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 September 30, 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
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(Exact name of small business issuer as specified in its charter)
Delaware 84-0448400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
415 West Foothill Blvd, Suite 206, Claremont, CA 91711-2766
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(Address of principal executive offices)
Issuer's telephone number: (909) 626-2358
-----------------------------------------
(Registrant's telephone number, including area code)
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 November 8, 2005, the Company had 65,100,287 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 and Comprehensive Income
(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)..........10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........20
Overview..................................................................20
Trends and Uncertainties in Regulation and
Government Policy in People's Republic of China..........................21
Critical Accounting Policies And Estimates................................22
Results of Operations For Three Months and Nine Months Ended
September 30, 2005 and 2004...............................................22
Liquidity and Capital Resources...........................................25
Inflation and Currency Matters............................................28
Commitments and Contingencies.............................................28
Off-Balance Sheet Arrangements............................................28
Related Party Transactions................................................29
ITEM 3. CONTROLS AND PROCEDURES............................................30
PART II OTHER INFORMATION.....................................................31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........31
ITEM 6. EXHIBITS............................................................31
SIGNATURES....................................................................32
- 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
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September 30, December 31,
2005 2004
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(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 15,113 $ 17,049
Accounts receivable 1,268,249 963,403
Other receivable -- 157,495
Inventories 446,537 83,677
Prepaid expenses 17,983 131,600
Other current assets 37,911 26,340
--------------------------------------------------------------------------------
Total current assets 1,785,793 1,379,564
Property, plant and equipment:
Buildings 1,009,367 986,965
Machinery and equipment 446,100 218,250
Automobiles 103,621 101,321
Office equipment 57,261 49,688
Computer software 8,915 8,717
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Property, plant and equipment - total 1,625,264 1,364,941
Less: Accumulated depreciation (172,309) (109,847)
--------------------------------------------------------------------------------
Property, plant and equipment - net 1,452,955 1,255,094
Construction in progress 33,334 32,595
Intangible asset - net 423,880 463,730
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Total assets $ 3,695,962 $ 3,130,983
================================================================================
- 3 -
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expense $ 893,156 $ 560,873
Construction costs payable 371,289 370,453
Short-term loans -- 50,000
Due to related parties 428,813 128,885
Convertible notes payable-unrelated party 400,000 312,104
Current portion of bank notes payable 13,491 12,879
--------------------------------------------------------------------------------
Total current liabilities 2,106,749 1,435,194
Long-term liabilities, less current portion:
Unsecured loans payable 1,420,981 1,389,443
Bank notes payable 17,304 26,853
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Total long-term liabilities 1,438,285 1,416,296
Stockholders' equity
Common stock - $0.001 par value
Authorized 100,000,000 shares at
September 30, 2005 and December 31, 2004
Issued and outstanding 59,235,930 shares
and 40,873,711 shares at September 30,
2005 and December 31, 2004, respectively 59,236 40,874
Preferred stock -$0.001 par value
Authorized 20,000,000 shares at September
30, 2005 and December 31, 2004 Issued and
outstanding nil shares at September 30,
2005 and December 31, 2004 -- --
Additional paid-in capital 4,842,490 4,393,415
Deficit accumulated (4,775,899) (4,154,796)
Accumulated other comprehensive income 25,101 --
--------------------------------------------------------------------------------
Total stockholders' equity 150,928 279,493
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,695,962 $ 3,130,983
================================================================================
See accompanying notes to condensed consolidated financial statements.
- 4 -
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Kiwa Bio-Tech Products Group Corporation and
Subsidiaries
Condensed Consolidated Statements of Operations
and Comprehensive Income
----------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
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Net sales $ 3,422 $ 407,884 $ 1,021,725 $ 701,101
Cost of sales 5,521 170,387 286,439 277,688
---------------------------------------------------------------------------------------------------------------
Gross (loss) profit (2,099) 237,497 735,286 423,413
Operating expenses:
Consulting and professional fees 153,634 186,075 500,031 285,535
Officers' compensation 7,864 2,175 32,846 22,473
General and administrative 115,255 160,245 477,389 436,234
Research and development 1,617 14,195 10,040 40,946
Depreciation and amortization 22,620 17,725 73,809 35,260
Reverse merger costs -- -- -- 1,417,434
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Total costs and expenses 300,990 380,415 1,094,115 2,237,882
---------------------------------------------------------------------------------------------------------------
Operating profit (loss): (303,089) (142,918) (358,829) (1,814,469)
Interest expense, net (130,444) (10,194) (264,690) (745,845)
Other income -- -- 2,416 --
---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (433,533) $ (153,112) $ (621,103) $ (2,560,314)
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Other comprehensive
income (loss):
---------------------------------------------------------------------------------------------------------------
Translation adjustments $ 25,101 $ -- $ 25,101 $ --
---------------------------------------------------------------------------------------------------------------
Comprehensive income
(loss) $ (408,432) $ (153,112) $ (596,002) $ (2,560,314)
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Net income (loss) per
common share outstanding
- basic and diluted $ (0.008) $ (0.004) $ (0.013) $ (0.072)
---------------------------------------------------------------------------------------------------------------
Weighted average number
of common shares
outstanding - basic and
diluted 54,846,674 39,166,806 48,168,361 35,772,751
---------------------------------------------------------------------------------------------------------------
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 Other Stockholders'
Paid-in Accumulated Comprehensive Equity
Shares Amount Capital Deficits Income (Deficiency)
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Balance, January 1, 2004 30,891,676 30,892 1,184,108 (1,426,123) -- (211,123)
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Shares retained by public shareholders
in March 2004 reverse merger transaction 4,038,572 4,038 (4,038) -- -- --
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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
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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
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Beneficial conversion feature of
convertible note payable funded on
January 25, 2004 -- -- 500,000 -- -- 500,000
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Beneficial conversion feature of
convertible note payable funded on April
7, 2004 -- -- 200,000 -- -- 200,000
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Restricted shares issued to a consultant
for services at $0.45 per share on May
24, 2004 75,000 75 33,675 -- -- 33,750
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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
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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) -- -- --
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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) -- -- --
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Shares issued to lawyer for legal
services at $0.014 per share on
September 14, 2004 892,857 893 124,107 -- -- 125,000
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Issuance of warrants on September 23,
2004 in conjunction with September 2004
convertible notes payable -- -- 82,559 -- -- 82,559
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Shares issued to consultants for
services at $0.10 per share on October
1, 2004 415,000 415 41,085 -- -- 41,500
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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
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Net loss for the year ended December 31, 2004 -- -- -- (2,728,673) -- (2,728,673)
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- 6 -
Total
Additional Other Stockholders'
Paid-in Accumulated Comprehensive Equity
Shares Amount Capital Deficits Income (Deficiency)
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Balance, December 31, 2004 40,873,711 40,874 4,393,415 (4,154,796) -- 279,493
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Issuance of common stock to Cornell
Capital Partners, Limited in the first
nine months of 2005, as first to
thirty-third repayments in conjunction
with Promissory Note dated January 4,
2005 18,362,219 18,362 301,638 -- -- 320,000
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Issuance of detachable warrants in
conjunction with the issuance of
convertible promissory notes to the
holders in June 2005 -- -- 21,700 -- -- 21,700
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Beneficial conversion feature of the
convertible promissory notes funded in
June 2005 -- -- 106,666 -- -- 106,666
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Issuance of detachable warrants in
conjunction with the advance agreement
with a director dated May 23, 2005 -- -- 8,633 -- -- 8,633
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Issuance of detachable warrants in
conjunction with the advance agreement
with a related party dated June 29, 2005 -- -- 5,417 -- -- 5,417
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Issuance of detachable warrants in
conjunction with the advance agreement
with a director dated September 30, 2005 -- -- 5,021 -- -- 5,021
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Net loss for nine months ended September
30, 2005 -- -- -- (621,103) -- (621,103)
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Translation adjustment -- -- -- -- 25,101 25,101
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Balance, September 30, 2005 59,235,930 $ 59,236 $ 4,842,490 ($4,775,899) 25,101 $ 150,928
====================================================================================================================================
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
--------------------------------------------------------------------------------
Nine months Ended
September 30,
-------------------------------
2005 2004
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (621,103) $(2,560,314)
Adjustments to reconcile net loss
to net cash used in operating activities:
Issuance of securities for reverse
merger costs -- 1,114,380
Issuance of common stock for services -- 158,749
Depreciation and amortization 112,041 66,611
Amortization of detachable warrants 74,038 --
Amortization of beneficial conversion
feature 106,666 700,000
of convertible notes payable
Changes in operating assets and liabilities:
(Increase) decrease in :
Accounts receivable (304,846) (488,820)
Inventories (362,860) (120,053)
Prepaid expenses 113,617 (74,902)
Other current assets (11,571) 53,388
Due from related parties --
Increase (decrease)in:
Accounts payable and accrued expenses 315,503 290,783
Construction cost payables -- (10,581)
Due to related parties -- 53,507
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Net cash used in operating activities (578,515) (817,252)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Other receivable 157,495 (157,495)
Purchase of property and equipment (229,187) (24,201)
Acquisition of intangible asset -- (30,205)
--------------------------------------------------------------------------------
Net cash provided by (used in) investing (71,692) (211,901)
activities
--------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in restricted cash -- 300,000
Repayment of short-term loans (50,000) (283,930)
Proceeds from convertible notes payable 720,000 1,050,000
Repayment of convertible notes payable (350,000) --
Proceeds from related parties 321,337 --
Proceeds from long-term borrowings -- 326,217
Repayment of long-term borrowings (6,388) (69,731)
--------------------------------------------------------------------------------
Net cash provided by financing activities 634,949 1,322,556
--------------------------------------------------------------------------------
Foreign currency translation 13,322 --
Cash and cash equivalents:
Net (decrease) increase (1,936) 293,403
Balance at beginning of period 17,049 48,730
--------------------------------------------------------------------------------
Balance at end of period $ 15,113 $ 342,133
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- 8 -
Supplemental disclosures of cash flow information:
Cash paid for interest $ 22,775 $ 7,675
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 $ 320,000 $ --
--------------------------------------------------------------------------------
Beneficial conversion feature of
convertible notes payable $ 106,666 $ 700,000
--------------------------------------------------------------------------------
Issuance of detachable warrants in
conjunction with issuance of convertible
notes payable $ 40,771 $ --
--------------------------------------------------------------------------------
Issuance of common stock for convertible
notes payable $ -- $ 700,000
--------------------------------------------------------------------------------
Transfer from convertible notes payable
to due to related party $ -- $ 100,000
--------------------------------------------------------------------------------
Issuance of common stock in exchange for
patent $ -- $ 420,000
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
- 9 -
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 marketing our products. The Company's first product,
a photosynthesis biological catalyst, was introduced in the Chinese agricultural
market in November 2003.
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 September 30, 2005, the results of operations for the three months and nine
months ended September 30, 2005 and 2004, and the cash flows for the nine months
ended September 30, 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.
The results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2005.
- 10 -
2. Significant accounting policies
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
$433,533 and $153,112 during the three months ended September 30, 2005 and 2004,
respectively, and our current liabilities exceeded our current assets by
$320,956 and $55,630 at September 30, 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.
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 will provide a 100% bad debt allowance for the amounts outstanding over
365 days except for those subsequently settled, 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 September 30, 2005 will be fully
collected.
Comprehensive (Loss) Income - The Company has adopted the Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
The Company has chosen to report comprehensive income (loss) in the statements
of operations and comprehensive income.
Net Income (Loss) Per Common Share - Basic income (loss) per common share is
calculated by dividing net loss by the weighted average number of shares of
common stock outstanding during the period. Diluted income (loss) per common
share reflects the potential dilution that would occur if dilutive securities
(stock options, warrants and convertible 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
September 30, 2005, potentially dilutive securities aggregated 21,669,116 shares
of common stock. The loss per common share calculation for nine months ended
September 30, 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.
Foreign Currency Translation - The functional currency of the Company is China
Renminbi ("RMB"), which is the primary medium of exchange where Kiwa-SD
operates. The Company reports its financial results in United States dollars
("U.S. dollars").
Translations of amounts from RMB into U.S. dollars were at approximately US$
1.00 = RMB 8.28 for all periods prior to July 21, 2005. Due to the stability of
the RMB during the periods covered by the consolidated financial statements
prior to July 21, 2005, no material exchange differences exist during the
aforesaid period. On July 21, 2005, the People's Bank of China announced it
would appreciate the RMB, increasing the RMB-US$ exchange rate from
approximately US$ 1.00 = RMB 8.28 to approximately US$ 1.00 = RMB 8.11. The
Company translates Kiwa-SD's assets and liabilities into U.S. dollars using the
rate of exchange prevailing at the balance sheet date (at September 30, 2005,
the prevailing exchange rate of the US dollar against the RMB was 8.093), and
the statement of operations is translated at the average rates over the relevant
reporting period. Equity items are translated at historical rates. Adjustments
resulting from the translation from RMB into US$ are recorded in shareholders'
equity as part of accumulated comprehensive income (loss). Gains or losses
resulting from transactions in currencies other than RMB are reflected in the
statement of operations.
- 11 -
Stock Issued for Compensation and Financing - The Company periodically issues
shares of common stock, options or warrants for services rendered or for
financing costs. Stock issued to non-employees is valued based on the market
price on the transaction date. With respect to stock options and warrants issued
to non-employees, the Company has adopted the SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value method of accounting
for stock-based compensation plans. 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 term of the loan
period.
With respect to stock awards issued to employees, the Company has elected to
continue to account for stock-based employee compensation plans utilizing the
intrinsic value method. The provisions of SFAS No. 123 currently in effect 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" ("APB No. 25"), 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. Under the intrinsic value method, the 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 the nine months ended September 30,
2005.
As of December 15, 2005, SFAS No. 123 and APB No. 25 will be superseded by SFAS
No. 123R, which will require all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values, beginning with the first interim or annual period
after December 15, 2005. See "Recent Accounting Pronouncements," below.
Reclassification from prior period financial statements - Certain prior period
comparative figures have been reclassified to conform with the current period
presentation.
3. Inventories
Inventories consisted of the following at September 30, 2005 and December 31,
2004:
--------------------------------------------------------------
September 30, 2005 December 31, 2004
(unaudited)
Raw materials $ 416,688 $ 36,248
Work in progress - 32,295
Finished goods 29,849 15,134
------ ------
Total $446,537 $83,677
--------------------------------------------------------------
- 12 -
4. Prepaid expenses
Prepaid expenses consisted of the following at September 30, 2005 and December
31, 2004:
-------------------------------------------------------------------------
September 30, 2005 December 31, 2004
(unaudited)
Marketing service fee $ - $ 63,750
Fees for public relations and - 51,850
sourcing of financing
Financing service fees 15,350 -
Others 2,633 -
Place agent fee - 16,000
-----------------------------------------
Total $17,983 $131,600
-------------------------------------------------------------------------
5. Intangible asset
The Company's intangible asset as of September 30, 2005 consisted of the
following:
----------------------------------------------------------
Expected Gross Intangible
Amortization Carrying Accumulated asset,
Period Value Amortization Net
----------------------------------------------------------
----------------------------------------------------------
Patent 8.5 years $480,411 $56,531 $423,880
----------------------------------------------------------
The following table presents future expected amortization expense related to the
patent:
Amount
2005 $ 14,450
2006 57,800
2007 57,800
2008 57,800
2009 57,800
Thereafter 178,230
----------
$ 423,880
==========
6. Construction Costs Payable
Construction costs payable represents remaining amounts to be paid for the Phase
I construction project based on an independent accountant's certification
pursuant to the construction contract. All construction costs payable are due to
be repaid in 2005.
7. Related Party Transactions
Amount due to related parties consisted of the following at September 30, 2005
and December 31, 2004:
------------------------------------------------------------------
September 30, December 31,
Notes 2005 2004
(unaudited)
Mr. Wei Li ("Mr. Li") (i) $ 186,201 $ 16,780
China Star Investment
Group ("China Star") (ii) 247,242 112,105
------- -------
Total $ 428,813 $128,885
------- -------
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- 13 -
Mr. Li
Mr. Li is the Chairman of the Board and the Chief Executive Officer of the
Company. The balance due to Mr. Li primarily consists of a loan and operating
expenses that Mr. Li paid on behalf of the Company.
On May 23, 2005, the Company entered into an advance agreement with Mr. Li for
various advances amounting to $156,685. The advances are unsecured, bear
interest at 12% per annum and will be due on November 22, 2005. The Company has
also granted 783,423 shares of detachable warrants to Mr. Li.
Each warrant attached to the advances entitles Mr. Li to subscribe for one share
of common stock of the Company at an exercise price equal to the closing quote
of the Company's shares on the date of draw down, which ranged from $0.011 to
$0.0481 per share. The warrants expire two years from the date of issue. None of
the detachable warrants were exercised in the nine months ended September 30,
2005. The intrinsic value of the detachable warrants at the time of their
issuance was determined to be $8,633, 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 advance 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 advance will be recognized as interest expense in the period the
conversion takes place.
(ii) China Star
China Star is a company which is 10% owned by a major stockholder of the
Company. The balance due to China Star 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. This
loan was fully paid on April 1, 2005.
On June 29, 2005 and September 30, 2005, the Company entered into advance
agreements with China Star for advances of $94,845 and $91,071, respectively.
The advances were drawn down in stages over the second and third quarters of
2005, respectively. The advances are unsecured, bear interest at 12% per annum
and will be due in six months from the date of draw down. The Company has also
granted detachable warrants to China Star to purchase the aggregate of 929,580
shares of common stock.
Each warrant attached to the advance entitles China Star to subscribe for one
share of common stock of the Company at an exercise price equal to the closing
quote of the Company's shares on the date of draw down, which ranged from $0.009
to $0.03 per share. The warrants expire two years from the date of issue. None
of the detachable warrants were exercised in the nine months ended September 30,
2005. The intrinsic value of the detachable warrants at the time of their
issuance was determined to be $10,438, calculated pursuant to the Black-Scholes
option pricing model in accordance with EITF Issue No 00-27.
8. Convertible notes payable
The balance of convertible notes payable as of September 30, 2005 and December
31, 2004 was $400,000 and $312,104, respectively.
- 14 -
10% Loan
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 did
not repay the 10% Loan by the extended maturity date. Prior to June 8, 2005, the
Company made payments to the lender in the amount of $359,991, which included a
penalty interest payment. On June 8, 2005, the Company signed a Payment
Acknowledgment and Release with the lender in which the lender acknowledged full
satisfaction of the 10% Loan and released the Company from all liability under
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 nine months ended September 30, 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.
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 were amortized on the straight-line
method over the term of the 10% Loan, with the amounts amortized being
recognized as interest expense.
Promissory Note with Cornell Capital Partners, LP
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 "Cornell Note"). The Cornell Note bears interest at a rate of 10%
per annum and has a term of 290 days. The Company's obligations under the
Cornell 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 10. Pursuant to the terms of
the Cornell 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 Cornell Note. Unless the Cornell 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 Cornell Note. As of September 30, 2005, the escrow agent had released 33
such advances for an aggregate of 18,362,219 shares of common stock. The
balances due on the Cornell Note as of September 30, 2005 and November 8, 2005
were $80,000 and $30,000, respectively.
The Cornell 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.
- 15 -
12% Loans
On May 30, 2005 and June 16, 2005, the Company entered into three convertible
promissory note agreements for the aggregate of $320,000 with interest at 12%
per annum (the "12% Loans"), and issued 1,600,000 detachable warrants. The
lenders are unrelated parties located in the United States. The 12% Loans are
initially due in 3 months from date of draw down, but the final maturity dates
were extended for another three months. The 12% Loans are secured by the
Company's assets. Mr. Li has provided personal guarantees for the 12% Loans. As
part of the loan terms, the lenders have the right to convert the 12% Loans into
shares of the Company's common stock at any time prior to the maturity. The
conversion price is based on 75% of the closing quote of the Company's common
stock on the date of conversion. However, the Company has the right in its sole
discretion to redeem the 12% Loans in whole or in part for 125% of the face
amount plus unpaid accrued interest.
Each warrant attached to the 12% Loans entitles the holder to subscribe for one
share of common stock of the Company at an exercise price equal to the closing
quote of the Company's shares on the date of draw down, which ranged from $0.018
to $0.023 per share. The warrants expire two years from the date of issue. None
of the detachable warrants were exercised in the nine months ended September 30,
2005. The intrinsic value of the detachable warrants at the time of their
issuance was determined to be $21,700, calculated pursuant to the Black-Scholes
option pricing model in accordance with EITF Issue No 00-27.
The fair value of the beneficial conversion feature of the 12% Loans was
determined to be $106,666, based on a formula that takes the lower of
outstanding loan principal and the difference between the conversion price and
the fair market value of the Company's common stock. The fair value of $106,666
was recorded as a reduction to convertible notes payable and will be charged to
operations as interest expense from the date of draw down through the date of
maturity, which resulted in a charge to operations of $$106,666 during the nine
months ended September 30, 2005.
In connection with the 12% Loans, the Company recorded deferred debt issuance
costs of $16,000, 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 12% Loans, with the amounts amortized
being recognized as interest expense. Any unamortized debt issuance costs
remaining at the date of conversion of the 12% Loans will be recognized as
interest expense in the period the conversion takes place.
9. Unsecured loans payable
Unsecured loans payable(including current portion)consisted of the following at
September 30, 2005 and December 31, 2004:
--------------------------------------------------------------------------------
September 30, December 31,
2005 2004
(unaudited)
--------------------------------------------------------------------------------
Unsecured loan payable to Zoucheng (Note)
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 $1,112,072 $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 308,909 302,053
--------------------------------------------------------------------------------
Total $1,420,981 $1,389,443
--------------------------------------------------------------------------------
- 16 -
Note: 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. 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 September 30, 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.
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.
10. Equity-Based Transactions
(a) Authorized share capital
Under the Company's Certificate of Incorporation, 100,000,000 shares of common
stock and 20,000,000 shares of preferred stock are authorized. The Board of
Directors has authority under the Certificate of Incorporation to determine the
rights, preferences, privileges and restrictions of the preferred stock.
(b) Issued and outstanding share capital
From January 1, 2004 to September 30, 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.
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.
- 17 -
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 was for a period of twelve
months and provided 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 shares of common stocks 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 SEC in December 2004.
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 of65,100,287, it could not issue shares under the Standby Equity
Distribution Agreement if it would result in Cornell Capital owning more than
6,444,929 shares. Assuming a price of $0.0112 per share, and the closing price
of the Company's common stock on November 8, 2005, the issuance of 6,444,929
shares under the Standby Equity Distribution Agreement would result in proceeds
to the Company of approximately $72,183 after taking into account fees and
discounts.
- 18 -
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 was for a period of six
months and provided 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 amortized 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 was for a period
of three months and provided 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 amortized 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 was for a period of
four months and provided 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 amortized 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 was 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 three quarters
of 2005, the Company issued an aggregate of 18,362,219 shares to repay Cornell
Capital $320,000 in accordance with the requests of Cornell Capital under the
Standby Equity Distribution Agreement. The balances due to Cornell Capital on
the promissory note as of September 30, 2005 and November 8, 2005 were $80,000
and $30,000, respectively.
(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"). There are 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 September 30, 2005, no
stock options or stock purchase rights had been granted under the Plan.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements
regarding guidance, industry prospects or future results of operations or
financial position, made in this Quarterly Report on Form 10-QSB are
forward-looking. We use words such as anticipates, believes, expects, future,
intends, and similar expressions to identify forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Actual results could differ materially for a variety of
reasons, including, among others, fluctuations in foreign exchange rates,
changes in global economic conditions and consumer spending, world events,
technological developments in ag-biotechnology, the amount that the Company
invests in new business opportunities and the timing of those investments, the
mix of products sold to customers, the mix of net sales derived from products as
compared with services, competition, management of growth, potential
fluctuations in operating results, international growth and expansion, outcomes
of legal proceedings and claims, risks of inventory management, seasonality, the
degree to which the Company enters into, maintains, and develops commercial
agreements, acquisitions, and strategic transactions, and risks of fulfillment
throughput and productivity. These risks and uncertainties describe some, but
not all, of the factors that could cause actual results to differ significantly
from management's expectations.
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 marketing our products. The Company's first product, a
photosynthesis biological catalyst, was introduced in the Chinese agricultural
market in November 2003.
Going Concern Risk
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 $433,533 and $153,112 during the
three months ended September 30, 2005 and 2004, respectively, and our current
liabilities exceeded our current assets by $320,956 and $55,630 at September 30,
2005 and December 31, 2004, respectively. These factors create substantial doubt
about our ability to continue as a going concern. The condensed consolidated
financial statements do not contain any adjustments that might result from the
outcome of this uncertainty.
Company management continues to evaluate the availability of debt and equity
financing in light of the Company's cash needs to fund operations. There can be
no assurances that the Company will be successful in obtaining sufficient debt
or equity financing to meet the Company's cash needs in the near term.
- 20 -
Major Customers and Suppliers
Three customers accounted for 28%, 15% and 11%, respectively, of our net sales
for the three months ended September 30, 2005 and three other customers
accounted for 38%, 32% and 28%, respectively, of our net sales for the nine
months ended September 30, 2005. Three customers accounted for 54%, 39% and 2%,
respectively, of our net sales for the three months ended September 30, 2004 and
49%, 34% and 1%, respectively, of our net sales for the nine months ended
September 30, 2004.
A supplier accounted for 99%, of our purchases of raw materials for the three
months ended September 30, 2005 and three suppliers accounted for 64%, 17%, and
12%, respectively, of our purchases of raw materials for the nine months ended
September 30, 2005. Three suppliers accounted for 51%, 38% and 4%, respectively,
of our purchases of raw materials for the three months ended September 30, 2004
and 41%, 30%, and 6%, respectively, of our purchases of raw materials for the
nine months ended September 30, 2004. The raw materials used in our products are
available from a variety of alternative sources.
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 sector is
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 $1,510,264 from November 28, 2002 to March 31, 2005.
As the government further increases investment in the agricultural sector, we
expect that similar loans or other favorable financing programs will be
available to us in the future, which we anticipate will assist us with managing
liquidity and capital resources during our growth period. However, if these
financing programs are not available in the future, we may have to borrow on
terms which are less favorable to us, or we may not be able to borrow additional
funds at all on terms which are acceptable.
- 21 -
Foreign Investment Policy Changes
The Chinese government is considering changes to its current policy that
provides favorable tax treatment to foreign invested enterprises as compared to
Chinese domestic business. The new policy under consideration will consolidate
enterprise income tax laws between foreign invested enterprises and Chinese
domestic enterprises. The new policy will also provide transitional arrangements
to facilitate the consolidation. No timetable has been announced yet for the
consolidation. If the new policy is implemented, newly established foreign
invested enterprises will not enjoy favorable tax treatment as in effect under
current tax laws. It is anticipated that the proposed policy will not have an
impact on companies like ours, which have already been granted favorable tax
treatment. We believe this beneficial tax status will make an investment in our
Company more attractive to both foreign and domestic investors in China, which
could improve our liquidity or provide additional capital resources. However, if
we were to be subject to such new policies, our tax rate and tax liability would
increase.
Foreign Exchange Policy Changes
China is considering allowing its currency to be freely exchangeable for other
major currencies. On July 21, 2005, the People's Bank of China announced it
would appreciate the RMB, increasing the RMB-US$ exchange rate from
approximately US$ 1.00 = RMB 8.28 to approximately US$ 1.00 = RMB 8.11. This
change resulted in greater liquidity for revenues generated in RMB. We benefited
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-US$ exchange rate impacted our reported
results of operations and financial condition. In the event that RMB was to
appreciate over the next year as compared to the US$, our earnings would benefit
from the appreciation of the RMB. However, if we have to use US$ to invest in
our Chinese operations, we would 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 will provide a bad debt allowance for amounts outstanding over 365 days.
- 22 -
We believe that the accounts receivable balance at September 30, 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 September 30, 2005, all accounts receivable, which
were not subsequently settled, 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.
REVENUE RECOGNITION. We recognize revenue 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, 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 September 30, 2005, the net value of property and
equipment and intangible assets was $1,452,955 and $423,880, respectively, which
represented approximately 39.3% and 11.5% 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 and Nine Months Ended September 30, 2005
and 2004
NET SALES. Net sales for the three months ended September 30, 2005 were $3,422,
a decrease of $404,462 or 99%, from $407,884, the amount of net sales for the
three months ended September 30, 2004. The decrease in net sales during the
period was the result of a temporary suspension of manufacturing while our plant
was being upgraded during July 2005.
- 23 -
Net sales for the nine months ended September 30, 2005 were $1,021,725, an
increase of $320,624 or 46%, from $701,101 for the nine months ended September
30, 2004. The increase in net sales during the period resulted from the
increased number of local and foreign customers in Southeast Asia during the
first half of 2005.
COST OF SALES. Costs of sales were $5,521 and $170,387 for the three months
ended September 30, 2005 and 2004, respectively. The decrease of $164,866, or
97%, in cost of sales was primarily due to decreased material costs resulting
from decreased sales.
Costs of sales were $286,439 and $277,688 for the nine months ended September
30, 2005 and 2004, respectively. The increase of $8,751 or 3%, in cost of sales
was primarily due to increased material costs, which resulted from increased
sales during the first half of 2005.
GROSS (LOSS) PROFIT. Gross (loss) profit was ($2,099) and $237,497 for the three
months ended September 30, 2005 and 2004, respectively. This represented a
profit (loss) margin of (61%) and 58% for those periods, respectively, and a
119% changes in gross (loss) profit of $239,596.
Gross profit was $735,286 and $423,413, representing a profit margin of 72% and
60% for the nine months ended September 30, 2005 and 2004, respectively. The
increase of $311,873 primarily occurred during the first half of 2005.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were $153,634
and $186,075 for the three months ended September 30, 2005 and 2004,
respectively, representing a decrease of $32,441 or 17%. It is attributable to
reduction of investor relations services incurred during the three-month period.
Consulting and professional fees were $500,031 and $285,535 for the nine months
ended September 30, 2005 and 2004, respectively, representing an increase of
$214,496 or 75%. The increase in consulting and professional fees is primarily
attributable to consulting and professional fees of Cornell Capital for finance
and investor relations services. Fees to accountants, lawyers and other fees
associated with operating a public company also contributed to the increase in
consulting and professional fees in the first nine months of 2005.
OFFICERS' COMPENSATION. Officers' compensation increased by $5,689 or 262% to
$7,864 for the three months ended September 30, 2005 as compared to $2,175 for
the three months ended September 30, 2004. The increase is primarily because of
the salary adjustment of certain officers in 2005.
Officers' compensation increased by $10,373 or 46% to $32,846 for the nine
months ended September 30, 2005 as compared to $22,473 for the nine months ended
September 30, 2004. The increase is primarily because of the salary adjustment
of certain officers and a performance bonus to an officer in 2005.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $115,255 for
the three months ended September 30, 2005, as compared to $160,245 for the same
period of 2004, a decrease of $44,990 or 28%, primarily as a result of the
decrease of entertainment expenses and insurance expenses during the third
quarter of 2005.
General and administrative expense was $477,389 for the nine months ended
September 30, 2005, as compared to $436,234 for the same period of 2004, an
increase of $41,155 or 9%, 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 during the period.
- 24 -
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 $12,578, or
89%, to $1,617 for the three months ended September 30, 2005, as compared to
$14,195 for the three months ended September 30, 2004. Research and development
expense decreased $30,906, or 75%, to $10,040 for the nine months ended
September 30, 2005, as compared to $40,946 for the nine months ended September
30, 2004. The decrease in both periods is due to reduction of field testing fees
for new products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $4,895, or
28%, to $22,620 for the three months ended September 30, 2005, as compared to
$17,725 for the three months ended September 30, 2004. Depreciation and
amortization, excluding depreciation and amortization included in cost of sales,
increased $38,549, or 109%, to $73,809 for the nine months ended September 30,
2005, as compared to $35,260 for the nine months ended September 30, 2004. The
increase in both periods is primarily attributable to depreciation expense in
respect of the patent we finished acquiring in August 2004.
INTEREST INCOME (EXPENSE). Interest expense increased $120,250, or 12-fold, to
$130,444 for the three months ended September 30, 2005, as compared to interest
expense of $10,194 for the three months ended September 30, 2004. The increase
of interest is primarily attributable to the convertible notes payable issued in
late second quarter of 2005. For more information refer to discussion of 12%
Loans at Note 8 to the financial statements.
Interest expense decreased $481,155, or 65%, to $264,690 for the nine months
ended September 30, 2005, as compared to interest expense of $745,845 for the
nine months ended September 30, 2004. This decrease is due to the termination of
the conversion feature of a convertible note that was converted to common stock
on June 8, 2004, which the Company had previously amortized as interest expense.
For more information refer to Note 8 to the financial statements regarding
retirement of 10% Loan.
OTHER INCOME. The municipal government in Shandong Province, China granted the
Company $2,416 during the first quarter of 2005. The grant is recorded as "other
income" on the financial statements. There are not other amounts recorded as
"other income" during the three months ended September 30, 2005 and 2004,
respectively.
COMPREHENSIVE INCOME (LOSS). We experienced a comprehensive loss of $408,432 for
the three months ended September 30, 2005 compared to a comprehensive loss of
$151,112 for the three months ended September 30, 2004. The increase of $257,320
or 170% in the current period as compared to third quarter 2004 is primarily due
to the significant decrease of sales during the period due to the temporary
suspension of manufacturing at our facility due to construction. Net
comprehensive loss decreased $1,964,312 to $596,002 for the nine months ended
September 30, 2005 as compared to $2,560,314 for the nine months ended September
30, 2004. The decrease in comprehensive loss in the current period as compared
to the same period in 2004 is primarily due to non-recurring costs of the
reverse merger equal to $1,417,434 and the decrease of interest expense
resulting from the termination of the conversion feature of a convertible note
that was converted to common stock on June 8, 2004.
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 nine months ended September 30,
2005, we raised $1,041,337 in debt financing.
- 25 -
We will require additional capital to fund our business plan and develop our
manufacturing facility, and have not generated sufficient revenues from our
operations for such purposes. We anticipate the need 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 executing our planned expansion
of our operations during 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 interest
rates have increased to 5.50% and 5.76%, respectively. The maturity dates are
October 2007 and March 2008, respectively. As of September 30, 2005, the
outstanding balances of these loans were $13,038 and $17,758, respectively.
In October 2003, we entered into a convertible loan agreement with China Star
pursuant to which we borrowed $100,000 from China Star. The loan bears interest
at the rate of 12% per annum and was originally due and payable in October 2004.
China Star has waived this conversion right. The loan was fully repaid in April
2005. On June 29, 2005 and September 30, 2005, the Company entered into two
advance agreements with China Star for advances in the aggregate of $94,845 and
$91,071, made to the Company during the second and third quarters of 2005,
respectively. The advances are unsecured, bear interest at 12% per annum and
will be due in six months from the date of draw down. The Company has also
granted detachable warrants to China Star for 929,580 shares of common stock. As
of September 30, 2005, the total outstanding balance to China Star under the
loan and for other obligations was $247,242.
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 did
not pay the 10% Loan by the extended maturity date and the lenders declared it
in default. Prior to June 8, 2005, the Company made payments to the lender in
the amount of $359,991, which included a penalty interest payment. On June 8,
2005, the Company signed a Payment Acknowledgment and Release with the lender in
which the lender acknowledged full satisfaction of the 10% Loan and released the
Company from all liability under the 10% Loan.
On January 4, 2005, we issued a promissory note in the original principal amount
of $400,000 to Cornell Capital that 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.
On May 30, 2005 and June 16, 2005, the Company entered into three convertible
promissory note agreements for the aggregate of $320,000 with interest at 12%
per annum (the "12% Loans"), and issued 1,600,000 detachable warrants. The
lenders are unrelated parties located in the United States. The 12% Loans were
initially due in 3 months from date of draw down, but the final maturity dates
were extended for another three months. The 12% Loans are secured by the
Company's assets. Mr. Li has provided personal guarantees for the 12% Loans. As
part of the loan terms, the lenders have the right to convert the 12% Loans into
shares of the Company's common stock at any time prior to the maturity. The
conversion price is based on 75% of the closing quote of the Company's common
stock on the date of conversion.
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.
- 26 -
As of September 30, 2005, we had obtained non-interest bearing loans from the
Chinese local government of approximately $1,510,264, of which $1,389,443 is
currently outstanding. We are required to begin repayment of the outstanding
balance of the 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 September 30, 2005 and December 31, 2004, we had cash of $15,113 and $17,049
respectively. At September 30, 2005 and 2004, our net working capital
(deficiency) was ($320,956) and ($55,630), respectively, reflecting current
ratios of 0.85:1 and 0.96:1, respectively, at such dates.
During the nine months ended September 30, 2005, our operations utilized cash of
$587,408, as compared to $817,252 utilized for the nine months ended September
30, 2004.
During the nine months ended September 30, 2005, we utilized cash of $71,692 for
investing activities consisting primarily of property and equipment purchases.
This was offset in part by collections due from other receivables. Cash utilized
for investing activities during the nine months ended September 30, 2004, was
$211,90, which reflects a 66% decrease.
During the nine months ended September 30, 2005, we generated a net of $634,949
from financing activities, consisting of the proceeds from convertible notes
payable of $720,000 and loans advanced from related parties of $321,337, offset
in part by the repayment of a short-term loan of $50,000, convertible notes
payable of $350,000 and long-term borrowings of $6,388. During the nine months
ended September 30, 2004, we generated $1,322,556 from financing activities
through increases in convertible loans and long-term borrowings.
We continue to develop our manufacturing facility and have invested
approximately $1,658,598 in Phase I of our new manufacturing facility, including
$1,009,367 in buildings and $446,100 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 $2.5 million over an estimated 3 years.
We do not anticipate generating sufficient positive internal operating cash flow
to fund our planned operations for several years. In the next year, we intend to
raise additional capital through the issuance of debt or equity securities to
fund the development of our planned business operations, although there can be
no assurances that we will be successful in obtaining this financing. To the
extent that we are unable to successfully raise the capital necessary to fund
our future cash requirements on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to maintain operations,
and may have to curtail operations and consider a formal or informal
restructuring or reorganization.
- 27 -
Inflation and Currency Matters
In the most recent decade, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Our
success depends in substantial part on the continued growth and development of
the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting business
abroad, including price and currency exchange controls, and fluctuations in the
relative value of currencies. We conduct virtually all of our business in China
and, accordingly, the sale of our products is settled primarily in RMB. As a
result, devaluation or currency fluctuation of the RMB against the US$ 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
US$ 1.00 to RMB 8.28 at December 31, 2004. On July 21, 2005, the People's Bank
of China increased the US$-RMB exchange rate to approximately US$ 1.00 = RMB
8.11. This change results in greater liquidity for revenues generated in RMB. We
benefit by having easier access to and greater flexibility with capital
generated in and held in the form of RMB.
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 replaced by
another operating lease expiring in March 2008 with an aggregate monthly lease
payment of approximately $4,933. Rent expense under the operating leases for the
three months and nine months ended September 30, 2005 was $14,799 and $33,446,
respectively.
The Company previously leased 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. This operating lease was replaced by
another operating lease with a third party expiring in June 2008 with an
aggregate monthly lease payment of approximately $1,000. Pursuant to the lease
agreements, rent expense for three months and nine months ended September 30,
2005 was $3,000 and $18,360, respectively. At September 30, 2005, the remaining
minimum lease payments amounted to $32,236.
Off-Balance Sheet Arrangements
At September 30, 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.
- 28 -
Related Party Transactions
China Star is a company which is 10% owned by a major stockholder of the
Company. The balance due to China Star at September 30, 2005 and December, 31,
2004 was $247,242 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. On June 29, 2005 and September 30, 2005, the Company entered into
two advance agreements with China Star for the advances of $94,845 and $91,071,
made to the Company during the second and third quarters of 2005, respectively.
The advances are unsecured, bear interest at 12% per annum and will be due in
six months from the date of draw down. The Company has also granted warrants for
929,580 shares of its common stock to China Star.
The balance of $186,201 shown on the balance sheet due to the Company's Chief
Executive Officer, Mr. Li, primarily consisted of a loan and the operating
expenses that Mr. Li paid on behalf of the Company.
On May 23, 2005, the Company entered an advance agreement with Mr. Li for
various advances amounting to $156,685. The advances are unsecured, bear
interest at 12% per annum and will be due on November 22, 2005. In
consideration, the Company granted warrants for 783,423 shares of common stock
to Mr. Li.
Mr. Li also executed a guarantee of repayment of the 10% Loan and the 12% Loans
(described at Note 8 to the Financial Statements and under "Liquidity and
Capital Resources"). On November 8, 2005, the 10% Loan had been retired and the
12% Loans had a balance of $320,000.
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 stocks 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.
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 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.
- 29 -
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" (referred to as "SFAS No.
123R"), which replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values, beginning with the first interim or annual period after December 15,
2005. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. The Company is
required to adopt SFAS No. 123R in its three months ending March 31, 2006. Under
SFAS No. 123R, The Company must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoption options. Under the
retroactive options, prior periods may be restated either as of the beginning of
the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of adoption of SFAS
No. 123R, while the retroactive methods would record compensation expense for
all unvested stock options and restricted stock beginning with the first period
restated. The Company is evaluating the requirements of SFAS No. 123R, and it
expects that the adoption of SFAS No. 123R will have no material impact on the
Company's financial statements.
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 September 30, 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.
- 30 -
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The warrants issued in conjunction with the advance agreement with China Star
Investment Management Co. Ltd. (described in Note 7 to the Financial
Statements) was an unregistered sale of equity securities under the Securities
Act. All of these securities were issued in reliance on an exemption from
registration under Section 4(2) under the Securities Act.
ITEM 6. EXHIBITS
These exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-B.
Exhibit No. in
Incorporated
Exhibit No. Description Incorporated by Reference in Document Document
Certificate of Incorporation, effective as of July 21,
3.1 2004. Form 8-K filed on July 23, 2004 3.1
3.2 Bylaws, effective as of July 22, 2004. Form 8-K filed on July 23, 2004 3.2
Advance Agreement, dated September 30, 2005, between Kiwa
Bio-Tech Products (Shandong) Co. Ltd. and China Star
10.1 Investment Management Co. Ltd.
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
31.1 1934
Certification of Principal Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
31.2 1934
Certifications of Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
32.1 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- 31 -
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 November 18, 2005 Chairman of Board of Directors
------------------ and Chief Executive Officer
Wei Li
/S/ LIAN JUN LUO November 18, 2005 Chief Financial Officer and
------------------ Director
Lian jun Luo
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