The following discussion of our financial condition and results of operations
should be read in conjunction with our audited consolidated financial statements
for the years ended December 31, 2020 and 2019 and the notes to those statements
included elsewhere in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. You should specifically
consider the various risk factors identified in this report that could cause
actual results to differ materially from those anticipated in these
forward-looking statements.
The financial statements contained in this Report as well as the description of
our business contained herein, unless otherwise indicated, principally reflect
the status of our business and the results of our operations as of December 31,
2020. Economies throughout the world have been severely disrupted by the effects
of the quarantines, business closures and the reluctance of individuals to leave
their homes resulting from the outbreak of the Covid-19 coronavirus. Although we
remain in the marketing stage, our efforts to develop and market our products
and raise necessary capital have been and will likely be adversely impacted by
the outbreak of COVID - 19 and we cannot forecast with any certainty when the
disruptions caused by COVID - 19 or future health concerns will no longer effect
our business and the results of our operations. In reading the discussion below,
consider the additional uncertainties caused by the outbreak of COVID - 19 and
the possibility that additional uncertainties and disruptions may result from
future health related outbreaks.
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 include markets outside the United States. In
November 2017, we 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. 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 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 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, during 2020 and for the immediate future,
our marketing efforts have primarily focused on the marker 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, 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.
There can be no assurance that we will be able to enter into contracts for the
use of our systems or that we will be able to perform under such contracts on a
profitable basis.
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During the next 12 months, we anticipate incurring costs for sales and marketing
efforts, costs related to initial performance under any contract entered into
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 28.29% shareholder for $500,000 on
May 1, 2018 for 4 years, and our issuance of 6,665,750 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 funds are considered held by Beijing QHY for
our benefit are to be used to pay manufacturers in China for the wastewater
equipment we would purchase if we received an order. It is likely that the funds
will not be available to incur expenses incurred outside of 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
Years ended December 31, 2020 and 2019
PBG was organized in August 2016. Since its organization, activities were
limited to the exploration of the markets for wastewater treatment within and
outside the United States, most recently, in China. We have yet to sell any
products or perform any services for a customer for which we have been paid, and
consequently, generated no revenues. The expenses incurred primarily related to
those costs and expenses incurred 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 listed company since the PBG Share Exchange.
Total operating expenses were $785,628 and $1,186,796 for the years ended
December 31, 2020 and 2019, respectively, a decrease of $401,168. This decrease
is attributable principally to a decrease in general and administrative expenses
largely devoted to a reduction in our marketing efforts outside of China.
During the year ended December 31, 2019, we incurred an inventory write-off of
$292,500 related to equipment which was ordered and never used, which was offset
by forgiveness of the related payable. We incurred interest expense during year
ended December 31, 2020 of $40,888 for the loan from a 28.29% shareholder as
compared to interest expense of $32,827 in year ended December 31, 2019. The
increase in interest expense resulted from additional borrowings to pay our
expenses.
Net loss for the year ended December 31, 2020 was $819,516, which decreased
$400,107, from our net loss of $1,219,623 for the year ended December 31, 2019
largely as a result of the reduction in our marketing efforts.
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 December 31, 2020, and 2019, we had an insignificant amount of cash on
hand other than the $2.20 million held by a related party in China and
designated for use in China for the purchase of equipment. The minimal amount of
cash on hand is clearly not sufficient to fund ongoing operations. We have not
generated revenues to fund our operating expenses since formation, do not
anticipate doing so in the immediate future 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 to fund our cash
needs. 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 that if we were to aggressively seek to grow our business over the
next twelve months we would incur expenses in excess of our cash on hand or
otherwise available to us under the Credit Agreement described in the following
paragraph. Further, should our marketing efforts prove successful we will
require funds 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.
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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 Roy Teng, 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 each year is to be paid no later than
90 days after the end of each year. All amounts borrowed were scheduled to be
repaid in full on or before May 1, 2020, and are then extended to May 1, 2022.
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 December 31, 2020, D&T has advanced an aggregate of
$430,606 to PBG and QHY Group.
The following table summarizes the Company's cash flows for the years ended
December 31, 2020 and 2019:
Years ended
December 31,
2020 2019
Net cash used in operating activities $ (54,859 ) $ (98,082 )
Net cash provided by investing activities
- -
Net cash provided by financing activities 61,784 92,102
Net increase in cash and cash equivalents $ 6,925 $ 20
Cash Used In Operating Activities
Cash used in operating activities primarily consists of our net loss adjusted
for certain non-cash items and changes to working capital items.
For the year ended December 31, 2020, we incurred a net loss of $819,516 but
used cash of only $54,859 in our operating activities. A large portion of our
net loss in 2020 is represented by accruals of expenses but not paid during the
year: 1) accrual of $570,000 staff costs; 2) $50,000 in respect of a license fee
due but not paid to a related party; 3) an accrual of $114,000 in respect of
professional fee due but not paid to a related party.
For the year ended December 31, 2019, we incurred a net loss of $1,219,623 but
used cash of only $92,082 in our operating activities. This reflects the
willingness of certain related parties and third-party service providers to
accept stock or warrants in lieu of cash and to allow certain amounts to accrue
in their favor for payment at a future date.
Cash Provided By Financing Activities
Cash provided by financing activities in year ended December 31, 2020 consisted
of loans from a stockholder $54,784 . In year ended December 31, 2019, we
borrowed $92,102 from such stockholder.
Cash Provided By Investing Activities
None.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of December 31,
2020.
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Contractual Obligations
The following table sets forth our future contractual obligations as of December
31, 2020:
Payment due by period (in thousands)
Less than 1-3 3-5 More than
Total 1 year years years 5 years
Debt and interests $ 519,317 519,317 - - -
Total $ 519,317 519,317 - - -
Going Concern Consideration
The Company's 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 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. 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.
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. generally accepted accounting principles. 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.
Basis of Presentation and principles of consolidation
The consolidated financial statements are prepared and presented in accordance
with U.S. GAAP. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
The consolidated financial statements included the accounts of the Company and
its wholly-owned subsidiaries PBG Water Solutions and QHY Water Solutions. All
significant intercompany balances and transactions have been eliminated in
consolidation.
19
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 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.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the weighted average method. Cost of work in progress and finished goods
comprise direct materials, direct production costs and an allocation of
production overheads based on normal operating capacity.
Inventories also include finished goods shipped to certain customers for which
the related revenue was not recognized since collectability was not reasonably
assured at time of shipment in accordance with the Company's accounting policy
on revenue recognition. The Company records a write down of the cost of these
finished goods, when it is determined that such finished goods are not expected
to be recovered through subsequent cash collection or other means, such as
repossession.
Income taxes
The Company's income tax expense, deferred tax assets and liabilities and
reserves for unrecognized tax benefits reflect management's best assessment of
estimated future taxes to be paid. The Company is subject to income taxes in the
U.S. during the year ended December 31, 2020 and 2019. Significant judgments and
estimates by management are required in determining the consolidated income tax
expense assessment.
Deferred income taxes are reported for timing differences between items of
income or expense reported in the financial statements and those reported for
income tax purposes in accordance with ASC 740, "Income Taxes", which requires
the use of the asset/liability method of accounting for income taxes. Deferred
income taxes and tax benefits are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and for tax
losses and credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The Company provides for deferred taxes for the estimated future tax
effects attributable to temporary differences and carry-forwards when
realization is more likely than not.
The calculation of the Company's tax liabilities may involves dealing with
uncertainties in the application of complex tax laws and regulations in a
multitude of jurisdictions across its global operations. Changes in tax laws and
rates could also affect recorded deferred tax assets and liabilities in the
future. Except as noted below, management is not aware of any such changes that
would have a material effect on the Company's results of operations, cash flows
or financial position.
A tax benefit from an uncertain tax position may only be recognized when it is
more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based on
the technical merits. As of December 31, 2020, the Company did not have any
uncertain tax positions.
The Company adjusts its tax liabilities when its judgment changes as a result of
the evaluation of new information not previously available. Due to the
complexity of some of these uncertainties, the ultimate resolution may result in
a payment that is materially different from its current estimate of the tax
liabilities. These differences will be reflected as increases or decreases to
income tax expense in the period in which they are determined.
20
On December 22, 2017, the 2017 Tax Act (the "Act") was passed. Due to the
significant complexity of the Act, the Securities Exchange Commission has issued
its Staff Accounting Bulletin 118 ("SAB 118") to provide companies additional
time to analyze and report the effects of tax reform. Under SAB 118, companies
are required to record those items where analysis is complete, include
reasonable estimates and label them as provisional where analysis is incomplete,
and if reasonable estimates cannot be made, record items under the previous tax
law. Companies are required to have their analysis completed within one year.
The tax effects related to the Act was not material to the Company and its
subsidiaries since they were either recently incorporated or dormant before the
PBG SEA.
Share Based Expenses
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.
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 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.
Year ended
December 31,
Dilutive shares not included in loss per share computation 2020 2019
Warrants 50,000,000 50,000,000
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.
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 the functional currency at the exchange rates prevailing at the
last date of the months the transactions occurred. The Company had no monetary
assets and liabilities denominated in foreign currencies at the balance sheet
dates.
21
Fair value
The carrying value of the Company's financial instruments including cash and
cash equivalents, other current assets, interest payable, other current
liabilities and due to related parties approximate their fair values because of
the short-term maturity of these financial instruments.
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.
In June 2016, the FASB issued ASU 2016-13, Credit Losses, Measurement of Credit
Losses on Financial Instruments. This ASU provides more useful information about
expected credit losses to financial statement users and changes how entities
will measure credit losses on financial instruments and timing of when such
losses should be recognized. This ASU is effective for annual and interim
periods beginning after December 15, 2022 for Smaller Reporting Company. Early
adoption is permitted for all entities for annual periods beginning after
December 15, 2018, and interim periods therein. The updates should be applied
through a cumulative-effect adjustment to retained earnings as of the beginning
of the first reporting period in which the guidance is effective (that is, a
modified-retrospective approach). The Group does not expect the adoption to have
a material impact on its consolidated financial statements.
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