UNITED STATES
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 |
For Quarter Ended: March 31, 2020
Commission File Number000-55933
QHY GROUP
(Exact Namename of Registrantregistrant as Specifiedspecified in its Charter)
| 33-1176182 | ||
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification |
1501 Broadway, Suite 1515
New York, NY 10036-5601
(Address of principal executive offices) (Zip Code)
(212) 324-1876
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if change since last report)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act
| Title of Each Class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.days: Yes xþ No o☐.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx þ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | þ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes oþ Nox
Securities registered pursuant to Section 12(b) of the issuer's classesAct: None
As of common equity, forMay 1, 2020, the period covered by this report and as at the latest practicable date:
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKINGFORWARD LOOKING STATEMENTS
This documentreport contains certain statements of a forward-looking nature. Such forward-looking statements including butas defined under the U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” and similar expressions identify forward looking statements, which generally are not limited tohistorical in nature. Forward looking statements regarding projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to materially differ materially from those projectedthe Company’s historical experience and its current expectations or anticipated, includingprojections indicated in any forward-looking statements. These risks include, but are not limited to, those set forth hereinrisks associated with beginning a new business, operating risks, risks associated with raising capital, dependence upon management and risks associated with recruiting personnel, our ability to develop our water treatment solutions and gain market acceptance, compliance with environmental and other governmental regulations, competition with existing and future providers of water treatment solutions, as well as the other risks described in Item 1.A in our Report on Form 8-K/A (Amendment No. 2)10-K filed on April 20, 2012. Readers are cautionedMarch 30, 2020 and discussed in our future filings with the SEC. You should not to place undue reliance on these forward-lookingforward looking statements, which speak only as of the date hereof.they are made. Except as required by the federal securities laws, the Company undertakeslaw, we assume no obligation to update any forward-looking information. Nonetheless,statements publicly, or to update the Company reservesreasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this report.future. Given these uncertainties, you should not place undue reliance on forward-looking statements.
ii
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 8,874,652 | $ | 1,586,158 | ||||
| Accounts receivable, net of allowance | 2,845,044 | 999,488 | ||||||
| Inventories, net | 232,825 | 264,237 | ||||||
| Other receivables | 27,411 | 21,138 | ||||||
| Advance to suppliers | 365,300 | 189,149 | ||||||
| Deferred tax assets | 117,334 | 69,268 | ||||||
| Deposits & prepayment | 11,125 | 11,090 | ||||||
| Total current assets | 12,473,691 | 3,140,528 | ||||||
| Property and equipment, net | 2,132,233 | 1,539,785 | ||||||
| Prepaid lease | 3,175,853 | 1,548,259 | ||||||
| Prepaid lease - related party | 5,154,557 | 5,994,681 | ||||||
| Loans to related party | 1,019,581 | 1,016,365 | ||||||
| Total assets | $ | 23,955,915 | $ | 13,239,618 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Customer deposits | $ | 16,221 | $ | 10,912 | ||||
| Accounts payable and accrued liabilities | 620,667 | 264,453 | ||||||
| Taxes payable | 3,312,401 | 305,570 | ||||||
| Related party payable | 260,018 | 234,860 | ||||||
| Total current liabilities | 4,209,307 | 815,795 | ||||||
STOCKHOLDERS' EQUITY Preferred stock, 5,000,000 shares authorized, 0 shares outstanding | ||||||||
| Common stock, $0.001 par value; 70,000,000 shares authorized, 13,259,600 shares issued and outstanding at September 30, 2012 and 12,059,600 shares issued and outstanding at December 31, 2011 | 13,260 | 12,060 | ||||||
| Additional paid in capital | 322,519 | 143,719 | ||||||
| Retained earnings | 18,599,200 | 11,567,692 | ||||||
| Accumulated other comprehensive income | 811,629 | 700,352 | ||||||
| Total stockholders' equity | 19,746,608 | 12,423,823 | ||||||
| Total liabilities and stockholders' equity | $ | 23,955,915 | $ | 13,239,618 | ||||
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash | $ | 91 | $ | 136 | ||||
| Due from a related party | 2,196,500 | 2,196,500 | ||||||
| Prepaid expenses and other current assets | 100 | 100 | ||||||
| Total assets | $ | 2,196,691 | $ | 2,196,736 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 694,027 | $ | 573,040 | ||||
| Due to related parties | 387,500 | 346,500 | ||||||
| Loan from a shareholder and interest payable | 460,975 | 423,645 | ||||||
| Total liabilities | 1,542,502 | 1,343,185 | ||||||
| Stockholders’ equity | ||||||||
| Preferred stock, 5,000,000 shares authorized, 0 shares outstanding | - | - | ||||||
| Common stock, $0.001 par value; 1,000,000,000 shares authorized, 87,269,789 shares issued and outstanding at March 31, 2020 and December 31, 2019 | 87,270 | 87,270 | ||||||
| Additional paid in capital | 7,243,001 | 7,243,001 | ||||||
| Accumulated deficit | (6,676,082 | ) | (6,476,720 | ) | ||||
| Total stockholders’ equity | 654,189 | 853,551 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,196,691 | $ | 2,196,736 | ||||
See accompanying notes to the unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited - Expressed in U.S. dollars)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Sales | $ | 12,736,088 | $ | 9,678,303 | $ | 21,042,548 | $ | 15,308,878 | ||||||||
| Cost of sales | 4,357,773 | 3,719,246 | 8,136,256 | 6,532,665 | ||||||||||||
| Cost of sales - related party | 206,410 | 59,929 | 622,062 | 140,163 | ||||||||||||
| Gross profit | 8,171,905 | 5,899,128 | 12,284,230 | 8,636,050 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | 966,646 | 442,530 | 2,580,853 | 1,007,873 | ||||||||||||
| Lease expenses - related party | 76,667 | 111,297 | 231,053 | 260,303 | ||||||||||||
| Total operating expenses | 1,043,313 | 553,827 | 2,811,906 | 1,268,176 | ||||||||||||
| Income from operations | 7,128,592 | 5,345,301 | 9,472,324 | 7,367,874 | ||||||||||||
| Other income | ||||||||||||||||
| Subsidy income | - | - | - | 109,231 | ||||||||||||
| Interest income | - | 38,064 | 878 | 112,835 | ||||||||||||
| Total other income | - | 38,064 | 878 | 222,066 | ||||||||||||
| Income before income tax expense | 7,128,592 | 5,383,365 | 9,473,202 | 7,589,940 | ||||||||||||
| Income tax expense | (1,802,545 | ) | (1,354,072 | ) | (2,441,694 | ) | (1,869,700 | ) | ||||||||
| Net income | 5,326,047 | 4,029,293 | 7,031,508 | 5,720,240 | ||||||||||||
| Other comprehensive income | ||||||||||||||||
| Foreign currency translation gain (loss) | 90,123 | 151,992 | 111,277 | 315,896 | ||||||||||||
| Total comprehensive income | $ | 5,416,170 | $ | 4,181,285 | $ | 7,142,785 | $ | 6,036,136 | ||||||||
| Earnings per share – basic and diluted | $ | 0.40 | $ | 0.45 | $ | 0.54 | $ | 0.68 | ||||||||
| Weighted average number of shares outstanding – basic and diluted | 13,259,600 | 8,884,933 | 13,027,483 | 8,461,644 | ||||||||||||
| Three Months ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenue | $ | - | $ | - | ||||
| Cost of Revenue | - | - | ||||||
| Gross profit | - | - | ||||||
| Expenses | ||||||||
| Listing fees | 1,947 | 1,355 | ||||||
| Professional fees | 2,000 | 3,205 | ||||||
| Professional fees – related party | 28,500 | 28,500 | ||||||
| License and royalty-related party | 12,500 | 12,500 | ||||||
| General and administrative | 144,935 | 161,737 | ||||||
| Total operating expenses | 189,882 | 207,117 | ||||||
| Other expenses | ||||||||
| Interest expenses – related party | 9,480 | 7,030 | ||||||
| Total other expenses | 9,480 | 7,030 | ||||||
| Net loss | 199,362 | 214,147 | ||||||
| Other comprehensive income | - | - | ||||||
| Total comprehensive loss | $ | 199,362 | $ | 214,147 | ||||
| Earnings per share – basic and diluted | $ | (0.002 | ) | $ | (0.002 | ) | ||
| Weighted average number of shares outstanding – basic and diluted | 87,269,789 | 87,269,789 | ||||||
See accompanying notes to the unaudited consolidated financial statements
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Expressed in U.S. dollars)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficits | Equity | ||||||||||||||||
| Balance as of December 31, 2019 | 87,269,789 | $ | 87,270 | $ | 7,243,001 | $ | (6,476,720 | ) | $ | 853,551 | ||||||||||
| Net loss | - | - | - | (199,362 | ) | (199,362 | ) | |||||||||||||
| Balance as of March 31, 2020 | 87,269,789 | $ | 87,270 | $ | 7,243,001 | $ | (6,676,082 | ) | $ | 654,189 | ||||||||||
| Balance as of December 31, 2018 | 87,269,789 | $ | 87,270 | $ | 7,243,001 | $ | (5,257,097 | ) | $ | 2,073,174 | ||||||||||
| Net loss | - | - | - | (214,147 | ) | (214,147 | ) | |||||||||||||
| Balance as of March 31, 2019 | 87,269,789 | $ | 87,270 | $ | 7,243,001 | $ | (5,471,244 | ) | $ | 1,859,027 | ||||||||||
See notes to the unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Expressed in U.S. dollars)
| For the Nine Months Ended September 30, | ||||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 7,031,508 | $ | 5,720,240 | ||||
| Depreciation and amortization | 340,783 | 184,612 | ||||||
| Prepaid lease amortization- related party | 852,632 | 399,841 | ||||||
| Stock based compensation | 180,000 | - | ||||||
| Accounts receivable | (1,828,537 | ) | (1,548,912 | ) | ||||
| Inventories | 32,007 | (122,861 | ) | |||||
| Other receivables | (6,160 | ) | (55,529 | ) | ||||
| Advance to suppliers | (174,232 | ) | (174,198 | ) | ||||
| Deferred tax assets | (47,487 | ) | - | |||||
| Accounts payable & accrued expense | 353,401 | 107,445 | ||||||
| Customer deposits | 5,235 | (6,141 | ) | |||||
| Taxes payable | 2,983,257 | (465,987 | ) | |||||
| Prepaid income taxes | - | (37,590 | ) | |||||
| Prepaid lease | (1,610,490 | ) | (415,219 | ) | ||||
| Prepaid lease – related party | - | (3,229,482 | ) | |||||
| Net cash provided by operating activities | 8,111,917 | 356,219 | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | (923,941 | ) | (108,391 | ) | ||||
| Net cash used in investing activities | (923,941 | ) | (108,391 | ) | ||||
| Cash flows from financing activities | ||||||||
| Increase of shareholder loan | 25,000 | 1,141 | ||||||
| Net cash provided by financing activities | 25,000 | 1,141 | ||||||
| Effect of exchange rate changes on cash | 75,518 | 25,718 | ||||||
| Net increase (decrease) in cash and cash equivalents | 7,288,494 | 274,687 | ||||||
| Cash and cash equivalents at beginning of period | 1,586,158 | 870,041 | ||||||
| Cash and cash equivalents at end of period | $ | 8,874,652 | $ | 1,144,728 | ||||
| Supplementary cash flow information: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income tax | $ | 868,975 | $ | 2,252,535 | ||||
| Three Months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (199,362 | ) | $ | (214,147 | ) | ||
| Interest expenses | 9,480 | 7,030 | ||||||
| Consulting fee paid by common shares | - | 160,963 | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable | 120,988 | (13,065 | ) | |||||
| License fee payable – related party | 12,500 | 12,500 | ||||||
| Professional fee payable – related party | 28,500 | 28,500 | ||||||
| Net cash used in operating activities | (27,894 | ) | (18,219 | ) | ||||
| Net cash provided by investing activities | - | - | ||||||
| Cash flows from financing activities | ||||||||
| Cash proceeds from shareholder loan | 27,849 | 18,174 | ||||||
| Net cash provided by financing activities | 27,849 | 18,174 | ||||||
| Net decrease in cash and cash equivalents | (45 | ) | (45 | ) | ||||
| Cash and cash equivalents at beginning of period | 136 | 116 | ||||||
| Cash and cash equivalents at end of period | $ | 91 | $ | 71 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Income taxes paid | $ | - | $ | - | ||||
| Interest paid | $ | - | $ | - | ||||
See accompanying notes to the unaudited consolidated financial statements
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Expressed in U.S. dollars)
1. Organization and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.
QHY Group (the “Company”, “Yakun International”, or ”we”“we”), formerly named Rhino Productions, Inc.Yakun International Investment and Holding Group (“Rhino Productions”Yakun International”), was incorporated under the laws of the State of Nevada on October 16, 2007.2007. Prior to the acquisition of PBG Water Solutions International Inc. (“PBG Water Solutions”) on January 15, 2018, the Acquisition”)of Vast Glory Holdings Limited (“Vast Glory”), we wereCompany was a development stage company that had not generated any revenue from operations and maintained no essential assets since inception.
In November 2017, Yakun International entered into a Share Exchange Agreement (the “PBG SEA”) with thePBG Water Solutions International Inc. (“PBG Water Solutions”) and its shareholders, of Vast Glory Holdings Limited (“Vast Glory”), pursuant to which we completed the Acquisition andYakun International acquired 100% of the outstanding capital stockshares of Vast GloryPBG Water Solutions in exchange for 8,250,00046,839,439 shares of our 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 68%83% of ourthe Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the Acquisition pursuantacquisition. 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 Exchange Agreement.
The Acquisitiontransaction was accounted for as a reorganization of equity interests under common control. In accordance with the applicable accounting guidance for accounting for a business combination as a pooling of interests, Vast Glory’s assets and liabilities were recorded at their historical carrying amounts, with no goodwill or other intangible assets recorded as a result“reverse acquisition” since, immediately following completion of the accounting merger of Vast Glory with the Company.
On December 21, 2017,HK Food wasYakun International incorporated QHY Water Solutions International Corp (“QHY Water Solutions”) under the lawslaw of State of Nevada as its wholly owned subsidiary.
On July 31, 2018, the Hong Kong Special Administrative RegionCompany 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 People's RepublicCompany issued 1,515,000 shares of China (“Hong Kong”,common stock to certain consultants for services rendered or “HK”) on June 28, 2010. HK Food established Changchun Yaqiao Business Consulting Co., Ltd. (“WFOE”), a wholly foreign-owned enterprise in China on October 28, 2010. Untilto be rendered (See Note 7).
In December 29, 2010, when HK Food through its WFOE2018, the Company entered into a series of variablesecurities 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 March 31, 2020 and for the three months ended March 31, 2020 and 2019 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 30, 2020.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2020, its consolidated results of operations for the three months ended March 31, 2020 and 2019, and its consolidated cash flows for the three months ended March 31, 2020 and 2019, 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 | ||||||||
| Dilutive shares not included | March 31, | |||||||
| in loss per share computation | 2020 | 2019 | ||||||
| (Unaudited) | (Unaudited) | |||||||
| Warrants | 50,000,000 | 50,000,000 | ||||||
(d) Recently issued accounting standards not yet adopted
The company does not expect the adoption of any recent accounting standards to have a material impact on its financial statements except for:
In 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. We are currently assessing whether we will early adopt this guidance, and the impact on our financial statements is not currently estimable.
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:
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Payroll | $ | 570,000 | $ | 427,500 | ||||
| Professional fees | 199,615 | 137,615 | ||||||
| Lab and testing fees | - | 1,611 | ||||||
| Listing fees | 1,847 | 3,749 | ||||||
| Others | 2,565 | 2,565 | ||||||
| Total | $ | 694,027 | $ | 573,040 | ||||
6. Related party transactions and balances
a) Related party transactions
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Loan from a shareholder | $ | 27,849 | $ | 18,174 | ||||
| Interest expense to a shareholder | 9,480 | 7,030 | ||||||
| Fee for professional services provided by related parties | 28,500 | 28,500 | ||||||
| License fee expense to a related party | $ | 12,500 | $ | 12,500 | ||||
b) Related party payables
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Loan from a shareholder | $ | 403,672 | $ | 375,822 | ||||
| Interest payable to a shareholder | 57,303 | 47,823 | ||||||
| Payable to a related party for license fee | 150,000 | 137,500 | ||||||
| Professional fee payable to related parties | 237,500 | 209,000 | ||||||
| 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. 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 March 31, 2020 and December 31, 2019, the Lender has provided $403,672 and $375,822 to the Company, respectively. During the three months ended March 31, 2020 and 2019 the Lender provided $27,849 and $18,174 to the Company, respectively. During the three months ended March 31, 2020 and 2019, the Company recorded $9,480 and $7,030 interest expense incurred from the loan, respectively.
In February 2018, PBG Water Solutions entered into a financial advisory agreement with Rebus Capital Group (the “Rebus”), an entity contractual agreements (the “VIE Agreements”) affiliated with Cangchun Decens Foodsa 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 March 31, 2020 and 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. (“Decens”Beijing QHY”) and its shareholders (the “Decens Shareholders”), HK Food had no operations other than those related to its incorporation.
September 30, 2012 | December 31, 2011 | |||||||
| Cash on hand | $ | 255,577 | $ | 730,399 | ||||
| Cash in bank | 8,619,075 | 855,759 | ||||||
| Total | $ | 8,874,652 | $ | 1,586,158 | ||||
September 30, 2012 | December 31, 2011 | |||||||
| Due from third parties | $ | 2,845,044 | $ | 999,488 | ||||
| Total | $ | 2,845,044 | $ | 999,488 | ||||
September 30, 2012 | December 31, 2011 | |||||||
| Jilin Fuyuanguan Foods Co., Ltd | $ | 1,019,581 | $ | 1,016,365 | ||||
| Total | $ | 1,019,581 | $ | 1,016,365 | ||||
September 30, 2012 | December 31, 2011 | |||||||
| Prepaid leases - outlets and office building (Note 5.b).1).) | $ | 119,319 | $ | 475,768 | ||||
| Prepaid leases - outlets and office building (Note 5.b).2).) | 2,418,187 | 2,410,560 | ||||||
| Prepaid leases - workshop and office building (Note 5.b).3).) | 2,617,051 | 3,108,353 | ||||||
| $ | 5,154,557 | $ | 5,994,681 | |||||
September 30, 2012 | December 31, 2011 | |||||||
| Due to shareholders | $ | 260,018 | $ | 234,860 | ||||
September 30, 2012 | December 31, 2011 | |||||||
| Raw materials | $ | 221,013 | $ | 254,161 | ||||
| Finished goods | 11,812 | 10,076 | ||||||
| Total | $ | 232,825 | $ | 264,237 | ||||
September 30, 2012 | December 31, 2011 | |||||||
| Machinery | $ | 1,775,514 | $ | 1,383,935 | ||||
| Vehicles | 368,314 | 342,097 | ||||||
| Office equipment and electronic devices | 57,680 | 44,841 | ||||||
| Leasehold improvements | 614,374 | 254,144 | ||||||
| Total | 2,816,882 | 2,025,017 | ||||||
| Less: accumulated depreciation | (684,649 | ) | (485,232 | ) | ||||
| Total fixed assets, net | $ | 2,132,233 | $ | 1,539,785 | ||||
In December 2018, the Company recorded depreciation expense in costissued 6,655,750 shares of goods soldthe Company’s common stock for aggregate consideration of $45,277 and $38,839, respectively, and depreciation expense in operating expenses$2,196,500. Beijing QHY collected the subscription on behalf of $20,862 and $23,841, respectively.
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 March 31, 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. $160,963 consulting expense in cost of goods sold of $154,129 and $112,336, respectively, and depreciation expense in operating expenses of $186,665 and $72,276, respectively.
September 30, 2012 | December 31, 2011 | |||||||
| Prepaid leases - outlet (Note 8.a).) | $ | 238,637 | �� | $ | 380,615 | |||
| Prepaid leases - outlet (Note 8.b).) | 472,501 | 628,013 | ||||||
| Prepaid leases – workshop (Note 8.c).) | 386,592 | 513,830 | ||||||
| Prepaid leases - outlet (Note 8.d).) | 5,598 | 25,801 | ||||||
| Prepaid leases - outlet (Note 8.e).) | 327,464 | - | ||||||
| Prepaid leases - outlet (Note 8.f).) | 310,272 | - | ||||||
| Prepaid leases - outlet (Note 8.g).) | 357,673 | - | ||||||
| Prepaid leases - outlet (Note 8.h).) | 271,374 | - | ||||||
| Prepaid leases - outlet (Note 8.i).) | 358,181 | - | ||||||
| Prepaid leases - outlet (Note 8.j).) | 136,613 | - | ||||||
| Prepaid leases - outlet (Note 8.k).) | 168,040 | - | ||||||
| Prepaid leases - outlet (Note 8.l).) | 88,552 | |||||||
| Prepaid leases - outlet (Note 8.m).) | 39,773 | |||||||
| Prepaid leases - outlet (Note 8.n).) | 14,583 | - | ||||||
| $ | 3,175,853 | $ | 1,548,259 | |||||
In December 2018, the Company recorded lease expense in operating expenses of $312,564 and $46,698, respectively; the Company recorded lease expenses in cost of sales of $42,462 and nil, respectively.
September 30, 2012 | December 31, 2011 | |||||||
| Value-added tax payable | $ | 1,344,359 | $ | 100,427 | ||||
| Enterprise Income tax payable | 1,833,826 | 195,334 | ||||||
| Others | 134,216 | 9,809 | ||||||
| Total | $ | 3,312,401 | $ | 305,570 | ||||
Warrants
On February 22, 2012,May 1, 2018, the Company granted 1,200,000 shares of restricted stocksissued warrants to 10 outside consultants under 2011 Plan. Those shares were vested immediately and non-forfeitable. Ata shareholder pursuant to the grant date,Credit Loan Agreement (See Note 6). The warrants issued by the fair value of these restricted shares issued was measured at estimated $0.15 per share.
The fair value of the stock warrants granted was estimated at $4,540,000 on the date granted using the Black-Scholes pricing model, with the following assumptions used for the valuation: exercise price of $ 0.01 per share, average risk-free interest rate of 2.66%, expected dividend yield of zero, expected lives of 3 years and an average expected volatility of 35%.
A summary of the status of the Company’s warrants as of March 31, 2020 is recognizedpresented below:
| Number of | ||||
| warrants | ||||
| (Unaudited) | ||||
| Warrants as at December 31, 2019 | 50,000,000 | |||
| Warrants granted | - | |||
| Exercised, forfeited or expired | - | |||
| Outstanding at March 31, 2020 | 50,000,000 | |||
| Exercisable at March 31, 2020 | 50,000,000 | |||
The following table summarizes information about the Company’s warrants as an expense overof March 31, 2020:
| 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 | 2.17 | $ | 0.01 | 50,000,000 | $ | 0.01 | ||||||||||||||
Equity Incentive Plan
In July 2018, the periodCompany adopted the 2018 Equity Incentive Plan (the “2018 Plan”) which provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, bonus stock, dividend equivalents, other stock related awards and performance awards. The maximum aggregate number of shares that may be subject to awards under the 2018 Plan is 10,000,000.
Following is a reconciliation of the shares available to be issued under the 2018 Plan as of March 31, 2020:
| Shares Available for Grant | ||||
| (Unaudited) | ||||
| Balance as of December 31, 2019 | 8,485,000 | |||
| Stock awards granted | - | |||
| Stock awards forfeited | - | |||
| Balance as of March 31, 2020 | 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 services are provided.
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 September 30, 2012,March 31, 2020, or during the prior three years applicable under FASB ASC 740. The Company recorded stock based compensation expensesdid not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of nil in Operating Expenses.
| Income tax provision at the federal statutory rate | 21 | % | ||
| Effect of operating losses | (21 | )% | ||
| - | % |
Net deferred tax assets consist of the following:
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Net operating loss carry forward | $ | 316,792 | $ | 274,926 | ||||
| Valuation allowance | (316,792 | ) | (274,926 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
A reconciliation of income taxes computed at the statutory rate is as follows:
| Three Months ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Tax at statutory rate (21%) | $ | 41,866 | $ | 44,971 | ||||
| Non-deductible expenses | - | (33,802 | ) | |||||
| Increase in valuation allowance | (41,866 | ) | (11,169 | ) | ||||
| Income tax expenses | $ | - | $ | - | ||||
The Company did not pay any income taxes during the three months ended September 30, 2012, the Company recorded stock based compensation expenses of $180,000 in Operating Expenses (1,200,000 shares at the fair value of $0.15 per share).
| For the nine months ended | For the nine months ended | |||||||
| September 30, 2012 | September 30, 2011 | |||||||
| Income (loss) before income taxes | ||||||||
| United States, BVI, HK | $ | (291,589 | ) | $ | (34,148 | ) | ||
| China (Decens) | 9,764,791 | 7,624,088 | ||||||
| 9,473,202 | 7,589,940 | |||||||
| Provision for Income Taxes | ||||||||
| Current income tax | 2,742,443 | 1,869,700 | ||||||
| Deferred income tax | (300,749 | ) | - | |||||
| 2,441,694 | 1,869,700 | |||||||
| Net income | $ | 7,031,508 | $ | 5,720,240 | ||||
| Worldwide effective rate | 25.77 | % | 24.63 | % | ||||
9. Subsequent events
In accordance with this standard, weFASB standards, the Company evaluated subsequent events up tothrough the date it filed this report with the financial statements were issuedSecurities and Exchange Commission (“SEC”) and no subsequent events occurred that required disclosure in the accompanying consolidated financial statements.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.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q and with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various risk factors identified in Item 1A of our 2019 Form 10-K that could cause actual results to differ materially from those anticipated in these forward-looking statements.
Management’s Discussion and Analysis or Plan of Operations
PBG Water Solutions International Inc. (“PBG”) was organized in August 2016 to explore the market in the United States for wastewater treatment solutions and subsequently expanded its focus to markets outside the United States. In November 2017, we, now known as QHY Group (f/k/a “Yakun International Investment & Holding Group”) entered into a Share Exchange Agreement (the “PBG SEA”) with PBG and its shareholders, pursuant to which we acquired 100% of the outstanding shares of PBG in exchange for 46,839,439 shares of our common stock and 19,000 shares of our Series A Convertible Preferred Stock (each Series A Convertible Preferred Stock has been converted into 1,000 shares of our common stock), which constituted approximately 83% of QHY Group’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the PBG SEA. Except where the context otherwise requires the “Company,” “we,” “us,” and “our” refer to the business of (i) PBG for periods ending on or prior to the consummation in January 2018 of the PBG SEA and (ii) the combined businesses of us and PBG from and after the consummation of the PBG SEA.
On April 3, 2017, we entered into a License Agreement with Beijing QHY Environment S&T Co. Ltd., a corporation organized under the laws of the People’s Republic of China, pursuant to which we were granted the exclusive right to outside of China 21 patents and related technologies related to wastewater treatment solutions. The License was amended in June 2017.
To date, we have not been adequately capitalized and have relied upon loans from our principal shareholders and sales and issuances of our common stock to pay expenses. Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until we become cash flow positive. If we are unable to obtain adequate capital, we could be forced to cease operations.
Upon receiving an order for one or more of our systems, we intend to seek to raise the necessary capital to recruit the personnel to expand our sales efforts and enter the market in the United States, and to begin performing under such contracts as we may be granted. Until such time, we will likely rely upon our principal shareholders to introduce our products to potential customers and distributors. Our revenues will be determined by the prices negotiated with those parties that choose to employ our water treatment systems and further, will be determined by the scope of the products and services agreed to be provided. Our expenses will be determined principally by the costs incurred in performing under any contract, and the amount devoted to expenses related to being a public company, such as accounting and legal expenses.
During the next 12 months, we anticipate incurring costs for sales and marketing efforts, costs related to initial performance under any contract entered into, costs associated with our personnel and costs incurred to file Exchange Act reports. We believe we will be able to meet these costs through amounts, as necessary, to be loaned by or invested in us by our principal stockholders or other investors. We have no specific plans, understandings or agreements with respect to the raising of such funds, except for a credit loan agreement we entered with a 20.8% shareholder for $500,000 on May 1, 2018, and our issuance of 6,655,750 shares for $2.2 million in December 2018. Beijing QHY collected the $2.2 million on our behalf in China as the monies were paid in RMB. The monies are considered held by Beijing QHY for our benefit and are to be used to pay to 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. We may seek to raise any capital required to continue our business through the issuance of equity or debt securities or by other means. Since we have no such arrangements or plans currently in effect, our inability to raise funds may have a severe negative impact on our ability to become a viable company.
Results of Operations
| For the Three Months Ended September 30, | % increase | For the Nine Months Ended March 31, | % increase | |||||||||||||||||||||
| 2012 | 2011 | (decrease) | 2012 | 2011 | (decrease) | |||||||||||||||||||
| Sales | $ | 12,736,088 | $ | 9,678,303 | 32 | % | $ | 21,042,548 | $ | 15,308,878 | 37 | % | ||||||||||||
| Cost of sales | 4,357,773 | 3,719,246 | 17 | % | 8,136,256 | 6,532,665 | 25 | % | ||||||||||||||||
| Cost of sales - related party | 206,410 | 59,929 | 244 | % | 622,062 | 140,163 | 344 | % | ||||||||||||||||
| Gross profit | 8,171,905 | 5,899,128 | 39 | % | 12,284,230 | 8,636,050 | 42 | % | ||||||||||||||||
| Selling, general and administrative | 966,646 | 442,530 | 118 | % | 2,580,853 | 1,007,873 | 156 | % | ||||||||||||||||
| Lease expenses - related party | 76,667 | 111,297 | -31 | % | 231,053 | 260,303 | -11 | % | ||||||||||||||||
| Income from operations | 7,128,592 | 5,345,301 | 33 | % | 9,472,324 | 7,367,874 | 29 | % | ||||||||||||||||
| Other income | - | 38,064 | -100 | % | 878 | 222,066 | -100 | % | ||||||||||||||||
| Income before income tax expense | 7,128,592 | 5,383,365 | 32 | % | 9,473,202 | 7,589,940 | 25 | % | ||||||||||||||||
| Income tax expense | (1,802,545 | ) | (1,354,072 | ) | 33 | % | (2,441,694 | ) | (1,869,700 | ) | 31 | % | ||||||||||||
| Net income | $ | 5,326,047 | $ | 4,029,293 | 32 | % | $ | 7,031,508 | $ | 5,720,240 | 23 | % | ||||||||||||
Three Months Ended September 30, 2012 Compared WithMarch 31, 2020 as compared to Three Months Ended September 30, 2011
For the three months ended September 30, 2012, our sales
PBG was organized in August 2016. Since its organization, its activities were $12,736,088, an increase of $3,057,785 or approximately 32% from $9,678,303 for the same period in 2011. A significant contributorlimited to the growth in sales was our new retail shops. By the endexploration of the 3rd quartermarkets for wastewater treatment within and outside the United States. We sold no products and performed no services during such period, other than in connection with the assembly and installation of 2012 we had opened 12 new stores-- 3a pilot wastewater treatment unit to be installed in a facility in New Zealand which project was abandoned and consequently, generated no revenues. Expenses incurred by us to date primarily related to those costs and expenses incurred by us in exploring the 1st quarter, 7market, and meeting with prospective customers to determine their interest in using the 2nd quarter and 2 in the 3rd quarter, a period in which we closed no stores. As a group, these 12 new stores contributed approximately $1 million to our sales in the three months ended September 30, 2012 which was slightly offset by the 2 stores closed in the fourth quarter of 2011. Both the Mid-autumn Festival (September 30th) and National Day (October 1st, 2012) were contributors to our sales in the 3rd quarter. As more companies and governmental organizations are purchasing products like moon cakes and bakery packages as holiday gifts for their employees, revenue generated from this type of group-buying increased about $1.7 million during the three months ended September 30, 2012. Our sales benefitted from increased demand for moon cakes, as many employers chose to give their employees a single gift appropriate for the Mid-Autumn Festival and National Day rather than gifts for each day. Sales of moon cakes increased about $2.4 million in the 3rd quarter of 2012 as comparedavailable pursuant to the comparable quarter iin 2011.
Total operating expenses were $189,882 and manufacturing overhead expenses. The cost of sales$207,117 for the three months ended September 30, 2012 was $4,357,773, an increase of $638,527, or 17%, from $3,719,246 for the same period in 2011.
During the three months ended March 31, 2020, we incurred $9,480 interest expense to a 20.8% shareholder for a 2-year $500,000 credit loan. This shareholder provided loans without any interest since the inception of PBG for its operations and to us since the PBG Share Exchange. Interest expense accrued for the same period in 2011. There are two main reasons for the increase: (1) an increase in salary expenses of $177,627 and (2) the increase in rent expense of $285,055 because of the new retail outlets leased by the Company.
Net loss for the three months ended September 30, 2012March 31, 2020 was nil,$199,362, as compared to $38,064 for the same period in 2011. The decrease was due to the decreasea net loss of $38,064 in interest income from two loans that were outstanding in 2011that were repaid in November 2011.
WFOE and Decens, which were incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRC enterprise income tax (“EIT”). The prevailing statutory rate of enterprise income tax is 25%. Income tax expense for the three months ended September 30, 2012 was $1,802,545, an increase of 33%, compared to $1,354,072 for the same period in 2011. The increase in income tax was in excess of the percentage increase in our income before taxes due to the increase in our loss in the United States which is not deductible in computing our tax to the PRC and differences in computing taxable income due to differences in the Chinese tax base and US GAAP.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At September 30, 2012,As of March 31, 2020 and December 31, 2019, we had an insignificant amount of cash except for $2.20 million held by a related party and designated to be used in China for the purchase of wastewater treatment equipment. We have cashnot generated revenues to fund our operating expenses since formation and cash equivalentshave had to rely upon the efforts of $8,874,652two of our stockholders on our behalf and working capitalcontributions from our stockholders and the proceeds from the sale of $8,264,384. We believe that our cashsecurities. In all likelihood, we will remain dependent upon our management and cash equivalents on hand are sufficientstockholders and the proceeds from the sale of our securities to satisfyfund our cash needs until we generate meaningful revenues.
We anticipate incurring a minimum of $800,000 in expenses over the next twelve months. Further, should our marketing efforts prove successful we will require additional working capital to perform any contracts we are awarded. The absence of capital will likely be a limiting factor on our ability to grow until such time as we raise a significant amount of equity or long-term debt. Even after we raise capital, our ability to grow may still be impeded by a lack of adequate working capital to simultaneously perform under multiple contracts.
In May 2018, we entered into a Credit Loan Agreement with Dragon & Tiger Holding Limited (“D&T”), one of our shareholders, which is controlled by one of our directors. Pursuant to the agreement, D&T has agreed to lend us up to $500,000. All amounts borrowed are to bear interest at the rate of 10% per annum. Accrued interest through the end of 2018 and 2019 is to be paid no later than 90 days after the end of each year. All amounts borrowed are to be repaid in full on or before May 1, 2020. In addition to interest, D&T was issued warrants to purchase 50,000,000 shares of our common stock at a price of $0.01 per share. The warrants have an expiration date of May 31, 2023 or such earlier date as the Company (i) raises more than $20 million in equity or (ii) has revenue in excess of $100 million in any fiscal year. As of March 31, 2020 and December 31, 2019, D&T has provided $403,672 and $375,822 to us, respectively. During the three months ended March 31, 2020 and 2019 the Lender provided $27,849 and $18,174 to us, respectively.
The following table summarizes the Company’s cash flows for the immediate futurethree months ended March 31, 2020 and that there2019:
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net cash used in operating activities | $ | (27,894 | ) | $ | (18,219 | ) | ||
| Net cash provided by investing activities | - | - | ||||||
| Net cash provided by financing activities | 27,849 | 18,174 | ||||||
| Net increase in cash and cash equivalents | $ | (45 | ) | $ | (45 | ) | ||
Going Concern Consideration
The Company’s unaudited financial statements are no commitments or anticipated events that are likely to result in a significant increase or decrease in our liquidityprepared using accounting principles generally accepted in the immediateUnited 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, is dependent upon obtaining additional financing. The Company plans to improve its future though we might seek to raiseliquidity by obtaining additional cashfinancing through the issuance of debtfinancial 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 fund expansion opportunities. In concludingraise 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 we have sufficient cash formight be necessary if the immediate future, we note that inflationary pressures remain strong in China. Nevertheless, we believe that we will be ableCompany is unable to increase the pricescontinue as a going concern.
Critical Accounting Policies
The discussion and analysis of our products to offset any cost increases due to inflation.
| For the nine months ended September 30 | ||||||||
| 2012 | 2011 | |||||||
| Net cash provided by operating activities | $ | 8,111,917 | $ | 356,219 | ||||
| Net cash used in investing activities | (923,941) | (108,391) | ||||||
| Net cash provided by financing activities | 25,000 | 1,141 | ||||||
| Exchange rate effect on cash | 75,518 | 25,718 | ||||||
| Net cash inflow (outflow) | $ | 7,288,194 | $ | 274,687 | ||||
Management believes the following critical accounting standardspolicies affect the significant judgments and regulations. Our PRC subsidiary is also required under PRC lawsestimates used in the preparation of the financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and regulations to allocateassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at least 10%the date of its annual after-tax profits determinedthe 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.
Income Taxes
Current income taxes are provided for in accordance with PRC GAAPthe 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 March 31, 2020 and December 31, 2019, the Company did not have any uncertain tax positions.
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 prevailing functional currency at the exchange rates prevailing at the late date of the months the transactions occurred. The Company had no monetary assets and liabilities denominated in foreign currencies at the balance sheet dates.
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.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
The Company reviews new accounting standards as issued. 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 statutory general reserve fund untillegal entity that is not subject to tax in its separate financial statements (although the amountsentity 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 said fund reaches 50%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. We are currently assessing whether we will early adopt this guidance, and the impact on our financial statements is not currently estimable.
The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its registered capital. Allocations to this statutory reserve fund can only be used for specific purposesfinancial position, results of operations, or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company and are not transferablerequired to us inprovide the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiaryinformation under this item pursuant to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Disclosure Controls and Procedures
These controls are designed to ensure that information required to be disclosed by us in the reports that we file or submit underpursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,CEO to allow timely decisions regarding required disclosure. In designing
Mao Xu, in his capacity as our chief executive officer and evaluatingchief financial officer (our principal executive officer, principal financial officer and principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures management recognizedas of March 31, 2020. Based on this evaluation, Mr. Mao concluded that, as of the end of such period, our disclosure controls and procedures were not effective due to a lack of accounting personnel with the requisite knowledge of U.S. GAAP and the financial reporting requirements of the Securities and Exchange Commission; insufficient written policies and procedures to ensure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements; and a lack of segregation of duties, in that we only had one person performing all accounting-related duties.
Inherent Limitations – Our management, including our Chief Executive Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedurescontrol system are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosuresystem of controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting.Reporting – There have not been anywere no changes in our internal control over financial reporting (as such term is definedduring our three month period ended March 31, 2020, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15(f) or 15d-15(f)13a-15 and 15d-15 under the Exchange Act) during our most recently completed fiscal quarter which is the subject of this reportAct, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
None
ITEM 1A. RISK FACTORS
Reference is made to the risks and uncertainties disclosed in Item 1A – RISK FACTORS.
ITEM 6 -2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have not issued any unregistered equity securities since January 1, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
Not applicable
| 1350). | ||
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the registrantRegistrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.
| By: | /s/ | |||
| President, Chief Executive Officer | ||||
| (principal executive and | ||||
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