UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from ______ to ______

 

Commission File Number: 000-33167

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada   77-0632186

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3200 Guasti Road, Suite #100,

Ontario, California

  91761
(Address of principal executive offices)   (Zip Code)

 

(909) 456-8828

(Registrant’s telephone number, including area code)

 

n/a

(Former address)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities Registered Pursuant to Section 12(g) of the Act:

 

Title of Each Class   Trading Symbol   Name of Each Exchange on which registered
Common Stock, par value $0.001   KWBTB   OTCQB

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [  ] Smaller reporting company [X]
   
(Do not check if a smaller reporting company) Emerging growth company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2019, based on a closing price of $0.75 was approximately $10,522,514.

 

As of May 29, 2020, the Company had 282,385,206 shares of common stock, $0.001 par value, issued and outstanding.

 

Documents Incorporated by Reference: None.

 

 

 

 
 

 

TABLE OF CONTENTS

 

  Page
Part I  
ITEM 1. Business 3
ITEM 1A.Risk Factors 8
ITEM 1B. Unresolved Staff Comments 8
ITEM 2. Properties 8
ITEM 3. Legal Proceedings 8
ITEM 4. Mine Safety Disclosures 8
Part II  
ITEM 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities 9
ITEM 6. Selected Financial Data 10
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 23
ITEM 8. Financial Statements and Supplementary Data 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
ITEM 9A. Controls and Procedures 23
ITEM 9B. Other Information 25
Part III
ITEM 10. Directors, Executive Officers and Corporate Governance 25
ITEM 11. Executive Compensation 27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 28
ITEM 13. Certain Relationships and Related Transactions, and Director Independence 29
ITEM 14. Principal Accountant Fees and Services 29
Part IV
ITEM 15. Exhibits and Financial Statement Schedules 29
Signatures 30
Index to Consolidated Financial Statements 31

 

  2  
 

 

Part I

 

Special Note Regarding Forward-Looking Statements

 

On one or more occasions, we may make forward-looking statements in this Annual Report on Form 10-K regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. Words or phrases such as “anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,” “will continue” or similar expressions identify forward-looking statements. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.

 

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

 

References herein to “we,” “us,” “our” or “the Company” refer to Kiwa Bio-Tech Products Group Corporation and its wholly-owned and majority-owned subsidiaries unless the context specifically states or implies otherwise.

 

ITEM 1. Business

 

The Company

 

1. Organizational History

 

The Company took its present corporate form in March 2004 when 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, entered into a share exchange transaction. The share exchange transaction left the shareholders of Kiwa BVI owning a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic. For accounting purposes this transaction was treated as an acquisition of Tintic by Kiwa BVI in the form of a reverse triangular merger and a recapitalization of Kiwa BVI and its wholly owned subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”). On July 21, 2004, we completed our reincorporation in the State of Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.

 

The Company currently mainly operates its business through Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”), which incorporated in March 2018, Kiwa Bio-Tech Products (Hebei) Co., Ltd. (“Kiwa Hebei”), which was incorporated in China in December 2016, and The Institute of Kiwa-Yangling Ecological Agriculture and Environment Research Co., Ltd. (“Kiwa Institute”), which incorporated in March 2018.

 

On October 12, 2018, the Company got the approval from the Administrative Committee of Yangling Agricultural High-tech Industry Demonstration Zone to obtain land to construct a new manufacturing facility to help meet the growing demand in China for bio-fertilizers. Yangling Free Trade Zone has agreed to offer the Company approximately US$432,975 (RMB 3,000,000) in incentives and provide tax preferences for the first three years of production. The manufacturing facility will specialize in developing and producing Kiwa Bio-Tech’s core microbes, the fundamental components for making high-quality bio-fertilizers. The total facility construction area is approximately 8.77 acres, and will include fermentation and production terminals, agricultural produce sorting facilities and storage, a research and development institute and corresponding ancillary facilities. The construction of the first phase of the manufacturing facility is expected to be completed in 2020 and have a production capacity of 60,000 tons of Kiwa Bio-Tech’s core microbes. The annual production value is expected to be over US$65 million (approximately 462 million RMB).

 

3
 

 

On October 21, 2019, the Company transferred all of its right, title and interest in Kiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa Asia), Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), and Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch Company, (“Kiwa Xian”), to the Hong Kong Sano Group Co., Ltd. for the HKD 17,000,000 equivalent of US $2,169,862. As Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, and Kiwa Xian has transferred all of their bio-technological products business to Kiwa Yangling, this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, and Kiwa Xian were not reported as discontinued operations under the guidance of Accounting Standards Codification (“ASC”) 205.

 

 

2. Overview of Business

 

We develop, manufacture, distribute and market innovative, cost-effective and environmentally safe bio-technological products for agriculture use. Our products are designed to enhance the quality of human life by increasing the value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes.

 

Our Products

 

We have developed three bio-fertilizer products with bacillus species (“bacillus spp”) and/or photosynthetic bacteria as core ingredients. For the year ended December 31, 2019, we are currently generating revenues from our four bio-fertilizer products: 1) Biological Organic Fertilizer; 2) Compound Microbial Fertilizer; 3) Bio-Water Soluble Fertilizer; 4) Microbial Inoculum Fertilizer.

 

Some of our products contain ingredients of both photosynthesis and bacillus bacteria. Bacillus spp is a species of bacteria that interacts with plants and promotes biological processes. It is highly effective for promoting plant growth, enhancing yield, improving quality and elevating resistances. Photosynthetic bacteria are a group of green and purple bacteria. Bacterial photosynthesis differs from green plant photosynthesis in that bacterial photosynthesis occurs in an anaerobic environment and does not produce oxygen. Photosynthetic bacteria can enhance the photosynthetic capacity of green plants by increasing the utilization of sunlight, which helps keep the photosynthetic process at a vigorous level, enhances the capacity of plants to transform inorganic materials to organic products, and boosts overall plant health and productivity.

 

Biological Fertilizer provide beneficial living microorganisms and micronutrition to soil and improve plants absorptivity of main growth ingredients. Proper use could prevent soil-borne, crops disease, improve soil fertility, alleviate agricultural pollution and degrade heavy metal in farmland soil.

 

4
 

 

Compound Microbial Fertilizer is adding appropriate amount of nitrogen, phosphorus, potassium and other nutrients into Biological Organic Fertilizer. Through the action of organic matter and beneficial microorganisms, the utilization rate of nitrogen, phosphorus, potassium can be significantly improved.

 

The Bio-Water Soluble Fertilizer is mainly another form of the biological fertilizer that we firstly introduced in the first quarter of 2018. It is in the form of powder which has high water solubility, and it is convenient for the farmers to use during the drop irrigation.

 

Microbial Inoculum Fertilizer is an environment-friendly biological soil conditioner that made of compound high-silicon, calcium, and mineral raw materials, on the basis of dissolving-phosphorus, dissolving-potassium, and disease-resistant microbial agents. It is rich in highly active microorganisms, which can improve the micro-ecological environment in the soil, transform and reduce heavy metal toxicity, release the plant growth stimulants, promote crop growth, and enhance the stress resistance.

 

Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally contain more microorganism and have a higher effectiveness on the productivity of crops and increasing the value and quality of the crops harvested than Biological Organic Fertilizer. As a result, our Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher average selling price as compared to Biological Organic Fertilizer.

 

Intellectual Property

 

Our bacillus bacteria based fertilizers are protected by patents. In 2004, we acquired patent no. ZL 93101635.5 entitled “Highly Effective Composite Bacteria for Enhancing Yield and the Related Methodology for Manufacturing” from China Agricultural University (“CAU”) for the aggregate purchase of $480,411, consisting of $60,411 in cash and 5,000 shares of our common stock, valued at $84.00 per share (aggregate value of $420,000). Our photosynthetic bacteria based fertilizers are also protected by trade secret laws.

 

The patent acquired from CAU covers six different species of bacillus which have been tested as bio-fertilizers to enhance yield and plant health. The production methods of the six species are also patented. The patent has expired on February 19, 2013.There are no limitations under this agreement on our exclusive use of the patent. Pursuant to our agreement with CAU, the University agreed to provide research and technology support services at no additional cost to us in the event we decide to use the patent to produce commercial products. These research and technology support services include: (1) furnishing faculty or graduate-level researchers to help bacteria culturing, sampling, testing, trial production and production formula adjustment; (2) providing production technology and procedures to turn the products into powder form while keeping live required bacteria in the products; (3) establishing quality standards and quality control systems; (4) providing testing and research support for us to obtain necessary sale permits from the Chinese government; and (5) cooperation in developing derivative products.

 

On January 5, 2011, the State Intellectual Property Office of the PRC (“Intellectual Property Office”) granted Kiwa two Certificates of Patent of Invention for (1) “A cucumber dedicated composite anti-continuous cropping effect probiotics and their specific strains with related application” with patent number of “ZL 2008 1 0144492.6”; and (2) “Cotton dedicated composite anti-continuous cropping effect probiotics and their special strains with related application” with patent number of “ZL 2008 1 0144491.1” These two patents have been developed by Kiwa-CAU R&D Center. These two patents will expire on August 5, 2028. These two patents can be used to develop specific environment-friendly bio-fertilizer.

 

We have obtained three fertilizer registration certificates from the Chinese government - two covering our bacillus bacteria fertilizer and one covering our photosynthetic bacteria fertilizer. The five registration certificates are: (1) Biological Organic Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture; (2) Compound Microbial Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture; (3) Compound Microbial Water Soluble Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture. Protected by these three fertilizer registration certificates and five trademarks under the names of “KANGTAN” (Chinese translation name for Kiwa), “ZHIGUANGYOU,” “PUGUANGFU,” “JINWA” and “KANGGUAN,” we have developed three series of bio-fertilizer products with bacillus spp and/or photosynthetic bacteria as core ingredients. Valid period of fertilizer registration certificates is five years and may be extended for another five years upon application from the owner of fertilizer registration certificates. The Company has determined to re-apply the Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture.

 

5
 

 

Our Customers

 

For the year ended December 31, 2019, three customers accounted for 46%, 31%, and 23% of the Company’s sales.

 

1. Qingdao Lanhai Hanrui Biotechnology Co., Ltd. (46% of sales)

2. Yangling Shaotao Agricultural Service Co., Ltd. (31% of sales)

3. Mingke Biotechnology Development (Shenzhen) Co., Ltd. (23% of sales)

 

Should we lose any of these large-scale customers in the future and are unable to obtain additional customers, our revenues and operation results might be adversely affected.

 

Our Suppliers

 

For the year ended December 31, 2019, one supplier Shandong Ronghua Bio-Tech Co., Ltd. accounted for 94% of the Company’s total purchases, respectively.

 

Our Competition

 

We compete primarily on the basis of quality, technological innovation and price. Some of our competitors have achieved greater market penetration but with less sophisticated technological innovation than our products as they were in the transition period from being the chemical bio-fertilizer producers to the organically bio-fertilizer producers. We believe that we have a better competitive advantage over them as we are the pioneer within our markets. Some of our competitors competed within our markets have lesser financial and other resources than us as they have established their companies a few years behind us. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.

 

Our main competitors include China Green Agriculture, Inc., Genliduo Biotechnology Ltd., Shenzhen Baitan Ecotypic Engineering Co. Ltd., Hunan Taigu Biotechnology Co. Ltd. and Shanxi A.K. Quantum Agricultural Technology Corporation.

 

Research and Development

 

In July 2006, we established a new research center with China Agricultural University (“CAU”) which is known as Kiwa-CAU Bio-Tech Research & Development Center (the “Kiwa-CAU R&D Center”). Pursuant to an agreement between CAU and Kiwa Shandong dated November 14, 2006, Kiwa agreed to contribute RMB 1 million (approximately $160,000) each year to fund research at Kiwa-CAU R&D Center. The term of this agreement was ten years starting from July 1, 2006. Prof. Qi Wang, who became one of our directors in July 2007, has acted as the Director of Kiwa-CAU R&D Center since July 2006. Under the above agreement, the Kiwa-CAU R&D Center is responsible for fulfilling the overall research-and-development functions of Kiwa Shandong, including: (1) development of new technologies and new products (which will be shared by Kiwa and CAU); (2) subsequent perfection of existing product-related technologies; and (3) training quality-control personnel and technicians and technical support for marketing activities.

 

During fiscal 2014, Kiwa-CAU R&D Center had successfully isolated several strains of endophytic bacillus from plants. A number of strains had been observed to have the capability of boosting crop yield and dispelling chemical pesticide residual from soil. These strains could be used for developing not only new biological preparation but also environmental protection preparation. The Company terminated its cooperation with CAU when the agreement expired on July 1, 2016. All the liabilities owed to Kiwa-CAU R&D Center were assumed by the Transferee of Kiwa Shandong when the Company disposed Kiwa Shandong on Feb 11, 2017.

 

6
 

 

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 Institute. The term of the Agreement is for three years beginning November 20, 2015. However, the Company is only liable for the annual funds to be provided to the extent of the contract obligations performed by CAAS IARRP and IAED, and the agreement is terminable before the three years’ commitment date based on negotiations of both parties. 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.

 

In March 2018, Kiwa Bio-Tech has established a Research Institute of Ecological Agriculture and Environmental Research. Based on cooperation with various Universities including the China Agriculture University, Northwest University, Northwest A&F University, Harbin Institute of Technology and Tsinghua University, we believe that it can secure a leading position in the KETS technology in the next thirty years. In comparison to our existing technology, Ecology Technological Sustainability (“KETS”) technology is comprised of microorganisms with a larger scale of micro-flora. The micro-flora could significantly increase the beneficial microorganism in the soil that enhances the yield of the plant crops and prevents soil ecological problems. The newly upgraded technology will be applied to the main crop planting areas and presently-polluted arable areas for soil restoration.

 

Other

 

On February 27, 2017, the Company signed a strategic cooperation agreement with the Beijing Zhongpin Agricultural Science and Technology Development Center (“Zhongpin Center”). Zhongpin Center is the Chinese Agricultural Science and Technology Innovation and Development Committee’s executive implementation agency (referred to as the Agricultural Science and Technology Commission). The Agricultural Science and Technology Commission is set up by the Chinese Central Government for the construction of the National Ecological Security Agriculture Industrial Chain standardization system. This includes the establishment of National Ecology Safe Agricultural Industrial Parks to build China’s Ecological Security and Agricultural Industrial in an orderly business environment, including completion of the National Soil Remediation Program and governance of the various government functions of the institutions. Through the guidance and support by the Zhongpin Center, Kiwa will participate and be involved in China’s National Soil Remediation Program and construction of the National Ecological Security Agriculture Industrial Chain Standardization System’s operation and process.

 

On April 2, 2018, the company had terminated its cooperation agreement with ETS Biological Science and Technology Development Co., Ltd. (“ETS”) and, in its place, has developed “Ecology Technological Sustainability” (“KETS”) as its core technology to upgrade its microbial fertilizer products. In February 2017, the Company had signed a strategic cooperation agreement with ETS and planned to build new product categories based on the cooperative research results. Following the research, the two parties did not reach a further agreement and determined to terminate the partnership. As a result, the Company switched its focus to the KETS technology to fulfill its needs in connection with fertilizer production. As a part of this process, Kiwa Bio-Tech has established a Research Institute of Ecological Agriculture and Environmental Research. Based on cooperation with various Universities including the China Agriculture University, Northwest University, Northwest A&F University, Harbin Institute of Technology and Tsinghua University, the Company believes that it can secure a leading position in the KETS technology in the next thirty years. In comparison to the Company’s existing technology, KETS technology is comprised of microorganisms with a larger scale of micro-flora. The micro-flora could significantly increase the beneficial bacteria in the soil that enhances the yield of the plant crops and prevents soil ecological problems. The newly upgraded technology will be applied to the main crop planting areas and presently-polluted arable areas for soil restoration.

 

Employees

 

As of December 31, 2019, we employed 16 full-time employees. The following table sets forth the number of our full-time employees by function as of December 31, 2019.

 

7
 

 

Employees and their Functions

 

Management & Administrative Staff     7       44 %
Sales     4       25 %
Technical & Engineering Staff     5       31 %
Total     16       100.00 %

 

As required by applicable PRC law, we have entered into employment contracts with all our officers, managers and employees. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff.

 

In addition, we are required by PRC law to cover employees in China with various types of social insurance and believe that we are in material compliance with the relevant laws.

 

Insurance

 

We believe our insurance coverage is customary and standard for companies of comparable size in comparable industries in China.

 

ITEM 1A. Risk Factors

 

Smaller reporting companies are not required to provide the information required by this item.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

On April 3, 2019, Kiwa Bio-Tech (Yangling) Co., Ltd. entered an office lease agreement with three-year term. Monthly lease payment is approximately RMB 14,000 or approximately of USD $2,000. The total useable space is 685 square meters.

 

ITEM 3. Legal Proceedings

 

None.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

8
 

 

Part II

 

ITEM 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities

 

Market Information

 

The Company’s common stock has been quoted under the symbol “KWBT” since March 30, 2004. Our shares are currently traded on the OTCQB.

 

The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTCQB for the periods indicated. The high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

Fiscal Year 2019   High     Low  
First Quarter   $ 1.40     $ 0.37  
Second Quarter   $ 1.09     $ 0.52  
Third Quarter   $ 1.00     $ 0.50  
Fourth Quarter   $ 0.38     $ 0.02  

 

Fiscal Year 2018   High     Low  
First Quarter   $ 1.77     $ 1.70  
Second Quarter   $ 1.23     $ 1.17  
Third Quarter   $ 1.02     $ 0.97  
Fourth Quarter   $ 0.58     $ 0.54  

 

Holders

 

As of December 31, 2019, there were approximately 500 shareholders of record of our common shares.

 

Dividend Policy

 

We have not paid any dividends on our common shares since our inception and do not anticipate that dividends will be paid at any time in the immediate future.

 

Equity Compensation Plan Information

 

The information required by Item 5 regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this report.

 

Recent Sales of Unregistered Securities

 

The following is a list of shares of Company Common Stock issued for cash, the conversion of convertible debentures or as stock compensation to consultants during the period from January 1, 2019 through May 29, 2020, which were not registered under the Securities Act:

 

Stock Purchase for Cash 220,000 shares
   
Commitment shares 1,463,333 shares
   
Consultant Fees 804,999 shares
   
Conversion of Convertible Note 262,587,130 shares
   
Salary Compensation 124,484 shares
   
Debt Settlement 300,000 shares
   
Total 265,499,946 shares

 

There were no other sales of unregistered securities not already reported on the Company’s quarterly filings on Form 10-Q or on a Current Report on Form 8-K.

 

9
 

 

ITEM 6. Selected Financial Data

 

Not required.

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Annual Report on Form 10-K for the fiscal year ended December 31, 2019 contains “forward-looking” statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, including statements that include the words “believes,” “expects,” “anticipates,” or similar expressions. These forward-looking statements include, among others, statements concerning our expectations regarding our working capital requirements, financing requirements, business, growth prospects, competition and results of operations, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements contained herein.

 

Overview

 

The Company took its present corporate form in March 2004 when 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, entered into a share exchange transaction. The share exchange transaction left the shareholders of Kiwa BVI owning a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic. For accounting purposes this transaction was treated as an acquisition of Tintic by Kiwa BVI in the form of a reverse triangular merger and a recapitalization of Kiwa BVI and its wholly owned subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”). On July 21, 2004, we completed our reincorporation in the State of Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.

 

The Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological products for agricultural use. Our products are designed to enhance the quality of human life by increasing the value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes.

 

The Company currently mainly operates its business through Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”), which incorporated in March 2018, Kiwa Bio-Tech Products (Hebei) Co., Ltd. (“Kiwa Hebei”), which was incorporated in China in December 2016, and The Institute of Kiwa-Yangling Ecological Agriculture and Environment Research Co., Ltd. (“Kiwa Institute”), which incorporated in March 2018.

 

On October 21, 2019, the Company transferred all of its right, title and interest in Kiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa Asia), Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), and Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch, (“Kiwa Xian”), to the Hong Kong Sano Group Co., Ltd. for a consideration of HKD 17,000,000 equivalent of US $2,169,862. Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, and Kiwa Xian has transferred all of their bio-technological products business to Kiwa Yangling, the Company conduct the same business of bio-technological products before and after the disposal of these entities.. These disposed subsidiaries did not operate or generate any revenue in 2019. This restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, and Kiwa Xian were not reported as discontinued operations under the guidance of Accounting Standards Codification (“ASC”) 205. The disposal transactions resulted in loss of approximately $3.5 million.

 

10
 

 

Principal Factors Affecting Our Financial Performance

 

We believe that the following factors could affect our financial performance:

 

  Change in the Chinese Government Policy on agricultural industry. The Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry. Below is a list of government policies issued by the Chinese Government to promote green environment and these policies are either directly or indirectly to encourage the end users of the bio-fertilizer to use more organic related products. Unfavorable changes to these policies could affect demand of our products that we produce and could materially and adversely affect the results of operations. Although we have generally benefited from these policies by using our bio-fertilizer to enhances the capacity of plants to transform inorganic materials to organic products, to boost overall plant health and productivity and not to deteriorate landfall soil.

 

  In April 2008, the Ministry of Finance of PRC issued Circular No. 2008-56 to tax-exempt value-added taxes on all organically fertilizer related products effectively from June 1, 2008.
     
  In January 2016, the PRC State Council official website issued statements to fasten the agricultural modernization process.
     
  In June 2016, the PRC State Council issued Circular No. 2016-31 to prevent further deterioration of landfall soil action plan.
     
  In February 2017, the PRC State Council official website issued statements to promote agricultural structural reform on accelerating the cultivation in the agricultural development.
     
  In February 2017, the Ministry of Agriculture of PRC issued Circular No. 2017-02 to carry out replacement of chemical bio-fertilizers by organically bio-fertilizers action plan on vegetables, fruits and teas planting.
     
  In April 2017, the Ministry of Agriculture of PRC issued Circular No. 2017-06 to implementing five major action plans on agriculture green development with an action plan for replacing chemical bio-fertilizers with organically bio-fertilizers on vegetables, fruits and teas planting under action plan No. 2-2.
     
  In April 2018, at the second meeting of the 13th National People’s Congress meeting, the Minister of the Agriculture and Rural Affairs has pronoun that the Chinese government will continue to promote green environment, to ensure food safety and food qualify for the people in the PRC, and to provide more education and training cause to the farmer in the Agriculture industry. Follow up with the second meeting, in July 2018, the Chinese government is in the process of setting up some government grants to these companies or individuals, including but not limited, organic fertilizer production companies, organic fertilizer raw materials (livestock and poultry excrement) storage and transportation companies, users of organic fertilizer, and users of organic fertilizer production machinery.

 

  Innovation Efforts. We strive to produce the most technically and scientifically advanced products for our customers and maintained close relationships with institutes in the PRC.

 

11
 

 

 

In March 2018, Kiwa Bio-Tech has established a Research Institute of Ecological Agriculture and Environmental Research. Based on cooperation with various Universities including the China Agriculture University, Northwest University, Northwest A&F University, Harbin Institute of Technology and Tsinghua University, we believe that it can secure a leading position in the KETS technology in the next thirty years. In comparison to our existing technology, Ecology Technological Sustainability (“KETS”) technology is comprised of microorganisms with a larger scale of micro-flora. The micro-flora could significantly increase the beneficial microorganism in the soil that enhances the yield of the plant crops and prevents soil ecological problems. The newly upgraded technology will be applied to the main crop planting areas and presently-polluted arable areas for soil restoration.

 

On October 12, 2018, Kiwa Bio-Tech got the approval from the Administrative Committee of Yangling Agricultural High-tech Industry Demonstration Zone to obtain land use rights to construct a new manufacturing facility to help meet the growing demand in China for bio-fertilizers. Yangling Free Trade Zone has agreed to offer Kiwa Bio-Tech approximately US$432,975 (RMB 3,000,000) in incentives and provide tax preferences for the first three years of production.

 

The manufacturing facility will specialize in developing and producing Kiwa Bio-Tech’s core microbes, the fundamental components for making high-quality bio-fertilizers. The total facility construction area is approximately 8.77 acres, and will include fermentation and production terminals, agricultural produce sorting facilities and storage, a research and development institute and corresponding ancillary facilities. The construction of the manufacturing facility is expected to be completed in 2020 and have a production capacity of 60,000 tons of Kiwa Bio-Tech’s core microbes. The annual production value is expected to be over US$65 million (approximately RMB462 million).

 

  Experienced Management. Management’s technical knowledge and business relationships give us the ability to secure more sales orders with our customers. If there were to be any significant turnover in our senior management, it could deplete the institutional knowledge held by our existing senior management team.
     
  Large Scale Customer Relationship. We have contracts with major customers that are distributors of our products. Our sales efforts focus on these distributors which place large recurring orders. For the year ended December 31, 2019, three customers accounted for 46%, 31%, and 23% of the Company’s total sales. Should we lose any large-scale customer in the future and are unable to obtain additional customers, our revenues will suffer.

 

  Competition. Our competition includes a number of publicly traded companies in the PRC and privately-held PRC-based companies that produce and sell products similar to ours. We compete primarily on the basis of quality, technological innovation and price. Some of our competitors have achieved greater market penetration but with less sophisticated technological innovation than our products as there were in the transition period from being the chemical bio-fertilizer producers to the organically bio-fertilizer producers. We believe that we have a better competitive advantage over them as we are the pioneer within our markets. Some of our competitors competed within our markets have lesser financial and other resources than us as they have established their companies a few years behind us. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.

 

12
 

 

Results of Operations for the Years ended December 31, 2019 and 2018

 

The following table summarizes the results of our operations for the years ended December 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   

Years Ended

December 31,

   

Amount

Increase

   

Percentage

Increase

 
Statement of Operations Data:   2019     2018     (Decrease)     (Decrease)  
                         
Revenues   $ 40,089,457     $ 30,650,402     $ 9,439,055       31 %
Cost of goods sold     (30,757,460 )     (22,391,952 )     (8,365,508 )     37 %
Gross profit     9,331,997       8,258,450       1,073,547       13 %
Operating expenses                                
Provision for deferred cost of goods sold     2,411,006       -       2,411,006       100 %
Research and development expense     -       122,774       (122,774 )     (100 )%
Selling expenses     199,664       617,387       (417,723 )     (68 )%
General and administrative expenses     4,379,851       4,928,943       (549,092 )     (11 )%
Loss on sale of subsidiaries     3,527,254       -       3,527,254       100 %
Total operating expenses     10,517,775       5,669,104       4,848,671       86 %
Operating income/(expense)     (1,185,778 )     2,589,346       (3,775,124 )     (146 )%
Other income/(expense), net                                
Change in fair value of derivative liabilities     101,765       241,312       (139,547 )     (58 )%
Interest expense     (3,943,751 )     (634,874 )     (3,308,877 )     521 %
Other income/(expense)     37,253       (1,185 )     38,438       (3,244 )%
Exchange gain     15,296       55,444       (40,148 )     (72 )%
Total other expense     (3,789,437 )     (339,303 )     (3,450,134 )     1,017 %
Income (loss) from continuing operations before income taxes     (4,975,215 )     2,250,043       (7,225,258 )     (321 )%
Provision for income taxes                                
Current     (2,091,736 )     (1,906,222 )     (185,514 )     10 %
Deferred     431,655       -       431,655       100 %
Income taxes     (1,660,081 )     (1,906,222 )     246,141       (13 )%
Net Income (loss)   $ (6,635,296 )   $ 343,821     $ (6,979,117 )     (2,030 )%

 

Revenue

 

Revenue increased by approximately $9.4 million or 31%, to approximately $40.1 million in the year ended December 31, 2019 from approximately $30.7 million in the year ended December 31, 2018. More sales are achieved for most of our four product lines in quantities are due to the good quality of our products and more reputation gained in different regions of the PRC, such as Hainan Province, Guangdong Province and Shaanxi Province upon establishment of our sales channel in different regions.

 

We currently realized revenue in four major product categories of Biological Organic Fertilizer, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer. Our revenues from our major product category are summarized as follows:

 

13
 

 

   

For the year ended

December 31, 2019

   

For the year ended

December 31, 2018

    Change     Change (%)  
                         
Biological Organic Fertilizer                                
Sold and shipped in USD   $ 16,026,941     $ 15,311,862     $ 715,079       5 %
Quantity sold in tons     92,229       84,139       8,090       10 %
Average selling price   $ 173.77     $ 181.98     $ (8.21 )     (5 )%
                                 
Compound Microbial Fertilizer                                
Sold and shipped in USD   $ 20,770,479     $ 13,499,578     $ 7,270,901       54 %
Quantity sold in tons     65,196       40,585       24,611       61 %
Average selling price   $ 318.59     $ 332.62     $ (14.03 )     (4 )%
                                 
Bio-Water Soluble Fertilizer                                
Sold and shipped in USD   $ 3,292,037     $ 1,825,752     $ 1,466,285       80 %
Quantity sold in tons     5,050       2,733       2,317       85 %
Average selling price   $ 651.89     $ 668.04     $ (16.15 )     (2 )%
                                 
Microbial Inoculum Fertilizer                                
Sold and shipped in USD   $ -     $ 13,210     $ (13,210 )     (100 )%
Quantity sold in tons     -       18       (18 )     (100 )%
Average selling price   $ -     $ 733.89     $ (733.89 )     (100 )%
                                 
Total                                
Sold and shipped in USD   $ 40,089,457     $ 30,650,402     $ 9,439,055       31 %
Quantity sold in tons     162,475       127,475       35,000       27 %
Average selling price   $ 246.74     $ 240.44     $ 6.30       3 %

 

Average selling prices of Biological Organic Fertilizers, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer decreased by $8.21 or 5%, $14.03 or 4% and $16.15 or 2%, respectively in the year ended December 31, 2019 as compared with the same period of 2018. This decrease is mainly due to the fluctuation of exchange rate as Chinese Yuan depreciated against U.S. dollars by approximately 4% for the year 2019 compares to the year 2018.

 

Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer will continue to grow in a higher rate than that from Biological Organic Fertilizer. Our Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher effectiveness on the productivity of crops that are suitable for promoting green environment. In addition, our marketing team is expanding to the Western areas of China and Hainan province and we expect our revenues will continue to grow in 2020. Meanwhile, we expect to continue to gain more market shares in our existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry.

 

14
 

 

Cost of Revenue

 

Our cost of revenues from our major product categories are summarized as follows:

 

   

For the year ended

December 31, 2019

   

For the year ended

December 31, 2018

    Change     Change (%)  
                         
Biological Organic Fertilizer                                
                                 
Cost of sold and shipped in USD   $ 11,233,403     $ 10,470,687     $ 762,716       7 %
Quantity sold and shipped in tons     92,229       84,139       8,090       10 %
Average unit cost   $ 121.80     $ 124.45     $ (2.65 )     (2 )%
                                 
Compound Microbial Fertilizer                                
Cost of sold and shipped in USD   $ 17,264,806     $ 10,644,951     $ 6,619,855       62 %
Quantity sold and shipped in tons     65,196       40,585       24,611       61 %
Average unit cost   $ 264.81     $ 262.29     $ 2.52       1 %
                                 
Bio-Water Soluble Fertilizer                                
Cost of sold and shipped in USD   $ 2,259,251     $ 1,264,068     $ 995,183       79 %
Quantity sold and shipped in tons     5,050       2,733       2,317       85 %
Average unit cost   $ 447.38     $ 462.52     $ (15.14 )     (3 )%
                                 
Microbial Inoculum Fertilizer                                
Cost of sold and shipped in USD   $ -     $ 12,246     $ (12,246 )     (100 )%
Quantity sold and shipped in tons     -       18       (18 )     (100 )%
Average unit cost   $ -     $ 680.33     $ (680.33 )     (100 )%
                                 
Total                                
Cost of sold and shipped in USD   $ 30,757,460     $ 22,391,952     $ 8,365,508       37 %
Quantity sold and shipped in tons     162,475       127,475       35,000       27 %
Average unit cost   $ 189.31     $ 175.66     $ 13.65       8 %

 

Cost of revenue from Biological Organic Fertilizer, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer increased by approximately $0.8 million, $6.6 million and $1.0 million or 7%, 62% and 79% to approximately $11.2 million, $17.3 million and $2.3 million in the year ended December 31, 2019 from approximately $10.5 million, $10.6 million and $1.3 million in the year ended December 31, 2018. The increase is mainly due to the total quantity of products sold increased due to the good quality of our products and more reputation gained in the agricultural industry, which offset by the fluctuation of exchange rate as Chinese Yuan depreciated against U.S. dollars by approximately 4.4% during the year ended December 31, 2019 compared to the year ended December 31, 2018.

 

Average unit cost of Biological Organic Fertilizers decreased by $2.65 or 2% in the year ended December 31, 2019 as compared with the same period of 2018. The decrease is mainly due to the fluctuation of exchange rate changes as Chinese Yuan depreciated against U.S. dollars by approximately 4.4% and offset by a slightly increase in overall purchase price of the raw material. Average unit cost of Compound Microbial Fertilizer increased by $2.52 or 1% is mainly due to increase in overall purchase price of raw material. Average unit cost of Bio-Water Soluble Fertilizer decreased by $15.14 or 3% is mainly due to the RMB depreciation against USD of approximately 4.4% along with a 2.6% decrease due to we outsourced manufacturing to a third party vendor in the year ended December 31, 2019 compares to the year ended December 31, 2018.

 

We did not sell any Microbial Inoculum Fertilizer during the year ended December 31, 2019. The company is adjusting the formula of Microbial Inoculum Fertilizer and plans to re-make the packaging and launch it in the market in August, 2020. 

 

15
 

 

Gross Profit

 

Our gross profit from our major product categories are summarized as follows:

 

   

For the year ended

December 31, 2019

   

For the year ended

December 31, 2018

    Change     Change (%)  
                         
Biological Organic Fertilizer                                
Gross Profit   $ 4,793,538     $ 4,841,175     $ (47,637 )     (1 )%
Gross Profit Percentage     30 %     32 %     (2 )%     (6 )%
                                 
Compound Microbial Fertilizer                                
Gross Profit   $ 3,505,673     $ 2,854,627     $ 651,046       23 %
Gross Profit Percentage     17 %     21 %     (4 )%     (19 )%
                                 
Bio-Water Soluble Fertilizer                                
Gross Profit   $ 1,032,786     $ 561,684     $ 471,102       84 %
Gross Profit Percentage     31 %     31 %     - %     - %
                                 
Microbial Inoculum Fertilizer                                
Gross Profit   $ -     $ 964     $ (964 )     (100 )%
Gross Profit Percentage     - %     7 %     (7 )%     (100 )%
                                 
Total                                
Gross Profit     9,331,997       8,258,450       1,073,547       13 %
Gross Profit Percentage     23 %     27 %     (4 )%     (15 )%

 

Gross profit percentage for Biological Organic Fertilizer decreased from 32% for the year ended December 31, 2018 to 30% for the year ended December 31, 2019 mainly due to the decrease in average unit cost less than the decrease in average selling price of our products as discussed above.

 

Gross profit percentage for Compound Microbial decreased from 21% for the year ended December 31, 2018 to 17% for the year ended December 31, 2019 mainly due to the increase in average unit cost was less than the decrease in average selling price of our products as discussed above.

 

Gross profit percentage for Bio-Water Soluble Fertilizer remains unchanged as 31% for year ended December 31, 2019 and 2018, respectively.

 

Gross profit percentage for Microbial Inoculum Fertilizer was 7% for the year ended December 31, 2018. We did not sell any Microbial Inoculum Fertilizer during the year ended December 31, 2019.

 

Provision for Deferred Cost of Goods Sold

 

Provision on deferred cost of goods sold was $2.4 million for the year ended December 31, 2019, increased by approximately $2.4 million or 100% from nil for the year ended December 31, 2018. The increase in provision on deferred cost of goods sold is made based on historical collection experience on related accounts receivable and realizability of deferred revenue. Because part of the shipments to several clients, for which revenue have already been deferred, have been assessed to be uncollectible, $2.4 million of provision for deferred cost of goods sold were made during the year ended December 31, 2019.

 

Research and Development Expenses

 

Research and development expenses was $0 for the year ended December 31, 2019, decreased by approximately $123,000 or 100% from approximately $123,000 (RMB 801,630) for the year ended December 31, 2018. On November 20, 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 $148,000) 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 and has expired on November 19, 2018. We did not have such expenses during the year ended December 31, 2019.

 

16
 

 

Selling Expenses

 

Selling expenses include salaries of sales personnel, sales commission, travel and entertainment as well as freight out expenses. Selling expenses for the years ended December 31, 2019 and 2018 were approximately $200,000 and $617,000, respectively. The decrease in selling expenses is because we were in the position of integrating and closing our offices from different locations and consolidated our bio-technological products business to Kiwa Yangling. The decrease in selling expenses is mainly due to a decrease of approximately $273,000 of sales personnel salary, a decrease of office, insurance, travel, entertainment expenses and other selling expenses of approximately $118,000, and a decrease of freight out and shipping expenses as our customers required to pay for its own shipping costs in 2019 of approximately $50,000, offset by an increase of approximately $23,000 advertising expenses.

 

General and Administrative Expenses

 

G&A expenses include professional fees, depreciation and amortization, insurance, salaries, employee benefits, travel, auto expense, meal and entertainment, rent, office expense and telephone expense and other miscellaneous G&A expenses. General and administrative (“G&A”) expenses decreased by approximately $0.5 million or 11% from approximately $4.9 million in the year ended December 31, 2018 to approximately $4.4 million in the same period in 2019. The decrease in G&A expenses is because we were in the position of integrating and closing our offices from different location and consolidated our bio-technological products business to Kiwa Yangling. The decrease in G&A expenses is mainly due to a decrease of approximately $783,000 salaries expense and employee benefits, a decrease of approximately $258,000 rent expense and related utilities and management fees, and a decrease of approximately $154,000 consulting and professional fees. This decrease is offset by an increase of approximately $410,000 of meals and entertainment, travel, office expense, and other G&A expenses, and an increase of approximately $235,000 bad debt expenses according to the company policy of allowance for doubtful accounts.

 

Loss on Sales of Subsidiaries

 

We were in the position of integrating and closing our offices from different locations and consolidated our bio-technological products business to Kiwa Yangling as we deemed restructuring our offices into our headquarters is the best course for the Company. On October 21, 2019, we transferred all of our right, title and interest in Kiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa Asia), Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), and Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch Company, (“Kiwa Xian”), to the Hong Kong Sano Group Co., Ltd. for the HKD 17,000,000 equivalent of US $2,169,862, which resulted in a loss of $3,527,254.

 

Interest Expense

 

Net interest expense was $3,943,751 and $634,874 for the years ended December 31, 2019 and 2018, respectively, representing an increase of $3,308,877 or 521%. Interest expense included accrued interest on convertible note and other note payable, and the amortization of the convertible note discount, and the issuance cost of the convertible note for the year ended December 31, 2019 and 2018. The increase in interest expenses is mainly attributed to the six 12% convertible notes issued during the year ended December 31, 2019 where we did not have these in the year ended December 31, 2018.

 

Provision for income taxes

 

Provision for income taxes was $1,660,081 and $1,906,222 for the years ended December 31, 2019 and 2018, respectively, representing a decrease of $246,141 or 13%. Our profitable PRC subsidiaries incurred more of taxable income in 2019 as compared to the same period in 2018 offset by the deferred income tax benefits resulted from the temporary difference of accrued expenses between book basis and tax basis.

 

Net Income

 

During the fiscal year 2019, net loss was $6,635,296, compared with a net income of $343,821 or the same period of 2018, representing a decrease of $6,979,117 or 2,030%. Such change was the result of the combination of the changes as discussed above.

 

17
 

 

Critical Accounting Policies and Estimates

 

We prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

 

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. In addition, you should refer to our accompanying consolidated balance sheets as of December 31, 2019, and the consolidated statements of operations and comprehensive income, and cash flows for the year ended December 31, 2019, and the related notes thereto, for further discussion of our accounting policies.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. We did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.

 

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time.

 

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

 

The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.

 

The Company continues to derive 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 to consider control of goods are transferred to its customer and collectability of payment is reasonably assured. The Company’s revenues are recognized at a point in time after all performance obligations are satisfied.

 

18
 

 

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 of these Co-ops and distributors, will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay the resellers. 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. Collectability is a necessary condition for the contract to be accounted for to meet the criteria of the first step “identifying the contract with the customer” under the new revenue guidance in ASC 606. As a result, the sales contracts with these customers are not considered a contract under ASC 606, thus the shipments under these contracts are not recognized as revenue until all criteria for “identifying the contract with the customer” and revenue recognition are met using the five-step model.

 

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 under the five-step model have not yet been met. Though these contracts are not considered a contract under ASC 606, they are legally enforceable, and the Company has an unconditional and immediate right to payment after the Company has shipped products, therefore, the Company recognizes a receivable and a corresponding deferred revenue upon shipment. Deferred cost of goods sold related to deferred product revenues includes direct inventory costs. Once all revenue recognition criteria under the five-step model have been met, the deferred revenues and associated cost of goods sold are recognized. The Company’s provision for deferred cost of goods sold is made based on historical collection experience on such related accounts receivable and realizability of deferred revenue.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable represent customer accounts receivables. 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 receivables are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets consist of property and equipment. The Company evaluates its investment in long-lived assets for recoverability whenever events or changes in circumstances indicate the net carrying amount may not be recoverable. It is possible that these assets could become impaired as a result of legal factors, market conditions, operational performance indicators, technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

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 when it is more likely than not that the assets will not be recovered.

 

19
 

 

ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.

 

Liquidity and Capital Resources

 

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs is to meet our working capital requirements, operating expenses and capital expenditure obligations.

 

Our business is capital intensive as we need to make advance payment to our suppliers to secure timely delivery and current market price of raw materials. Debt financing in the form of notes payable and loans from related parties have been utilized to finance our working capital requirements. As of December 31, 2019, our working capital was approximately $8.6 million, however, we had only cash of approximately $8,000, with remaining current assets mainly composed of advance to suppliers, notes receivable, other receivables, and prepaid expenses. In addition, we sold Convertible Promissory Notes (“Notes”) in the aggregate principal amount of $1,901,250 for the year ended 2019.

 

We may have to consider supplementing our available sources of funds for operations through the following sources:

 

  We will continuously seek additional equity financing to support our working capital;
  other available sources of financing from PRC banks and other financial institutions; and
  financial support and credit guarantee commitments from our major shareholder.

 

Based on the above considerations, our management is of the opinion that it does not have sufficient funds to meet our working capital requirements and debt obligations as they become due one year from the date of this report. Therefore, our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If the Company can’t raise enough funds, it might be unable to fund our future cash requirement on a timely basis and under acceptable terms and conditions and may not have sufficient liquidity to maintain operations and repay our liabilities for the next twelve months. As a result, we may be unable to implement our current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition and results of operations.

 

The following table set forth summary of our cash flows for the periods indicated:

 

    Years Ended December 31,  
      2019       2018  
Net cash provided by (used in) operating activities   $ 183,067     $ (1,648,963 )
Net cash used in investing activities     (2,070,522 )     (52,992 )
Net cash provided by financing activities     1,482,086       510,707  
Effect of exchange rate changes on cash     405,475       115,568  
Net increase (decrease) in cash     106       (1,075,680 )
Cash, beginning of year     7,859       1,083,539  
Cash, end of year   $ 7,965     $ 7,859  

 

20
 

 

Operating Activities

 

Net cash provided by operating activities was approximately $0.2 million for the year ended December 31, 2019, compared to cash used in operating activities of approximately $1.6 million for the same period in 2018. Net cash provided by operating activities for the year ended December 31, 2019 was primarily attributable to 1) a decrease of approximately $3.4 million accounts receivable, 2) approximately $3.5 million loss on selling those subsidiaries, 3) approximately $2.7 million provision for deferred cost of goods sold and bad debt expenses, 4) approximately $2.1 million accrued interest, penalties and financing costs of convertible note, 5) an increase of approximately $2.1 million in tax payables, 6) a decrease of approximately $1.6 million of inventories 7) approximately $1.9 million stock compensation for services, 8) a decrease of approximately $1.2 million of prepaid expenses, 9) an increase of approximately $0.3 million in other payables and accruals, 10) an increase of approximately $0.5 million in salary payable, and 11) an increase of approximately $0.5 million in advance from customers. This increase in cash was offset by 1) a net loss of approximately $6.6 million, 2) an increase in approximately $7.2 note receivables as promissory notes was received, 3) an increase of approximately $3.4 million deferred revenue, 4) a decrease of approximately $1.5 million accounts payables, and 5) an increase of approximately $0.4 million deferred tax assets, and 6) an increase approximately $0.3 million advance to suppliers.

 

Investing Activities

 

Net cash used in investing activities was approximately $2.1 million in the year ended December 31, 2019, which was mainly attributable to loan to third parties as they were our important strategy partners. Net cash used in investing activities was approximately $53,000 for the year ended December 31, 2018.

 

Financing Activities

 

Net cash provided by financing activities was approximately $1.5 million for the year ended December 31, 2019 and net cash provided by financing activities was approximately $0.6 million for the year ended December 31, 2018. The cash inflow for the year ended December 31, 2019 was mainly due to an approximately $1.6 million proceed from six new issued convertible notes, and an approximately 0.2 million proceeds from sale of common stocks; offset by an approximately $0.3 million net payment to related parties.

 

Trends and Uncertainties in Regulation and Government Policy in China

 

Foreign Exchange Policy Changes

 

China is considering allowing its currency to be freely exchangeable for other major currencies. This change will result in greater liquidity for revenues generated in Renminbi (“RMB”). We would benefit by having easier access to and greater flexibility with capital generated in and held in the form of RMB. The majority of our assets are located in China and most of our earnings are currently generated in China and are therefore denominated in RMB. Changes in the RMB-U.S. Dollar exchange rate will impact our reported results of operations and financial condition. In the event that RMB appreciates over the next year as compared to the U.S. Dollar, our earnings will benefit from the appreciation of the RMB. However, if we have to use U.S. Dollars to invest in our Chinese operations, we will suffer from the depreciation of U.S. Dollars against the RMB. On the other hand, if the value of the RMB were to depreciate compared to the U.S. Dollar, then our reported earnings and financial condition would be adversely affected when converted to U.S. Dollars.

 

From the end of 2018 through December 31, 2019, the value of the RMB depreciated by approximately 1.6% against the U.S. Dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. Dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. Dollar in the future. The exchange rate of U.S. Dollar against RMB on December 31, 2019 was US$1.00 = RMB 6.9860.

 

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Risk

 

Credit Risk

 

Credit risk is one of the most significant risks for our business.

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.

 

Accounts receivable are typically unsecured and derived from revenue (or deferred revenue) earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. We manage credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, we normally require certain prepayment from the customers prior to begin production or delivery products. We identify credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.

 

In measuring the credit risk of our sales to our customers, we mainly reflect the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.

 

Liquidity Risk

 

We are also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions or related parties to obtain short-term funding to meet the liquidity shortage.

 

Inflation Risk

 

We are also exposed to inflation risk Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.

 

Coronavirus (COVID-19) Pandemic Risk

 

In December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to a number of other countries, including the United States. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, as of this time, several states in the United States have declared states of emergency, and several countries around the world, including the United States, have taken steps to restrict travel. Our operations are principally located in China, which has taken action to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations, or to our suppliers’ or customers’ supply chains and business operations, could include disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects on our manufacturing output and delivery schedule. If a critical number of our employees become too ill to work, or we are not able to access a sufficient quantity of our inventory for shipment due to enforced office closures, our production ability could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse business consequences due to COVID-19, or any other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate. Any of these uncertainties could have a material adverse effect on our business, financial condition or results of operations.

 

22
 

 

Commitments and Contingencies

 

See Note 22 to the Consolidated Financial Statements under Item 8 in Part II.

 

Off-Balance Sheet Arrangements

 

At December 31, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Recent Accounting Pronouncements

 

See Note 2 to the Consolidated Financial Statements under Item 8, Part II.

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

ITEM 8. Financial Statements and Supplementary Data

 

The full text of our audited consolidated financial statements as of December 31, 2019 and 2018 begins on page F-1 of this annual report.

 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

ITEM 9A. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2019 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The principal basis for this conclusion is the lack of segregation of duties within our financial function and the lack of an operating Audit Committee.

 

23
 

 

b) Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
   
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
   
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

The management has evaluated the effectiveness of the design and operation of our internal controls over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2019. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on our evaluation and on those criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective as of December 31, 2019. The principal basis for this conclusion is (i) failure to engage sufficient resources in regards to our accounting and reporting obligations and (ii) failure to fully document our internal control policies and procedures.

 

Remediation

 

Our management has dedicated resources to correcting the control deficiencies and to ensuring that we take proper steps to improve our internal control over financial reporting in the area of financial statement preparation and disclosure.

 

We have taken a number of remediation actions that we believe will improve the effectiveness of our internal control over financial reporting, including the following:

 

  Hired a consulting firm with expertise in U.S. GAAP financial reporting and accounting.
     
  Implemented an internal review process over financial reporting to continue to improve our ongoing review and supervision of our internal control over financial reporting;

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only the management’s report in this annual report.

 

24
 

 

(c) Changes in Internal Control over Financial Reporting

 

On January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02 Leases (FASB ASC Topic 842). Except as disclosed in the aforementioned remediation plans and the adoption of ASU 2016-02, there have not been any other changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the year ended December 31, 2019, to have materially affected the Company’s internal control over financial reporting.

 

ITEM 9B. Other Information

 

None.

 

Part III

 

ITEM 10. Directors, Executive Officers and Corporate Governance

 

Directors and Executive Officers

 

Set forth below are the names of our directors and executive officers, their ages, their offices with us, if any, their principal occupations or employment for the past five years. The directors listed below will serve until the Company’s next annual meeting of the shareholders:

 

Name   Age   Position   Director Since
             
Wade Li   57   Acting President, CEO   2020
Yvonne Wang   41   Secretary, Director   2015
Hon Man Yun   50   CFO   2018
Qi Wang   51   Vice President of Technology, Director   2007
Xiao Qiang Yu   41   COO, Director   2016

 

Wade Li Mr. Wade Li used to work in People’s Insurance Company of China. In 1989, established Xinhua International Market Development Co., Ltd. and served as president, investing in a variety of growth industries companies of high-tech, pharmaceutical, medical and real estate, etc. and has extensive experience in corporate operation.

 

He founded Kiwa Bio-Tech Products Group Corporation in 1999. Over the past two decades, Mr. Li has focused on China’s ecological agriculture industry, and accumulated massive experience; he has also gained high recognition of the market and related government departments in microbial fertilizer, as well as the planning and promotion of green safe agricultural products.

 

Yvonne Wang Ms. Wang became our Chairman in November 2015. She served as corporate Secretary from 2005 to 2015. Prior to 2005, she served as an executive assistant and a manager of the Company’s U.S. office between April 2003 and September 2005. She obtained her B.S. degree of Business Administration from University of Phoenix.

 

On August 11, 2016, she became Company’s acting president, CEO and CFO. On April 15, 2018, the Company’s Board of Directors appointed Hon Man Yun as Chief Financial Officer of the Company. On March 4, 2020, Yvonne Wang submitted her resignation as Chief Executive Officer. Her position now is the secretary of Kiwa Bio-Tech Products Group Corp.

 

Hon Man Yun Mr. Yun became our CFO in April 2018. Mr. Yun is a Chartered Accountant having fellowship with the Institute of Chartered Accountants in England and Wales. He is also a Fellow Member of the Chartered Association of Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants. He was a member of Association of International Accountants, the Society of Registered Financial Planners, the Institute of Financial Accountants and the Institute of Crisis and Risk Management. Mr. Yun received his MBA at the University of Western Sydney in 2007.

 

25
 

 

Qi Wang became our Vice President - Technical on July 19, 2005 and was elected as one of our directors of the Company on July 18, 2007. Prof. Wang has also acted as Director of Kiwa-CAU R&D Center since July 2006. Prof. Wang served as a Professor and Advisor for Ph.D. students in the Department of Plant Pathology, China Agricultural University (“CAU”) since January 2005. Prior to that, he served as an assistant professor and lecturer of CAU since June 1997. He obtained his master degree and Ph.D. in agricultural science from CAU in July 1994 and July 1997, respectively. Prof. Wang received his bachelor’s degree of science from Inner Mongolia Agricultural University in July 1989. He is a committee member of various scientific institutes in China, including the National Research and Application Center for Increasing-Yield Bacteria, Chinese Society of Plant Pathology, Chinese Association of Animal Science and Veterinary Medicine. Prof. Wang’s unique expertise in the field of agriculture offers significant knowledge and experience to the Board of Directors when making critical operational decisions.

 

Xiaoqiang Yu became our COO on June 2016 and is responsible for managing the overall marketing strategy of Kiwa, which includes brand expansion, sale targets, strategic planning and corporate communications. Mr. Yu participated in Chinese fertilizer market since 1999. Mr. Yu has over 15 years of marketing, management and strategy experience from two major fertilizer companies in China.

 

Family Relationships

 

There are no family relationships among our directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

None of our directors or executive officers has, during the past ten years:

 

(a) Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
   
(b) Been convicted in a criminal proceeding or subject to a pending criminal proceeding;
   
(c) Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and
   
(d) Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Section 16(a) Beneficial Ownership Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and certain persons holding more than 10 percent of a registered class of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Officers, directors and certain other shareholders are required by the SEC to furnish the Company with copies of all Section 16(a) forms they file. To the best of the Company’s knowledge, based solely upon a review of the copies of such reports, the Company believes that all Section 16(a) filing requirements applicable to its officers, directors and certain other shareholders were complied with during the fiscal year ended December 31, 2019.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to all employees, consultants and members of the Board of Directors, including the Chief Executive Officer, Chief Financial Officer and Secretary. This Code embodies our commitment to conduct business in accordance with the highest ethical standards and applicable laws, rules and regulations. We will provide any person a copy of the Code, without charge, upon written request to the Company’s Secretary. Requests should be addressed in writing to Ms. Yvonne Wang; 3200 Guasti Road, Ste. 100, California 91761.

 

26
 

 

Board Composition; Audit Committee and Financial Expert

 

Our Board of Directors is currently composed of four members: Yvonne Wang, Feng Li, Qi Wang, Xiaoqiang Yu and Wade Li. All board actions require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.

 

We currently do not have an audit committee. We intend, however, to establish an audit committee of the board of directors as soon as practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. Currently such functions are performed by our Board of Directors.

 

The Board does not have a “financial expert” as defined by SEC rules implementing Section 407 of the Sarbanes-Oxley Act.

 

Board meetings and committees; annual meeting attendance.

 

The Board of Directors either met or took action by unanimous consent ten (10) times during fiscal year 2019. No Committee Meetings were held during fiscal year 2018. The Company did not have an Annual Meeting of Shareholders in 2019.

 

ITEM 11. Executive Compensation

 

We currently have no Compensation Committee. The Board of Directors is currently performing the duties and responsibilities of Compensation Committee. In addition, we have no formal compensation policy. We decide on our executives’ compensation based on average compensation levels of similar companies in the U.S. or China, depending on consideration of many factors such as where the executive works. Our Chief Executive Officer’s compensation is approved by the Board of Directors. Other named executive officers’ compensation are proposed by our Chief Executive Officer and approved by the Board of Directors.

 

Our Stock Incentive Plan is administered by the Board of Directors. Any amendment to our Stock Incentive Plan requires majority approval of the shareholders of the Company.

 

Currently, the main forms of compensation provided to each of our executive officers are: (1) annual salary; (2) non-equity Incentive Plan; and (3) the granting of incentive stock options subject to approval by our Board of Directors.

 

Summary Compensation Table

 

Summary Compensation Table

 

Name and
principal position
  Year     Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Option Awards ($)     Non-Equity
Incentive Plan
Compensation
($)
   

Nonqualified
Deferred
Compensation
Earnings

($)

    All Other
Compensation
($)
    Total
($)
 
(a)   (b)     (c)     (d)     (e)     (f)     (g)     (h)     (i)     (j)  
                                                       
Yvonne Wang,     2019       84,000       -0-       -0-       -0-       -0-       -0-       -0-       84,000  
Acting President, CEO     2018       84,000       -0-       -0-       -0-       -0-       -0-       -0-       84,000  
                                                                         
Hon Man Yun     2019       104,290       -0-       -0-       -0-       34,738       -0-       -0-       139,028  
CFO     2018       77,102       -0-       -0-       -0-       25,299       -0-       -0-       102,401  
                                                                         
Xiaoqiang Yu,     2019       59,927       -0-       -0-       -0-       -0-       -0-       -0-       59,927  
COO     2018       59,927       -0-       -0-       -0-       -0-       -0-       -0-       59,927  

 

27
 

 

Employment Contracts and Termination of Employment and Change of Control Arrangements

 

There are no compensatory plans or arrangements with respect to a named executive officer that would result in payments or installments in excess of $100,000 upon the resignation, retirement or other termination of such executive officer’s employment with us or from a change-in-control.

 

Stock Incentive Plan and Option Grants

 

2018 Stock-based Compensation

 

During 2018, the Company registered 1,663,702 shares of common stock, par value $0.001 allocated to its 2016 Employee, Director and Consultant Stock Plan. No options were granted under the Plan.

 

Option Exercises and Stock Vested

 

No stock options were exercised by any officers or directors during 2019 and 2018. We did not adjust or amend the exercise price of any stock options previously awarded to any named executive officers during 2019 and 2018.

 

Director Compensation for 2019

 

We currently have no policy in effect for providing compensation to our directors for their services on our Board of Directors, and did not compensate our directors in 2019 for services performed as directors.

 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth as of May 29, 2020 certain information with respect to the beneficial ownership of our common stock by (i) each of our executive officers, (ii) each person who is known by us to beneficially own more than 5% of our outstanding common stock, and (iii) all of our directors and executive officers as a group. Percentage ownership is calculated based on 282,385,206 shares of our common stock 500,000 shares of our Series A Preferred Stock, and 811,148 shares of our Series B Preferred Stock outstanding as of May 29, 2020. None of the shares listed below are issuable pursuant to stock options or warrants of the Company.

 

Title of class   Name and Address of
Beneficial Ownership(1)
  Amount and Nature of
Beneficial Owner (2)
    Percentage of class  
                 
Common Stock   Yvonne Wang     240,000       0.1 %
Common Stock   Feng Li (3)     1,965,326       0.7 %
Common Stock   Qi Wang     -       -  
Common Stock   All officers and directors as a group     2,205,326       0.8 %
                     
Ser. A Pref. Stock   Yvonne Wang     250,000       50.00 %
Ser. A Pref. Stock   Feng Li     250,000       50.00 %
                     
Ser. A Pref. Stock   All officers and directors as a group     500,000       100.00 %
Ser. B Preferred   Wei Li     811,148       100.00 %

 

  (1) The address for all holders is 3200 Guasti Road, Ste. 100, Ontario, California 91761.
     
  (2) In determining beneficial ownership of our Common Stock and Series A Preferred Stock, the number of shares shown includes shares which the beneficial owner may acquire upon exercise of debentures, warrants and options which may be acquired within 60 days. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.

 

28
 

 

  (3) Includes 61,784 shares of common stock held by All Star Technology, Inc., a British Virgin Islands international business company. Feng Li’s father, Wei Li, exercises voting and investment control over the shares held by All Star Technology, Inc. Wei Li is a principal shareholder of All Star Technology, Inc. and may be deemed to beneficially own such shares, but disclaims beneficial ownership in such shares held by All Star Technology, Inc. except to the extent of his pecuniary interest therein. Mr. Li has pledged all of his common stock of the Company as collateral security for the Company’s obligations under certain 6% Convertible Notes owed by the Company.

 

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

 

For description of transactions with related parties, see Note 7 to Consolidated Financial Statements under Item 8 in Part II.

 

Under the independence standard set forth in Rule 4200(a) (15) of the Market Place Rules of the Nasdaq Stock Market, which is the independence standard that we have chosen to report under.

 

ITEM 14. Principal Accountant Fees and Services

 

Fees Paid to Independent Public Accountants for 2019 and 2018.

 

Audit Fees

 

All of the services described below were approved by our board of directors prior to performance of such services. The board of directors has determined that the payments made to its independent accountants for these services are compatible with maintaining such auditor’s independence.

 

The aggregate audit fees for 2019 paid and payable to Friedman LLP were approximately $220,000. The aggregate audit fees for 2018 paid and payable to Friedman LLP were approximately $205,000.

 

The amounts include: (1) fees for professional services rendered by Friedman LLP in connection with the audit of our consolidated financial statements; (2) reviews of our quarterly reports on the Form 10-Q.

 

Audit-Related Fees

 

Audit-related fees for 2019 and 2018 were $0.

 

Tax Fees

 

Tax fees for 2019 and 2018 were $0.

 

All Other Fees

 

None.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

 

Since we did not have a formal audit committee, our board of directors served as our audit committee. We have not adopted pre-approval policies and procedures with respect to our accountants in 2019 and 2018. All of the services provided and fees charged by our independent registered accounting firms in 2018 and 2017 were approved by the board of directors. There is no non-audit services provided by our independent auditors during the year of 2019 and 2018.

 

Part IV

 

ITEM 15. Exhibits and Financial Statement Schedules

 

Exhibit No.   Description
     
23.1   CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
     
32.1   Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

29
 

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 29, 2020

 

  KIWA BIO-TECH PRODUCTS GROUP CORPORATION.
     
  By: /s/ Wade Li
   

Wade Li

Chief Executive Officer

(Principal Executive Officer)

     
  By: /s/ Hon Man Yun
   

Hon Man Yun

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ Wade Li   Chief Executive Officer and Director   May 29, 2020
Wade Li   (Principal Executive Officer)    
         
/s/ Hon Man Yun   Chief Financial Officer   May 29, 2020
Hon Man Yun   (Principal Financial and Accounting Officer)    

 

30
 

 

Kiwa Bio-Tech Products Group Corporation

 

Index to Consolidated Financial Statements

 

    Page
Report of Independent Registered Public Accounting Firm   F-1
     
Consolidated Balance Sheets   F-2
     
Consolidated Statements of Operations and Comprehensive Income (Loss)   F-3
     
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)   F-4
     
Consolidated Statements of Cash Flows   F-5
     
Notes to Consolidated Financial Statements   F-6

 

31
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Kiwa Bio-Tech Products Group Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products Group Corporation and its subsidiaries (collectively, the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had an accumulated deficit of $21,158,508 and $14,803,530 as at December 31, 2019 and 2018, respectively, the Company incurred a net loss of $6,635,296 for the year ended December 31, 2019. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding this matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Friedman LLP

 

We have served as the Company’s auditor since 2017.

 

New York, New York

May 29, 2020

 

F-1
 

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    December 31, 2019     December 31, 2018  
             
ASSETS                
Current assets                
Cash and cash equivalents   $ 7,965     $ 7,859  
Accounts receivable, net     -       6,751,113  
Prepaid expenses     1,091,927       2,259,565  
Other receivables, net     2,208,199       323,362  
Loan to a third party     2,046,822       -  
Notes receivable     7,140,335       -  
Advance to suppliers     10,274,222       15,763,198  
Due from related parties - non-trade     34,380       12,108  
Inventories     31,506       1,643,033  
Deferred cost of goods sold     -       4,929,855  
                 
Total current assets     22,835,356       31,690,093  
                 
Property, plant and equipment - net     33,260       93,181  
Operating lease right-of-use assets     54,345       -  
Rent deposits-non current     3,865       613  
Deferred tax asset     426,786       -  
Deposit for long-term investment     715,717       727,155  
                 
Total non-current assets     1,233,973       820,949  
Total assets   $ 24,069,329     $ 32,511,042  
                 
LIABILITIES AND stockholders’ EQUITY                
Current liabilities                
Accounts payable   $ 135,504     $ 1,611,273  
Advances from customers     1,096,392       580,720  
Due to related parties     248,617       570,921  
Convertible notes payable, net of discount of $273,559 and $99,907 at December 31, 2019 and 2018, respectively     2,376,948       971,086  
Derivative liabilities     -       6,621  
Notes payable     360,000       360,000  
Salary payable     875,266       1,024,959  
Income taxes payable     3,476,676       2,946,926  
Interest payable     2,785,927       2,020,821  
Operating lease liabilities – current     24,993       -  
Other payables and accruals     2,873,556       2,940,088  
Deferred revenue     -       6,751,113  
Total current liabilities     14,253,879       19,784,528  
                 
Non-Current Liabilities                
Convertible note payable - non current     97,895       -  
Operating lease liabilities – non current     32,267       -  
Total non-current liabilities     130,162       -  
                 
Total liabilities     14,384,041       19,784,528  
                 
STOCKHOLDERS’ EQUITY                
Preferred stock - $0.001 par value, Authorized 20,000,000 shares. Series A - Issued and outstanding 500,000 and 500,000 shares (liquidation preference in $1,000,000) at December 31, 2019 and 2018, respectively;
Series B - Issued and outstanding 811,148 and 811,148 shares (liquidation preference in $1,054,492) at December 31, 2019 and 2018, respectively.
    1,311       1,311  
Common stock - $0.001 per value. Authorized 300,000,000 shares. Issued and outstanding 82,531,999 and 16,885,260 shares at December 31, 2019 and 2018, respectively.     82,532       16,886  
Additional paid-in capital     30,890,661       27,047,457  
Statutory Reserve     742,287       1,022,605  
Accumulated deficit     (21,158,508 )     (14,803,530 )
Accumulated other comprehensive loss     (872,995 )     (558,215 )
Total stockholders’ equity     9,685,288       12,726,514  
Total liabilities and stockholder’s equity   $ 24,069,329     $ 32,511,042  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2
 

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERTIONS AND COMPREHENSIVE INCOME/(LOSS)

 

    Years Ended December 31,  
    2019     2018  
             
Revenue   $ 40,089,457     $ 30,650,402  
                 
Cost of goods sold     (30,757,460 )     (22,391,952 )
                 
Gross profit     9,331,997       8,258,450  
                 
Operating expenses                
Provision for deferred cost of goods sold     2,411,006       -  
Research and development expenses     -       122,774  
Selling expenses     199,664       617,387  
General and administrative expenses     4,379,851       4,928,943  
Loss on disposal of subsidiaries     3,527,254       -  
Total operating expenses     10,517,775       5,669,104  
Operating Income     (1,185,778 )     2,589,346  
                 
Other income/(expense), net                
Change in fair value of derivative liabilities     101,765       241,312  
Interest expense     (3,943,751 )     (634,874 )
Other income/(expense)     37,253       (1,185 )
Exchange gain/(loss)     15,296       55,444  
Total other expense, net     (3,789,437 )     (339,303 )
Income (loss) from operations before income taxes     (4,975,215 )     2,250,043  
                 
Provision for income taxes                
Current     (2,091,736 )     (1,906,222 )
Deferred     431,655       -  
Total provision for income taxes     (1,660,081 )     (1,906,222 )
                 
Net income (loss)     (6,635,296 )     343,821  
                 
Other comprehensive income                
Foreign currency translation adjustment     (314,780 )     (881,991 )
Total comprehensive loss   $ (6,950,076 )   $ (538,170 )
                 
Earnings per share - Basic:                
Net income (loss)     (0.29 )     0.02  
                 
Earnings per share - Diluted:                
Net income (loss)     (0.29 )     0.02  
                 
Weighted average number of common shares outstanding - basic     22,814,035       16,522,099  
Weighted average number of common shares outstanding - diluted     22,814,035       16,522,099  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHODERS’ EQUITY

 

                                  Accumulated      
                Additional                 Other     Total  
    Preferred Stock     Common Stock     Paid-in     Statutory     Accumulated     Comprehensive     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Reserve     Deficit     Gain/(Loss)     Equity  
Balance, December 31, 2017     1,311,148     $ 1,311       15,202,965     $ 15,203     $ 24,455,291     $ 458,334     $ (14,583,080 )   $ 323,776     $ 10,670,835  
Issuance of common stock for cash     -       -       247,700       248       307,352       -       -       -       307,600  
Issuance of common stock for consulting services     -       -       1,277,918       1,278       2,181,271       -       -       -       2,182,549  
Issuance of common shares for salary payment     -       -       30,632       31       25,270                               25,301  
Conversion of convertible note     -       -       126,045       126       78,273       -       -       -       78,399  
Net income     -       -       -       -       -       -       343,821       -       343,821  
Statutory reserve     -       -       -       -       -       564,271       (564,271 )     -       -  
Foreign currency translation adjustments     -       -       -       -       -       -       -       (881,991 )     (881,991 )
Balance, December 31, 2018     1,311,148     $ 1,311       16,885,260     $ 16,886     $ 27,047,457     $ 1,022,605     $ (14,803,530 )   $ (558,215 )   $ 12,726,514  
Issuance of common stock for cash     -       -       220,000       220       175,780       -       -       -       176,000  
Issuance of common stock for consulting services     -       -       784,999       785       672,065       -       -       -       672,850  
Issuance of common shares for salary payment     -       -       124,484       124       34,614                               34,738  
Conversion of convertible note     -       -       62,523,923       62,524       510,705       -       -       -       573,229  
Issuance of common shares as convertible note issuance costs                     273,333       273       121,551                               121,824  
Issuance of common shares for Liabilities settlement                     300,000       300       221,700                               222,000  
Issuance of common shares for convertible notes                     1,420,000       1,420       (1,420 )                             -  
Fair value of beneficial conversion feature of convertible note                                     1,430,509                               1,430,509  
Financing expense of issuance of convertible note                                     677,700                               677,700  
Net loss     -       -       -       -       -               (6,635,296 )     -       (6,635,296 )
Appropriation of statutory Reserve                                             307,736       (307,736 )             -  
Reverse of statutory reserve for disposal of subsidiaries                                             (588,054 )     588,054               -  
Foreign currency translation adjustments     -       -       -       -       -       -       -       (314,780 )     (314,780 )
Balance, December 31, 2019     1,311,148     $ 1,311       82,531,999     $ 82,532     $ 30,890,661     $ 742,287     $ (21,158,508 )   $ (872,995 )   $ 9,685,288  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Years Ended December 31,  
    2019     2018  
             
Cash flow from continuing operating activities:                
Net income (loss)   $ (6,635,296 )   $ 343,821  
Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operating activities:                
Depreciation and amortization     47,953       27,947  
Bad debt     254,922       19,844  
Provision for deferred cost of goods sold     2,411,006       -  
Impairment loss on equipment     8,299       -  
Accrued interest     1,369,135       634,874  
Stock compensation for consulting services and salary payment     1,853,704       2,207,850  
Financing cost of convertible note     704,900       -  
Gain on derivative liabilities     (101,765 )     (241,312 )
Loss on disposal of subsidiaries     3,527,254       -  
Changes in continuing operating assets and liabilities:                
Accounts receivable     3,405,344       (6,989,810 )
Prepaid expenses     1,167,522       52,895  
Other receivables     50,998       (221,388 )
Notes receivable     (7,221,795 )     -  
Advance to suppliers     (316,776 )     (3,926,197 )
Due from related parties-non-trade     (22,719 )     6,128  
Inventories     1,603,772       994,483  
Deferred cost of goods sold     -       (5,108,265 )
Deferred tax assets     (431,655 )     -  
Accounts payable     (1,466,971 )     (97,108 )
Salary payable     478,786       763,005  
Taxes payable     2,118,185       1,938,545  
Advances from customers     535,753       68,711  
Lease liability     (14,155 )     -  
Other payables and accruals     262,010       887,204  
Deferred revenue     (3,405,344 )     6,989,810  
Net cash provided by (used in) operating activities     183,067       (1,648,963 )
                 
Cash flows from investing activities:                
Loan to a third party     (2,070,173 )     -  
Purchase of property, plant and equipment     -       (52,992 )
Cash disposed in subsidiaries     (349 )     -  
Net cash used in investing activities     (2,070,522 )     (52,992 )
                 
Cash flows from financing activities:                
Working capital borrowed from (repaid to) related parties     (322,164 )     252,171  
Proceeds from sale of common stock     176,000       307,600  
Proceeds from convertible note     1,628,250       -  
Net cash provided by financing activities     1,482,086       559,771  
                 
Effect of exchange rate change     405,475       66,504  
                 
Cash and cash equivalents:                
Net increase/(decrease)     106       (1,075,680 )
Balance at beginning of year     7,859       1,083,539  
Balance at end of year   $ 7,965     $ 7,859  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

 

1. Description of Business and Organization

 

Organization

 

The Company took its present corporate form in March 2004 when 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, entered into a share exchange transaction. The share exchange transaction left the shareholders of Kiwa BVI owning a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic. For accounting purposes this transaction was treated as an acquisition of Tintic by Kiwa BVI in the form of a reverse triangular merger and a recapitalization of Kiwa BVI and its wholly owned subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”). On July 21, 2004, we completed our reincorporation in the State of Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.

 

The Company currently mainly operates its business through Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”), which incorporated in March 2018, Kiwa Bio-Tech Products (Hebei) Co., Ltd. (“Kiwa Hebei”), which was incorporated in China in December 2016, and The Institute of Kiwa-Yangling Ecological Agriculture and Environment Research Co., Ltd. (“Kiwa Institute”), which incorporated in March 2018.

 

On October 12, 2018, the Company got the approval from the Administrative Committee of Yangling Agricultural High-tech Industry Demonstration Zone to obtain land to construct a new manufacturing facility to help meet the growing demand in China for bio-fertilizers. Yangling Free Trade Zone has agreed to offer the Company approximately US$432,975 (RMB 3,000,000) in incentives and provide tax preferences for the first three years of production. The manufacturing facility will specialize in developing and producing Kiwa Bio-Tech’s core microbes, the fundamental components for making high-quality bio-fertilizers. The total facility construction area is approximately 8.77 acres, and will include fermentation and production terminals, agricultural produce sorting facilities and storage, a research and development institute and corresponding ancillary facilities. The construction of the manufacturing facility is expected to be completed in 2020 and have a production capacity of 60,000 tons of Kiwa Bio-Tech’s core microbes. The annual production value is expected to be over US$65 million (approximately 462 million RMB).

 

On October 21, 2019, the Company transferred all of its right, title and interest in Kiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa Asia), Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), and Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch, (“Kiwa Xian”), to the Hong Kong Sano Group Co., Ltd. for a consideration of HKD 17,000,000 equivalent of US $2,169,862. As Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, and Kiwa Xian has transferred all of their bio-technological products business to Kiwa Yangling, the Company conduct the same business of bio-technological products before and after the disposal of these entities. These disposed subsidiaries did not operate or generate any revenue in 2019. This restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, and Kiwa Xian were not reported as discontinued operations under the guidance of Accounting Standards Codification (“ASC”) 205.

 

F-6
 

 

 

Business

 

The Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological products for agricultural use. Our products are designed to enhance the quality of human life by increasing the value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes.

 

2. Liquidity

 

The Company’s consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

As of December 31, 2019 and 2018, the Company had an accumulated deficit of $21,158,508 and $14,803,530, respectively, and the Company incurred a net loss of $6,635,296 for the year ended December 31, 2019. These circumstances, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company has assessed its ability to continue as a going concern for a period of one year from the date of the issuance of these financial statements. In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.

 

The Company engages in the business for organically bio-fertilizer and its customers are mainly agricultural cooperative company and distributors who then resell its products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay the Company’s distributors. The Company’s current payment terms on these customers are ranging from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers. As a result, the Company’s accounts receivable turnover ratio is normally low due to the nature of the Company’s business. In addition, the Company’s business is capital intensive as the Company needs to make advance payment to its suppliers to secure timely delivery and current market price of raw materials. Debt financing in the form of notes payable and loans from related parties have been utilized to finance the working capital requirements of the Company.

 

F-7
 

 

The Company sold Convertible Promissory Notes (“Notes”) in the aggregate principal amount of $1,901,250 for the year ended December 31, 2019. As of December 31, 2019, the Company’s working capital was approximately $8.6 million, however, the Company had only cash of $7,965, with remaining current assets mainly composed of advance to suppliers, notes receivable, other receivables, and prepaid expenses.

 

Although the Company believes that it can realize its current assets in the normal course of business, the Company’s ability to repay its current obligations will depend on the future realization of its current assets and the future operating revenues generated from its products. Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, the Company expects its revenues from its innovated and highly effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow in its business. In addition, the Company’s marketing team is expanding to the Western areas of China and Hainan province and it expects its revenues will continue to grow in 2020. Meanwhile, the Company expects to continue to gain market shares in its existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry.

 

Management has considered its historical experience, the economic environment, trends in the Agricultural industry, the realization of the notes receivables, other receivables, advance to suppliers and other receivables as of December 31, 2019. The Company expects to realize the balance of its current assets within the normal operating cycle of a twelve-month period. If the Company is unable to realize its current assets within the normal operating cycle of a twelve-month period, the Company may have to consider supplementing its available sources of funds through the following sources:

 

  the Company will continuously seek additional equity financing to support its working capital;
  other available sources of financing from PRC banks and other financial institutions;
  financial support and credit guarantee commitments from the Company’s major shareholder.

 

Based on the above considerations, management is of the opinion that it does not have sufficient funds to meet its working capital requirements and debt obligations as they become due one year from the date of this report. If the Company can’t raise enough funds, it might be unable to fund its future cash requirement on a timely basis and under acceptable terms and conditions and may not have sufficient liquidity to maintain operations and repay its liabilities for the next twelve months. As a result, the Company may be unable to implement its current plans for expansion, repay its debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations.

 

3. Summaries of Significant Accounting Policies

 

Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).

 

Principle of Consolidation

 

These consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Kiwa BVI, Kiwa Asia Holdings Company, Kiwa Beijing, Kiwa Shenzhen, Kiwa Hebei, Kiwa Asia, Kiwa Yangling, and Kiwa Institute. All significant inter-company balances or transactions are eliminated on consolidation.

 

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, derivative liabilities, deferred tax assets and related valuation allowance.

 

F-8
 

 

Certain of the Company’s 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 the Company’s industry, and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company re-evaluates all of the Company’s accounting estimates annually based on these conditions and record adjustments when necessary.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable represent customer accounts receivables. 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.

 

Inventory

 

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 materials, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated based on 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 improvement   The shorter of the
lease term and useful
life

 

F-9
 

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets consist of property, plant and equipment. 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. It is possible that these assets could become impaired as a result of legal factors, market conditions, operational performance indicators, technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Leases

 

Prior to December 31, 2018, leases are classified as either capital or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are accounted for as capital leases as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases and the lease expense is included in the consolidated statements of operations on a straight-line basis over the term of the leases.

 

On January 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). This update supersedes the lease accounting guidance found under ASC 840, Leases (“ASC 840”) and requires the recognition of right-of-use (“ROU”) assets and lease obligations (“lease liabilities”) by lessees for those leases currently classified as operating leases under existing lease guidance. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Short term leases with a term of 12 months or less are not required to be recognized. The Company elected the practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. There is no impact from the adoption of ASC 842 on January 1, 2019 as the Company did not have any existing material leases with a lease term in excess of twelve months on January 1, 2019.

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of operating leases liabilities, and operating leases, non-current on our consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

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.

 

F-10
 

 

Embedded conversion features of convertible debentures that are classified as derivative liabilities

 

The embedded conversion features of convertible debentures that are classified as derivative liabilities are recorded at fair value as a discount from the face amount of the respective debt instrument. The discount is being amortized to interest expense over the life of the note using the straight-line method, which approximates the effective interest method. These instruments are accounted for as derivative liabilities and marked-to-market each reporting period. The change in the value of the derivative liabilities is charged against or credited to income in the captioned “change in fair value of derivative liabilities” in the accompanying consolidated statements of operations and comprehensive income.

 

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 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. Derivative instruments are carried at fair value, estimated using the Black Scholes Merton model.

 

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.

 

F-11
 

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.

 

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time.

 

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

 

The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.

 

The Company continues to derive 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 to consider control of goods are transferred to its customer and collectability of payment is reasonably assured. The Company’s revenues are recognized at a point in time after all performance obligations are satisfied.

 

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. Collectability is a necessary condition for the contract to be accounted for to meet the criteria of the first step “identifying the contract with the customer” under the new revenue guidance in ASC 606. As a result, these sales contracts are not considered a contract under ASC 606, thus the shipments under these contracts are not recognized as revenue until all criteria for “identifying the contract with the customer” and revenue recognition are met using the five-step model.

 

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 under the five-step model have not yet been met. Though these contracts are not considered a contract under ASC 606, they are legally enforceable, and the Company has an unconditional and immediate right to payment after the Company has shipped products, therefore, the Company recognizes a receivable and a corresponding deferred revenue upon shipment. Deferred cost of goods sold includes direct inventory costs. Once all revenue recognition criteria under the five-step model have been met, the deferred revenues and associated cost of goods sold are recognized. The Company’s provision for deferred cost of goods sold is made based on historical collection experience on such related accounts receivable and realizability of deferred revenue. The Company has $2,411,006 and nil provision of deferred cost of goods sold for the years ended December 31, 2019 and 2018, respectively.

 

F-12
 

 

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.

 

FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns prior to 2015 are not subject to examination by any applicable tax authorities. PRC tax returns filed for 2016, 2017 and 2018 are subject to examination by any applicable tax authorities.

 

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.

 

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”) and Hong Kong Dollar (“HKD”), being the functional 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.

 

F-13
 

 

Other comprehensive income for the years ended December 31, 2019 and 2018 represented foreign currency translation adjustments and were included in the unaudited condensed consolidated statements of operations and comprehensive income.

 

The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the unaudited condensed consolidated financial statements were as follows:

 

    As of December 31,  
    2019     2018  
Balance sheet items, except for equity accounts     6.9860       6.8761  

 

    Years ended December 31,  
    2019     2018  
Items in the statements of operations and comprehensive income/(loss)     6.9072       6.6146  

 

The exchange rates used to translate amounts in HKD into U.S. Dollars for the purposes of preparing the consolidated financial statements were as follows:

 

    As of December 31,  
    2019     2018  
Balance sheet items, except for equity accounts     7.7872       7.8297  

 

    Years ended December 31,  
    2019     2018  
Items in the statements of operations and comprehensive income/(loss)     7.8346       7.8370  

 

Earnings 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. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share.

 

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 unassured claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unassured 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.

 

F-14
 

 

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.

 

Recent Accounting Pronouncements

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

 

In August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The adoption of this ASU on January 1, 2020 did not have a material effect on the Company’s consolidated financial statements.

 

In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in Update 2016-13 address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for the Company for annual reporting periods beginning after December 15, 2019. The adoption of this ASU on January 1, 2020 did not have a material effect on the Company’s consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s consolidated financial statement presentation or disclosures.

 

4. Accounts receivable, net

 

As of December 31, 2019 and December 31, 2018, we had nil and $6.8 million, respectively, of accounts receivable from the Company’s customers. The Company’s current payment terms on these customers are ranging typically from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers. These customers are either agricultural cooperative company or distributors who then resell the Company’s products to individual farmers.

 

F-15
 

 

The Company’s provision on allowance for doubtful accounts 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 and come up with an aging allowance method. The Company’s management has continued to evaluate the reasonableness of the valuation allowance policy and update it if necessary.

 

Accounts receivable consisted of the following:

 

    December 31, 2019     December 31, 2018  
Accounts receivable   $ -     $ 6,751,113  
Less: Allowance for doubtful debt     -       -  
Accounts receivable, net   $ -     $ 6,751,113  

 

5. Other receivables, net

 

Other receivables consisted of the following:

    December 31, 2019     December 31, 2018  
Consideration receivable from sales of subsidiaries (1)   $ 2,183,070     $ -  
Rent deposits and others     277,176       323,362  
Other receivables   $ 2,460,246     $ 323,362  
Allowance for other receivables     (252,047 )     -  
Other receivables, net   $ 2,208,199     $ 323,362  

 

(1) On October 21, 2019, the Company transferred all of its right, title and interest in Kiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa Asia), Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), and Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch Company, (“Kiwa Xian”), to the Hong Kong Sino Group Co., Ltd. for the HKD 17,000,000, equivalent of approximately US $2.2 million.

 

6. Loan to a third party

 

      December 31, 2019       December 31, 2018  
Yangling SanKang Life Agricultural Development Co. Ltd     2,046,822       -  
Loan to third parties   $ 2,046,822     $ -  

 

On October 10, 2019, the Company loan approximately RMB 14.3 million (approximately US$ 2.0 million) to Yangling Sankang Agriculture Development Ltd. The repayment date is June 30, 2020, the monthly interest rate is 1% after January 1, 2020.

 

7. Prepaid expenses

 

Prepaid expenses consisted of the following:

 

    Notes     December 31, 2019     December 31, 2018  
Prepaid office rent           $ 1,491     $ 4,921  
Prepaid government filing expense             6,000       7,000  
Prepaid consulting expenses     (1)     1,084,436       2,230,553  
Others             -       17,091  
Total           $ 1,091,927     $ 2,259,565  

 

F-16
 

 

(1) Prepaid consulting expenses represent issuance of common stock for prepaid services. As of December 31, 2019, the Company evaluated the performance of the consultants and concluded all the contracts were on schedule of delivery. The company amortized the consulting fee over the service periods per agreements based on the progress of services delivered. For the years ended December 31, 2019 and 2018, the prepaid consulting expenses totaled $672,849 and $2,242,050, respectively. For the years ended December 31, 2019 and 2018, the amortization of consulting expense was $1,890,628 and $2,403,770, respectively.

 

8. Advance to suppliers

 

Advance to suppliers are mainly funds deposited for future raw material and finished goods purchases. The Company’s major vendors require deposits with them as a guarantee that the Company will complete its purchases on a timely basis as well as securing the current agreed upon purchase price. Since the Company anticipated the price of raw materials continues to be on the rise, the Company agreed to make large amount of advances to suppliers.

 

As of December 31, 2019 and December 31, 2018, advance to suppliers consisted of the following:

 

    December 31,
2019
    December 31,
2018
 
Advance to suppliers   $ 10,274,222     $ 15,763,198  
Less: provisions for advance to suppliers     -       -  
Advance to suppliers, net   $ 10,274,222     $ 15,763,198  

 

9. Inventory

 

Inventory consisted of the following:

 

    December 31,
2019
    December 31,
2018
 
Raw materials   $ -     $ 1,358,384  
Finished goods     31,506       253,331  
Packing materials     -       31,318  
Total   $ 31,506     $ 1,643,033  

 

10. Property, Plant and Equipment

 

Property, plant and equipment, net consisted of the following:

 

    December 31, 2019     December 31, 2018  
Property, Plant and Equipment                
Office equipment   $ 5,586     $ 17,451  
Furniture and fixture     8,225       27,312  
Leasehold improvements     43,172       130,357  
Construction in progress     -       25,305  
Others     -       1,047  
Property, plant and equipment - total     56,983       201,472  
Less: accumulated depreciation     (23,723 )     (108,291 )
Property, plant and equipment - net   $ 33,260     $ 93,181  

 

Depreciation expense was $30,850, and $27,947 for the years ended December 31, 2019 and 2018, respectively.

 

11. Deposit for long-term investment

 

On June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000 (approximately US$ 2.1 million). As of December 31, 2019, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately $0.7 million). Since the Company had received an approval from relevant authorities to obtain a land purchase discount from the Yangling Free Trade Zone to construct a new manufacturing facility for bio-fertilizers, the Company decided to abandon its plan to build a production base in Penglai and has initiated the process of refund of the deposits. The Company expected to collect all of the deposits within one year.

 

F-17
 

 

12. Salary payable

 

    December 31, 2019     December 31, 2018  
Ms. Yvonne Wang (“Ms. Wang”)   $ 343,000     $ 259,000  
Hon Man Yun (“Mr. Yun”)     164,992       60,702  
Other Employees     367,274       705,257  
Total   $ 875,266     $ 1,024,959  

 

Ms. Wang served as Chairman of the Board since November 2015 and served as Secretary since March 2020. No salary was paid to Ms. Wang since December 2015. Mr. Yun was the Chief Financial Officer of the Company since April 2018. The Company expects to be in negotiations with Mr. Yun and Ms. Wang to settle these obligations.

 

13. Related party transactions

 

Due from related parties – non-trade

 

Amounts due from related parties consisted of the following as of December 31, 2019 and 2018:

 

Item   Nature     Notes     December 31, 2019     December 31, 2018  
Mr. Xiaoqiang Yu     Non-trade       (1)     11,240       12,108  
Ms. Feng Li (“Ms. Li”)     Non-trade       (2)     23,140       -  
Total                   $ 34,830     $ 12,108  

 

(1) Mr. Xiaoqiang Yu

 

During the year ended December 31, 2019, Mr. Xiaoqiang Yu, the COO of the Company, obtained a cash advance from the Company for operational purpose. As of December 31, 2019 and December 31, 2018, the amount due from Mr. Xiaoqiang Yu was $11,240 and $12,108, respectively.

 

(2) Ms. Feng Li

 

Ms. Feng Li is a member of the Company’s board of directors and shareholder of the Company. Ms. Li held approximately 11% of the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock. Ms. Feng Li obtained a cash advance from the company for operational purpose. As of December 31, 2019 and December 31, 2018, the amount due from Ms. Feng Li was $23,141 and nil, respectively.

 

Due to related parties

 

Amounts due to related parties consisted of the following as of December 31, 2019 and 2018:

 

Item   Nature     Notes     December 31, 2019     December 31, 2018  
Ms. Wang     Non-trade       (1)       247,619       534,563  
Ms. Feng Li (“Ms. Li”)     Non-trade       (2)       -       36,358  
Yangling Kangxi Agricultural Technology Development Co., Ltd.     Non-trade       (3)       1,002          
Total                   $ 248,617     $ 570,921  

 

F-18
 

 

(1) Ms. Wang

 

Effective November 20, 2015, the Company appointed Ms. Wang as the Chairman of the Board and 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 April 15, 2018, Ms. Wang turned over the Acting Chief Financial Officer to her successor. On March 4, 2020, Yvonne Wang submitted her resignation as Chief Executive Officer. Her position now is the secretary of Kiwa Bio-Tech Products Group Corp.

 

During the years ended December 31, 2019 and 2018, Ms. Wang paid various expenses on behalf of the Company. As of December 31, 2019 and 2018, the amount due to Ms. Wang was $247,619 and $534,563, respectively.

 

(2) Ms. Feng Li

 

Ms. Feng Li is a member of the Company’s board of directors and shareholder of the Company. Ms. Li held approximately 11% of the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock. Ms. Feng Li paid various expenses on behalf of the Company. As of December 31, 2019 and 2018, the amount due to Ms. Feng Li was nil and $36,358, respectively.

 

(3) Yangling Kangxi Agricultural Technology Development Co., Ltd. (Kangxi)

 

Yangling Kangxi Agricultural Technology Development Co., Ltd. (Kangxi) is the Company’s affiliate established by Kiwa Yangling on November 21, 2019 with registered capital of RMB 1 million. Kiwa Yangling owned 40% of shareholder interests of Kangxi. As of December 31, 2019, Kiwa Yangling has not made any capital contribution Kangxi’s business will be focusing on soil remediation projects. As of December 31, 2019, Kangxi has not commenced operations. The balance due to Kangxi represents the advance for assisting to handle Kangxi’s business license. The amount was subsequently recorded as other income upon the service completion..

 

14. Convertible notes payable

 

Convertible notes payable consisted of the following:

 

    December 31,
2019
    December 31,
2018
 
6% secured convertible notes – FirsTrust Group Inc. (1)   $ 185,867     $ 125,692  
15% convertible notes- Mr. Geng Liu (2)     143,145       145,431  
15% convertible notes- Mr. Junwei Zheng (3)     787,294       799,870  
12% convertible notes- Labrys (4)     940,250       -  
12% convertible notes- TFK (5)     -       -  
12% convertible notes- EMA (6)     303,847          
12% convertible notes- Firstfire (7)     100,000          
12% convertible notes- GRR (8)     153,000          
12% convertible notes- Morningview (9)     135,000          
Less: notes discount     (273,559 )     (99,907 )
Convertible notes payable - total   $ 2,474,844     $ 971,086  
Non-current     97,895       -  
Current   $ 2,376,949     $ 971,086  

 

(1) 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.

 

F-19
 

 

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.

 

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. 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.

 

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 $78,540 and $75,280 for liquidated damages for the years ended December 31, 2019 and 2018, respectively. The Company also accrued $19,939 and $16,914 for interest at the rate of 15% per annum for the years ended December 31, 2019 and 2018, respectively. The total 15% accrued interests were $174,911 and $177,372 at December 31, 2019 and 2018, respectively. The total accrued liquidated damages were $592,078 and $555,538 at December 31, 2019 and 2018, respectively.

 

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, has pledged all of his common stock of the Company as collateral for the Company’s obligations under the 6% Convertible Notes.

 

On October 19, 2017, the Company issued total 14,151 common shares at $1.04 per share price to FirsTrust Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price 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 per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled to the fair value of the 14,151 common shares at $2.25 per share, no gain or loss were recognized upon this conversion.

 

On December 13, 2017, the Company issued total 105,095 common shares at $0.75 per share price to FirsTrust Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price 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 per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled to the fair value of the 105,095 common shares at $2.3 per share, no gain or loss were recognized upon this conversion.

 

On April 27, 2018, the Company issued total 126,045 common shares to FirsTrust Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price 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 per the convertible notes agreement.

 

On September 19, 2018, the Company has entered a Settlement Agreement and Release (“Settlement Agreement”) with FirsTrust to settle the 6% secured convertible notes and interest and penalties. The Company has agreed to allow FirsTrust to effect a conversion in accordance with the terms of the 6% Note by October 18, 2018, and to make a cash payment of $500,000 by December 17, 2018. If the payment is not timely made, then FirsTrust shall be permitted to immediately effect further conversion in accordance with the terms of the 6% Notes into the Company’s shares, and the Company shall make a final cash payment of $340,000 by February 28, 2019. The Settlement Agreement has not been carried out by the Company as agreed as of December 31, 2018. The interest and penalties on this Note are continuously accrued in accordance with the original terms.

 

F-20
 

 

On October 18, 2018, FirsTrust requested a conversion in accordance with the terms of the 6% Notes into the Company’s shares. The Company had failed to convert and thus incurred a financial liquidated damage at $245 per day for a total of $18,130 as of December 31, 2018, which had been added to the principle amount of the Note. On March 26, 2019, the Company issued 395,959 shares to FirsTrust for the conversion. According to the convertible note agreement, the conversion price 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 per the convertible notes agreement.

 

On March 26, 2019, the Company has entered into a First Amendment to Settlement Agreement and Release (“First Amendment Agreement”) with FirsTrust to settle the 6% secured convertible notes together with the promissory notes as disclosed under Note 13 plus interest and penalties with a total payable of approximately $2.3 million as of the date of the First Amendment Agreement was entered. The Company has agreed to make a payment of approximately $29,789 (RMB200,000), which has been paid on April 1, 2019, to enter into this Amendment and settled with the total outstanding balance of $1.3 million to be due under the terms of the First Amendment Agreement by June 30, 2019. If such settled outstanding balance was not made by June 30, 2019, it will deem the First Amendment Agreement to be ineffective and the Company will need to continue to pay FirsTrust the amount set forth in the Settlement Agreement.

 

As of this date, the Company remains in default of the Settlement Agreement and Release and is in the process of raising funds to retire these obligations. Notwithstanding, there is no guarantee that the Company will be successful in these efforts and that FirsTrust will not exercise all rights available to it under the applicable agreements between the parties.

 

On February 13, 2019, the Company received notice from FirsTrust that the Company has failed to make cash payment according to Sections 1 and 2 of the Settlement Agreement. FirsTrust advised the Company that it was in breach of the Settlement Agreement and that all interest and penalties applicable to the Promissory Note and 6% Note will continue to accrue so long as the Promissory Note and 6% Note remain in default. FirsTrust advised the Company that it believed that it had the right to immediately effect further conversions of 6% Note and that they would be reviewing various options to enforce the Company’s payment obligations under the Promissory Note, 6% Note and Settlement Agreement. In the meantime, FirsTrust has continued to effect conversions pursuant to the Promissory Note and 6% Note.

 

In January and February of 2020, the Company issued a total of 13,773,125 common shares to FirsTrust Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price 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 per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled to the fair value of the 13,773,125 common shares at $0.01 per share, no gain or loss were recognized upon this conversion.

 

(2) 15% convertible notes- Mr. Geng Liu

 

On January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng Liu and received principal of RMB 1 million, approximately $140,000. The note bears interest at 15% per annum and matured 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. The maturity date of the note has been extended to June 30, 2020.

 

The notes are convertible into shares of the common stock, at conversion price is $0.90 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.

 

F-21
 

 

For the years ended December 31, 2019 and 2018, the Company recorded interest expense of $21,746 and $24,945 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 December 31, 2019 was $143,145.

 

(3) 15% convertible notes- Mr. Junwei Zheng

 

On May 9, 2017, the Company entered a Convertible Note Agreement with Mr. Junwei Zheng with principal of RMB 30 million. The note bears interest at 15% per annum and will mature on May 8, 2019. Before the maturity date, the Note holder has an option to convert partial or all of the outstanding principal and accrued interest to the Company’s common shares with a conversion price of $3.5 per share. On August 17, 2018, the Company does not expect that the remaining funds will ever be so advanced. As of December 31, 2019, the Company has received principal totaled RMB 5.5 million ($787,294 equivalent USD at December 31, 2019) out of the RMB 30 million Convertible Note Agreement. On May 7, 2019, the Company reached an agreement with Mr. Junwei Zheng that the maturity date will be extended to May 8, 2020.

 

The notes are convertible into shares of the common stock, at conversion price is $3.5 which is higher than the price of the Company’s common stock on the date of issue, therefore the conversion feature embedded in the note did not meet the definition of BCF. The Company determined that conversion option embedded in the note meet the definition of a derivative instrument. Since the embedded conversion price of the conversion feature is denominated in U.S. dollar, a currency other than the convertible note payable currency. As a result, the embedded conversion feature is not considered indexed to the Company’s own stock due to the variable exchange rate between U.S. Dollar and RMB, and as such, the Company determined that the embedded conversion feature to be carried as a liability and re-measured at fair value at each financial reporting date until such time as the conversion feature is exercised or expired. The Company evaluated the fair value of the embedded conversion feature at the issue date and recorded the amount into as discount to convertible note payable. The discount to convertible note payable is being amortized to interest expense over the life of the note using the straight-line method, which approximates the effective interest method.

 

On May 7, 2019, due to the extension of the convertible notes and embedded conversion feature continued to be considered as a derivative instrument, the Company determined that the embedded conversion feature to be carried as a liability and re-measured at fair value at each financial reporting date until such time as the conversion feature is exercised or expired. The Company evaluated the fair value of the embedded conversion feature at the renewal date and recorded the amount into as discount to convertible note payable. The discount to convertible note payable is being amortized to interest expense over the life of the note using the straight-line method, which approximates the effective interest method.

 

The fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables at inception on May 9, 2017:

 

  Strike price of $3.5, for the conversion options
     
  Expected volatility of 260.8% calculated using the Company’s historical price of its common stock
     
  Expected dividend yield of 0%
     
  Risk-free interest rate of 1.37%, for the conversion options
     
  Expected lives of 2.0 years
     
  Market price at issuance date of $2.7

 

The fair value of embedded conversion feature was calculated using the BlackScholesMerton model based on the following variables on December 31, 2018:

 

  Strike price of $3.5, for the conversion options
     
  Expected volatility of 204.73% calculated using the Company’s historical price of its common stock

 

F-22
 

 

     
  Expected dividend yield of 0%
     
  Risk-free interest rate of 2.49%, for the conversion options
     
  Expected lives of 0.33 years
     
  Market price at re-measurement date of $0.50

 

The fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables on May 7, 2019:

 

  Strike price of $3.5, for the conversion options
     
  Expected volatility of 192.48% calculated using the Company’s historical price of its common stock
     
  Expected dividend yield of 0%
     
  Risk-free interest rate of 2.37%, for the conversion options
     
  Expected lives of 1.00 years
     
  Market price at re-measurement date of $0.95

 

The fair value of embedded conversion feature was calculated using the BlackScholesMerton model based on the following variables on December 31, 2019:

 

  Strike price of $3.5, for the conversion options
     
  Expected volatility of 204.73% calculated using the Company’s historical price of its common stock
     
  Expected dividend yield of 0%
     
  Risk-free interest rate of 1.57%, for the conversion options
     
  Expected lives of 0.33 years
     
  Market price at re-measurement date of $0.02

 

For the years ended December 31, 2019 and 2018, the Company recorded interest expense of $281,470 and $409,798, respectively on the note, including the amortization of the debt discount resulting from the value of the embedded conversion feature, and the carrying value of the note as of December 31, 2019 and 2018 was $754,110 and $699,963, respectively.

 

(4) 12% convertible notes- Labrys

 

On February 27, 2019, the Company entered into a Convertible Note Agreement with Labrys Fund, LP (“Labrys”), for the principal amount of $1,365,000 (the “Note”). The Note carries an Original Issue Discount of $102,375, bears interest at the rate of 12% per annum and must be repaid on or before 180 calendar days after the funding date of the respective tranche. The amounts advanced under the Note may be converted by Labrys at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion. As of December 31, 2019, the Company has received principal totaled $1,213,250 out of the $1,365,000 Convertible Note Agreement.

 

In addition, the Company issued 50,000 shares of the Company’s common stock with a fair value of $40,000, determined using the closing price of the issuance date of $0.80 per shares in connection with these issuances along with the original issue discount of $90,994 were recognized as discounts from the principal amount to be amortized over 180 days.

 

F-23
 

 

Furthermore, the notes are convertible into shares of the common stock, at conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion, 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 $1,071,506 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital.

 

On August 28, 2019, the Company released 420,000 shares of the Company’s common stock with a fair value of $336,000 to Labrys as a penalty due to the Company was not able to repay the Note upon the maturity date. On September 15, 2019, the Company released 390,000 shares of the Company’s common stock with a fair value of $210,600 to Labrys as a penalty due to the Company was not able to repay the Note upon the maturity date. The fair value of the released shares are determined using the closing price of the date of Note default. The Company recorded $546,600 as financing expense during the year ended December 31, 2019.

 

On September 25, 2019, the Company repaid $90,000 to Labrys. On October 12, 2019, the Company repaid $202,691 to Labrys.

 

On October 24, 2019, the Note became default due to insufficient shares for issuance. For the year ended December 31, 2019, the Company recorded $498,564 default penalty amount.

 

For the year ended December 31, 2019, the Company issued total 25,017,964 common shares to Labrys for the conversion of $115,612 interests and $109,928 default penalties of the convertible note. For the year ended December 31, 2019, the Company recorded interest expense of $1,362,983 on the note, including the amortization of the debt discount of $1,202,500 resulting from the value of beneficial conversion feature, and the carrying value of the note as at December 31, 2019 was $940,250.

 

On February 5, 2020, the Company executed a Securities Purchase Agreement (the “SPA”) between Labrys Fund, LP and the Company, pursuant to which Labrys purchased from the Company a Convertible Promissory Note in the principal amount of $375,000 (the “Note”) dated February 5, 2020. The Note carries an Original Issue Discount of $37,500, bears interest at the rate of 12% per annum and must be repaid on or before 180 calendar days after the funding date of each respective tranche (each a “Maturity Date”). The Note may be prepaid at any time before Maturity Date without any prepayment penalty. The amounts advanced under the Note may be converted by Labrys at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 70% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion.

 

(5) 12% convertible notes- TFK

 

On March 21, 2019, the Company entered into a Convertible Note Agreement with TFK Investments Inc. (“TFK”), for the principal amount of $300,000 (the “Note”). The Note carries an Original Issue Discount of $28,500, bears interest at the rate of 12% per annum and must be repaid on or before 180 calendar days after the funding date of the respective tranche. The amounts advanced under the Note may be converted by TFK at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion. As of December 31, 2019, the Company has received principal totaled $150,000 out of the $300,000 Convertible Note Agreement.

 

In addition, the Company issued 7,500 shares of the Company’s common stock with a fair value of $6,975, determined using the closing price of the issuance date of $0.93 per shares in connection with these issuances along with the original issue discount of $14,250 were recognized as discounts from the principal amount to be amortized over 180 days.

 

Furthermore, the notes are convertible into shares of the common stock, at conversion price equal to 70% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion, 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 $128,775 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital.

 

F-24
 

 

 

On September 22, 2019, the Company released 230,000 shares of the Company’s common stock with a fair value of $131,100 to TFK as a penalty due to the Company was not able to repay the Note upon the maturity date. The fair value of the released shares are determined using the closing price of the date of Note default. The Company recorded $131,100 as financing expense during the year ended December 31, 2019.

 

On October 24, 2019, the Note became default due to insufficient shares for issuance. For the year ended December 31, 2019, the Company recorded $75,000 default penalty amount.

 

For the year ended December 31, 2019, the Company issued total 37,109,964 common shares to TFK for the conversion of $150,000 principle amounts, $17,089 interests, and $75,000 default penalties of the convertible note. For the year ended December 31, 2019, the Company recorded interest expense of $173,761 on the note, including the amortization of the debt discount of $150,000 resulting from the value of beneficial conversion feature, and the carrying value of the note as at December 31, 2019 was $0.

 

On February 5, 2020, the Company executed a Securities Purchase Agreement (the “SPA”) between TFK Investments, LLC (“TFK”) and the Company, pursuant to which TFK purchased from the Company a Convertible Promissory Note in the principal amount of $375,000 (the “Note”) dated February 5, 2020. The Note carries an Original Issue Discount of $37,500, bears interest at the rate of 12% per annum and must be repaid on or before 180 calendar days after the funding date of the respective tranche (each a “Maturity Date”). The Note may be prepaid at any time before Maturity Date without any prepayment penalty. The Note may be prepaid at any time before Maturity Date without any prepayment penalty. The amounts advanced under the Note may be converted by Labrys at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 70% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion.

 

(6) 12% convertible notes- EMA

 

On September 12, 2019, the Company entered into a Convertible Note Agreement with EMA Financial LLC. (“EMA”), for the principal amount of $150,000 (the “Note”). The Note carries an Original Issue Discount of $9,000, bears interest at the rate of 12% per annum and must be repaid on or before June 5, 2020. The amounts advanced under the Note may be converted by EMA at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 70% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion.

 

In addition, the Company issued 7,500 shares of the Company’s common stock with a fair value of $3,975, determined using the closing price of the agreement date of $0.53 per shares in connection with these issuances along with the original issue discount of $9,000 were recognized as discounts from the principal amount to be amortized over 264 days.

 

Furthermore, the notes are convertible into shares of the common stock, at conversion price equal to 70% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion, 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 $56,494 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital.

 

On October 24, 2019, the Note became default due to insufficient shares for issuance. For the year ended December 31, 2019, the Company recorded $153,847 default principle amount.

 

For the year ended December 31, 2019, the Company recorded interest expense of $42,541 on the note, including the amortization of the debt discount of $28,156 resulting from the value of beneficial conversion feature, and the carrying value of the note as at December 31, 2019 was $262,534.

 

F-25
 

 

On February 12, 2020, the Company completed a debt settlement, repaid $250,000 of principal, interest and penalty balances to EMA Financial, LLC.

 

(7) 12% convertible notes- Firstfire

 

On September 19, 2019, the Company entered into a Convertible Note Agreement with Firstfire Global Opportunities Fund LLC. (“Firstfire”), for the principal amount of $100,000 (the “Note”). The Note carries an Original Issue Discount of 5,000, bears interest at the rate of 12% per annum and must be repaid on or before 12 months after the funding date of the respective tranche. The amounts advanced under the Note may be converted by Firstfire at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion.

 

In addition, the Company issued 83,333 shares of the Company’s common stock with a fair value of $45,000, determined using the closing price of the agreement date of $0.54 per shares in connection with these issuances along with the original issue discount of $5,000 were recognized as discounts from the principal amount to be amortized over 365 days.

 

Furthermore, the notes are convertible into shares of the common stock, at conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion, 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 $45,000 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital.

 

For the year ended December 31, 2019, the Company recorded interest expense of $28,989 on the note, including the amortization of the debt discount of $25,767 resulting from the value of beneficial conversion feature, and the carrying value of the note as at December 31, 2019 was $30,767.

 

On February 10, 2020, the Company completed a debt settlement, repaid $135,000 of principal, interest and penalty balances to Firstfire Global Opportunities Fund LLC.

 

(8) 12% convertible notes- GRR

 

On October 7, 2019, the Company entered into a Convertible Note Agreement with Geneva Roth Remark Holdings, Inc. (“GRR”), for the principal amount of $153,000 (the “Note”). The Note bears interest at the rate of 12% per annum and must be repaid on or before April 7, 2021. The amounts advanced under the Note may be converted by GRR at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion.

 

In addition, the notes are convertible into shares of the common stock, at conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion, 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 $64,984 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital.

 

For the year ended December 31, 2019, the Company recorded interest expense of $14,004 on the note, including the amortization of the debt discount of $9,879 resulting from the value of beneficial conversion feature, and the carrying value of the note as at December 31, 2019 was $97,913.

 

(9) 12% convertible notes- Morningview

 

On October 7, 2019, the Company entered into a Convertible Note Agreement with Morningveiw Financial, LLC. (“Morningview”), for the principal amount of $135,000 (the “Note”). The Note carries an Original Issue Discount of 6,750, bears interest at the rate of 12% per annum and must be repaid on or before 12 months after the funding date of the respective tranche. The amounts advanced under the Note may be converted by Morningview at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion.

 

F-26
 

 

In addition, the Company issued 125,000 shares of the Company’s common stock with a fair value of $25,875, determined using the closing price of the agreement date of $0.21 per shares in connection with these issuances along with the original issue discount of $6,750 were recognized as discounts from the principal amount to be amortized over 365 days.

 

Furthermore, the notes are convertible into shares of the common stock, at conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion, 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 $63,750 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital.

 

For the year ended December 31, 2019, the Company recorded interest expense of $25,290 on the note, including the amortization of the debt discount of $21,695 resulting from the value of beneficial conversion feature, and the carrying value of the note as at December 31, 2019 was $60,258.

 

15. 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”). In 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.

 

On September 19, 2018, the Company has entered a Settlement Agreement and Release with Firs Trust to settle the Notes and interest. The Company has agreed to make a cash payment of $200,000 and issue 300,000 Shares to FirsTrust by October 18, 2018 and to make a final cash payment of $260,000 by February 28, 2019. However, the Company has not performed its obligations in the Settlement Agreement as of December 31, 2018, and considered the payment terms as default and continued to accrue its interest after September 19, 2018.

 

On March 26, 2019, the Company has entered into the First Amendment Agreement with FirsTrust to settle the promissory notes together with the 6% secured convertible notes as disclosed under Note 13 plus interest and penalties with a total payable of approximately $2.3 million as of the date of the First Amendment Agreement was entered. The Company has agreed to make a payment of $29,789 (RMB200,000) ), which has been paid on April 1, 2019, to enter into this Amendment, and settled with the total outstanding balance of $1.3 million to be due under the terms of the First Amendment Agreement by June 30, 2019. On March 26, 2019, the Company issued 300,000 shares to FirsTrust Group Inc. for debt settlement under the terms of the Settlement Agreement and Release (“Settlement Agreement”) with FirsTrust to settle the Promissory Note. The Company has not performed its obligations in the First Amendment Agreement, and considered the payment terms as default and continued to accrue its interest after June 30, 2019.

 

As of December 31, 2019, all of $360,000 of Promissory Note to FirsTrust is still outstanding, and total accrued interest of the Promissory Note is $1,129,300. The Company accrued $90,000 and $90,000 interest expense on note payable for the years ended December 31, 2019 and 2018, respectively.

 

On November 15, 2019, FirsTrust Group, Inc. filed a Complaint for Breach of Contract in Cobb County Superior Court, Georgia (Matter # 19108353) seeking damages in the aggregate amount of $3,914,447, which included accrued interest through October 31, 2019. On January 28, 2020, FirsTrust Group filed a Motion for Default Judgment against the Company regarding 6% secured convertible notes (Note 14) and the Promissory Note in the principal amount of $2,286,000 plus interest and other damages in the amount of $114,850, attorney fees in the amount of $240,190 and costs in the amount of $299.91. On March 11, 2020, the Cobb County Superior Court issuawarded a Default Judgment against the Company in the amount prayed. Interest accrues on this judgment at the annual rate of 15% as of the date the judgment was granted (i.e., March 11, 2020). The amount of daily interest currently accruing on this judgment is $1,100.89. The Company has not paid any amount of this judgment as of the date of this disclosure. The Company has not discussed a potential settlement with the judgment creditor as of the date of this disclosure. The Company will discuss with FirsTrust which respect to a potential settlement of this matter, however, there is no guarantee that any settlement will be reached. As of date of this disclosure, to the best of the Company’s knowledge, FirsTrust has not undertaken any collection activities other than obtaining the Default Judgment. At this time, it is not possible to predict the ultimate outcome of the matter and the financial impact, if any, as a result thereof aside from the liability of the judgment itself and the interest currently accruing thereon.

 

F-27
 

 

16. Other payable and accruals

 

Other payable consisted of the following:

 

    Notes    

December 31,

2019

   

December 31,

2018

 
Stock subscription proceeds received in advance     (1)   $ 1,685,134     $ 1,692,454  
Accrued expenses             241,206       219,033  
R&D expense payable             431,009       431,009  
Others             516,207       597,592  
            $ 2,873,556     $ 2,940,088  

 

(1) The Company received $458,059 (RMB 3.2 million, revalued as $458,059 as at December 31, 2019) in 2016 from two unrelated potential investors, and additionally received $1,227,075 in 2017 from three unrelated potential investors pending for stock issuances. The Company is in the process of negotiating the issuance price per shares of these stock subscriptions with the investors.

 

17. Stockholders’ equity

 

Preferred stock

 

On December 14, 2015, the Company issued 500,000 shares of preferred stock series A for the aggregate amount of $1,000,000 as debt cancellation owed to two related party individuals.

 

These shares of Series A Preferred Stock shall have voting rights equal to aggregate of 75% of total shares entitled to vote by both (i) the holders of all of the then outstanding shares of Common Stock (whether or not such holders vote) and (ii) the holders of all of the then outstanding shares of the Company. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. The Company shall have the right to redeem the Series A Preferred Stock, plus any accrued and unpaid dividends at a cash redemption price equal to the aggregate issuance price of $2.0 per share.

 

On December 28, 2017, the Company issued 811,148 shares of preferred stock series B for the aggregate amount of $1,054,492 as debt cancellation owed to one related party individual.

 

These shares of Series B Preferred Stock has a liquidation preference which is same with the Company’s Series A Preferred Stock, and is entitled to vote on an as-converted basis as the holder of common stock, and is convertible into the Company’s common stock on a one-for-one basis at any time at the option of the holder. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. The Company shall have the right to redeem the Series B Preferred Stock, plus any accrued and unpaid dividends at a cash redemption price equal to the aggregate issuance price of $1.3 per share.

 

Authorized common stock

 

On October 22, 2019, the Board of Directors of the Company amend the Company’s Articles of Incorporation to increase the number of authorized Company Common Shares from 100,000,000 to 300,000,000.

 

F-28
 

 

Common stock

 

During the year ended December 31, 2018, the Company issued 247,700 common shares to five individuals residing in China for net proceeds of $307,600. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

During the year ended December 31, 2018, the Company entered into eleven consulting agreements and issued 1,277,918 shares of common stock to consultants for IR, Training system, and business development services based on market price of the shares at the transaction dates. The valuation of the shares utilized an average issuance price of $1.71 per share.

 

During the year ended December 31, 2018, the Company issued 30,632 common shares to one officer for salary payment based on the average stock price of his service period which valued at $25,299.

 

During the year ended December 31, 2019, the Company issued 220,000 common shares to two individuals residing in China for net proceeds of $176,000. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

 

During the year ended December 31, 2019, the Company entered into three consulting agreements and issued 784,999 shares of common stock to consultants for IR and business development services based on market price of the shares at the transaction dates. The valuation of the shares utilized an average issuance price of $0.86 per share.

 

During the year ended December 31, 2019, the Company issued 124,484 common shares to one officer for salary payment based on the average stock price of his service period which valued at $34,738.

 

During the year ended December 31, 2019, the Company issued 1,420,000 common shares as a contingent shares to be released to the holders of the Convertible Notes if the Company is not able to repay the Convertible Notes at maturity date. As of December 31, 2019, 1,040,000 common shares are released to the holders of the Convertible Notes as discussed in Note 14 (4 & 5).

 

Conversion of convertible note

 

During the year ended December 31, 2018, the Company issued total 126,045 common shares at an average issuance price of $$0.62 per share for the conversion of convertible note.

 

During the year ended December 31, 2019, the Company issued total 62,523,923 common shares at an average issuance price of $$0.01 per share for the conversion of convertible note.

 

Additional paid-in-capital

 

As disclosed in Note 14, in February, March, September, and October 2019, the Company issued in the principal amount of $1,901,250 convertible notes with BCF embedded. The Company evaluated the intrinsic value of the BCF as $1,430,509, at the issue date and recorded the amount into additional paid in capital. All other amounts recorded in additional paid in capital are derived from issuance of preferred shares or common shares as disclosed in the above.

 

18. Stock-based compensation

 

On March 15, 2017, the Board of Directors approved a new stock option plan with ten years’ term. As of December 31, 2019, the Company has not granted any incentive compensation under this plan.

 

19. Fair value measurements

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities recorded at fair value on recurring basis that were accounted for at fair value as of:

 

F-29
 

 

December 31, 2018

 

Recurring Fair Value Measures   Level 1     Level 2     Level 3     Total  
Derivative liabilities               $ 6,621     $ 6,621  
Total               $ 6,621     $ 6,621  

 

The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2019 and 2018:

 

   

Year ended

December 31, 2019

   

Year ended

December 31, 2018

 
             
Beginning balance   $ 6,621     $ 247,933  
Increase in derivative liabilities     95,144       -  
Change in fair value of derivative liabilities     (101,765 )     (241,312 )
Ending balance   $ -     $ 6,621  

 

20. Income taxes

 

In accordance with the current tax laws in the U.S., the Company is subject to a federal corporate tax rate of 21% on its taxable income for the years ended December 31, 2019 and 2018. No provision for taxes is made for U.S. income tax for the years ended December 31, 2019 and 2018 as the Company has no taxable income in the U.S for these years.

 

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits.

 

For purposes of the inclusion of GILTI, the Company has determined the taxable off-shore earnings in the amount of $904,487 for the year ended December 31, 2019, which has been fully offset by the current year tax loss of Kiwa US in the amount of $5.0 million. Therefore, this is no accrual of US income tax for GILTI as of December 31, 2019.

 

In accordance with the current tax laws in China, Kiwa Beijing, Kiwa Shenzhen, Kiwa Xian, Kiwa Hebei, Kiwa Yangling, and Kiwa Institute are subject to a corporate income tax rate of 25% on its taxable income. Kiwa Beijing, Kiwa Shenzhen, Kiwa Xian, Kiwa Hebei, and Kiwa Institute have not provided for any corporate income taxes since each had no taxable income for the year ended December 31, 2019. For the year ended December 31, 2019, Kiwa Yangling recorded income tax provision for approximately $1,660,081.

 

In accordance with the relevant tax laws in the British Virgin Islands, Kiwa BVI, as an International Business Company, is exempt from income taxes in the BVI.

 

A reconciliation of the provision for income taxes from continuing operation determined at the local income tax rate to the Company’s effective income tax rate is as follows:

 

    Years ended December 31,  
    2019     2018  
Pre-tax income (loss)   $ (4,975,215 )   $ 2,250,043  
                 
U.S. federal corporate income tax rate     21 %     21 %
Income tax expense computed at U.S. federal corporation income tax rate     (1,044,795 )     472,509  
Reconciling items:                
Rate differential     355,645       260,451  
Change of valuation allowance     1,577,292       438,698  
Deductible loss from disposal of subsidiaries     581,997       -  
Utilization of NOL     189,942       734,564  
Income tax expenses   $ 1,660,081