NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Description of Business and Organization
Organization
Kiwa
Bio-Tech Products Group Corporation (“the Company”) is the result of a share exchange transaction accomplished on
March 12, 2004 between the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company originally organized
under the laws of the British Virgin Islands on June 5, 2002 and Tintic Gold Mining Company (“Tintic”), a corporation
originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah. The share exchange resulted
in a change of control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on a fully diluted basis
and Kiwa BVI surviving as a wholly-owned subsidiary of Tintic. Subsequent to the share exchange transaction, Tintic changed its
name to Kiwa Bio-Tech Products Group Corporation. On July 21, 2004, the Company completed its reincorporation in the State of
Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.
The
Company operates through a series of subsidiaries in the Peoples Republic of China as detailed in the following Organizational
Chart. The Company had previously operated its business through its subsidiaries Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa
Shandong”) and Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin”). Kiwa Tianjin has been dissolved since July, 11,
2012. On February 11, 2017, the Company entered an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co.
(“Transferee”) to transfer all of shareholders’ right, title and interest in Kiwa Shandong to the Transferee
for RMB1.00. 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”), 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 China in December 2016.
Kiwa
Beijing was acquired from a group of unrelated third parties in January 2016 together with its holding company HK Baina Group
Holding Company for approximately $34,000 (RMB 220,000) and renamed to Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. from Oriental Baina
Co., Ltd. in February 2016. HK Baina Group Holding Company and Oriental Baina Co., Ltd. have no operations prior to the acquisition
and the purchase price was initially recorded as goodwill and fully impaired at the year end of 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 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.
Prior
to August 2016, the Company did not have any license to sell its bio-technological fertilizer products in China and could not
generate direct sales on its own. Instead the Company had been licensing its trademark to Kangtan Gerui (Beijing) Bio-Tech Co.,
Ltd. (“Gerui”), a related party (see Note 10), in China to sell fertilizers. The Company charged Gerui 10% of net
sales of fertilizers bearing the Company’s trademark. The trademark license income was recorded in the captioned “Trademark
license income-related party” in the accompanying unaudited condensed consolidated statements of operations and comprehensive
income. In August 2016, the Company obtained a fertilizer sales permit from the Chinese government. As a result, the Company ceased
its cooperation with Gerui and began to sell products directly to customers on its own.
2.
Summaries of Significant Accounting Policies
Basic
of presentation
The
accompanying unaudited condensed 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”).
In
the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair
presentation have been included. Interim results are not necessarily indicative of results of a full year. The information in
this Form 10-Q should be read in conjunction with information included in the annual report for the fiscal year ended December
31, 2016 on Form 10-K/A filed with the SEC on November 22, 2017.
Principle
of Consolidation
These
consolidated unaudited condensed financial statements include the financial statements of the Company and its wholly-owned subsidiaries,
Kiwa BVI, Hong Kong Baina Group Holding Company, Kiwa Beijing, Kiwa Shandong, Kiwa Shenzhen, Kiwa Hebei, Kiwa Asia and Kiwa Jing
Nong. 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.
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, 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
|
|
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.
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.
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 unaudited condensed 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.
Revenue
Recognition
The
Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes
revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all
of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the
services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably
assured.
The
Company derives its revenues from sales contracts with its customers with revenues being recognized upon delivery of products.
Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed
upon acceptance of the
sales contract
and there is no
separate sales rebate, discount, or volume incentive. The Company recognizes revenue when title and ownership of the goods are
transferred upon shipment to the customer by the Company and collectability of payment is reasonably assured.
The
Company’s
customers are mainly agricultural cooperative company and distributors who then resell the
Company’s products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in
the agricultural industry, for some co-ops and distributors, it will take approximately similar time frame of 3 to 9 months
for farmers to harvest crops and to realize profits to repay them. As a result, for the sales contracts with these customers,
the collectability of payment is highly dependent on the successful harvest of corps and the customers’ ability to
collect money from farmers. The Company deemed the collectability of payment may not be reasonably assured until after the
Company get paid. For those sales contracts that the Company has shipped its products but the payment is contingent on
collections of payments from the downstream customers, the Company considers the revenue recognition criteria are not met and
therefore defers the revenue and cost of goods sold until payments are collected. These revenue and cost of goods sold are
classified in the captioned “Deferred revenue” and “Deferred cost of goods sold” in the accompanying
unaudited condensed consolidated balance sheets. For other customers whose repayment term is within normal business course
and not dependent on the harvest of corps, the Company recognized revenue when title and ownership of the goods are
transferred upon shipment to the customer by the Company.
Deferred
Revenue and Deferred Cost of Goods Sold
Deferred
revenue and deferred cost of goods sold result from transactions where the Company has shipped product for which all revenue recognition
criteria have not yet been met. Deferred cost of goods sold related to deferred product revenues includes direct inventory costs.
Once all revenue recognition criteria have been met, the deferred revenues and associated cost of goods sold are recognized.
Income
Taxes
The
Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated
financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable
to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation when it
is more likely than not that the assets will not be recovered.
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 2014 are not subject to examination by any applicable tax authorities. PRC tax returns filed for 2014, 2015 and 2016
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.
Other
comprehensive income for the nine months ended September 30, 2017 and 2016 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
September 30, 2017
|
|
|
As
of
December 31, 2016
|
|
Balance
sheet items, except for equity accounts
|
|
|
6.6574
|
|
|
|
6.9472
|
|
|
|
Three
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Items
in the statements of comprehensive income
|
|
|
6.6721
|
|
|
|
6.6702
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Items
in the statements of comprehensive income
|
|
|
6.8068
|
|
|
|
6.5806
|
|
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
September 30, 2017
|
|
|
As
of
December 31, 2016
|
|
Balance
sheet items, except for equity accounts
|
|
|
7.8107
|
|
|
|
-
|
|
|
|
Three
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Items
in the statements of comprehensive income
|
|
|
7.8143
|
|
|
|
-
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Items
in the statements of comprehensive income
|
|
|
7.7868
|
|
|
|
-
|
|
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.
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.
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;
(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.
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. While no significant impact is expected
upon adoption of the new guidance, the Company will not be able to make that determination until the time of adoption based upon
outstanding contracts at that time. In September 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-13,
“Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments
to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements
and Observer Comments.”
The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies
related to the adoption of ASU No. 2014-09. The effective date for the Company is the same as the effective date and transition
requirements for the amendments for ASU 2014-09 beginning in January 1, 2018.
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 unaudited condensed consolidated 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 unaudited condensed 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 unaudited condensed consolidated 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 unaudited condensed
consolidated financial statements for the nine months ended September 30, 2017.
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 unaudited condensed consolidated financial statement presentation or disclosures.
3.
Going Concern
The
unaudited condensed 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 September 30, 2017, the Company had an accumulated deficit of $17,072,416, and net cash used in continuing operating activities
of $3,367,270. These circumstances, among others, raise substantial doubt about the Company’s ability to continue
as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments that might result
from the outcome of this uncertainty. The accompanying unaudited condensed consolidated 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.
Though
the Company is generating additional revenue
but not cash flow
while seeking additional equity financing, the Company does not have enough cash to support the operation without raising additional
capital, within the one year from the date of the issuance of these financial statements. To the extent that the Company is unable
to successfully raise the capital necessary to fund its future cash requirements on a timely basis and under acceptable terms
and conditions, the Company 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.
4.
Accounts Receivable, net
As
of September 30, 2017 and December 31, 2016, we had approximately $15.2 million and $1.1 million, respectively, of accounts receivable
from the Company’s customers. Since the Company
obtained a fertilizer sales permit from the Chinese government in
August 2016 and began to sell the products directly to its customers in September 2016
,
the Company’s strategy was to gain market shares in the
bio-fertilizer
market
by extending longer credit term to its customers. As a result, the Company’s accounts receivable increased from approximately
$1.1 million at December 31, 2016 to approximately $15.2 million at September 30, 2017.
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.
These
customers are either agricultural cooperative company or distributors
who then resell the Company’s products to individual farmers. The reason the Company decides to extend credit for up to
9 months is mainly 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 us. It is
very common for cooperative farms and distributors to request longer sales credit under these circumstances.
Based on the evaluation of the collectability
of these accounts receivable, the Company has provided allowance for doubtful accounts of approximately $0.3 million as of September
30, 2017. As of the date of this report, the Company has subsequently collected approximately $8.7 million or 56% of these
outstanding accounts receivable as of September 30, 2017. The Company expects to fully collect the remaining balance of approximately
$6.8 million of these accounts receivable by December 31, 2017.
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. Currently, the Company provides a provision of 1%-6% of the allowance for doubtful accounts for accounts
receivable balance that are more than 180 days old but less than one year old, 50% of the allowance for doubtful accounts for
accounts receivable from one to one and half years old, 100% of the allowance for doubtful accounts for accounts receivable beyond
one and half years old, plus additional amount as necessary, which the Company’s collection department had determined the
collection of the full amount is remote with the approval from its management to provide a 100% provision allowance for doubtful
accounts. 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:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Accounts
receivable
|
|
$
|
15,543,835
|
|
|
$
|
1,177,994
|
|
Less: Allowance
for doubtful accounts
|
|
|
(298,580
|
)
|
|
|
(55,240
|
)
|
Accounts
receivable, net
|
|
$
|
15,245,255
|
|
|
$
|
1,122,754
|
|
Movement
of allowance for doubtful accounts is as follows:
|
|
Nine
months ended September 30, 2017
|
|
|
Year
ended
December 31, 2016
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
55,240
|
|
|
$
|
-
|
|
Provision
for doubtful accounts
|
|
|
237,998
|
|
|
|
55,240
|
|
Less:
write-off
|
|
|
-
|
|
|
|
-
|
|
Exchange
rate effect
|
|
|
5,342
|
|
|
|
-
|
|
Ending
balance
|
|
$
|
298,580
|
|
|
$
|
55,240
|
|
5.
Prepaid Expense
Prepaid
expenses consisted of the following:
|
|
Notes
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Prepaid
office rent
|
|
|
|
|
|
$
|
21,080
|
|
|
$
|
12,504
|
|
Prepaid
government filing expense
|
|
|
|
|
|
|
33,036
|
|
|
|
5,000
|
|
Prepaid
consulting expenses
|
|
|
(1)
|
|
|
|
1,160,145
|
|
|
|
1,400,050
|
|
|
|
|
|
|
|
$
|
1,214,261
|
|
|
$
|
1,417,554
|
|
(1)
Prepaid consulting expense for issuance of common stock
As
of September 30, 2017, the Company issued a total of 1,825,916 shares of common stock to three consulting companies for
investor relation consulting services, one individual for financing service, one consulting company for IT service and four individuals
for the growth and development strategy consulting service in China, which represents the amount of $1,922,696 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 September 30, 2017, 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 $1,922,696 and amortized the consulting fee over the service periods per agreements based on the progress
of services delivered. For the nine months ended September 30, 2017 and 2016, the amortization of consulting expense was $474,301
and $57,717, respectively.
6.
Advance to suppliers
Since
currently the Company does not have manufacturing facility, it has contracted with several third parties to produce fertilizer
products.
These third parties produce the fertilizer products in accordance with the product
formula and specification instructed by the Company.
Pursuant to the agreements entered
by the Company and those third-party companies, the Company was required to make partially prepayments in advance of securing
the purchases or completion of productions on a timely basis. As of September 30, 2017 and December 31, 2016, such advance to
suppliers was $ 2,979,664 and $1,880,044, respectively.
7.
Property, Plant and Equipment
Property,
plant and equipment, net consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
Office
equipment
|
|
$
|
14,270
|
|
|
$
|
896
|
|
Furniture
|
|
|
22,813
|
|
|
|
7,838
|
|
Leasehold
improvement
|
|
|
74,251
|
|
|
|
66,896
|
|
Construction
in progress
|
|
|
26,137
|
|
|
|
-
|
|
Others
|
|
|
1,082
|
|
|
|
-
|
|
Property,
plant and equipment - total
|
|
$
|
138,553
|
|
|
$
|
75,630
|
|
Less:
accumulated depreciation
|
|
|
(54,100
|
)
|
|
|
(20,311
|
)
|
Property,
plant and equipment - net
|
|
$
|
84,453
|
|
|
$
|
55,319
|
|
Depreciation
expense was $11,878 and $10,045 for the three months ended September 30, 2017 and 2016, and $29,527 and $ 13,039 for the
nine months ended September 30, 2017 and 2016, respectively.
8.
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$ 2.2
million). As of September 30, 2017, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately $751,050).
9.
Salary payable
There
were $1,208,492 and $1,145,492 as at September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016:
Item
|
|
Nature
|
|
|
Notes
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kangtan
Gerui (Beijing) Bio-Tech Co., Ltd. (“Gerui”)
|
|
|
Non-trade
|
|
|
|
(1)
|
|
|
$
|
963,846
|
|
|
$
|
1,522,434
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
963,846
|
|
|
$
|
1,522,434
|
|
(1)
Gerui
Ms.
Feng Li, a member of the Company’s board of directors and shareholder of the Company (Ms. Li held approximately 20% of the
Company’s Common Stock and 50% of the Company’s Series A Preferred Stock), is also a 23% shareholder of Gerui. According
to the agreement between the Company and Gerui, all the balances will be paid off before June 30, 2018. During the nine months
ended September 30, 2017, the Company collected $558,588 from Gerui and the remaining balance was $963,846 as at September
30, 2017. The management has determined that no allowance for doubtful debts was necessary.
Amounts
due to related parties consisted of the following as of September 30, 2017 and December 31, 2016:
Item
|
|
Nature
|
|
|
Notes
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms.
Yvonne Wang (“Ms. Wang”)
|
|
|
Non-trade
|
|
|
|
(1)
|
|
|
|
130,199
|
|
|
|
100,798
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
130,199
|
|
|
|
100,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAAS
IARRP and IAED Institutes
|
|
|
Trade
|
|
|
|
(2)
|
|
|
|
-
|
|
|
|
160,461
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
160,461
|
|
Total
amount due to related parties
|
|
|
|
|
|
|
|
|
|
|
130,199
|
|
|
|
261,259
|
|
(1)
Ms. Wang
Effective
as of November 20, 2015, the Company appointed Ms. Wang as the Chairman of the Board and effective as of 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.
During
the nine months ended September 30, 2017, Ms. Wang paid various expenses on behalf of the Company. As of September 30, 2017, the
amount due to Ms. Wang was $130,199.
(2)
CAAS IARRP and IAED Institutes
On
November 5, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural
Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute
of Agricultural Economy & Development (“IAED”). The term of the Agreement was three years that began on November
20, 2015 and ends on November 19, 2018.
Pursuant
to the agreement, Kiwa agree to fund 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 $37,469 and $37,303 research and development expenses related to the institutes, for the three months ended September
30, 2017 and 2016, respectively, and $110,194 and $112,580 research and development expenses for the nine months ended September
30, 2017 and 2016, respectively.
The
amount due to CAAS IARRP and IAED Institutes was reclassified to other payables and accruals at September 30, 2017 since Professor
Yong Chang Wu is no longer the Company’s director from March 13, 2017. See note 13.
11.
Convertible Notes Payable
(1)
Convertible Notes Payable - Current
Convertible
notes payable - current consists of $ 150,250 of 6% secured convertible notes issued to FirsTrust Group Inc. on June 29, 2006
and $136,742 (face amount $150,208 net of discount of $13,466) of 15% convertible note issued to Mr. Geng
Liu on January 17, 2017.
6%
secured convertible notes – FirsTrust Group Inc.
On
June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional
investors (collectively, the “Purchasers”) for the issuance and sale of 6% secured convertible notes, due three years
from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Convertible Notes”), convertible
into shares of the Company’s common stock.
On
August 12, 2013, the Company, entered into a Settlement Agreement and Release (the “Release”) with the holders (the
“Holders”) of the “6% Convertible Notes” in the aggregate principal amount of $2,000,000. Pursuant to
the terms of the Release, the Company paid the Holders $75,000 for a full release, including the forgiveness of past defaults
of unpaid principal amounts, interests and penalties. During the course of the time, certain notes had been converted as well.
On March 18, 2008, FirsTrust Group, Inc. (“FirsTrust”) purchased the three remaining 6% Convertible Notes, totaling
$168,000 ($59,100, $50,400 and $59,100 respectively), from Nite Capital, one of the six institutional investors which purchased
a total of $300,000 of the Note in three tranches ($105,000, $90,000, $105,000 respectively), for a cash payment of $100,000.
After the Release and conversion, FirsTrust is the only holder of the outstanding 6% Convertible Note with outstanding principal
amount of $150,250.
On
June 29, 2009, the 6% Notes were due. The Company informed the Purchasers of its inability to repay the outstanding balance on
the due date. Therefore, the 6% Notes are in default and the default interest rate of 15% per annum is being charged on the 6%
Notes.
The
conversion price of the Notes is based on a 40% discount to the average of the lowest three days trading price of the Company’s
common stock on the OTC Bulletin Board over a 20-day trading period. The conversion price is also adjusted for certain subsequent
issuances of equity securities of the Company at prices below the conversion price then in effect. The Notes contain a volume
limitation that prohibits the holder from further converting the 6% Notes if doing so would cause the holder and its affiliates
to hold more than 4.99% of the Company’s outstanding common stock.
The
Company has elected to early adopt the guidance in ASU 2017-11. As a result, the Company has concluded that the conversion feature
of the Notes is indexed to its own stock and would be classified and recorded as equity. The Company retrospectively applied the
guidance to the above Notes and determined that the impact of the conversion feature for the above Notes is immaterial.
The
Company also incurs a financial liquidated damages in cash or shares at the option of the Company (equal to 2% of the outstanding
amount of the Notes per month plus accrued and unpaid interest on the Notes, prorated for partial months) if it breaches any affirmative
covenants in the Purchase Agreement, including a covenant to maintain a sufficient number of authorized shares under its Certificate
of Incorporation to cover at least 110% of the stock issuable upon full conversion of the Notes. Pursuant to the relevant provisions
for liquidated damages in Purchase Agreement, the Company has accrued the amounts of $61,730 and $57,672 for liquidated damages
for the nine months ended September 30, 2017 and 2016, respectively. The Company also accrued $16,857 and $16,919 for interest
at the rate of 15% per annum for the nine months ended September 30, 2017 and 2016, respectively. The total 15% interest was $200,218
and $177,681 at September 30, 2017 and 2016, respectively. The total accrued liquidated damages were $544,056 and $462,423 at
September 30, 2017 and 2016, 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.
15%
convertible notes- Mr. Geng Liu
On
January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng Liu with principal of RMB 3 million. The note
bears interest at 15% per annum and will mature on January 16, 2018. Before the maturity date, the Note holder has an option to
convert partial or all of the outstanding principal to the Company’s common shares with a conversion price of $0.90 per
share. As of September 30, 2017, the Company has received partial principal totaled RMB 1 million ($150,208 equivalent
revalued as at September 30, 2017).
The
notes are convertible into shares of the common stock, at conversion price is $0.9 which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital, and the remainder proceeds of $99,850 from issuance
of the convertible note was allocated to convertible notes payable.
For
the nine months ended September 30, 2017, the Company recorded interest expense of $45,535 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 September
30, 2017 was $136,742 .
(2)
Convertible Notes Payable - Non-current and derivative liabilities
Convertible
notes payable – non-current consists $826,148 of 15% convertible note issued to Mr. Junwei Zheng on May 9, 2017.
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. As of September 30, 2017, the Company has received partial principal totaled RMB 5.5 million ($826,148
equivalent
revalued at September 30, 2017).
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 was out of money at the issue date thus 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 remeasured 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.
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 were calculated using the BlackScholesMerton model based on the following variables
on September 30, 2017:
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
●
|
Expected
volatility of 158.1% calculated using the Company’s historical price of its common stock
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
●
|
Risk-free
interest rate of 1.43%, for the conversion options
|
|
|
|
|
●
|
Expected
lives of 1.58 years
|
|
|
|
|
●
|
Market
price at remeasurement date of $2.5
|
On
May 9, 2017, the Company recorded $569,784 as derivative liability for fair value of the conversion option. The initial carrying
value of the Notes was $227,051. On September 30, 2017, the fair value of derivative liabilities was recalculated at $370,733.
For the three months and nine months ended September 30, 2017, the Company recognized a gain of $205,612 and $199,051, respectively,
in change in fair value of derivative liabilities.
For
the nine months ended September 30, 2017, the Company recorded interest expense of $162,520 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 September 30, 2017 was $370,321.
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 $22,500 and 22,500 interest expense on note payable for the three months ended September 30, 2017 and 2016, respectively,
and $67,500 and $67,500 interest expense on note payable for the nine months ended September 30, 2017 and 2016, respectively.
As
of December 31, 2016, the Original Note holder informed the Company that all right, title and interests in the Promissory Note
has been assigned and transferred to FirsTrust. As of September 30, 2017, all of $360,000 of Promissory Note to FirsTrust is still
outstanding, and total accrued interest of the Promissory Note is $ 926,800. The Company has begun preliminary discussion with
FirsTrust with regards to a potential settlement of the Note, but no agreement has been reached yet.
13.
Other Payables and accruals
Other
payable consisted of the following:
|
|
Notes
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Stock
subscription proceeds received in advance
|
|
|
(1)
|
|
|
$
|
1,310,522
|
|
|
$
|
460,617
|
|
Investment
received in advance
|
|
|
(2)
|
|
|
|
-
|
|
|
|
79,168
|
|
Accrued
expenses
|
|
|
|
|
|
|
59,216
|
|
|
|
385,090
|
|
R&D
expense payable
|
|
|
|
|
|
|
271,151
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
1,640,889
|
|
|
$
|
924,875
|
|
(1).
The Company received RMB 3.2 million in 2016 and RMB 5.5 million for the nine months ended September 30, 2017 from four unrelated
potential investors, which was approximately $1,310,522. The Company has subsequently issued 38,000 shares of common stock to
one investor for the amount $ 76,000 (RMB 0.5 million) and the other investment agreements have not been finalized yet for the
remaining part.
(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. See Note 12.
14.
Stockholders’ Equity (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 nine months ended September 30,
2017, the Company issued 1,674,900 common shares to six individuals residing in China for net proceeds of $2,410,654.
On
June 30, 2017, the Company issued 97,850 common shares to ten employees for cash at $1.95 per share for an aggregate price to
$190,807. The difference $102,273 based on the calculation between stock price and employee purchase price was recognized as expense
of employee benefits and accordingly, credited the same amount to APIC.
During
the nine months ended September 30, 2017, the Company entered into ten consulting agreements and issued 665,988 shares of common
stocks to consultants for financing, business development services and IT services based on market price of issuance.
Additional
paid-in-capital
As
disclosed in Note 11(1), on January 17, 2017, the Company issued RMB 1 million ($144,944 equivalent).Convertible Note to Mr. Geng
Liu with BCF embedded. The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date and recorded the amount
into additional paid in capital.
15.
Stock-based Compensation
On
March 15, 2017, the Board of Directors approved a new stock option plan with ten years’ term. As of September 30, 2017,
the Company has not granted any incentive compensation under this plan.
16.
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:
September
30, 2017
Recurring
Fair Value Measures
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
370,733
|
|
|
$
|
370,733
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
$
|
370,733
|
|
|
$
|
370,733
|
|
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 nine months ended September 30, 2017 and for the year ended December 31, 2016:
|
|
Nine
months ended September 30, 2017
|
|
|
Year
ended
December
31, 2016
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair
value of derivative liabilities at inception
|
|
|
569,784
|
|
|
|
-
|
|
Change
in fair value of derivative liabilities
|
|
|
(199,051
|
)
|
|
|
-
|
|
Ending balance
|
|
$
|
370,733
|
|
|
$
|
-
|
|
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 three and nine months ended September 30, 2017 and 2016 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 three and nine months ended September 30, 2017 and 2016. Kiwa Shenzhen and Kiwa Hebei has not provided for any
corporate income taxes since it had no taxable income for the three and nine months ended September 30, 2017 and 2016. For the
three and nine months ended September 30, 2017, Kiwa Beijing recorded no current income tax provision.
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:
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income (loss) from continuing operation
|
|
$
|
(850,876
|
)
|
|
$
|
224,712
|
|
|
$
|
(2,227,413
|
)
|
|
$
|
570,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
federal corporate income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Income tax expense (benefit)
computed at U.S. federal corporation income tax rate
|
|
|
(289,298
|
)
|
|
|
76,402
|
|
|
|
(757,320
|
)
|
|
|
193,935
|
|
Reconciling
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
differential for PRC earnings
|
|
|
85,840
|
|
|
|
(32,403
|
)
|
|
|
133,249
|
|
|
|
(28,419
|
)
|
Change
of valuation allowance
|
|
|
73,251
|
|
|
|
60,880
|
|
|
|
381,789
|
|
|
|
180,581
|
|
Effect
of tax exempted income in BVI
|
|
|
7,139
|
|
|
|
(25,934
|
)
|
|
|
21,422
|
|
|
|
(267,152
|
)
|
Effective
tax expenses (benefits)
|
|
$
|
(123,068
|
)
|
|
$
|
78,945
|
|
|
$
|
(220,860
|
)
|
|
$
|
78,945
|
|
The
Company had deferred tax assets from continuing operation as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Net operating losses carried forward by the Company and its China subsidiaries
except for Kiwa Beijing
|
|
$
|
2,814,453
|
|
|
$
|
2,555,064
|
|
Less: Valuation allowance
|
|
|
(2,814,453
|
)
|
|
|
(2,555,064
|
)
|
Bad debt allowance
|
|
|
63,244
|
|
|
|
-
|
|
Net operating losses carried forward by Kiwa Beijing
|
|
|
183,628
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
246,872
|
|
|
$
|
-
|
|
As of September 30, 2017 and December 31,
2016, the Company had approximately $8.3 million and $7.5 million net operating loss carryforwards available to
reduce future taxable income. Net operating loss of the parent Company could be carried forward and taken against any taxable
income for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the Internal Revenue
Code of 1986, as amended. The net operating loss of Kiwa Shenzhen 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, the Company recorded a full valuation allowance on its deferred tax assets.
As
of September 30, 2017, the Company had approximately $0.1 million deferred tax assets on bad debt allowance. Bad debt allowance
must be approved by the PRC tax authority prior to being deducted as an expense item on the tax return.
As
of September 30, 2017 and December 31, 2016, the Company has no material unrecognized tax benefits which would favorably affect
the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases
of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Company during the nine months ended September 30, 2017 and December 31, 2016, and no provision for interest and
penalties is deemed necessary as of September 30, 2017 and December 31, 2016.
18.
Commitments and Contingencies
The
Company has the following material contractual obligations:
(1)
Investment in manufacturing facilities in Penglai City, Shandong Province in China
As disclosed in Note 8, on June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders
of Yantai Peng Hao New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately
RMB 15,000,000 (approximately US$ 2.2 million). As of September 30, 2017, Kiwa Hebei has made deposit payment of RMB 5,000,000
(approximately $751,050) and is committed to pay the remaining RMB10,000,000 based on the payment milestone in the equity purchase
agreement.
(2)
Strategic cooperation with the 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.
(3)
Lease payments
(a)
On March 21, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. entered an office lease agreement with two-year term. Monthly lease
payment fee totaled RMB 68,133 or approximately USD $10,536.
(b)
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.
(c)
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. This lease was terminated on August 31, 2017.
(d)
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 landlord is the same one.
(e)
On September 1, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd. entered a storage lease agreement with one-year term. Monthly lease payment
fee totaled RMB 4,800 or approximately USD $721.
(f)
On May 5, 2017, Kiwa Bio-Tech Products Group Corporation entered an office lease agreement with 13 months term. Monthly lease
payment totaled USD $781.15.
(g)
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.
(h)
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.
(
i)
On September 1, 2017, Kiwa Bio-Tech (Hebei) Co., Ltd, entered an apartment lease agreement for its employees. The lease term is
one year with monthly lease payment of RMB 1,060 or approximately USD $161.
The
future lease payments at September 30, 2017 are summarized below.
Twelve
months ending September 30, 2018
|
|
$
|
314,214
|
|
Twelve months
ending September 30, 2019
|
|
$
|
167,976
|
|
Thereafter
|
|
|
-
|
|
Total
minimum lease payment
|
|
$
|
482,190
|
|
19.
Concentration of Risk
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts
receivable. As of September 30, 2017 and December 31, 2016, $23,275, and $13,469 were deposited with various major financial institutions
located in the PRC, respectively. 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 earned from customers, thereby exposed to credit risk. The risk is
mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding
balances.
Customer
and vendor concentration risk
For
the nine months ended September 30, 2017, five customers accounted for 23%, 14%, 14%, 14% and 14% of the Company’s sales.
For the nine months ended September 30, 2016, one customer accounted for 100% of the Company’s revenues.
As
of September 30, 2017, three customers accounted for 45%, 30% and 12% of the Company’s accounts receivable. As of
December 31, 2016, one customer accounted for 100% of the Company’s accounts receivable.
For
the nine months ended September 30, 2017, one supplier accounted for 93% of the Company’s total purchases. For the nine
months ended September 30, 2016, one supplier accounted for 91% of the Company’s total purchases.
As
of September 30, 2017, two suppliers accounted for 81% and 13% of the Company’s accounts payable. As of December 31, 2016,
two suppliers accounted for 57% and 43% of the Company’s accounts payable.
20.
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 approval and processing of the transaction was completed on April 12, 2017.
This transaction was considered as 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 April 12, 2017 and December 31, 2016, respectively:
|
|
April
12, 2017
|
|
|
December
31, 2016
|
|
Assets
held for sale:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment – Original cost
|
|
|
2,117,324
|
|
|
|
2,117,324
|
|
Less:
accumulated depreciation
|
|
|
(765,598
|
)
|
|
|
(765,598
|
)
|
Less:
impairment
|
|
|
(1,351,726
|
)
|
|
|
(1,351,726
|
)
|
Deferred
tax assets
|
|
|
1,013,365
|
|
|
|
1,013,365
|
|
Less:
Deferred tax assets allowance
|
|
|
(1,013,365
|
)
|
|
|
(1,013,365
|
)
|
Total
assets of business held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities
of business held for sale:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
253,208
|
|
|
|
251,466
|
|
Advances
from customers
|
|
|
12,972
|
|
|
|
12,883
|
|
Salary
payable
|
|
|
537,127
|
|
|
|
533,432
|
|
Accrued
expense
|
|
|
29,035
|
|
|
|
28,835
|
|
Other
payable
|
|
|
102,291
|
|
|
|
101,588
|
|
Due
to related party-trade
|
|
|
1,130,534
|
|
|
|
1,122,754
|
|
Loan
payable
|
|
|
1,666,813
|
|
|
|
1,655,343
|
|
Construction
cost payable
|
|
|
257,309
|
|
|
|
255,539
|
|
Tax
payable
|
|
|
522,893
|
|
|
|
502,845
|
|
Total
liabilities of business held for sale
|
|
$
|
4,512,182
|
|
|
$
|
4,464,685
|
|
The
income statements for the three and nine months ended September 30, 2017 and 2016 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 unaudited condensed consolidated statements of operations:
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating
expense
|
|
|
-
|
|
|
|
52,166
|
|
|
|
16,790
|
|
|
|
159,745
|
|
Income
tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
from discontinued operations
|
|
$
|
-
|
|
|
$
|
52,166
|
|
|
$
|
16,790
|
|
|
$
|
159,745
|
|
The
following is the calculation of the gain on the sale of Kiwa Shandong:
Selling
price
|
|
$
|
-
|
|
Net
assets (liabilities) transferred at the transaction date
|
|
$
|
(4,512,182
|
)
|
Gain
on sale of discontinued operations
|
|
$
|
4,512,182
|
|
21.
Subsequent Events
On
October 24, 2017, the Company issued 38,000 shares of restricted common stock at $2.00 per share to Erli Wei for an aggregate
amount of $76,000. The Company has received the full amount.
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.
On
October 24, 2017, the Company issued a total of 1,338,000 common shares to nine 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.