NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016
1.
Description of Business and Organization
Organization
– Kiwa Bio-Tech Products Group Corporation (“the Company”) is the result of a share exchange transaction
accomplished on March 12, 2004 between the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company
originally organized under the laws of the British Virgin Islands on June 5, 2002 and Tintic Gold Mining Company (“Tintic”),
a corporation originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah. The share exchange
resulted in a change of control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on a fully diluted
basis and Kiwa BVI surviving as a wholly-owned subsidiary of Tintic. Subsequent to the share exchange transaction, Tintic changed
its name to Kiwa Bio-Tech Products Group Corporation. On July 21, 2004, the Company completed its reincorporation in the State
of Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.
The Company operates through a series of subsidiaries
in the Peoples Republic of China as detailed in the following Organizational Chart. The Company had previously operated its business
through its subsidiaries Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”) and Tianjin Kiwa Feed Co.,
Ltd. (“Kiwa Tianjin ”). Kiwa Tianjin has been dissolved since July, 11, 2012. On February 11, 2017, the Company
entered an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) to transfer
all of shareholders’ right, title and interest in Kiwa Shandong to the Transferee for RMB $1.00. On April 12, 2017,
the government processing of transfer has been completed. Currently, the Company mainly operates its business through its subsidiaries
Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), which was acquired in January, 2016 and rename to Kiwa Baiao
Bio-Tech (Beijing) Co., Ltd. from Oriental Baina Co., Ltd. in February, 2016, Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa
Shenzhen”), which was incorporated in China in November, 2016 and Kiwa Bio-Tech Products (Hebei) Co., Ltd. (“Kiwa
Hebei”), which was incorporated in December, 2016. In July, 2017, the Company established Kiwa Bio-Tech Asia Holding
(Shenzhen) Ltd. (“Kiwa Asia”) to be the direct holding company of Kiwa Beijing, Kiwa Shenzhen and Kiwa Hebei. The
Company established Inner Mongolia Jing Nong Investment & Management, Ltd. (“Kiwa Jing Nong”) in August 2017.
Business
– The Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological
products for agriculture. 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.
Summary of Significant Accounting Policies
Principle
of Consolidation
These
consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Kiwa BVI,
Hong Kong Baina Group Holding Company, Kiwa Beijing, Kiwa Shandong, Kiwa Shenzhen and Kiwa Hebei. 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, deferred tax assets and related
valuation allowance.
Certain
of our estimates, including evaluating the collectability of accounts receivable and the fair market value of long-lived assets,
could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible
that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates.
We re-evaluate all of our accounting estimates annually based on these conditions and record adjustments when necessary.
Cash
and Cash Equivalents
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 and a review of the current status
of trade accounts receivable. 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.
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 material, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated
selling price in the ordinary course of business, less estimated costs to complete and dispose.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses
on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property,
plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All
ordinary repair and maintenance costs are expensed as incurred. Depreciation for financial reporting purposes is provided using
the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
Useful Life
|
|
|
|
|
(In years)
|
|
|
Buildings
|
|
|
30 - 35
|
|
|
Machinery and equipment
|
|
|
5 - 10
|
|
|
Automobiles
|
|
|
8
|
|
|
Office equipment
|
|
|
2 - 5
|
|
|
Computer software
|
|
|
3
|
|
|
Leasehold improvement
|
|
|
The
shorter of the lease term and its useful life
|
|
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. Judgments
regarding potential impairment are based on legal factors, market conditions and operational performance indicators, among others.
In assessing the impairment of property and equipment, the Company makes assumptions regarding the estimated future cash flows
and other factors to determine the fair value of the respective assets.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820- 10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value with
U.S. GAAP, and expands disclosures about fair value measurements.
To
increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37
are described below:
|
|
●
|
Level
1: quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
|
|
|
●
|
Level
2: pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly
observable as of the reporting date.
|
|
|
|
|
|
|
●
|
Level
3: Pricing inputs that are generally observable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalent, prepaid expenses, accounts
payable and accrued expenses, approximate their fair value because of the short maturity of those instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
It
is not however practical to determine the fair value of advances from stockholders, if any, due to their related party nature.
Revenue
Recognition
The
Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes
revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all
of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the
services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably
assured.
The
Company derives its revenues from sales contracts with its customers with revenues being recognized upon delivery of products.
Persuasive evidence of an arrangement is demonstrated via invoice; and the sales price to the customer is fixed upon acceptance
of the purchase order and there is no separate sales rebate, discount, or volume incentive.
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.
ASC
Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
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 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”), being the
primary currency of the economic environment in which its operations are conducted. In general, the Company translates its assets
and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement
of comprehensive loss and the statement of cash flow are translated at average exchange rates during the reporting period. Equity
accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements
are recorded as accumulated other comprehensive income.
Other
comprehensive income for the years ended December 31, 2016 and 2015 represented foreign currency translation adjustments and were
included in the consolidated statements of comprehensive loss.
The
exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements
were as follows:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.9472
|
|
|
|
6.4857
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Items in the statements of comprehensive loss
|
|
|
6.6418
|
|
|
|
6.2281
|
|
Net
Loss Per Common Share
Net
income per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income
per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.
Diluted
net income per common share is computed by dividing net income by the weighted average number of shares of common stock and potentially
outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable
through contingent shares issuance arrangement, stock options or warrants.
Related
Parties
The Company follows subtopic 850-10 of
the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to Section 850-10-20 the related parties include: a) affiliates of the Company; b) entities for which investments in
their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection
of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit
of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal
owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or
can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management
or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can
significantly Influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing
its own separate interests.
The disclosures shall include: a. the nature
of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts
were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary
to an understanding of the effects of the transactions on the consolidated financial statements; c. the dollar amounts of transactions
for each of the periods for which income statements are presented and the effects of any change in the method of establishing
the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance
sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitments
and Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Management does not believe, based upon information available at this time that these matters will have a material
adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance
that such matters will not materially and adversely
Cash
Flow Reporting
The
Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash
receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions
of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25
of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile
it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and
payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income
that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency
cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held
in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents
and separately provides information about investing and financing activities not resulting in cash receipts or payments in the
period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
Subsequent
Events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU
2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when
they are widely distributed to users, such as through filing them on EDGAR.
Recent
accounting pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09 (ASU
2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition
guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will
require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU
2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015,
Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting
periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected
to have any impact on the Company’s financial statement presentation or disclosures.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating
activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows
arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December IS, 2018, including interim
periods within those fiscal years. Early application is permitted. The Company has not yet evaluated the impact of the adoption
of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
The amendments in this guidance are clarifying the definition of a business to assist entities when determining whether an integrated
set of assets and activities meets the definition of a business. The update provides that when substantially all the fair value
of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not
a business. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. The adoption of this new guidance is not expected to have a material impact on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The amendments in this guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure
goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s
carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still
has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. The amendment should be applied on a prospective basis. The guidance is effective for goodwill impairment tests in
fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January
1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.
In
May 2017, the FASB issued Accounting Standards Update No. 2017-09 (ASU 2017-09), Compensation — Stock Compensation (Topic
718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 which
will become effective for annual periods beginning after December 15, 2017 and for interim periods within those annual periods,
is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In July 2017, the FASB issued Accounting
Standards Update No. 2017-11 (ASU 2017-11), Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in ASU 2017-11 change the classification
analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether
certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes
equity classification when assessing whether the instrument is indexed to an entity’s own stock. The adoption of ASU 2017-11
which will become effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods.
The Company elected to early adopt ASU 2017-11 when preparing these financial statements for the year ended December 31, 2016.
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 financial statement presentation or disclosures.
3.
Going Concern
The
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, 2016, the Company’s current liabilities substantially exceeded its current assets by $5,856,324, had an
accumulated deficit of $19,561,255, and stockholders’ deficiency of $4,244,052. 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. The management of the
Company already raised additional equity for approximately $3,115,031 and $941,779 convertible debts during the period
ended on September 30, 2017.
Though the Company is
generating additional revenue while seeking additional equity financing, we do not have enough cash to support the operation in
the one year from the date of the issuance of these financial statements
.
To the extent that we are unable to successfully raise the capital necessary to fund our future cash requirements on a timely
basis and under acceptable terms and conditions, we may not have sufficient liquidity to maintain operations and repay our 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. The accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
4.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified
for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
In fourth quarter fiscal 2016, the Company initiated the process of selling Kiwa Shandong to an unrelated third party company.
The Company assessed that all the criteria required for the classification of Kiwa Shandong have been met as at December 31, 2016.
As a result, the consolidated balance sheets at December 31, 2016 and 2015 reflected the assets and liabilities of Kiwa Shandong
business segment as a discontinued operation (See Note 19). This change in classification does not materially affect previously
reported consolidated cash flows and had no effect on the previously reported consolidated statement of operations for the years
ended December 31, 2016 and 2015.
5.
Accounts Receivable, net
Accounts
receivable consisted of the following:
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Accounts receivable
|
|
$
|
1,177,994
|
|
|
$
|
-
|
|
|
Less: Allowance for doubtful debt
|
|
|
(55,240
|
)
|
|
|
-
|
|
|
Accounts receivable, net
|
|
$
|
1,122,754
|
|
|
$
|
-
|
|
6.
Prepaid Expenses
Prepaid
expenses consisted of the following:
|
|
|
Notes
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Prepaid office rent
|
|
|
|
|
|
$
|
12,504
|
|
|
$
|
-
|
|
|
Prepaid government filing expense
|
|
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
Prepaid consulting expenses
|
|
|
(1)
|
|
|
|
1,400,050
|
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
1,417,554
|
|
|
$
|
-
|
|
(1)
Prepaid consulting expenses
The Company issued a total of 1,710,808
shares of common stock to three consulting companies for investor relation consulting services, one individual for financing service
and three individuals for the growth and development strategy consulting service in China, which represents the amount of $1,688,300
based on quoted price at issuance. Pursuant to the indemnification terms of the services agreements, the Company has the rights
to demand the full services being accomplished as scheduled during the service period and to enforce the consultants to pay pro-rata
penalties if the consultants do not fulfill the contract services within the services periods. As of December 31, 2016, the Company
evaluated the performance of the consultants and concluded all the contracts were on schedule of delivery. The Company recorded
the prepaid consulting expenses totally $1,688,300 and amortized the consulting fee over the service periods per agreements based
on the progress of services delivered. For the year ended December 31, 2016, the amortization of consulting expense was $288,250.
7.
Advance to suppliers
Since
currently the Company does not have manufacturing facility, it has contracted with several third parties to produce fertilizer
products. Pursuant to the agreements entered by the Company and those third-party companies, the Company was required to make
partially prepayments in advance of purchase or completion of productions. As of December 31, 2016 and December 31, 2015, such
advance to suppliers was $ 1,880,044 and $ - 0 -, respectively.
8.
Property, Plant and Equipment
Property,
plant and equipment, net consisted of the following:
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
896
|
|
|
$
|
-
|
|
|
Furniture
|
|
|
7,838
|
|
|
|
-
|
|
|
Leasehold improvement
|
|
|
66,896
|
|
|
|
-
|
|
|
Property, plant and equipment - total
|
|
|
75,630
|
|
|
|
-
|
|
|
Less: accumulated depreciation
|
|
|
(20,311
|
)
|
|
|
-
|
|
|
Property, plant and equipment - net
|
|
$
|
55,319
|
|
|
$
|
-
|
|
Depreciation
expense was $21,246 and $ - 0 - for the years ended December 31, 2016 and 2015, respectively.
9.
Salary payable
There were $1,145,492 and $1,061,492 as at
December 31, 2016 and December 31, 2015, respectively, among the balance of salary payable which were due to the former Chairman
of the Board and CEO Mr. Li, and the current Chairman of the Board and CEO Ms. Wang. Mr. Li was the Chairman of the Board until
November 2015 and was the Chief Executive Officer of the Company until July 2015. No salary was paid to Mr. Li during his service
period. Ms. Wang served as Chairman of the Board since November 2015 and served as CEO since August 2016. No salary was paid to
Ms. Wang since December 2015. The Company expects to be in negotiations with both parties to settle these obligations.
10.
Related Party Transactions
Amounts
due from related parties consisted of the following as of December 31, 2016 and 2015:
|
Item
|
|
Nature
|
|
Notes
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kangtai Xinnong Agriculture Tech (Beijing) Co., Ltd. (“Kangtai”)
|
|
Non-trade
|
|
(1)
|
|
$
|
-
|
|
|
$
|
12,173
|
|
|
Kangtan Gerui (Beijing) Bio-Tech Co., Ltd. (“Gerui”)
|
|
Non-trade
|
|
(2)
|
|
|
1,522,434
|
|
|
|
-
|
|
|
Total
|
|
|
|
|
|
$
|
1,522,434
|
|
|
$
|
12,173
|
|
(1)
Kangtai
Kangtai
is a private company and is 64% owned by Mr. Wei Li, who is also the Chairman of Kangtai.
(2)
Gerui
Ms. Feng Li, a member of the Company’s
board of directors and shareholder of the Company (Ms. Li held approximately 20% of the Company’s Common Stock and 50% of
the Company’s Series A Preferred Stock), is also a 23% shareholder of Gerui. For the year ended December 31, 2016, the Company
reported other receivable due from Gerui of $1,522,435.
According
to the agreement between the Company and Gerui, all the balances will be paid off before June 30, 2018. T
he
Company has collected RMB 4,160,000 (approximately $611,154) from Gerui as of the date of issuance of the consolidated
financial statements. The management has determined that no allowance for doubtful debts was necessary.
For
the ended December 31, 2016, the Company recognized right-to-use trademark income of $786,329 from Gerui, which has been fully
collected and realized during the year ended December 31, 2016.
Amounts
due to related parties consisted of the following as of December 31, 2016 and 2015:
|
Item
|
|
Nature
|
|
Notes
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Wei Li (“Mr. Li”)
|
|
Non-trade
|
|
(1)
|
|
$
|
-
|
|
|
$
|
2,879,307
|
|
|
Ms. Yvonne Wang (“Ms. Wang”)
|
|
Non-trade
|
|
(2)
|
|
|
100,798
|
|
|
|
299,064
|
|
|
Subtotal
|
|
|
|
|
|
|
100,798
|
|
|
|
3,178,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAAS IARRP and IAED Institutes
|
|
Trade
|
|
(3)
|
|
|
160,461
|
|
|
|
18,425
|
|
|
Subtotal
|
|
|
|
|
|
|
160,461
|
|
|
|
18,425
|
|
|
Total amount due to related parties
|
|
|
|
|
|
$
|
261,259
|
|
|
$
|
3,196,796
|
|
(1)
Mr. Li
Mr.
Li was the Chairman of the Board until November 20, 2015 and was the Chief Executive Officer of the Company until July 1, 2015.
On
December 14, 2015, Mr. Li assigned $500,000 of obligation owed by the Company to his daughter, Feng Li. On the same day, Feng
Li subscribed for the purchase of 250,000 shares of preferred stock for the aggregate amount of $500,000, and agreed to the concurrent
cancellation of debt owed by the Company.
On
March 24, 2016, the Company issued 2,900,000 shares of common stock to Mr. Li in lieu of the cancellation of debt of an aggregate
of $2,900,000, which included personal loans of $2,879,307 Kiwa Shandong owed to Mr. Li and salary payable of $20,693.
Mr.
Li has pledged without any compensation from the Company all of his common stock of the Company as collateral for the Company’s
obligations under the 6% Convertible Notes (See Note 11).
(2)
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
December 14, 2015, Ms. Wang subscribed for the purchase of 250,000 shares of preferred stock for the aggregate amount of $500,000,
and agreed to the concurrent cancellation of debt owed by the Company. On March 24, 2016, the Company issued 240,000 shares of
common stock to Ms. Wang to pay off the loan balance of $240,000.
During
the year ended December 31, 2016, Ms. Wang paid various expenses on behalf of the Company. As of December 31, 2016, the amount
due to Ms. Wang was $100,798.
(3)
CAAS IARRP and IAED Institutes
On
November 5, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural
Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute
of Agricultural Economy & Development (“IAED”). The term of the Agreement was three years that began on November
20, 2015 and ends on November 19, 2018.
Pursuant
to the agreement, Kiwa agree to invest RMB 1 million (approximately $160,000) each year to the Spatial Agriculture Planning Method
& Applications Innovation Team that belongs to the Institutes. Professor Yong Chang Wu, the authorized representative of CAAS
IARRP, is also one of the Company’s directors effective since November 20, 2015 until March 13, 2017.
The
Company recorded $149,176 and $18,425 research and development expenses related to the institutes, for the years ended December
31, 2016 and 2015, respectively.
11.
Convertible Notes Payable
On
June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional
investors (collectively, the “Purchasers”) for the issuance and sale of 6% secured convertible notes, due three years
from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Convertible Notes”), convertible
into shares of the Company’s common stock.
On
August 12, 2013, the Company, entered into a Settlement Agreement and Release (the “Release”) with the holders
(the “Holders”) of the “6% Convertible Notes” in the aggregate principal amount of $2,000,000. Pursuant
to the terms of the Release, the Company paid the Holders $75,000 for a full release, including the forgiveness of past defaults
of unpaid principal amounts, interests and penalties. During the course of the time, certain notes had been converted as well.
On March 18, 2008, FirsTrust Group, Inc. (“FirsTrust”) purchased the three remaining 6% Convertible Notes, totaling
$168,000 ($59,100, $50,400 and $59,100 respectively), from Nite Capital, one of the six institutional investors which purchased
a total of $300,000 of the Note in three tranches ($105,000, $90,000, $105,000 respectively), for a cash payment of $100,000.
After the Release and conversion, FirsTrust is the only holder of the outstanding 6% Convertible Note with outstanding principal
amount of $150,250.
On
June 29, 2009, the 6% Notes were due. The Company informed the Purchasers of its inability to repay the outstanding balance on
the due date. Therefore, the 6% Notes are in default and the default interest rate of 15% per annum is being charged on the 6%
Notes.
The
conversion price of the Notes is based on a 40% discount to the average of the lowest three days trading price of the Company’s
common stock on the OTC Bulletin Board over a 20-day trading period. The conversion price is also adjusted for certain subsequent
issuances of equity securities of the Company at prices below the conversion price then in effect. The Notes contain a volume
limitation that prohibits the holder from further converting the 6% Notes if doing so would cause the holder and its affiliates
to hold more than 4.99% of the Company’s outstanding common stock.
The Company has elected to early adopt
the guidance in ASU 2017-11. As a result, the Company has concluded that the conversion feature of the Notes is indexed to its
own stock and would be classified and recorded as equity. The Company retrospectively applied the guidance to the above Notes
and determined that the impact of the conversion feature for the above Notes is immaterial.
The Company also incurs a financial liquidated
damages in cash or shares at the option of the Company (equal to 2% of the outstanding amount of the Notes per month plus accrued
and unpaid interest on the Notes, prorated for partial months) if it breaches any affirmative covenants in the Purchase Agreement,
including a covenant to maintain a sufficient number of authorized shares under its Certificate of Incorporation to cover at least
110% of the stock issuable upon full conversion of the Notes. Pursuant to the relevant provisions for liquidated damages in Purchase
Agreement, the Company has accrued the amounts of $77,575 and $72,152 for liquidated damages for the years ended December 31,
2016 and 2015, respectively. The Company also accrued $22,977 and $22,538 for interest at the rate of 15% per annum for
the years ended December 31, 2016 and 2015, respectively. The total 15% interest accrued was $183,361 and $160,762 at December
31, 2016 and 2015, respectively. The total accrued liquidated damages were $482,327 and $404,752 at December 31,
2016 and 2015, 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 until July 1, 2015, has pledged all of his common stock of the Company as collateral for the Company’s
obligations under the 6% Convertible Notes.
12.
Note payable
On May 29, 2007, the Company issued a $360,000 promissory note (the “Promissory Note”) to an unrelated
individual (the “Original Note holder”). This note bears interest at 18% per annum and was due on July 27, 2007. This
note is currently in default and bears interest of 25% per annum (the “Default rate”) until paid in full. This note
is secured by a pledge of shares of the Company’s common stock owned by Investlink (China) Limited (the “Pledged Shares”).
The Company accrued $90,000 and $90,000 interest expense on note payable for the years ended December 31, 2016 and 2015, respectively.
As
of December 31, 2016, the Original Note holder informed the Company that all right, title and interests in the Promissory Note
has been assigned and transferred to FirsTrust. As of December 31, 2016, all of $360,000 of Promissory Note to FirsTrust is still
outstanding, and total accrued interest of the Promissory Note is $ 859,300. The Company has begun preliminary discussion with
FirsTrust with regard to a potential settlement of the Note, but no agreement has been reached yet.
13.
Other payable and accruals
Other
payable consisted of the following:
|
|
|
Notes
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Stock subscription proceeds received in advance
|
|
(1)
|
|
$
|
460,617
|
|
|
$
|
-
|
|
|
Investment received in advance
|
|
(2)
|
|
|
79,168
|
|
|
|
-
|
|
|
Accrued expenses
|
|
|
|
|
385,090
|
|
|
|
415,389
|
|
|
|
|
|
|
$
|
924,875
|
|
|
$
|
415,389
|
|
(1).
The Company received RMB 3.2 million in 2016 from two unrelated potential investors, which was approximately $460,617 and the
investment agreements have not been finalized yet.
(2).
The Company received the investment funds in advance in 2016 from Mr. Geng Liu, which amount was approximately $79,168. Subsequently
on January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng. The note bears interest at 15% per annum
and will mature on January 16, 2018.
14.
Stockholders’ Deficiency
Preferred
stock
On
December 14, 2015, the Company issued 500,000 shares of preferred stock for the aggregate amount of $1,000,000 as debt cancellation
owed to two related party individuals.
Reverse
Split
On
January 14, 2016, the Company filed a Certificate of Amendment of its Certificate of Incorporation with the State of Delaware
with reference to a 1-for-200 reverse stock split with respect to its Common Stock with effective date of January 28, 2016. In
connection with the reverse split, the Company’s authorized capital was amended to be 120,000,000 shares, comprising 100,000,000
shares of Common Stock par value $0.001 and 20,000,000 shares of Preferred Stock par value $0.001. All relevant information relating
to numbers of shares and per share information have been retrospectively adjusted to reflect the reverse stock split for all periods
presented.
Common
stock
During
the year ended December 31, 2016, the Company issued 1,650,000 common shares to sixteen individuals residing in China for net
proceeds of $770,497.
On
November 15, 2016, the Company completed another private offering of common stock to an accredited investor for 125,000 shares
of its common stock and warrants to purchase 300,000 shares of Company common stock at an exercise price of $3.00 per share for
net proceeds of $100,000. The Company has determined the burfication of the issued warrants has no impact on the accounting of
the common stock and additional paid in capital.
During
the year ended December 31, 2016, the Company issued 2,900,000 Common shares and 240,000 Common shares, respectively, to Mr. Wei
Li and Ms. Wang in lieu of the cancellation of debt of an aggregate of $3,140,000, The Company issued 101,947 common shares to
former chief executive officer to settle compensation payable for $50,974. As both Mr. Wei Li and Ms. Wang are shareholders of
the Company, the Company concluded there should be no gain or loss recorded for the debt cancellation.
The
Company also issued 1,000 common shares to an attorney to settle legal fee payable for $1,000. The Company concluded the impact
of the fair value measurement of the shares issued for exchange of debt is immaterial.
During the year ended December
31, 2016, the Company entered into seven consulting agreements and issued 1,710,808 shares of common stocks to consultants for
financing, investor relation, and business development services based on market price of the shares at the transaction dates.
15.
Stock-based Compensation
On December 12, 2006, the Company granted
options for 2,000,000 shares (10,000 post-reverse split shares) of its common stock under its 2004 Stock Incentive Plan. As
of December 31, 2016, no stock options or other stock-based compensation was outstanding and all prior grants of stock options
had expired as of that date.
Summary of options
issued and outstanding at December 31, 2016 and 2015 and the movements during the years then ended are as follows:
|
|
|
Number of
underlying
shares
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted- Average
Contractual Life
Remaining in Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
6,163
|
|
|
$
|
35
|
|
|
$
|
-
|
|
|
|
2
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Outstanding at December 31, 2015
|
|
|
6,163
|
|
|
$
|
35
|
|
|
$
|
-
|
|
|
|
1
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Expired
|
|
|
6,163
|
|
|
$
|
35
|
|
|
|
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Outstanding at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Exercisable at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
16.
Statutory Reserves
The
Company’s subsidiaries in China are required to make appropriations to reserve funds, comprising the statutory surplus reserve,
statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should
be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the
entities’ registered capital or members’ equity. In accordance with the Chinese Company Law, the Company allocated
10% of income after taxes to the statutory surplus reserve the year ended December 31, 2016, statutory reserve activity is as
follows:
|
Balance – January 1, 2016
|
|
$
|
-
|
|
|
Addition to statutory reserve in 2016
|
|
|
127,473
|
|
|
Balance – December 31, 2016
|
|
|
127,473
|
|
17.
Income Tax
In
accordance with the current tax laws in the U.S., the Company is subject to a corporate tax rate of 34% on its taxable income.
No provision for taxes is made for U.S. income tax for the years ended December 31, 2016 and 2015 as it has no taxable income
in the U.S.
In
accordance with the current tax laws in China, Kiwa Shandong, Kiwa Beijing, Kiwa Shenzhen and Kiwa Hebei is subject to a corporate
income tax rate of 25% on its taxable income. Kiwa Shandong has not provided for any corporate income taxes since it had no taxable
income for the years ended December 31, 2016 and 2015. Kiwa Shenzhen and Kiwa Hebei has not provided for any corporate income
taxes since it had no taxable income for the years ended December 31, 2016. For the year ended December 31, 2016, Kiwa Beijing
recorded income tax provision for RMB 2,822,160 or approximately $424,911.
In
accordance with the relevant tax laws in the British Virgin Islands, Kiwa BVI, as an International Business Company, is exempt
from income taxes.
A
reconciliation of the provision for income taxes 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,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss) from continuing operation
|
|
$
|
1,466,412
|
|
|
$
|
(428,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal corporate income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
Income tax computed at U.S. federal corporate income tax rate
|
|
|
498,580
|
|
|
|
(145,530
|
)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Rate differential for PRC earnings
|
|
|
(152,968
|
)
|
|
|
-
|
|
|
Change of valuation allowance
|
|
|
275,767
|
|
|
|
109,660
|
|
|
Effect of tax exempted income in BVI
|
|
|
(196,468
|
)
|
|
|
35,870
|
|
|
Effective tax expense
|
|
$
|
424,911
|
|
|
$
|
-
|
|
The
Company had deferred tax assets from continuing operation as follows:
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net operating losses carried forward by parent Company in the US
|
|
$
|
2,555,064
|
|
|
$
|
2,279,297
|
|
|
Less: Valuation allowance
|
|
|
(2,555,064
|
)
|
|
|
(2,279,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2016 and 2015, the Company had approximately $7.3 million and $6.7 million net operating loss carryforwards available
to reduce future taxable income. Net operating loss of the Company could be carried forward and taken against any taxable income
for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the Internal Revenue Code
of 1986, as amended. It is more likely than not that the deferred tax assets cannot be utilized in the future because there will
not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full
valuation allowance on its deferred tax assets.
As
of December 31, 2016 and 2015, the Company has no material unrecognized tax benefits which would favorably affect the effective
income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized
tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company
during the two years ended December 31, 2016 and 2015, and no provision for interest and penalties is deemed necessary as of December
31, 2016 and 2015.
18.
Commitments and Contingencies
The
Company has the following material contractual obligations:
(1)
Strategic cooperation with two institutes in China
On November 5, 2015, the Company signed a
strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural Science (“CAAS”)’s
Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute of Agricultural Economy &
Development (“IAED”). Pursuant to the Agreement, the Company will form a strategic partnership with the two institutes
and establish an “International Cooperation Platform for Internet and Safe Agricultural Products”. To fund the cooperation
platform’s R&D activities, the Company will provide RMB 1 million (approximately $160,000) per year to the Spatial Agriculture
Planning Method & Applications Innovation Team that belongs to the Institutes. The term of the Agreement is for three years
beginning November 20, 2015 and will expire on November 19, 2018. 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.
(2)
Lease payments
(1)
On March 21, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. entered an office lease agreement with two-year team. Monthly lease
payment fee totaled RMB 68,133 or approximately USD $10,536.
(2)
On November 20, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. entered an apartment lease agreement for its employees. The lease
term is one year with monthly lease payment of RMB 6,000 or approximately USD $896. This lease was terminated on May 31, 2017
upon mutual agreement.
(3)
On March 1, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd, a newly established subsidiary entered an office lease agreement with one-year
term. Monthly lease payment is RMB 29,000 or approximately of USD $4,320.
(4)
On June 20, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd, a newly established subsidiary entered an office lease agreement with two-year
term. Monthly lease payment is RMB 117,221 or approximately of USD $17,213 for the first year and RMB 124,254 or approximately
of USD $18,245 for the second year. And the previous lease agreement terminated automatically since the landloard is the same
one.
(5)
On May 5, 2017, Kiwa Bio-Tech Products Group Corporation entered an office lease agreement with 13 months term. Monthly lease
payment totaled USD $680.
(6)
On July 1, 2017, Kiwa Bio-Tech Products Group Corporation entered an office lease agreement with one-year term. Monthly lease
payment totaled USD $1,087.
(7)
On July 4, 2017, Kiwa Bio-Tech (Hebei) Co., Ltd, a newly established subsidiary entered an office lease agreement with one-year
term. Monthly lease payment is RMB 2,000 or approximately of USD $301.
The
future lease payments at December 31, 2016 are summarized below.
|
2017
|
|
$
|
269,195
|
|
|
2018
|
|
$
|
260,851
|
|
|
2019
|
|
$
|
107,313
|
|
|
Thereafter
|
|
$
|
-
|
|
|
Total minimum lease payment
|
|
|
637,359
|
|
19.
Discontinued Operation
The Company initiated the process of selling
Kiwa Shandong to an unrelated third party company at the end of 2016. The Company assessed that all the criteria required for
the classification of Kiwa Shandong as held for sale have been met as at December 31, 2016. As a result, the consolidated
balance sheets at December 31, 2016 and 2015 reflected the assets and liabilities of Kiwa Shandong business segment as a discontinued
operation.
On
February 11, 2017, the Company executed an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”)
whereby the Company transferred all of its right, title and interest in Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Shandong”)
to the Transferee for the RMB 1.00. The government processing of the transaction has been completed on April 12, 2017. This transaction
was completed and effective on April 12, 2017.
The
following table summarizes the assets and liabilities of the discontinued operation, excluding intercompany balances eliminated
in consolidation, at December 31, 2016 and 2015, respectively:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Assets held for sale:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
|
245
|
|
|
Other receivables
|
|
|
-
|
|
|
|
13,533
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
1,308,785
|
|
|
|
1,308,785
|
|
|
Machinery and equipment
|
|
|
595,623
|
|
|
|
595,623
|
|
|
Automobiles
|
|
|
85,769
|
|
|
|
85,769
|
|
|
Office equipment
|
|
|
104,843
|
|
|
|
104,843
|
|
|
Computer software
|
|
|
22,304
|
|
|
|
22,304
|
|
|
Property, plant and equipment - total
|
|
|
2,117,324
|
|
|
|
2,117,324
|
|
|
Less: accumulated depreciation
|
|
|
(765,598
|
)
|
|
|
(762,791
|
)
|
|
Less: impairment on long-lived assets
|
|
|
(1,351,726
|
)
|
|
|
(1,351,726
|
)
|
|
Deferred tax assets
|
|
|
1,013,365
|
|
|
|
1,119,105
|
|
|
Less: Deferred tax assets allowance
|
|
|
(1,013,365
|
)
|
|
|
(1,119,105
|
)
|
|
Total assets of business held for sale
|
|
$
|
-
|
|
|
$
|
16,585
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of business held for sale:
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
251,466
|
|
|
|
269,360
|
|
|
Advances from customers
|
|
|
12,883
|
|
|
|
13,800
|
|
|
Salary payable
|
|
|
533,432
|
|
|
|
571,389
|
|
|
Accrued expense
|
|
|
28,835
|
|
|
|
30,887
|
|
|
Other payable
|
|
|
101,588
|
|
|
|
108,816
|
|
|
Due to related party-trade
|
|
|
1,122,754
|
|
|
|
1,125,553
|
|
|
Loan payable
|
|
|
1,655,343
|
|
|
|
1,773,131
|
|
|
Construction cost payable
|
|
|
255,539
|
|
|
|
273,722
|
|
|
Tax payable
|
|
|
502,845
|
|
|
|
478,209
|
|
|
Total liabilities of business held for sale
|
|
$
|
4,464,685
|
|
|
$
|
4,644,867
|
|
The
building is on a piece of land the use right of which was granted to Kiwa Bio-Tech Products (Shandong) Co., Ltd. by local government
free for 10 years and then for another 20 years on a fee calculated according to Kiwa Shandong’s net profit. Since Kiwa
Shandong did not generate any net profit, no fee is payable.
Depreciation
expense was $2,807 and $4,352 for the years ended December 31, 2016 and 2015, respectively. And all of property, plant and equipment
which belong to Kiwa Bio-Tech Products (Shandong) Co., Ltd. had been fully depreciated or impaired by the end of year 2016.
All
of our property, plant and equipment have been held as collateral to secure the 6% Notes (see Note 11).
The
net operating loss of Kiwa Shandong could be carried forward for a period of not more than five years from the year of the initial
loss pursuant to relevant PRC tax laws and regulations. It is more likely than not that the deferred tax assets cannot be utilized
in the future because there will not be significant future earnings from the entity which generated the net operating loss. Therefore,
Kiwa Shandong recorded a full valuation allowance on its deferred tax assets.
The
income statement for the year ended December 31, 2016 and 2015 reflected the Kiwa Shandong business segment as a discontinued
operation. The following results of operations of Kiwa Shandong are presented as a loss from a discontinued operation in the consolidated
statements of operations:
|
|
|
Years ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
-
|
|
|
|
-
|
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
Operating expense
|
|
|
150,471
|
|
|
|
249,327
|
|
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
|
Loss from discontinued operations
|
|
$
|
150,471
|
|
|
$
|
249,327
|
|
In
accordance with the current tax laws in China, Kiwa Shandong is subject to a corporate income tax rate of 25% on its taxable income.
A reconciliation of the provision for income taxes from discontinued operation determined at the local income tax rate to the
Company’s effective income tax rate is as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss) from discontinued operation
|
|
$
|
(150,471
|
)
|
|
$
|
(249,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal corporate income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
Income tax computed at U.S. federal corporate income tax rate
|
|
|
(51,159
|
)
|
|
|
(84,771
|
)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Rate differential for PRC earnings
|
|
|
13,542
|
|
|
|
22,439
|
|
|
Change of valuation allowance
|
|
|
37,617
|
|
|
|
62,332
|
|
|
Non-deductible expenses
|
|
|
-
|
|
|
|
-
|
|
|
Effective tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
20.
Reclassification of previously disclosed quarterly financial information
As
disclosed in Note 10(2), Ms. Feng Li, a member of the Company’s board of directors and shareholder of the Company (Ms. Li
held approximately 20% of the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock), is also a
23% shareholder of Gerui. There were $187,616, $1,152,863 and $1,677,459 due from Gerui as at March 31, June 30 and September
30, 2016, respectively. The Company failed to identify Gerui as a related party and disclosed the above amounts as due from related
party in the quarterly filing for the periods ended March 31, June 30 and September 30, 2016.
For
the purpose to reflect all adjustments of the quarterly information and necessary for the fair presentation, the Company reclassified
the above-mentioned amount to due from related parties from advance to customer-Gerui as following:
Before
the reclassification:
|
|
|
March 31, 2016
|
|
|
June
30, 2016
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit and other receivable
|
|
|
201,363
|
|
|
|
1,203,564
|
|
|
|
-
|
|
|
Advance to customer-Gerui
|
|
|
-
|
|
|
|
-
|
|
|
|
1,677,459
|
|
|
Due from related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
After
the reclassification:
|
|
|
March 31, 2016
|
|
|
June
30, 2016
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit and other receivable
|
|
|
13,747
|
|
|
|
50,701
|
|
|
|
-
|
|
|
Due from related party - Non-trade
|
|
|
187,616
|
|
|
|
1,152,863
|
|
|
|
1,677,459
|
|
Meanwhile,
the Company generated $ 267,010, $710,095 and $786,329 trademark license revenue from Gerui for the three, six and nine months
ended September 30, 2016, which have been recorded in other income.
21.
Subsequent Events
The
Company has evaluated the existence of significant events subsequent to the balance sheet date through the date these financial
statements were issued and has determined that there were no subsequent events or transactions which would require recognition
or disclosure in the financial statements, other than noted herein.
On
February 11, 2017, the Company executed an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”)
whereby the Company transferred all of its right, title and interest in Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Shandong”)
to the Transferee for the RMB 1.00. In connection with the transaction, the Transferee received all assets of
Shandong which are estimated to be approximately RMB 14,057,713 at the effective date and assumed all liabilities of Shandong
which are estimated to be approximately RMB 59,446,513 at the effective date. In connection with this transaction, Transferee
agreed to indemnify the Company for any liability or claims of any third party (ies) against Shandong or the Company for five
(5) years. The transaction is subject to obtaining Chinese government approval for the transaction, which the parties agrees to
use their best efforts to obtain prior to December 31, 2017. The completion of transfer is under government processing.
On
February 23, 2017, the Company has agreed to a strategic relationship with ETS (Tianjin) Biological Science and Technology Development
Co., Ltd. (“ETS”). The partnership will include the deployment and strategic use of ETS biotechnology to produce bio-fertilizers
for use in both China and internationally. Kiwa and ETS, together with the certain Chinese government departments, will work together
to enhance China’s microbial fertilizer industry standards and China’s food safety industry chain standards. The parties
will work together on the development of microbial technology and products in agriculture, environmental protection, soil management
and other fields. Relying on the Chinese Academy of Sciences, ETS Environmental and Agricultural Microbial Technology Research
Center and biotechnology project research results, Kiwa has introduced the ETS core technology to complete bio-fertilizer upgrading,
transformation and to develop new product lines. In order to meet the growing global consumer demand to increase food supply and
develop sustainable farming we are applying sustainable use of biotechnology and the use of biotechnology products to replace
chemical products, which will strengthen environmental protection and promote international cooperation. As a result of strict
management of many agricultural chemicals, such chemicals will continue to be abandoned, resulting is a growing demand for bio-fertilizers.
It has been widely accepted that the application of ETS biotechnology facilitates agricultural sustainability and helps to protect
the soil and improve grain output. The technology focuses on keeping soil healthy by restoring healthy microbes that are naturally
present in healthy soils. As the technology gains worldwide recognition, it is imperative to popularize bio-fertilizer in developing
countries to fulfill the needs of growing populations and promote environmentally friendly agriculture. Through the cooperation
of Kiwa and ETS, the parties aim to enhance the usage of the bio-fertilizers in China. The cooperation will bring technological
transformation and support for Kiwa to improve its existing manufacturing techniques. Kiwa and ETS will also collaborate to establish
a comprehensive platform for producing, supplying, and marketing in China. Ultimately, Kiwa would look to introduce these products
to the international market, including the United States.
On February 15, 2017, the Company issued
70,000 common shares to Yuan Wang for his consulting service to assist the Company in financing projects. The number of shares
was determined based on the fair value of the service. The agreement has one year term.
On February 15, 2017, the Company entered
into Common Stock Purchase Agreement with two individuals. Pursuant to the Agreement, the Company issued total 1,000,000 shares
of restricted common stock at $1.00 per share price for an aggregate amount of $1,000,000. The Company has received the full amount.
On
February 27, 2017, the Company has 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
March 8, 2017, pursuant to the consent of the holders of a majority of the votes entitled to be cast on the matter and the approval
of the majority of the directors of the Company, the Company was converted from a Delaware corporation to a Nevada corporation
by filing of Articles of Conversion and Articles of Incorporation in the State of Nevada and filing a Certificate of Dissolution
in the State of Delaware.
On
March 8, 2017, pursuant to the consent of the holders of a majority of the votes entitled to be cast on the matter, the Company
approved 2016 Employee, Director and Consultant Stock Plan.
On
March 13, 2017, Yong Change Wu was removed as a director of the Company by the consent of the holders of a majority of the votes
entitled to be cast on the matter and the approval of the majority of the directors of the Company. Immediately thereafter, the
Board appointed Yong Lin Song as a director of the Company to be effective immediately.
On
May 9, 2017, the Company entered into a Convertible Loan Agreement with Junwei Zheng wherein the lender agreed to advance of approximately
US$ 4.5 million (RMB 30,000,000) under a Convertible Promissory Note with a term of 24 months bearing interest at a rate of Fifteen
Percent (15%) per annum. The Loan is convertible at any time at the option of the Lender at a conversion price of $3.50 per share.
The net proceeds will be used for the further development of Kiwa products and distribution, as well as for general working capital.
The Company has received the amount of $796,835.
On May 22, 2017, the Company entered into
Common Stock Purchase Agreement with Yang Yang. Pursuant to the Agreement, the Company issue total 96,900 shares of restricted
common stock at $3.00 per share price for an aggregate amount of $290,700. The Company has received the full amount.
On May 25, 2017, the Company issued 19,380
common shares to Haiping Liu for her consulting service to assist the Company in financing projects. The number of shares was
determined based on the fair value of the service. The agreement has one year term.
On June 15, 2017, the Company entered into
Common Stock Purchase Agreement with ten individuals. Pursuant to the Agreement, the Company issued total 97,850 shares of restricted
common stock at $1.95 per share price for an aggregate amount of $190,807.50. The Company has received the full amount.
On May 25, 2017, the Company issued 15,108
common shares to Xian Pupuxing Information Technology Co. Ltd. for their consulting service to assist the Company in technical
service. The number of shares was determined based on the fair value of the service. The agreement has five years term.
On
July 1, 2017, Kiwa Bio-Tech Products Group Corporation entered an office lease agreement with two-year term. Monthly lease payment
totaled USD $1,087.
On
July 19, 2017, the Company entered into Common Stock Purchase Agreement with Junwei Zheng. Pursuant to the Agreement, the Company
will issue total 245,000 shares of restricted common stock at $3.00 per share price for an aggregate amount of $735,000. The Company
has received the amount of $120,954.
On
July 19, 2017, the Company entered into Common Stock Purchase Agreement with Quanzhen Shen. Pursuant to the Agreement, the Company
issue total 98,000 shares of restricted common stock at $3.00 per share price for an aggregate amount of $294,000. The Company
has received the full amount.
On
July 19, 2017, the Company issued 49,000 common shares to Quanzhen Shen for her consulting service to assist the Company in financing
projects. The number of shares was determined based on the fair value of the service. The agreement has one year term.
On
July 18, 2017, the Company issued 39,000 common shares to Yuan Wang in assistance with the Company financing projects. The number
of shares was determined based on the fair value of the service. The agreement has one year term.
On
August 2, 2017, the Company entered into Common Stock Purchase Agreement with Yuefeng Su. Pursuant to the Agreement, the Company
issued total 135,000 shares of restricted common stock at $3.00 per share price for an aggregate amount of $405,000. The Company
has received the full amount.
On
August 9, 2017, the Company issued a total of 473,500 common shares to five invididuals for their consulting services to assist
the Company in financing and marketing projects. The number of shares was determined based on the fair value of the services.
All of these agreements have three years term.
On
August 14, 2017, the Company entered into Common Stock Purchase Agreement with Zhen Lin. Pursuant to the Agreement, the Company
will issue total 50,000 shares of restricted common stock at $3.00 per share price for an aggregate amount of $150,000. The Company
has received the full amount.
On
August 14, 2017, the Company entered into Common Stock Purchase Agreement with Haipeng Liu. Pursuant to the Agreement, the Company
will issue total 50,000 shares of restricted common stock at $3.00 per share price for an aggregate amount of $150,000. The Company
has received the full amount.
On September 29, 2017, the Company entered
into Common Stock Purchase Agreement with Erli Wei. Pursuant to the Agreement, the Company will issue total 38,000 shares of restricted
common stock at $2.00 per share price for an aggregate amount of $76,000. The Company has received the full amount.
On October 19, 2017 the Company issued
38,000 common shares to Hairong Chen for his consulting service to assist the Company in marketing projects. The number of shares
was determined based on the fair value of the service. The agreement has one year term.
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.
On
November 7, 2017, the Company issued a total of 1,300,000 common shares to eight individuals for their consulting services to
assist the Company in marketing and financing projects. The number of shares was determined based on the fair value of the services.
The agreements have terms ranging from one to three years.
The
Company has evaluated the existence of significant events subsequent to the balance sheet date through the date these financial
statements were issued and has determined that, other than as stated above, there were no subsequent events or transactions which
would require recognition or disclosure in the financial statements, other than noted herein.