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. (“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, 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 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 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 formed 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 its 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
(“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 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, 2019 and for the three and nine months ended September
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 September 30, 2019, its consolidated results of operations for the
three and nine months ended September 30, 2019 and 2018, and its consolidated cash flows for the nine months ended September 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 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 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
|
|
Dilutive shares not included September 30,
|
|
September 30,
|
|
|
September 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 September 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
September 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 as of December 31, 2018 mainly consisted of $458,537 paid to several consultants to the Company in form of the Company’s
common stock (see Note 9) pursuant to agreements with remaining services terms ended as of September 30, 2019.
7.
Accounts payable
Accounts
payables consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll
|
|
$
|
285,000
|
|
|
$
|
-
|
|
Professional fees
|
|
|
110,804
|
|
|
|
81,746
|
|
Lab and testing fees
|
|
|
16,611
|
|
|
|
-
|
|
Listing fees
|
|
|
2,201
|
|
|
|
1,963
|
|
Others
|
|
|
1,748
|
|
|
|
6,866
|
|
Total
|
|
$
|
416,364
|
|
|
$
|
90,575
|
|
8.
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.
9.
Related party transactions and balances
a)
Related party transactions
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
25,103
|
|
|
$
|
55,267
|
|
|
$
|
71,369
|
|
|
$
|
94,747
|
|
Interest expense to a shareholder
|
|
|
8,842
|
|
|
|
5,336
|
|
|
|
23,455
|
|
|
|
8,660
|
|
Fair value of warrants issued to a shareholder
|
|
|
-
|
|
|
|
4,540,000
|
|
|
|
-
|
|
|
|
4,540,000
|
|
Fee for professional services provided by related parties
|
|
|
28,500
|
|
|
|
74,290
|
|
|
|
85,500
|
|
|
|
168,050
|
|
License fee expense to a related party
|
|
$
|
12,500
|
|
|
$
|
12,500
|
|
|
$
|
37,500
|
|
|
$
|
37,500
|
|
b)
Related party payables
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan from a shareholder
|
|
$
|
355,090
|
|
|
$
|
283,720
|
|
Interest payable to a shareholder
|
|
|
38,450
|
|
|
|
14,996
|
|
Payable to a related party for license fee
|
|
|
125,000
|
|
|
|
87,500
|
|
Professional fee payable to related parties
|
|
|
180,500
|
|
|
|
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 the Company entered into a Credit Loan Agreement with a 20.8% 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, 2019 and December 31, 2018, the Lender has provided $355,090 and
$283,720 to the Company, respectively. During the three months ended September 30, 2019 and 2018 the Lender provided $25,103 and
$55,267 to the Company, respectively. During the nine months ended September 30, 2019 and 2018 the Lender provided $71,369 and
$94,747 to the Company, respectively. During the three months ended September 30, 2019 and 2018, the Company recorded $8,842 and
$5,336 interest expense incurred from the loan. During the nine months ended September 30, 2019 and 2018, the Company recorded
$23,455 and $8,660 interest expense 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 $66,500
for the three and nine months ended September 30, 2018, respectively. Professional service expense related to this agreement was
$28,500 and $85,500 for the three and nine months ended September 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 during the year ended December 31, 2018 and the
nine months ended September 30, 2019. The Company recorded a $12,500 and $37,500 license fee expense for the three and nine months
ended September 30, 2019, respectively, and made no payment of license fees as of September 30, 2019. The Company recorded a $12,500
and $37,500 license fee expense for the three and nine months ended September 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 September 30, 2019.
QHY
Oceania 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 September 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 September 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 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 September 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 $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 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 September 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 September 30, 2019
|
|
|
50,000,000
|
|
Exercisable at September 30, 2019
|
|
|
50,000,000
|
|
The
following table summarizes information about the Company’s warrants as of September 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
|
|
|
|
2.67
|
|
|
$
|
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, 2019:
|
|
Shares
Available
for Grant
|
|
|
|
(Unaudited)
|
|
Balance as of December 31, 2018
|
|
|
8,485,000
|
|
Stock awards granted
|
|
|
-
|
|
Stock awards forfeited
|
|
|
-
|
|
|
|
|
|
|
Balance as of September 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 nine
months ended September 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(413,713
|
)
|
|
$
|
(97,885
|
)
|
|
$
|
(991,797
|
)
|
|
$
|
(4,778,765
|
)
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The
effective income tax rates for the three and nine months ended September 30, 2018 and 2019 were 0% and 0%, respectively. The effective
income tax rate for the three and nine months ended September 30, 2018 and 2019 differs from the U.S. Federal statutory corporate
income tax rate of 21% is due to the increase in valuation allowance
The
Company did not pay any income taxes during the nine months ended September 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.