UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to _________
Commission File Number: 000-33167
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 84-0448400
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17700 Castleton Street, Suite 589, City of Industry, California 91748
(Address of principal executive offices)
Issuer's telephone number: (626) 964-3232
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
As of May 6, 2005, the Company had 49,135,930 shares of common stock issued and
outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION.....................................................................................3
ITEM 1. FINANCIAL STATEMENTS...................................................................................3
CONDENSED CONSOLIDATED BALANCE SHEETS.......................................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED).................................................5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)...........................6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED).................................................8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)............................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.............................................21
OVERVIEW...................................................................................................21
TRENDS AND UNCERTAINTIES IN REGULATION AND GOVERNMENT POLICY IN PEOPLE'S REPUBLIC OF CHINA.................22
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.................................................................23
LIQUIDITY AND CAPITAL RESOURCES............................................................................25
INFLATION AND CURRENCY MATTERS.............................................................................27
COMMITMENTS AND CONTINGENCIES..............................................................................27
OFF-BALANCE SHEET ARRANGEMENTS.............................................................................28
RELATED PARTY TRANSACTIONS.................................................................................28
CAUTIONARY STATEMENTS AND RISK FACTORS.....................................................................29
ITEM 3. CONTROLS AND PROCEDURES..............................................................................40
PART II OTHER INFORMATION........................................................................................41
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................41
ITEM 6. EXHIBITS..............................................................................................41
SIGNATURES.......................................................................................................44
- 2 -
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2005 2004
---------------------------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 21,132 $ 17,049
Accounts receivable 1,286,766 963,403
Other receivable 95,085 157,495
Inventories 44,850 83,677
Prepaid consulting fees 106,891 131,600
Other current assets 29,947 26,340
----------------------------------------------------------------------------------------------------------------------
Total current assets 1,584,671 1,379,564
Property, plant and equipment:
Buildings 986,964 986,965
Machinery and equipment 218,698 218,250
Automobiles 101,321 101,321
Office equipment 53,416 49,688
Computer software 8,717 8,717
----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment - Total 1,369,116 1,364,941
Less: Accumulated depreciation (129,229) (109,847)
----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment - net 1,239,887 1,255,094
Construction in progress 32,595 32,595
Intangible assets-net 442,731 463,730
----------------------------------------------------------------------------------------------------------------------
Total assets $ 3,299,884 $ 3,130,983
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expensed $ 586,806 $ 577,653
Construction costs payable 366,828 370,453
Short-term loans -- 50,000
Due to related party 51,946 112,105
Convertible notes payable-unrelated party 650,000 312,104
Current portion of bank notes payable 12,983 12,879
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,668,563 1,435,194
Long-term liabilities, less current portion:
Unsecured loans payable 1,389,443 1,389,443
Bank notes payable 23,568 26,853
----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,413,011 1,416,296
Stockholders' equity
- 3 -
Common stock - $0.001 par value
Authorized 100,000,000 shares at March 31, 2005
and December 31, 2004
Issued and outstanding 45,423,542 shares and 40,873,711 shares at
March 31, 2005 and December 31, 2004, respectively 45,423 40,874
Preferred stock -$0.001 par value
Authorized 20,000,000 shares at March 31, 2005 and December 31, 2004 Issued
and outstanding nil shares at March 31, 2005
and December 31, 2004 -- --
Additional paid-in capital 4,488,866 4,393,415
Deficit accumulated (4,315,979) (4,154,796)
----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 218,310 279,493
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,299,884 $ 3,130,983
======================================================================================================================
See accompanying notes to condensed consolidated financial statements.
- 4 -
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------
Three Months Ended March. 31,
---------------------------------------------
2005 2004
----------------------------------------------------------------------------------------------------
NET SALES $ 410,692 $ 53,458
Cost of sales 74,973 31,011
----------------------------------------------------------------------------------------------------
GROSS PROFIT 335,719 22,447
OPERATING EXPENSES:
Consulting and professional fees 136,573 29,887
Officers' compensation 8,350 8,699
General and administrative 247,800 74,545
Research and development 7,280 12,540
Depreciation and amortization 29,495 9,138
Reverse merger costs -- 1,397,981
----------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 429,498 1,532,790
----------------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS): (93,779) (1,510,343)
----------------------------------------------------------------------------------------------------
INTEREST EXPENSE, NET (67,404) (139,904)
NET INCOME (LOSS) $ (161,183) $ (1,650,247)
----------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE $ (0.004) $ (0.047)
- BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 42,778,689 31,564,771
====================================================================================================
See accompanying notes to condensed consolidated financial statements.
- 5 -
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
---------------------------------------------------------------------------------------------------------------------
Total
Additional Stockholders'
Paid-in Accumulated Equity
Shares Amount Capital Deficits (Deficiency)
---------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 12,356,670 $12,357 $452,643 ($70,884) $394,116
Share issued to consultants for services at
$0.04 per share on December 31, 2003 10,503,170 10,503 414,497 -- 425,000
Shares issued to directors as directors'
compensation at $0.04 per share on December 31,
2003 8,031,836 8,032 316,968 -- 325,000
Net loss for the year ended December 31, 2003 -- -- -- (1,355,239) (1,355,239)
BALANCE, JANUARY 1, 2004 30,891,676 30,892 1,184,108 (1,426,123) (211,123)
---------------------------------------------------------------------------------------------------------------------
Shares retained by public shareholders in March
2004 reverse merger transaction 4,038,572 4,038 (4,038) -- --
---------------------------------------------------------------------------------------------------------------------
Issuance of warrants valued at $0.54 per share
on March 30, 2004 in conjunction with March
2004 reverse merger transaction -- -- 943,380 -- 943,380
---------------------------------------------------------------------------------------------------------------------
Issuance of stock options valued at $0.57
per share on March 30, 2004 to consultant in
conjunction with March 2004 reverse merger
transaction -- -- 171,000 -- 171,000
---------------------------------------------------------------------------------------------------------------------
Beneficial conversion feature of convertible
note payable funded on January 25, 2004 -- -- 500,000 -- 500,000
---------------------------------------------------------------------------------------------------------------------
Beneficial conversion feature of convertible
note payable funded on April 7, 2004 -- -- 200,000 -- 200,000
---------------------------------------------------------------------------------------------------------------------
Restricted shares issued to a consultant for
services at $0.45 per share on May 24, 2004. 75,000 75 33,675 -- 33,750
---------------------------------------------------------------------------------------------------------------------
Shares issued upon conversion of convertible
notes payable at $0.25 per share on June 8,
2004 2,800,000 2,800 697,200 -- 700,000
---------------------------------------------------------------------------------------------------------------------
Shares issued to China Agricultural University
in conjunction with April 2004 Patent Transfer
Agreement at $0.42 per share on July 19, 2004 1,000,000 1,000 419,000 -- 420,000
---------------------------------------------------------------------------------------------------------------------
Shares issued to consultant in conjunction with
July 2004 Standby Equity Distribution
transaction at $0.001 per share on July 29, 2004 26,567 27 (27) -- --
---------------------------------------------------------------------------------------------------------------------
Shares issued for commitment fee in conjunction
with July 2004 Standby Equity Distribution
transaction at $0.001 per share on July 29, 2004 704,039 704 (704) -- --
---------------------------------------------------------------------------------------------------------------------
Shares issued to lawyer for legal services at
$0.014 per share on September 14, 2004 892,857 893 124,107 -- 125,000
---------------------------------------------------------------------------------------------------------------------
Issuance of warrants on September 23, 2004 in
conjunction with September 2004 convertible
notes payable -- -- 82,559 -- 82,559
---------------------------------------------------------------------------------------------------------------------
Shares issued to consultants for services at
$0.10 per share on October 1, 2004 415,000 415 41,085 -- 41,500
---------------------------------------------------------------------------------------------------------------------
Issuance of restricted common stock to a
consultant as final compensation at $0.07 per
share on November 19, 2004 30,000 30 2,070 -- 2,100
---------------------------------------------------------------------------------------------------------------------
Net loss for the year ended December 31, 2004 -- -- -- (2,728,673) (2,728,673)
---------------------------------------------------------------------------------------------------------------------
- 6 -
BALANCE, DECEMBER 31, 2004 40,873,711 40,874 4,393,415 (4,154,796) 279,493
=====================================================================================================================
Issuance of common stock at $0.0317 per share to
Cornell Capital on January 17, 2005, as first
repayment in conjunction with Promissory Note
dated January 4, 2005 315,457 315 9,685 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.03 per share to
Cornell Capital on January 24, 2005, as second
repayment in conjunction with Promissory Note
dated January 4, 2005 333,333 333 9,667 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.0248 per share to
Cornell Capital on January 31, 2005, as third
repayment in conjunction with Promissory Note
dated January 4, 2005 403,226 403 9,597 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.025 per share to
Cornell Capital on February 7, 2005, as fourth
repayment in conjunction with Promissory Note
dated January 4, 2005 400,000 400 9,600 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.0196 per share to
Cornell Capital on February 14, 2005, as fifth
repayment in conjunction with Promissory Note
dated January 4, 2005 510,204 510 9,490 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.0202 per share to
Cornell Capital on February 21, 2005, as sixth
repayment in conjunction with Promissory Note
dated January 4, 2005 495,049 495 9,505 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.0292 per share to
Cornell Capital on February 28, 2005, as seventh
repayment in conjunction with Promissory Note
dated January 4, 2005 342,466 343 9,657 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.0191 per share to
Cornell Capital on March 7, 2005, as eighth
repayment in conjunction with Promissory Note
dated January 4, 2005 523,560 524 9,476 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.01396 per share to
Cornell Capital on March 14, 2005, as ninth
repayment in conjunction with Promissory Note
dated January 4, 2005 716,332 716 9,284 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $0.0196 per share to
Cornell Capital on March 21, 2005, as tenth
repayment in conjunction with Promissory Note
dated January 4, 2005 510,204 510 9,490 -- 10,000
---------------------------------------------------------------------------------------------------------------------
Net loss for three months ended March 31, 2005 -- -- -- (161,183) (161,183)
---------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005 45,423,542 $45,423 $4,488,866 $(4,315,979) $218,310
=====================================================================================================================
See accompanying notes to condensed consolidated financial statements.
- 7 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------
Three months Ended
March 31,
--------------------------------
2005 2004
--------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 161,183 $ (1,650,247)
Adjustments to reconcile net loss
to net cash used in operating activities:
Issuance of securities for reverse merger costs -- 1,114,380
Depreciation and amortization 40,381 18,710
Amortization of detachable warrants 37,896 --
Amortization of beneficial conversion feature -- 125,000
of convertible notes payable
Changes in operating assets and liabilities:
(Increase) decrease in :
Accounts receivable (323,363) (15,173)
Inventories 38,827 (9,556)
Prepaid consulting fees 24,709 --
Other current assets (3,607) (173,413)
Increase (decrease)in:
Accounts payable and accrued expenses 9,153 183,881
Construction cost payables (3,625) (153,045)
Due to related party (60,159) --
--------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (400,971) (559,463)
--------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other receivable 62,410 --
Purchase of property and equipment (4,175) (8,752)
--------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 58,235 (8,752)
--------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash -- 100,000
Proceeds from short-term loans -- 283,930
Repayment of short-term loans (50,000) (90,626)
Proceeds from convertible notes payable 400,000 500,000
Proceeds from long-term borrowings -- 21,021
Repayment of long-term borrowings (3,181) --
--------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 346,819 530,395
--------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 4,083 (37,820)
Balance at beginning of period 17,049 48,730
--------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 21,132 $ 10,910
--------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 16,507 $ 3,593
Cash paid for taxes $ -- $ --
Non-cash investing and financing activities:
Issuance of common stock as partial repayments in
conjunction with Promissory Note dated January 4, 2005 $ 100,000 $ --
--------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
- 8 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - On March 12, 2004, pursuant to an Agreement and Plan of Merger
dated as of March 11, 2004, by and among Tintic Gold Mining Company ("Tintic"),
TTGM Acquisition Corporation, a Utah corporation and wholly-owned subsidiary of
Tintic Gold Mining Company, and Kiwa Bio-Tech Products Group Ltd. ("Kiwa
Bio-Tech"), a British Virgin Islands international business company, TTGM
Acquisition Corporation merged with and into Kiwa Bio-Tech. Each share of Kiwa
Bio-Tech common stock was converted into 1.5445839 shares of Tintic Gold Mining
Company Common Stock, with Kiwa Bio-Tech surviving as Tintic Gold Mining
Company's wholly-owned subsidiary. The merger resulted in a change of control of
Tintic Gold Mining Company, with former Kiwa Bio-Tech stockholders owning
approximately 89% of Tintic Gold Mining Company on a fully diluted basis. The
Company accounted for this transaction as a reverse merger. Subsequent to the
merger, Tintic Gold Mining Company changed its name to Kiwa Bio-Tech Products
Group Corporation (the "Company"). On July 22, 2004, we completed our
reincorporation in the State of Delaware.
BUSINESS - The Company's business plan is to develop, manufacture, distribute
and market innovative, cost-effective and environmentally safe bio-technological
products for the agricultural, natural resources and environmental protection
markets, primarily in China. The Company intends to improve existing products
and to develop new products. Activities to date have included conducting
research and development, acquiring and developing intellectual property,
raising capital, development of a manufacturing facility, identification of
strategic acquisitions and execution of sales in selected major agricultural
markets in China. The Company's first product, a photosynthesis biological
catalyst, was introduced in the Chinese agricultural market in November 2003.
The Company passed a significant milestone in the fourth quarter of 2004 by
generating significant revenue from planned principal operations.
In 2002, Kiwa Bio-Tech chartered Kiwa Bio-Tech Products (Shandong) Co. Ltd.
("Kiwa-SD"), a wholly-owned subsidiary organized under the laws of China, as its
offshore manufacturing base to capitalize on low cost, high quality
manufacturing advantages available in China.
BASIS OF PRESENTATION - The condensed consolidated financial statements include
the operations of Kiwa Bio-Tech Products Group Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The interim condensed consolidated financial statements are unaudited, but in
the opinion of management of the Company, contain all adjustments, which include
normal recurring adjustments, necessary to present fairly the financial position
at March 31, 2005, the results of operations for the three months ended March
31, 2005 and 2004, and the cash flows for the three months ended March 31, 2005
and 2004. The consolidated balance sheet as of December 31, 2004 is derived from
the Company's audited financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial information and with the instructions to
Form 10-QSB and Item 310 of Regulation S-B. Certain information and footnote
disclosures normally included in financial statements that have been presented
in accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") with respect to interim financial
statements, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading.
- 9 -
The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2005.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
COUNTRY RISK - As the Company's principal operations are conducted in China, the
Company is subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These risks
include, among others, risks associated with the political, economic and legal
environments and foreign currency exchange limitations encountered in China. The
Company's results of operations may be adversely affected by changes in the
political and social conditions in China, and by changes in governmental
policies with respect to laws and regulations, among other things.
In addition, all of the Company's transactions undertaken in China are
denominated in Renminbi ("RMB"), which must be converted into other currencies
before remittance out of China may be considered. Both the conversion of RMB
into foreign currencies and the remittance of foreign currencies abroad require
the approval of the Chinese government.
CREDIT RISK - The Company performs ongoing credit evaluations of its customers
and intends to establish an allowance for doubtful accounts when amounts are not
considered fully collectable. According to the Company's credit policy, the
Company provides a 100% bad debt provision for the amounts outstanding over 365
days, which management believes is consistent with industry practice in the
China region. Based on industry practice and the credit history of customers,
the management of the Company believes the accounts receivable balance as of
March 31, 2005 will be fully collected.
GOING CONCERN - The 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. The carrying amounts of assets and liabilities
presented in the condensed consolidated financial statements do not purport to
represent the realizable or settlement values. We incurred a net loss of
$161,183 and $1,650,247 during the three months ended March 31, 2005 and 2004,
respectively, and our current liabilities exceeded our current assets by $83,892
and $55,630 at March 31, 2005 and December 31, 2004, respectively. These factors
create substantial doubt about our ability to continue as a going concern.
Company management continues to evaluate the Company's cash needs and the
availability of debt and equity financing to fund the Company's operations. The
condensed consolidated financial statements do not contain any adjustments that
might result from the outcome of this uncertainty.
REVENUE RECOGNITION - The Company recognizes sales in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 104, "Revenue Recognition." Sales represent
the invoiced value of goods, net of value added tax ("VAT"), supplied to
customers, and are recognized upon delivery of goods and passage of title.
All of the Company's sales made in China are subject to the Chinese value-added
tax at rates ranging from 13% to 17% ("output VAT"). Such output VAT is payable
after offsetting VAT paid by the Company on purchases.
NET LOSS PER COMMON SHARE - Basic loss per common share is calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per common share reflects the potential dilution
that would occur if dilutive securities (stock options, warrants and convertible
- 10 -
debt) were exercised. These potentially dilutive securities were not included in
the calculation of loss per share for the periods presented because the Company
incurred a loss during such periods and thus their effect would have been
anti-dilutive. Accordingly, basic and diluted loss per common share is the same
for all periods presented. As of March 31, 2005, potentially dilutive securities
aggregated 3,097,000 shares of common stock. The loss per common share
calculation for three months ended March 31, 2005 and 2004 reflect the March
2004 recapitalization of Kiwa Bio-Tech.
The Company effected a 4-for-1 split of its outstanding shares of common stock
effective March 29, 2004, in conjunction with the reverse merger transaction
with Kiwa Bio-Tech as described above. Unless otherwise indicated, all share and
per share amounts presented herein have been adjusted to reflect the stock
split.
ADVERTISING - The Company charges all advertising costs to expense as incurred.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to expense
as incurred.
CASH AND CASH EQUIVALENTS - Highly liquid investments with a maturity of three
months or less at the time of acquisition are considered to be cash equivalents.
FINANCIAL INSTRUMENTS AND FAIR VALUE - The Company accounts for financial
instruments under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 133: "Accounting for Derivative Instruments and Hedging
Activities," which requires that all derivative financial instruments be
recognized in the consolidated financial statements and maintained at fair value
regardless of the purpose or intent for holding them. Changes in fair value of
derivative financial instruments are either recognized periodically in income or
stockholders' equity (as a component of comprehensive income), depending on
whether the derivative is being used to hedge changes in fair value or cash
flows. The adoption of SFAS No. 133 did not have a material impact on the
Company's consolidated financial position or its results of operations because
the Company does not currently hold any derivative financial instruments and
does not engage in hedging activities. The carrying amounts for cash and cash
equivalents, restricted cash, accounts receivable, other receivables, deposits
and prepayments, short-term borrowings, accounts payable, other payables and
accruals approximate their fair values because of the short maturity of those
instruments. The Company estimates that the carrying value of its long-term debt
also approximates its fair value based on financing currently available from
government sponsored programs and other lenders.
INVENTORIES - Inventories are stated at the lower of cost, determined on a
weighted average basis, and net realizable value. Work in progress and finished
goods are composed of direct material, direct labor and a portion of
manufacturing overhead. Net realizable value is the estimated selling price, in
the ordinary course of business, less estimated costs to complete and dispose.
Management believes that there is no obsolete inventory.
PROPERTY, PLANT AND EQUIPMENT - Property, Plant and Equipment are stated at
cost. Major expenditures for betterments and renewals are capitalized while
ordinary repairs and maintenance costs are expensed as incurred. Depreciation
and amortization is provided using the straight-line method over the estimated
useful lives of the assets after taking into account the estimated residual
value. The estimated useful lives are as follows:
Buildings 20-35 years
Machinery and equipments 4-12 years
Automobiles 8 years
Office equipment 5 years
Computer software 3 years
- 11 -
Construction in progress represents land costs as well as factory and office
buildings under construction. The Company capitalizes interest during the
construction phase of qualifying assets in accordance with SFAS No. 34,
"Capitalization of Interest Cost." No interest was capitalized during three
months ended March 31, 2005 and 2004 as the construction in progress was
minimal.
We periodically evaluate our 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. Our judgments regarding
potential impairment are based on legal factors, market conditions and
operational performance indicators, among others. In assessing the impairment of
property and equipment, we make assumptions regarding the estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or the related assumptions change in the future, we may be
required to record impairment charges for these assets. The Company has
determined that there was no impairment of long-lived assets at March 31, 2005.
INCOME TAXES - The Company accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes," 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 income taxes are provided using the liability method and is
recognized for all significant temporary differences between the income tax and
financial statement bases of assets and liabilities. There were no material
deferred tax assets or liabilities as of March 31, 2005 and 2004.
OPERATING LEASES - Operating leases represent those leases under which
substantially all the risks and rewards of ownership of the leased assets remain
with the lessors. Rental payments under operating leases are charged to expense
on the straight-line basis over the period of the relevant leases.
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company is the
RMB. Transactions denominated in foreign currencies are translated into RMB at
the unified exchange rates quoted by the People's Bank of China, prevailing at
the transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable unified exchange rates
prevailing at the balance sheet date.
Translations of amounts from RMB into United States Dollar ("US$") were at
approximately US $1.00 = RMB 8.28 for all periods presented. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
that rate or at any other rate. Due to the stability of the RMB during the
periods covered by the consolidated financial statements, no material exchange
differences exist.
COMPREHENSIVE INCOME (LOSS) - The Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial statements. SFAS
No. 130 defines comprehensive income (loss) to include all changes in equity
except those resulting from investments by owners and distributions to owners,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company did not have any minimum pension liabilities, foreign currency
translation income or loss or unrealized gains or losses on marketable
securities at March 31, 2005.
The Company's only component of comprehensive income (loss) is foreign currency
translation income (loss). Comprehensive income (loss) was not material for all
periods presented.
STOCK ISSUED FOR COMPENSATION AND FINANCING - The Company periodically issues
shares of common stock for services rendered or for financing costs. Such shares
are valued based on the market price on the transaction date. The Company has
adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
establishes a fair value method of accounting for stock-based compensation
plans.
- 12 -
The provisions of SFAS No. 123 allow companies to either record an expense in
the financial statements to reflect the estimated fair value of stock options or
warrants to employees, or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," but to disclose on an annual basis the pro forma effect on
net income (loss) and net income (loss) per common share had the fair value of
the stock options and warrants been recorded in the financial statements. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies to disclose in
financial statements the pro forma effect on net income (loss) and net income
(loss) per common share of the estimated fair market value of stock options or
warrants issued to employees. The Company has elected to continue to account for
stock-based employee compensation plans utilizing the intrinsic value method.
Accordingly, compensation cost for stock options and warrants is measured as the
excess, if any, of the fair market price of the Company's common stock at the
date of grant above the amount an employee must pay to acquire the common stock.
The Company did not issue any stock options to its officers or management during
three months ended March 31, 2005.
In accordance with SFAS No. 123, the cost of stock options and warrants issued
to non-employees is measured at the grant date based on the fair value of the
award. The fair value of the stock-based award is determined using the
Black-Scholes option-pricing model. The resulting amount is charged to expense
on the straight-line basis over the period in which the Company expects to
receive benefit, which is generally the vesting period.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2004, Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 04-08 ("EITF 04-08"), "The Effect of Contingently Convertible
Debt on Diluted Earnings per Share." Under current interpretations of FASB No.
128, "Earnings per Share," issuers of contingently convertible debt instruments
("Co-Cos") generally exclude the potential common shares underlying the Co-Cos
from the calculation of diluted earnings per share until the underlying common
stock achieves a specified price target, or other contingency is met. EITF 04-08
requires that Co-Cos should be included in diluted earnings per share
computations, if dilutive, regardless of whether the market price trigger has
been met. We do not anticipate that the adoption of EITF 04-08 will have a
significant effect on our earnings or financial position.
On October 13, 2004, the Financial Accounting Standards Board ("FASB") issued
the SFAS No. 123R, "Share-Based Payment," which would require all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value, would be effective for public companies for interim or
annual periods beginning after June 15, 2005. We could adopt the new standard in
one of two ways - the modified prospective transition method or the modified
retrospective transition method. We will adopt SFAS No. 123R in our fourth
quarter of fiscal 2005 and are currently evaluating the effect that the adoption
of SFAS No. 123R will have on our financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," an amendment
of ARB No. 43, Chapter 4, which would be effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The amendments made by SFAS
No. 151 will improve financial reporting by clarifying that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the
production facilities. We do not anticipate that the adoption of the SFAS No.
151 will have a significant effect on our earnings or financial position.
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment to APB Opinion 29." The provisions of this statement are
effective for non monetary asset exchanges occurring in fiscal periods beginning
after June 1, 2005. This statement eliminates the exception to fair value for
exchanges of similar productive assets and replaces it with a general exception
for exchange transactions that do not have commercial substance - that is,
transactions that are not expected to result in significant changes in the cash
flows of the reporting entity. The Company does not believe that the adoption of
SFAS No. 153 will have a significant effect on our earnings or financial
position.
- 13 -
3. OTHER RECEIVABLE
The other receivable consists of an obligation to repay an advance of $95,085
made to an unrelated U.S. incorporated entity, Kiwa Bio-Tech Products, Inc.
("KBPI"), for payment of merger costs in March 2004. The Company has reached a
repayment schedule with KBPI, under which KBPI was to initially fully repay the
amount by March 2005. The repayment schedule was subsequently extended and KBPI
is to fully repay the amount by September 2005.
4. INVENTORIES
Inventories consisted of the following at March 31, 2005 and December 31, 2004:
================================================================================
March 31, 2005 December 31, 2004
(unaudited)
Raw materials $ 24,076 $ 36,248
Work in progress -- 32,295
Finished goods 20,774 15,134
------ ------
Total $ 44,850 $83,677
================================================================================
5. PREPAID CONSULTING FEES
Prepaid consulting fees consisted of the following at March 31, 2005 and
December 31, 2004:
================================================================================
March 31, 2005 December 31, 2004
(unaudited)
Marketing service fee $42,501 $ 63,750
Fees for public relation
and sourcing of financing 30,690 51,850
Financing service fees 33,700
Place agent fee -- 16,000
Total $106,891 $131,600
================================================================================
6. INTANGIBLE ASSET
The Company's intangible asset as of March 31, 2005 consisted of the following:
================================================================================
Expected Gross Accumulated Intangible
Amortization Period Carrying Value Amortization asset, Net
--------------------------------------------------------------------------------
Patent 8.5 years $480,411 $37,680 $442,731
================================================================================
The following table presents future expected amortization expense related to the
patent:
Amount
2005 $ 42,389
2006 56,518
2007 56,518
2008 56,518
2009 56,518
Thereafter 174,270
-------
$ 442,731
- 14 -
7. CONSTRUCTION COSTS PAYABLE
Construction costs payable represents remaining amounts to be paid for the Phase
I construction project based on the independent accountant's certification.
Construction costs payable will be fully repaid in 2005.
8. RELATED PARTY TRANSACTIONS WITH CHINA STAR INVESTMENT GROUP
China Star Investment Group ("China Star") is a company which is 10% owned by a
major stockholder of the Company. The balance due to China Star at March 31,
2005 and December, 31, 2004 was $51,946 and $112,105 respectively, which
primarily consisted of a loan from China Star and operating expenses that China
Star paid on behalf of the Company. The original principal amount of the loan
was $100,000 and was entered into in October 2003. The loan was scheduled to
mature on October 20, 2004, and bears interest at 12% per annum, payable at
maturity. As part of the loan terms, China Star had the right to convert the
loan into shares of the Company's common stock at $0.25 per share at any time
prior to the maturity date, subject to the Company completing a reverse merger
transaction in the United States, which was accomplished in March 2004. China
Star has waived this conversion right. The final maturity date has been
subsequently extended to August 31, 2005.
9. CONVERTIBLE NOTES PAYABLE
The balance of convertible notes payable as of March 31, 2005 and December 31,
2004 was $650,000 and $312,104, respectively.
On September 23, 2004, the Company entered into a convertible loan agreement for
$350,000 with interest at 10% per annum (the "10% Loan"), and issued 1,050,000
detachable warrants. The lender is an unrelated party located in the United
States. The 10% Loan was initially due on March 23, 2005, but the final maturity
date was subsequently extended by agreement to April 21, 2005. The Company has
not repaid the 10% Loan and the lenders have declared it in default. The
Company's Chief Executive Officer, Mr. Li Wei, executed a guarantee of repayment
of the 10% Loan which is secured by shares of the Company's common stock that he
owns. On May 6, 2005, the balance remaining on the 10% Loan was $219,742. The
Company, Mr. Li and the lender are negotiating repayment terms of the 10% Loan.
Each warrant attached to the 10% Loan entitles the holder to subscribe for one
share of common stock of the Company at an exercise price of $0.20 per share
through September 23, 2007. None of the detachable warrants were exercised in
the three months ended March 31, 2005. The intrinsic value of the detachable
warrants at the time of their issuance was determined to be $82,559, calculated
pursuant to the Black-Scholes option pricing model in accordance with EITF Issue
No 00-27. This intrinsic value has been recorded as a reduction to the 10% Loan
and has been credited to additional paid-in capital, and is being amortized on
the straight-line basis over the term of the loan with the amounts amortized
being recognized as interest expense. Any unamortized discount remaining at the
date of conversion of the 10% Loan will be recognized as interest expense in the
period the conversion takes place.
In connection with the 10% Loan, the Company recorded deferred debt issuance
costs of $32,000, consisting of the direct costs incurred for the issuance of
the convertible loan. Debt issuance costs are being amortized on the
straight-line method over the term of the 10% Loan, with the amounts amortized
being recognized as interest expense. Any unamortized debt issuance costs
remaining at the date of conversion of the 10% Loan will be recognized as
interest expense in the period the conversion takes place.
- 15 -
On January 4, 2005, as amended by letter agreements dated March 21, 2005 and
April 5, 2005, the Company completed a loan transaction pursuant to which the
Company received an advance of $400,000 (before deduction of expenses and fees)
from Cornell Capital Partners, LP ("Cornell Capital") in exchange for the
issuance by the Company of a promissory note in the original principal amount of
$400,000 (the "Note"). The Note bears interest at a rate of 10% per annum and
has a term of 290 days. The Company's obligations under the Note may be paid
from, among other funds, the proceeds the Company receives pursuant to the
Standby Equity Distribution Agreement entered into with Cornell Capital on July
6, 2004, described in Note 11. Pursuant to the terms of the Note, the Company
deposited in escrow 39 requests for advances under the Standby Equity
Distribution Agreement in the amount of $10,000 each and one request in the
amount of $29,589, as well as sufficient shares of the Company's Common Stock
registered pursuant to the Company's Registration Statement No. 333-117868, to
cover the advances. An attorney will serve as escrow agent in connection with
the advance notices and shares to be deposited in escrow pursuant to the Note.
Unless the Note is repaid by the Company, the escrow agent will release such
requests for advances to Cornell Capital every seven days commencing on January
17, 2005 and Cornell Capital may then, at its discretion, apply the proceeds
from the advance to the outstanding balance on the Note. As of March 31, 2005,
the escrow agent had released 10 such advances for an aggregate of 4,549,831
shares of common stock. The balance due on the Note to Cornell Capital as of
March 31, 2005 was $300,000.
The Note contains customary events of default and permits Cornell Capital to
accelerate the maturity of the full principal amount together with interest and
other amounts owing upon the occurrence of such events of default.
10. UNSECURED LOANS PAYABLE
Unsecured loans payable (including current portion)consisted of the following at
March 31, 2005 and December 31, 2004:
====================================================================================================================
March 31,
2005 December 31,
Notes (unaudited) 2004
--------------------------------------------------------------------------------------------------------------------
Unsecured loan payable to Zoucheng Municipal
Government, non-interest bearing, becoming due within three years
from Kiwa-SD's first profitable year on a formula basis, interest
has not been imputed due to the undeterminable repayment date (i) $1,087,390 $1,087,390
--------------------------------------------------------------------------------------------------------------------
Unsecured loan payable to Zoucheng Science & Technology Bureau,
non-interest bearing, it is due in Kiwa-SD's first profitable
year, interest has not been imputed due to the undeterminable
repayment date (ii) 302,053 302,053
--------------------------------------------------------------------------------------------------------------------
Total $1,389,443 $1,389,443
====================================================================================================================
Notes:
(i) The unsecured loan payable consists of amounts borrowed under a
project agreement with Zoucheng Municipal Government, whereby the
Company is allowed to borrow up to $1.2 million. The loan is
non-interest bearing, becoming due within three years from Kiwa-SD's
first profitable year on a formula basis. Interest has not been
imputed due to the undeterminable repayment date.
- 16 -
According to the project agreement, Zoucheng Municipal Government
granted the Company use of at least 15.7 acres in Shandong Province,
China at no cost for 10 years to construct a manufacturing facility.
Under the agreement, the Company has the option to pay a fee of
$58,696 per acre for the land use right after the 10-year period.
The Company may not transfer or pledge the temporary land use right.
The Company also committed to invest approximately $18 million to
$24 million for developing the manufacturing and research facilities
in Zoucheng, Shandong Province. As of March 31, 2005, the Company
invested approximately $1.4 million for the project. Management
believes that neither the Company nor management will be liable for
compensation or penalty if such commitment is not fulfilled.
(ii) The amount was borrowed from Zoucheng Science & Technology Bureau in
2004. It is non-interest bearing, unsecured and due in Kiwa-SD's
first profitable year. Interest has not been imputed due to the
undeterminable repayment date.
The Company qualifies for non-interest bearing loans under a government
sponsored program to encourage economic development in certain industries and
locations. To qualify for the favorable loan terms, a company must meet the
following criteria: (1) be a technology company with innovative technology or
product (as determined by the Science Bureau of the central government); (2)
operate in specific industries, such as agriculture, environmental, education,
and others, which the government has determined are important to encourage
development; and (3) be located in undeveloped areas such as Zoucheng, Shandong
Province where the manufacturing facility of the Company is located.
11. EQUITY-BASED TRANSACTIONS
(A) AUTHORIZED SHARE CAPITAL
On June 3, 2004, a majority of the Company's stockholders approved an amendment
to the Company's Second Restated and Amended Articles of Incorporation to (a)
increase from 50,000,000 to 100,000,000 the authorized number of shares of the
Company's common stock and (b) authorize 20,000,000 shares of preferred stock
(the rights, preferences, privileges and restrictions to be determined by the
Board of Directors). The amendment was effective on July 16, 2004.
(B) ISSUED AND OUTSTANDING SHARE CAPITAL
From January 1, 2004 to March 31, 2005, the Company has engaged in the following
equity-based transactions:
In conjunction with the March 2004 reverse merger transaction, the Company
entered into the following equity-based transactions:
a. In exchange for 100% of the issued and outstanding shares of Kiwa Bio-Tech,
the Kiwa Bio-Tech stockholders were issued 30,891,676 shares of Tintic's common
stock.
b. The stockholders of Tintic retained their 4,038,572 shares of common stock
which were issued and outstanding prior to the consummation of the Merger
Agreement.
c. Tintic assumed 1,852,501 stock options issuable by Kiwa Bio-Tech at March 12,
2004.
- 17 -
d. Effective March 11, 2004, the Company issued a warrant to its financial
advisor to purchase 1,747,000 shares of common stock exercisable at $0.20 per
share for six years. The fair value of this warrant was determined to be
approximately $0.54 per share pursuant to the Black-Scholes option-pricing
model. The aggregate fair value of such warrant of $943,380 was charged to
operations as reverse merger costs during the year ended December 31, 2004.
e. Effective March 30, 2004, the Company issued a stock option to a consultant
to purchase 300,000 shares of common stock exercisable at $0.20 per share for
ten years. The fair value of this option was determined to be approximately
$0.57 per share pursuant to the Black-Scholes option pricing model. The
aggregate fair value of such option of $171,000 was charged to operations as
reverse merger costs during the year ended December 31, 2004.
On April 12, 2004, the Company entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing," which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration was $480,411, of which $30,205 was paid at
signing of the agreement and an additional $30,205 was paid in December 2004. In
addition, the Company issued 1,000,000 shares of common stock valued at $0.42
per share based on its fair market value on July 19, 2004 (aggregate value
$420,000), the date when the application for the patent right holder alternation
registration was approved.
On May 24, 2004, the Company entered into a contract with Cinapsys Inc. to
provide investor relations services. The engagement is for a period of twelve
months and provides for a monthly retainer of $4,000 and the issuance of 75,000
shares of common stock. The Company recorded a prepaid expense of $33,750 based
on the closing price of its common stock on the effective date of the agreement
and is amortizing such amount to operations over the 12 month contract period.
On September 27, 2004, the Company terminated the engagement letter with
Cinapsys Inc. according to the termination clause and the Board of Directors
authorized the issuance of the above 75,000 common shares to Cinapsys Inc.
Accordingly, the prepaid expense was written off in 2004.
On July 6, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital. Under the Standby Equity Distribution Agreement,
the Company may, at its discretion, periodically issue and sell to Cornell
Capital common stock for a total purchase price of up to $10,000,000, subject to
further limitations noted in the next paragraph. The purchase price for the
shares is equal to 99% of the market price, which is defined in the Standby
Equity Distribution Agreement as the lowest volume weighted average price of the
common stock during the five trading days following the notice date. Cornell
Capital received a one-time commitment fee of 704,039 shares of the Company's
common stock following execution of the Agreement on July 29, 2004, which was
treated as a reduction of the proceeds. Cornell Capital will be paid a fee equal
to 4% of each advance, to be retained from each advance. As a result, our
proceeds from the sale of shares under the Standby Equity Distribution Agreement
will be equal to 95% of the market price, calculated as described above. In
connection with the Standby Equity Distribution Agreement, the Company also
entered into a Placement Agent Agreement with Newbridge Securities Corporation,
a registered broker-dealer. On July 29, 2004, the Company paid Newbridge
Securities Corporation a one-time placement agent fee of 26,567 shares of common
stock with a value of approximately $10,000 based on the volume weighted average
price of the Company's common stock as quoted by Bloomberg, LP on the date of
the Placement Agent Agreement which was treated as a reduction of the proceeds.
The Company registered the shares of common stock issuable under the Standby
Equity Distribution Agreement for resale by Cornell Capital pursuant to a
Registration Statement on Form SB-2 (No. 333-117868), which was declared
effective by the Securities and Exchange Commission in December 2004.
- 18 -
The amount of stock the Company may sell under the Standby Equity Distribution
Agreement at one time is subject to a maximum advance amount of $500,000, with
no cash advance occurring within seven trading days of a prior advance, and the
Company may not request cash advances if the shares to be issued in connection
with an advance would result in Cornell Capital owning more than 9.9% of the
Company's outstanding common stock. Based on the Company's current outstanding
shares of 45,423,542, it could not issue shares under the Standby Equity
Distribution Agreement if it would result in Cornell Capital owning more than
4,496,931 shares. Assuming a price of $0.028 per share, and the closing price of
the Company's common stock on May 6, 2005, the issuance of 4,496,931 shares
under the Standby Equity Distribution Agreement would result in proceeds to the
Company of approximately $125,914 after taking into account fees and discounts.
On September 14, 2004, the Company issued 892,857 shares of common stock to
Stubbs Alderton and Markiles, LLP, with an aggregate value of $125,000, as
payment for legal fees incurred during 2004.
On October 1, 2004, the Company entered a Consulting Agreement with Amy L.Yi to
provide investor relations services. The engagement is for a period of six
months and provides for the issuance of 200,000 shares of common stock. The
Company recorded a prepaid expense of $20,000 based on the closing price of its
common stock on the effective date of the agreement and is amortizing such
amount to operations over the six month contract period.
On October 1, 2004, the Company entered a Consulting Agreement with Robert
Sullivan to provide investor relations services. The engagement is for a period
of three months and provides for the issuance of 165,000 shares of common stock.
The Company recorded a prepaid expense of $16,500 based on the closing price of
its common stock on the effective date of the agreement and is amortizing such
amount to operations over the three month contract period.
On October 1, 2004, the Company entered a Consulting Agreement with Barry R.
Clark to provide investor relations services. The engagement is for a period of
four months and provides for the issuance of 200,000 shares of common stock. The
Company recorded a prepaid expense of $20,000 based on the closing price of its
common stock on the effective date of the agreement and is amortizing such
amount to operations over the four month contract period. After one month of
service, the Company terminated the engagement with Barry R. Clark according to
the termination clause and the Board of Directors authorized the cancellation of
certificates representing 150,000 shares of stock issued to Barry R. Clark and
the issuance of 30,000 shares of restricted stock to Barry R. Clark as final
compensation, which has been recognized as consulting expenses as of December
31, 2004.
On January 4, 2005, as amended by letter agreements dated March 21, 2005 and
April 5, 2005, the Company completed a loan transaction pursuant to which the
Company received an advance of $400,000 (before deduction of expenses and fees)
from Cornell Capital in exchange for the issuance by the Company of a promissory
note in the original principal amount of $400,000. In the first quarter of 2005,
the Company issued 4,549,831 shares to repay Cornell Capital $100,000 in
accordance with the requests of Cornell Capital under the standby Equity
Distribution Agreement. The balance due to Cornell Capital on the promissory
note as of March 31, 2005 was $300,000.
(C) OPTION
On June 3, 2004, a majority of the Company's stockholders approved the adoption
of the Company's 2004 Stock Incentive Plan (the "Plan"). The plan reserved
1,047,907 shares of the Company's common stock for the issuance of stock options
and stock purchase rights under the Plan, of which not more than 350,000 shares
may be granted to any participant in any fiscal year.
The options granted under of the Plan will expire ten years from the date of
grant. The options which are not issued to an officer, a director or a
consultant will become exercisable at least as rapidly as 20% per year over the
five-year period commencing on the date of grant. As of March 31, 2005 and
December 31, 2004, no stock options or stock purchase rights had been granted
under the Plan.
- 19 -
12. MAJOR CUSTOMERS AND SUPPLIERS
One customer accounted for 94% of our net sales for the three months ended March
31, 2005. Another customer accounted for 100% of the Company's net sales for the
three months ended March 31, 2004.
Three suppliers accounted for 27%, 25% and 10% of our purchases of raw materials
and 21%, 21%, and 10% of our purchases of raw materials for the three months
ended March 31, 2005 and 2004, respectively. The raw materials used in our
products are available from a variety of alternative sources.
13. LEASE COMMITMENTS
The Company has the following material contractual obligations:
Operating lease commitments - The Company previously leased an office in Beijing
under an operating lease that expired in April 2005 with an aggregate monthly
lease payment of approximately $2,882. This operating lease was subsequently
replaced by another operating lease expiring in March 2008 with an aggregate
monthly lease payment of approximately $7,400. Rent expense under the operating
lease for three months ended March 31, 2005 and 2004 was $8,646 and $8,646,
respectively.
The Company leases an office in the United States under a commercial lease
agreement with China Star expiring in June 2005 with an aggregate monthly lease
payment of approximately $2,560. Pursuant to the agreement, rent expense for the
three months ended March 31, 2005 was $7,680. At March 31, 2005, the remaining
minimum lease payments amounted to $5,120.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB for the quarterly period ended March 31,
2005 contains "forward-looking" statements within the meaning of Section 21E of
the Securities and Exchange Act of 1934, as amended, including statements that
include the words "plans," intends," estimates," "believes," "expects,"
"anticipates," or similar expressions. These forward-looking statements include,
among others, statements concerning our expectations regarding our working
capital requirements, financing requirements, business, growth prospects,
competition and results of operations, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. The
forward-looking statements in this Quarterly Report on Form 10-QSB for the
quarterly period ended March 31, 2005 involve known and unknown risks,
uncertainties and other factors that could cause our actual results, performance
or achievements to differ materially from those expressed in or implied by the
forward-looking statements contained herein.
OVERVIEW
The Company's Business plan is to develop, manufacture, distribute and market
innovative, cost-effective and environmentally safe bio-technological products
for the agricultural, natural resources and environmental protection markets,
primarily in China. The Company intends to improve existing products and to
develop new products. Activities to date have included conducting research and
development, acquiring and developing intellectual property, raising capital,
development of a manufacturing facility, identification of strategic
acquisitions and execution of sales in selected major agricultural markets in
China. The Company's first product, a photosynthesis biological catalyst, was
introduced in the Chinese agricultural market in November 2003. The Company
passed a significant milestone in the fourth quarter of 2004 by generating
significant revenue from planned principal operations.
MAJOR CUSTOMERS AND SUPPLIERS:
One customer accounted for 94% of our net sales for the three months ended March
31, 2005. Another customer accounted for 100% of the Company's net sales for the
three months ended March 31, 2004.
Three suppliers accounted for 27%, 23% and 10% of our purchases of raw materials
and 21%, 21%, and 10% of our purchases of raw materials for the three months
ended March 31, 2005 and 2004, respectively. The raw materials used in our
products are available from a variety of alternative sources.
GOING CONCERN
Our condensed consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the condensed
consolidated financial statements do not purport to represent the realizable or
settlement values. We incurred a net loss of $161,183 and $1,650,247 during the
three months ended March 31, 2005 and 2004, respectively, and our current
liabilities exceeded our current assets by $83,892 and $55,630 at March 31, 2005
and December 31, 2004, respectively. These factors create substantial doubt
about our ability to continue as a going concern.
In the three months ended March 31, 2005, our only wholly-owned subsidiary,
Kiwa-SD, generated net income equal to $154,334.
We generated $0.4 million and $1.3 million in sales during the three months
ended March 31, 2005 and the fiscal 2004, respectively, from sales of our two
products in three China provinces and in Cambodia. We believe the Company is
well-positioned to increase sales of these products and to generate revenue from
the introduction of new products in 2005.
- 21 -
In 2005, we intend to raise additional capital through the issuance of debt or
equity securities to fund the development of our planned business operations,
although there can be no assurances that we will be successful in obtaining this
financing. To the extent that we are unable to successfully raise the capital
necessary to fund our future cash requirements on a timely basis and under
acceptable terms and conditions, we will not have sufficient cash resources to
maintain operations, and may have to curtail operations and consider a formal or
informal restructuring or reorganization.
TRENDS AND UNCERTAINTIES IN REGULATION AND GOVERNMENT POLICY IN PEOPLE'S
REPUBLIC OF CHINA
AGRICULTURAL POLICY CHANGES IN CHINA
After over ten years of economic growth, China now faces an imbalance between
urban and rural environments as well as the manufacturing and agricultural
industries. On February 10, 2004, the Chinese central government issued a new
policy to correct the imbalance by offering favorable taxation of agricultural
products. Existing agricultural products will be taxed at a rate of 1%. At the
Central Working Conference on Agriculture on December 28, 2004, China's central
authorities pledged to continue agriculture-friendly policies, to stabilize
upward trends in grain production and to increase farmers' income in 2005,
including further reducing agricultural taxes, increasing financial subsidies to
farmers, investing more money in rural infrastructure and increasing financial
assistance to main grain-production counties. We may benefit from these
favorable policies as farmers will retain more of their income and may spend
some of that income on our products resulting in greater sales. In addition, we
anticipate receiving additional governmental support in marketing our products
to farmers due to additional procedural changes included with the new policy.
GENERAL FISCAL AND MONETARY POLICY CHANGES IN CHINA
In 2004, China adopted restricted fiscal and monetary policies to fight
potential inflation. However, "People's Daily," the most popular state-owned
newspaper in China, stated on August 10, 2004 that the agricultural area has
been one of a few industries which will continue to enjoy expansionary policy.
The article noted that the Chinese government will continue to increase
investment in agricultural development. We have previously benefited from these
policies, as evidenced by our receipt of non-interest bearing loans from the
government in the amount of approximately $1,510,264 from November 28, 2002 to
March 31, 2005. As the government further increases investment in the
agricultural area, we expect that similar loans or other favorable financing
programs will be available to us in the future, which we anticipate will assist
us with managing liquidity and capital resources during our growth period.
However, if these financing programs are not available in the future, we may
have to borrow on terms which are less favorable to us, or we may not be able to
borrow additional funds at all on terms which are acceptable.
FOREIGN INVESTMENT POLICY CHANGES
The Chinese government is considering changes to its current policy that
provides favorable tax treatment to foreign invested enterprises as compared to
Chinese domestic business. The new policy under consideration will consolidate
enterprise income tax laws between foreign invested enterprises and Chinese
domestic enterprises. The new policy will also provide transitional arrangements
to facilitate the consolidation. No timetable has been announced yet for the
consolidation. If the new policy is implemented, newly established foreign
invested enterprises will not enjoy favorable tax treatment as in effect under
current tax laws. It is anticipated that the proposed policy will not have an
impact on companies like ours, which have already been granted favorable tax
treatment. We believe this beneficial tax status will make an investment in our
Company more attractive to both foreign and domestic investors in China, which
could improve our liquidity or provide additional capital resources. However, if
we were to be subject to such new policies, our tax rate and tax liability would
increase.
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FOREIGN EXCHANGE POLICY CHANGES
China is considering allowing its currency to be freely exchangeable for other
major currencies. This change will result in greater liquidity for revenues
generated in RMB. We would benefit by having easier access to and greater
flexibility with capital generated in and held in the form of RMB. The majority
of our assets are located in China and most of our earnings are currently
generated in China, and are therefore denominated in RMB. Changes in the
RMB-U.S. Dollar exchange rate will impact our reported results of operations and
financial condition. In the event that RMB appreciates over the next year as
compared to the U.S. Dollar ("US$"), our earnings will benefit from the
appreciation of the RMB. However, if we have to use US$ to invest in our Chinese
operations, we will suffer from the depreciation of US$ against the RMB. On the
other hand, if the value of the RMB were to depreciate compared to the US$, then
our reported earnings and financial condition would be adversely affected when
converted to US$.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepared our condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our consolidated financial statements.
ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our customers by
analyzing historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns,
and intend to establish an allowance for doubtful accounts when amounts are not
considered fully collectible or when they are more than 365 days past due.
We believe that the accounts receivable balance at March 31, 2005 is fully
collectible. Our belief is based on industry practices in the China region and
those of our competitors, our ongoing relationships and our payment experience
with our customers. As of March 31, 2005, all accounts receivable were less than
one year old and we have no indication of insolvency from any of our customers.
Terms of the sales vary from cash on delivery through a credit term up to three
to twelve months. Ordinarily, we require our customers to pay between 20% and
60% of the purchase price of an order placed, depending on the results of our
credit investigations, prior to shipment. The remaining balance is due within
twelve months, unless other terms are approved by management. We maintain a
policy that all sales are final, we do not allow returns. However, in the event
of defective products, we may allow customers to exchange the defective products
for new products within 90 days of delivery and prior to the product's
expiration date. In the event of any exchange, the customers pay all
transportation expenses.
INVENTORIES. Inventories are stated at the lower of cost or net realizable
value. Cost is determined on the weighted average method. Inventories include
raw materials, work-in-progress, finished goods and low-value consumables. Net
realizable value is the estimated selling price in the ordinary course of
business, less estimated costs to complete and dispose. Management believes that
there is no obsolete inventory.
- 23 -
REVENUE RECOGNITION. We recognize revenue in accordance with SAB No. 101,
"Revenue Recognition in Financial Statements," as amended by SAB No. 104,
"Revenue Recognition". Sales represent the invoiced value of goods, net of value
added tax, supplied to customers, and are recognized upon delivery of goods and
passage of title.
IMPAIRMENT OF ASSETS. Our long-lived assets consist of property and equipment
and intangible assets. At March 31, 2005, the net value of property and
equipment and intangible assets was $1,239,888 and $442,731, respectively, which
represented approximately 37.6% and 13.4% of our total assets, respectively.
We periodically evaluate our 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. Our judgments regarding
potential impairment are based on legal factors, market conditions and
operational performance indicators, among others. In assessing the impairment of
property and equipment, we make assumptions regarding the estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or the related assumptions change in the future, we may be
required to record impairment charges for these assets.
INCOME TAXES. We record a valuation allowance to reduce our deferred tax assets
arising from net operating loss carryforwards to the amount that is more likely
than not to be realized. In the event we were to determine that we would be able
to realize our deferred tax assets in the future in excess of our recorded
amount, an adjustment to the deferred tax assets would be credited to operations
in the period such determination was made. Likewise, should we determine that we
would not be able to realize all or part of our deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to operations
in the period such determination was made.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2005 AND 2004
NET SALES. Net sales were $410,692 and $53,458 for the three months ended March
31, 2005 and 2004, respectively, representing an increase of seven times the
revenue generated during the three months ended March 31, 2004. The increase in
net sales during the period resulted from the increased number of local and
overseas customers.
COST OF SALES. The Company's cost of sales which consists primarily of material
costs, depreciation, direct wages and utilities are mainly fixed and do not
fluctuate proportionately as sales volume increases. Costs of sales were $74,973
and $31,011 for the three months ended March 31, 2005 and 2004, respectively.
The increase of $43,962, or 142%, in cost of sales was primarily due to
increased material costs.
GROSS PROFIT. Gross profit was $335,719 and $22,447, representing a profit
margin of 82% and 42% for the three months ended March 31, 2005 and 2004,
respectively. This represents a 14-fold increase in gross profit of $313,272.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were $136,573
and $29,887 for the three months ended March 31, 2005 and 2004 respectively,
representing an increase of $106,686 or 357%. The increase in consulting and
professional fees in 2005 is primarily attributable to consulting and
professional fees relating to the financing provided by Cornell Capital in
January 2005 and the increased compliance fees as a public company.
OFFICERS' COMPENSATION. Officers' compensation decreased by $349 or 4% to $8,350
for the three months ended March 31, 2005 as compared to $8,699 for the three
months ended March 31, 2004.
- 24 -
GENERAL AND ADMINISTRATIVE. General and administrative expense was $247,800 for
the three months ended March 31, 2005, as compared to $74,545 for the same
period of 2004, an increase of $173,255 or 232%, primarily as a result of
increased marketing expenses commensurate with enhanced sales volume and
increased personnel-related costs in China reflecting an increased level of
business activity and increased costs associated with being a public company.
General and administrative expenses mainly include salaries, travel and
entertainment, rent, office expense, telephone expense and insurance costs.
RESEARCH AND DEVELOPMENT. Research and development expense decreased $5,260, or
42%, to $7,280 for the three months ended March 31, 2005, as compared to $12,540
for the three months ended March 31, 2004. The decrease is due to reduction of
the field testing fees for new products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $20,357, or
223%, to $29,495 for the three months ended March 31, 2005, as compared to
$9,138 for the three months ended March 31, 2004. This increase is mainly the
result of the addition of a patent in late 2004.
INTEREST INCOME (EXPENSE). Interest expense decreased $72,500, or 52%, to
$67,404 for the three months ended March 31, 2005, as compared to interest
expense of $139,904 for the three months ended March 31, 2004. This decrease is
due to the termination of the conversion feature of a convertible debt
instrument which was converted to common stock on June 8, 2004, which the
Company had previously amortized as an interest expense.
NET LOSS. Net loss decreased $1,489,064 to $161,183 for the three months ended
March 31, 2005 as compared to $1,650,247 for the three months ended March 31,
2004. The decrease in net loss in the current period as compared to first
quarter 2004 is primarily due to non-recurring costs of the reverse merger equal
to $1,397,981 and increases in revenue.
LIQUIDITY AND CAPITAL RESOURCES
Since inception of our ag-biotech business in 2002, we have relied on the
proceeds from the sale of our equity securities and loans from both unrelated
and related parties to provide the resources necessary to fund the development
of our business plan and operations. During the three months ended March 31,
2005, we raised $400,000 in debt financing.
We will require additional capital to fund our business plan and develop our
manufacturing facility, and have not generated significant revenues from our
operations for such purposes. In the next year, we intend to raise additional
capital through the issuance of debt or equity securities to fund the
development of our planned business operations, although there can be no
assurances that we will be successful in this regard. There can be no assurances
that we will be able to obtain sufficient funds to allow us to continue
operations in the next year.
In November 2002 and June 2003, we entered into two bank loans for two auto
purchases with a local bank in Beijing, China in the amounts of $38,663 and
$25,498, with interest rates of 5.32% and 5.02%, respectively. The maturity
dates are October 2007 and March 2008, respectively. As of March 31, 2005, the
outstanding balances of these loans were $15,299 and $21,253, respectively.
In October 2003, we entered into a convertible loan agreement with China Star
Investment Group pursuant to which we borrowed $100,000 from the China Star
Investment Group. The loan bears interest at the rate of 12% per annum and was
originally due and payable in October 2004. In May 2004, China Star Investment
- 25 -
Group agreed to waive the conversion right in exchange for acceleration of the
maturity date to June 30, 2004. The maturity date has been subsequently extended
to August 31, 2005. As of March 31, 2005, the total outstanding balance to China
Star Investment Group under the loan and for other obligations was $51,946.
On September 23, 2004, the Company entered into a convertible loan agreement for
$350,000 with interest at 10% per annum (the "10% Loan"), and issued 1,050,000
detachable warrants. The lender is an unrelated party located in the United
States. The 10% Loan was initially due on March 23, 2005, but the final maturity
date was subsequently extended by agreement to April 21, 2005. The Company has
not repaid the 10% Loan and the lenders have declared it in default. The
Company's Chief Executive Officer, Mr. Li Wei, executed a guarantee of repayment
of the 10% Loan which is secured by shares of the Company's common stock that he
owns. On May 6, 2005, the balance remaining on the 10% Loan was $219,742. The
Company, Mr. Li and the lender are negotiating repayment terms of the 10% Loan.
On January 4, 2005, we issued a promissory note in the original principal amount
of $400,000 to Cornell Capital which will be automatically repaid with cash
proceeds from the sale of our common stock under our Standby Equity Distribution
Agreement unless we elect to pay earlier from other sources. The note bears
interest at a rate of 10% per annum and has a term of 290 days.
We qualified for non-interest bearing loans under a government sponsored program
to encourage economic development in certain industries and locations. To
qualify for the favorable loan terms, a company must meet the following
criteria: (1) be a technology company with innovative technology or product (as
determined by the Science Bureau of the central government); (2) operate in
specific industries, such as agriculture, environmental, education, and others,
which the government has determined important to encourage development; and (3)
be located in undeveloped areas such as Zoucheng, Shandong Province where our
facility is located.
As of March 31, 2005, we had obtained non-interest bearing loans from the
Chinese local government of approximately $1,510,264. Among these loans,
$120,821 was received from Zoucheng Science & Technology Bureau in Shandong
Province, China. The Company repaid $60,411 of the loan during 2004, and
Zoucheng Science & Technology Bureau forgave the payment of the remaining
balance of $60,411 at the end of 2004, which was recorded as other income. We
are required to begin repayment of the outstanding balance of the other loans in
the first year after our Chinese subsidiary reaches an accumulative profit
position. The entire balance is to be fully repaid within three years
thereafter.
At March 31, 2005 and December 31, 2004, we had cash of $21,132 and $17,049
respectively. At March 31, 2005 and 2004, our net working capital deficiency was
$83,892 and $55,630, respectively, reflecting current ratios of 0.95:1 and
0.96:1, respectively, at such dates.
During the three months ended March 31, 2005, our operations utilized cash of
$400,971, as compared to $559,463 utilized for the three months ended March 31,
2004, as a result of the improved business activity.
During the three months ended March 31, 2005 we generated $58,235 from investing
activities from collections due from KBPI, offset in part by the purchase of
property and equipment, as compared to $8,752 utilized for the three months
ended March 31, 2004.
During the three months ended March 31, 2005, we generated $346,819 from
financing activities, consisting of the proceeds from convertible notes payable
of $400,000, offset in part by the repayment of a short-term loan of $50,000 and
long-term borrowings of $3,181. During the three months ended March 31, 2004, we
generated $530,395 from financing activities through increases in convertible
loans and long-term borrowings.
- 26 -
We continue to develop our manufacturing facility and have invested
approximately $1,397,536 in Phase I of our new manufacturing facility, including
$986,965 in buildings and $218,250 in equipment. We estimate that the total
investment for the completion of Phases II and III of the construction of our
manufacturing facility will be at least $2.5 million.
We do not anticipate generating sufficient positive internal operating cash flow
to fund our planned operations for several years. In the next year, we intend to
raise additional capital through the issuance of debt or equity securities to
fund the development of our planned business operations, although there can be
no assurances that we will be successful in obtaining this financing. To the
extent that we are unable to successfully raise the capital necessary to fund
our future cash requirements on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to maintain operations,
and may have to curtail operations and consider a formal or informal
restructuring or reorganization.
INFLATION AND CURRENCY MATTERS
In the most recent decade, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Our
success depends in substantial part on the continued growth and development of
the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting business
abroad, including price and currency exchange controls, and fluctuations in the
relative value of currencies. We conduct virtually all of our business in China
and, accordingly, the sale of our products is settled primarily in RMB. As a
result, devaluation or currency fluctuation of the RMB against the US$ would
adversely affect our financial performance when measured in US$. Although prior
to 1994 the RMB experienced significant devaluation against the US$, the RMB has
remained fairly stable since then. In addition, the RMB is not freely
convertible into foreign currencies, and the ability to convert the RMB is
subject to the availability of foreign currencies. Effective December 1, 1998,
all foreign exchange transactions involving the RMB must take place through
authorized banks or financial institutions in China at the prevailing exchange
rates quoted by the People's Bank of China. The exchange rate was approximately
$1.00 to RMB 8.28 at March 31, 2005 and December 31, 2004.
As China has recently been admitted as a member of the World Trade Organization,
the central government of China is expected to adopt a more rigorous approach to
partially deregulate currency conversion restrictions, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, we do not believe that
such an action would have a detrimental effect on our operations, since we
conduct virtually all of our business in China, and the sale of our products is
settled in RMB.
COMMITMENTS AND CONTINGENCIES
We have the following material contractual obligations:
Operating lease commitments - The Company previously leased an office in Beijing
under an operating lease that expired in April 2005 with an aggregate monthly
lease payment of approximately $2,882. This operating lease was subsequently
replaced by another operating lease expiring in March 2008 with an aggregate
monthly lease payment of approximately $7,400. Rent expense under the operating
lease for three months ended March 31, 2005 and 2004 was $8,646 and$8,646,
respectively.
The Company leases an office in the United States under a commercial lease
agreement with China Star expiring in June 2005 with an aggregate monthly lease
payment of approximately $2,560. Pursuant to the lease agreement, rent expense
for three months ended March 31, 2005 was $7,680. At March 31, 2005, the
remaining minimum lease payments amounted to $5,120.
- 27 -
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2005 we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
RELATED PARTY TRANSACTIONS
China Star Investment Group ("China Star") is a company which is 10% owned by a
major stockholder of the Company. The balance due to China Star at March 31,
2005 and December, 31, 2004 was $51,946 and $112,105 respectively, which
primarily consisted of a loan from China Star and operating expenses that China
Star paid on behalf of the Company. The original principal amount of the loan
was $100,000 and was entered into in October 2003. The loan was scheduled to
mature on October 20, 2004, and bears interest at 12% per annum, payable at
maturity. As part of the loan terms, China Star had the right to convert the
loan into shares of the Company's common stock at $0.25 per share at any time
prior to the maturity date, subject to the Company completing a reverse merger
transaction in the United States, which was accomplished in March 2004. China
Star has waived this conversion right. The final maturity date has been
subsequently extended to August 31, 2005.
The Company's Chief Executive Officer, Mr. Li Wei, executed a guarantee of
repayment of the 10% Loan (described at Note 9 to the Financial Statements and
under "Liquidity and Capital Resources") which is secured by shares of the
Company's common stock that he owns. On May 6, 2005, the balance remaining on
the 10% Loan was $219,742. The Company, Mr. Li and the lender are negotiating
repayment terms of the 10% Loan.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2004, Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 04-08 ("EITF 04-08"), "The Effect of Contingently Convertible
Debt on Diluted Earnings per Share." Under current interpretations of FASB No.
128, "Earnings per Share," issuers of contingently convertible debt instruments
("Co-Cos") generally exclude the potential common shares underlying the Co-Cos
from the calculation of diluted earnings per share until the underlying common
stock achieves a specified price target, or other contingency is met. EITF 04-08
requires that Co-Cos should be included in diluted earnings per share
computations, if dilutive, regardless of whether the market price trigger has
been met. We do not anticipate that the adoption of EITF 04-08 will have a
significant effect on our earnings or financial position.
On October 13, 2004, the Financial Accounting Standards Board ("FASB") issued
the SFAS No. 123R, "Share-Based Payment," which would require all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value, and would be effective for public companies for interim
or annual periods beginning after June 15, 2005. We could adopt the new standard
in one of two ways - the modified prospective transition method or the modified
retrospective transition method. We will adopt SFAS No. 123R in our fourth
quarter of fiscal 2005 and are currently evaluating the effect that the adoption
of SFAS No. 123R will have on our financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," an amendment
of ARB No. 43, Chapter 4, which would be effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The amendments made by SFAS
No. 151 will improve financial reporting by clarifying that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the
production facilities. We do not anticipate that the adoption of the SFAS No.
151 will have a significant effect on our earnings or financial position.
- 28 -
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment to APB Opinion 29." The provisions of this statement are
effective for non monetary asset exchanges occurring in fiscal periods beginning
after June 1, 2005. This statement eliminates the exception to fair value for
exchanges of similar productive assets and replaces it with a general exception
for exchange transactions that do not have commercial substance - that is,
transactions that are not expected to result in significant changes in the cash
flows of the reporting entity. The Company does not believe that the adoption of
SFAS No. 153 will have a significant effect on our earnings or financial
position.
CAUTIONARY STATEMENTS AND RISK FACTORS
We operate in a market environment that is difficult to predict and that
involves significant risks and uncertainties, many of which will be beyond our
control. The following risk factors and other information included in this
Quarterly Report should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks occur,
our business, financial condition, operating results, and cash flows could be
materially adversely affected.
(1) RISKS RELATED TO OUR BUSINESS
INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS DUE TO OUR SHORT
OPERATING HISTORY, LACK OF SIGNIFICANT REVENUE AND LIMITED PRODUCT OFFERINGS.
DUE TO THIS SHORT OPERATING HISTORY, WE HAVE NOT YET GENERATED ANY PROFITS AND
WILL REQUIRE ADDITIONAL FUNDING TO IMPLEMENT OUR BUSINESS PLAN.
We have only been operating our current business (ag-biotechnology) since June
2002, providing a limited period for investors to evaluate our business model.
Because of this limited operating history and the uncertain nature of the
rapidly changing markets that we serve, we believe any prediction of future
results of operations is difficult. We have only recently begun to generate
significant revenue, have not been profitable, and incurred net operating losses
during our recent operating history. From the inception of our current business
(ag-biotechnology) on June 5, 2002 to March 31, 2005, we had accumulated losses
of $4,218,968. We expect to continue to have operating losses for the
foreseeable future as we further our research and continue to conduct product
tests. We will require additional capital to implement our business plan and
continue operating. Until sufficient cash flow is generated from operations, we
will have to utilize our capital resources or external sources of funding to
satisfy our working capital needs. To the extent that we are unable to
successfully raise the capital necessary to fund our future cash requirements on
a timely basis and under acceptable terms and conditions, we will not have
sufficient cash resources to maintain operations, and may have to curtail
operations and consider a formal or informal restructuring or reorganization.
Furthermore, our prospects must be evaluated in light of risks, uncertainties,
expenses and difficulties frequently encountered by companies in an early growth
stage.
WE HAVE LIMITED PRODUCT OFFERINGS AND MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP
AND MARKET NEW PRODUCTS.
We currently have two commercial product lines, a bio-fertilizer and a water
treatment and pathogen suppression agent, and plan to market additional products
in the agriculture market in the next six to twelve months. There can be no
assurances that any of the intellectual property or products intended to be
developed by us will be marketed successfully or that ultimately we can develop
a sufficiently large production capacity and sufficiently large customer demand
to operate on a profitable basis. In addition, we are generally required to
obtain a license from the China Agriculture Department, which can take three to
six months, prior to selling a new product in China.
- 29 -
OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS.
We expect that our operating results will be subject to seasonal trends. This
trend is dependent on numerous factors, including the markets in which we
operate, growing seasons, climate, economic conditions and numerous other
factors beyond our control. Generally, we expect the second and third quarters
will be stronger than the first and fourth quarters, primarily because the
second and third quarters correspond with the growing seasons in our primary
markets in China. It is during those growing seasons when application of our
products by our customers would be most beneficial and we therefore expect
greater demand for our products during those periods. There can be no assurance
that these operating patterns will occur. But we will seek to develop markets
outside of China such as South-east Asia in order to reduce the impact of
seasonality.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN
VOLATILITY OR HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.
We have experienced, and expect to continue to experience, substantial variation
in our net sales and operating results from quarter to quarter. Our business is
subject to seasonal fluctuations due to growing seasons in different markets. We
believe the factors that influence this variability of quarterly results
include:
o the timing and size of orders from major customers;
o budgeting and purchasing cycles of customers;
o the timing of enhancements to products or new products introduced by us or
our competitors;
o changes in pricing policies made by us, our competitors or suppliers,
including possible decreases in average selling prices of products in
response to competitive pressures; and
o fluctuations in general economic conditions.
We may also choose to reduce prices or to increase spending in response to
competition or to pursue new market opportunities. Due to fluctuations in our
revenue and operating expenses, we believe that period-to-period comparisons of
our results of operations are not a good indication of our future performance.
It is possible that in some future quarter or quarters our operating results
will be below the expectations of securities analysts or investors. In that
case, our stock price could fluctuate significantly or decline.
From January 1, 2004 to March 31, 2005, the market price for our common stock as
quoted on the OTC Bulletin Board has ranged from $0.01 to $0.75. High volatility
in the market price of our common stock may result in lower prices for our
common stock, making it more difficult for us to obtain equity financing on
terms and conditions which are favorable to us, if at all. We expect to continue
to incur losses in the near future as we develop and market our initial
products. As a result, we will be dependent on additional debt or equity
financing to fund our operations. If such financing is not available on terms
which are acceptable to us, we may have to delay development of new products
and/or reduce sales and marketing efforts for our existing products. Such
actions may have an adverse effect on our results of operations. In addition,
uncertainties with respect to our ability to raise additional capital would make
operational planning more difficult for management.
- 30 -
REVOCATION OF OUR RIGHT TO USE PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS
COULD ADVERSELY IMPACT THE GROWTH OF OUR BUSINESS.
We acquired a patent in April 2004 from China Agricultural University titled
"Highly Effective Composite Bacteria for Enhancing Yield and the Related
Methodology for Manufacturing," issued by the China Intellectual Property
Bureau. While we do not yet have any commercial products utilizing the
technology covered by this patent, we plan to use the patent to develop a new
series of products that will compliment our current products. If our rights
under this patent or our other intellectual property are challenged or if we
default on our obligations under applicable Chinese regulatory requirements, our
right to use that patent or our other intellectual property could be revoked and
we would no longer be permitted to use that patent or our other intellectual
property in our research, development and sales activities. Such a revocation or
default could have an adverse impact on the growth of our business by reducing
the introduction of new products, and consequently, sales.
OUR SUCCESS DEPENDS IN PART ON OUR SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
CURRENTLY IN THE RESEARCH AND DEVELOPMENT STAGE.
We currently have two commercial products based on photosynthesis bacteria
technology. The first is a bio-fertilizer called Photosynthesis Biological
Catalyst and the second is a water treatment and pathogen suppression agent. We
commenced sales of a powdered form of Photosynthesis Biological Catalyst in
November 2003 and a liquid form in April 2004. We commenced sales of our water
treatment and pathogen suppression agent in April 2004. Many of our product
candidates are still in the research and development stage. The successful
development of new products is uncertain and subject to a number of significant
risks. Potential products that appear to be promising at early states of
development may not reach the market for a number of reasons, including but not
limited to, the cost and time of development. Potential products may be found to
be ineffective or cause harmful side effects, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale or be
uneconomical or fail to achieve market acceptance. Our failure to successfully
develop and sell new products may delay or eliminate future acquisition plans
and would most likely slow our development. Our plans to introduce additional
proprietary products may not be realized as expected, if at all.
There can be no assurance that any of our intended products will be successfully
developed or that we will achieve significant revenues from such products even
if they are successfully developed. Our success is dependent upon our ability to
develop and market our products on a timely basis. There can be no assurance
that we will be successful in developing or marketing such products or taking
advantage of the perceived demand for such products. In addition, there can be
no assurance that products or technologies developed by others will not render
our products or technologies non-competitive or obsolete. The China
bio-fertilizer market is still in a very early stage and is very fragmented with
many potential customers, but with no single producer or small group of
producers dominating the market. To some extent, however, we also face
competition from large chemical fertilizer manufacturers in Chinese markets,
such as Sino-Arabic Chemical Fertilizer Company in the national market as well
as Red Sun Group in Shandong and Jiangsu provinces. These chemical fertilizer
manufacturers have provided chemical fertilizers to farmers in China for several
years and customers are more accustomed to using their established products as
compared to new products.
FAILURE TO ADEQUATELY EXPAND TO ADDRESS EXPANDING MARKET OPPORTUNITIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We anticipate that a significant expansion of operations will be required to
address potential market opportunities. There can be no assurances that we will
expand our operations in a timely or sufficiently large manner to capitalize on
these market opportunities. The anticipated substantial growth is expected to
place a significant strain on our managerial, operational and financial
resources and systems. While management believes it must implement, improve and
effectively use our operational, management, research and development,
marketing, financial and employee training systems to manage anticipated
substantial growth, there can be no assurances that these practices will be
successful.
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OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO RETAIN AND RECRUIT KEY
PERSONNEL.
Our success is highly dependent upon the continued services of our executive
officers, key product development personnel and key scientific personnel,
including without limitation, Wei Li, Da chang Ju, Lian jun Luo, James Nian
Zhan, Dr. Daniel Qu, Jing hong Zhang, Professor Qi Wang, Feng jun Ding,Yu hong
Pang, and Professor Gui sheng Chen. Given the intense competition for qualified
management and product development personnel in our industry, the loss of the
services of any key management or product development personnel may
significantly and detrimentally affect our business and prospects. We maintain
employment agreements with two of our key personnel in China: Lian jun Luo and
Qu Bin. These employment agreements include three-year terms, provision for
annual bonuses and stock option grants based on performance, and severance of
three month's base salary if these executives are laid off without cause. We do
not have employment agreements with any other members of management or key
personnel. While we have not experienced difficulty in attracting and
maintaining key personnel, there can be no assurance that we will be able to
retain these personnel, and it may be time consuming and costly to recruit
qualified replacement personnel.
WE CURRENTLY DO NOT HAVE SUFFICIENT REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND, IF OPERATING LOSSES CONTINUE, WE WILL REQUIRE ADDITIONAL FINANCING WHICH WE
MAY NOT BE ABLE TO SECURE.
We require substantial working capital to fund our business. In the short term,
we plan to continue building out our manufacturing facility, adjust our product
formula to improve product stability and optimize our product offerings, expand
our sales and marketing efforts in China, expand our distribution base in China,
introduce new products, and acquire two to three small or medium sized
bio-technology companies in the Chinese agricultural and/or environmental
markets. Over the next 24 months, we estimate that we will require approximately
$2.5 million for completion of construction of our manufacturing facility and
equipment investment, $1 million to consummate our planned acquisitions,
$600,000 in working capital and $500,000 in administrative and operations
expenses. In the long term, we plan to become a commercialization platform for
world-class biotechnological research and development results for applications
in agriculture, natural resources conservation and environmental protection,
launch our products in the United States and other markets, continue our
introduction of new products, create formal strategic alliances with selected
United States companies to co-develop and/or co-market products in the United
States and China, and form an international biotechnology research center in
China for the research and development of agricultural, environmental and
medical applications.
Because we currently do not have sufficient revenues to support our business
activities and we expect operating losses to continue, we will require
additional capital to fund our operations and finance our research and
development activities. Funding, whether from a public or private offering of
debt or equity, a bank loan or a collaborative agreement, may not be available
when needed or on favorable terms. If we are unable to obtain necessary
financing in the amounts and on terms deemed acceptable, we may have to limit,
delay, scale back or eliminate our research and development activities or future
operations. Any of the foregoing may adversely affect our business.
ENTERING INTO EQUITY OR DEBT FINANCINGS COULD RESULT IN DILUTION TO EXISTING
STOCKHOLDERS.
We will be required to raise additional capital to fund our operations and
finance our research and development activities through public or private
offerings of debt or equity. Any equity financing could result in dilution to
the existing stockholders as a direct result of our issuance of additional
shares of our capital stock. Debt financings will result in interest expense and
likely subject us to negative covenants that would limit our operational
flexibility, and if convertible into equity, could also dilute then-existing
stockholders.
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THE RISKS ASSOCIATED WITH RAISING CAPITAL THROUGH COLLABORATIONS AND LICENSING
AGREEMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
We will be required to raise additional capital to fund our operations and
finance our research and development activities through collaborative and/or
licensing agreements. Under these agreements, we may be subject to various
restrictive covenants which could significantly limit our operating and
financial flexibility and may limit our ability to respond to changes in our
business or competitive environment. If we are unable to obtain necessary
financing in the amounts and on terms deemed acceptable, we may have to limit,
delay, scale back or eliminate our research and development activities or future
operations. Any of the foregoing may adversely affect our business.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO EFFECTIVELY RECEIVE
AND USE OUR REVENUE.
Because almost all of our future revenues may be in the form of RMB, China's
currency which is denominated RMB, any future restrictions on currency exchanges
may limit our ability to use revenue generated in RMB to fund our business
activities outside China or to make dividend or other payments in U.S. Dollars.
Although the Chinese government introduced regulations in 1996 to allow greater
convertibility of the RMB, for current account transactions significant
restrictions still remain, including primarily the restriction that foreign
invested enterprises may only buy, sell and/or remit foreign currencies at those
banks authorized to conduct foreign exchange business after providing valid
commercial documents. In addition, conversion of RMB for capital account items,
including direct investment and loans, is subject to governmental approval in
China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the RMB, especially with respect to foreign exchange
transactions.
We may also be subject to foreign exchange risk and foreign ownership
restrictions. The Chinese government is loosening its control on foreign
exchange transactions. More liberal foreign exchange policies will reduce our
foreign exchange risk by increasing the liquidity of revenues generated in RMB.
We do anticipate conducting operations in any countries other than China and the
United States over the next twenty-four months. Fluctuations in the exchange
rate of the RMB relative to the US$ could adversely affect our results of
operations by affecting our reported earnings for any given period. In addition,
foreign ownership restrictions could also impact our ability to expand our
business through investment and acquisition opportunities. If we are unable to
pursue such strategic opportunities due to foreign ownership regulations, the
growth of our business could be limited.
CHANGES IN CHINA'S POLITICAL, SOCIAL, ECONOMIC OR LEGAL SYSTEMS COULD MATERIALLY
HARM OUR BUSINESS.
All of our manufacturing and production and the majority of our sales occur in
China. Consequently, an investment in our common stock may be adversely affected
by the political, social and economic environment in China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be significantly altered
from time to time.
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Our business and prospects are dependent upon agreements and regulatory approval
with various entities controlled by Chinese governmental instrumentalities.
Historically, our operations in China have received relatively favorable
treatment from these instrumentalities as a result of the Chinese government's
policies of encouraging economic development and innovation, especially in
underdeveloped regions. However, our operations and prospects would be
materially and adversely affected by a change in China's economic policies,
which could make it more difficult for us to obtain necessary approvals from
governmental authorities and to obtain economic incentives from governmental
authorities. In addition, if the Chinese government elects not to honor certain
contracts as a result of political change, it might be difficult to enforce
these contracts against such governmental entities in China. In addition, the
legal system of China relating to foreign investments is both new and
continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances.
A SLOW-DOWN IN THE CHINESE ECONOMY MAY ADVERSELY EFFECT OUR GROWTH AND
PROFITABILITY.
The growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any recessionary conditions will not have a negative
effect on our business. Several years ago, the Chinese economy experienced
deflation, which may reoccur in the foreseeable future. In addition, if an
outbreak of SARS recurs, it may cause a decrease in the level of economic
activity and may adversely affect economic growth in China, Asia and elsewhere
in the world. The performance of the Chinese economy overall affects our
profitability as expenditures for agricultural technological products may
decrease due to slowing domestic demand.
OUR ABILITY TO GENERATE REVENUES COULD SUFFER IF THE CHINESE AG-BIOTECHNOLOGY
MARKET DOES NOT DEVELOP AS ANTICIPATED.
The agriculture-biotechnology market in China, the primary market in which we do
business, is in the early stages of development. While we believe the market
opportunity looks promising, we expect that the market will take several years
to develop. While it is difficult to project exactly how long it will take to
develop the ag-biotechnology industry in China, we anticipate that it will take
at least ten years to reach a level of development which is similar to the
current state of the industry in the United States. Successful development of
the ag-biotechnology market in China depends on the following:
o continuation of governmental and consumer trends favoring the use of
products and technologies designed to create sustainable agriculture;
o educating the Chinese agricultural community and consumers about the uses
of ag-biotechnology products; and
o certain institutional developments such as governmental agricultural
subsidies designed to promote the use of environmentally friendly
ag-biotechnological products.
There are no assurances that these trends will continue, governmental subsidies
will be offered, or that the Chinese agricultural community and consumers will
be successfully educated about the uses of ag-biotechnology products. The
conduct of business in the ag-biotechnology market involves high risks. There
can be no assurances that the ag-biotechnology market in China will develop
sufficiently to facilitate our profitable operation. While we believe that we
will benefit from our first-mover advantage in a growing market, existing
competitors and new entrants in the ag-biotechnology market are expected to
create fierce competition in the future as the market evolves. Competitors and
new entrants may introduce new products into the market that may detrimentally
affect sales of our existing products, and consequently our revenues.
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WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
MAY BE EXPOSED TO INFRINGEMENT CLAIMS FROM THIRD PARTIES.
Our success will depend in part on our ability to obtain patent protection for
our technology, to preserve our trade secrets and to operate without infringing
on the proprietary rights of third parties. We have several trademarks
registered in China, which will be protected by the trademark laws in China for
ten years and are renewable at the expiration of the initial ten year term. In
addition, we have recently acquired a China patent from the China Agricultural
University entitled "Highly Effective Composite Bacteria for Enhancing Yield and
the Related Methodology for Manufacturing," issued by China Intellectual
Property Bureau, which has a remaining term of eight years.
We may also file patents with the China Intellectual Property Bureau and/or the
U.S. Patent and Trademark Office as we deem appropriate. There can be no
assurance that the patents applied for will be reviewed in a timely manner, that
any additional patents will be issued or that any patents issued will afford
meaningful protection against competitors with similar technology or that any
patents issued will not be challenged by third parties. There also can be no
assurance that others will not independently develop similar technologies,
duplicate our technologies or design around our technologies whether or not
patented. There also can be no assurance that we will have sufficient resources
to maintain a patent infringement lawsuit should anyone be found or believed to
be infringing our patents. There also can be no assurance that the technology
ultimately used by us will be covered in any additional patent applications that
we may file. We do not believe that our technology infringes on the patent
rights of third parties. However, there can be no assurance that certain aspects
of our technology will not be challenged by the holders of other patents or that
we will not be required to license or otherwise acquire from third parties the
right to use additional technology. The failure to overcome such challenges or
obtain such licenses or rights on acceptable terms could have a material adverse
affect on us, our business, results of operations and financial condition.
The processes and know-how of importance to our technology are dependent upon
the skills, knowledge and experience of our technical personnel, consultants and
advisors and such skills, knowledge and experience are not patentable. To help
protect our rights, we require employees, significant consultants and advisors
with access to confidential information to enter into confidentiality and
proprietary rights agreements. There can be no assurance, however, that these
agreements will provide adequate protection for our trade secrets, know-how or
proprietary information in the event of any unauthorized use or disclosure.
There can be no assurance that we will be able to obtain a license for any
technology that we may require to conduct our business or that, if obtainable,
such technology can be licensed at a reasonable cost. The cost of obtaining and
enforcing patent protection and of protecting proprietary technology may involve
a substantial commitment of our resources. Any such commitment may divert
resources from other areas of our operations. We may be required to license or
sublicense certain technology or patents in order to commence operations. There
can be no assurance that we will be able to obtain any necessary licenses or to
do so on satisfactory terms. In addition, we could incur substantial costs in
defending ourselves against suits brought by other parties for infringement of
intellectual property rights and there are no assurances that we will have the
resources to do so.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY LITIGATION, THE DEFENSE OF WHICH
COULD ADVERSELY IMPACT OUR BUSINESS OPERATIONS.
Currently we have one patent in China (Patent Number ZL93 101635.5 and
International patent classification Number A01N 63/00), which covers six
different species of bacillus which have been tested as bio-fertilizers to
enhance yield and plant health as well as the production methods of the six
species. The patent will expire on February 19, 2013.
- 35 -
While we have not received any allegations, complaints or threats of litigation
relating to any intellectual property rights, we may, from time to time, become
involved in litigation regarding patent and other intellectual property rights.
From time to time, we may receive notices from third parties of potential
infringement and claims of potential infringement. Defending these claims could
be costly and time consuming and would divert the attention of management and
key personnel from other business issues. The complexity of the technology
involved and the uncertainty of intellectual property litigation increase these
risks. Claims of intellectual property infringement also might require us to
enter into costly royalty or license agreements. However, we may be unable to
obtain royalty or license agreements on terms acceptable to us, or at all. In
addition, third parties may attempt to appropriate the confidential information
and proprietary technologies and processes used in our business, which we may be
unable to prevent and which would harm the businesses and our prospects.
WE FACE TECHNICAL RISKS ASSOCIATED WITH COMMERCIALIZING OUR TECHNOLOGY WHICH
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS RESULTS AND OPERATIONS.
A key to our future success is the ability to produce our bacillus series of
products at lower costs than our competitors. Although we are currently
utilizing our proprietary technology to produce such products at lower costs,
our method for producing such products on a commercial basis has only recently
begun. Further, although results from recent independent tests and our early
production results have been encouraging, the ability of our technology to
commercially produce such products at consistent levels is still being
evaluated. There can be no assurance that we will continue to be able to produce
such products at lower costs than our competitors, nor that our technology will
be able to commercially produce such products at consistent levels.
WE DEPEND ON A FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE.
One customer accounted for approximately 94% of our net sales for the three
months ended March 31, 2005. The loss of any of our significant customers would
result in a material reduction in our sales and results of operations. We do not
have long-term contracts with any of our customers. Purchases generally occur on
an order-by-order basis, and relationships exist as long as there is a perceived
benefit to both parties. A decision by a major customer, whether motivated by
competitive considerations, financial difficulties, economic conditions or
otherwise, to decrease its purchases from us or to change its manner of doing
business with us, could adversely affect our business and financial condition.
There can be no assurances that we will be able to retain these customers or
further expand our customer base to reduce our dependence on a small number of
customers. Our inability to generate new customers could negatively impact our
business and our ability to continue as a going concern.
WE HAVE LIMITED BUSINESS INSURANCE COVERAGE.
The insurance industry in China is still in its early stage of development.
Insurance companies in China offer limited business insurance. As a result, we
do not have any business liability insurance coverage for our operations.
Moreover, while business disruption insurance is available, we have determined
that the risks of disruption and cost of the insurance are such that we do not
require it at this time. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.
(2) RISK RELATED TO OUR COMMON STOCK
IF AN ACTIVE TRADING MARKET FOR OUR SECURITIES DOES NOT REMAIN IN EXISTENCE, THE
MARKET PRICE OF OUR SECURITIES MAY DECLINE AND STOCKHOLDERS' LIQUIDITY MAY BE
REDUCED.
Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is
an inter-dealer, over-the-counter market that provides significantly less
liquidity than the NASD's automated quotation system. Although being quoted on
the OTC Bulletin Board provides a trading market for our Common Stock, we have
- 36 -
experienced significant fluctuations in the volume of shares traded. There can
be no assurance that an active trading market will develop and be maintained in
the future. In the absence of an active public trading market, our common stock
has been and may continue to be subject to wide price fluctuations, which may be
unrelated or disproportionate to our operating performance. As a result,
investors may be unable to liquidate their investment in us.
As of March 31, 2005, we had 380 stockholders of record. As of March 31, 2005,
the closing price per share of common stock was $0.0122 and the average daily
trading volume for the first quarter in 2005 was 124,448 shares.
Market prices for our common stock will be influenced by a number of factors,
including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by competitors of new
products or services or significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the ag-biotechnology industry
generally; and
o general economic and other conditions.
WE ARE CONTROLLED BY TWO EXISTING STOCKHOLDERS WHO POSSESS SUFFICIENT VOTING
POWER TO PREVENT OR FRUSTRATE ATTEMPTS TO REPLACE OR REMOVE OUR CURRENT
MANAGEMENT OR TO ENGAGE IN CHANGE OF CONTROL TRANSACTIONS.
Our principal stockholders are All Star Technology Inc. and InvestLink (China)
Limited. Wei Li, our Chief Executive Officer and Chairman, is a principal
shareholder of All Star Technology Inc. Da chang Ju, one of our directors, is a
principal stockholder of InvestLink (China) Limited. All Star Technology Inc.,
together with InvestLink (China) Limited, currently beneficially own
approximately 55% of the outstanding shares of our common stock. Accordingly,
All Star Technology Inc., together with InvestLink (China) Limited, currently
have the ability to determine the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including election of
directors, mergers, consolidations and the sale of all or substantially all of
our assets. Our principal stockholders will also have the power to prevent or
cause a change in control. The interests of these stockholders may differ from
other stockholders' interests.
THE DESIGNATION OF OUR COMMON STOCK AS "PENNY STOCK" COULD IMPACT THE TRADING
MARKET FOR OUR COMMON STOCK DUE TO BROKER-DEALER REQUIREMENTS IMPOSED BY THE
DESIGNATION OF OUR COMMON STOCK AS "PENNY STOCK."
Our common stock is a "penny stock" as defined in Rules 15g-2 through 15g-6
promulgated under Section 15(g) of the Securities Exchange Act of 1934, as
amended, as it meets the following definitions: (i) the stock trades at a price
less than $5.00 per share; (ii) it is not traded on a "recognized" national
exchange; (iii) it is not quoted on the NASDAQ Stock Market, or even if so, has
a price less than $5.00 per share; and (iv) is issued by a company with net
tangible assets less than $2.0 million, if in business more than a continuous
three years, or with average revenues of less than $6.0 million for the past
three years. The principal result or effect of being designated a "penny stock"
is that securities broker-dealers cannot recommend the stock but must trade in
it on an unsolicited basis.
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Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the Securities and Exchange Commission require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor's account. Potential investors in our common stock
are urged to obtain and read such disclosure carefully before purchasing any
shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
PROVISIONS IN OUR CHARTER AND THE CORPORATE LAW OF OUR STATE OF INCORPORATION
COULD DETER OR PREVENT AN ACQUISITION OR CHANGE OF CONTROL.
Provisions of our certificate of incorporation may deter or prevent a change in
control of management. Specifically, our certificate of incorporation allows our
Board of Directors to issue 20,000,000 shares of preferred stock, in one or more
series and with such rights and preferences including voting rights, without
further stockholder approval. In the event that the Board of Directors
designates additional series of preferred stock with rights and preferences,
including super-majority voting rights, and issues such preferred stock, the
preferred stock could make our acquisition by means of a tender offer, a proxy
contest or otherwise, more difficult, and could also make the removal of
incumbent officers and directors more difficult. As a result, these provisions
may have an anti-takeover effect. The preferred stock authorized in our
certificate of incorporation may inhibit changes of control.
In addition, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with some exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of the person, who is an
"interested stockholder" for a period of three years from the date that the
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's Board of Directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
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These provisions could also limit the price that future investors might be
willing to pay in the future for our common stock. This could have the effect of
delaying, deferring or preventing a change in control of our Company and/or a
change in the members our Board of Directors. The issuance of preferred stock
could also effectively limit or dilute the voting power of our stockholders.
Accordingly, such provisions of our certificate of incorporation, as amended,
may discourage or prevent an acquisition or disposition of our business that
could otherwise be in the best interest of our shareholders.
INVESTORS SHOULD NOT RELY ON AN INVESTMENT IN OUR COMMON STOCK FOR DIVIDEND
INCOME AS WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain any earnings to finance the growth of
our business. We cannot assure you that we will ever pay cash dividends.
Therefore, investors should not rely on an investment in our common stock if
they require dividend income. The only income in the foreseeable future such
investors may receive from an investment in our common stock will come from
increases in the market price of our common stock. There can be no assurances
that the market price of our common stock will increase or continue to increase,
and such increases will most likely be uncertain and unpredictable. Whether we
pay any cash dividends in the future will depend on the financial condition,
results of operations and other factors that the Board of Directors will
consider.
IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE A SERVICE OF PROCESS OR ENFORCE
LIABILITIES AGAINST US.
We are incorporated in the State of Delaware, and our principal executive
offices are located in the State of California. However, substantially all our
fixed assets and operations are located in the People's Republic of China. In
addition, some of our directors and officers are Chinese citizens and residents.
As a result, it may be more difficult for investors or other third parties to
attach our assets in enforcement of a judgment against us or to enforce
liabilities and obligations against us in certain circumstances. It may also be
difficult to enforce service of process against directors and officers in China.
- 39 -
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no changes in the Company's internal control over financial reporting
during the quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
We plan to evaluate the level of our internal controls, identify certain
possible matters involving internal control deficiencies and adopt remedial
measures according to the COSO framework in 2005 with the assistance of a
professional internal control consultant. We believe we can meet the
requirements as defined in Section 404 of Sarbanes-Oxley Act of 2002 by the end
of 2006.
- 40 -
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On September 23, 2004, the Company entered into a convertible loan agreement for
$350,000 with interest at 10% per annum (the "10% Loan"), and issued 1,050,000
detachable warrants. The lender is an unrelated party located in the United
States. The 10% Loan was initially due on March 23, 2005, but the final maturity
date was subsequently extended by agreement to April 21, 2005. The Company has
not repaid the 10% Loan and the lenders have declared it in default. The
Company's Chief Executive Officer, Mr. Li Wei, executed a guarantee of repayment
of the 10% Loan which is secured by shares of the Company's common stock that he
owns. On May 6, 2005, the balance remaining on the 10% Loan was $219,742. The
Company, Mr. Li and the lender are negotiating repayment terms of the 10% Loan.
ITEM 6. EXHIBITS
These exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-B.
Exhibit No. in
Incorporated by Reference in Incorporated
Exhibit No. Description Document Document
2.1 Agreement and Plan of Merger, dated March 11, Form 8-K filed on March 29, 2004 2.1
2004, by and among Tintic Gold Mining
Company, TTGM Acquisition Corporation, and Kiwa
Bio-Tech Products Group Ltd.
2.2 Agreement and Plan of Merger, dated July 22, Form 8-K filed on July 23, 2004 2.1
2004, between Kiwa Bio-Tech Products Group
Corporation, a Utah corporation, and Kiwa Bio-Tech
Products Group Corporation.
3.1 Certificate of Incorporation, effective as of July Form 8-K filed on July 23 2004 3.1
21, 2004.
3.2 Bylaws, effective as of July 22, 2004. Form 8-K filed on July 23, 2004 3.2
10.1 Standby Equity Distribution Agreement, dated July Form SB-2 filed August 2, 2004 10.1
6, 2004, between Cornell Capital Partners, LP and
Kiwa Bio-Tech Products Group Corporation.
10.2 Placement Agent Agreement, dated July 6, 2004, Form SB-2 filed August 2, 2004 10.2
between Newbridge Securities Corporation and Kiwa
Bio-Tech Products Group Corporation.
10.3 Registration Rights Agreement, dated July 6, 2004, Form SB-2 filed August 2, 2004 10.3
between Cornell Capital Partners, LP and Kiwa
Bio-Tech Products Group Corporation.
10.4 Warrant Purchase Agreement, dated March 12, 2004, Form 10-QSB filed May 20, 2004 10.1
issued to Westpark Capital, Inc.
10.5 Convertible Loan Agreement, dated January 25, 2004 Form 10-QSB filed May 20, 2004 10.2
between Kiwa Bio-tech Products Group Ltd. and Kao
Ming Investment Company
10.6 Convertible Loan Agreement dated March 12, 2004 Form 10-QSB filed August 20, 2004 10.1
for $200,000 between Kiwa Bio-Tech Products
Group Corporation and Jzu Hsiang Trading Co., Ltd.
10.7 Engagement agreement between Kiwa Bio-Tech Form 10-QSB filed August 20, 2004 10.3
Products Group Corporation and Cinapsys Inc. dated
May 24, 2004
10.8 Patent Transfer Agreement dated April 12, 2004, Form SB-2/A filed October 8, 2004 10.5
between Kiwa Bio-Tech Products (Shandong) Co.,
Ltd. and China Agricultural University.
10.9 Patent Transfer Contract, dated April 12, 2004, Form SB-2/A filed November 23, 2004 10.5
between Kiwa Bio-Tech Products Group Corporation
and China Agricultural University
10.10 Contract of Project of Venture Capital of Form SB-2/A filed October 8, 2004 10.6
Zoucheng Science & Technology Plan (Contract No.:
2004) among KIWA Bio-Tech Products (Shandong)
Company, Science & Technology Bureau and Zoucheng
Branch of China Commercial Bank of ICBC dated
April 2004.
- 41 -
Exhibit No. in
Incorporated by Reference in Incorporated
Exhibit No. Description Document Document
10.11 Contract of Project of Venture Capital of Form SB-2/A filed October 8, 2004 10.7
Zoucheng Science & Technology Plan (Contract No.
2002) among KIWA Bio-Tech Products (Shandong)
Company, Zoucheng Science & Technology Bureau
and Zoucheng Branch of China Commercial Bank
of ICBC. dated November 2002.
10.12 Contract of Project of Venture Capital of Form SB-2/A filed November 23, 2004 10.7
Zoucheng Science & Technology Plan (Contract No.
2002) among KIWA Bio-Tech Products Group Limited,
Zoucheng Municipal People's Government Bureau and
Zoucheng Branch of China Commercial Bank of ICBC
dated May 26, 2002.
10.13 PBC Project Investment Agreement between KIWA Form 10-KSB filed April 13, 2005 10.13
Bio-Tech Products Group Limited and Zoucheng
Municipal Government dated June 25, 2002
10.14 Employment Agreement dated March 18, 2003 Form SB-2/A filed November 23, 2004 10.13
between Kiwa Bio-Tech Products Group and Lian jun
Luo
10.15 Employment Agreement dated March 18, 2003 Form SB-2/A filed November 23, 2004 10.14
between Kiwa Bio-Tech Products Group and Bin Qu
10.16 Convertible Loan Agreement dated October 20, 2003 Form SB-2/A filed October 8, 2004 10.8
between China Star Investment Group and Kiwa
Bio-Tech Products Group Ltd., as amended by letter
agreement dated August 1, 2004
10.17 Loan Agreement dated July 26, 2004 between China Form SB-2/A filed November 23, 2004 10.15
Star Investment Group and Kiwa Bio-Tech Products
Group Corporation
10.18 Commercial Lease Agreement dated April 1, 2004 Form SB-2/A filed October 8, 2004 10.10
between Kiwa Bio-Tech Products Group Corporation
and China Star Investment Company.
10.19 Convertible Note Agreement dated September 23, Form 10-QSB filed November 15, 2004 10.4
2004 among Kiwa Bio-Tech Products Group
Corporation and Young San Kim and Song N. Bang
10.20 Amendment, dated April 7, 2005, to Convertible Form 10-KSB filed April 13, 2005 10.20
Note Agreement dated September 23, 2004 among Kiwa
Bio-Tech Products Group Corporation and Young San
Kim and Song N. Bang
10.21 Common Stock Warrant dated September 23, 2004, Form 10-QSB filed November 15, 2004 10.5
issued by Kiwa Bio-Tech Products Group Corporation
to Young San Kim
10.22 Common Stock Warrant dated September 23, 2004, 10-QSB filed November 15, 2004 10.6
issued by Kiwa Bio-Tech Products Group Corporation
to Song N. Bang
- 42 -
Exhibit No. in
Incorporated by Reference in Incorporated
Exhibit No. Description Document Document
10.23 Promissory Note of Kiwa Bio-Tech Products Group Form 10-KSB filed April 13, 2005 10.23
Corporation, principal amount $400,000, issued to
Cornell Capital Partners, LP on January 4, 2005,
as amended by letter agreements dated March 21,
2005 and April 5, 2005.
21 List of Subsidiaries
31.1 Certification of Principal Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
31.2 Certification of Principal Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934
32.1 Certifications of Principal Executive Officer and
Principal Financial Officer, pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 43 -
SIGNATURES
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Registrant)
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
/S/ LI WEI May 19, 2005 Chairman of Board of Directors
------------------ and Chief Executive Officer
Wei Li
/S/ LIAN JUN LUO May 19, 2005 Chief Financial Officer and Director
------------------
Lian jun Luo
- 44 -