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 our 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.
As a result of the impact of Covid-19, for the past two quarters, our marketing
efforts primarily have focused on the market for wastewater systems in China.
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, if then practical given the effects of the Covid-19 pandemic, 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
in China. 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.
12
Results of Operations
Three Months Ended September 30 2020 as compared to Three Months Ended September
30, 2019
PBG was organized in August 2016. Since its organization, its activities were
limited to the exploration of the markets for wastewater treatment within and
outside the United States. We sold no products and performed no services during
such period and consequently, generated no revenues. Expenses incurred by us to
date primarily related to those costs and expenses incurred by us in exploring
the market, and meeting with prospective customers to determine their interest
in using the products available pursuant to the License Agreement, and
professional fees incurred in connection with our organization, initial
activities, and fees and costs related to being a public company since the PBG
Share Exchange.
Total operating expenses were $189,666 and $404,871 for the three months ended
September 30, 2020 and 2019, respectively. The decrease in operating expenses
for the three months ended September 30, 2020 compared to 2019 is attributable
principally to the decrease of $152,814 in consulting expenses related to the
consultant we engaged in October 2018 and whose services were completed in 2019.
In addition, there was a decrease of $27,069 in professional fee since we had
less activities in 2020 due to the COVID-19.
During the three months ended September 30, 2020, we incurred $10,459 interest
expense to a 20.8% shareholder for a 2-year $500,000 credit loan. Interest
expense accrued for the same period in year 2019 was $8,842.
Net loss for the three months ended September 30, 2020 was $200,125, as compared
to a net loss of $413,713 for the three months ended September 30, 2019.
Nine Months Ended September 30, 2020 as compared to Nine Months Ended September
30, 2019
Total operating expenses were $577,495 and $968,342 for the nine months ended
September 30, 2020 and 2019, respectively. The decrease in operating expenses
for the nine months ended September 30, 2020 compared to 2019 is attributable
principally to the decrease of $466,589 in consulting expenses related to the
consultant we engaged in October 2018 and whose services were completed in 2019,
offset by the $142,500 increase in accrued payroll expenses in the nine months
ended September 30, 2020 for services rendered by our officers and additional
personnel we engaged from April 2019 to perform various functions. We had no
personnel except for our CEO and Executive Director until April 2019.
During the nine months ended September 30, 2020, we incurred $30,132 interest
expense to a 20.8% shareholder for a 2-year $500,000 credit loan. Interest
expense accrued for the same period in year 2019 was $23,455. During the nine
months ended September 30, 2020, we received a $7,000 Small Business Association
("SBA") Disaster Loan and the advanced amount was forgiven per the program.
Net loss for the nine months ended September 30, 2020 was $600,627, as compared
to a net loss of $991,797 for the nine months ended September 30, 2019.
Liquidity and Capital Resources
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. As of September 30, 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 not generated revenues to fund our operating expenses since
formation and have had to rely upon the efforts of two of our stockholders on
our behalf and contributions from our stockholders and the proceeds from the
sale of our securities. In all likelihood, we will remain dependent upon our
management and stockholders and the proceeds from the sale of our securities to
fund 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.
13
In May 2018, we entered into a Credit Loan Agreement with Dragon & Tiger Holding
Limited (the "Lender"), 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. 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, 2022 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 September 30, 2020
and December 31, 2019, the Lender has provided $418,519 and $375,822 to the
Company, respectively. During the three months ended September 30, 2020 and 2019
the Lender provided $6,564 and $25,103 to the Company, respectively. During the
nine months ended September 30, 2020 and 2019 the Lender provided $42,697 and
$71,369 to the Company, respectively. During the three months ended September
30, 2020 and 2019, the Company recorded $10,459 and $8,842 interest expense
incurred from the loan, respectively. During the nine months ended September 30,
2020 and 2019, the Company recorded $30,132 and $23,455 interest expense
incurred from the loan, respectively.
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.
The following table summarizes the Company's cash flows for the nine months
ended September 30, 2020 and 2019:
Nine Months Ended
September 30,
2020 2019
(Unaudited) (Unaudited)
Net cash used in operating activities $ (42,772 ) $ (71,303 )
Net cash provided by investing activities
- -
Net cash provided by financing activities 49,697 71,368
Net increase in cash and cash equivalents $ 6,925 $ 65
Going Concern Consideration
The Company's unaudited 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, is dependent upon obtaining additional financing. The Company plans
to improve its future liquidity by obtaining additional financing through the
issuance of financial instruments such as equity and warrants or through credit
loans. Additional financing may not be available on acceptable terms or at all.
If the Company issues additional equity securities to raise funds, the ownership
percentage of existing stockholders would be reduced. New investors may demand
rights, preferences or privileges senior to those of existing holders of common
stock.
The ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going
concern.
14
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with U.S. GAAP. The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect the
significant judgments and estimates 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 assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Management makes these estimates using the best information available at the
time the estimates are made; however, actual results could differ from those
estimates.
Income Taxes
Current income taxes are provided for in accordance with the laws of the
relevant taxing authorities. As part of the process of preparing financial
statements, the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. The Company accounts for income taxes using
the assets and liability method. Under this method, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates applicable for the differences that are expected to
affect taxable income.
The Company adopts a more likely than not threshold and a two-step approach for
the tax position measurement and financial statement recognition. Under the
two-step approach, the first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained, including
resolution of related appeals or litigation process, if any. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon settlement. As of September 30, 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.
15
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 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.
The Company does not expect the adoption of any recently issued accounting
pronouncements to have a significant impact on its financial position, results
of operations, or cash flows.
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