NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
1. Organization and principal activities
QHY Group (the “Company”, or “we”),
formerly named Yakun International Investment and Holding Group (“Yakun International”), was incorporated under the
laws of the State of Nevada on October 16, 2007. Prior to the acquisition of PBG Water Solutions International Inc. (“PBG
Water Solutions”) on January 15, 2018, the Company was a development stage company that had not generated any revenue from operations
and maintained no essential assets since inception.
In November 2017, the
Company entered into a Share Exchange Agreement (the “PBG SEA”) with PBG Water Solutions and its shareholders, pursuant to
which the Company 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 the Company on the same date. As of the issuance of these financial
statements. PBG Water Solutions has not generated revenue.
The transaction was
accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of
PBG Water Solutions effectively controlled the post-combination Company. For accounting purposes, PBG Water Solutions was deemed to be
the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of PBG Water Solutions
(i.e., a capital transaction involving the issuance of shares by the Company for the shares of PBG Water Solutions). Accordingly, the
consolidated assets, liabilities and results of operations of PBG Water Solutions became the historical financial statements of the Company,
and assets, liabilities and results of operations of the Company 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,
the Company incorporated QHY Water Solutions International Corp (“QHY Water Solutions”) under the law of State of Nevada
as its wholly owned subsidiary.
On July 31, 2018, the
Company filed an amendment to its articles of incorporation changing its corporate name to QHY Group. The amendment became effective
August 31, 2018.
In December 2018, the
Company issued 1,515,000 shares of common stock to certain consultants for services rendered or to be rendered (See Note 7).
In December 2018, the
Company entered into a series of securities purchase agreements with certain non-affiliate investors for the sale of 6,655,750 shares
of the Company’s common stock for aggregate consideration of $2,196,500. Of the shares sold, 5,972,582 were issued to six investors
for $1,851,500 and the remaining 683,168 shares were sold to a single investor for $345,000.
2. Going concern
The Company’s
financial statements are prepared using accounting principles generally accepted in the United States of America (“U.S. GAAP”)
applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as
a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s obtaining adequate capital
to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease
operations.
In order to continue
as a going concern, the Company will need, among other things, additional capital resources. Successful execution of the Company’s
plan to enter the water solutions business and its transition to attaining profitable operations, are dependent upon obtaining additional
financing. The Company plans to improve its future liquidity by obtaining additional financing through the issuance of financial instruments
such as equity and warrants or through credit loans. Additional financing may not be available on acceptable terms or at all. If the
Company issues additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors
may demand rights, preferences or privileges senior to those of existing holders of common stock.
The ability of the Company
to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph
and eventually secure other sources of financing and attain profitable operations. We will continue to rely on loans from our major shareholders
and directors for payments of expenditures other than purchasing from manufacturers in China. The accompanying financial statements do
not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
3. Summary of significant accounting policies
(a) Basis of presentation and principles of consolidation
The unaudited consolidated
interim financial statements are prepared and presented in accordance with U.S. GAAP.
The unaudited consolidated
interim financial information as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures,
which are normally included in complete consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant
to those rules and regulations. The unaudited consolidated interim financial information should be read in conjunction with the audited
financial statements and the notes thereto, included in the Form 10-K filed on March 29, 2021.
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, 2021, its consolidated results of operations for the three and six months ended June 30, 2021 and 2020,
and its consolidated cash flows for the six months ended June 30, 2021 and 2020, as applicable, have been made. The interim results of
operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
(b) Use of estimates
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates
are made; however, actual results could differ from those estimates.
(c) Loss per share
Basic loss per share
is computed using the weighted average number of common shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of common shares and potential common shares outstanding during the period for options and restricted shares
under the treasury stock method and for convertible debts under if-convertible method, if dilutive. Potential common shares are not included
in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period
in which a net loss is recorded.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Dilutive shares not included in loss per share computation
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
Warrants
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
(d) Recently issued accounting standards
The Company does not expect the adoption of any
recent accounting standards to have a material impact on its financial statements except for:
In December 2019, the FASB issued guidance intended
to simplify the accounting for income taxes. The guidance removes the following exceptions: 1) exception to the incremental approach
for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, 2) exception to
the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method
investment, 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method
investment becomes a subsidiary and 4) exception to the general methodology for calculating income taxes in an interim period when a
year-to-date loss exceeds the anticipated loss for the year. Additionally, the guidance simplifies the accounting for income taxes by:
1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account
for any incremental amount incurred as a non-income-based tax, 2) requiring that an entity evaluate when a step up in the tax basis of
goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should
be considered a separate transaction, 3) specifying that an entity is not required to allocate the consolidated amount of current and
deferred tax expense to a legal entity that is not subject to tax in its separate financial statements (although the entity may elect
to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority),
4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation
in the interim period that includes the enactment date and 5) making minor improvements for income tax accounting related to employee
stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. The guidance will
be effective for fiscal years and interim periods beginning after December 15, 2020. Different components of the guidance require retrospective,
modified retrospective or prospective adoption, and early adoption is permitted. The adoption did not have nor is expected to have a
material impact on our results of operations, financial position or disclosures.
4. Due from a related party
The Renminbi (the “RMB”) equivalent
to $2,196,500 received in December 2018 as proceeds from issuing 6,655,750 shares of the Company’s common stock (see Note 7) was
collected by Beijing QHY on behalf of the Company because the Company cannot collect RMB due to the currency control on RMB. The monies
are considered held by Beijing QHY for the benefit of the Company and are to be used to pay manufacturers in China for the wastewater
treatment equipment we would purchase if we received an order. It is likely that the funds will not be available to pay expenses incurred
outside China.
5. Accounts payable
Accounts payables consisted of the following:
|
|
June 30,
2020
|
|
|
December 31,
2020
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Payroll
|
|
$
|
1,282,500
|
|
|
$
|
997,500
|
|
Professional fees
|
|
|
115,387
|
|
|
|
138,123
|
|
Listing fees
|
|
|
2,148
|
|
|
|
1,621
|
|
Others
|
|
|
2,564
|
|
|
|
2,565
|
|
Total
|
|
$
|
1,402,599
|
|
|
$
|
1,139,809
|
|
6. Related party transactions and balances
a) Related party transactions
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
9,965
|
|
|
$
|
8,284
|
|
|
$
|
38,516
|
|
|
$
|
36,133
|
|
Interest expense to a shareholder
|
|
|
11,536
|
|
|
|
10,193
|
|
|
|
22,180
|
|
|
|
19,673
|
|
Fee for professional services provided by related parties
|
|
|
28,500
|
|
|
|
28,500
|
|
|
|
57,000
|
|
|
|
57,000
|
|
License fee expense to a related party
|
|
$
|
12,500
|
|
|
$
|
12,500
|
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
b) Related party payables
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Loan from a shareholder
|
|
$
|
469,122
|
|
|
$
|
430,606
|
|
Interest payable to a shareholder
|
|
|
110,891
|
|
|
|
88,711
|
|
Payable to a related party for license fee
|
|
|
212,500
|
|
|
|
187,500
|
|
Professional fee payable to related parties
|
|
|
380,000
|
|
|
|
323,000
|
|
Due from a related party
|
|
$
|
2,196,500
|
|
|
$
|
2,196,500
|
|
On May 1, 2018, PBG
Water Solutions and the Company entered into a Credit Loan Agreement with a 28.29% shareholder of the Company (the “Lender”).
The Lender had provided operating capital to PBG Water Solutions since its inception, and to the Company since the consummation of PBG
SEA. Pursuant to the Credit Loan Agreement, the Lender will provide a loan of $500,000 to the Company for 2 years with 10% annual interest
which shall be applied from the date of the Credit Loan Agreement. The due date of the loan has been extended until December 31, 2021.
In compensation for the loan, the Company issued to the Lender a 5-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, 2021 and December 31, 2020, the Lender has provided $469,122 and $430,606 to the
Company, respectively. During the three months ended June 30, 2021 and 2020 the Lender provided $9,965 and $8,284 to the Company, respectively.
During the six months ended June 30, 2021 and 2020 the Lender provided $38,516 and $36,133 to the Company, respectively. During the three
months ended June 30, 2021 and 2020, the Company recorded $11,536 and $10,193 interest expense incurred from the loan, respectively.
During the six months ended June 30, 2021 and 2020, the Company recorded $22,180 and $19,673 interest expense incurred from the loan,
respectively.
In February 2018, PBG
Water Solutions entered into a financial advisory agreement with Rebus Capital Group (“Rebus”), an entity affiliated with
a shareholder of the Company, pursuant to which PBG Water Solutions will pay Rebus $30,000 per quarter. The agreement has a term of five
years from March 2018 but is cancellable by either party on sixty days’ notice. The service fee for the first 3 months was waived
by Rebus. Professional service expense related to this agreement was $28,500 and $28,500 for the three months ended June 30, 2021 and
2020, respectively. Professional service expense related to this agreement was $57,000 and $57,000 for the six months ended June 30,
2021 and 2020, respectively.
In April 2017, PBG Water
Solutions entered into a License and Supply Agreement with an individual shareholder who owned 50% of PBG Water Solutions’ common
stock and the shareholder’s majority owned company Beijing QHY Environment S & T Co., Ltd. (“Beijing QHY”). Pursuant
to the License and Supply Agreement and its Amendment entered into in June 2017, the individual shareholder and Beijing QHY (the “Licensor”)
granted PBG the exclusive use of 21 patents in any area outside the People’s Republic of China (the “PRC”) for 20 years.
A one-time fee of $1 million shall be paid before December 31, 2021, and royalties of 1% of the net revenue received by PBG from the
sale, license or other distribution of the licensed products shall be paid annually. In addition, the Licensor shall supply PBG Water
Solutions licensed products at prices agreed upon from time to time by the Licensor and PBG Water Solutions. The Company, QHY Water Solutions
and PBG Water Solutions didn’t generate any net revenue from the licensed equipment or products during the six months ended June
30, 2021 and 2020. The Company recorded a $12,500 and $12,500 license fee expense for the three months ended June 30, 2021 and 2020,
respectively. The Company recorded a $25,000 and $25,000 license fee expense for the six months ended June 30, 2021 and 2020, respectively,
and made no payment of license fees as of June 30, 2021. The shareholder/licensor owns 47.15% of the Company’s common stock as
of June 30, 2021.
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, 2021, and are to be
used to pay manufacturers in China for the wastewater treatment equipment we would purchase if we received an order. It is likely that
the funds will not be available to pay expenses incurred outside China.
7. Stockholder’s equity
Common stock
In April 2018, the Company
increased its authorized common stock from 70 million to 1 billion shares. The Company issued 46,839,439 shares of common stock and 19,000
shares of Series A Convertible Preferred Stock to the shareholders of PBG Water Solutions pursuant to PBG SEA. The 19,000 shares of Series
A Convertible Preferred Stock were converted into 19,000,000 shares of common stock upon increase in the number of shares of authorized
common stock.
In October 2018, the Company hired certain consultants
to provide general advisory services relating to the Company operating as a publicly traded enterprise, strategic planning and execution,
corporate governance and financial reporting. Pursuant to each agreement, the service term is 12 months and the Company shall pay the
Consultants an aggregate of 1,500,000 shares of the Company’s common stock which was delivered at inception of the Agreements.
The shares were issued in December 2018. In November 2018, the Company hired a consultant for investor relations and strategic planning,
pursuant to an agreement whereby the Company shall issue to the consultant 20,000 shares of the Company’s common stock each month.
The service was terminated in February 2020. As of June 30, 2020, the Company has issued 15,000 shares of common stock to the consultant.
Cost for the consulting service was measured based on the fair value of the Company’s common stock at the date of the consulting
agreement since the common stock was vested and non-forfeitable upon the entry into the agreement. The fair value of the common stock
was estimated to be $0.4075, and resulted in $617,550 for the fair value of the 1,515,000 common shares issued.
In December 2018, the
Company issued 6,655,750 shares of the Company’s common stock for aggregate consideration of $2,196,500.
Warrants
On May 1, 2018, the Company issued warrants to
a shareholder pursuant to the Credit Loan Agreement (See Note 6). The warrants issued by the Company are classified as equity. The fair
value of the warrants was recorded as additional-paid-in-capital, and no further adjustments are made.
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, 2021 is presented below:
|
|
Number of
|
|
|
|
warrants
|
|
|
|
|
(Unaudited)
|
|
Warrants as at December 31, 2020
|
|
|
50,000,000
|
|
Warrants granted
|
|
|
-
|
|
Exercised, forfeited or expired
|
|
|
-
|
|
Outstanding at June 30, 2021
|
|
|
50,000,000
|
|
Exercisable at June 30, 2021
|
|
|
50,000,000
|
|
The
following table summarizes information about the Company’s warrants as of June 30, 2021:
|
|
|
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
|
|
|
|
0.92
|
|
|
$
|
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, 2021:
|
|
Shares
Available
for Grant
|
|
|
|
(Unaudited)
|
|
Balance as of December 31, 2020
|
|
|
8,485,000
|
|
Stock awards granted
|
|
|
-
|
|
Stock awards forfeited
|
|
|
-
|
|
|
|
|
|
|
Balance as of June 30, 2021
|
|
|
8,485,000
|
|
8.
Income taxes
The
Company did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because
it has experienced operating losses. When it is more likely than not that a tax asset cannot be realized through future income, the Company
must take a full valuation allowance for this future tax benefit. The Company provided a full valuation allowance on the net deferred
tax asset, consisting of net operating loss carryforwards, because management has determined that it is more likely than not that the
Company will not earn income sufficient to realize the deferred tax assets during the carryforward period.
The
Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the three months
ended June 30, 2021, 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,
2021
|
|
|
December 31,
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
532,176
|
|
|
$
|
447,024
|
|
Valuation allowance
|
|
|
(532,176
|
)
|
|
|
(447,024
|
)
|
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,
|
|
|
|
2020
|
|
|
2020
|
|
|
2020
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Tax at statutory rate (21%)
|
|
$
|
42,245
|
|
|
$
|
42,239
|
|
|
$
|
85,152
|
|
|
$
|
84,105
|
|
Increase in valuation allowance
|
|
|
(42,245
|
)
|
|
|
(42,239
|
)
|
|
|
(85,152
|
)
|
|
|
(84,105
|
)
|
Income tax expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company did not pay any income taxes during the three and six months ended June 30, 2021 and 2020.
9.
Other income
In
April 2020, PBG Water Solutions executed the standard loan documents required for securing a loan (the “EIDL Loan”) from
the Small Business Association under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact
of the coronavirus (“COVID-19”) pandemic on the Company’s business. In connection therewith, PBG Water Solutions received
a $7,000 advance, which does not have to be repaid.
10.
Subsequent events
In
accordance with FASB standards, the Company evaluated subsequent events through the date it filed this report with the Securities and
Exchange Commission (“SEC”) and no subsequent events occurred that required disclosure in the accompanying consolidated financial
statements except below.
The
impact of the coronavirus (“COVID-19”) outbreak on the Company’s results of operations, financial position and cash
flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions.
These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted.
If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial
position and cash flows may be materially adversely affected.