01
|
|
6.
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 allow 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, 2018, 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:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net operating loss carry forward
|
|
$
|
75,666
|
|
|
$
|
46,140
|
|
Valuation allowance
|
|
|
(75,666
|
)
|
|
|
(46,140
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation
of income taxes computed at the statutory rate is as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Tax at statutory rate (21%)
|
|
$
|
23,545
|
|
|
$
|
13,544
|
|
|
$
|
29,585
|
|
|
$
|
10,290
|
|
Increase in valuation allowance
|
|
|
(23,545
|
)
|
|
|
(13,544
|
)
|
|
|
(29,585
|
)
|
|
|
(10,290
|
)
|
Income tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company did
not pay any income taxes during the three and six months ended June 30, 2018 or 2017.
7.
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 for the following.
On July 31,
2018, the Company filed an amendment to articles of incorporation changing its corporate name to QHY Group. The amendment is to
become effective August 31, 2018, provided that prior to that date the Company has obtained approval from FINRA.