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, the Company completed its 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 currently mainly operates its business through Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”),
which was incorporated in China in January 2016, 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, Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch Company, (“Kiwa Xian”), which was
incorporated in China in December 2017, Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”), which incorporated in
March 2018, and The Institute of Kiwa-Yangling Ecological Agriculture and Environment Research Co., Ltd. (“Kiwa Institute”),
which incorporated in March 2018. 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, Kiwa Institue and Kiwa Hebei.
Business
The
Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological
products for agricultural use. The Company’s products are designed to enhance the quality of human life by increasing the
value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes.
2.
Going concern
The
Company’s unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As
of September 30, 2019, and December 31, 2018, the Company had an accumulated deficit of $16,347,380 and $14,803,530, respectively,
and the Company incurred a net loss of $1,543,850 for the nine months ended September 30, 2019. These circumstances, among others,
raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty. The unaudited condensed
financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts
or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The
Company has assessed its ability to continue as a going concern for a period of one year from the date of the issuance of these
unaudited condensed financial statements. In assessing the Company’s liquidity, the Company monitors and analyzes its cash
on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital
requirements, operating expenses and capital expenditure obligations.
The
Company engages in the business for organically bio-fertilizer and its customers are mainly agricultural cooperative company and
distributors who then resell its products to individual farmers. Because the crop growing cycle usually takes approximately 3
to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest
crops and to realize profits to repay the Company’s distributors. The Company’s current payment terms on these customers
are ranging from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers. As a result,
the Company’s accounts receivable turnover ratio is normally low due to the nature of the Company’s business. In addition,
the Company’s business is capital intensive as the Company needs to make advance payment to its suppliers to secure timely
delivery and current market price of raw materials. Debt financing in the form of notes payable and loans from related parties
have been utilized to finance the working capital requirements of the Company.
The
Company sold Convertible Promissory Notes (“Notes”) in the aggregate principal amount of $1,915,000 for the nine months
ended September 30, 2019. As of September 30, 2019, the Company’s working capital was approximately $12.8 million and the
Company had cash of approximately $2,021,000, with remaining current assets mainly composed of advance to suppliers, accounts
receivable, prepaid expenses, and deferred cost of goods sold.
Although
the Company believes that it can realize its current assets in the normal course of business, the Company’s ability to repay
its current obligations will depend on the future realization of its current assets and the future operating revenues generated
from its products. Because the Chinese Government is continuously to promote green environment and implement quality standards
and environmentally sensitive policies in the Agricultural industry, the Company expects its revenues from its innovated and highly
effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow in its business. In
addition, the Company’s marketing team is expanding to the Western areas of China and Hainan province and it expects its
revenues will continue to grow in 2019. Meanwhile, the Company expects to continue to gain market shares in its existing sales
channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in
the industry.
Management
has considered its historical experience, the economic environment, trends in the Agricultural industry, the realization of the
accounts receivables and advance to suppliers as of September 30, 2019. The Company expects to realize the balance of its current
assets within the normal operating cycle of a twelve-month period. If the Company is unable to realize its current assets within
the normal operating cycle of a twelve-month period, the Company may have to consider supplementing its available sources of funds
through the following sources:
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●
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the
Company will continuously seek additional equity financing to support its working capital;
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other
available sources of financing from PRC banks and other financial institutions;
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●
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financial
support and credit guarantee commitments from the Company’s major shareholder.
|
Based
on the above considerations, management is of the opinion that it does not have sufficient funds to meet its working capital requirements
and debt obligations as they become due one year from the date of this report. If the Company can’t raise enough funds,
it might be unable to fund its future cash requirement on a timely basis and under acceptable terms and conditions and may not
have sufficient liquidity to maintain operations and repay its liabilities for the next twelve months. As a result, the Company
may be unable to implement its current plans for expansion, repay its debt obligations or respond to competitive pressures, any
of which would have a material adverse effect on its business, prospects, financial condition and results of operations.
3.
Summaries of Significant Accounting Policies
Basis
of presentation
The
accompanying 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, 2018 on Form 10-K filed with the SEC on April 12, 2019.
Principle
of Consolidation
These
consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Kiwa BVI,
Kiwa Asia Holdings Company, Kiwa Beijing, Kiwa Shenzhen, Kiwa Hebei, Kiwa Asia, Kiwa Yangling, and Kiwa Institute. All significant
inter-company balances or transactions are eliminated on consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting estimates include the valuation of securities issued, derivative liabilities, deferred
tax assets and related valuation allowance.
Certain
of the Company’s estimates, including evaluating the collectability of accounts receivable and the fair market value of
long-lived assets, could be affected by external conditions, including those unique to the Company’s industry, and general
economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could
cause actual results to differ from its estimates. The Company re-evaluates all of the Company’s accounting estimates annually
based on these conditions and record adjustments when necessary.
Cash
and Cash Equivalents
Cash
and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less.
Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded
from cash and cash equivalents.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable represent customer accounts receivables. The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company’s estimate is based on historical collection experience, the economic environment, trends
in the microbial fertilizer industry, and a review of the current status of trade accounts receivable. Management reviews its
accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. Such allowances, if
any, would be recorded in the period the impairment is identified. It is reasonably possible that the Company’s estimate
of the allowance for doubtful accounts will change. Uncollectible accounts receivable are charged against the allowance for doubtful
accounts when all reasonable efforts to collect the amounts due have been exhausted.
Inventory
Inventories
are stated at the lower of cost, determined on the weighted average method, and net realizable value. Work in progress and finished
goods are composed of direct materials, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated
based on selling price in the ordinary course of business, less estimated costs to complete and dispose.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses
on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property,
plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All
ordinary repair and maintenance costs are expensed as incurred. Depreciation for financial reporting purposes is provided using
the straight-line method over the estimated useful lives of the assets as follows:
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Useful
Life
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|
|
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(In
years)
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|
Buildings
|
|
30
- 35
|
|
Machinery
and equipment
|
|
5
- 10
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|
Automobiles
|
|
8
|
|
Office
equipment
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|
2
- 5
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|
Computer
software
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|
3
|
|
Leasehold
improvement
|
|
The
shorter of the
lease term and useful life
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Impairment
of Long-Lived Assets
The
Company’s long-lived assets consist of property, plant and equipment. The Company evaluates its investment in long-lived
assets, including property and equipment, for recoverability whenever events or changes in circumstances indicate the net carrying
amount may not be recoverable. It is possible that these assets could become impaired as a result of legal factors, market conditions,
operational performance indicators, technological or other industry changes. If circumstances require a long-lived asset or asset
group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that
asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on
an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary.
Leases
Prior
to December 31, 2018, leases are classified as either capital or operating leases. Leases that transfer substantially all the
benefits and risks incidental to the ownership of assets are accounted for as capital leases as if there was an acquisition of
an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases
and the lease expense is included in the consolidated statements of operations on a straight-line basis over the term of the leases.
On
January 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). This update supersedes the lease accounting guidance
found under ASC 840, Leases (“ASC 840”) and requires the recognition of right-of-use (“ROU”) assets and
lease obligations (“lease liabilities”) by lessees for those leases currently classified as operating leases under
existing lease guidance. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition. Short term leases with a term of 12 months or less are not required to be recognized. The
Company elected the practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are,
or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or
existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of
a lease as a single lease component. There is no impact from the adoption of ASC 842 on January 1, 2019 as the Company did not
have any existing material leases with a lease term in excess of twelve months on January 1, 2019.
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, current portion of operating leases liabilities, and operating leases, non-current on our consolidated balance sheets.
Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations
under capital leases, non-current on our consolidated balance sheets.
Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments
over the lease term at commencement date. As most of our leases do not provide an implicit rate, the Company uses its incremental
borrowing rate based on the information available at commencement date in determining the present value of future payments. The
operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise
that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Financial
Instruments
The
Company analyzes all financial instruments with features of both liabilities and equity under FASB Accounting Standards Codification
(“ASC”) Topic 480 “Distinguishing Liabilities from Equity” and FASB ASC Topic 815 “Derivatives and
Hedging”.
Embedded
conversion features of convertible debentures not considered to be derivative instruments
The
embedded conversion features of convertible debentures not considered to be derivative instruments provide for a rate of conversion
that is below market value. Such feature is normally characterized as a “beneficial conversion feature” (“BCF”).
The relative fair values of the BCF were recorded as discounts from the face amount of the respective debt instrument. The Company
amortized the discount using the straight-line method which approximates the effective interest method through maturity of such
instruments.
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:
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●
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Level
1: quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
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●
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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.
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●
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Level
3: Pricing inputs that are generally observable inputs and not corroborated by market data.
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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
to consider control of goods are transferred to its customer and collectability of payment is reasonably assured. The Company’s
revenues are recognized at a point in time after all performance obligations are satisfied.
The
Company’s customers are mainly agricultural cooperative company and distributors who then resell the Company’s products
to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry,
for some co-ops and distributors, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops
and to realize profits to repay them. As a result, for the sales contracts with these customers, the collectability of payment
is highly dependent on the successful harvest of corps and the customers’ ability to collect money from farmers. The Company
deemed the collectability of payment may not be reasonably assured until after the Company get paid. Collectability is a necessary
condition for the contract to be accounted for to meet the criteria of the first step “identifying the contract with the
customer” under the new revenue guidance in ASC 606. As a result, these sales contracts are not considered a contract under
ASC 606, thus the shipments under these contracts are not recognized as revenue until all criteria for “identifying the
contract with the customer” and revenue recognition are met using the five-step model.
Deferred
Revenue and Deferred Cost of Goods Sold
Deferred
revenue and deferred cost of goods sold result from transactions where the Company has shipped product for which all revenue recognition
criteria under the five-step model have not yet been met. Though these contracts are not considered a contract under ASC 606,
they are legally enforceable, and the Company has an unconditional and immediate right to payment after the Company has shipped
products, therefore, the Company recognizes a receivable and a corresponding deferred revenue upon shipment. Deferred cost of
goods sold includes direct inventory costs. Once all revenue recognition criteria under the five-step model have been met, the
deferred revenues and associated cost of goods sold are recognized. The Company’s provision for deferred cost of goods sold
is made based on historical collection experience on such related accounts receivable and realizability of deferred revenue. The
Company made provision of $2,420,964 and nil for deferred cost of goods sold for the nine months ended September 30, 2019 and
2018, respectively.
Income
Taxes
The
Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated
financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable
to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation allowance
when it is more likely than not that the assets will not be recovered.
FASB
ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation
of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position
will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits
of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the
amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that
is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet
the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns
prior to 2015 are not subject to examination by any applicable tax authorities. PRC tax returns filed for 2015, 2016 and 2017
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 and nine months ended September 30, 2019 and 2018 represented foreign currency translation
adjustments and were included in the unaudited condensed consolidated statements of operations and comprehensive income.
The
exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the unaudited condensed consolidated
financial statements were as follows:
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As
of
September 30, 2019
|
|
|
As
of
December 31, 2018
|
|
|
Balance
sheet items, except for equity accounts
|
|
|
7.1217
|
|
|
|
6.8761
|
|
|
|
|
Three
months ended September 30,
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|
|
|
|
2019
|
|
|
2018
|
|
|
Items
in the statements of comprehensive income
|
|
|
6.9861
|
|
|
|
6.8031
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Items
in the statements of comprehensive income
|
|
|
6.8618
|
|
|
|
6.5137
|
|
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:
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|
|
As of
September 30, 2019
|
|
|
As of
December 31, 2018
|
|
|
Balance sheet items, except for equity accounts
|
|
|
7.8394
|
|
|
|
7.8297
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Items in the statements of comprehensive income
|
|
|
7.8282
|
|
|
|
7.8446
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Items in the statements of comprehensive income
|
|
|
7.8380
|
|
|
|
7.8398
|
|
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 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required
to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive
income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this
Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public
business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities
for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update
should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption
of this ASU would have a material effect on the Company’s consolidated financial statements.
In
August 2018, the FASB Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies
the disclosure requirements on fair value measurements. ASU 2018-13 is effective for public entities for fiscal years beginning
after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures
will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not
expect this guidance will have a material impact on its 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 consolidated financial statement presentation or disclosures.
4.
Accounts Receivable, net
As
of September 30, 2019 and December 31, 2018, we had $3.5 million and $6.8 million, respectively, of accounts receivable from the
Company’s customers. The Company’s current payment terms on these customers are ranging typically from 60 days to
9 months after receipts of the goods depending on the creditworthiness of these customers. These customers are either agricultural
cooperative company or distributors who then resell the Company’s products to individual farmers.
The
Company’s provision on allowance for doubtful accounts is based on historical collection experience, the economic environment,
trends in the microbial fertilizer industry, and a review of the current status of trade accounts receivable and come up with
an aging allowance method. The Company’s management has continued to evaluate the reasonableness of the valuation allowance
policy and update it if necessary.
Accounts
receivable consisted of the following:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Accounts receivable
|
|
$
|
3,500,098
|
|
|
$
|
6,751,113
|
|
|
Less: Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
Accounts receivable, net
|
|
$
|
3,500,098
|
|
|
$
|
6,751,113
|
|
5.
Prepaid Expense
Prepaid
expenses consisted of the following:
|
|
|
Notes
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Prepaid office rent
|
|
|
|
$
|
19,345
|
|
|
$
|
4,921
|
|
|
Prepaid government filing expense
|
|
|
|
|
9,000
|
|
|
|
7,000
|
|
|
Prepaid consulting expenses
|
|
(1)
|
|
|
1,377,954
|
|
|
|
2,230,553
|
|
|
Others
|
|
|
|
|
27,266
|
|
|
|
17,091
|
|
|
Total
|
|
|
|
$
|
1,433,565
|
|
|
$
|
2,259,565
|
|
(1)
Prepaid consulting expenses represent issuance of common stock for prepaid services. As of September 30, 2019, the Company evaluated
the performance of the consultants and concluded all the contracts were on schedule of delivery. The company amortized the consulting
fee over the service periods per agreements based on the progress of services delivered. For the three months ended September
30, 2019 and 2018, the amortization of consulting expense was $420,402 and $547,509, respectively. For the nine months
ended September 30, 2019 and 2018, the amortization of consulting expense was $1,525,448 and $1,815,969, respectively.
6.
Advance to suppliers
Advance
to suppliers are mainly funds deposited for future raw material and finished goods purchases. The Company’s major vendors
require deposits with them as a guarantee that the Company will complete its purchases on a timely basis as well as securing the
current agreed upon purchase price. Since the Company anticipated the price of raw materials continues to be on the rise, the
Company agreed to make large amount of advances to suppliers.
As
of September 30, 2019 and December 31, 2018, advance to suppliers consisted of the following:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Advance to suppliers
|
|
$
|
22,581,884
|
|
|
$
|
15,763,198
|
|
|
Less: provisions for advance to suppliers
|
|
|
(217,645
|
)
|
|
|
-
|
|
|
Advance to suppliers, net
|
|
$
|
22,364,239
|
|
|
$
|
15,763,198
|
|
7.
Inventory
Inventory
consisted of the following:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
1,358,384
|
|
|
Finished goods
|
|
|
111,164
|
|
|
|
253,331
|
|
|
Packing materials
|
|
|
30,238
|
|
|
|
31,318
|
|
|
Total
|
|
$
|
141,402
|
|
|
$
|
1,643,033
|
|
8.
Property, Plant and Equipment
Property,
plant and equipment, net consisted of the following:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
17,027
|
|
|
$
|
17,451
|
|
|
Furniture
|
|
|
30,209
|
|
|
|
27,312
|
|
|
Leasehold improvement
|
|
|
125,863
|
|
|
|
130,357
|
|
|
Construction in progress
|
|
|
24,432
|
|
|
|
25,305
|
|
|
Others
|
|
|
1,011
|
|
|
|
1,047
|
|
|
Property, plant and equipment - total
|
|
$
|
198,542
|
|
|
$
|
201,472
|
|
|
Less: accumulated depreciation
|
|
|
(128,769
|
)
|
|
|
(108,291
|
)
|
|
Property, plant and equipment - net
|
|
$
|
69,773
|
|
|
$
|
93,181
|
|
Depreciation
expense was $23,160 and $3,930 for the three months ended September 30, 2019 and 2018, and $33,748 and $24,381 for the nine months
ended September 30, 2019 and 2018, respectively.
9.
Deposit for Long-Term Investment
On
June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao New Materials Technology
Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000 (approximately US$ 2.1
million). As of September 30, 2019, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately $0.7 million). Since
the Company had received an approval from relevant authorities to obtain a land purchase discount from the Yangling Free Trade
Zone to construct a new manufacturing facility for bio-fertilizers, the Company decided to abandon its plan to build a production
base in Penglai and has initiated the process of refund of the deposits. The Company expected to collect all of the deposits within
six months.
10.
Salaries payable
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Ms. Yvonne Wang (“Ms. Wang”)
|
|
$
|
322,000
|
|
|
$
|
259,000
|
|
|
Hon Man Yun (“Mr. Yun”)
|
|
|
145,248
|
|
|
|
60,702
|
|
|
Other Employees
|
|
|
923,523
|
|
|
|
705,257
|
|
|
Total
|
|
$
|
1,390,771
|
|
|
$
|
1,024,959
|
|
Ms.
Wang served as Chairman of the Board since November 2015 and served as CEO since August 2016. No salary was paid to Ms. Wang since
December 2015. Mr. Yun was the Chief Financial Officer of the Company since April 2018. The Company expects to be in negotiations
with Mr. Yun and Ms. Wang to settle these obligations.
11.
Related Party Transactions
Due
from related parties – non-trade
Amounts
due from related parties consisted of the following as of September 30, 2019 and December 31, 2018:
|
Item
|
|
Nature
|
|
|
Notes
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Xiaoqiang Yu
|
|
|
Non-trade
|
|
|
(1)
|
|
|
13,872
|
|
|
|
12,108
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
13,872
|
|
|
$
|
12,108
|
|
(1)
Mr. Xiaoqiang Yu
During
the year ended December 31, 2018, Mr. Xiaoqiang Yu, the COO of the Company, obtained a cash advance from the Company for operational
purpose. As of September 30, 2019, and December 31, 2018, the amount due from Mr. Xiaoqiang Yu was $13,872 and $12,108,
respectively.
Due
to related parties– non-trade
Amounts
due to related parties consisted of the following as of September 30, 2019 and December 31, 2018:
|
Item
|
|
Nature
|
|
|
Notes
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. Wang
|
|
|
Non-trade
|
|
|
(1)
|
|
|
272,572
|
|
|
|
534,563
|
|
|
Ms. Feng Li (“Ms. Li”)
|
|
|
Non-trade
|
|
|
(2)
|
|
|
2,154
|
|
|
|
36,358
|
|
|
Total amount due to related parties
|
|
|
|
|
|
|
|
$
|
274,726
|
|
|
$
|
570,921
|
|
(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 nine months ended September 30, 2019 and 2018, Ms. Wang paid various expenses on behalf of the Company. As of September 30,
2019 and December 31, 2018, the amount due to Ms. Wang was $272,572 and $534,563, respectively.
(2)
Ms. Feng Li
Ms.
Feng Li is a member of the Company’s board of directors and shareholder of the Company. Ms. Li held approximately 11% of
the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock. Ms. Feng Li paid various expenses on
behalf of the Company. As of September 30, 2019 and December 31, 2018, the amount due to Ms. Feng Li was $2,154 and $36,358, respectively.
12.
Convertible Notes Payable
Convertible
notes payable consisted of the following:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
6% secured convertible notes – FirsTrust Group Inc. (1)
|
|
$
|
132,762
|
|
|
$
|
125,692
|
|
|
15% convertible notes- Mr. Geng Liu (2)
|
|
|
140,416
|
|
|
|
145,431
|
|
|
15% convertible notes- Mr. Junwei Zheng (3)
|
|
|
772,284
|
|
|
|
799,870
|
|
|
12% convertible notes- Labrys (4)
|
|
|
1,123,250
|
|
|
|
-
|
|
|
12% convertible notes- TFK (5)
|
|
|
150,000
|
|
|
|
-
|
|
|
12% convertible notes- EMA (6)
|
|
|
150,000
|
|
|
|
|
|
|
12% convertible notes- Firstfire (7)
|
|
|
100,000
|
|
|
|
|
|
|
Less: notes discount
|
|
|
(215,735
|
)
|
|
|
(99,907
|
)
|
|
Convertible notes payable - total
|
|
$
|
2,352,977
|
|
|
$
|
971,086
|
|
(1)
6% secured convertible notes – FirsTrust Group Inc.
On
June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional
investors (collectively, the “Purchasers”) for the issuance and sale of 6% secured convertible notes, due three years
from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Convertible Notes”), convertible
into shares of the Company’s common stock.
On
June 29, 2009, the 6% Notes were due. The Company informed the Purchasers of its inability to repay the outstanding balance on
the due date. Therefore, the 6% Notes are in default and the default interest rate of 15% per annum is being charged on the 6%
Notes.
On
August 12, 2013, the Company, entered into a Settlement Agreement and Release (the “Release”) with the holders (the
“Holders”) of the “6% Convertible Notes” in the aggregate principal amount of $2,000,000. Pursuant to
the terms of the Release, the Company paid the Holders $75,000 for a full release, including the forgiveness of past defaults
of unpaid principal amounts, interests and penalties. On March 18, 2008, FirsTrust Group, Inc. (“FirsTrust”) purchased
the three remaining 6% Convertible Notes, totaling $168,000 ($59,100, $50,400 and $59,100 respectively), from Nite Capital, one
of the six institutional investors which purchased a total of $300,000 of the Note in three tranches ($105,000, $90,000, $105,000
respectively), for a cash payment of $100,000. After the Release and conversion, FirsTrust is the only holder of the outstanding
6% Convertible Note with outstanding principal amount of $150,250.
The
Company also incurs a financial liquidated damages in cash or shares at the option of the Company (equal to 2% of the outstanding
amount of the Notes per month plus accrued and unpaid interest on the Notes, prorated for partial months) if it breaches any affirmative
covenants in the Purchase Agreement, including a covenant to maintain a sufficient number of authorized shares under its Certificate
of Incorporation to cover at least 110% of the stock issuable upon full conversion of the Notes. Pursuant to the relevant provisions
for liquidated damages in Purchase Agreement, the Company has accrued the amounts of $18,060 and $16,760 for liquidated damages
for the three months ended September 30, 2019 and 2018, respectively, and the Company has accrued the amounts of $60,180 and $52,006
for liquidated damages for the nine months ended September 30, 2019 and 2018, respectively. The Company also accrued $5,020 and
$4,067 for interest at the rate of 15% per annum for the three months ended September 30, 2019 and 2018, respectively, and the
Company accrued $14,920 and $12,654 for interest at the rate of 15% per annum for the nine months ended September 30, 2019 and
2018, respectively. The total 15% accrued interests were $169,891 and $177,372 at September 30, 2019 and December 31, 2018,
respectively. The total accrued liquidated damages were $573,718 and $555,538 at September 30, 2019 and December 31, 2018, respectively.
The
Company’s obligations under the Notes are secured by a first priority security interest in the Company’s intellectual
property pursuant to an Intellectual Property Security Agreement with the Holders. In addition, Mr. Li, the Company’s former
Chief Executive Officer, has pledged all of his common stock of the Company as collateral for the Company’s obligations
under the 6% Convertible Notes.
On
October 19, 2017, the Company issued total 14,151 common shares at $1.04 per share price to FirsTrust Group, Inc. for the conversion
of convertible note. According to the convertible note agreement, the conversion price is based on a 40% discount to the average
of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period
per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled
to the fair value of the 14,151 common shares at $2.25 per share, no gain or loss were recognized upon this conversion.
On
December 13, 2017, the Company issued total 105,095 common shares at $0.75 per share price to FirsTrust Group, Inc. for the conversion
of convertible note. According to the convertible note agreement, the conversion price is based on a 40% discount to the average
of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period
per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled
to the fair value of the 105,095 common shares at $2.3 per share, no gain or loss were recognized upon this conversion.
On
April 27, 2018, the Company issued total 126,045 common shares to FirsTrust Group, Inc. for the conversion of convertible note.
According to the convertible note agreement, the conversion price is based on a 40% discount to the average of the lowest three
days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period per the convertible
notes agreement.
On
September 19, 2018, the Company has entered a Settlement Agreement and Release (“Settlement Agreement”) with FirsTrust
to settle the 6% secured convertible notes and interest and penalties. The Company has agreed to allow FirsTrust to effect a conversion
in accordance with the terms of the 6% Note by October 18, 2018, and to make a cash payment of $500,000 by December 17, 2018.
If the payment is not timely made, then FirsTrust shall be permitted to immediately effect further conversion in accordance with
the terms of the 6% Notes into the Company’s shares, and the Company shall make a final cash payment of $340,000 by February
28, 2019. The Settlement Agreement has not been carried out by the Company as agreed as of December 31, 2018. The interest and
penalties on this Note are continuously accrued in accordance with the original terms.
On
October 18, 2018, FirsTrust requested a conversion in accordance with the terms of the 6% Notes into the Company’s shares.
The Company had failed to convert and thus incurred a financial liquidated damage at $245 per day for a total of $18,130 as of
December 31, 2018, which had been added to the principle amount of the Note. On March 26, 2019, the Company issued 395,959 shares
to FirsTrust for the conversion. According to the convertible note agreement, the conversion price is based on a 40% discount
to the average of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day
trading period per the convertible notes agreement.
On
March 26, 2019, the Company has entered into a First Amendment to Settlement Agreement and Release (“First Amendment Agreement”)
with FirsTrust to settle the 6% secured convertible notes together with the promissory notes as disclosed under Note 12 plus interest
and penalties with a total payable of approximately $2.3 million as of the date of the First Amendment Agreement was entered.
The Company has agreed to make a payment of approximately $29,789 (RMB200,000), which has been paid on April 1, 2019, to enter
into this Amendment and settled with the total outstanding balance of $1.3 million to be due under the terms of the First Amendment
Agreement by June 30, 2019. If such settled outstanding balance was not made by June 30, 2019, it will deem the First Amendment
Agreement to be ineffective and the Company will need to continue to pay FirsTrust the amount set forth in the Settlement Agreement.
As
of this date, the Company remains in default of the Settlement Agreement and Release and is in the process of raising funds to
retire these obligations. Notwithstanding, there is no guarantee that the Company will be successful in these efforts and that
FirsTrust will not exercise all rights available to it under the applicable agreements between the parties.
On
July 30, 2019, the Company received a notice of default and formal demand for payment and performance, which was followed by correspondence
from FirsTrust’s lawyers that the commencement of legal action was imminent. As of this date, the Company has not received
the service of any formal legal papers related to the matter. Since this matter is in its early stages, the final outcome cannot
be predicted at this time and is largely dependent on the Company’s ability to raise funding to retire these obligations.
If FirsTrust is successful in pursuing its legal action, the result could have a material adverse impact on the Company and its
operations.
(2)
15% convertible notes- Mr. Geng Liu
On
January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng Liu and received principal of RMB 1 million,
approximately $140,000. The note bears interest at 15% per annum and matured on January 16, 2018. Before the maturity date, the
Note holder has an option to convert partial or all of the outstanding principal to the Company’s common shares with a conversion
price of $0.90 per share. The maturity date of the note has been extended to June 30, 2020.
The
notes are convertible into shares of the common stock, at conversion price is $0.90 which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital, and the remainder proceeds of $99,850 from issuance
of the convertible note was allocated to convertible notes payable.
For
the nine months ended September 30, 2019 and 2018, the Company recorded interest expense of $16,377 and $19,477 on the note, including
the amortization of the debt discount resulting from the value of beneficial conversion feature, and the carrying value of the
note as at September 30, 2019 was $140,416.
(3)
15% convertible notes- Mr. Junwei Zheng
On
May 9, 2017, the Company entered a Convertible Note Agreement with Mr. Junwei Zheng with principal of RMB 30 million. The note
bears interest at 15% per annum and will mature on May 8, 2019. Before the maturity date, the Note holder has an option to convert
partial or all of the outstanding principal and accrued interest to the Company’s common shares with a conversion price
of $3.5 per share. On August 17, 2018, the Company does not expect that the remaining funds will ever be so advanced. As of September
30, 2019, the Company has received principal totaled RMB 5.5 million ($772,284 equivalent USD at September 30, 2019) out of the
RMB 30 million Convertible Note Agreement. On May 7, 2019, the Company reached an agreement with Mr. Junwei Zheng that the maturity
date will be extended to May 8, 2020.
The
notes are convertible into shares of the common stock, at conversion price is $3.5 which is higher than the price of the Company’s
common stock on the date of issue, therefore the conversion feature embedded in the note did not meet the definition of BCF. The
Company determined that conversion option embedded in the note meet the definition of a derivative instrument. Since the embedded
conversion price of the conversion feature is denominated in U.S. dollar, a currency other than the convertible note payable currency.
As a result, the embedded conversion feature is not considered indexed to the Company’s own stock due to the variable exchange
rate between U.S. Dollar and RMB, and as such, the Company determined that the embedded conversion feature to be carried as a
liability and re-measured at fair value at each financial reporting date until such time as the conversion feature is exercised
or expired. The Company evaluated the fair value of the embedded conversion feature at the issue date and recorded the amount
into as discount to convertible note payable. The discount to convertible note payable is being amortized to interest expense
over the life of the note using the straight-line method, which approximates the effective interest method.
On
May 7, 2019, due to the extension of the convertible notes and embedded conversion feature continued to be considered as a derivative
instrument, the Company determined that the embedded conversion feature to be carried as a liability and re-measured at fair value
at each financial reporting date until such time as the conversion feature is exercised or expired. The Company evaluated the
fair value of the embedded conversion feature at the renewal date and recorded the amount into as discount to convertible note
payable. The discount to convertible note payable is being amortized to interest expense over the life of the note using the straight-line
method, which approximates the effective interest method.
The
fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables
at inception on May 9, 2017:
|
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
volatility of 260.8% calculated using the Company’s historical price of its common stock
|
|
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
|
|
●
|
Risk-free
interest rate of 1.37%, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
lives of 2.0 years
|
|
|
|
|
|
|
●
|
Market
price at issuance date of $2.7
|
The
fair value of embedded conversion feature was calculated using the BlackScholesMerton model based on the following variables on
December 31, 2018:
|
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
volatility of 204.73% calculated using the Company’s historical price of its common stock
|
|
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
|
|
●
|
Risk-free
interest rate of 2.49%, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
lives of 0.33 years
|
|
|
|
|
|
|
●
|
Market
price at re-measurement date of $0.50
|
The
fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables
on May 7, 2019:
|
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
volatility of 192.48% calculated using the Company’s historical price of its common stock
|
|
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
|
|
●
|
Risk-free
interest rate of 2.37%, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
lives of 1.00 years
|
|
|
|
|
|
|
●
|
Market
price at re-measurement date of $0.95
|
The
fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables
on September 30, 2019:
|
|
●
|
Strike
price of $3.5, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
volatility of 204.07% calculated using the Company’s historical price of its common stock
|
|
|
|
|
|
|
●
|
Expected
dividend yield of 0%
|
|
|
|
|
|
|
●
|
Risk-free
interest rate of 1.82%, for the conversion options
|
|
|
|
|
|
|
●
|
Expected
lives of 0.58 years
|
|
|
|
|
|
|
●
|
Market
price at re-measurement date of $0.51
|
For
the three months ended September 30, 2019 and 2018, the Company recorded interest expense of $53,616 and $102,374, respectively,
and for the nine months ended September 30, 2019 and 2018, the Company recorded interest expense of $228,090 and $307,915,
respectively, on the note, including the amortization of the debt discount resulting from the value of the embedded conversion
feature, and the carrying value of the note was $715,249 and $699,963 as of September 30, 2019 and December 31, 2018, respectively.
(4)
12% convertible notes- Labrys
On
February 27, 2019, the Company entered into a Convertible Note Agreement with Labrys Fund, LP (“Labrys”), for the
principal amount of $1,365,000 (the “Note”). The Note carries an Original Issue Discount of $102,375, bears interest
at the rate of 12% per annum and must be repaid on or before 180 calendar days after the funding date of the respective tranche.
The amounts advanced under the Note may be converted by Labrys at any time after 180 days from the date of the Note into shares
of Company common stock at a conversion price equal to 70% of the lowest trading price during the 20 trading day period prior
to the date of any notice of conversion. As of September 30, 2019, the Company has received principal totaled $1,213,250 out of
the $1,365,000 Convertible Note Agreement.
In
addition, the Company issued 50,000 shares of the Company’s common stock with a fair value of $40,000, determined using
the closing price of the issuance date of $0.80 per shares in connection with these issuances along with the original issue discount
of $90,994 were recognized as discounts from the principal amount to be amortized over 180 days.
Furthermore,
the notes are convertible into shares of the common stock, at conversion price equal to 70% of the lowest trading price during
the 20 trading day period prior to the date of any notice of conversion, which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $1,071,506 at the issue date.
The relative fair values of the BCF were recorded into additional paid in capital.
On
August 28, 2019, the Company released 420,000 shares of the Company’s common stock with a fair value of $336,000 to Labrys
as a penalty due to the Company was not able to repay the Note upon the maturity date. On September 15, 2019, the Company released
390,000 shares of the Company’s common stock with a fair value of $210,600 to Labrys as a penalty due to the Company was
not able to repay the Note upon the maturity date. The fair value of the released shares are determined using the closing price
of the date of Note default. The Company recorded $546,600 as financing expense during the three and nine months ended September
30, 2019.
On
September 25, 2019, the Company repaid $90,000 to Labrys. On October 12, 2019, the Company repaid $202,631 to Labrys.
On
October 17, 2019, the Company issued total 855,000 common shares to Labrys for the conversion of $62,044 interest of the convertible
note. On October 31, 2019, the Company issued total 544,000 common shares to Labrys for the conversion of $19,256 interest of
the convertible note. On November 7, 2019, the Company issued total 1,128,264 common shares to Labrys for the conversion of
$5,873 and 12,828 interest of the convertible note.
For
the three and nine months ended September 30, 2019, the Company recorded interest expense of $520,946 and $1,285,149 on the note,
including the amortization of the debt discount of $480,997 and $1,202,500 resulting from the value of beneficial conversion feature,
and the carrying value of the note as at September 30, 2019 was $1,123,250.
(5)
12% convertible notes- TFK
On
March 21, 2019, the Company entered into a Convertible Note Agreement with TFK Investments Inc. (“TFK”), for the principal
amount of $300,000 (the “Note”). The Note carries an Original Issue Discount of $28,500, bears interest at
the rate of 12% per annum and must be repaid on or before 180 calendar days after the funding date of the respective tranche.
The amounts advanced under the Note may be converted by TFK at any time after 180 days from the date of the Note into shares of
Company common stock at a conversion price equal to 70% of the lowest trading price during the 20 trading day period prior to
the date of any notice of conversion. As of September 30, 2019, the Company has received principal totaled $150,000 out of the
$300,000 Convertible Note Agreement.
In
addition, the Company issued 7,500 shares of the Company’s common stock with a fair value of $6,975, determined using the
closing price of the issuance date of $0.93 per shares in connection with these issuances along with the original issue discount
of $14,250 were recognized as discounts from the principal amount to be amortized over 180 days.
Furthermore,
the notes are convertible into shares of the common stock, at conversion price equal to 70% of the lowest trading price during
the 20 trading day period prior to the date of any notice of conversion, which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $128,775 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital.
On
September 22, 2019, the Company released 230,000 shares of the Company’s common stock with a fair value of $131,100 to TFK
as a penalty due to the Company was not able to repay the Note upon the maturity date. The fair value of the released shares are
determined using the closing price of the date of Note default. The Company recorded $131,100 as financing expense during the
three and nine months ended September 30, 2019.
On
October 17, 2019, the Company issued total 300,000 common shares to TFK for the conversion of $19,775 interest of the convertible
note. On October 25, 2019, the Company issued total 600,000 common shares to TFK for the conversion of $19,940 interest of the
convertible note.
For
the three and nine months ended September 30, 2019, the Company recorded interest expense of $73,901 and $159,469 on the note,
including the amortization of the debt discount of $69,167 and $150,000 resulting from the value of beneficial conversion feature,
and the carrying value of the note as at September 30, 2019 was $150,000.
(6)
12% convertible notes- EMA
On
September 12, 2019, the Company entered into a Convertible Note Agreement with EMA Financial LLC. (“EMA”), for the
principal amount of $150,000 (the “Note”). The Note carries an Original Issue Discount of $9,000, bears interest
at the rate of 12% per annum and must be repaid on or before June 5, 2020. The amounts advanced under the Note may be converted
by EMA at any time after 180 days from the date of the Note into shares of Company common stock at a conversion price equal to
70% of the lowest trading price during the 20 trading day period prior to the date of any notice of conversion. As of September
30, 2019, the Company has received in full the principal amount of the Convertible Note Agreement.
In
addition, the Company issued 7,500 shares of the Company’s common stock with a fair value of $3,975, determined using the
closing price of the agreement date of $0.53 per shares in connection with these issuances along with the original issue discount
of $9,000 were recognized as discounts from the principal amount to be amortized over 264 days.
Furthermore,
the notes are convertible into shares of the common stock, at conversion price equal to 70% of the lowest trading price during
the 20 trading day period prior to the date of any notice of conversion, which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $56,494 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital.
For the three months ended September 30, 2019,
the Company recorded interest expense of $4,638 on the note, including the amortization of the debt discount of $3,947
resulting from the value of beneficial conversion feature, and the carrying value of the note as at September 30, 2019 was
$84,478.
(7)
12% convertible notes- Firstfire
On
September 19, 2019, the Company entered into a Convertible Note Agreement with Firstfire Global Opportunities Fund LLC. (“Firstfire”),
for the principal amount of $100,000 (the “Note”). The Note carries an Original Issue Discount of 5,000, bears interest
at the rate of 12% per annum and must be repaid on or before 12 months after the funding date of the respective tranche. The amounts
advanced under the Note may be converted by Firstfire at any time after 180 days from the date of the Note into shares of Company
common stock at a conversion price equal to 60% of the lowest trading price during the 20 trading day period prior to the date
of any notice of conversion. As of September 30, 2019, the Company has received in full the principal amount of the Convertible
Note Agreement.
In
addition, the Company issued 83,333 shares of the Company’s common stock with a fair value of $45,000, determined using
the closing price of the agreement date of $0.54 per shares in connection with these issuances along with the original issue discount
of $5,000 were recognized as discounts from the principal amount to be amortized over 365 days.
Furthermore,
the notes are convertible into shares of the common stock, at conversion price equal to 60% of the lowest trading price during
the 20 trading day period prior to the date of any notice of conversion, which is lower than the price of the Company’s
common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial
conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $45,000 at the issue date. The
relative fair values of the BCF were recorded into additional paid in capital.
For
the three months ended September 30, 2019, the Company recorded interest expense of $2,019 on the note, including the amortization
of the debt discount of $1,822 resulting from the value of beneficial conversion feature, and the carrying value of the note as
at September 30, 2019 was $6,822.
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”). In
2016, the Original Note holder informed the Company that all right, title and interests in the Promissory Note has been assigned
and transferred to FirsTrust.
On
September 19, 2018, the Company has entered a Settlement Agreement and Release with Firs Trust to settle the Notes and interest.
The Company has agreed to make a cash payment of $200,000 and to issue 300,000 Shares to FirsTrust by October 18, 2018 and to
make a final cash payment of $260,000 by February 28, 2019. However, the Company has not performed its obligations in the Settlement
Agreement as of December 31, 2018, and considered the payment terms as default and continued to accrue its interest after September
19, 2018.
On
March 21, 2019, the Company issued 300,000 shares of common stock with fair value of $222,000, determined using the closing prices
of $0.74 on March 21, 2018, to repay $222,000 of the note payable. As a result, no gain or loss were recognized upon this conversion.
On
March 26, 2019, the Company has entered into the First Amendment Agreement with FirsTrust to settle the promissory notes together
with the 6% secured convertible notes as disclosed under Note 11 plus interest and penalties with a total payable of approximately
$2.3 million as of the date of the First Amendment Agreement was entered. The Company has agreed to make a payment of $29,789
(RMB200,000) , which has been paid on April 1, 2019, to enter into this Amendment, and settled with the total outstanding balance
of $1.3 million to be due under the terms of the First Amendment Agreement by June 30, 2019. If such settled outstanding balance
was not made by June 30, 2019, it will deem the First Amendment Agreement to be ineffective and the Company will need to continue
to pay FirsTrust the amount set forth in the Settlement Agreement.
As
of this date, the Company remains in default of the Settlement Agreement and Release and is in the process of raising funds to
retire these obligations. Notwithstanding, there is no guarantee that the Company will be successful in these efforts and that
FirsTrust will not exercise all rights available to it under the applicable agreements between the parties.
On
July 30, 2019, the Company received a notice of default and formal demand for payment and performance, which was followed by correspondence
from FirsTrust’s lawyers that the commencement of legal action was imminent. As of this date, the Company has not received
the service of any formal legal papers related to the matter. Since this matter is in its early stages, the final outcome cannot
be predicted at this time and is largely dependent on the Company’s ability to raise funding to retire these obligations.
If FirsTrust is successful in pursuing its legal action, the result could have a material adverse impact on the Company and its
operations.
As
of September 30, 2019 and December 31, 2018, $138,000 and $360,000 of Promissory Note to FirsTrust is still outstanding. The Company
accrued $8,625 and $22,500 interest expense on note payable for the three months ended September 30, 2019 and 2018, respectively.
The Company accrued $39,750 and $67,500 interest expense on note payable for the nine months ended September 30, 2019 and
2018, respectively.
14.
Other Payables and accruals
Other
payable consisted of the following:
|
|
|
Notes
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Stock subscription proceeds received in advance
|
|
(1)
|
|
$
|
1,676,406
|
|
|
$
|
1,692,454
|
|
|
Accrued expenses
|
|
|
|
|
213,605
|
|
|
|
219,033
|
|
|
R&D expense payable
|
|
|
|
|
431,009
|
|
|
|
431,009
|
|
|
Others
|
|
|
|
|
481,864
|
|
|
|
597,592
|
|
|
|
|
|
|
$
|
2,802,884
|
|
|
$
|
2,940,088
|
|
(1).
The Company received RMB 3.2 million ($449,331 equivalent as at September 30, 2019) in 2016 from two unrelated potential investors,
and additionally received RMB 8 million ($1,227,075 equivalent as at September 30, 2019) in 2017 from one unrelated potential
investor 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 have 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.
Common
stock
During
the nine months ended September 30, 2019, the Company entered into three consulting agreements and issued 784,999 shares of common
stocks to consultants for IR and business development services based on market price of the shares at the transaction dates. The
valuation of the shares is amounted to an average issuance price of $0.86 per share.
During
the nine months ended September 30, 2019, the Company issued 31,966 common shares to one officer for salary payment based on the
average stock price of his service period which valued at $26,218.
During
the nine months ended September 30, 2019, the Company issued 1,345,000 common shares as a contingent shares to be released to
the holders of the Convertible Notes if the Company is not able to repay the Convertible Notes at maturity date. As of September
30, 2019, 1,040,000 common shares are released to the holders of the Convertible Notes as discussed in Note 12(4) & 12(5).
Conversion
of convertible note
As
disclosed in Note 12(1), on April 27, 2018, the Company issued total 126,045 common shares at $0.62 per share price to FirsTrust
Group, Inc. for the conversion of convertible note.
As
disclosed in Note 12(1), on March 26, 2019, the Company issued total 395,959 common shares at $0.20 per share price to FirsTrust
Group, Inc. for the conversion of convertible note.
As
disclosed in Note 12(4), on October 17, 2019, the Company issued total 855,000 common shares at $0.07 per share price to Labrys
Fund LP for the conversion of convertible note.
As disclosed in Note 12(5), on October
17, 2019, the Company issued total 300,000 common shares at $0.07 per share price to TFK for the conversion of convertible note.
As disclosed in Note 12(5), on October
25, 2019, the Company issued total 600,000 common shares at $0.03 per share price to TFK for the conversion of convertible note.
As disclosed in Note 12(4), on October 31,
2019, the Company issued total 544,000 common shares at $0.04 per share price to Labrys Fund LP for the conversion of convertible
note.
As disclosed in Note 12(4), on November
7, 2019, the Company issued total 1,128,264 common shares at $0.02 per share price to Labrys Fund LP for the conversion of convertible
note.
Additional
paid-in-capital
As
disclosed in Note 12, in February, March, and September 2019, the Company issued in the principal amount of $1,613,250 convertible
notes with BCF embedded. The Company evaluated the intrinsic value of the BCF as $1,301,775, 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 September 30, 2019,
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:
September
30, 2019
|
Recurring Fair Value Measures
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,695
|
|
|
$
|
19,695
|
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
$
|
19,695
|
|
|
$
|
19,695
|
|
December
31, 2018
|
Recurring Fair Value Measures
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
6,621
|
|
|
$
|
6,621
|
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
$
|
6,621
|
|
|
$
|
6,621
|
|
The
following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring
basis for the nine months ended September 30, 2019 and for the year ended December 31, 2018:
|
|
|
Nine months ended
September 30, 2019
|
|
|
Year ended
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,621
|
|
|
$
|
247,933
|
|
|
Fair value of derivative liabilities at inception
|
|
|
95,144
|
|
|
|
-
|
|
|
Change in fair value of derivative liabilities
|
|
|
(82,070
|
)
|
|
|
(241,312
|
)
|
|
Ending balance
|
|
$
|
19,695
|
|
|
$
|
6,621
|
|
18.
Earnings per share
The
following table set forth the computation of basic and diluted earnings per share for the three and nine months ended September
30, 2019 and 2018.
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain or loss
|
|
$
|
311,217
|
|
|
$
|
623,361
|
|
|
$
|
(1,543,850
|
)
|
|
$
|
40,961
|
|
|
Change in Net Income
|
|
|
4,908
|
|
|
|
21,048
|
|
|
|
-
|
|
|
|
-
|
|
|
Net Gain or Loss (Diluted)
|
|
|
316,125
|
|
|
|
644,409
|
|
|
|
(1,543,850
|
)
|
|
|
40,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share (weighted-average shares)
|
|
|
19,544,849
|
|
|
|
16,757,163
|
|
|
|
18,701,575
|
|
|
|
16,388,438
|
|
|
Diluted effect of stocks
|
|
|
3,594,068
|
|
|
|
1,557,550
|
|
|
|
-
|
|
|
|
-
|
|
|
Denominator for diluted earnings per share (adjusted weighted-average shares)
|
|
|
23,138,917
|
|
|
|
18,314,713
|
|
|
|
18,701,575
|
|
|
|
16,388,438
|
|
|
Basic earnings per share
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
(0.08
|
)
|
|
|
0.00
|
|
|
Diluted earnings per share
|
|
|
0.01
|
|
|
|
0.04
|
|
|
|
(0.08
|
)
|
|
|
0.00
|
|
19.
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 and nine months ended September 30, 2019 and 2018 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, the Company has re-measured
its deferred tax assets on net operating loss carry forwards in the U.S at the lower enacted cooperated tax rate of 21%. However,
this re-measurement 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.
The
Company has determined that this one-time Toll Charge has no effect on the Company’s income tax expenses for the three months
ended September 30, 2018 as the Company has no undistributed foreign earnings at either of the two testing dates of November 2,
2017 and December 31, 2017.
For
purposes of the inclusion of GILTI, the Company has determined the taxable off-shore earnings in the amount of $3.5 million in
the year ended December 31, 2018, which has been fully offset by the current year loss of $3.2 million and NOL carryforwards of
$0.3 million of Kiwa US. Therefore, this is no accrual of US income tax for GILTI as of December 31, 2018. The Company will evaluate
the GILTI tax effect at the year end for the year ended 31, 2019.
In
accordance with the current tax laws in China, Kiwa Beijing, Kiwa Shenzhen, Kiwa Xian, Kiwa Hebei, Kiwa Yangling, and Kiwa Institute
are subject to a corporate income tax rate of 25% on its taxable income. Kiwa Shenzhen, Kiwa Baiao, Kiwa Hebei, and Kiwa Institute
have not provided for any corporate income taxes since each had no taxable income for the year ended September 30, 2019. For the
three and nine months ended September 30, 2019, Kiwa Yangling recorded income tax provision for approximately $247,615 and $1,472,638
respectively, and Kiwa Xian recorded income tax provision for approximately $4,242 and $14,129, respectively.
In
accordance with the relevant tax laws in the British Virgin Islands, Kiwa BVI, as an International Business Company, is exempt
from income taxes in the BVI.
A
reconciliation of the provision for income taxes from continuing operation determined at the local income tax rate to the Company’s
effective income tax rate is as follows:
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss) from continuing operation
|
|
$
|
563,074
|
|
|
$
|
1,137,761
|
|
|
$
|
(57,083
|
)
|
|
$
|
1,452,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
|
Income tax expense (benefit) computed at U.S. federal corporation income tax rate
|
|
|
118,246
|
|
|
|
238,930
|
|
|
|
(11,987
|
)
|
|
|
305,040
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate differential for PRC earnings
|
|
|
39,459
|
|
|
|
75,311
|
|
|
|
122,724
|
|
|
|
155,581
|
|
|
Change of valuation allowance
|
|
|
82,558
|
|
|
|
193,880
|
|
|
|
1,339,537
|
|
|
|
934,250
|
|
|
Effect of tax exempted income in BVI
|
|
|
11,594
|
|
|
|
6,279
|
|
|
|
36,493
|
|
|
|
16,738
|
|
|
Deferred tax used to offset tax liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Effective tax expenses
|
|
$
|
251,857
|
|
|
$
|
514,400
|
|
|
$
|
1,486,767
|
|
|
$
|
1,411,609
|
|
The
Company had deferred tax assets from continuing operation as follows:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Net operating losses carried forward by parent Company in the US
|
|
$
|
2,296,033
|
|
|
$
|
1,676,335
|
|
|
Net operating losses carried forward by China Subsidiaries
|
|
|
1,540,928
|
|
|
|
821,089
|
|
|
Provision for Deferred COGS
|
|
|
583,153
|
|
|
|
|
|
|
Allowance for Bad Debt
|
|
|
86,966
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
(4,507,080
|
)
|
|
|
(2,497,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of September 30, 2019 and December 31, 2018, the Company had approximately $17.1 million and $11.3 million net operating loss
carryforwards available to reduce future taxable income. Net operating loss of the parent Company could be carried forward and
taken against any taxable income for a period of not more than twenty years from the year of the initial loss pursuant to Section
172 of the Internal Revenue Code of 1986, as amended. The net operating loss of Kiwa Baiao, Kiwa Shenzhen, Kiwa Xian, Kiwa Hebei,
and Kiwa Institute could be carried forward for a period of not more than five years from the year of the initial loss pursuant
to relevant PRC tax laws and regulations. It is more likely than not that the deferred tax assets cannot be utilized in the future
because there will not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company
recorded a full valuation allowance on its deferred tax assets.
As
of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and 2018, and no provision for interest and penalties
is deemed necessary as of September 30, 2019 and December 31, 2018.
Note
20 – Leases
In
January 2019, the Company entered a new office lease agreement with a 3-year lease term starting in April 2019 and terminating
in April 2022. Upon adoption of ASU 2016-02, the Company recognized lease labilities of approximately $61,842, with corresponding
right-of-use (“ROU”) asset in the same amount based on the present value of the future minimum rental payments of
the new lease, using an effective interest rate of 4.75%, which is determined using the company’s incremental borrowing
rate in the RPC. The remaining lease term of the lease is 2.50 years.
The
Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For
the three months ended September 30, 2019 and 2018, lease expenses amounted to $6,302 and $101,596, respectively. For the
nine months ended September 30, 2019 and 2018, lease expenses amounted to $22,707 and $309,724, respectively.
The
three-year maturity of the Company’s lease obligations is presented below:
|
Twelve months ended September 30,
|
|
Operating lease amount
|
|
|
2020
|
|
$
|
22,747
|
|
|
2021
|
|
|
22,747
|
|
|
2022
|
|
|
11,374
|
|
|
Total lease payments
|
|
|
56,868
|
|
|
Less: interest
|
|
|
(3,346
|
)
|
|
Present value of lease liabilities
|
|
$
|
53,522
|
|
21.
Commitments and Contingencies
As
disclosed in Note 9, on June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao
New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000
(approximately US$ 2.1 million). As of September 30, 2019, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately
$0.7 million) and is committed to pay the remaining RMB10,000,000 based on the payment milestone in the equity purchase agreement.
However, since the Company had decided to abandon the acquisition plan and initiated the process of refund of the deposits, the
Company expected no more payment will be made for the agreement.
22.
Concentration of Risk
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts
receivable. As of September 30, 2019, and December 31, 2018, $ 2,021,337, and $7,859 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 September 30, 2019, three customers accounted for 44%, 33%, and 24% for the Company’s total sales.
For the nine months ended September 30, 2019, three customers accounted for 47%, 29%, and 23% for the Company’s total sales.
For
the three months ended September 30, 2018, one customer accounted for 99% for the Company’s total sales. For the nine months
ended September 30, 2018, four customers accounted for 36%, 32%, 20% and 10% for the Company’s total sales.
As
of September 30, 2019, three customers accounted for 39%, 28% and 25% of the Company’s accounts receivable.
As of December 31, 2018, three customers accounted for 42%, 30%, and 27% of the Company’s accounts receivable.
For
the three months ended September 30, 2019, one supplier accounted for 94% of the Company’s total purchases. For the nine
months ended September 30, 2019, one supplier accounted for 94% of the Company’s total purchases.
For
the three months ended September 30, 2018, one supplier accounted for 94% of the Company’s total purchases. For the nine
months ended September 30, 2018, three suppliers accounted for 53%, 24% and 17% of the Company’s total purchases.
As
of September 30, 2019, one accounted for 88% of the Company’s accounts payable. As of December 31, 2018, one
supplier accounted for 84% of the Company’s accounts payable.
23.
Subsequent Events
On
October 7, 2019, the Company executed a Securities Purchase Agreement (the “SPA”) between Geneva Roth Remark Holdings,
Inc. (“GRR”) and the Company, Pursuant to which GRR purchased from the Company a Convertible Promissory Note in the
principal amount of $153,000 (the “Note”) dated October 7, 2019. The Note bears interest at the rate of 12% per annum
and must be repaid on or before April 7, 2021 after the funding date of the respective tranche (each a “Maturity Date”)
the Note may be prepaid at any time before Maturity Date without any prepayment penalties. The Note bears interest at the rate
of 12% per annum and must be repaid on or before April 7, 2021 after the funding date of the respective tranche (each a “Maturity
Date”) the Note may be prepaid at any time before Maturity Date without any prepayment penalties.
On
October 7, 2019, the Company executed a Securities Purchase Agreement (the “SPA”) between Geneva Morningview Financial,
LLC. (“Morningview”) and the Company, Pursuant to which Morningview purchased from the Company a Senior Convertible
Promissory Note in the principal amount of $135,000 (the “Note”) dated October 7, 2019. The Note bears interest at
the rate of 12% per annum and must be repaid on or before October 6, 2020 after the funding date of the respective tranche (each
a “Maturity Date”) the Note may be prepaid at any time before Maturity Date without any prepayment penalties.
On October 9, the Company issued a total
of 220,000 common shares to two unrelated individuals for stock purchase for an aggregate sum of $176,000.
On
October 12, 2019, the Company repaid $202,631 to Labrys Fund LP.
During
October and November, 2019, the Company issued total 2,527,264
common shares to Labrys for the conversion of convertible note. According to the convertible note agreement, the conversion
price is based on a 40% discount to the lowest bid price of the Company’s common stock on the OTC Bulletin Board over a
20-day trading period per the convertible note’s agreement.
During
October 2019, the Company issued total 900,000 common
shares to TFK for the conversion of convertible note. According to the convertible note agreement, the conversion price is based
on a 40% discount to the lowest bid price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading
period per the convertible notes agreement.
On
October 22, 2019, the Board of Directors of the Company amend the Company’s Articles of Incorporation to increase the number
of authorized Company Common Shares from 100,000,000 to 300,000,000.