NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed
in U.S. dollars)
|
1.
|
Organization
and principal activities
|
Yakun
International Investment and Holding Group (the “Company”, “Yakun International”, or
“we”) formerly named Rhino Productions, Inc. (“Rhino Productions”) was
incorporated
under the laws of the State of Nevada on October 16, 2007
.
Prior to the
acquisition of Vast Glory Holdings Limited (“Vast Glory”) on September 13, 2011, the Company was a development
stage company that had not generated any revenue from operations and maintained no essential assets since
inception.
On September 13, 2011, the Company consummated a Share Exchange Agreement with the shareholders of Vast Glory Holdings Limited
(“Vast Glory”), pursuant to which it acquired 100% of the outstanding capital stock of Vast Glory in exchange
for 8,250,000 shares of the Company’s common stock, which constituted approximately 68% of its issued and outstanding capital
stock on a fully-diluted basis as of and immediately after the consummation of the acquisition pursuant to the Exchange Agreement
(the “Acquisition”). The Acquisition was accounted for as a reorganization of entities under common control.
Vast
Glory was incorporated on February 26, 2009 in the British Virgin Islands (“BVI”), and through its wholly owned subsidiary
HK Food Logistics, Limited (“HK Food”, incorporated under the laws of the Hong Kong Special Administrative Region
of the People’s Republic of China (“Hong Kong”, or “HK”) on June 28, 2010) and HK Food’s wholly
owned subsidiary Changchun Yaqiao Business Consulting Co., Ltd. (“WFOE”, incorporated in China on October 28, 2010), Vast
Glory indirectly controlled Changchun Decens Foods Co., Ltd. (“Decens”). Decens is located in Changchun
City, Jilin Province, the People’s Republic of China (“PRC”). It was established in September 2003
under the law of PRC and is principally engaged in the production of cakes and Chinese traditional foods which it distributes
through its outlets and distribution network throughout Jilin Province. In December 2010, WFOE entered into a series of variable
interest entity contractual agreements (the “VIE Agreements”) with Decens and its shareholders (the “Decens
Shareholders”). WFOE effectively assumed management of the business activities of Decens and has the right to appoint all
executive and senior management and the members of the board of the directors of Decens.
On
July 23, 2014, WFOE, Decens and Decens Shareholders entered into a Termination Agreement (the “Termination Agreement”)
that all parties agreed to terminate all the VIE Agreements, and waived all interests or liabilities under the VIE Agreements.
On the same day, the Company entered into a Share Transfer Agreement with a third party and sold all shares of Vast Glory for
consideration of $1. In consequence of the agreements,
Yakun International
disposed
all its operations, assets and liabilities, and became a dormant company.
In
November 2017, Yakun International entered into a Share Exchange Agreement (the “PBG SEA”) with PBG Water Solutions
International Inc. (the “PBG Water Solutions”) and its shareholders,
pursuant
to which Yakun International acquired 100% of the outstanding shares of PBG Water Solutions in exchange for 46,839,439 shares
of common stock of the Company and 19,000 shares of Series A Convertible Preferred Stock (each Series A Convertible Preferred
Stock is convertible into 1,000 shares of common stock) of the Company, which will constitute approximately 83% of the Company’s
issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the acquisition
pursuant to the PBG SEA. PBG Water Solutions was incorporated under the law of the State of Delaware on August 4, 2016, and in
October 2017, it merged into a company with the same name incorporated under the law of the State of Nevada. On January 15, 2018,
all parties to the SEA agreed to amend the original agreement and consummate the transaction forthwith. Shareholders of PBG Water
solutions took control of Yakun International on the same date, and completed Yakun International’s registry of new officers
and directors as of the issuance of these financial statements. PBG Water Solutions has not generated revenue as of today.
The
transaction was accounted for as a “reverse acquisition” since, immediately following completion of the transaction,
the shareholders of PBG Water Solutions effectuated control of the post-combination Company. For accounting purposes, PBG Water
Solutions was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization
of PBG Water Solutions (i.e., a capital transaction involving the issuance of shares by the Company for the shares of PBG Water
Solutions). Accordingly, the consolidated assets, liabilities and results of operations of PBG Water Solutions and Yakun International
became the historical financial statements of Yakun International and its subsidiaries, and the Company’s assets, liabilities
and results of operations were consolidated with PBG Water Solutions beginning on the acquisition date. No step-up in basis or
intangible assets or goodwill were recorded in this transaction.
On
December 21, 2017,
Yakun International incorporated QHY Water Solutions International Corp
(the “QHY Water Solutions”) under the law of State of Nevada as its wholly owned subsidiary.
On March 8, 2018,
QHY Water Solutions incorporated QHY Environmental Science & Technologies Oceania Limited (the “QHY Oceania”)
under the law of New Zealand. QHY Oceania is 51% owned by QHY Water Solutions, and 49% owned by a New Zealand company.
Currently,
both and QHY Water Solutions and QHY Oceania have no operations.
The
Company’s unaudited financial statements are prepared using accounting principles generally accepted in the United States of America
applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow
it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s
obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital,
it could be forced to cease operations.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Successful completion
of the Company’s engagement in water solutions business and its transition to attaining profitable operations, is dependent
upon obtaining additional financing. The Company plans to improve its future liquidity by obtaining additional financing through
the issuance of financial instruments such as equity and warrants or through credit loans. Additional financing may not be available
on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of
existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing
holders of common stock.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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3.
|
Summary
of significant accounting policies
|
|
(a)
|
Basis
of presentation and principles of consolidation
|
The
unaudited consolidated interim financial statements are prepared and presented in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
The
unaudited consolidated interim financial information as of March 31, 2018 and for the three months ended March 31, 2018
and 2017 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures, which are normally included in complete consolidated financial statements prepared
in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited consolidated
interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included
in the Form 10 filed on May 14, 2018.
In
the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair
statement of the Company’s consolidated financial position as of March 31, 2018, its consolidated results of
operations for the three months ended March 31, 2018 and 2017, and its consolidated cash flows for the three months
ended March 31, 2018 and 2017, as applicable, have been made. The interim results of operations are not necessarily
indicative of the operating results for the full fiscal year or any future periods.
The
consolidated interim financial statements include the financial statements of all the subsidiaries of the Company.
All accounts and balances between the Company and its subsidiaries have been eliminated upon consolidation.
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.
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 March 31, 2018, the Company did not have any uncertain tax positions.
FASB
ASC 718 “Compensation - Stock Compensation” prescribes accounting and reporting standards for all stock-based payments
awarded to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation
rights, and may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based
payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the
option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of
an entity’s past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability;
otherwise, the transaction should be recognized as equity. The Company accounts for stock-based compensation issued to non-employees
and consultants in accordance with the provisions of FASB ASC 505-50 “Equity - Based Payments to Non-Employees.” Measurement
of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a)
the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is
determined at the earlier of performance commitment date or performance completion date.
Basic
loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted loss per
share is computed using the weighted average number of common shares and potential common shares outstanding during the period
for options and restricted shares under treasury stock method and for convertible debts under if-convertible method, if dilutive.
Potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such
shares would be anti-dilutive, such as in a period in which a net loss is recorded. The Company has no potential common shares
outstanding as of March 31, 2018.
Parties
are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operating decisions. Parties are also considered to be related if they
are subject to common control or significant influence, such as a family member or relative, stockholder, or a related corporation.
|
(g)
|
Functional
currency and foreign currency translation and transactions
|
The
Company’s functional and reporting currency is the U.S. dollar (“US$”). Transactions denominated in currencies
other than the functional currency are translated into 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.
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(h)
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Recently
issued accounting standards not yet adopted
|
The
Company reviews new accounting standards as issued. Although some of these accounting standards issued or effective after the
end of the Company’s previous fiscal year may be applicable to the Company, it has not identified any standards that it
believes merit further discussion. 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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4.
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Related
party transactions and balances
|
|
a)
|
Related party transactions
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Loan from a shareholder
|
|
$
|
14,992
|
|
|
$
|
15,497
|
|
Fee for professional service provided by related parties
|
|
|
9,500
|
|
|
|
10,000
|
|
License fee expense to a shareholder
|
|
$
|
12,500
|
|
|
$
|
-
|
|
Loan from a
shareholder was a non-interest-bearing loan made by one of the Company’s shareholder to pay the expenses of the Company and
its subsidiary during the three months ended March 31, 2018 and 2017. The shareholder owns 20.8% of the outstanding common stock
of the Company.
PBG Water Solutions’
sole director from inception to December 31, 2017 is an attorney and provided legal services to PBG Water Solutions during the
three months ended March 31, 2017 with a service fee of $10,000.
In February
2018, PBG Water Solutions entered into a financial advisory agreement with Pluris Capital Group (the “Pluris”), an
entity affiliated with a shareholder of the Company, pursuant to which PBG Water Solutions will pay Pluris $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 is waived by Pluris. Professional service expense related to this agreement was $9,500 for the three
months ended March 31, 2018.
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 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 or as adjusted by the Licensor and PBG Water Solutions.
The Company and PBG Water Solutions didn’t generate any net revenue from or make any purchases of licensed products during
the three months ended March 31, 2018. The Company recorded a $12,500 license fee expense for the three months ended March 31,
2018, and made no payment of license fees as of March 31, 2018. The shareholder/licensor owns 41.6% of the Company’s common
stocks after giving effect to the PBG SEA.
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b)
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Related party payables
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Due to shareholders
|
|
$
|
245,962
|
|
|
$
|
208,971
|
|
The
Company did not provide for any current or deferred U.S. federal income tax provision or benefit for any of the periods presented
because it has experienced operating losses. When it is more likely than not that a tax asset cannot be realized through future
income, the Company must allow for this future tax benefit. The Company provided a full valuation allowance on the net deferred
tax asset, consisting of net operating loss carryforwards, because management has determined that it is more likely than not that
the Company will not earn income sufficient to realize the deferred tax assets during the carryforward period.
The Company
has not taken a tax position that, if challenged, would have a material effect on the financial statements for the three-month
ended March 31, 2018, or during the prior three years applicable under FASB ASC 740. The Company did not recognize any adjustment
to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated
deficit on the balance sheet. All tax returns have been appropriately filed by the Company.
Income tax provision at the federal statutory rate
|
|
|
21
|
%
|
Effect of operating losses
|
|
|
(21
|
%)
|
|
|
|
-
|
%
|
Net
deferred tax assets consist of the following:
|
|
March 31, 2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net operating loss carry forward
|
|
$
|
52,181
|
|
|
$
|
46,140
|
|
Valuation allowance
|
|
|
(52,181
|
)
|
|
|
(46,140
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation of income taxes computed at the statutory rate is as follows:
|
|
Three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Tax at statutory rate (21%)
|
|
$
|
6,040
|
|
|
$
|
3,254
|
|
Increase in valuation allowance
|
|
|
(6,040
|
)
|
|
|
(3,254
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company did not pay any income taxes during the three months ended March 31, 2018 or 2017.
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 the following:
Incorporation
of QHY
New Zealand LLC
On
April 17, 2018, QHY Water Solutions incorporated QHY New Zealand LLC (the “QHY NZ”) under the law of the State of
Nevada as a Limited Liability Company. QHY NZ is 51% owned by QHY Water Solutions, and 49% owned by a third party.
Credit
Loan Agreement
On May 1, 2018, PBG Water Solutions and Yakun International, entered into a Credit Loan Agreement with a 20.8% shareholder of
Yakun International (the “Lender”). The Lender had provided operating capital to PBG Water Solutions since its inception.
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 April 1, 2019, and shall be void and non-exercisable
if the Company (i) raises more than $20 million in equity or (ii) has revenue in excess of $100 million in any fiscal year.
Increase
in
Authorized Number of Shares and Issuance of Common Stocks
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.