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, Kiwa Bio-Tech Products (Hebei)
Co., Ltd. (“Kiwa Hebei”), which was incorporated in China in December 2016, and Kiwa Bio-Tech Products (Shenzhen)
Co., Ltd. Xian Branch Company, (“Kiwa Xian”), which was incorporated in China in December 2017. 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, Kiwa Xian
and Kiwa Hebei. The Company established Inner Mongolia Jing Nong Investment & Management, Ltd. (“Kiwa Jing Nong”)
in August 2017. The Company established Kiwa Bio-Tech (Shanxi) Engineering Co., Ltd. (“Kiwa Shanxi”) in February 2018.
The Company established Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”) and Kiwa Yangling Ecological Agriculture
and Environment Research Center Co., Ltd. (“Kiwa R&D Center”) in March 2018.
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.
Liquidity
In
assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure
commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital
expenditure obligations.
The
Company’s business is capital intensive as the Company needs to make advance payment to its suppliers to secure timely delivery
and current market price of raw materials. Debt financing in the form of notes payable and loans from related parties have been
utilized to finance the working capital requirements of the Company. As of March 31, 2018, the Company’s working capital
was approximately $12.6 million and the Company had cash of only $61,768, with remaining current assets mainly composed
of advance to suppliers, and inventory.
Although
the Company believes that it can realize its current assets in the normal course of business, the Company’s ability to repay
its current obligations will depend on the future realization of its current assets and the future operating revenues generated
from its products. Because the Chinese Government is continuously promoting green environment and implementing quality standards
and environmentally sensitive policies in the Agricultural industry, the Company expects its revenues from its innovated and highly
effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow. In addition, the Company’s
marketing team is expanding to the Western areas of China and Hainan province and it expects its revenues will continue
to grow in 2018. Meanwhile, the Company expects to continue to gain market share in its existing sales channel bases in the Northern
and the Southern areas of China due to the quality of the products and reputation in the industry. In addition, starting in March
2018, the Company began to use a supply chain financing model, which the Company’s customers engage with third party financing
companies to advance the Company’s accounts receivable on its behalf without recourse to the Company. The Company’s
customers are required to purchase an insurance product to cover the risk of bad weather or any other reason which they are not
able to harvest crops and to realize profits of repaying the third party financing companies. This model allows the Company to
collect its accounts receivables sooner than the 3 to 9 months crop growing period. Because of this newly added financing model
in the industry, the Company is expecting to generate more operating cash flows in the near future to expand its business and
to meet the Company’s working capital equipment and debt obligations as they become due. In the month of April 2018, the
Company has shipped and sold its products for approximately $3.6 million and the Company is expected to collect theses balances
in the month of May and June 2018 to continue on expanding its business and to meet any debt obligation as they become
due. The Company believes these factors will enable it sufficiently to support its working capital needs for the next twelve months.
The
Company expects to realize the balance of its current assets within the normal operating cycle of a twelve month period. If the
Company is unable to realize its current assets within the normal operating cycle of a twelve month period, the Company may have
to consider supplementing its available sources of funds through the following sources:
|
●
|
the
Company will continuously seek additional equity financing to support its working capital;
|
|
●
|
other
available sources of financing from PRC banks and other financial institutions;
|
|
●
|
financial
support and credit guarantee commitments from the Company’s major shareholders.
|
Based
on the above considerations, the Company’s management is of the opinion that it has sufficient funds to meet the Company’s
working capital requirements and debt obligations as they become due one year from the date of this report. However, there is
no assurance that management will be successful in their plans. There are a number of factors that could potentially arise that
could undermine the Company’s plans, such as changes in the demand for the Company’s products, PRC government policy,
economic conditions, and competitive pricing in the Agricultural industry.
2.
Restatements of March 31, 2017 consolidated financial statements
The
March 31, 2017 consolidated unaudited condensed financial statements contain restatements related to the following:
|
a)
|
Revenue
of $3,150,667 and cost of goods sold of $2,067,680 were being deferred as the Company considers the revenue recognition criteria
are not met as of March 31, 2017 and therefore defers the revenue and cost of goods sold until payments were collected;
|
|
b)
|
Recognition
of the relative fair value of beneficial conversion feature (“BCF”) $45,094 into additional paid in capital and
debt discount and amortize value over the term of the convertible notes issued on January 17, 2017 with amortization of debt
discount of $10,467 for the three months ended March 31, 2017;
|
|
c)
|
Issuance
of common stock for financing related services of $23,043 were reversed from G&A expenses and net against additional paid-in-capital
as they were directly incremental to the financing transaction;
|
|
d)
|
Tax
effect of $270,747 and foreign currency translation effect of $67,487 as a result of the above restatements;
|
|
e)
|
Reclassification
of discontinued operations loss of $14,220 from continued operation transactions. The Company executed an Equity Transfer
Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) on February 11, 2017 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;
|
|
f)
|
Reclassification
of $205,850 of change in other receivables to change in due from related party in the consolidated statement of cash flow
as the Company previously presented the balance of $1,329,166 and $1,522,434 due from Kangtan Gerui (Beijing) Bio-Tech Co,
Ltd (“Gerui”), which Ms. Feng Li, a member of the Company’s board of directors and shareholder of the Company
(Ms. Li held approximately 12.93% of the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock),
is also a 23% shareholder of Gerui, as other receivables - third party as of March 31, 2017 and December 31, 2016, respectively;
|
|
g)
|
Reclassification
of prepaid expenses to advance to suppliers of $75,000 as of March 31, 2017.
|
The
impact of these restatements on the three months ended March 31, 2017 consolidated unaudited condensed financial statements is
reflected in the following:
Statement
of operations and comprehensive income (loss) amounts:
|
|
As previously reported
|
|
|
Restatement
|
|
|
As restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,150,667
|
|
|
$
|
(3,150,667
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,067,680
|
|
|
|
(2,067,680
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,082,987
|
|
|
|
(1,082,987
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
36,291
|
|
|
|
-
|
|
|
|
36,291
|
|
Selling expenses
|
|
|
36,286
|
|
|
|
-
|
|
|
|
36,286
|
|
General and administrative
|
|
|
431,570
|
|
|
|
(37,263
|
)
|
|
|
394,307
|
|
Total operating expenses
|
|
|
504,147
|
|
|
|
(37,263
|
)
|
|
|
466,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
578,840
|
|
|
|
(1,045,724
|
)
|
|
|
(466,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
(51,326
|
)
|
|
|
(10,467
|
)
|
|
|
(61,793
|
)
|
Other income/(expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exchange loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total other income/(expense), net
|
|
|
(51,326
|
)
|
|
|
(10,467
|
)
|
|
|
(61,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
527,514
|
|
|
|
(1,056,191
|
)
|
|
|
(528,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes-current
|
|
|
(219,356
|
)
|
|
|
-
|
|
|
|
(219,356
|
)
|
Income taxes-deferred
|
|
|
-
|
|
|
|
270,747
|
|
|
|
270,747
|
|
Income taxes (expense) benefit
|
|
|
(219,356
|
)
|
|
|
270,747
|
|
|
|
51,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
308,158
|
|
|
|
(785,444
|
)
|
|
|
(477,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
|
-
|
|
|
|
(14,220
|
)
|
|
|
(14,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
308,158
|
|
|
|
(799,664
|
)
|
|
|
(491,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
32,216
|
|
|
|
(67,487
|
)
|
|
|
(35,271
|
)
|
Total comprehensive income (loss)
|
|
$
|
340,374
|
|
|
$
|
(867,151
|
)
|
|
$
|
(526,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
9,257,970
|
|
|
|
(184,211
|
)
|
|
|
9,073,759
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
10,851,204
|
|
|
|
(1,777,445
|
)
|
|
|
9,073,759
|
|
Statement
of cash flows amounts:
|
|
As previously reported
|
|
|
Restatement/
Reclassification
|
|
|
As restated
|
|
Cash flows from continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
308,158
|
|
|
$
|
(799,664
|
)
|
|
$
|
(491,506
|
)
|
(Income) loss from discontinued operations, net of taxes
|
|
|
-
|
|
|
|
14,220
|
|
|
|
14,220
|
|
Net Income (loss) from continuing operations
|
|
|
308,158
|
|
|
|
(785,444
|
)
|
|
|
(477,286
|
)
|
Adjustments to reconcile net income (loss) to net cash used in continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
9,466
|
|
|
|
-
|
|
|
|
9,466
|
|
Accrued interest
|
|
|
51,017
|
|
|
|
10,776
|
|
|
|
61,793
|
|
Stock compensation for consulting fee
|
|
|
165,891
|
|
|
|
(8,841
|
)
|
|
|
157,050
|
|
Gain on derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred income tax
|
|
|
-
|
|
|
|
(51,391
|
)
|
|
|
(51,391
|
)
|
Changes in continuing operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,641,137
|
)
|
|
|
-
|
|
|
|
(2,641,137
|
)
|
Prepaid expenses
|
|
|
62,983
|
|
|
|
(75,000
|
)
|
|
|
(12,017
|
)
|
Rent deposit and other receivables
|
|
|
(853,360
|
)
|
|
|
(205,850
|
)
|
|
|
(1,059,210
|
)
|
Advance to suppliers
|
|
|
1,681,189
|
|
|
|
75,000
|
|
|
|
1,756,189
|
|
Due from related parties-non-trade
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Due from related parties-trade
|
|
|
-
|
|
|
|
205,850
|
|
|
|
205,850
|
|
Inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred cost of goods sold
|
|
|
-
|
|
|
|
(2,067,680
|
)
|
|
|
(2,067,680
|
)
|
Deferred tax assets
|
|
|
-
|
|
|
|
(270,747
|
)
|
|
|
(270,747
|
)
|
Accounts payable
|
|
|
7,813
|
|
|
|
-
|
|
|
|
7,813
|
|
Salary payable
|
|
|
29,303
|
|
|
|
-
|
|
|
|
29,303
|
|
Taxes payable
|
|
|
232,944
|
|
|
|
(14,220
|
)
|
|
|
218,724
|
|
Advances from customers
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other payables and accruals
|
|
|
(40,951
|
)
|
|
|
-
|
|
|
|
(40,951
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
3,150,667
|
|
|
|
3,150,667
|
|
Net cash used in continuing operating activities
|
|
|
(986,684
|
)
|
|
|
(36,880
|
)
|
|
|
(1,023,564
|
)
|
Net cash used in discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(986,684
|
)
|
|
|
(36,880
|
)
|
|
|
(1,023,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital borrowed from related parties, net of payments to related parties
|
|
|
27,000
|
|
|
|
-
|
|
|
|
27,000
|
|
Proceeds from sale of common stock
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Proceeds from convertible note
|
|
|
145,165
|
|
|
|
-
|
|
|
|
145,165
|
|
Net cash provided by financing activities
|
|
|
1,172,165
|
|
|
|
-
|
|
|
|
1,172,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change
|
|
|
(58,849
|
)
|
|
|
36,880
|
|
|
|
(21,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
|
|
|
126,632
|
|
|
|
-
|
|
|
|
126,632
|
|
Balance at beginning of period
|
|
|
13,469
|
|
|
|
-
|
|
|
|
13,469
|
|
Balance at end of period
|
|
$
|
140,101
|
|
|
$
|
-
|
|
|
$
|
140,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for consulting service
|
|
$
|
10,605
|
|
|
$
|
(10,605
|
)
|
|
$
|
-
|
|
Issuance of common stock for financing related service
|
|
$
|
-
|
|
|
$
|
85,400
|
|
|
$
|
85,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
3.
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, 2017 on Form 10-K filed with the SEC on March 30, 2018.
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, Kiwa Yangling,
Kiwa Shanxi, Kiwa R&D Center 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 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
On
January 1, 2018 we adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB
ASC Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did not
result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized
based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.
The
core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of
goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such
exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be
recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s
revenue streams are recognized at a point in time.
The
ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that
the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will
not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue
when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared
to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company
evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using
the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.
The
Company continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery
of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the
customer is fixed upon acceptance of the sales contract and there is no separate sales rebate, discount, or volume incentive.
The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company
and collectability of payment is reasonably assured. The Company's revenues are recognized at a point in time after all performance
obligations are satisfied.
The
Company’s customers are mainly agricultural cooperative company and distributors who then resell the Company’s products
to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry,
for some co-ops and distributors, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops
and to realize profits to repay them. As a result, for the sales contracts with these customers, the collectability of payment
is highly dependent on the successful harvest of corps and the customers’ ability to collect money from farmers. The Company
deemed the collectability of payment may not be reasonably assured until after the Company get paid. Starting in March 2018, the
Company began to use a supply chain financing model, which the Company’s customers engage with third party financing companies
to advance the Company’s accounts receivable on its behalf without recourse to the Company. The Company’s customers
are required to purchase an insurance product to cover the risk of bad weather or any other reason which they are not able to
harvest crops and to realize profits of repaying the third party financing companies. This model allows the Company to collect
its accounts receivables sooner than the 3 to 9 months crop growing period. The Company deemed the collectability of payment may
not be reasonably assured until after the Company get paid from these financing companies.
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.
FASB
ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation
of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position
will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits
of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the
amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that
is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns
prior to 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 three months ended March 31, 2018 and 2017 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
March 31, 2018
|
|
|
As of
December 31, 2017
|
|
Balance sheet items, except for equity accounts
|
|
|
6.2771
|
|
|
|
6.5098
|
|
|
|
Three
months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Items
in the statements of comprehensive income
|
|
|
6.3591
|
|
|
|
6.8888
|
|
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
March 31, 2018
|
|
|
As
of
December 31, 2017
|
|
Balance
sheet items, except for equity accounts
|
|
|
7.8483
|
|
|
|
7.8149
|
|
|
|
Three
months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Items
in the statements of comprehensive income
|
|
|
7.8267
|
|
|
|
-
|
|
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
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 15, 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 and no effect on the Company’s unaudited condensed consolidated financial statements.
In
February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), Income Statement - Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this
Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive
Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income
as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption
in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been
issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for
issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or
periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.
The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed
consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s unaudited condensed consolidated financial statement presentation or disclosures.
4.
Accounts Receivable, net
As
of March 31, 2018 and December 31, 2017, we had $24,096 and $28,620, respectively, of accounts receivable from the Company’s
customers. The Company’s current payment terms on these customers are ranging typically from 60 days to 9 months after receipts
of the goods depending on the creditworthiness of these customers. These customers are either agricultural cooperative company
or distributors who then resell the Company’s products to individual farmers. Starting in March 2018, the Company began
to use a supply chain financing model, which the Company’s customers engage with third party financing companies to advance
the Company’s accounts receivable on its behalf without recourse to the Company. The Company’s customers are required
to purchase an insurance product to cover the risk of bad weather or any other reason which they are not able to harvest crops
and to realize profits of repaying the third party financing companies. This model allows the Company to collect its accounts
receivables sooner than the 3 to 9 months crop growing period.
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:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable
|
|
$
|
24,096
|
|
|
$
|
83,860
|
|
Less: Allowance for doubtful accounts
|
|
|
-
|
|
|
|
(55,240
|
)
|
Accounts receivable, net
|
|
$
|
24,096
|
|
|
$
|
28,620
|
|
5.
Prepaid Expense
Prepaid
expenses consisted of the following:
|
|
Notes
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Prepaid office rent
|
|
|
|
|
|
$
|
37,344
|
|
|
$
|
41,487
|
|
Prepaid License Fee (for fertilizer)
|
|
|
|
|
|
|
-
|
|
|
|
26,115
|
|
Prepaid government filing expense
|
|
|
|
|
|
|
2,500
|
|
|
|
5,000
|
|
Prepaid consulting expenses
|
|
|
(1)
|
|
|
|
3,563,738
|
|
|
|
2,392,273
|
|
Others
|
|
|
|
|
|
|
64,665
|
|
|
|
9,397
|
|
Total
|
|
|
|
|
|
$
|
3,668,247
|
|
|
$
|
2,474,272
|
|
(1)
Prepaid consulting expense for issuance of common stock
As
of March 31, 2018, the Company issued a total of 3,781,416 shares of common stock to four consulting companies for investor relation
consulting services, one individual for IT service, and nine individuals for the marketing consulting service in China, which
represents the amount of $5,138,196 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 March 31, 2018, 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 totaled $1,760,000 and $0 for three months ended March 31, 2018
and 2017, respectively, and amortized the consulting fee over the service periods per agreements based on the progress of services
delivered. For the three months ended March 31, 2018 and 2017, the amortization of consulting expense was $588,535 and $157,050,
respectively.
6.
Advance to suppliers
Advance
to suppliers are mainly funds deposited for future raw material purchases. As a common practice in China’s agriculture industry,
many of these vendors require a certain amount to be deposited with them as a guarantee that the Company will complete its purchases
on a timely basis as well as securing the current agreed upon purchase price. Since the Company anticipates the price of raw materials
is on the rise in 2018, it entered large amount of purchase agreements with its major raw materials supplier, and made prepayments
in advance of securing a lower purchase price and timely delivery. As of March 31, 2018 and December 31, 2017, such advance to
suppliers was $6,281,462 and $12,660,793, respectively.
7.
Inventory
Inventory
consisted of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
3,019,959
|
|
|
$
|
2,745,991
|
|
Finished goods
|
|
|
10,576,059
|
|
|
|
-
|
|
Packing materials
|
|
|
27,695
|
|
|
|
-
|
|
Total
|
|
$
|
13,623,713
|
|
|
$
|
2,745,991
|
|
8.
Property, Plant and Equipment
Property,
plant and equipment, net consisted of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
18,256
|
|
|
$
|
15,899
|
|
Furniture
|
|
|
24,196
|
|
|
|
23,331
|
|
Leasehold improvement
|
|
|
95,006
|
|
|
|
91,609
|
|
Construction in progress
|
|
|
27,720
|
|
|
|
26,729
|
|
Others
|
|
|
798
|
|
|
|
1,106
|
|
Property, plant and equipment - total
|
|
$
|
165,976
|
|
|
$
|
158,674
|
|
Less: accumulated depreciation
|
|
|
(90,778
|
)
|
|
|
(68,174
|
)
|
Property, plant and equipment - net
|
|
$
|
75,198
|
|
|
$
|
90,500
|
|
Depreciation
expense was $19,564 and $9,466 for the three months ended March 31, 2018 and 2017, respectively.
9.
Deposit for Long-Term Investment
On
June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao New Materials Technology
Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000 (approximately US$ 2.3
million). As of March 31, 2018, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately $0.8 million). Due to certain
administrative approval process from the Chinese government, the closing of the equity purchase agreement has been delayed. RMB
6,500,000 (approximately $1.0 million) will be paid upon completion of the land use rights ownership transfer and RMB 3,500,000
(approximately $0.5 million) will be paid upon completion of the business licenses transfer. The Company estimated the completion
of the transfer will be sometime in August 2018.
10.
Salaries payable
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Ms. Yvonne Wang (“Ms. Wang”)
|
|
$
|
196,000
|
|
|
$
|
175,000
|
|
Other Employees
|
|
|
177,415
|
|
|
|
116,401
|
|
Total
|
|
$
|
373,415
|
|
|
$
|
291,401
|
|
No
salary was paid to Ms. Wang since December 2015. The Company expects to be in negotiations with Ms. Wang to settle these obligations.
11.
Related Party Transactions
Due
from related parties – non-trade
Amounts
due from related parties consisted of the following as of March 31, 2018 and December 31, 2017:
Item
|
|
Nature
|
|
|
Notes
|
|
|
March
31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Wei Li
|
|
|
Non-trade
|
|
|
|
(1)
|
|
|
|
-
|
|
|
|
19,017
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
19,017
|
|
(1)
Mr. Wei Li
During
the year ended December 31, 2017, Mr. Wei Li, the former chairman and CEO, founder and major shareholder of the Company, obtained
cash advance from the Company for operational purpose . The balance was repaid in March 2018.
Due
to related parties– non-trade
Amounts
due to related parties consisted of the following as of March 31, 2018 and December 31, 2017:
Item
|
|
Nature
|
|
|
Notes
|
|
|
March
31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. Wang
|
|
|
Non-trade
|
|
|
|
(1)
|
|
|
|
380,126
|
|
|
|
320,199
|
|
Ms. Feng Li (“Ms. Li”)
|
|
|
Non-trade
|
|
|
|
(2)
|
|
|
|
39,828
|
|
|
|
-
|
|
Total amount due to related parties
|
|
|
|
|
|
|
|
|
|
$
|
419,954
|
|
|
$
|
320,199
|
|
(1)
Ms. Wang
Effective
November 20, 2015, the Company appointed Ms. Wang as the Chairman of the Board and effective August 11, 2016, the Company’s
Board of Directors has assigned Ms. Wang the additional titles of Acting President, Acting Chief Executive Officer and Acting
Chief Financial Officer. On April 15, 2018, Ms. Wang turned over the Acting Chief Financial Officer to her successor.
During
the three months ended March 31, 2018 and 2017, Ms. Wang paid various expenses on behalf of the Company. As of March 31, 2018
and December 31, 2017, the amount due to Ms. Wang was $380,126 and $320,199, respectively.
(2)
Ms. Feng Li
Ms.
Feng Li is a member of the Company’s board of directors and shareholder of the Company. Ms. Li held approximately 20% of
the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock. Ms. Feng Li paid various expenses on
behalf of the Company. As of March 31, 2018 and December 31, 2017, the amount due to Ms. Feng Li was $39,828 and $0, respectively.
12.
Convertible Notes Payable
Convertible
notes payable consisted of the following:
|
|
March
31, 2018
|
|
|
December 31, 2017
|
|
6% secured convertible notes – FirsTrust Group Inc. (1)
|
|
$
|
121,562
|
|
|
$
|
121,562
|
|
15% convertible notes- Mr. Geng Liu (1)
|
|
|
159,311
|
|
|
|
153,615
|
|
15% convertible notes- Mr. Junwei Zheng (2)
|
|
|
876,207
|
|
|
|
844,881
|
|
Less: notes discount
|
|
|
(314,552
|
)
|
|
|
(386,776
|
)
|
Convertible notes payable - total
|
|
|
842,528
|
|
|
|
733,282
|
|
Non-current
|
|
|
(561,655
|
)
|
|
|
(460,082
|
)
|
Current
|
|
$
|
280,873
|
|
|
$
|
273,200
|
|
(1)
Convertible Notes Payable - Current
Convertible
notes payable - current consists of $121,562 of 6% secured convertible notes issued to FirsTrust Group Inc. on June 29, 2006 and
$159,311 (face amount $159,311 net of discount of $0) 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.
On
October 19, 2017, the Company issued total 14,151 common shares at $1.04 per share price to FirsTrust Group, Inc. for the conversion
of convertible note. According to the convertible note agreement, the conversion price is based on a 40% discount to the average
of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period
per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled
to the fair value of the 14,151 common shares at $2.25 per share, no gain or loss were recognized upon this conversion.
On
December 13, 2017, the Company issued total 105,095 common shares at $0.75 per share price to FirsTrust Group, Inc. for the conversion
of convertible note. According to the convertible note agreement, the conversion price is based on a 40% discount to the average
of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period
per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled
to the fair value of the 105,095 common shares at $2.3 per share, no gain or loss were recognized upon this conversion.
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 $18,445 and $20,239 for liquidated damages
for the three months ended March 31, 2018 and 2017, respectively. The Company also accrued $4,496 and $5,557 for interest at the
rate of 15% per annum for the three months ended March 31, 2018 and 2017, respectively. The total 15% interest accrued was $187,354
and $182,858 at March 31, 2018 and at December 31, 2017, respectively. The total accrued liquidated damages were $540,702 and
$522,257 at March 31, 2018 and at December 31, 2017, respectively.
The
Company’s obligations under the Notes are secured by a first priority security interest in the Company’s intellectual
property pursuant to an Intellectual Property Security Agreement with the Holders. In addition, Mr. Li, the Company’s former
Chief Executive Officer, has pledged all of his common stock of the Company as collateral for the Company’s obligations
under the 6% Convertible Notes.
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. Subsequently, the Company reached an agreement with Mr. Geng Liu that the maturity date will be extended to July 30, 2018.
The
notes are convertible into shares of the common stock, at conversion price is $0.90 which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital, and the remainder proceeds of $99,850 from issuance
of the convertible note was allocated to convertible notes payable.
For
the three months ended March 31, 2018 and 2017, the Company recorded interest expense of $7,792 and $13,497 on the note, including
the amortization of the debt discount resulting from the value of beneficial conversion feature, and the carrying value of the
note as at March 31, 2018 was $159,311.
(2)
Convertible Notes Payable - Non-current and derivative liabilities
Convertible
notes payable – non-current consists $876,208 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 March 31, 2018, the Company has received partial principal totaled RMB 5.5 million ($876,208 equivalent
USD at March 31, 2018) out of the RMB 30 million Convertible Note Agreement.
The
notes are convertible into shares of the common stock, at conversion price is $3.5 which is higher than the price of the Company’s
common stock on the date of issue, therefore the conversion feature embedded in the note did not meet the definition of BCF. The
Company determined that conversion option embedded in the note meet the definition of a derivative instrument. Since the embedded
conversion price of the conversion feature is denominated in U.S. dollar, a currency other than the convertible note payable currency.
As a result, the embedded conversion feature is not considered indexed to the Company’s own stock due to the variable exchange
rate between U.S. Dollar and RMB, and as such, the Company determined that the embedded conversion feature to be carried as a
liability and 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 December 31, 2017:
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
●
|
Expected
volatility of 151.9% calculated using the Company’s historical price of its common stock
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
●
|
Risk-free
interest rate of 1.80%, for the conversion options
|
|
|
|
|
●
|
Expected
lives of 1.33 years
|
|
|
|
|
●
|
Market
price at issuance date of $2.0
|
The
fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables
on March 31, 2018:
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
●
|
Expected
volatility of 147.45% calculated using the Company’s historical price of its common stock
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
●
|
Risk-free
interest rate of 2.11%, for the conversion options
|
|
|
|
|
●
|
Expected
lives of 1.08 years
|
|
|
|
|
●
|
Market
price at remeasurement date of $1.35
|
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 $247,933. On December 31, 2017, the fair value of derivative liabilities was recalculated at $247,933.
On March 31, 2018, the fair value of derivative liabilities was recalculated at $117,995. For the three months ended March 31,
2018, the Company recognized a gain of $129,938, in change in fair value of derivative liabilities.
For
the three months ended March 31, 2018, the Company recorded interest expense of $102,236 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 March
31, 2018 was $561,655.
13.
Note Payable
On
May 29, 2007, the Company issued a $360,000 promissory note (the “Promissory Note”) to an unrelated individual (the
“Original Note holder”). This note bears interest at 18% per annum and was due on July 27, 2007. This note is currently
in default and bears interest of 25% per annum (the “Default rate”) until paid in full. This note is secured by a
pledge of shares of the Company’s common stock owned by Investlink (China) Limited (the “Pledged Shares”). The
Company accrued $22,500 and $22,500 interest expense on note payable for the three months ended March 31, 2018 and 2017, respectively.
As
of December 31, 2016, the Original Note holder informed the Company that all right, title and interests in the Promissory Note
has been assigned and transferred to FirsTrust. As of March 31, 2018, all of $360,000 of Promissory Note to FirsTrust is still
outstanding, and total accrued interest of the Promissory Note is $ 971,800. The Company has begun preliminary discussion with
FirsTrust with regards to a potential settlement of the Note, but no agreement has been reached yet.
14.
Other Payables and accruals
Other
payable consisted of the following:
|
|
Notes
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Stock subscription proceeds received in advance
|
|
|
(1)
|
|
|
$
|
1,736,869
|
|
|
$
|
1,718,642
|
|
Accrued expenses
|
|
|
|
|
|
|
125,289
|
|
|
|
36,240
|
|
R&D expense payable
|
|
|
|
|
|
|
349,382
|
|
|
|
309,555
|
|
Others
|
|
|
|
|
|
|
236,847
|
|
|
|
44,436
|
|
|
|
|
|
|
|
$
|
2,448,414
|
|
|
$
|
2,108,873
|
|
(1).
The Company received $460,617 (RMB 3.2 million, revalued as $509,794 as at March 31, 2018) in 2016 from two unrelated potential
investors, and additionally received $1,227,075 (RMB 8 million, revalued as $1,272,572 as at March 31, 2018) in 2017 from
one unrelated potential investors pending for stock issuances. The Company is in the process of negotiating the issuance price
per shares of these stock subscriptions with the investors.
15.
Stockholders’ Equity
Preferred
stock
On
December 14, 2015, the Company issued 500,000 shares of preferred stock series A for the aggregate amount of $1,000,000 as debt
cancellation owed to two related party individuals.
These
shares of Series A Preferred Stock shall have voting rights equal to aggregate of 75% of total shares entitled to vote by both
(i) the holders of all of the then outstanding shares of Common Stock (whether or not such holders vote) and (ii) the holders
of all of the then outstanding shares of the Company. The holders of preferred stock are entitled to receive noncumulative dividends,
when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. The Company shall have the right
to redeem the Series A Preferred Stock, plus any accrued and unpaid dividends at a cash redemption price equal to the aggregate
issuance price of $2.0 per share.
On
December 28, 2017, the Company issued 811,148 shares of preferred stock series B for the aggregate amount of $1,054,492 as debt
cancellation owed to one related party individual.
These
shares of Series B Preferred Stock has a liquidation preference which is same with the Company’s Series A Preferred Stock,
and is entitled to vote on an as-converted basis as the holder of common stock, and is convertible into the Company’s common
stock on a one-for-one basis at any time at the option of the holder. The holders of preferred stock are entitled to receive noncumulative
dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. The Company shall
have the right to redeem the Series B Preferred Stock, plus any accrued and unpaid dividends at a cash redemption price equal
to the aggregate issuance price of $1.3 per share.
In
the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, distributions to the
stockholders of the Company should firstly go to the holders of Series A and B preferred stock. After the payment of the full
Series A and B liquidation preference, the remaining assets of the Company legally available for distribution shall be distributed
ratably to the holders of the common stock in an amount equal to the full payment of the full Series A and B liquidation preference,
after such distributions to the holders of the Common stock , the remaining assets of the Company legally available for distribution
shall be distributed ratably among the holders of Series A and B preferred stock and the holders of the common stock.
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 three months ended March 31, 2018, the Company entered into five consulting agreements and issued 917,500 shares of common
stocks to consultants for IR, Training system, and business development services based on market price of the shares at the transaction
dates. The valuation of the shares are amounted to an average issuance price of $1.92 per share.
Conversion
of convertible note
As
disclosed in Note 12(1), on October 19, 2017, the Company issued total 14,151 common shares at $1.04 per share price to FirsTrust
Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price is based
on a 40% discount to the average of the lowest three days trading price of the Company’s common stock on the OTC Bulletin
Board over a 20-day trading period per the convertible notes agreement.
As
disclosed in Note 12(1), on December 13, 2017, the Company issued total 105,095 common shares at $0.75 per share price to FirsTrust
Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price is based
on a 40% discount to the average of the lowest three days trading price of the Company’s common stock on the OTC Bulletin
Board over a 20-day trading period per the convertible notes agreement.
Additional
paid-in-capital
As
disclosed in Note 12(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. All other amounts recorded in additional paid in capital are derived from issuance of
preferred shares or common shares as disclosed in the above.
16.
Stock-based Compensation
On
March 15, 2017, the Board of Directors approved a new stock option plan with ten years’ term. As of March 31, 2018, the
Company has not granted any incentive compensation under this plan.
17.
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:
March
31, 2018
Recurring Fair Value Measures
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
117,995
|
|
|
$
|
117,995
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
$
|
117,995
|
|
|
$
|
117,995
|
|
December
31, 2017
Recurring Fair Value Measures
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
247,933
|
|
|
$
|
247,933
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
$
|
247,933
|
|
|
$
|
247,933
|
|
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 three months ended March 31, 2018 and for the year ended December 31, 2017:
|
|
Three months ended March 31, 2018
|
|
|
Year ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
247,933
|
|
|
$
|
-
|
|
Fair value of derivative liabilities at inception
|
|
|
-
|
|
|
|
569,784
|
|
Change in fair value of derivative liabilities
|
|
|
(129,938
|
)
|
|
|
(321,851
|
)
|
Ending balance
|
|
$
|
117,995
|
|
|
$
|
247,933
|
|
18.
Income Tax
In
accordance with the current tax laws in the U.S., the Company is subject to a corporate tax rate of 21% on its taxable income.
No provision for taxes is made for U.S. income tax for the three months ended March 31, 2018 and for the year ended December 31,
2017 as it has no taxable income in the U.S.
On
December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States.
Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. Accordingly, we have remeasured our deferred
tax assets on net operating loss carryforwards in the U.S at the lower enacted cooperated tax rate of 21%. However, this remeasurment
has no effect on the Company’s income tax expenses as the Company has provided a 100% valuation allowance on its deferred
tax assets previously.
Additionally,
the 2017 Tax Act implemented a modified territorial tax system and imposing a tax on previously untaxed accumulated earnings and
profits (“E&P”) of foreign subsidiaries (the “Toll Charge”). The Toll Charge is based in part on the
amount of E&P held in cash and other specific assets as of December 31, 2017. The Toll Charge can be paid over an eight-year
period, starting in 2018, and will not accrue interest. The 2017 Tax Act also imposed a global intangible low-taxed income tax
(“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning
after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign
tax credits. As a fiscal-year taxpayer, certain provisions of the 2017 Tax Act may impact the Company in fiscal 2018, including
the Toll Charge, while other provisions, including the GILTI, will be effective starting at the beginning of fiscal 2018.
On
December 22, 2017, the Securities and Exchange Commission Staff issued Accounting Bulletin No. 118, Income Tax Accounting Implications
of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Tax
Act. SAB 118 provides a measurement period that extends beyond one year from the 2017 Tax Act’s enactment date for registrants
to complete the accounting under ASC 740. In accordance with SAB 118, a registrant must reflect the income tax effects of those
aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a registrant’s accounting
for certain income tax effects of the 2017 Tax Act is incomplete, but the registrant is able to determine a reasonable estimate,
the registrant must record a provisional estimate to be included in its financial statements. If a registrant is unable to determine
a reasonable estimate and record a provisional estimate, the registrant should continue to apply ASC 740 on the basis of the provision
of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.
The
Company has determined that this one-time Toll Charge has no effect on the Company’s income tax expenses as the Company
has no undistributed foreign earnings prior to December 31, 2017 since the Company has cumulative foreign losses as of December
31, 2017.
The
Company determined that there is no impact of GILTI for the year ended December 31, 2018, which the Company believes that it will
be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax, which
may result in no additional US federal income tax being due.
In
accordance with the current tax laws in China, Kiwa Shandong, Kiwa Beijing, Kiwa Shenzhen, Kiwa Xian, and Kiwa Hebei, Kiwa Shanxi
and Kiwa Yangling 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 months ended March 31, 2017. Kiwa Xian, Kiwa Hebei, Kiwa Shenzhen,
Kiwa Shanxi and Kiwa Yangling has not provided for any corporate income taxes since it had no taxable income for the three months
ended March 31, 2018. For the three months ended March 31, 2018, Kiwa Beijing recorded income tax provision for RMB 3,429,747
or approximately $539,000.
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
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Pre-tax income (loss) from continuing operation
|
|
$
|
592,945
|
|
|
$
|
(528,677
|
)
|
|
|
|
|
|
|
|
|
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
34
|
%
|
Income tax expense (benefit) computed at U.S. federal corporation income tax rate
|
|
|
124,518
|
|
|
|
(179,750
|
)
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Rate differential for PRC earnings
|
|
|
55,740
|
|
|
|
18,519
|
|
Change of valuation allowance
|
|
|
354,673
|
|
|
|
102,700
|
|
Effect of tax exempted income in BVI
|
|
|
4,410
|
|
|
|
7,140
|
|
Effective tax expenses (benefits)
|
|
$
|
539,341
|
|
|
$
|
(51,391
|
)
|
The
Company had deferred tax assets from continuing operation as follows:
|
|
March
31,
2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Net operating losses carried forward by parent Company in the US
|
|
$
|
1,910,508
|
|
|
$
|
1,746,802
|
|
Net operating losses carried forward by China Subsidiaries except for Kiwa Beijing
|
|
|
502,892
|
|
|
|
311,925
|
|
Less: Valuation allowance
|
|
|
(2,413,400
|
)
|
|
|
(2,058,727
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of March 31, 2018 and December 31, 2017, the Company had approximately $11.5 million and $9.5 million net operating loss carryforwards
available to reduce future taxable income. Net operating loss of the parent Company could be carried forward and taken against
any taxable income for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the
Internal Revenue Code of 1986, as amended. The net operating loss of the Company’s PRC subsidiaries could be carried forward
for a period of not more than five years from the year of the initial loss pursuant to relevant PRC tax laws and regulations.
It is more likely than not that the deferred tax assets cannot be utilized in the future because there will not be significant
future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full valuation allowance
on its deferred tax assets.
As
of March 31, 2018 and December 31, 2017, the Company has no material unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed
on the Company during the three months ended March 31, 2018 and 2017, and no provision for interest and penalties is deemed necessary
as of March 31, 2018 and December 31, 2017.
19.
Commitments and Contingencies
The
Company has the following material contractual obligations:
(1)
Investment in manufacturing facilities in Penglai City, Shandong Province in China
As
disclosed in Note 8, on June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao
New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000
(approximately US$ 2.3 million). As of December 31, 2017, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately
$0.8 million) and is committed to pay the remaining RMB10,000,000 based on the payment milestone in the equity purchase agreement.
RMB 6,500,000 (approximately $1.0 million) will be paid upon completion of the land use rights ownership transfer and RMB 3,500,000
(approximately $0.5 million) will be paid upon completion of the business licenses transfer.
(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
The
Company entered various lease agreements for business purpose. The future lease payments at March 31, 2018 are summarized below:
Twelve months ending March 31, 2019
|
|
$
|
290,293
|
|
Twelve months ending March 31, 2020
|
|
|
72,924
|
|
Twelve months ending March 31, 2021
|
|
|
11,046
|
|
Thereafter
|
|
|
-
|
|
Total minimum lease payment
|
|
$
|
374,263
|
|
20.
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 March 31, 2018 and December 31, 2017, $61,768, and $1,083,539 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 three months ended March 31, 2018, three customers accounted for 52%, 24%, and 23%.
As
of March 31, 2018, three customers accounted for 64%, 18% and 14% of the Company’s accounts receivable. As of December 31,
2017, three customers accounted for 52%, 22% and 14% of the Company’s accounts receivable.
For
the three months ended March 31, 2018, two suppliers accounted for 76% and 20% of the Company’s total purchases, respectively.
For the three months ended March 31, 2017, one supplier accounted for 90% of the Company’s total purchase.
As
of March 31, 2018, two suppliers accounted for 75% and 20% of the Company’s accounts payable, respectively. As of December
31, 2017, two suppliers accounted for 67% and 27% of the Company’s accounts payable, respectively.
As of March 31, 2018, one supplier
accounted for 99% of the Company’s advance to suppliers, respectively. As of December 31, 2017, one supplier accounted
for 97% of the Company’s advance to suppliers.
21.
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
income statements for the three months ended March 31, 2018 and 2017 reflected the Kiwa Shandong business segment as a discontinued
operation. The following results of operations of Kiwa Shandong are presented as a loss from a discontinued operation in the unaudited
condensed consolidated statements of operations:
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Operating expense
|
|
|
-
|
|
|
|
14,220
|
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
14,220
|
|
22.
Subsequent Events
On
April 2, 2018, the Company terminated its cooperation agreement with ETS Biological Science and Technology Development Co., Ltd.
(“ETS”) and, in its place, has developed “Ecology Technological Sustainability” (“KETS”) as
its core technology to upgrade its microbial fertilizer products. In February 2017, the Company had signed a strategic cooperation
agreement with ETS and planned to build new product categories based on the cooperative research results. Following the research,
the two parties did not reach a further agreement and determined to terminate the partnership. As a result, the Company switched
its focus to the KETS technology to fulfill its needs in connection with fertilizer production. As a part of this process, Kiwa
Bio-Tech has established a Research Institute of Ecological Agriculture and Environmental Research. Based on cooperation with
various Universities including the China Agriculture University, Northwest University, Northwest A&F University, Harbin Institute
of Technology and Tsinghua University, the Company believes that it can secure a leading position in the KETS technology in the
next thirty years. In comparison to the Company’s existing technology, KETS technology is comprised of microorganisms with
a larger scale of micro-flora. The micro-flora could significantly increase the beneficial bacteria in the soil that enhances
the yield of the plant crops and prevents soil ecological problems. The newly upgraded technology will be applied to the main
crop planting areas and presently-polluted arable areas for soil restoration.
On April 3, 2018, the Company issued 83,000
shares of restricted common stock at $1.20 per share to Xueyang Xiao for an aggregate amount of $64,000. The Company has received
the full amount.
On
April 3, 2018, the Company issued 17,000 common shares to Xueyang Xiao 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 a one year term.
On
April 12, 2018, the Company issued 100,000 common shares to Lixin Zhou 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 a one year term.
On
April 18, 2018, the Company issued 11,000 common shares to Xueyang Xiao 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 a one year term.
On
April 18, 2018, the Company issued 53,000 shares of restricted common stock at $1.20 per share to Xueyang Xiao for an aggregate
amount of $99,600. The Company has received the full amount.
On
October 27, 2017, the Company issued total 126,045 common shares at $0.62 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.