NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Description of Business and Organization
Organization
Kiwa
Bio-Tech Products Group Corporation (“the Company”) is the result of a share exchange transaction accomplished on
March 12, 2004 between the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company originally organized
under the laws of the British Virgin Islands on June 5, 2002 and Tintic Gold Mining Company (“Tintic”), a corporation
originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah. The share exchange resulted
in a change of control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on a fully diluted basis
and Kiwa BVI surviving as a wholly-owned subsidiary of Tintic. Subsequent to the share exchange transaction, Tintic changed its
name to Kiwa Bio-Tech Products Group Corporation. On July 21, 2004, the Company completed its reincorporation in the State of
Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.
The
Company operates through a series of subsidiaries in the Peoples Republic of China as detailed in the following Organizational
Chart. The Company had previously operated its business through its subsidiaries Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa
Shandong”) and Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin ”). Kiwa Tianjin has been dissolved since July,
11, 2012. On February 11, 2017, the Company entered an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology
Co. (“Transferee”) to transfer all of shareholders’ right, title and interest in Kiwa Shandong to the Transferee
for RMB ¥1.00. The government approval and processing of the transaction was completed on April 12, 2017. This transaction
was considered as completed and effective on April 12, 2017.
Business
The
Company’s business plan is to develop and market innovative, manufacture, distribute cost-effective and environmentally
safe bio-technological products for agriculture markets primarily in China. The Company has acquired technologies to produce and
market bio-fertilizer.
2.
Summaries of Significant Accounting Policies
Principle
of Consolidation
These
consolidated unaudited condensed financial statements include the financial statements of the Company and its wholly-owned subsidiaries,
Kiwa BVI, Hong Kong Baina Group Holding Company, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd (“Kiwa Beijing”), Kiwa Bio-Tech
Products (Shandong) Co., Ltd. (“Kiwa Shandong”). All significant inter-company balances or transactions are eliminated
on consolidation.
Reverse
Split
On
January 14, 2016, the Company filed a Certificate of Amendment of its Certificate of Incorporation with the State of Delaware
with reference to a 1-for-200 reverse stock split with respect to its Common Stock with effective date of January 28, 2016. In
connection with the reverse split, the Company’s authorized capital was amended to be 120,000,000 shares, comprising 100,000,000
shares of Common Stock par value $0.001 and 20,000,000 shares of Preferred Stock par value $0.001. All relevant information relating
to numbers of shares, options and per share information have been retrospectively adjusted to reflect the reverse stock split
for all periods presented.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting estimates include the valuation of securities issued, deferred tax assets and related
valuation allowance.
Certain
of our estimates, including evaluating the collectability of accounts receivable and the fair market value of long-lived assets,
could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible
that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates.
We re-evaluate all of our accounting estimates annually based on these conditions and record adjustments when necessary.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less to be cash and cash equivalents. At times,
such investments may be in excess of Federal Deposit Insurance Corporation (FDIC) insurance limit.
Accounts
Receivables
Accounts
receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and
do not bear interest. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The
Company’s estimate is based on historical collection experience, the economic environment, trends in the microbial fertilizer
industry, and a review of the current status of trade accounts receivable. Management reviews its accounts receivable each reporting
period to determine if the allowance for doubtful accounts is adequate. Such allowances, if any, would be recorded in the period
the impairment is identified. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts
will change. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts
to collect the amounts due have been exhausted. There was $55,240 allowance for doubtful accounts at March 31, 2017 and December
31, 2016.
Inventories
Inventories
are stated at the lower of cost, determined on the weighted average method, and net realizable value. Work in progress and finished
goods are composed of direct material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated
selling price in the ordinary course of business, less estimated costs to complete and dispose.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses
on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property,
plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All
ordinary repair and maintenance costs are expensed as incurred. Depreciation for financial reporting purposes is provided using
the straight-line method over the estimated useful lives of the assets as follows:
|
|
Useful Life
|
|
|
(In years)
|
Buildings
|
|
30 - 35
|
Machinery and equipment
|
|
5 - 10
|
Automobiles
|
|
8
|
Office equipment
|
|
2 - 5
|
Computer software
|
|
3
|
Leasehold improvements
|
|
The shorter of the
lease term and
useful life
|
Impairment
of Long-Lived Assets
The
Company’s long-lived assets consist of property, equipment and intangible assets. The Company evaluates its investment in
long-lived assets, including property and equipment, for recoverability whenever events or changes in circumstances indicate the
net carrying amount may not be recoverable. Judgments regarding potential impairment are based on legal factors, market conditions
and operational performance indicators, among others. In assessing the impairment of property and equipment, the Company makes
assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets.
Fair
value of warrants and options
The
Company adopted ASC Topic 815, “Accounting for Derivative Instruments and Hedging Activities” to recognize warrants
relating to loans and warrants issued to consultants as compensation as derivative instruments in our consolidated financial statements.
The Company also adopted ASC Topic 718, “Share Based Payment” to recognize options granted to employees as derivative
instruments in our consolidated financial statements. The Company calculates the fair value of the warrants and options using
the Black-Scholes Model.
Revenue
Recognition
The
Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes
revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all
of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the
services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably
assured.
The
Company derives its revenues from sales contracts with its customers with revenues being recognized upon delivery of products.
Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed
upon acceptance of the sales contract and there is no separate sales rebate, discount, or volume incentive. The Company recognizes
revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company and collectability
of payment is reasonably assured.
The
Company’s customers are mainly agricultural cooperative company and distributors who then resell the Company’s products
to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry,
for some co-ops and distributors, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops
and to realize profits to repay them. As a result, for the sales contracts with these customers, the collectability of payment
is highly dependent on the successful harvest of corps and the customers’ ability to collect money from farmers. The Company
deemed the collectability of payment may not be reasonably assured until after the Company get paid. For those sales contracts
that the Company has shipped its products but the payment is contingent on collections of payments from the downstream customers,
the Company considers the revenue recognition criteria are not met and therefore defers the revenue and cost of goods sold until
payments are collected. These revenue and cost of goods sold are classified in the captioned “Deferred revenue” and
“Deferred cost of goods sold” in the accompanying unaudited condensed consolidated balance sheets. For other customers
whose repayment term is within normal business course and not dependent on the harvest of corps, the Company recognized revenue
when title and ownership of the goods are transferred upon shipment to the customer by the Company.
Deferred
Revenue and Deferred Cost of Goods Sold
Deferred
revenue and deferred cost of goods sold result from transactions where the Company has shipped product for which all revenue recognition
criteria have not yet been met. Deferred cost of goods sold related to deferred product revenues includes direct inventory costs.
Once all revenue recognition criteria have been met, the deferred revenues and associated cost of goods sold are recognized.
Income
Taxes
The
Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated
financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable
to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation allowance
when it is more likely than not that the assets will not be recovered.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
Foreign
Currency Translation and Other Comprehensive Income
The
Company uses United States dollars (“US Dollar” or “US$” or “$”) for financial reporting purposes.
However, the Company maintains the books and records in its functional currency, Chinese Renminbi (“RMB”), being the
primary currency of the economic environment in which its operations are conducted. In general, the Company translates its assets
and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement
of comprehensive loss and the statement of cash flow are translated at average exchange rates during the reporting period. Equity
accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements
are recorded as accumulated other comprehensive income.
Other
comprehensive income for the three months ended March 31, 2017 and 2016 represented foreign currency translation adjustments and
were included in the consolidated statements of comprehensive loss.
The
exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements
were as follows:
|
|
As of March 31
|
|
|
As of December 31
|
|
|
|
2017
|
|
|
2016
|
|
Balance sheet items, except for equity accounts
|
|
|
6.8905
|
|
|
|
6.9472
|
|
|
|
Three
months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Items
in the statements of comprehensive loss
|
|
|
6.8887
|
|
|
|
6.5395
|
|
Net
Loss Per Common Share
Net
income per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income
per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.
Diluted
net income per common share is computed by dividing net income by the weighted average number of shares of common stock and potentially
outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable
through contingent shares issuance arrangement, stock options or warrants.
Financial
Instruments
The
Company analyzes all financial instruments with features of both liabilities and equity under FASB Accounting Standards Codification
(“ASC”) Topic 480 “Distinguishing Liabilities from Equity” and FASB ASC Topic 815 “Derivatives and
Hedging”.
Embedded
conversion features of convertible debentures not considered to be derivative instruments
The
embedded conversion features of convertible debentures not considered to be derivative instruments provide for a rate of conversion
that is below market value. Such feature is normally characterized as a “beneficial conversion feature” (“BCF”).
The relative fair values of the BCF were recorded as discounts from the face amount of the respective debt instrument. The Company
amortized the discount using the straight-line method which approximates the effective interest method through maturity of such
instruments.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820- 10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value with
U.S. GAAP, and expands disclosures about fair value measurements.
To
increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37
are described below:
|
●
|
Level
1: quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
|
●
|
Level
2: pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly
observable as of the reporting date.
|
|
|
|
|
●
|
Level
3: Pricing inputs that are generally observable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalent, prepaid expenses, accounts
payable and accrued expenses, approximate their fair value because of the short maturity of those instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
It
is not however practical to determine the fair value of advances from stockholders, if any, due to their related party nature.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions. Pursuant to Section 850-10-20 the related parties include: a) affiliates of the Company; b) entities
for which investments in their equity securities would be required, absent the election of the fair value option under the Fair
Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c)
trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of
management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal
if one party controls or can significantly influence the management or operating policies of the other to an extent that one of
the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly
influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting
parties and can significantly Influence the other to an extent that one or more of the transacting parties might be prevented
from fully pursuing its own separate interests.
The
consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated financial statements is not required in those statements. The disclosures shall include: a.
the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or
nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed
necessary to an understanding of the effects of the transactions on the consolidated financial statements; c. the dollar amounts
of transactions for each of the periods for which income statements are presented and the effects of any change in the method
of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date
of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitments
and Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Management does not believe, based upon information available at this time that these matters will have a material
adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance
that such matters will not materially and adversely
Stock
Based Compensation
The
Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation –
Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date
fair value of the equity instrument issued and recognized as compensation expense over the requisite service period. The Company
records stock-based compensation expense at fair value on the grant date and recognizes the expense over the employee’s
requisite service period. The Company’s expected volatility assumption is based on the historical volatility of Company’s
stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior.
The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time
of grant. The expected dividend yield is based on the Company’s current and expected dividend policy.
The
Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic
505-50, “Equity-Based Payments to Non-employees”. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation
granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument
issued, whichever is more reliably measured and is recognized as an expense as the goods or services are received.
Cash
Flows Reporting
The
Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash
receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions
of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25
of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile
it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and
payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income
that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency
cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held
in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents
and separately provides information about investing and financing activities not resulting in cash receipts or payments in the
period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
3.
Accounts Receivable, net
Accounts
receivable consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable
|
|
$
|
3,827,680
|
|
|
$
|
1,177,994
|
|
Less: Allowance for doubtful accounts
|
|
|
(55,240
|
)
|
|
|
(55,240
|
)
|
Accounts receivable, net
|
|
$
|
3,772,440
|
|
|
$
|
1,122,754
|
|
4.
Other Receivable
Other
receivable consisted of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Weifang Deluke Fertilizer Co., Ltd.
|
|
$
|
978,918
|
|
|
$
|
-
|
|
Advance to employees
|
|
|
53,842
|
|
|
|
38,897
|
|
Others
|
|
|
65,390
|
|
|
|
-
|
|
|
|
$
|
1,098,150
|
|
|
$
|
38,897
|
|
On
May 10, 2017, the Company collected from Weifang Deluke Fertilizer Co., Ltd. of repayments totaled RMB 6,860,000 or approximately
$996,000.
5.
Property, Plant and Equipment
Property,
plant and equipment, net consisted of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
-
|
|
|
$
|
-
|
|
Machinery and equipment
|
|
|
-
|
|
|
|
-
|
|
Automobiles
|
|
|
-
|
|
|
|
-
|
|
Office equipment
|
|
|
904
|
|
|
|
896
|
|
Furniture
|
|
|
7,903
|
|
|
|
7,838
|
|
Leasehold improvement
|
|
|
67,466
|
|
|
|
66,896
|
|
Property, plant and equipment - total
|
|
$
|
76,253
|
|
|
$
|
75,630
|
|
Less: accumulated depreciation
|
|
|
(29,943
|
)
|
|
|
(20,311
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment - net
|
|
$
|
46,310
|
|
|
$
|
55,319
|
|
Depreciation
expense was $9,466 and $nil for the three months ended March 31, 2017 and 2016, respectively.
All
of our property, plant and equipment have been held as collateral to secure the 6% Notes (see Note 12).
6.
Related Party Transactions
Amounts
due from related parties consisted of the following as of March 31, 2017 and December 31, 2016:
Item
|
|
Nature
|
|
Notes
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kangtan Gerui (Beijing) Bio-Tech Co., Ltd. (“Gerui”)
|
|
Non-trade
|
|
|
(1)
|
|
|
|
1,329,166
|
|
|
|
1,522,434
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,329,166
|
|
|
$
|
1,522,434
|
|
(1)
Gerui
Ms.
Feng Li, a member of the Company’s board of directors and shareholder of the Company (Ms. Li held approximately 20% of the
Company’s Common Stock and 50% of the Company’s Series A Preferred Stock), is also a 23% shareholder of Gerui. According
to the agreement between the Company and Gerui, all the balances will be paid off before June 30, 2018. The management has determined
that no allowance for doubtful debts was necessary.
Amounts
due to related parties consisted of the following as of March 31, 2017 and December 31, 2016:
Item
|
|
Nature
|
|
Notes
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. Yvonne Wang (“Ms. Wang”)
|
|
Non-trade
|
|
|
(1
|
)
|
|
|
73,798
|
|
|
|
100,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAAS IARRP and IAED Institutes
|
|
Trade
|
|
|
(2
|
)
|
|
|
196,743
|
|
|
|
160,461
|
|
Total
|
|
|
|
|
|
|
|
$
|
270,541
|
|
|
$
|
261,259
|
|
(1)
Ms. Wang
Ms.
Wang is the Secretary of the Company until November 20, 2015. Effective as of November 20, 2015, the Company appointed Ms. Wang
as the Chairman of the Board. Effective August 11, 2016, the Company’s Board of Directors has assigned Ms. Wang the additional
titles of Acting President, Acting Chief Executive Officer and Acting Chief Financial Officer.
On
December 14, 2015, Ms. Wang subscribed for the purchase of 250,000 shares of preferred stock for the aggregate amount of $500,000,
and agrees to the concurrent cancellation of debt owed by the Company.
On
March 24, 2016, the Company issued 240,000 shares of common stock to Ms. Wang to pay off the loan balance of $240,000. During
the three months ended March 31, 2017, Ms. Wang paid various expenses on behalf of the Company. As of March 31, 2017, the amount
due to Ms. Wang was $73,798.
(2)
CAAS IARRP and IAED Institutes
On
November 5, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural
Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute
of Agricultural Economy & Development (“IAED”). The term of the Agreement was three years commencing November
20, 2015.
Pursuant
to the agreement, Kiwa agree to invest RMB 1 million (approximately $160,000) each year to the Spatial Agriculture Planning Method
& Applications Innovation Team that belongs to the Institutes. Prof. Yong Chang Wu, the authorized representative of IARRP,
CAAS, is also one of the Company’s directors effective since November 20, 2015 until March 13, 2017. The Company recorded
$36,291 and $38,764 research and development expenses related to the institutes, for the three months ended March 31, 2017 and
2016, respectively.
7.
Convertible Notes Payable
Convertible
notes payable - current consists of $ 150,250 of 6% secured convertible notes issued to FirsTrust Group Inc. on June 29, 2006
and $109,175 (face amount $145,127 net of discount of $35,952) of 15% convertible note issued to Mr. Geng Liu on January 17, 2017.
6%
secured convertible notes – FirsTrust Group Inc.
On
June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional
investors (collectively, the “Purchasers”) for the issuance and sale of 6% secured convertible notes, due three years
from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Convertible Notes”), convertible
into shares of the Company’s common stock.
On
August 12, 2013, the Company, entered into a Settlement Agreement and Release (the “Release”) with the holders (the
“Holders”) of the “6% Convertible Notes” in the aggregate principal amount of $2,000,000. Pursuant to
the terms of the Release, the Company paid the Holders $75,000 for a full release, including the forgiveness of past defaults
of unpaid principal amounts, interests and penalties. During the course of the time, certain notes had been converted as well.
On March 18, 2008, FirsTrust Group, Inc. (“FirsTrust”) purchased the three remaining 6% Convertible Notes, totaling
$168,000 ($59,100, $50,400 and $59,100 respectively), from Nite Capital, one of the six institutional investors which purchased
a total of $300,000 of the Note in three tranches ($105,000, $90,000, $105,000 respectively), for a cash payment of $100,000.
After the Release and conversion, FirsTrust is the only holder of the outstanding 6% Convertible Note with outstanding principal
amount of $150,250.
On
June 29, 2009, the 6% Notes were due. The Company informed the Purchasers of its inability to repay the outstanding balance on
the due date. Therefore, the 6% Notes are in default and the default interest rate of 15% per annum is being charged on the 6%
Notes.
The
conversion price of the Notes is based on a 40% discount to the average of the lowest three days trading price of the Company’s
common stock on the OTC Bulletin Board over a 20-day trading period. The conversion price is also adjusted for certain subsequent
issuances of equity securities of the Company at prices below the conversion price then in effect. The Notes contain a volume
limitation that prohibits the holder from further converting the 6% Notes if doing so would cause the holder and its affiliates
to hold more than 4.99% of the Company’s outstanding common stock.
The
Company has elected to early adopt the guidance in ASU 2017-11. As a result, the Company has concluded that the conversion feature
of the Notes is indexed to its own stock and would be classified and recorded as equity. The Company retrospectively applied the
guidance to the above Notes and determined that the impact of the conversion feature for the above Notes is immaterial.
The
Company also incurs a financial liquidated damages in cash or shares at the option of the Company (equal to 2% of the outstanding
amount of the Notes per month plus accrued and unpaid interest on the Notes, prorated for partial months) if it breaches any affirmative
covenants in the Purchase Agreement, including a covenant to maintain a sufficient number of authorized shares under its Certificate
of Incorporation to cover at least 110% of the stock issuable upon full conversion of the Notes. Pursuant to the relevant provisions
for liquidated damages in Purchase Agreement, the Company has accrued the amounts of $20,239 and $18,886 liquidated damages for
the three months ended March 31, 2017 and 2016, respectively. The Company also accrued $5,557 and $5,619 for interest at the rate
of 15% per annum for the three months ended March 31, 2017 and 2016, respectively. The total 15% interest was $188,919 at March
31, 2017. The total accrued liquidated damages were $502,566 at March 31, 2017.
The
Company’s obligations under the Notes are secured by a first priority security interest in the Company’s intellectual
property pursuant to an Intellectual Property Security Agreement with the Holders. In addition, Mr. Li, the Company’s former
Chief Executive Officer until July 1, 2015, has pledged all of his common stock of the Company as collateral for the Company’s
obligations under the 6% Convertible Notes.
15%
convertible notes- Mr. Geng Liu
On
January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng Liu with principal of RMB 3 million. The note
bears interest at 15% per annum and will mature on January 16, 2018. Before the maturity date, the Note holder has an option to
convert partial or all of the outstanding principal to the Company’s common shares with a conversion price of $0.90 per
share. As of March 31, 2017, the Company has received partial principal totaled RMB 1 million ($145,127 equivalent revalued as
at March 31, 2017).
The
notes are convertible into shares of the common stock, at conversion price is $0.9 which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital, and the remainder proceeds of $99,850 from issuance
of the convertible note was allocated to convertible notes payable.
For
the three months ended March 31, 2017, the Company recorded interest expense of $13,497 on the note, including the amortization
of the debt discount resulting from the value of beneficial conversion feature, and the carrying value of the note as at March
31, 2017 was $109,175.
8.
Note payable
On
May 29, 2007, the Company issued a $360,000 promissory note (the “Promissory Note”) to an unrelated individual (the
“Original Note holder”). This note bears interest at 18% per annum and was due on July 27, 2007. This note is currently
in default and bears interest of 25% per annum (the “Default rate”) until paid in full. This note is secured by a
pledge of shares of the Company’s common stock owned by Investlink (China) Limited (the “Pledged Shares”). The
Company accrued $22,500 and $22,500 interest expense on note payable for the three months ended March 31 and 2016, respectively.
As
of December 31, 2016, the Original Note holder informed the Company that all right, title and interests in the Promissory Note
has been assigned and transferred to FirsTrust. As of March 31, 2017, all of $360,000 of Promissory Note to FirsTrust is still
outstanding, and total accrued interest of the Promissory Note is $ 881,800. The Company has begun preliminary discussion with
FirsTrust with regards to a potential settlement of the Note, but no agreement has been reached yet.
9.
Other payables and accruals
Other
payable and accruals includes the payables to two unrelated potential investors, accrued expenses and other liabilities. As of
March 31, 2017, two potential investors have made the payments approximately $464,408 to the Company and the investment agreements
have not finalized. As of March 31, 2017, the balance of other payables and accruals was $852,065.
10.
Stockholders’ Equity (Deficiency)
During
the three months ended March 31, 2017, the Company issued 1,000,000 common shares to one individual residing in China for net
proceeds of $1,000,000.
During
the three months ended March 31, 2017, the Company entered into one consulting agreement and issued 70,000 shares of common stocks
to consultants for financing services based on market price of issuance.
11.
Stock-based Compensation
On
March 15, 2017, the Board of Directors approved a new stock option plan with ten years’ term. As of March 31, 2017, the
Company has not granted any option yet.
12.
Income Tax
In
accordance with the current tax laws in China, Kiwa Beijing is subject to a corporation income tax rate of 25% on its taxable
income. For the three months ended March 31, 2017, it recorded income tax provision for RMB1,511,077 or approximately USD219,356.
No
provision for taxes is made for U.S. income tax as the Company has no taxable income in the U.S. In accordance with the relevant
tax laws in the British Virgin Islands, Kiwa BVI, as an International Business Company, is exempt from income taxes.
A
reconciliation of the provision for income taxes determined at the local income tax rate to the Company’s effective income
tax rate is as follows:
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
$
|
(528,677
|
)
|
|
$
|
110,461
|
|
Income tax computed at U.S. federal corporate income tax rate
|
|
|
(179,750
|
)
|
|
|
37,557
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Rate differential
|
|
|
18,519
|
|
|
|
(90,577
|
)
|
Change of valuation allowance
|
|
|
102,700
|
|
|
|
53,020
|
|
Non-deductible expenses
|
|
|
7,140
|
|
|
|
-
|
|
Effective tax expense
|
|
$
|
(51,391
|
)
|
|
$
|
-
|
|
The
Company had deferred tax assets as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
3,565,236
|
|
|
$
|
2,555,064
|
|
Less: Valuation allowance
|
|
|
(3,294,560
|
)
|
|
|
(2,555,064
|
)
|
Net deferred tax assets
|
|
$
|
270,676
|
|
|
$
|
-
|
|
As
of March 31, 2017, and December 31, 2016, the Company had approximately $10.5 million and $7.3 million net operating loss carryforwards
available to reduce future taxable income. Net operating loss of the Company could be carried forward and taken against any taxable
income for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the Internal Revenue
Code of 1986, as amended. The net operating loss of Kiwa Beijing could be carried forward for a period of not more than five years
from the year of the initial loss pursuant to relevant tax laws and regulations. As of March 31, 2017, the Company recorded $3,294,560
valuation allowance, and the deferred tax assets was $270,676.
As
of March 31, 2017 and December 31, 2016, the Company has no material unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed
on the during three months ended March 31, 2017 and December 31, 2016, and no provision for interest and penalties is deemed necessary
as of March 31, 2017 and December 31, 2016.
According
to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due
to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under
special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is
ten years. There is no statute of limitation in the case of tax evasion.
13.
Discontinued Operations
The
Company initiated the process of selling Kiwa Shandong to an unrelated third-party company at the end of 2016. The Company
assessed that all the criteria required for the classification of Kiwa Shandong as held for sale have been met as at December
31, 2016. As a result, the consolidated balance sheets at March 31, 2017 reflected the assets and liabilities of Kiwa Shandong
business segment as a discontinued operation.
On
February 11, 2017, the Company executed an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”)
whereby the Company transferred all of its right, title and interest in Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Shandong”)
to the Transferee for the RMB 1.00. The government processing of the transaction has been completed on April 12, 2017. This transaction
was completed and effective on April 12, 2017.
The
following table summarizes the assets and liabilities of the discontinued operation, excluding intercompany balances eliminated
in consolidation, at March 31, 2017:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Assets held for sale:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
Other receivables
|
|
|
-
|
|
|
|
-
|
|
Property, plant and equipment - total
|
|
|
623,060
|
|
|
|
2,117,324
|
|
Less: accumulated depreciation
|
|
|
(623,060
|
)
|
|
|
(765,598
|
)
|
Less: impairment on long-lived assets
|
|
|
-
|
|
|
|
(1,351,726
|
)
|
Deferred tax assets
|
|
|
-
|
|
|
|
1,013,365
|
|
Less: Deferred tax assets allowance
|
|
|
-
|
|
|
|
(1,013,365
|
)
|
Total assets of business held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities of business held for sale:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
253,535
|
|
|
|
251,466
|
|
Advances from customers
|
|
|
-
|
|
|
|
12,883
|
|
Salary payable
|
|
|
537,821
|
|
|
|
533,432
|
|
Accrued expense
|
|
|
29,072
|
|
|
|
28,835
|
|
Other payable
|
|
|
115,413
|
|
|
|
101,588
|
|
Due to related party-trade
|
|
|
1,131,993
|
|
|
|
1,122,754
|
|
Loan payable
|
|
|
1,668,965
|
|
|
|
1,655,343
|
|
Construction cost payable
|
|
|
257,642
|
|
|
|
255,539
|
|
Tax payable
|
|
|
521,199
|
|
|
|
502,845
|
|
Total liabilities of business held for sale
|
|
$
|
4,515,640
|
|
|
$
|
4,464,685
|
|
The
income statement for the three months ended March 31, 2017 reflected the Kiwa Shandong business segment as a discontinued operation.
The following results of operations of Kiwa Shandong are presented as a loss from a discontinued operation in the consolidated
statements of operations:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Operating expense
|
|
|
14,220
|
|
|
|
54,331
|
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
14,220
|
|
|
$
|
54,331
|
|
14.
Commitments and Contingencies
The
Company has the following material contractual obligations:
(1)
Investment in manufacturing and research facilities in Zoucheng, Shandong Province in China
According
to the Project Agreement with Zoucheng Municipal Government in 2002, we have committed to investing approximately $18 million
to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province. As of December 31, 2016,
we had invested approximately $1.91 million for the project. On February 11, 2017, the Company entered an Equity Transfer Agreement
with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) to transfer all of shareholders’ right, title
and interest in Kiwa Shandong to the Transferee for USD $1.00. On April 12, 2017, the government processing of transfer has been
completed.
(2)
Strategic cooperation with two institutes in China
On
November 5, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural
Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute
of Agricultural Economy & Development (“IAED”). Pursuant to the Agreement, the Company will form a strategic partnership
with the two institutes and establish an “International Cooperation Platform for Internet and Safe Agricultural Products”.
To fund the cooperation platform’s R&D activities, the Company will provide RMB 1 million (approximately $160,000) per
year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. The term of
the Agreement is for three years beginning November 20, 2015. Prof. Yong Chang Wu, the authorized representative of IARRP, CAAS,
is also one of the Company’s directors effective since November 20, 2015 until March 13, 2017.
(3)
Distribution agreement with Kangtan Gerui Bio-Tech in China
On
December 17, 2015, Kiwa Bio-Tech Products Group Corporation (the “Company”) entered into a distribution agreement
(the “Agreement”) with Kangtan Gerui (Beijing) Bio-Tech Co., Ltd. (“Gerui”) and formally awarded Gerui
a right to sell and distribute the Company’s fertilizer products in 3 major agricultural regions of China— Hainan
Province, Hunan Province and Xinjiang Autonomous Region. The Company’s Research and Development department has been conducting
application experiments in Hainan and Hunan Provinces since August 2015, in accordance with the market requirements. The experiment
data indicates that the Company’s fertilizer products have fulfill the requirements of reduction of content of heavy metals
in soil and improve crop yield. Gerui was founded in Beijing in April 2015 and relies on the sales network of China’s Supply
and Marketing Cooperatives system. Currently, the Company and Gerui do not hold any interest in each other; however, a collaboration
and integration may take place in the future. The term of the Agreement is for a period of three years commencing December 17,
2015. In September 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd obtained a fertilizer sales permit from the Chinese government
and began to sale the products directly to customers in those 3 major agricultural regions.
(4)
Lease payments
(1)
On April 29, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. entered an office lease agreement with two-year team. Monthly lease
payment and building management fee totaled RMB 77,867 or approximately USD $11,303.
(2)
On November 11, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. entered an apartment lease agreement for its employees. The lease
term is one year with monthly lease payment of RMB 6,000 or approximately USD $871.
(3)
In March 15, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd, a newly established subsidiary entered an office lease agreement with one-year
term. Monthly lease payment is RMB 29,000 or approximately of USD $4,210.
The
future lease payments at March 31, 2017 are summarized below.
|
|
Beijing Office
|
|
|
Beijing Apartment
|
|
|
Shenzhen Office
|
|
|
Total
|
|
2017
|
|
$
|
101,727
|
|
|
$
|
6,384
|
|
|
$
|
37,890
|
|
|
$
|
146,001
|
|
2018
|
|
$
|
45,212
|
|
|
|
-
|
|
|
$
|
10,525
|
|
|
$
|
55,737
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
15.
Subsequent Events
On
May 9, 2017, the Company entered into a Convertible Loan Agreement with Junwei Zheng with principal of approximately US$ 4.5 million
(RMB 30,000,000) with a term of 24 months and bearing interest at a rate of Fifteen Percent (15%) per annum. The Loan is convertible
at any time at the option of the Lender at a conversion price of $3.50 per share. The net proceeds will be used for the further
development of Kiwa products and distribution, as well as for general working capital. As of May 15, 2017, the Company has received
partial principal totaled $507,946.
The
Company has evaluated the existence of significant events subsequent to the balance sheet date through the date these financial
statements were issued and has determined that, other than as stated above, there were no subsequent events or transactions which
would require recognition or disclosure in the financial statements, other than noted herein.