As
filed
with the Securities and Exchange Commission on August 11, 2006 Registration
No. 333-
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT UNDER
THE SECURITIES ACT OF 1933
KIWA
BIO-TECH PRODUCTS GROUP CORPORATION
(Name
of
small business issuer in its charter)
Delaware
(State
or jurisdiction of incorporation or organization)
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8731
(Primary
Standard Industrial
Classification
Code Number)
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84-0448400
(I.R.S.
Employer
Identification
No.)
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415
West Foothill Blvd., Suite 206
Claremont,
CA 91711-2766
(909)
626-2358
(Address
and telephone number of principal executive offices
and
principal place of business)
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Yvonne
Wang
415
West Foothill Blvd., Suite 206
Claremont,
CA 91711-2766
(909)
626-2358
(Name,
address and telephone number of agent for
service)
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Copies
to:
Carter
R. Mackley
Preston
Gates & Ellis LLP
925
4th Avenue
Suite
2900 Seattle, WA 98104 (206) 623-7580
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Raymond
L. Veldman
Preston
Gates & Ellis LLP
1900
Main Street
Sixth
Floor
Irvine,
CA 92614-7319
(949)
253-0900
|
Approximate
date of proposed sale to the public:
As
soon
as practicable after this Registration Statement becomes effective.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
CALCULATION
OF REGISTRATION FEE
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Title
of each class of securities to be registered
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Amount
to be registered(1)
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Proposed
maximum offering price per share(2)
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Proposed
maximum aggregate offering price(2)
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Amount
of registration fee(2)
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Common
Stock, $.001 par
value per share
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48,805,784
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$0.233
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$11,371,748
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$1,217
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(1) |
In
addition, pursuant to Rule 416 under the Securities Act of 1933,
this
Registration Statement includes an indeterminate number of additional
shares as may be issuable as a result of stock splits, stock dividends
or
similar transactions which occur during this continuous
offering.
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(2) |
Estimated
solely for the purpose of calculating the amount of the registration
fee
pursuant to Rule 457(c) of the Securities Act based on the average
of the
high and low quotation of our common stock, as reported on the OTC
Bulletin Board quotation service on August 8, 2006.
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The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a),
may
determine
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in
any
jurisdiction where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED AUGUST 11, 2006
PROSPECTUS
48,805,784
Shares
KIWA
BIO-TECH PRODUCTS GROUP CORPORATION
Common
Stock
This
prospectus relates to the offer and sale of up to 48,805,784 shares of our
common stock from time to time by certain of our stockholders, or persons who
may become our stockholders, upon the conversion of certain notes issued by
us
or exercise of certain warrants issued by us. We refer to these persons
throughout this prospectus as the “selling stockholders.”
The
selling stockholders may sell all or any portion of their shares of common
stock
in one or more transactions on the over the counter stock market or in private,
negotiated transactions. Each selling stockholder will determine the prices
at
which he/she sells his/her shares. Although we will incur expenses in connection
with the registration of the shares of common stock offered under this
prospectus, we will not receive any proceeds from the sale of the shares of
common stock by the selling stockholders.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “KWBT.OB.” On
August 8, 2006, the closing bid quotation of our common stock was $0.245.
We
may
amend or supplement this prospectus from time to time by filing amendments
or
supplements as required. You should read this entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
The
shares of common stock offered under this prospectus involve a high degree
of
risk. See “Risk Factors” beginning at page 4.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is , 2006
TABLE
OF CONTENTS
PART
I
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Page
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Prospectus
Summary
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1
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Risk
Factors
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4
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Special
Note Regarding Forward-Looking Statements
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17
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Market
for Common Equity and Related Stockholder Matters
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18
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Management’s
Discussion and Analysis Of Operation
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20
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Business
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35
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Property
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47
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Management
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48
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Executive
Compensation
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50
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Transactions
with Management And Others
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51
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Description
of Securities
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52
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Security
Ownership of Certain Beneficial Owners and Management
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54
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Shares
Eligible For Future Sale
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55
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Selling
Stockholders
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56
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Plan
of Distribution
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60
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Legal
Matters
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61
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Experts
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61
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Changes
In Accountants
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61
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Where
You Can Find More Information
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62
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Index
to Financial Statements
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F-1
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We
have
not authorized any person to give you any supplemental information or to make
any representations for us. You should not rely upon any information about
our
company that is not contained in this prospectus. Information contained in
this
prospectus may become stale. You should not assume that the information
contained in this prospectus or any prospectus supplement is accurate as of
any
date other than their respective dates, regardless of the time of delivery
of
this prospectus or of any sale of the shares. Our business, financial condition,
results of operations and prospects may have changed since those dates.
The
selling stockholders are offering to sell, and seeking offers to buy, shares
of
our common stock only in jurisdictions where offers and sales are
permitted.
Unless
otherwise specified or the context otherwise requires, references in this
prospectus to “Kiwa,” the “Company,” “we,” “us,” and “our” refer to Kiwa
Bio-Tech Products Group Corporation, a Delaware corporation, and its
consolidated subsidiaries.
PROSPECTUS
SUMMARY
You
should read this summary in conjunction with the more detailed information
and
financial statements appearing elsewhere in this prospectus. This summary does
not contain all of the information you should consider before investing in
our
securities. You should read this entire prospectus carefully, especially the
risks of investing in our securities discussed under “Risk Factors” before
making an investment decision.
Except
as expressly stated otherwise, all financial information contained in this
prospectus represent the results of operations and financial condition of Kiwa
Bio-Tech Products Group Corporation and its subsidiaries. All of the sales
and
expenses of the Company are denominated in Renminbi ("RMB"), the national
currency of the People's Republic of China. For the convenience of the reader,
the financial information contained in this prospectus has been converted into
United States dollars at the approximate exchange rates prevailing as of the
stated date and during the stated periods, as the case may be.
Overview
Kiwa
Bio-Tech Products Group Corporation develops, manufactures, distributes and
markets innovative, cost-effective and environmentally safe bio-technological
products for agriculture. Our product initiatives can be divided into three
primary categories - bio-fertilizers and related products; biologically enhanced
feed for livestock; and an animal flu disinfector delivered by aerosol. Our
products are designed to enhance the quality of human life by increasing the
value, quality and productivity of crops and decreasing the negative
environmental impact of chemicals and other wastes.
We
are
the result of a reverse merger accomplished on March 12, 2004 between Tintic
Gold Mining Company, a corporation originally incorporated in the state of
Utah
on June 14, 1933 to perform mining operations in Utah, and Kiwa Bio-Tech
Products Group Ltd., a company originally organized under the laws of the
British Virgin Islands on June 5, 2002. The merger resulted in a change of
control of Tintic Gold Mining Company, with former Kiwa Bio-Tech Products Group
Ltd. stockholders owning approximately 89% of Tintic Gold Mining Company on
a
fully diluted basis. Subsequent to the merger, Tintic Gold Mining Company
changed its name to Kiwa Bio-Tech Products Group Corporation. On July 22, 2004,
we completed our reincorporation in the State of Delaware.
In
2002,
Kiwa Bio-Tech Products Group Ltd. chartered Kiwa Bio-Tech Products (Shandong)
Co., Ltd., 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. In October 2003, Kiwa Bio-Tech
Products Group Ltd. completed the first phase of the construction of its
state-of-the-art manufacturing facility in Shandong Province, China. In November
2003, Kiwa Bio-Tech Products Group Ltd. began shipping its first commercial
product, a bio-fertilizer, to the agricultural market in China. We have since
been working on existing product improvement and new product
development.
On
July
11, 2006, we completed the formation of a joint venture with Tianjin Challenge
Feed Co., Ltd. to engage in the developing, manufacturing and marketing of
biologically enhanced feed for livestock. The joint venture will be located
in
Tianjin, China and operated through Tianjin Kiwa Feed Co., Ltd., a jointly-owned
limited liability company organized under the laws of the PRC. We have committed
to invest $480,000 in the joint venture in the next six months for an 80%
ownership share.
We
aim to
build a platform to commercialize bio-technological research and development
results for applications in agriculture. In this respect, we are working on
developing cooperative research relationships with several universities and
institutions in China. We are also planning to acquire innovative technologies
to reduce research and development costs and shorten commercialization cycles
for bio-technological products. We are currently developing technologies related
to applications of bio-fertilizer,
livestock feed enhanced with bio-tech products, and veterinary disinfectants
and
drugs. These technologies have applications in the agriculture, natural
resources and environmental conservation sectors. We may also acquire similar
technologies from third parties in both China and the United
States.
Our
principal executive offices are located at 415 West Foothill Blvd., Suite 206,
Claremont, CA 91711-2766. Our telephone number is (909) 626-2358.
The
Offering
This
offering relates to the sale of up to 48,805,784 shares of our common stock
from
time to time by certain of our stockholders, or persons who may become our
stockholders upon the conversion of our convertible notes or exercise of our
warrants. We refer to these persons throughout this prospectus as the “selling
stockholders.” Approximately 39,431,331 of the offered shares relate to shares
of common stock issuable upon conversion of our 6% Convertible Secured Notes
issued pursuant to a Securities Purchase Agreement dated as of June 29, 2006.
The terms of the 6% Notes, as well as the terms of other of our convertible
notes and warrants held by selling stockholders, are described in this
prospectus under the heading “Selling Stockholders” beginning on page 56.
The
selling stockholders may sell all or any portion of their shares of common
stock
in one or more transactions on the over the counter stock market or in private,
negotiated transactions. The selling stockholders will determine when
they
will sell their shares,
and in
all cases will sell their shares at the current market price or at negotiated
prices at the time of the sale. Although we will incur expenses in connection
with the registration of the shares of common stock offered under this
prospectus, we will not receive any proceeds from the sale of the shares of
common stock by the selling stockholders.
Overview
of Financial Condition
Our
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 consolidated financial
statements do not purport to represent the realizable or settlement values.
We
incurred a net loss of $1,327,759 and $2,728,673 during the fiscal years ended
December 31, 2005 and 2004, respectively, and our current liabilities
exceeded our current assets by $1,006,983 and $55,630 at December 31, 2005
and
2004, respectively. We
had a
stockholders’ deficiency of $564,993 at December 31, 2005. During
the six months ended June 30, 2006, we also incurred a net loss of
$1,201,926. Our current liabilities exceeded our current assets by $20,679
at June 30, 2006.
Furthermore,
we are continuing to develop our manufacturing facility and have not generated
significant revenues from our operations. Until sufficient cash flow is
generated from operations, we will have to utilize our capital resources or
external sources of funding to satisfy our working capital needs. Our revenues
from operations were disappointingly low during 2005 and the first half year
of
2006 due to the temporary closing of our manufacturing facility for the planned
upgrade to produce bacillus fertilizer and the failure of an anticipated
financing in the second half of 2005 to fund the upgrade. These
factors create substantial doubt about our ability to continue as a going
concern.
Our
independent certified public accountants, in their independent auditors’ reports
on the consolidated financial statements as of and for the year ended December
31, 2005, 2004 and 2003, have expressed substantial doubt about our ability
to
continue as a going concern.
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.
Summary
Consolidated Financial Data
The
following tables summarize historical consolidated financial data regarding
our
business and should be read together with “Management’s Discussion and Analysis
or Plan of Operation” beginning on page 20 of this prospectus and our financial
statements and related notes included elsewhere in this prospectus. The
information below is only a summary and does not provide all of the information
contained in our financial statements of and related notes.
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Year
ended December 31,
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Six
months ended June 30,
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Consolidated
Statement of Operations Data:
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2004
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2005
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2005
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2006
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(Unaudited)
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Net
sales
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$
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1,300,251
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$
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631,794
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$
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1,018,303
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$
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24,374
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Cost
of sales
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641236
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232,692
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280,918
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19,955
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Gross
profit
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659,015
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399,102
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737,385
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4,419
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Operating
expenses:
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Consulting
and professional fees
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448,442
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614,532
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346,397
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288,314
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Officers'
compensation
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77,398
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38,727
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24,982
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115,070
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General
and administrative
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598,492
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664,637
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362,134
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171,483
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Research
and development
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49,622
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11,264
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8,423
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16,362
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Depreciation
and amortization
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52,798
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106,283
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51,189
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70,232
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Reverse
merger cost
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1,417,434
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—
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—
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—
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Total
costs and expenses
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2,644,186
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1,435,443
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793,125
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661,461
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Operating
profit (loss)
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(1,985,171
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)
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(1,036,341
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)
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(55,740
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)
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(657,042
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)
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Changes
in fair value of warrants
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—
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—
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—
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53,652
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Interest
expense, net
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(803,913
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)
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(293,834
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)
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(134,246
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)
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(598,536
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)
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Other
income
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60,411
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2,416
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2,416
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—
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Net
loss
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(2,728,673
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)
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(1,327,759
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)
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(187,570
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)
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(1,201,926
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)
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Other
comprehensive income:
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Translation
adjustment
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—
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22,358
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—
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16,197
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Comprehensive
loss
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($2,728,673
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)
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($1,305,401
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)
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($187,570
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)
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($1,185,729
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)
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Net
loss per common share
-
basic and diluted
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(0.074
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(0.026
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)
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(0.004
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)
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(0.020
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)
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Weighted
average number of common shares
-
basic and diluted
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36,887,339
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50,957,995
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44,771,631
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60,423,775
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As
of December 31,
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As
of June 30,
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Consolidated
Balance Sheet Data:
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2004
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2005
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2006
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(unaudited)
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Cash
and cash equivalents
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$
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17,049
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$
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14,576
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$
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673,371
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Working
Capital
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(55,630
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)
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(1,006,983
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)
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(20,679
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)
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Total
assets
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3,130,983
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3,121,688
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3,929,468
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Total
liabilities
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2,851,490
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3,686,681
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4,079,343
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Total
stockholders' equity (deficiency)
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279,493
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(564,993
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)
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(149,875
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)
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An
investment in our securities involves substantial risks. Prospective purchasers
should consider the following risk factors in connection with other information
contained in this prospectus before making a decision to purchase the securities
offered. Our failure to successfully address the risks and uncertainties
described below would have a material adverse effect on our business, financial
condition and/or results of operations, and the trading price of our common
stock may decline and investors may lose all or part of their investment. We
cannot assure you that we will successfully address these risks or other unknown
risks that may affect our business.
We
operate in a market environment that is difficult to predict and that involves
significant risks and uncertainties, many of which will be beyond our control.
The following risk factors and other information included in this prospectus
should be carefully considered. The risks and uncertainties described below
are
not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks occur, our business, financial
condition, operating results, and cash flows could be materially adversely
affected.
Risks
Related to Our Business
Investors
may not be able to adequately evaluate our business due to our short operating
history, lack of significant revenue and limited product offerings.
We
have
only been operating our current business in ag-biotechnology since June 2002,
providing a limited period for investors to evaluate our business model. Because
of this limited operating history and the uncertain nature of the rapidly
changing markets that we serve, we believe any prediction of future results
of
operations is difficult. We have generated insignificant revenue, have not
been
profitable, and incurred a severe decrease of sales in the second half of 2005
and 2006 due to the temporary closure of our manufacturing facility to conduct
a
planned upgrade, coupled with the failure of an anticipated financing to fund
the upgrade. From the inception of our current business in ag-biotechnology
on
June 5, 2002 to June, 30, 2006 we had accumulated losses of $6,684,481. We
also
plan to introduce new innovative, cost-effective bio-tech products in the
livestock industry, including bio-enhanced feed products and veterinary drugs.
Since we have never entered into these fields before, and our products have
not
been tested by the market, we cannot guarantee that the predicted market
performance of our new products will materialize.
We
have not yet generated any profits and if we do not become profitable or obtain
additional funding to implement our business plan our ability to continue as
a
going concern is in doubt.
We
expect
to continue to have operating losses for the foreseeable future as we are still
in the process of exploring market, further research and product tests.
We
will
require additional capital to implement our business plan and continue
operating. 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 or cease operations and consider
a
formal or informal restructuring or reorganization.
We
have
obtained four Fertilizers Registration Certificates under which we can produce
and market microorganism microbial inoculum fertilizer, amino acid aoliar
aomular fertilizer, organic fertilizer and water-run fertilizer. There can
be no
assurances that any of the intellectual property or products intended to be
developed by us will be marketed successfully or that ultimately we can develop
a sufficiently large production capacity and sufficiently large customer demand
to operate on a profitable basis. Until sufficient cash flow is generated from
operations, we will have to utilize our capital resources or external sources
of
funding to satisfy our working capital needs. Furthermore, our prospects must
be
evaluated in light of risks, uncertainties, expenses and difficulties frequently
encountered by companies in an early growth stage.
Our
independent auditors have added an explanatory paragraph to their audit opinion
issued in connection with our financial statements for the years ended December
31, 2005, 2004 and 2003, which states that the financial statements raise
substantial doubt as to our ability to continue as a going concern. Our ability
to make operations profitable or obtain additional funding will determine our
ability to continue as a going concern.
We
depend on a few customers for a significant portion of our revenue.
Two
customers together accounted for approximately 96.6% of our net sales for the
fiscal year ended December 31, 2005. Three customers accounted for 22%, 10%
and
9%, respectively, of our net sales for the six months ended June 30, 2006.
The
loss of any of our significant customers would result in a material reduction
in
our sales and results of operations. We do not have long-term contracts with
any
of our customers. Purchases generally occur on an order-by-order basis, and
relationships exist as long as there is a perceived benefit to both parties.
A
decision by a major customer, whether motivated by competitive considerations,
financial difficulties, and economic conditions or otherwise, to decrease its
purchases from us or to change its manner of doing business with us, could
adversely affect our business and financial condition. There can be no
assurances that we will be able to retain these customers or further expand
our
customer base to reduce our dependence on a small number of customers. Our
inability to generate new customers could negatively impact our business and
our
ability to continue as a going concern.
Our
business is subject to seasonal fluctuations.
Our
operating results have been and are expected to continue to be subject to
seasonal trends. This trend is dependent on numerous factors, including the
markets in which we operate, growing seasons, climate, economic conditions
and
numerous other factors beyond our control.
As
for
bio-fertilizer products, we generally expect the second and third quarters
will
be stronger than the first and fourth quarters, primarily because the second
and
third quarters correspond with the growing seasons in our primary markets in
China. It is during those growing seasons when application of our products
by
our customers would be most beneficial and we therefore expect greater demand
for our products during those periods. There can be no assurance that these
operating patterns will occur. But we will seek to develop markets outside
China
such as in Southeast Asia to reduce the impact of seasonality.
Our
operating results may fluctuate significantly, which may result in volatility
or
have an adverse effect on the market price of our common stock.
We
have
experienced, and expect to continue to experience, substantial variation in
our
net sales and operating results from quarter to quarter. Our business is subject
to seasonal fluctuations due to growing seasons in different markets. We believe
the factors that influence this variability of quarterly results
include:
· |
the
timing and size of orders from major customers;
|
· |
budgeting
and purchasing cycles of customers;
|
· |
the
timing of enhancements to products or new products introduced by
us or our
competitors;
|
· |
changes
in pricing policies made by us, our competitors or suppliers, including
possible decreases in average selling prices of products in response
to
competitive pressures;
|
· |
fluctuations
in general economic conditions; and
|
· |
the
status of operating cash.
|
We
may
also choose to reduce prices or to increase spending in response to competition
or to pursue new market opportunities. Due to fluctuations in our revenue and
operating expenses, we believe that period-to-period comparisons of our results
of operations are not a good indication of our future performance. It is
possible that in some future quarter or quarters our operating results will
be
below the expectations of securities analysts or investors. In that case, our
stock price could fluctuate significantly or decline.
From
January 1, 2005 to August 8, 2006, the market price for our common stock as
quoted on the OTC Bulletin Board has ranged from a low of $0.007 to a high
of
$0.37 per share. High volatility in the market price of our common stock may
result in lower prices for our common stock, making it more difficult for us
to
obtain equity financing on terms and conditions which are favorable to us,
if at
all. We expect to continue to incur losses in the near future as we develop
and
market our initial products. As a result, we will be dependent on additional
debt or equity financing to fund our operations. If such financing is not
available on terms which are acceptable to us, we may have to delay development
of new products and/or reduce sales and marketing efforts for our existing
products. Such actions may have an adverse effect on our results of operations.
In addition, uncertainties with respect to our ability to raise additional
capital would make operational planning more difficult for management.
Revocation
of our right to use patents or other intellectual property rights could
adversely impact the growth of our business.
We
acquired a patent in April 2004 from China Agricultural University, entitled
“Highly Effective Composite Bacteria for Enhancing Yield and the Related
Methodology for Manufacturing,” issued by the China Intellectual Property
Bureau. On May 8, 2006, we entered into a technology transfer agreement with
Jinan Kelongboao Bio-Tech Co., Ltd. with respect to the technology transfer
and
relating technical service for the AF-01 Anti-viral Aerosol. If our rights
under
this patent and technology transfer agreement are challenged or if we default
on
our obligations under applicable Chinese regulatory requirements, our right
to
use these forms of intellectual property could be revoked and we would no longer
be permitted to use that them in our research, development and sales activities.
Such a revocation or default could have an adverse impact on the growth of
our
business by reducing the introduction of new products, and consequently, sales.
Some
of
our product candidates are still in the research and development stage. The
successful development of new products is uncertain and subject to a number
of
significant risks. Potential products that appear to be promising at early
states of development may not reach the market for a number of reasons,
including but not limited to, the cost and time of development. Potential
products may be found to be ineffective or cause harmful side effects, fail
to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale or be uneconomical or fail to achieve market acceptance. For example,
before marketing of the planned AF-01 Anti-viral Aerosol, there are several
test, trial, evaluation procedures. Our failure to successfully develop and
sell
new products may delay or eliminate future acquisition plans and would most
likely slow our development. Our plans to introduce additional proprietary
products may not be realized as expected, if at all.
There
can
be no assurance that any of our intended products will be successfully developed
or that we will achieve significant revenues from such products even if they
are
successfully developed. Our success is dependent upon our ability to develop
and
market our products on a timely basis. There can be no assurance that we will
be
successful in developing or marketing such products or taking advantage of
the
perceived demand for such products. In addition, there can be no assurance
that
products or technologies developed by others will not render our products or
technologies non-competitive or obsolete. The China bio-fertilizer market is
still in a very early stage and is very fragmented with many potential
customers, but with no single producer or small group of producers dominating
the market. To some extent, however, we also face competition from large
chemical fertilizer manufacturers in China. These chemical fertilizer
manufacturers have provided chemical fertilizers to farmers in China for several
years and customers are more accustomed to using their established products
as
compared to new products.
Failure
to adequately expand to address expanding market opportunities could have a
material adverse effect on our business and results of operations.
We
anticipate that a significant expansion of operations will be required to
address potential market opportunities. There can be no assurances that we
will
expand our operations in a timely or sufficiently large manner to capitalize
on
these market opportunities. The anticipated substantial growth is expected
to
place a significant strain on our managerial, operational and financial
resources and systems. While management believes it must implement, improve
and
effectively use our operational, management, research and development,
marketing, financial and employee training systems to manage anticipated
substantial growth, there can be no assurances that these practices will be
successful.
Our
success depends in part upon our ability to retain and recruit key personnel.
Our
success is highly dependent upon the continued services of our executive
officers, key product development personnel and key scientific personnel. Given
the intense competition for qualified management and product development
personnel in our industry, the loss of the services of any key management or
product development personnel may significantly and detrimentally affect our
business and prospects. We maintain employment agreements with two of our key
personnel in China, Wei Li and Lianjun Luo. We do not have employment agreements
with any other members of management or key personnel. There can be no assurance
that we will be able to retain these personnel, and it may be time-consuming
and
costly to recruit qualified replacement personnel.
We
currently do not have sufficient revenues to support our business activities,
expect operating losses continue, and will require additional financing which
we
may not be able to secure.
We
require substantial working capital to fund our business. In the short term,
we
still need to continue building out our bio-fertilizer manufacturing facility,
adjust our product formula to improve product stability and optimize our product
offerings, expand our sales and marketing efforts in China, expand our
distribution base in China, introduce new veterinary drug products and acquire
a
small or medium sized bio-technology company or a factory with GMP qualification
for this new product, and further invest in our livestock feed joint venture.
In
the long term, we plan to become a commercialization platform for world-class
biotechnological research and development results for applications in
agriculture, natural resources conservation and environmental protection, launch
our products in the United States and other markets, continue our introduction
of new products, create formal strategic alliances with selected United States
companies to co-develop and/or co-market products in the United States and
China, and form an international biotechnology research center in China for
the
research and development of agricultural, environmental and medical
applications.
We
incurred a severe decrease of sales in the second half of 2005 and the first
half of 2006 due to the temporarily closing of our manufacturing facility for
a
planned upgrade and the failure of an anticipated financing that would have
allowed us to construct a facility to produce bacillus fertilizer. We currently
do not have sufficient revenues to support our business activities and we expect
operating losses to continue. We will require additional capital to fund our
operations and finance our research and development activities. Funding, whether
from a public or private offering of debt or equity, a bank loan or a
collaborative agreement, may not be available when needed or on favorable terms.
Further, any significant equity or debt financing will require us to obtain
consents from holders of our 6% Notes, which they may not give. If we are unable
to obtain necessary financing in the amounts and on terms deemed acceptable,
we
will have to limit, delay, scale back or eliminate our research and development
activities or future operations. Any of the foregoing may adversely affect
our
business and cause us to discontinue as a going concern.
Entering
into equity or debt financings could result in dilution to existing
stockholders.
We
will
be required to raise additional capital to fund our operations and finance
our
research and development activities through a public or private offering of
debt
or equity securities. Any equity financing could result in dilution to the
existing stockholders as a direct result of our issuance of additional shares
of
our capital stock. Debt financings will result in interest expense and likely
subject us to negative covenants that would limit our operational flexibility,
and if convertible into equity, could also dilute then-existing stockholders.
The
risks associated with raising capital through collaborations and licensing
agreements could adversely affect our business.
We
will
be required to raise additional capital to fund our operations and finance
our
research and development activities through collaborative and/or licensing
agreements. Under these agreements, we may be subject to various restrictive
covenants which could significantly limit our operating and financial
flexibility and may limit our ability to respond to changes in our business
or
competitive environment. If we are unable to obtain necessary financing in
the
amounts and on terms deemed acceptable, we may have to limit, delay, scale
back
or eliminate our research and development activities or future operations.
Any
of the foregoing may adversely affect our business.
Restrictions
on currency exchange may limit our ability to effectively receive and use our
revenue.
Because
most of our future revenues may be in the form of China Renminbi, any future
restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund our business activities outside China or to make
dividend or other payments in U.S. Dollars. Although the Chinese government
introduced regulations since 1996 to allow greater convertibility of the
Renminbi, for current account transactions significant restrictions still
remain, including primarily the restriction that foreign invested enterprises
may only buy, sell and/or remit foreign currencies at those banks authorized
to
conduct foreign exchange business after providing valid commercial documents.
In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in China, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility
of
the Renminbi, especially with respect to foreign exchange transactions.
We
may
also be subject to foreign exchange risk and foreign ownership restrictions.
The
Chinese government is loosening its control on foreign exchange transactions,
and has steadily appreciated Renminbi since relative to the U.S. dollar since
July 2005. However, there can be no assurance that this policy will continue.
More liberal foreign exchange policies will reduce our foreign exchange risk
by
increasing the liquidity of revenues generated in Renminbi. Fluctuations in
the
exchange rate of the Renminbi relative to the U.S. Dollar could adversely affect
our results of operations by affecting our reported earnings for any given
period. In addition, foreign ownership restrictions could also impact our
ability to expand our business through investment and acquisition opportunities.
If we are unable to pursue such strategic opportunities due to foreign ownership
regulations, the
growth of our business could be limited.
Changes
in China’s political, social, economic or legal systems could materially harm
our business.
All
of
our manufacturing and production and the majority of our sales occur in China.
Consequently, an investment in our common stock may be adversely affected by
the
political, social and economic environment in China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be significantly altered
from time to time.
Our
business and prospects are dependent upon agreements and regulatory approval
with various entities controlled by Chinese governmental instrumentalities.
Historically, our operations in China have received relatively favorable
treatment from these instrumentalities as a result of the Chinese government’s
policies of encouraging economic development and innovation, especially in
underdeveloped regions. However, our operations and prospects would be
materially and adversely affected by a change in China’s economic policies,
which could make it more difficult for us to obtain necessary approvals from
governmental authorities and to obtain economic incentives from governmental
authorities. In addition, if the Chinese government elects not to honor certain
contracts as a result of political change, it might be difficult to enforce
these contracts against such governmental entities in China. In addition, the
legal system of China relating to foreign investments is both new and
continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances.
A
slow-down in the Chinese economy may adversely effect our growth and
profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any recessionary conditions will not have a negative
effect on our business. Several years ago, the Chinese economy experienced
deflation, which may reoccur in the foreseeable future. The performance of
the
Chinese economy overall affects our profitability as expenditures for
agricultural technological products may decrease due to slowing domestic demand.
Any
recurrence of SARS, avian influenza or another widespread public health problem,
could adversely affect our business and results of
operations.
A
renewed
outbreak of SARS, Avian influenza or another widespread public health problem
in
China, where most of our revenue is derived, could have a negative effect on
our
operations. Our operations may be impacted by a number of health-related
factors, including the following: (1) quarantines or closures of some of our
offices and factories which would severely disrupt our operations, (2) the
sickness or death of our key officers and employees, and (3) a general slowdown
in the Chinese economy.
Any
of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our business and results of operations.
Our
ability to generate revenues could suffer if the Chinese ag-biotechnology market
does not develop as anticipated.
The
agriculture-biotechnology market in China, the primary market in which we do
business, is in the early stages of development. While we believe the market
opportunity looks promising, we expect that the market will take several years
to develop. While it is difficult to project exactly how long it will take
to
develop the ag-biotechnology industry in China, we anticipate that it will
take
at least ten years to reach a level of development that is similar to the
current state of the industry in the United States. Successful development
of
the ag-biotechnology market in China depends on the following: (1)
continuation of governmental and consumer trends favoring the use of products
and technologies designed to create sustainable agriculture; (2)
educating the Chinese agricultural community and consumers about the uses of
ag-biotechnology products; and (3)
certain institutional developments such as governmental agricultural subsidies
designed to promote the use of environmentally friendly ag-biotechnological
products.
There
are
no assurances that these trends will continue, governmental subsidies will
be
offered, or that the Chinese agricultural community and consumers will be
successfully educated about the uses of ag-biotechnology products. The conduct
of business in the ag-biotechnology market involves high risks. There can be
no
assurances that the ag-biotechnology market in China will develop sufficiently
to facilitate our profitable operation. While we believe that we will benefit
from our first-mover advantage in a growing market, existing competitors and
new
entrants in the ag-biotechnology market are expected to create fierce
competition in the future as the market evolves. Competitors and new entrants
may introduce new products into the market that may detrimentally affect sales
of our existing products, and consequently our revenues. We intend to fund
operations through sales, debt and equity financings until such time as the
ag-biotechnology market in China is sufficiently developed to support our
profitable operation.
The
admission of the People’s Republic of China into the World Trade Organization
could lead to increased foreign competition for us.
Domestic
competition in the compound fertilizer industry is largely fragmented and
foreign competition is minimal. However, as a result of The People’s Republic of
China becoming a member of the World Trade Organization (“WTO”), import
restrictions on agricultural products are expected to be reduced. With the
lowering of import restrictions and the WTO’s requirement for a reduction of
import tariffs as condition of membership, such reduced import restrictions
and
tariffs for us may result in an increase of foreign products and could in turn
lead to increased competition in the domestic agricultural market.
We
may not be able to adequately protect our intellectual property rights, and
may
be exposed to infringement claims from third parties.
Our
success will depend in part on our ability to obtain patent protection for
our
technology, to preserve our trade secrets and to operate without infringing
on
the proprietary rights of third parties. We have several trademarks registered
in China, which will be protected by the trademark laws in China for ten years
and are renewable at the expiration of the initial ten year term. In addition,
we acquired a China patent in 2004 from the China Agricultural University
entitled “Highly Effective Composite Bacteria for Enhancing Yield and the
Related Methodology for Manufacturing,” issued by China Intellectual Property
Bureau, which has a remaining term of seven years, and entered into a Technology
Transfer Agreement with Jinan Kelongboao Bio-Tech Co., Ltd. (“JKB”) on the
technology transfer and relating technical service for the AF-01 Anti-viral.
We
may
also file patents with the PRC Intellectual Property Bureau and/or the U.S.
Patent and Trademark Office as we deem appropriate, or buy other patents such
as
above said anti-viral aerosol agent patents. There can be no assurance that
the
patents applied for will be reviewed in a timely manner, that any additional
patents will be issued or that any patents issued will afford meaningful
protection against competitors with similar technology or that any patents
issued will not be challenged by third parties. There also can be no assurance
that others will not independently develop similar technologies, duplicate
our
technologies or design around our technologies whether or not patented. There
also can be no assurance that we will have sufficient resources to maintain
a
patent infringement lawsuit should anyone be found or believed to be infringing
our patents. There also can be no assurance that the technology ultimately
used
by us will be covered in any additional patent applications that we may file.
We
do not believe that our technology infringes on the patent rights of third
parties. However, there can be no assurance that certain aspects of our
technology will not be challenged by the holders of other patents or that we
will not be required to license or otherwise acquire from third parties the
right to use additional technology. The failure to overcome such challenges
or
obtain such licenses or rights on acceptable terms could have a material adverse
affect on us, our business, results of operations and financial condition.
The
processes and know-how of importance to our technology are dependent upon the
skills, knowledge and experience of our technical personnel, consultants and
advisors and such skills, knowledge and experience are not patentable. To help
protect our rights, we require employees, significant consultants and advisors
with access to confidential information to enter into confidentiality and
proprietary rights agreements. There can be no assurance, however, that these
agreements will provide adequate protection for our trade secrets, know-how
or
proprietary information in the event of any unauthorized use or disclosure.
There can be no assurance that we will be able to obtain a license for any
technology that we may require to conduct our business or that, if obtainable,
such technology can be licensed at a reasonable cost. The cost of obtaining
and
enforcing patent protection and of protecting proprietary technology may involve
a substantial commitment of our resources. Any such commitment may divert
resources from other areas of our operations. We may be required to license
or
sublicense certain technology or patents in order to commence operations. There
can be no assurance that we will be able to obtain any necessary licenses or
to
do so on satisfactory terms. In addition, we could incur substantial costs
in
defending ourselves against suits brought by other parties for infringement
of
intellectual property rights and there are no assurances that we will have
the
resources to do so.
We
may become involved in intellectual property litigation, the defense of which
could adversely impact our business operations.
Currently
we have one patent in China (Patent Number ZL93 101635.5 and International
patent classification Number A01N 63/00), which covers six different species
of
bacillus which have been tested as bio-fertilizers to enhance yield and plant
health as well as the production methods of the six species. The patent will
expire on February 19, 2013. Pursuant to Technology Transfer Agreement dated
on
May 8, 2006, we will acquire the AF-01 Anti-viral Aerosol
technology.
While
we
have not received any allegations, complaints or threats of litigation relating
to any intellectual property rights, we may, from time to time, become involved
in litigation regarding patent and other intellectual property rights. From
time
to time, we may receive notices from third parties of potential infringement
and
claims of potential infringement. Defending these claims could be costly and
time consuming and would divert the attention of management and key personnel
from other business issues. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims
of
intellectual property infringement also might require us to enter into costly
royalty or license agreements. However, we may be unable to obtain royalty
or
license agreements on terms acceptable to us, or at all. In addition, third
parties may attempt to appropriate the confidential information and proprietary
technologies and processes used in our business, which we may be unable to
prevent and which would harm the businesses and our prospects.
We
face technical risks associated with commercializing our technology which could
have a material adverse impact on our business results and operations.
A
key to
our future success is the ability to produce our planed animal flu disinfector,
livestock feed and bacillus series of products at lower costs than our
competitors. Although we are currently utilizing our proprietary technology
to
produce such products at lower costs, our method for producing such products
on
a commercial basis has only recently begun. Further, although results from
recent independent tests and our early production results have been encouraging,
the ability of our technology to commercially produce such products at
consistent levels is still being evaluated. There can be no assurance that
we
will continue to be able to produce such products at lower costs than our
competitors, nor that our technology will be able to commercially produce such
products at consistent levels.
We
have limited business insurance coverage.
The
insurance industry in China is still in its early stage of development.
Insurance companies in China offer limited business insurance. As a result,
we
do not have any business liability insurance coverage for our operations.
Moreover, while business disruption insurance is available, we have determined
that the risks of disruption and cost of the insurance are such that we do
not
require it at this time. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.
We
have risks associated with recent urea contracts.
On
July
31, 2006, we entered into an irrevocable agreement with Shengkui Technologies,
Inc. to purchase from Shengkui 1,200,000 metric tons of urea conforming to
certain specifications set forth in the agreement. Pursuant to the agreement,
Shengkui is committed to deliver to us the entire stated quantity in multiple
shipments of 25,000 metric tons within 18 months from the date of the agreement.
The
aggregate value of contracted deliveries under the agreement is approximately
US$162,000,000, based on a value of US$135 per metric ton. On
July
28, 2006, we entered into an irrevocable agreement with Hua Yang Roneo
Corporation to sell to Hua Yang Roneo 200,000 metric tons of urea conforming
to
certain specifications set forth in the agreement. Pursuant to the agreement,
we
are committed to deliver to Hua Yang Roneo the entire stated quantity in
multiple shipments of 25,000 metric tons within 18 months from the date of
the
agreement. The aggregate value of contracted deliveries under the agreement
is
approximately US$34,000,000, based on a value of US$170 per metric ton.
The
Shengkui contract may create the potential for significant revenue generation
for the company, but also imposes significant financial risk on us if we are
unable to procure commitments to purchase the remaining 1,000,000 metric tons
of
urea
in
excess of that committed to by Hua Yang Roneo. If we cannot procure such
commitments, and are unable to renegotiate our contract with Shengkui, we may
be
subject to claims by Shengkui for damages due to breach of contract. The
enforcement of such a claim would reduce our net worth, and potentially exceed
our ability to pay, resulting in loss of some or all of our stockholders’
investment in the Company.
Risk
Related to Our Common Stock
If
an active trading market for our securities does not remain in existence, the
market price of our securities may decline and stockholders’ liquidity may be
reduced.
Our
common stock is quoted on the OTC Bulletin Board, however, trading volume is
very limited. We cannot guarantee that trading volumes to sustain a regular
trading market will ever develop. The OTC Bulletin Board is an inter-dealer,
over-the-counter market that provides significantly less liquidity than the
NASD’s automated quotation system. Market prices for our common stock will be
influenced by a number of factors, including: (1)
the
issuance of new equity securities; (2)
changes in interest rates; (3)
competitive developments, including announcements by competitors of new products
or services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments; (4)
variations in quarterly operating results; (5)
change
in financial estimates by securities analysts; (6)
the
depth and liquidity of the market for our common stock; (7)
investor perceptions of our company and the ag-biotechnology industry generally;
and (8)
general
economic and other conditions.
Our
common stock is a “penny stock” as defined in Rules 15g-2 through 15g-6
promulgated under Section 15(g) of the Securities Exchange Act of 1934, as
amended, as it meets the following definitions: (i) the stock trades at a price
less than $5.00 per share; (ii) it is not traded on a “recognized” national
exchange; (iii) it is not quoted on the NASDAQ Stock Market, or even if so,
has
a price less than $5.00 per share; and (iv) is issued by a company with net
tangible assets less than $2.0 million, if in business more than a continuous
three years, or with average revenues of less than $6.0 million for the past
three years. The principal result or effect of being designated a “penny stock”
is that securities broker-dealers cannot recommend the stock but must trade
in
it on an unsolicited basis.
Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the Securities and Exchange Commission require
broker-dealers dealing in penny stocks to provide potential investors with
a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction
in a
penny stock for the investor’s account.
Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any
penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience
as to
be reasonably capable of evaluating the risks of penny stock transactions;
(iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that
it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
Provisions
in our charter and the corporate law of our state of incorporation could deter
or prevent an acquisition or change of control.
Provisions
of our certificate of incorporation may deter or prevent a change in control
of
management. Specifically, our certificate of incorporation allows our Board
of
Directors to issue 20,000,000 shares of preferred stock, in one or more series
and with such rights and preferences including voting rights, without further
stockholder approval. In the event that the Board of Directors designates
additional series of preferred stock with rights and preferences, including
super-majority voting rights, and issues such preferred stock, the preferred
stock could make our acquisition by means of a tender offer, a proxy contest
or
otherwise, more difficult, and could also make the removal of incumbent officers
and directors more difficult. As a result, these provisions may have an
anti-takeover effect. The preferred stock authorized in our certificate of
incorporation may inhibit changes of control.
In
addition, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with some exceptions, that
a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of the person, who is
an
“interested stockholder” for a period of three years from the date that the
person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the Board of Directors of the corporation before
the
person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in
the
same transaction that makes it an interested stockholder, excluding shares
owned
by persons who are both officers and directors of the corporation, and shares
held by some employee stock ownership plans; or (iii) on or after the date
the person becomes an interested stockholder, the business combination is
approved by the corporation’s Board of Directors and by the holders of at least
66 2/3% of the corporation’s outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder. An “interested
stockholder” is defined as any person that is (a) the owner of 15% or more
of the outstanding voting stock of the corporation or (b) an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
the
person is an interested stockholder.
These
provisions could also limit the price that future investors might be willing
to
pay in the future for our common stock. This could have the effect of delaying,
deferring or preventing a change in control of our Company and/or a change
in
the members our Board of Directors. The issuance of preferred stock could also
effectively limit or dilute the voting power of our stockholders. Accordingly,
such provisions of our certificate of incorporation, as amended, may discourage
or prevent an acquisition or disposition of our business that could otherwise
be
in the best interest of our stockholders.
Investors
should not rely on an investment in our common stock for dividend income as
we
do not intend to pay dividends in the foreseeable future.
We
do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We intend to retain any earnings to finance the growth of our business.
We cannot assure you that we will ever pay cash dividends. Therefore, investors
should not rely on an investment in our common stock if they require dividend
income. The only income in the foreseeable future such investors will receive
from an investment in our common stock will come from increases in the market
price of our common stock. There can be no assurances that the market price
of
our common stock will increase or continue to increase, and such increases
will
most likely be uncertain and unpredictable. Whether we pay any cash dividends
in
the future will depend on the financial condition, results of operations and
other factors that the Board of Directors will consider.
It
may be difficult for investors to enforce a service of process or enforce
liabilities against us.
We
are
incorporated in the State of Delaware, and our principal executive offices
are
located in the State of California. However, substantially all our fixed assets
and operations are located in the PRC. In addition, some of our directors and
officers are Chinese citizens and residents. As a result, it may be more
difficult for investors or other third parties to attach our assets in
enforcement of a judgment against us or to enforce liabilities and obligations
against us in certain circumstances. It may also be difficult to enforce service
of process against directors and officers in China.
Risk
Relating to Our Current Financing Arrangement
Future
sales by our stockholders may negatively affect our stock price and our ability
to raise funds in new stock offerings.
Sales
of
our common stock in the public market during and following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in
the
future at a time and price that our management deems acceptable or at all.
As of
August 8, 2006, we had 64,285,930 shares of common stock outstanding, of which
2,846,646 are being registered for resale hereunder and of which approximately
30,120,000of which we estimate have been held more than two years and are freely
tradable under rule 144. We are currently registering up to 48,805,784 shares
of
common stock for resale by the selling stockholders.
There
are a large number of shares underlying our convertible notes and warrants
which
may be available for future sale and the sale of these shares may depress the
market price of our common stock.
As
of
August 8, 2006, we had $857,500
of 6% Notes outstanding that may be converted into an estimated 6,133,763 shares
of common stock and we had outstanding 6% Note Warrants to purchase 12,250,000
shares
of
common stock, based upon current market prices. Additionally, we have an
obligation in the future to sell $1,592,500 of 6% Notes that may be converted
into an estimated 11,391,273 shares of common stock at current market prices.
In
addition to the 6% Notes and Warrants we had outstanding convertible notes,
warrants and other instruments issuable for approximately 11,929,983 shares
as
of August 8, 2006. Of particular risk is the fact that the number of shares
of
common stock issuable upon conversion of the outstanding 6% Notes and certain
of
our other outstanding convertible notes will increase if the market price of
our
stock declines. All of the shares issuable upon conversion of convertible notes
or exercise of our warrants held by the selling stockholders may be sold without
restriction under securities laws. The sale of these shares may adversely affect
the market price of our common stock.
The
continuously adjustable conversion price feature of our 6% notes could require
us to issue a substantially greater number of shares, which will cause dilution
to our existing stockholders.
Our
obligation to issue shares upon conversion of our 6% Notes is essentially
limitless. The following is an example of the amount of shares of our common
stock that are issuable, upon conversion of the principal amount of our 6%
Notes, based on market prices 25%, 50% and 75% below the market price as of
August 8, 2006 of $0.233.
%
Below Market
|
|
Price
Per Share
|
|
Discount
of 40%
|
|
Number
of Shares
|
25%
|
|
0.175
|
|
0.105
|
|
23,333,333
|
50%
|
|
0.070
|
|
0.070
|
|
35,000,000
|
75%
|
|
0.035
|
|
0.035
|
|
70,000,000
|
As
illustrated, the number of shares of common stock issuable upon conversion
of
our 6% Notes will increase if the market price of our stock declines, which
will
cause dilution to our existing stockholders.
The
continuously adjustable conversion price feature of our 6% notes may have a
depressive effect on the price of our common stock.
The
6%
Notes are convertible into shares of our common stock at a 40% discount to
the
trading price of the common stock prior to the conversion. The significant
downward pressure on the price of the common stock as the selling stockholders
convert and sell material amounts of common stock could have an adverse effect
on our stock price. In addition, not only the sale of shares issued upon
conversion or exercise of 6% Notes and 6% Note Warrants, but also the mere
perception that these sales could occur, may adversely affect the market price
of the common stock.
The
issuance of shares upon conversion of the 6% notes and exercise of outstanding
6% note warrants may cause immediate and substantial dilution to our existing
stockholders.
The
issuance of shares upon conversion of the 6% Notes and exercise of the 6% Note
Warrants will result in substantial dilution to the interests of other
stockholders since the selling stockholders may sell the full amount issuable
on
conversion. Although the 6% Note holders may not convert their 6% Notes and/or
exercise their 6% Note Warrants if such conversion or exercise would cause
them
to own more than 4.99% of our outstanding common stock, this restriction does
not prevent them from converting and/or exercising some of their holdings,
selling the underlying shares and then converting the rest of their holdings.
In
this way, 6% Notes holders could sell more than this limit while never holding
more than this limit. There is no upper limit on the number of shares that
may
be issued which will have the effect of further diluting the proportionate
equity interest and voting power of holders of our common stock, including
investors in this offering.
In
the event that our stock price declines, the shares of common stock allocated
for conversion of the 6% notes and registered pursuant to this prospectus may
not be adequate and we may be required to file a subsequent registration
statement covering additional shares and further amend our certificate of
incorporation to increase our authorized shares of common stock. If the shares
we have allocated and are registering herewith are not adequate and we are
required to file an additional registration statement, we may incur substantial
costs in connection therewith.
Based
on
our current market price and the potential decrease in our market price as
a
result of the issuance of shares upon conversion of the 6% Notes, we have made
a
good faith estimate as to the amount of shares of common stock that we are
required to register and allocate for conversion of the 6% Notes. Accordingly,
we have allocated an aggregate of 39,431,331 shares to cover the conversion
of
the 6% Notes. In the event that our stock price decreases, the shares of common
stock we have allocated for conversion of the 6% Notes and are registering
hereunder may not be adequate. If the shares we intend to allocate to the
registration statement are not adequate and we are required to file an
additional registration statement and further amend our Certificate of
Incorporation to increase our authorized shares of common stock, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.
If
we are required for any reason to repay our outstanding 6% notes, we would
be
required to deplete our working capital, if available, or raise additional
funds. Our failure to repay the 6% notes, if required, could result in legal
action against us, which could require the sale of substantial assets.
The
6%
Notes were sold pursuant to a Securities Purchase Agreement we entered into
in
June 2006. The 6% Notes are due and payable, with 6% interest, three years
from
the date of issuance, unless sooner converted into shares of our common stock.
Although we currently have $857,500
of 6% Notes outstanding, the investors are obligated to purchase additional
secured convertible note in the principal amount of $1,592,500. In addition,
any
event of default such as our failure to repay the principal or interest when
due, our failure to issue shares of common stock upon conversion by the holder,
our failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property
or
business, the filing of a money judgment, writ or similar process against our
company in excess of $100,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the 6% Notes, including
a default interest rate of 15% on the outstanding principal balance of the
notes
if the default is not cured with the specified grace period. We anticipate
that
the full amount of the 6% Notes will be converted into shares of our common
stock, in accordance with the terms of the 6% Notes. If we were required to
repay the 6% Notes, we would be required to use our limited working capital
and
raise additional funds. If we were unable to repay the notes when required,
the
6% Note holders could commence legal action against us and foreclose on all
of
our assets to recover the amounts due. Any such action would require us to
curtail or cease operations.
If
an event of default occurs under the securities purchase agreement, 6% notes,
6%
note warrants, security agreement or intellectual property security agreement,
the investors could foreclose on our on our assets.
In
connection with the Securities Purchase Agreement we entered into in June 2006,
we executed a Security
Agreement and an Intellectual Property Security Agreement in favor of the
investors granting them a first priority security interest in all of our goods,
inventory, contractual rights and general intangibles, receivables, documents,
instruments, chattel paper, and intellectual property. The Security Agreements
and Intellectual Property Security Agreements
state
that if an event of default occurs under the Securities Purchase Agreement,
the
6% Notes, the 6% Note Warrants, the Security Agreement or the Intellectual
Property Security Agreement, the investors have the right to take possession
of
the collateral, to operate our business using the collateral, and have the
right
to assign, sell, lease or otherwise dispose of and deliver all or any part
of
the collateral, at public or private sale or otherwise to satisfy our
obligations under these agreements. If the investors were to foreclose on our
assets, investors may lose all or substantially all of their investment.
The
sale of our stock under the Securities Purchase Agreement could encourage short
sales by third parties, which could contribute to the future decline of our
stock price.
In
many
circumstances the provision of financing based on the distribution of
equity/convertible notes for companies that are quoted on the OTC Bulletin
Board
has the potential to cause a significant downward pressure on the price of
common stock. Since the registration statement for this offering is effective,
the number of freely tradable shares will significantly increase, thus there
is
a possibility that the balance of sell side pressure would overwhelmingly exceed
that of the buying side. As a consequence, the price of shares will drop
considerably. This is especially the case if the shares being placed into the
market exceed the market’s ability to take up the increased stock or if we have
not performed in such a manner to show that the equity funds raised will be
used
to grow our business. Such an event could place further downward pressure on
the
price of our common stock. If there are significant short sales of stock, the
price decline that would result from this activity will cause the share price
to
decline more so which in turn may cause long holders of the stock to sell their
shares thereby contributing to sales of stock in the market. If there is an
imbalance on the sell side of the market for the stock, the price will decline
significantly and quickly. It is not possible to predict if the circumstances
exist under which short sales could materialize or to what level our stock
price
could decline. In some companies that have been subjected to short sales the
stock price has dropped to near zero.
We
may not be able to access sufficient funds when needed.
We
are
dependent on external financing to fund our operations. Our financing needs
are
expected to be more than the available proceeds from the sale of the 6% Notes
and warrants. Under the terms of the 6% Notes, we may not incur any debt
(subject to certain exceptions) without obtaining the consent of the 6% Note
holders. Further, the Securities Purchase Agreement for the 6% Notes places
an
obligation on us to present any term sheet received from any potential investor
to the 6% Note holders for their consideration and first right of participation
for as long as the 6% Notes are outstanding. These provisions may be a material
obstacle for future financing. No assurances can be given future financings
will
be available in sufficient amounts or at all when needed.
SPECIAL
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This
prospectus and the documents to which we refer you and incorporate into this
prospectus by reference contain forward-looking statements. In addition, from
time to time, we or our representatives may make forward-looking statements
orally or in writing. We base these forward-looking statements on our
expectations and projections about future events, which we derive from the
information currently available to us. Such forward-looking statements relate
to
future events or our future performance. You can identify forward-looking
statements by those that are not historical in nature, particularly those that
use terminology such as “may,” “will,” “should,” “expects,” “anticipates,”
“contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,”
“potential” or “continue” or the negative of these or similar terms. In
evaluating these forward-looking statements, you should consider various
factors, including those described in this prospectus under the heading “Risk
Factors” beginning on page 4. These and other factors may cause our actual
results to differ materially from any forward-looking statement. Forward-looking
statements are only predictions. The forward-looking events discussed in this
prospectus, the documents to which we refer you and other statements made from
time to time by us or our representatives, may not occur, and actual events
and
results may differ materially and are subject to risks, uncertainties and
assumptions about us.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is listed for trading on the OTC Bulletin Board under the symbol
“KWBT.OB.” Our common stock has been quoted on the OTC Bulletin Board of the
NASD under the symbol “KWBT.OB” since March 30, 2004, and was quoted under the
symbol “TTGM.OB” prior to the merger in March 2004..
During
2005, the market price for our common stock has ranged from $0.059 to $0.007.
From the beginning of 2006 to August, 8, 2006, the market price for our common
stock has ranged from $0.30 to $0.0062.
The
following table sets forth the high and low bid quotations per share of our
common stock as reported on the OTC Bulletin Board for the periods indicated.
The
high
and low bid quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Fiscal
Year 2004
|
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$
|
0.50
|
|
$
|
0.12
|
|
Second
Quarter
|
|
$
|
0.75
|
|
$
|
0.32
|
|
Third
Quarter
|
|
$
|
0.45
|
|
$
|
0.09
|
|
Fourth
Quarter
|
|
$
|
0.10
|
|
$
|
0.06
|
|
Fiscal
Year 2005
|
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$
|
0.059
|
|
$
|
0.0122
|
|
Second
Quarter
|
|
$
|
0.023
|
|
$
|
0.007
|
|
Third
Quarter
|
|
$
|
0.0155
|
|
$
|
0.0102
|
|
Fourth
Quarter
|
|
$
|
0.014
|
|
$
|
0.0091
|
|
Fiscal
Year 2006
|
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$
|
0.085
|
|
$
|
0.0062
|
|
Second
Quarter
|
|
$
|
0.30
|
|
$
|
0.11
|
|
July
1, 2006 through August 8, 2006
|
|
$
|
0.32
|
|
$
|
0.171
|
|
The
foregoing high and low bid quotations take into account the 4-for-1 stock split
of our shares that occurred during the first quarter of 2004, and the 1-for-10
reverse stock split that occurred during the first quarter of 2003.
Holders
As
of
August 8, 2006, there were approximately 423
holders
of record of our common stock.
Dividends
We
have
not paid any dividends on our common shares since our inception and do not
anticipate that dividends will be paid at any time in the immediate future.
We
intend to retain any earnings to finance the growth of the business. Whether
we
pay any cash dividends in the future will depend on the financial conditions,
results of operations and other factors that our board of directors will
consider.
Authorized
and Unissued Stock
The
authorized but unissued shares of our capital stock are available for future
issuance without our stockholders’ approval. These additional shares may be
utilized for a variety of corporate purposes including but not limited to future
public or direct offerings to raise additional capital, corporate acquisitions
and employee incentive plans. In the event of an unsolicited tender offer or
takeover proposal, the increased number of shares could give us greater
opportunity to issue shares to persons who are friendly to management. The
shares might also be available to make acquisitions or enter into other
transactions that might frustrate potential acquirers.
2004
Stock Incentive Plan
On
May
10, 2004, our Board of Directors determined that it was in our best interest
to
provide equity incentives to certain of our directors, officers and employees
and/or consultants and adopted, subject to stockholder approval, our 2004 Stock
Incentive Plan. On June 3, 2004, our stockholders approved the Plan. Under
the
Plan, we may issue to qualifying participants options and stock purchase rights
with respect to up to 1,047,907 shares of our common stock, of which not more
than 350,000 shares may be granted to any participant in any fiscal year. Our
Board of Directors has approved an amendment to the Plan to increase the number
of shares reserved for options and other stock awards under it to 3,047,907,
and
to increase the limit on the number of shares that may be granted to any
participant in a fiscal year to 500,000. The amendment will be effected if
it is
approved by the Company’s stockholders at its annual meeting, which has been
scheduled for September 12, 2006. The proposed amendment is described in the
Company’s preliminary proxy statement, which was filed with the SEC on July 28,
2006.
The
Plan
is a key aspect of our compensation program, designed to attract, retain, and
motivate the highly qualified individuals required for our long-term success.
As
of August 8, 2006, we had not made any grants under our 2004 Stock Plan. Options
issued under 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.
Stock
Option and Stock Appreciation Rights Granted
We
did
not grant any stock options or stock appreciation rights (“SARs”) to any
officers or directors during 2005 and have not granted any in 2006.
Aggregate
Option and SAR Exercises in 2005 and Fiscal Year-End
Values
No
stock
options or SARs were exercised by any officers or directors in 2005 or as of
August 8 in 2006. As of August 8, 2006, none of our named executive officers
held any stock options or SARs. We did not adjust or amend the exercise price
of
any stock options or SARs previously awarded to any named executive officers
during 2005 or through August 8, 2006.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF OPERATION
The
following discussion and analysis of financial condition and results of
operations relates to management’s review of the factors that affected our
financial condition and operating performance for the years ended December
31,
2004 and 2005 and for the quarterly period ended June 30, 2006. The following
discussion and analysis should be read in conjunction with the audited
consolidated financial statements of the Company as of and for the years ended
December 31, 2005 and 2004 and related notes thereto and consolidated financial
statements as of and for the three and six month periods ended June, 30, 2006
and related notes thereto.
In
addition to the historical consolidated financial information, the following
discussion and analysis contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Our
consolidated financial statements including the notes thereto, together with
the
reports thereon of Mao & Company CPAs, Inc. and Grobstein, Horwath &
Company, LLP are presented beginning on page F-1.
Overview
The
Company took its present corporate form in March 2004 when Tintic Gold
Mining Company, a Utah public corporation, merged with and into Kiwa Bio-Tech
Products Group Ltd., a privately-held British Virgin Islands corporation..
For
accounting purposes this transaction was treated as an acquisition of Tintic
Gold Mining Company by Kiwa Bio-Tech Products Group Ltd. in the form of a
reverse triangular merger and a recapitalization of Kiwa Bio-Tech Products
Group
Ltd. and its wholly owned subsidiary, Kiwa Bio-Tech Products (Shandong) Co.,
Ltd. (Kiwa Shandong). On July 22, 2004, we completed our reincorporation in
the
state of Delaware. We
have
established two subsidiaries in China, Kiwa Shandong in 2002 and Tianjin Kiwa
Feed Co., Ltd. in July 2006. The following chart presents the Company’s
structure.
Our
business plan is to develop, manufacture, distribute and market innovative,
cost-effective and environmentally safe bio-technological products for
agriculture markets located primarily in China. The Company’s product
initiatives can be divided into three primary categories - bio-fertilizers
and
related products; biologically enhanced feed for livestock; and an animal flu
disinfector delivered by aerosol. We intend to improve existing products and
to
develop new products. Our activities to date have included conducting research
and development, acquiring and developing intellectual property, raising
capital, developing a manufacturing facility, entering into strategic
relationships, and marketing our products.
Bio-fertilizer.
We have
developed a number of bio-fertilizer and other products for plants and are
developing more. Our first product, a photosynthetic bacteria based biological
catalyst, was introduced in China’s agricultural market in November 2003. We had
significant sales of this product in 2004 and the first half of 2005, but sales
have been significantly reduced since then due to the temporary shutdown of
our
manufacturing facility. In the second half of 2005 we interrupted production
at
our manufacturing facility with the intention of upgrading the it to produce
a
new, potentially lucrative series of bacillus bacteria based fertilizer.
Unfortunately an anticipated financing in the second half of 2005 did not close
which contributed to a shortage of working capital and prevented us from
upgrading our facility as planned. Our sales volume in the second half of 2005
declined severely as a result of the temporarily closing of our manufacturing
facility and the delay of the launching of the new bacillus fertilizer product
as planned. In the first half of 2006, we have begun to increase our production
levels, but the volume of production and sales remains low.
Our
photosynthetic bacteria based fertilizers are protected by trade secret. Our
bacillus bacteria based fertilizers are protected by patents. On April 12,
2004,
we entered into an agreement with China Agricultural University to acquire
patent Number ZL 93101635.5 entitled “Highly Effective Composite Bacteria for
Enhancing Yield and the Related Methodology for Manufacturing,” which was
originally granted by the PRC Intellectual Property Bureau on July 12, 1996.
There are no limitations under this agreement on our exclusive use of the
patent. The patent covers six different species of bacillus which have been
tested as bio-fertilizers to enhance yield and plant health. The production
methods of the six species are also patented. The patent will expire on
February 9, 2013.
We
have
obtained four Fertilizer Registration Certificates from the Chinese government
-
one covering our photosynthetic bacteria fertilizer, and three covering our
bacillus bacteria fertilizer. Some of our products contain ingredients of both
photosynthesis and bacillus bacteria.
Currently
our manufacturing facility has the capability to produce leaf fertilizer
(ZHIGUANGYOU, JINPENGJIABAO, PENDUOSHOU), additional fertilizer (YIMULING,
CHAOFEIBAO, ZHIGUANGYOU) and ground fertilizer (ZHIGUANGYOU II). Currently,
due
to the lack of our own bacillus production capability, we purchased
semi-manufactured bacillus goods and reprocessed our products with other
fertilizer components according to our particular fertilizer prescriptions.
When
we have sufficient resources, we plan is to upgrade our facility to 1,000 metric
tons. These upgrades are expected to cost $300,000.
Livestock
Feed.
On
July
11, 2006, we completed the formation of a joint venture with Tianjin Challenge
Feed Co., Ltd. (“Challenge Feed”) to engage in the developing, manufacturing and
marketing of biologically enhanced feed for livestock. The joint venture will
be
located in Tianjin, China and operated through Tianjin Kiwa Feed Co., Ltd.
(“Kiwa Tianjin”), a jointly-owned limited liability company organized under the
laws of the PRC. Pursuant to a joint venture agreement we agreed to invest
$480,000 in cash for 80% of the equity of Kiwa Tianjin. For 20% equity of Kiwa
Tianjin, Challenge Feed agreed to invest machinery and equipment used in
bio-feedstuff production lines with an agreed value of $120,000. Under the
joint
venture agreement, both we and Challenge Feed are required to make capital
contributions within six months of the date that Kiwa Tianjin receives its
business license. As of July 31, 2006, we had contributed $150,000 of our
committed capital.
Kiwa
Tianjin’s
total
annual production capacity is expected to be approximately 40,000 metric tons
of
concentrated and supportive feeds and it is expected to produce sales starting
in August 2006.
Avian
Flu Disinfector.
On May
8, 2006 we entered into a Technology Transfer Agreement with Jinan Kelongboao
Bio-Tech Co., Ltd. ("JKB"). Pursuant to the agreement, JKB agreed to transfer
its AF-01 Anti-Viral Aerosol technology for veterinary medicine applications
to
the Company. The AF-01 aerosol technology is a broad-spectrum antiviral agent
with potent inhibitory and/or viricidal effects on a variety of RNA viruses
found in animals and fowls such as bird flu. We acquired the exclusive
production right and other related rights to produce an anti-viral aerosol
drug
for use with animals. Our hope is to develop a commercialized product in the
form of spray for applying in fowl houses and other animal holding facilities
to
prevent and cure virus-caused diseases. Before our product is ready for the
market we must receive an appropriate medicine certification from the Chinese
government, acquire a factory with GMP qualification, and pass a number of
other
evaluations and qualifications described in more detail under “BUSINESS”,
below.
Results
of Operations and Financial Resources.
Since
inception of our bio-ag business, we
have
generated approximately $2 million of revenue in total, of which $40 thousand
was generated in 2003, $1.3 million in 2004, $630 thousand in 2005 and $24
thousand in the first half year of 2006, respectively. The marked decrease
in
the second half of 2005 and the first half of 2006 is due to the temporary
closing of our manufacturing facility for a planned upgrade to manufacture
bacillus fertilizer and the failure of an anticipated financing in the second
half of 2005 to finance the upgrade.
We
have
been unprofitable since inception of our bio-ag business, and our liabilities
continue to exceed our assets. As of June, 30, 2006, we had an accumulated
deficit of $6,684,481, among which we incurred net losses of 1,201,906,
$1,327,759 and $2,728,673 for the first half of 2006 and for the fiscal years
ending December 31, 2005 and December 31, 2004, respectively.
Due
to
our limited revenues from sales, 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 first
half of
2006, we
raised $75,633 in debt financing from two related parties, $745,416 for the
issuance of common stock under a stock purchase agreement dated as of March
10,
2006, and $857,500 for the first payments in respect of the issuance of our
6%
Notes, of which the total commitment is $2,450,000
(see further discussion of 6% Notes transaction below and at Note
11
to the Condensed Consolidated Financial Statements as of and for the three
and
six months ended June 30, 2006).
In
the
next six months, we expect to apply the proceeds from the sale of the 6% Notes
as follows: approximately $550,000 of the offering was used or will be to
satisfy fees and expenses of the offering, and to satisfy accounts payable
to
service providers, approximately $400,000 will be applied to our
bio-fertilizer project (research, development and sale of bio-fertilizers),
$480,000 is committed to our Kiwa Tianjin livestock feed joint venture, and
approximately $1,020,000 will be applied to our AF-01 anti-viral aerosol agent
project (research, development and sale of anti-viral aerosol
agents).
These
funds are insufficient to execute our business plan as currently contemplated,
and we will need to seek other sources of funding to sustain our operations.
If
we can achieve the necessary financing, our plan is to continue develop our
manufacturing facility. As of June 30, 2006, we have invested approximately
$1.4
million in the first phase of our manufacturing facility, including $1 million
in buildings and $450,000 in equipment. We estimate that the total investment
for the completion of the construction of our manufacturing facility for
bacillus fertilizer, livestock feed and anti-viral aerosol agent products and
the respective marketing and distribution costs will be approximately $5 million
over an estimated
two-year period.
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.
Major
Customers and Suppliers
Three
customers accounted for 20%, 12% and 10%, respectively, of our net sales for
the
three months ended June 30, 2006 and two other customers accounted for 52%
and
47%, respectively, of our net sales for the three months ended June 30, 2005.
Three customers accounted for 22%, 10% and 9%, respectively, of our net sales
for the six months ended June 30, 2006 and 38%, 32% and 28%, respectively,
of
our net sales for the six months ended June 30, 2005.
Three
suppliers accounted for 31%, 17% and 11%, of our purchases of raw materials
for
the three months ended June 30, 2006 and two suppliers accounted for 53% and
38%, respectively, of our purchases of raw materials for the three months ended
June 30, 2005. Three suppliers accounted for 38%, 19% and 10%, respectively,
of
our purchases of raw materials for the six months ended June 30, 2006 and 48%,
34% and 6%, respectively, of our purchases of raw materials for the six months
ended June 30, 2005. The raw materials used in our products are available from
a
variety of alternative sources.
We
have
two significant customers accounting for 51.3% and 45.3%, of our net sales
for
the fiscal year ended December 31, 2005, respectively. No other single
customer accounted for more than 3% of our revenues. These two customers are
leading agricultural distributors in the eastern and northern regions of China.
During the fiscal year ended December 31, 2005, the total number of
customers increased although the total sales volume dropped. However, our
revenues generated during the fiscal year ended December 31, 2005 were
approximately $630,000, reflecting a decrease of 51.4% compared to the revenues
generated during the fiscal year ended December 31, 2004. This marked decrease
is mainly due to the temporarily closing of our manufacturing facility for
the
planned upgrade and the failure of an anticipated financing in the second half
of 2005.
Three
suppliers accounted for 64.0%, 17.2% and 12.5% of our net purchases for the
fiscal year ended December 31, 2005, respectively. Our total purchases increased
to $606,965 during the fiscal year 2005 compared with $526,897 during the fiscal
year 2004.
Going
Concern
Our
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 consolidated financial
statements do not purport to represent the realizable or settlement values.
As
of June, 30, 2006, we had an accumulated deficit of $6,684,481, among which
we
incurred net losses of 1,201,906, $1,327,759 and $2,728,673 for the first half
of 2006 and for the fiscal years ending December 31, 2005 and December 31,
2004,
respectively.
Our
current liabilities exceeded our current assets by $20,679, $1,006,983 and
$55,630 at June 30, 2006, December 31, 2005 and 2004, respectively. We
had a
stockholders’ deficiency of $149,875 and $564,993 at June,
30,
2006 and December
31, 2005 respectively.
Furthermore,
we are continuing to develop our manufacturing facility and have not generated
significant revenues from our operations. Until sufficient cash flow is
generated from operations, we will have to utilize our capital resources or
external sources of funding to satisfy our working capital needs. Our revenues
from operations were disappointingly low during 2005 and the first half year
of
2006 due to the temporary closing of our manufacturing facility for the planned
upgrade to produce bacillus fertilizer and the failure of an anticipated
financing in the second half of 2005 to fund the upgrade. These
factors create substantial doubt about our ability to continue as a going
concern.
Our
independent auditors have added an explanatory paragraph to their audit opinion
issued in connection with our financial statements for the year ended December
31, 2005, 2004 and 2003, which states that the financial statements raise
substantial doubt as to our ability to continue as a going concern. Our ability
to make operations profitable or obtain additional funding will determine our
ability to continue as a going concern.
In
the
near future, we may 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.
Results
of Operations
Comparison
of Three Months and Six Months Ended June 30, 2006 and
2005
Net
Sales.
Net
sales were $13,351 and $607,611 for the three months ended June 30, 2006 and
2005 respectively, representing a 98% decrease. The primary cause of low sales
in the second quarter of 2006 was the halt in operations at our manufacturing
facility in the second half of 2005 to upgrade the facility to produce bacillus
fertilizer. This upgrade was delayed due to the failure to obtain expected
financing for it in the second half of 2005. We restarted production in the
late
first quarter of 2006 but volume has been low due to a shortage of working
capital. In addition, sales in the first quarter of 2006 were low because the
first quarter is a low season for products in China and net sales for the three
months ended June 30, 2005 were mainly attributable to exports.
Net
sales
were $24,374 and $1,018,303 for the six months ended June 30, 2006 and 2005
respectively, representing a 98% decrease. The primary cause of low sales in
the
first half of 2006 was the halt in operations at our manufacturing facility
in
the second half of 2005 to upgrade the facility to produce bacillus fertilizer.
This upgrade was delayed due to the failure to obtain expected financing for
it
in second half of 2005. We restarted production in the late first quarter of
2006 but volume has been low due to a shortage of working capital. In addition,
sales in the first quarter of 2006 were low because the first quarter is a
low
season for products in China and most of the net sales for the six months ended
June 30, 2005 were attributable to exports.
Cost
Of Sales.
Costs
of sales were $12,545 and $205,945 for the three months ended June 30, 2006
and
2005, respectively. The decrease of $193,400, or 94%, in cost of sales was
primarily due to the reduction of sales volume.
Costs
of
sales were $19,955 and $280,918 for the six months ended June 30, 2006 and
2005,
respectively. The decrease of $260,963, or 93%, in cost of sales was primarily
due to the reduction of sales volume.
Gross
Profit (Loss).
Gross
profit was $806 and $401,666 for the three months ended June 30, 2006 and 2005,
representing a profit margin of 6% and 66% respectively. Gross profit was $4,419
for the six months ended June 30, 2006 representing a profit margin of 18%.
Gross profit was $737,385 for the six months ended June 30, 2005, a profit
margin of 72%.
The
drop
of the gross margin for the three months and six months ended June 30, 2006
was
mainly attributable to fixed overhead while net sales were significantly
decreased during the periods.
Consulting
and Professional Fees.
Consulting and professional fees were $243,914 and $209,824 for the three months
ended June 30, 2006 and 2005 respectively, representing a increase of $34,090
or16%. The increase for the second quarter was mainly due to increase of legal
fee and other fees relating to new financing activities. Consulting and
professional fees were $288,314 and $346,397 for the six months ended June
30,
2006 and 2005, respectively, representing a decrease of $58,083 or 17%. The
higher consulting and professional fees for the first half of 2005 were
primarily attributable to consulting and professional fees paid to Cornell
Capital in connection with the financing completed in January 2005.
Officers’
Compensation.
Officers’ compensation increased by $92,470, or 556%, to $109,102 for the three
months ended June 30, 2006, as compared to $16,632 for the three months ended
June 30, 2005. Officers’ compensation increased by $90,088, or 361%, to $115,070
for the six months ended June 30, 2006, as compared to $24,982 for the six
months ended June 30, 2005. The increase in both periods is primarily due to
the
two employment agreements with two key executives, commencing on January 1,
2006
(See
Note
14 to the Condensed Consolidated Financial Statements as of and for the three
and six months ended June 30, 2006)
and the
fair value of shares as compensation to an employee charged to expenses in
the
second quarter of 2006. Moreover, one of these two key executives, Mr. Wei
Li,
did not earn any compensation during the same periods of 2005.
General
and Administrative.
General
and administrative expense was $99,261 for the three months ended June 30,
2006,
as compared to $114,334 for the same period of 2005, a decrease of $15,073,
or
13%. General and administrative expense was $171,483 for the six months ended
June 30, 2006, as compared to $362,134 for the same period of 2005, a decrease
of $190,651, or 53%. The decrease was primarily due to reduction in our
operations and staff for the three months and six months ended June 30, 2006,
as
compared to the same periods of 2005.
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 increased $7,318, or 640%, to $8,461 for the
three months ended June 30, 2006, as compared to $1,143 for the three months
ended June 30, 2005. The increase is mainly due to the increased field testing
for our new products and the increased depreciation on the research equipment
purchased in the fourth quarter of 2005.
Research
and development expense increased $7,939, or 94%, to $16,362 for the six months
ended June 30, 2006, as compared to $8,423 for the six months ended June 30,
2005. The increase is mainly due to depreciation of new research equipment
purchased in the fourth quarter of 2005.
Depreciation
and Amortization.
Depreciation and amortization, excluding depreciation and amortization included
in cost of sales, increased $15,375, or 71%, to $37,069 for the three months
ended June 30, 2006, as compared to $21,694 for the three months ended June
30,
2005. This increase is mainly the result of partial depreciation of our
facilities recognized as current-period charges because of abnormal lower-volume
production for the three months ended June 30, 2006.
Depreciation
and amortization, excluding depreciation and amortization included in cost
of
sales, increased $19,043, or 37%, to $70,232 for the six months ended June
30,
2006, as compared to $51,189 for the six months ended June 30, 2005. This
increase is mainly the result of an
adjustment
related to the amortization of the patent for fiscal 2004, which was adjusted
in
the first quarter of 2005, and partial depreciation of our facilities recognized
as current-period charges because of abnormal lower-volume production for the
six months ended June 30, 2006.
Changes
in Fair Value of Warrants.
Changes
in fair value of warrants of $53,652 for the six months ended June 30, 2006
is
the result of certain warrants with cashless exercise feature accounted in
accordance with SFAS No.133, “Accounting for Derivative Instruments and Hedging
Activities”.
Interest
Expense, Net.
Interest expense increased $507,290, or 759%, to $574,132 for the three months
ended June 30, 2006, as compared to interest expense of $66,842 for the three
months ended June 30, 2005. Interest expense increased $464,290, or 346%, to
$598,536 for the six months ended June 30, 2006, as compared to interest expense
of $134,246 for the six months ended June 30, 2005. The increase in both periods
is due to the amortization of fair value of warrants and beneficial conversion
feature of convertible notes in the second quarter of 2006.
Comprehensive
Income (Loss).
Comprehensive loss increased by $981,540, or 3,720%, to $1,007,927 for the
three
months ended June 30, 2006, as compared to $26,387 for the comparable period
of
2005. Comprehensive loss increased by $998,159, or 532%, to $1,185,729 for
the
six months ended June 30, 2006, as compared to $187,570 for the comparable
period of 2005.
The
reasons for the increase in comprehensive loss in both periods as compared
to
the comparable periods in 2005 primarily include: (1) gross profit decreased
by
$400,860 and 732,966, respectively; (2) operating expenses increased by $134,181
and decreased by $131,664, respectively; (3) interest increased by $507,290
and
464,290, respectively; (4) there was a currency translation adjustment of $9,556
and $16,197 for the three months and six months ended June 30, 2006,
respectively, when there was not any such adjustment for the comparable periods
of 2005.
Net
Income (Loss) Per Common Share.
Net
loss per common share for the three months ended June 30, 2006 was $0.016
compared to $0.001 for the same period of the prior year. Net loss per common
share for the six months ended June 30, 2006 was $0.020 compared to $0.004
for
the same period of the prior year.
Comparison
of Twelve Months Ended December 31, 2005 and 2004
Net
Sales.
Net
sales were $631,794 and $1,300,251 for the twelve months ended December 31,
2005
and 2004, respectively, representing a decrease of 51.4%. The severe decrease
in
sales revenue is due to the temporary closing of our manufacturing facility
for
the planned upgrade to produce bacillus fertilizer and the failure of an
anticipated financing in the second half of 2005 to fund the upgrade, all of
which resulted in a lack of inventory of both our bacillus fertilizer and our
existing products and the consequent loss of sales. In
addition, we entered into a sales agreement to sell fertilizer products
amounting to $385,530 to a Cambodian customer in March 2005. However, the
customer did not settle the payment in according to the agreement. In November
2005, the customer agreed to return the products to us and thus the previously
recognized revenue is reversed.
Cost
of Sales.
Cost of
sales were $232,692 and $641,236 for the twelve months ended December 31,
2005 and 2004, respectively. The decrease of $408,544 or 63.7% in cost of sales
was primarily due to the
severe decrease of sales.
Gross
Profit.
Gross
profit was $399,102 and $659,015,
respectively, representing a profit margin of 63.2% and 50.7% for the twelve
months ended December 31, 2005 and 2004, respectively. This $259,913
(39.4%) decrease was due to our decreased sales in 2005.
Consulting
and Professional Fees.
Consulting and professional fees were $614,532 and $448,442 for the twelve
months ended December 31, 2005 and 2004, respectively, representing an increase
of $166,090 or 37.0%. Most of these fees are related to fund-raising, investor
relations, public company operations and marketing. The increase in consulting
and professional fees in 2005 is primarily attributable to consulting and
professional fees relating to investor relation service, market consulting
services and financing commissions.
Officers’
Compensation.
Officers’ compensation decreased
by $38,671 or 50% to $38,727 for the twelve months ended December 31, 2005,
as
compared to $77,398 for the comparable period of 2004. The decrease is mainly
due to reduction in compensation to one of our officers.
General
and Administrative.
General
and administrative expenses were $664,637 for the twelve months ended December
31, 2005, as compared to $598,492 for the same period of 2004, an increase
of
$66,145 or 11.1%. The increase is largely attributable to the accrued bad debt
allowance of $82,942 in 2005, and there was no bad debt allowance for the
comparable period in 2004. General and administrative expenses include salaries,
travel and entertainment, rent, office expense, telephone expense and insurance
costs, and other marketing expenses.
Research
and Development.
Research and development expenses decreased by $38,358 to $11,264, or 77.3%,
for
the twelve months ended December 31, 2005, as compared to $49,622 for the twelve
months ended December 31, 2004. This decrease is attributable to the
reduced expenses related to field testing of our products for sales licenses
granted in 2005 and insufficiency of working capital in the second half of
2005.
Depreciation
and Amortization.
Depreciation and amortization, excluding depreciation and amortization included
in cost of production, increased $53,485 to $106,283, or 101.3%, for the twelve
months ended December 31, 2005, as compared to $52,798 for the same period
of 2004. The increase in amount amortized is due to the fact that patents were
amortized for a full year in 2005 but for only four months in 2004.
Reverse
Merger Costs.
The
reverse merger costs are non-recurring and there was no reverse merge cost
in
2005. In 2004, reverse merger costs equaled $1,417,434, which included non-cash
costs relating to the issuance of the warrants and options of $1,114,380 to
consultants.
Net
Interest Income (Expense).
Net
interest expense decreased by $293,834 to $510,079, a 63.5% reduction, for
the
twelve months ended December 31, 2005, as compared to interest expense of
$803,913 for the same period of 2004. The factors associated with this
decrease
include the following: (1) amortization of beneficial conversion feature of
convertible loan charged as interest expenses in 2005 was only $106,666,
representing a decrease of $593,334, compared to $700,000 in 2004; (2)
amortization of fair value of warrants in 2005 was $78,446, representing an
increase of $33,813, compared to $44,633 in 2004; (3) net interest on loan
principal is $108,722, representing an increase of $49,442, compared to $59,280
in 2004.
Other
Income.
We had
other income of $2,416 for the period ended December 31, 2005, generated from
a
grant from the municipal government in Shandong Province of China during 2005.
In 2004, we
had
other income of $60,411 attributable to the forgiveness by Zoucheng Science
& Technology Bureau (Shandong Province, China) of money we borrowed in
2003.
Comprehensive
Income (Loss).
Comprehensive income (loss) decreased by $1,423,272 to ($1,305,401) for the
twelve months ended December 31, 2005, as compared to ($2,728,673) for the
comparable period of 2004. The decrease in comprehensive
loss in the current year as compared to the comparable year 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.
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 our operations and the
execution of our business plan. During the six
months ended
June
30, 2006, we raised $75,633 in debt financing from two related parties, $745,416
for the issuance of 5,000,000 shares of our common stock under a stock purchase
agreement dated as of March 10, 2006, and $700,000 for the first payments in
respect of the issuance of 6% secured convertible notes of which the total
commitment is $2,450,000
(see further discussion of 6% convertible note transaction below and at
Note
11
to our Condensed Consolidated Financial Statements as of and for the three
and
six months ended June 30, 2006).
These
funds are most likely insufficient to execute our business plan and we expect
that we will need to seek other sources of funding to sustain our operations.
Our
total
liabilities exceed our total assets and we continue to suffer losses. In the
second half of 2005 we interrupted production at our manufacturing facility
with
the intention of upgrading the facility to produce a new, potentially lucrative
series of bacillus fertilizer. Unfortunately, an anticipated financing in the
second half of 2005 did not close which contributed to a shortage of working
capital and prevented us from upgrading our facility as planned. Our sales
volume in the second half of 2005 and the first half of 2006 suffered severely
as a result of the temporary closing of our manufacturing facility and the
delay
of the launching of the new bacillus fertilizer product as planned. In the
first
half of 2006, although we have begun to increase our production levels, but
the
volume of production and sales remains low.
In
the
next six months, we expect to apply the proceeds from the sale of the 6% Notes
as follows: approximately $550,000 of the offering was used or will be used
to
satisfy fees and expenses of the offering, and to satisfy accounts payable
to
service providers, approximately $400,000 will be applied to our
bio-fertilizer project (research, development and sale of bio-fertilizers),
$480,000 is committed to our Kiwa Tianjin livestock feed joint venture, and
approximately $1,020,000 will be applied to our AF-01 anti-viral aerosol agent
project (research, development and sale of anti-viral aerosol
agents).
We
qualified for non-interest bearing loans under a Chinese government-sponsored
program to encourage economic development in certain industries and locations
in
China. As of June 30, 2006, we had obtained non-interest bearing loans from
the
Chinese local government of approximately $1,500,000, of which the last payment
was received in the first half of 2005 and $1,438,291 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.
In
November 2002 and June 2003, we borrowed money from a local bank in Beijing
to
finance two automobile purchases. The borrowing was in the form of two loans
for
$38,663 and $25,498, with interest rates of 5.32% and 5.02% per annum,
respectively. The maturity dates are October 2007 and March 2008,
respectively. As of June 30, 2006, the combined outstanding balance of these
loans was $20,967.
On
September 23, 2004, we entered into a convertible loan agreement for $350,000
with interest at 10% per annum. Prior to June 8, 2005, we made payments to
the
lender in the amount of $359,991, which included a penalty interest payment,
and
were released from all liability (See Note 9 to our Condensed Consolidated
Financial Statements).
On
January 4, 2005, we issued a promissory note in the original principal amount
of
$400,000 to Cornell Capital, and received an advance of $400,000. The Cornell
Note bore interest at a rate of 10% per annum and had a term of 290 days. In
2005, we issued an aggregate of 18,362,219 shares of common stock and repaid
$312,865 of the Cornell Note principal. On
March
31, 2006, we settled the Cornell Note with a payment of $110,176, constituting
the outstanding principal amount of $87,135 and accrued interest on the Cornell
Note (See Note 9 to our Condensed Consolidated Financial Statements as of and
for the three and six months ended June 30, 2006).
On
May
30, 2005 and June 16, 2005, we entered into three convertible promissory note
agreements in the aggregate amount of $320,000 with interest at 12% per annum,
and issued 1,600,000 detachable warrants. The 12% Loans were initially due
in
three months from date of draw down, but the final maturity dates were extended
for another three months. We did not pay the 12% Loans by the extended maturity
date. We are now in negotiations with the lenders to extend the payment date.
We
have not received from the lenders any notice of default or demand for immediate
payment. (See Note 9 to
our
Condensed Consolidated Financial Statements as of and for the three and six
months ended June 30, 2006).
We
borrowed $488,501 and $75,663 from two related parties respectively for the
fiscal year 2005 and the first half of 2006, and also repaid $163, 741 and
$420,641 to these two related parties respectively for the same periods. As
of
June 30, 2006, the outstanding balance due to these two related parties is
$107,842 (See Note 8 to our Condensed Consolidated Financial Statements as
of
and for the three and six months ended June 30, 2006).
On
March
10, 2006, we entered into a stock purchase agreement with two Chinese investors
to issue 5,000,000 shares of our common stock in a private placement for RMB
6,000,0000 (approximately $750,000). As of June 30, 2006, we had received
the proceeds in full and issued the 5,000,000 shares of stock to the
investors.
On
June
29, 2006, we entered into a securities purchase agreement with six institutional
investors for the issuance and sale of 6% secured convertible notes (“6% Notes”)
in the aggregate principal amount of $2,450,000. The 6% Notes are due in three
years, are convertible into shares of our common stock, and were sold with
attached warrants to purchase 12,250,000 shares of our common stock. The closing
for the sale of the 6% Notes is to occur in three stages. A first sale of 6%
Notes with a principal amount of $857,500 closed on June 29, 2006. The second
closing of the sale of 6% Notes with a principal amount of $735,000 are to
be
issued and sold within two days of the filing of a registration statement
covering the common stock issuable upon conversion of the notes, and additional
6% Notes with a principal amount of $857,500 are to be issued and sold within
two days of the registration statement being declared effective. As of June
30,
2006 and July 31, 2006, we had received $700,000 and $857,500, respectively,
which represents 82% and 100% of the first closing of 6% Notes.
We
do not
expect these amounts to be sufficient to allow us to implement our business
plan. During the second half of 2006, we may need to raise additional capital
through the issuance of debt or equity securities to fund our operations and
the
execution of our planned business plan, although there can be no assurances
that
we will be successful in this regard. There can be no assurances that we will
be
able to obtain sufficient funds to allow us to continue operations and to
develop our facilities and products as scheduled.
At
June
30, 2006 and December 31, 2005, we had cash of $673,371 and $14,576,
respectively. At June 30, 2006 and December 31, 2005, our net working capital
(deficiency) was $(20,679) and $(1,006,983), respectively, reflecting current
ratios of 0.99:1 and 0.55:1, respectively, as of such dates.
During
the six months ended June 30, 2006, our operations utilized cash of $365,351
as
compared with $113,245 provided by operations for the six months ended June
30,
2005.
During
the six months ended June 30, 2006, no cash flow occurred from investing
activities, as compared to $6,749 utilized for the purchase of equipment for
the
six months ended June 30, 2005.
During
the six months ended June 30, 2006, we generated $1,006,699 from financing
activities, consisting of the proceeds from issuance of common stock of
$745,416, issuance of the Convertible Notes of $700,000 and several advances
from related parties of $75,633, offset by the repayments of amounts due to
related parties of $420,641, the Cornell Note of $87,135, and long-term
borrowings of $6,574. During the six months ended June 30, 2005, we generated
$534,507 from financing activities, consisting of the proceeds from the Cornell
Note of $400,000, the 12% Loan of $320,000, advances from related parties of
$251,529 and offset by the repayments of short-term loan of $50,000, the 10%
Loan of $350,000, amounts due to related parties of $30,634 and long-term
borrowings of $6,388.
In
July
2006, we established the Kiwa Tianjin joint venture discussed above, which
requires our capital contribution of $480,000 in six months. As of July 31,
we
had
contributed $150,000 of its required capital contribution.
If
we can
achieve the necessary financing, our plan is to continue to develop our
manufacturing facility. As of June 30, 2006, we have invested approximately
$1.4
million in the first phase of our manufacturing facility, including $1 million
in buildings and $450,000 in equipment. We estimate that the total investment
for the completion of the construction of our manufacturing facility for
bacillus fertilizer, livestock feed and anti-viral aerosol agent products and
the respective marketing and distribution costs will be approximately $5 million
over an estimated
two-year period.
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.
Critical
Accounting Policies and Estimates
We
prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. 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 its customers and intends to establish
an
allowance for doubtful accounts when amounts are not considered fully
collectable. According to our credit policy, we generally
provides
100% bad debt provision for the amounts outstanding over 365 days after the
deduction of the amount subsequently settled after the balance sheet date,
which
management believes is consistent with industry practice in the China region.
Terms
of
our sales vary from cash on delivery to 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. The
agriculture-biotechnology market in China is in the early stages of development
and we are still in the process of exploring the new market. We may also
distribute our bio-products to special wholesalers with favorable payment terms
with a focus on the future. We maintain a policy that all sales are final and
we
do not allow returns. However, we will allow customers to exchange defective
products for new products within 90 days of delivery. In the event of any
exchange, the customers pay all transportation expenses.
As
of
June 30, 2006, there was $790,479 in accounts receivables over 365 days old.
However, we have established repayment schedules with certain major customers
in
April 2006 to extend their credit periods. These customers are currently making
repayment on schedule. Subsequent to the balance sheet date of June, 30, 2006,
RMB3,000,000 (approximately $375,000) was collected against those receivables.
We expect that the remaining uncollected balance of those receivables can be
collected according to the agreed repayment schedules.
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 was
no
obsolete inventory as of June 30, 2006.
Revenue
Recognition
We
recognize revenue in accordance with SAB No. 101, “Revenue Recognition in
Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”. Sales
represent the invoiced value of goods, net of value added tax, supplied to
customers, and are recognized upon delivery of goods and passage of title.
In
general we maintain a policy that all sales are final and we do not allow
returns. As discussed above management approved an isolated return of an export
sale to a Cambodia distributor because the distributor was experiencing cash
flow difficulties. Management continues to evaluate and estimate expected
returns as of the time of sale. If a return is estimated, a reserve account
is
recorded to offset sales. As at June 30, 2006, we have determined that there
are
no significant estimated returns.
Impairment
of Assets
Our
long-lived assets consist of property and equipment assets and intangible
assets. As of June 30, 2006, the net value of property, plant and equipment
assets and intangible assets was $1,396,137 and $385,164, respectively, which
represented approximately 35.5% and 9.8% 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.
With
production resuming in the first quarter of 2006, we have determined that there
was no impairment to our current production facilities as of June 30,
2006.
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.
Trends
and Uncertainties in Regulation and Government Policy in
China
Agricultural
Policy Changes in China
Economic
growth in China has averaged 9½ percent over the past two decades and seems
likely to continue at that pace for some time. However China now faces an
imbalance between urban and rural environments as well as the manufacturing
and
agricultural industries. Since 2004, the Chinese central government has adopted
a series of effective policies to promote the development of agriculture. On
February 10, 2004, the Chinese central government issued a new policy to correct
the imbalance by offering favorable taxation of agricultural products. On
December 29, 2005, the Standing Committee of the National People’s Congress
decided to abolish the agricultural tax starting January 1, 2006. The abolition
of the agricultural tax would tend to increase incomes of farmers and ease
their
financial burdens. Three was a series of policies adopted by the State Council
on February 9, 2006 that are favorable to agriculture including (1) Decision
of the State Council on Implementing the Interim Regulation on Promoting the
Adjustment of Industrial Structure
promulgated by the State Council on December 7, 2005, (2) Guiding
Catalogue for the Adjustment of Industrial Structure
issued
by the State Council, the National Development and Reform Commission on December
7, 2005, and (3) Outline
of National Medium and Long-Term Plans for Science & Technology Development
(2006-2020).
We
believe we will benefit from these favorable policies as farmers can be expected
to retain more of their income and will most likely 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
The
volatility in the inflation rate in China in the past decade (almost eight
times
that in the United States and four times that in Western Europe) suggests that
China’s domestic monetary policy has not always been successful in maintaining
low and stable inflation. In recent years, China has been adopting restricted
or
prudent fiscal and monetary policies to fight potential inflation. However,
the
agricultural area has been one of a few industries which are expected to
continue to enjoy expansionary policy. We have previously benefited from these
policies, as evidenced by our receipt of non-interest bearing loans of over
$1.5
million from the Chinese government so far. As the government further increases
investment in the agricultural area, we believe that similar loans or other
favorable financing programs will be made 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 made
available in the future, we may have to borrow on terms which are less favorable
to us, or we may not be able to borrow additional funds at all on terms which
are acceptable.
Foreign
Investment Policy Changes
The
Chinese government is considering changes to its current policy that provide
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. This change will result in greater liquidity for revenues generated
in RMB. We would benefit by having easier access to and greater flexibility
with
capital generated in and held in the form of RMB. The majority of our assets
are
located in China and most of our earnings are currently generated in China,
and
are therefore denominated in RMB. Changes in the RMB-U.S. Dollar exchange rate
will impact our reported results of operations and financial condition. In
the
event that RMB appreciates over the next year as compared to the U.S. Dollar,
our earnings will benefit from the appreciation of the RMB. However, if we
have
to use U.S. Dollars to invest in our Chinese operations, we will suffer from
the
depreciation of U.S. Dollars against the RMB. On the other hand, if the value
of
the RMB were to depreciate compared to the U.S. Dollar, then our reported
earnings and financial condition would be adversely affected when converted
to
U.S. Dollars.
On
July
21, 2005, the People’s Bank of China announced it would appreciate the RMB,
increasing the RMB-U.S. Dollar exchange rate from approximately
US$ 1.00 = RMB 8.28 to approximately US$ 1.00 = RMB 8.11. So
far
the bank has continued to gradually appreciate the RMB - the exchange rate
of
U.S. Dollar against RMB on June 30, 2006 was 1:7.9956.
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 U.S. Dollar would
adversely affect our financial performance when measured in U.S. Dollars.
Although prior to 1994 the RMB experienced significant devaluation against
the
U.S. Dollar, the RMB has remained fairly stable since then. In addition, the
RMB
is not freely convertible into foreign currencies, and the ability to convert
the RMB is subject to the availability of foreign currencies. Effective
December 1, 1998, all foreign exchange transactions involving the RMB must
take place through authorized banks or financial institutions in China at the
prevailing exchange rates quoted by the People’s Bank of China. The exchange
rate was approximately $1.00 to RMB 8.28 at December 31, 2004. On July 21,
2005, the People’s Bank of China increased the US$-RMB exchange rate to
approximately
US$ 1.00 = RMB 8.11. So far the Bank continues to gradually increase the
exchange rate. On June 30, 2006 it was US$ 1.00 = RMB 7.9956. 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 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
- We
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 $5,107. Rent expense
under the operating leases for the six months ended June 30, 2006 and 2005
was
$30,642 and $18,647, respectively.
We
previously leased an office in the United States under a commercial lease
agreement with China Star with an aggregate monthly lease payment of
approximately $2,560. The lease expired in June 2005 and 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 the six months ended June 30, 2006 and 2005 was $6,000 and
$15,360, respectively.
We
leased
an office in the United States under a commercial lease agreement with a third
party expiring in June 2008 with an aggregate monthly lease payment of
approximately $1,000.
Lease
commitments under the foregoing lease agreements are as follows:
Fiscal
year
|
|
Amount
|
|
Remaining
6months of 2006
|
|
$
|
36,642
|
|
2007
|
|
|
73,284
|
|
2008
|
|
|
21,321
|
|
Total
|
|
$
|
101,247
|
|
Technology
acquisition-On
May 8,
2006, we entered into a Technology Transfer Agreement with Jinan Kelongboao
Bio-Tech Co. Ltd. ("JKB"). Pursuant to the Agreement, JKB agreed to transfer
its
AF-01 Anti-viral Aerosol technology for veterinary medicines to the Company.
Pursuant to the agreement we will pay JKB a transfer fee of RMB 10 million
(approximately $1.247 million), of which RMB 6 million will be paid in cash
and
RMB 4 million will be paid in stock. The cash portion will be paid in
installments, the first RMB 3 million installment was set for May 23, 2006
initially, and both parties have agreed to extend it to August 31, 2006. Three
other installments of RMB 1 million are due upon the achievement of certain
milestones, the last milestone being the issuance by the PRC Ministry of
Agriculture of a new medicine certificate in respect of the technology. The
RMB
4 million stock payment will be due 90 days after the AF-01 technology is
approved by the appropriate PRC department for use as a livestock disinfector
for preventing bird flu.
Investment
in manufacturing and research facilities in Zoucheng, Shandong Province in
China
-
According
to the Project Agreement with Zoucheng Municipal Government in 2002, the Company
committed to invest approximately $18 million to $24 million for developing
the
manufacturing and research facilities in Zoucheng, Shandong Province. As of
June
30, 2006, 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.
Investment
commitment in Kiwa Tianjin -
In July
2006, the Company established a joint venture, Tianjin Kiwa Feed Co., Ltd (“Kiwa
Tianjin”), which committed us to invest $480,000 in six months for 80% of the
equity in the joint venture. As of August 8, 2006, we have contributed $150,000
of our capital commitment.
Off-Balance
Sheet Arrangements
At
June
30, 2006 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.
Recent
Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections”. This statement requires entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods’
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, “Accounting Changes”, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period’s net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
“retrospective application” of an accounting principle and the “restatement” of
financial statements to reflect the correction of an error. SFAS No. 154 applies
to accounting changes and error corrections that are made in fiscal years
beginning after December 15, 2005. Management believes the adoption of this
statement will not have an immediate material impact on the consolidated
financial statements of the Company.
In
March
2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for
Conditional Asset Retirement Obligations”. FIN 47 clarifies that the term
“conditional asset retirement obligation,” which as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations”, refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within
the
control of the entity. The entity must record a liability for a “conditional”
asset retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Management believes the adoption of this statement
does
not have an immediate material impact on the consolidated financial statements
of the Company.
The
adoption of EITF Issue No. 03-13, “Applying the Conditions in Paragraph 42
of FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in Determining Whether to Report Discontinued Operations” in
the first quarter of 2005 did not have a material impact on the Company’s
results of operations and financial condition.
In
October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to
the Application of Grant Date as Defined in FASB Statement No. 123(R)”,
which provides clarification of the concept of mutual understanding between
employer and employee with respect to the grant date of a share-based payment
award. This FSP provides that a mutual understanding of the key terms and
conditions of an award shall be presumed to exist on the date the award is
approved by management if the recipient does not have the ability to negotiate
the key terms and conditions of the award and those key terms and conditions
will be communicated to the individual recipient within a relatively short
time
period after the date of approval. This guidance shall be applied upon initial
adoption of SFAS 123R. The Company does not expect the adoption of the FSP
will
have a material impact on its consolidated results of operations and financial
condition.
In
November 2005, the FASB issued FSP FAS 123(R)-3, “Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards”, which
provides a practical transition election related to accounting for the tax
effects of share-based payment awards to employees. An entity must follow either
the transition guidance for the APIC pool in SFAS 123R or the alternative
transition method described in the FSP. The alternative method comprises a
computational component that establishes a beginning balance of the APIC pool
and a simplified method to determine the subsequent impact on the APIC pool
of
awards that are fully vested and outstanding upon the adoption of SFAS 123R.
The
impact on the APIC pool of awards partially vested upon, or granted after,
the
adoption of SFAS 123R should be determined in accordance with the guidance
in
that statement. The FSP was effective November 10, 2005. As described in
the FSP, an entity will be permitted to take up to one year to determine its
transition alternatives to make its one-time election. The Company does not
expect the adoption of the FSP will have a material impact on its consolidated
results of operations and financial condition.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140.”
SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, to permit fair value remeasurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on
a
fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, to allow a qualifying
special-purpose entity (“SPE”) to hold a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 applies to all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006, with earlier application allowed. The Company does not
expect the adoption of SFAS No. 155 to have a material impact on its
consolidated results of operations and financial condition.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets-an amendment of FASB Statement No. 140." SFAS No. 156 requires that
all
separately recognized servicing rights be initially measured at fair value,
if
practicable. In addition, this Statement permits an entity to choose between
two
measurement methods (amortization method or fair value measurement method)
for
each class of separately recognized servicing assets and liabilities. This
new
accounting standard is effective January 1, 2007. The adoption of SFAS 156
is
expected to have no material impact on our financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.
BUSINESS
Our
Company
We
are
the result of a reverse merger completed in March 2004 between Tintic Gold
Mining Company, a corporation originally incorporated in the state of Utah
on
June 14, 1933 to perform mining operations in Utah, and Kiwa Bio-Tech Products
Group Ltd., a company originally organized under the laws of the British Virgin
Islands on June 5, 2002. The merger resulted in a change of control of Tintic
Gold Mining Company, with former Kiwa Bio-Tech Products Group Ltd. stockholders
owning approximately 89% of Tintic Gold Mining Company on a fully diluted basis.
Subsequent to the merger, Tintic Gold Mining Company changed its name to Kiwa
Bio-Tech Products Group Corporation. On July 22, 2004, we completed our
reincorporation in the State of Delaware. On July 22, 2004, we completed the
reincorporation in the state of Delaware.
We
have
established two subsidiaries in China - Kiwa SD in 2002 and Tianjin Kiwa Feed
Co., Ltd. in July 2006. The following chart summarizes our
structure.
We
develop, manufacture, distribute and market innovative, cost-effective and
environmentally safe bio-technological products for agriculture. Our main
product groups are bio-fertilizer, biologically enhanced livestock feed, and
animal drugs and disinfectants. Our products are designed to enhance the quality
of human life by increasing the value, quality and productivity of crops and
decreasing the negative environmental impact of chemicals and other
wastes.
Bio-fertilizer.
We have
developed a number of bio-fertilizer and other products for plants and are
developing more. In 2002, Kiwa Bio-Tech Products Group Ltd. chartered Kiwa
Bio-Tech Products (Shandong) Co. Ltd. (“Kiwa Shandong”), 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. In October 2003, Kiwa Bio-Tech Products Group Ltd. completed the first
phase of the construction of its state-of-the-art manufacturing facility in
Shandong Province, China. In November 2003, Kiwa Bio-Tech Products Group Ltd.
began shipping its first commercial product, a photosynthetic bacteria-based
bio-fertilizer, to the agricultural market in China.
Sales
in
the second half of 2005 and the first half of 2006 were disappointingly low
largely due to (1) a lack of inventory of our established product -
Photosynthesis Biological Catalyst- caused by a halt in production at our
manufacturing facility in the second half of 2005, and (2) an inability to
produce a new product - bacillus bacteria-based fertilizer, caused largely
by
the failure of an anticipated financing. The halt in manufacturing at our
facility was related to the effort to develop bacillus fertilizer, a solid
form
product that decomposes phosphate, potassium and other elements within the
soil
which compliments our existing products. The development of bacillus fertilizer
was in furtherance of our plan to develop a full product line of bio-tech
products for agriculture. To produce bacillus fertilizer, it was necessary
for
us to upgrade our existing manufacturing facilities and to secure a source
of
raw materials. In the third quarter of 2005, we believed we had the financing
in
place to fund the facility upgrade. In anticipation of that, we used our working
capital to purchase raw materials for producing bacillus fertilizer. In
addition, in the third quarter of 2005 we closed our existing manufacturing
facility in Shangdong for the upgrade. During the period of closure we were
not
able to produce inventory for Photosynthesis Biological Catalyst or any of
our
other existing products. In the fourth quarter, the anticipated financing was
not realized. As a consequence we were left with reduced inventory of our
existing products and had used up most of our working capital on raw materials
for bacillus fertilizer. This caused us to largely miss the peak sales season
in
2005. In the first half 2006, we resumed production at our manufacturing
facilities and consummated new financing arrangements.
Livestock
Feed.
On
July
11, 2006, we completed the formation of a joint venture to engage in the
developing, manufacturing and marketing of biologically enhanced feed for
livestock with Tianjin Challenge Feed Co., Ltd. (“Challenge Feed”). The joint
venture will be located in Tianjin, China and operated through Kiwa Feed o.,
Ltd. (“Kiwa Tianjin”), a jointly-owned limited liability company organized under
the laws of the PRC. Pursuant to a joint venture agreement we agreed to invest
$480,000 in cash for 80% of the equity of Kiwa Tianjin. For 20% equity of Kiwa
Tianjin, Challenge Feed agreed to invest machinery and equipment used in
bio-feedstuff production lines with an agreed value of $120,000. Under the
joint
venture agreement, both we and Challenge Feed are required to make our capital
contributions within six months of the date that Kiwa Tianjin receives its
business license. As of August 8, 2006, we had contributed $150,000 of our
capital contribution commitment.
Kiwa
Tianjin’s total annual production capacity is expected to be approximately
40,000 metric tons of concentrated and supportive feeds and it is expected
to
produce sales starting in August 2006.
Avian
Flu Disinfector.
On May
8, 2006 we entered into a Technology Transfer Agreement with Jinan Kelongboao
Bio-Tech Co. Ltd. ("JKB"). Pursuant to the agreement, JKB agreed to transfer
its
AF-01 Anti-Viral Aerosol technology for veterinary medicine applications to
the
Company. The AF-01 aerosol technology is a broad-spectrum antiviral agent with
potent inhibitory and/or viricidal effects on a variety of RNA viruses found
in
animals and fowls such as bird flu. We acquired the exclusive production right
and other related rights to produce an anti-viral aerosol drug for use with
animals. Our hope is to develop a commercialized product in the form of spray
for applying in fowl houses and other animal holding facilities to prevent
and
cure virus-caused diseases.
We
are
now in the process of applying for a new animal medicine certification for
the
AF-01 technology. Before marketing this product, we will need to: (1)
successfully complete a safety evaluation, pre-clinical study, pharmacological
and toxicological test, clinical trial report, stability test report,
environmental impact report and other obligatory experiments by statutory
authorities; (2) acquire a company or factory with GMP qualification and submit
the new drug application in the name of the acquired company to the
Administrative Department for Veterinary Medicine of State Council (the
“Administrative Department”); (3) pass an evaluation by the veterinary drug
evaluation institution established by the Administrative Department and pass
a
sample quality retrial by a test institution established by the Administrative
Department after the application is accepted; (4) acquire a Administrative
Certificate of New Veterinary Drug from the Administrative Department compliant
with its drug qualification standards; and (5) pass an evaluation of
manufacturing requirements by the Administrative Department and procure a
Veterinary Drug Manufacturing License.
Intellectual
Property and Product Lines
Our
goal
is to build a platform to commercialize bio-technological research and
development results for applications in agriculture and environmental
protection. In this respect, we are working on developing cooperative research
relationships with several universities and institutions in China. When our
liquidity position improves, we also intend to continue to acquire technologies
to reduce research and development costs and shorten commercialization cycles.
Bio-fertilizer
products
We
have
developed four series of bio-fertilizer products with photosynthetic bacteria
and/or bacillus SPP bacteria as core ingredients. Bacillus ssp is one type
of
species that interacts with plants and promotes biological processes. It is
highly effectively on promoting plant growth, enhancing yield, improving quality
and elevating resistances. Photosynthetic bacteria are a group of green and
purple bacteria; energy for growth is derived from sunlight; carbon is derived
from carbon dioxide or organic carbon. Bacterial photosynthesis differs from
green plant photosynthesis in that bacterial photosynthesis occurs in an
anaerobic environment and does not produce oxygen. Photosynthetic bacteria
can
help enhance the photosynthetic capacity of green plants by increasing the
utilization of sunlight. This helps keep the photosynthetic process at a
vigorous level, enhancing the capacity of plants to transform inorganic
materials to organic products. It greatly boosts overall plant health and the
productivity of agricultural products. We have mastered the production process
to mass-produce anoxygenic photosynthetic bacteria for agriculture.
Our
photosynthetic bacteria based fertilizers are protected by trade secret. Our
bacillus bacteria based fertilizers are protected by patents. On April 12,
2004,
we entered into an agreement with China Agricultural University to acquire
from
the university Chinese patent no. ZL 93101635.5 entitled “Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing”. The aggregate purchase consideration under the agreement was
$480,411, of which $30,205 was paid in cash at signing of the agreement and
an
additional $30,206 was paid in December 2004. For the balance of the
consideration for the purchase, we issued 1,000,000 shares of our common stock
to China Agricultural University in September 2004, valued at $0.42 per share
based on its fair market value on July 20, 2004 (aggregate value of $420,000),
the date when the transfer of the patent was approved.
The
patent acquired from China Agricultural University covers six different species
of bacillus which have been tested as bio-fertilizers to enhance yield and
plant
health. The production methods of the six species are also patented. The patent
will expire on February 9, 2013. In 2006, we plan to utilize the patent to
develop a new series of products that will complement our current products
and
create a comprehensive product pipeline. There are no limitations under this
agreement on our exclusive use of the patent. Pursuant to our agreement with
China Agricultural University, the university agreed to provide research and
technology support services at no additional cost to us in the event we decide
to use the patent to produce commercial products. These research and technology
support services include: (1) furnishing faculty or graduate-level researchers
to help bacteria culturing, sampling, testing, trial production and formula
adjustment; (2) providing production technology and procedures to turn the
products into powder form while keeping live required bacteria in the products;
(3) establishing quality standards and quality control systems; (4) providing
testing and research support for us to obtain necessary sale permits from the
Chinese government; and (5) cooperation in developing derivative products.
China
Agricultural University has been providing some of these services since August
2004. If the University fails to provide any of these support services, our
remedy against the university would be to bring a breach of contract suit for
damages.
We
have
obtained four fertilizer registration certificates from the Chinese government
-
one covering our photosynthetic bacteria fertilizer, and three covering our
bacillus bacteria fertilizer. Some of our products contains ingredients of
both
photosynthesis and bacillus bacteria. The
four
registration certificates are: (1) Microorganism Microbial Inoculum Fertilizer
Registration Certificate issued by Ministry of Agriculture; (2) Amino Acid
Foliar Fomular Fertilizer Registration Certificate issued by Ministry of
Agriculture; (3) Organic Fertilizer Registration Certificate issued by
Agriculture Department of Shandong Province, and (4) Water-run Fertilizer
Registration Certificate issued by Agriculture Department of Shandong Province.
Protected by these four Fertilizer Registration Certificates and two trademarks
- “ZHIGUANGYOU” and “PUGUANGFU” - we have developed four series of
bio-fertilizer products with photosynthetic bacteria and/or bacillus SPP as
core
ingredients. In 2005 and the first half of 2006, lacking our own bacillus
production capability, we purchased semi-manufactured bacillus goods and
reprocessed our products with other fertilizer components according to our
particular fertilizer prescriptions.
Our
plan
to develop our own bacillus fertilizer production facility is part of our
overall plan to develop a portfolio of products to serve the needs of
agriculture customers through the various crops seasons. We believe that
bacillus fertilizer will increase our market share and competitiveness. In
addition, we believe greater product variety will increase sales in the long
run
and lower average fixed production costs and marketing costs.
Livestock
feed products
We
have
developed our own special concentrated and supportive feeds prescriptions,
mainly for fowl, fish and pigs. We add distilled materials from animal blood,
bacillus ssp, photosynthetic bacteria or other products to standard livestock
feed to improve quality and function. Our feed products can enhance digestion
and inhibit disease in animals, in some uses functioning as a substitute for
antibiotic additives. Currently we have different feed descriptions for fowl,
fish and pigs at different growth stages. We expect to develop products for
other animals such as sheep and cattle.
On
July
11, 2006, the Company and Tianjin Challenge Feed Co., Ltd. (“Challenge Feed”)
completed the formation of a joint venture to engage in the developing,
manufacturing and marketing of our livestock feed products. The joint venture
will be located in Tianjin, China and operated through Tianjin Kiwa Feed Co.,
Ltd, (“Kiwa Tianjin”), a jointly-owned limited liability company organized under
the laws of the PRC. Pursuant to a joint venture agreement we agreed to invest
$480,000 in cash for 80% of the equity of Kiwa Tianjin. For 20% equity of Kiwa
Tianjin, Challenge Feed agreed to invest machinery and equipment used in
bio-feedstuff production lines with an agreed value of $120,000. Under the
joint
venture agreement, both we and Challenge Feed are required to make our capital
contributions within six months of the date that Kiwa Tianjin receives its
business license. As of August 8, 2006, we had contributed $150,000 of our
capital contribution commitment. Kiwa Tianjin's
total
annual production capacity is expected to be approximately 40,000 metric tons
of
concentrated and supportive feeds The
first
batch of feed product is expected to be shipped to market in August 2006 and
we
expect to achieve revenue from sales soon thereafter.
AF-01
anti-viral
aerosol
AF-01
anti-viral aerosol is a broad-spectrum antiviral agent with potent inhibitory
and/or viricidal effects on a variety of RNA viruses found in fowl and other
animals, initially discovered and developed by the Institute of Medicinal
Biotechnology, Chinese Academy of Medical Sciences (“IMB”). Pursuant to a
related technical appraisal report certified by the Ministry of Health of the
PRC, the current owners of technology rights are IMB and its medium test center,
Jinan Kelongboao Bio-Tech Co. Ltd. (“JKB”). IMB designated JKB as its custodian
on to apply and dispose all rights of the AF-01 technology on IMB’s behalf.
Pursuant to a technical appraisal report certified by the Ministry of Health,
no
adverse effects have been found of this agent, and it is not irritant or erosive
to the skin, mucous membrane or the eyes of the recipient animal after
swallowing or inhalation. Furthermore, the report indicates that the anti-viral
aerosol is not carcinogenic, teratogenic or mutagenic.
On
May 8,
2006 we entered into a Technology Transfer Agreement with JKB. Pursuant to
the
agreement, JKB agreed to transfer to us its AF-01 anti-viral aerosol technology
for veterinary medicine applications. The AF-01 technology, which can be used
to
deliver animal vaccines by aerosol spray, is recognized by a technological
achievement appraisal certificate issued by the government of China. Under
the
agreement JKB will facilitate transfer of the technology by providing consulting
services to the Company and to cooperate in the development of an animal vaccine
product for the market. Pursuant to the agreement we will pay JKB a transfer
fee
of RMB 10 million (approximately US$1.247 million), of which RMB 6 million
will
be paid in cash and RMB 4 million will be paid in stock. The cash portion will
be paid in installments, the first RMB 3 million installment was set for May
23,
2006 initially, and both parties have agreed to extend it to August 31, 2006.
Three other installments of RMB 1 million are due upon the achievement of
certain milestones, the last milestone being the issuance by the PRC Ministry
of
Agriculture of a new medicine certificate in respect of the technology. The
RMB
4 million stock payment will be due 90 days after the AF-01 technology is
approved by the appropriate PRC department for use as a livestock disinfector
for preventing bird flu.
We
plan
to develop a commercialized product in the form of spray for applying in hen
houses and other animal holding facilities to prevent and cure virus-caused
diseases. Before marketing this product, we must complete the
following:
· |
successfully
complete safety evaluation, pre-clinical study, pharmacological and
toxicological test, clinical trial report, stability test report,
environmental impact report and other obligatory experiments by statutory
authorities;
|
· |
acquire
a company or factory with GMP qualification and submit the new drug
application in the name of the acquired company to the Administrative
Department for Veterinary Medicine of State Council (the “Administrative
Department”);
|
· |
pass
an evaluation by the veterinary drug evaluation institution established
by
the Administrative Department and pass a sample quality retrial by
the
test institution established by the Administrative Department after
the
application is accepted.
|
· |
acquire
an administrative certificate for a new veterinary drugs from the
Administrative Department compliant with its drug qualification
standards.
|
· |
pass
an evaluation of manufacturing requirements by the Administrative
Department and procure a veterinary drug manufacturing
license.
|
Strategies
With
the
world’s largest population to feed, China’s demand for agricultural products is
immense. Problems with pollution and soil contamination have increased pressure
on the Chinese government to conserve land and enhance environmental protection.
Serious diseases such as H5N1 avian flu are spreading around the world and
have
threatened animal husbandry. More critically, such diseases have threatened
the
health and safety of humans through possible bird to human and human to human
transmission. China thus faces an urgent need to improve unit land yield,
prevent and treat such diseases, and reduce pollution. We plan to address this
need through the development of our ag-biotec products which may resolve all
these problems in environmentally friendly ways. To exploit this opportunity,
our core strategies are as follows:
· |
build
a platform for world-class biotechnological research and development
results to be commercialized into products for applications in
agriculture;
|
· |
invest
in mature technologies that will not require large amounts of research
expense to develop into
commercial products;
|
· |
establish
strategic alliances for research and development, sales and distribution
and customer acquisition with complimentary entities in the
biological-agriculture industry;
|
· |
establish
manufacturing capability in China by improving our existing facility,
constructing new facilities
or acquiring established facilities;
|
· |
enhance
overall management systems, operational structure and corporate
governance; and
|
· |
utilize
proprietary technology to supply
products at lower cost than our
competitors.
|
Our
sales
strategy involves utilizing both a direct sales force and distribution networks.
Our distribution efforts are expected to include the following:
· |
leveraging
government support and existing rural area distribution networks
to more
effectively reach end-users;
|
· |
cooperating
with special agricultural production materials distributors who also
help
farmers resell their products;
|
· |
focusing
on large-to-medium size wholesalers of agricultural production materials
at provincial and municipal levels;
|
· |
establishing
a three-level distribution network consisting of a company-centralized
sales office, prefectural representative office and direct distributors
in
villages and towns; and
|
· |
leveraging
existing sales channel network of affiliates’ products to save costs of
building the network from scratch.
|
We
plan
to target major agricultural companies and growers as customers that can realize
significant financial benefits from using our products including:
· |
high
value crop (such as fruits and vegetables) growers and breed bases
in
China that supply major cities;
|
· |
agricultural
producers in China who export to Japanese, Korean and other regional
markets; and
|
· |
“green”
or organic growers throughout the world.
|
Given
the
global trend of customers favoring environmentally safe organically grown food,
growers’ needs for higher crop yields and better quality and increasing pressure
of treating and preventing such diseases as H5N1 avian flu, we also foresee
strong market needs in other international markets including East Asia and
Southeast Asia. We plan to explore these markets when the time is right.
Market
Overview
Modern
agricultural practices largely rely on heavy use of chemical
fertilizers,pesticides and veterinary drugs that can cause tremendous harm
to
the environment soils and human health. Such practices have been under
increasing public scrutiny across the world, leading to increased consumer
demand for agricultural practices that are more environmentally friendly. China
has only 9.1%1 of
the
world’s agricultural land but needs to feed over 1.32 billion
people, or approximately 22.9%3 of
the
world’s population. If the situation continues unchanged, the largest population
in the world could potentially face severe food and water shortages and an
increasingly polluted living environment. One
solution to the environmental problem is to develop environmental friendly
fertilizer, veterinary drugs and feeding stuff. China’s current consumption of
bio-fertilizer consists of only 2.3%of
the
total fertilizer consumption in China.
China’s
agricultural production has steadily increased for more than 20 years due to
agricultural policy reform, agricultural technology and recent government
support programs, including price supports, export incentives, direct payment
and tax incentives.
Increases
in Output of Major Agricultural Products
|
|
Variety
(1,000 tons)
|
|
1949
|
|
1978
|
|
%
|
|
1999
|
|
%
|
|
2004
|
|
%
|
|
Grain
|
|
|
113,180
|
|
|
304,770
|
|
|
169
|
%
|
|
508,390
|
|
|
67
|
%
|
|
469,472
|
|
|
-8
|
%
|
Cotton
|
|
|
444
|
|
|
2,167
|
|
|
388
|
%
|
|
3,831
|
|
|
77
|
%
|
|
6,324
|
|
|
65
|
%
|
Oil-bearing
crops
|
|
|
2,564
|
|
|
5,218
|
|
|
104
|
%
|
|
26,012
|
|
|
399
|
%
|
|
30,659
|
|
|
18
|
%
|
Sugar
crops
|
|
|
2,833
|
|
|
23,818
|
|
|
741
|
%
|
|
83,340
|
|
|
250
|
%
|
|
95,707
|
|
|
15
|
%
|
Flue-cured
tobacco
|
|
|
43
|
|
|
1,052
|
|
|
2347
|
%
|
|
2,185
|
|
|
108
|
%
|
|
2,163
|
|
|
-1
|
%
|
Tea
|
|
|
41
|
|
|
268
|
|
|
554
|
%
|
|
676
|
|
|
152
|
%
|
|
835
|
|
|
24
|
%
|
Fruit
|
|
|
1,200
|
|
|
6,570
|
|
|
448
|
%
|
|
62,376
|
|
|
849
|
%
|
|
83,941
|
|
|
35
|
%
|
Meat
|
|
|
2,200
|
|
|
8,563
|
|
|
289
|
%
|
|
59,609
|
|
|
596
|
%
|
|
72,448
|
|
|
22
|
%
|
Aquatic
products
|
|
|
450
|
|
|
4,660
|
|
|
936
|
%
|
|
41,220
|
|
|
785
|
%
|
|
49,018
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source:
http://www.china.org.cn and China Agriculture Year Book
2005.
|
As
indicated in China:
Agriculture in Transition,
published by the U.S. Department of Agriculture (USDA) in November, 2001, rapid
growth in the nonagricultural economy will bring changes in agricultural
production, including both the demand for and the supply of food in China.
Rising incomes are clearly changing food consumption patterns. Demand for meat,
fruits, vegetables, and other high-value commodities are rising rapidly. The
per
capita demand for staple food grains, such as wheat and rice, however, is not
increasing as fast and may even be falling as consumer substitute higher value
foods for staple food grains. Growing urban incomes will continue to put forward
pressure on the demand for processed and higher quality foods. As these changes
in food consumption patterns are transmitted back to farmers in the forms of
price changes, agricultural production patterns are shifting to carter to the
rising demand for meat, fruits, vegetables, and other high-valued
crops.
According
to Organic
Products Market in China 2006, a
publication issued by USDA in June 2006, China has the potential to become
a
world power in the organic foods industry. Home to one-fifth of the world’s
population, a growing number of its Chinese consumers are making more
health-conscious purchases. The country continues to attempt to increase organic
export production as well as boost domestic demand. With the growth of the
international market for organic products, some products in China are now being
grown to international organic standards for export with the help of third-party
global certification groups. Other products continue to target the domestic
market with certification by local or provincial bodies. In 2003, the total
turnover for the “Green Foods” market reached approximately $11.9 billion or
$8.7 billion wholesale for the domestic market. According to a report from
the
International Fund for Agricultural Development (IFAD), the value of Chinese
organic exports grew from less than $1 million in the mid-1990s to roughly
$142
million in 2003. An initiative by the government to promote pure foods led
to
development of an organic food market that continues to show growth potential.
Organic farms in China are beginning to resemble Western counterparts in farming
practices, certification, and retail promotion.
1 |
Total
area of cultivated land of China is 127,082,000 hectares - as
cited on
page 385 in “China Statistical Yearbook” published by National Bureau of
Statistics of China (September 2002). Total area of world cultivated
land
is 1,401,700,000 hectares - as cited on page 17 in “Summary of Food and
Agricultural Statistics 2003” published by Food and Agricultural
Organization of the United Nations
(2003).
|
2 |
Calculated
based on data from the website of National Bureau of Statistics
of China:
http://www.stats.gov.cn.
|
3 |
Calculated
based on data from the website of National Bureau of Statistics
of China :
http://www.stats.gov.cn.
|
4 |
Bio-fertilizer
production and consumption of 1,000,000 metric tons, as cited
on page 1 of
“Bio-Fertilizer Present and Future,” by Linfeng Li, published by Jiangxi
Agricultural University. Aggregate fertilizer consumption of
43,390,000 metric
tons, as cited on page 73 of “Current Agriculture Situation and Chemical
Fertilizer Demand in China,” by Gao Xiangzhao, Ma Shangbao and Du Sen,
published by Science Publication House (July 2004).
|
Bio-fertilizer
market
To
increase the overall crop yield, farmers in China use vast amounts of chemical
fertilizers. According to the Ministry of Agriculture, the use of fertilizer
rocketed from 8,840,000 tons in 1978 to 46,366,000 tons in the 2004. According
to the China Statistics Bureau and the Food & Agriculture Organization of
the United Nations, the use of chemical fertilizers in China increased 64.2%
in
the past decade and accounted for one-third of total world fertilizer
consumption5. Long-term excessive use of chemical fertilizers in
China has led to severe soil contamination and pollution
The
Chinese agricultural industry has started to recognize the importance of
bio-fertilizers to sustainable long-term agriculture in China. Our serial
commercialized products, with Photosynthesis Biological Catalyst and/or bacillus
as main ingredients, capitalize on this market trend and we hope to become
one
of the leaders in developing green technologies for productive, more sustainable
agriculture in China.
Our
main
markets have so far been in China, mostly in Shandong Province, Jiangsu and
Zhejiang Provinces. In 2006, with continuous expansion of the current market,
our sales efforts are focused on Jilin Province, Henan Province, and Guangdong
Province, the three largest agricultural provinces in terms of grain yield
or
exports of fish and other aquatic products.
Bio-feed
market
According
to The Year Book of China Stockbreeding Industry 2005, in the year 2004 the
total amount of meat production of Chinese domestic market reached 72.4482
million tons, an increase of 4.5% compared with the previous year. Meanwhile,
total production of dairy products hit 23.684 million tons, for a 28.1%
increase. The total production value of the livestock industry exceeded RMB
1
trillion. And it is expected that the market will keep on expanding. In 2004,
the Chinese livestock industry has recovered from the shadow from SARS. The
total production value of the livestock feed industry has increased 13.36%
to
approximately RMB 242.8 billion. The average margin of feed producers has
increased 1 to 2 %. It is estimated that the livestock feed market will continue
to grow for the foreseeable future.
In
2004,
the production of feed products in China increased to 93 million tons, annual
11% increase over the previous year, compared to production of 35.7 million
tons
in 1991. The total production value of feeding stuff industry has increased
13.36% to approximately 242.8 billion RMB. It is estimated that the market
for
livestock feed will continue to grow in the foreseeable future. (China
Stockbreeding Industry Year Book 2005) And the Chinese livestock industry is
suffering from lack of powerful feed producers that are capable of manufacturing
high-quality, environment-friendly bio-enhanced feed in a cost-effective manner
to satisfy the increasing demand of the market. Consequently, we have concluded
that the livestock feed market is a good opportunity for the Company.
Livestock
disinfectant and drug market
5
|
Calculated
based on data published in the “China Statistical Yearbook” published by
National Bureau of Statistics of China (September 2002), page
389.
|
6 |
Calculated
based on data published in “Current Agriculture Situation and Chemical
Fertilizer Demand in China,” by Gao Xiangzhao, Ma Shangbao and Du Sen,
published by Science Publication House (July 2004), page
73.
|
Our
planned anti-viral aerosol agent product is intended to prevent various virus
infections in fowl and livestock. We
plan
to implement the AF-01 anti-viral
aerosol agent technology and to
develop
a commercialized product in the form of aerosol spray for applying in hen
houses
and other animal holding facilities
to
prevent various virus infections in fowl and livestock. Our product is aimed
at
inhibiting avian influenza in its first stage.
Beginning
in December 2003, outbreaks of avian influenza (H5N1) in poultry populations
occurred in seven countries in the East Asia and Pacific region (Cambodia,
China, Indonesia, the Republic of Korea, Lao PDR, Thailand and
Vietnam). Urgent measurements have been taken after the outbreak of avian
flu. After subsiding in March 2004, a new wave of avian flu began in July 2005,
with an outbreak in Malaysia and increased outbreaks in Indonesia, Thailand,
Vietnam and China. Despite aggressive control measures involving the
culling of more than 140 million birds since September 2005, outbreaks have
continued. The H5N1 of Highly Pathogenic Avian Influenza (HPAI) is now
considered to be endemic in many parts of East Asia, with Cambodia, Indonesia,
Laos PDR, and Thailand, the most severely affected. (The World Bank) On
June 16, 2006, the Ministry of Health in China confirmed the country’s 19th case
of human infection with the H5N1 avian influenza virus. According to the World
Health Organization, the cumulative number of confirmed human cases of avian
influenza A/(H5N1) is 228, with 130 deaths. The situation is also severe in
China. H5N1 of Highly Pathogenic Avian Influenza (HPAI) was first found in
China
in 2005, with eight reported cases and five deaths. And there is no sign that
the situation will improve in China - 11 cases have been reported before June
20, 2006, and seven of them have been reported dead.
To
make
things worse, scientists are studying the possibility of bird-to-human
transmission crossing over due to genetic changes to sustained human-to-human
transmission in all affected countries. Potentially, it is a serve challenge
to
human health and safety.
As
estimated in a report by the World Bank on January 13, 2006, the total fund
for
a global fight against bird flu
is
estimated to range between 1.2 to 1.4 billion U.S. dollars. Most of the fund
is
likely to be put into the densely-populated East Asia and the Pacific region;
the remainder will mostly go to Europe, Central Asia and Africa. After
consulting with the World Health Organization and the UN Food and Agricultural
Organization, the Word Bank estimated that a bird flu pandemic that lasts a
year
could cost the global economy as much as 800 billion dollars. (See:
http://english.people.com.cn).
The
use
of appropriate antiseptics is an effective prevention method against avian
influenza. As indicated by our Technical Appraisal Report (No.
GuoWeiKeChengJianZi [2004] A0101) certified by the PRC Ministry of Health,
our
planned product with bio-active glycopeptides produced by actinomycetes as
the
functioning element has been proved to be an effective antiseptic to prevent
H5N1. Furthermore, we believe this product has competitive differentia compared
with other existing chemical disinfectors. We also believe that if we obtain
the
requisite funding and are able to complete approval procedures to develop our
intended anti-viral aerosol agent product, we expect that it will obtain a
significant share of the Chinese market upon launching and benefit from large
government orders.
We
have
three different product lines, bio-fertilizer, bio-logically supplemented
livestock feed and veterinary disinfectants and drugs. The market condition
and
competition that we are confronted are different in each of them.
Bio-fertilizer
Due
to
the unique products that we offer and the very early stage of the bio-fertilizer
market in China, we believe there is limited direct competition for our products
in the Chinese marketplace. We may experience competition from existing products
that are similar to Photosynthesis Biological Catalyst, bacillus and other
organic fertilizers. We believe that we have product differentiation and cost
advantages (cost to customer) that will enable us to be more profitable than
our
competitors,
in terms
of profitability, for the following reasons, among others:
· |
high
effectiveness in increasing crop yield and quality while being
environmentally friendly;
|
· |
lower
price point and higher return on investment to end
users;
|
· |
powder-based
form making transportation and storage easier;
and
|
· |
complimentary
to existing use of chemical fertilizer which will help to minimize
switching costs for end users.
|
We
have
conducted detailed research and analysis of the competitive landscape in the
marketplace. From a broader view, there are about 12 companies, in different
stages and of varied sizes of operations, which have or are producing similar
photosynthesis related, microbial bio-fertilizer products in China, according
to
the categorization records from the Agriculture Fertilizer License Authority
in
China. Below is a summary of these 12 companies:
Company
Name
|
|
Current
Status
|
Bodisen
Biotech, Inc.
|
|
Manufacturer
of bio compound fertilizers.
Listed
on AMEX.
|
|
|
|
China
Agritech, Inc.
|
|
Developer,
manufacturer and distributor of organic compound fertilizer, traded
on
OTCBB.
|
|
|
|
Shanxi
Kelin Environment Protection Center,
Shanxi Province
|
|
Products
apparently still in the experimental stage.
|
|
|
|
Xinjin
Microbial Products
Factory of Sichuan Agriculture University, Sichuan
Province
|
|
Currently
only sells in part of Sichuan Province with a relatively low sales
volume.
|
|
|
|
Shenyang
Fengyuan Bio-tech Products Co., Ltd.,
Liaoning Province
|
|
A
wholly-owned Japanese company.
Three
years in production of photosynthesis-based fertilizer product.
Annual
production of 2,000 tons (liquid).
|
|
|
|
Shanghai
Pudong Yiyijou Bio-engineering Co., Ltd.,
Shanghai
|
|
In
business since 1999.
Covers
more than 10 provincial markets.
|
|
|
|
Chongyi
Bio-technology Development Center,
She County, Hebei Province
|
|
A
county-level plant.
Small
production scale.
Products
are sold in Linxi County in Shandong Province nearby.
|
|
|
|
Bierfu
Bio-engineering Co., Ltd.,
Weihai, Shandong Province
|
|
Products
mostly sold in Jinan and Shouguang areas in Shandong
Province.
Sales
branches in Hebei, Nanjing & Fujian.
Annual
sales of 100 tons.
|
|
|
|
North
Design Institute, Protection Sub-Institute
|
|
Has
no commercial production.
Owns
the related intellectual property rights.
|
|
|
|
Wuhan
Shiruifu Bio-Technology
Co., Ltd., Wuhan, Hubei Province
|
|
Its
target market is in Hubei Province.
Annual
production of 3,000 tons (liquid).
|
|
|
|
Harbin
Tianye Bio-Technology
Co., Ltd., Harbin, Heilongjiang Province
|
|
For
details, refer to the following section.
|
|
|
|
Beijing
Feishite Bio-engineering Co., Ltd.,
Beijing
|
|
Expected
to establish two photosynthetic bacteria fertilizer production bases
in
Beijing with annual production of 5,000 tons
(liquid).
|
In
addition, we face competition from large chemical fertilizer manufacturers
in
China. These chemical fertilizer manufacturers have provided chemical
fertilizers to farmers in China for several years and customers are more
accustomed to using their established products as compared to our
products.
Livestock
Feed
In
the
meantime, we also face competition in the livestock feed market. Since the
animal husbandry industry is relatively developed in China, there are many
livestock feed producers in China. The total production of feed-stuff in China
exceeded 1.28 million metric tons in April 2006 (http://www.DataGoo.com), which
shows the huge market volume of China. However, since we are new entrants to
the
livestock feed industry, and our production capacity is small relative to the
whole industry, we believe our planned feed products have enough differentiation
give us competition advantages.
The
competition in livestock feed market is intense. Some major feed producers
are
shown in the following table.
Company
Name
|
|
Current
Status
|
New
Hope Group Co., Ltd.
|
|
Yearly
feed production capacity exceeds 3,500,000 metric tons
More
than 200 sales points in rural areas of China
|
|
|
|
Liu
He Group Co., Ltd.
|
|
Sold
3,400,000 metric tons of feed in 2005
|
|
|
|
Tong
Wei Group Co., Ltd.
|
|
Yearly
feed production capacity exceeds 4,000,000 metric tons
|
|
|
|
Guang
Dong Heng Xing Group, Co., Ltd.
|
|
Annual
feed production capacity exceeds 1,000,000 metric tons
|
|
|
|
Zheng
Hong Technologies Group Co., Ltd.
|
|
Annual
feed production capacity exceeds 2,000,000 metric tons
|
|
|
|
Xin
Jiang Tian Kang Feed Bio-Tech Co., Ltd.
|
|
Annual
feed production capacity exceeds 240,000 metric tons
|
|
|
|
Xing
Da Group Co., Ltd.
|
|
Annual
feed production capacity exceeds 660,000 metric tons
|
|
|
|
Guang
Dong Hai Da Group Co., Ltd.
|
|
Sold
approximately 800,000 metric tons of feed in the year
2005
|
|
|
|
Mu
He Industry Co., Ltd.
|
|
Annual
feed production capacity approximately 1,000,000 metric
tons
|
|
|
|
Yue
Yang Yue Tai Group Co., Ltd.
|
|
Annual
feed production capacity exceeds 1,200,000 metric
tons
|
Bio-veterinary
drugs
In
the
veterinary drugs product line, there are several Chinese veterinary drug
manufactures that are developing anti-avian flu vaccine which can be regarded
as
substitutes of our product. According to the China Agriculture Department,
there
are nine Chinese companies that are working on anti-avian flu vaccine.
Other
potential competitors of in the veterinary drugs product line also include
some
veterinary disinfector manufacturers.
Raw
Materials
and Suppliers
The
major
raw materials for our photosynthetic bacteria and bacillus production are
photosynthetic bacteria, bacillus spp. sodium acetate, glucose, diammonium
phosphate, dipotassium hydrogen phosphate and turf. Other chemicals are also
used in the growth media. These materials are either cultured by our technicians
or purchased from local markets. The key raw materials used in production of
our
products are widely available from a wide variety of supply sources.
Historically, we have not experienced any difficulty in procuring adequate
quantities of raw materials for our bio-fertilizers.
The
major raw materials for bio-feed products are microbes as enhanced ingredients,
grains, bean cake, and trace elements. These materials are either cultured
by
our technicians or purchased from local markets. As for our planned anti-viral
aerosol agent product,
pursuant to our technology transfer agreement with JKB,
it will
exclusively supply the raw material medicine for AF-01 anti-viral aerosol to
us.
Under the technology transfer agreement, the medicine must have an index of
200,000 zymolysis units/milliliter. We are negotiating with a long-term supply
contract with JKB.
Three
suppliers accounted for 64.0%, 17.2%, 12.5% of our net purchases for the fiscal
year ended December 31, 2005, respectively. Historically these suppliers have
met our needs. In addition, the raw materials used in our products are available
from a variety of alternative sources.
Three
suppliers accounted for 31%, 17% and 11%, of our purchases of raw materials
for
the three months ended June 30, 2006 and two suppliers accounted for 53% and
38%, respectively, of our purchases of raw materials for the three months ended
June 30, 2005. Three suppliers accounted for 38%, 19% and 10%, respectively,
of
our purchases of raw materials for the six months ended June 30, 2006 and 48%,
34% and 6%, respectively, of our purchases of raw materials for the six months
ended June 30, 2005. The raw materials used in our products are available from
a
variety of alternative sources.
We
do not
have agreements with our suppliers due to the availability of numerous suppliers
who have the ability to supply our raw materials on fairly short notice. We
place purchase orders when we need supplies.
Customers
Three
customers accounted for 20%, 12% and 10%, respectively, of our net sales for
the
three months ended June 30, 2006 and two other customers accounted for 52%
and
47%, respectively, of our net sales for the three months ended June 30, 2005.
Three customers accounted for 22%, 10% and 9%, respectively, of our net sales
for the six months ended June 30, 2006 and 38%, 32% and 28%, respectively,
of
our net sales for the six months ended June 30, 2005.
We
have
two significant customers accounting for 51.3% and 45.3%, of our net sales
for
the fiscal year ended December 31, 2005, respectively. No other single
customer accounted for more than 3% of our revenues. These two customers are
leading agricultural distributors in the eastern and northern regions of China.
During the fiscal year ended December 31, 2005, the total number of
customers increased although the total sales volume dropped. However, our
revenues generated during the fiscal year ended December 31, 2005 were
approximately $630,000, reflecting a decrease of 51.4% compared to the revenues
generated during the fiscal year ended December 31, 2004. This marked decrease
is mainly due to the temporarily closing of our manufacturing facility for
the
planned upgrade and the failure of an anticipated financing in the second half
of 2005.
Seasonality
Our
operating results have been and are expected to continue to be subject to
seasonal trends. This trend is dependent on numerous factors, including the
markets in which we operate, growing seasons, climate, economic conditions
and
numerous other factors beyond our control. For example, in terms of
bio-fertilizer we expect the second and third quarters will be stronger than
the
first and fourth quarters, primarily because the second and third quarters
correspond with the growing seasons in our primary markets in China. It is
during those growing seasons when application of our products by our customers
would be most beneficial and we therefore expect greater demand for our products
during those periods. There can be no assurance that these operating patterns
will occur. But we will seek to develop markets outside China such as in
Southeast Asia to reduce the impact of seasonality.
Employees
We
currently employ 20 full-time employees in China, one in the United States
and
one in Hong Kong. We also have 15 seasonal employees in China.
Regulatory
Concerns
Our
production needs to comply with bio-fertilizer standard production and testing
procedures issued by the Chinese Ministry of Agriculture. We have complied
with
the applicable government standard production and testing procedures.
Environmental
Matters
Our
two
manufacturing facilities, Kiwa Shandong and Kiwa Tianjin, have passed
environment evaluation by local environment authorities. Photosynthesis
bacteria, bacillus ssp, and actinomycetes are environmentally friendly and
are
not known to cause any environmental problems.
There
are
no pending legal proceedings to which we or our properties are
subject.
PROPERTY
In
June
2002, we entered into an agreement with Zoucheng Municipal Government granting
us 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, we have the
option to pay a fee of approximately $60,700 per acre for the land use right
at
the expiration of the 10-year period. We may not transfer or pledge the
temporary land use right. In the same agreement, we have also committed to
invest approximately $18 million to $24 million for developing the manufacturing
and research facilities in Zoucheng, Shandong Province. As of August 8, 2006,
we
had invested approximately $1.5 million for the project. Management believes
that neither the company nor management will be liable for compensation or
penalty if the investment commitment is not fulfilled. As of August 8, 2006,
the
first phase of a three-phase construction plan has been completed and production
has begun in the completed facility. A plan to complete the second construction
phase scheduled for the last half of 2005 was postponed and the facility
temporarily shut down (last half of 2005, first quarter of 2006), when an
anticipated financing for the construction was not realized. Production resumed
in the second quarter of 2006. The production capacity of the current facility
is 600 tons of bio-organic products. Completion of the next phase of
construction will expand the manufacturing capacity to 1,000 tons and will
enable us to produce the bacillus fertilizer.
On
July
11, 2006, we completed the formation of completed of a joint venture with
Tianjin Challenge Feed Co., Ltd. to engage in the developing, manufacturing
and
marketing of biologically supplemented livestock feed. The joint venture will
be
located in Tianjin, China and operated through Tianjin Kiwa Feed Co. Ltd. (“Kiwa
Tianjin”), a jointly-owned limited liability company organized under the laws of
the PRC. Pursuant to the joint venture agreement, we have agreed to invest
$480,000 in cash for 80% of the equity of Kiwa Tianjin. Challenge Feed has
agreed to invest machinery and equipment used in bio-feed production lines
with
an agreed value of $120,000 for 20% of the equity in Kiwa Tianjin. Under the
joint venture agreement, both we and Challenge Feed are required to make our
capital contributions within six months of the date when Kiwa Tianjinreceives
its business license. As of July 11, 2006, we and Challenge Feed complied with
and completed all legal procedures in accordance with applicable Chinese laws
and government regulations to establish Kiwa Tianjin. As of August 8, 2006,
we
have contributed $150,000 of its committed capital to Kiwa Tianjin. Kiwa
Tianjin’s total annual production capacity is expected to be approximately
40,000 metric tons of concentrated and supportive feeds and it is expected
to
produce sales from August 2006.
We
lease
our principal executive offices located at 415 West Foothill Blvd, Suite 206,
Claremont, California 91711-2766. The lease has a term of three years and
expires in March 2008.
We
currently expect that we will renew this lease prior to its
expiration.
During
the fiscal year of 2004, we leased our principal executive offices located
at
17700 Castleton Street, Suite 589, City of Industry, California 91748. Such
lease has a term of two years and expired on June 11, 2005.
We
also
lease an office in Beijing under an operating lease expiring in June 2008 with
an aggregate monthly lease payment of approximately $5,107. We
currently expect that we will renew this lease prior to its expiration. Prior
to
relocating our existing Beijing office, we leased another office in Beijing
under an operating lease expiring in April 2005 with an aggregate monthly lease
payment of approximately $2,882.
The
following table provides information about our executive officers and directors
and their respective age and position as of August 8, 2006. The directors listed
below will serve until the Company’s next annual meeting of the stockholders:
Name
|
|
Age
|
|
Position
|
Wei
Li
|
|
44
|
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
Lian
jun Luo
|
|
36
|
|
Chief
Financial Officer and Director
|
Da
chang Ju
|
|
65
|
|
Director
|
Yun
long Zhang
|
|
42
|
|
Director
|
Johnson
Shun-Pong Lau
|
|
32
|
|
Chief
Operating Officer
|
Qi
Wang
|
|
39
|
|
Vice
President - Technical
|
Wei
Li
became
our Chief Executive Officer and Chairman of the Board of Directors on
March 12, 2004. From January 1, 2004 to the time of the Tintic/Kiwa merger,
Mr. Li was the acting Chief Executive Officer of Kiwa Bio-Tech Products Group
Ltd. Mr. Li founded Kiwa Bio-Tech Products Group Ltd. to capitalize on the
growth of the ag-biotechnology industry in China. Prior to founding Kiwa
Bio-Tech Products Group Ltd., Mr. Li founded China Star, an entity which
provides integrated financing services and/or venture investments to growth
businesses in China. Mr. Li served as President of China Star from June 1993
to
January 2004. In 1989, Mr. Li founded Xinhua International Market Development
Ltd., a company which engaged in investing in China’s high tech, pharmaceutical,
medical device, media, entertainment and real estate industries. Mr. Li holds
a
B.S. in finance from Hunan Finance and Economics University.
Lian
jun Luo
became
our Chief Financial Officer on March 12, 2004, and one of our directors on
March 27, 2004. Mr. Luo served as the Chief Executive Officer of Kiwa
Bio-Tech Products Group Ltd. from October 2002 to December 2003. From
January 2002 to October 2002, Mr. Luo served as the Chief Financial Officer
of
China Star. From August 2000 to December 2001, Mr. Luo served as manager of
Security Department and Assistant to President at Jilin Hengfa Group Ltd.,
a
Chinese drug manufacturing company, responsible for the company’s preparation
for an aborted IPO and for merger and acquisition activities. From May 1998
to
July 2000, Mr. Luo worked as manager of Investment Department and Associate
General Manager for Hongli Enterprise Ltd, a Chinese investment company on
merger and acquisition transactions. Mr. Luo obtained his law degree from China
University of Political Science and Law in 1993. Mr. Luo is a certified public
accountant and lawyer in China.
Da
chang Ju
became
one of our directors on March 12, 2004. From 1987 to 1999 when he retired,
Mr. Ju worked as General Manager of XinShen Company, an investment firm in
China. He was responsible for the company's daily operations and investment
decision making. He served as a board member of Kiwa Bio-Tech Products Group
Ltd. since 2003 and a board member of China Star from 1999 to 2000. Mr. Ju
holds
a B.S. in mathematics from Capital Normal University in Beijing, China.
Yun
long Zhang
became
one of our directors on March 27, 2004. From May 2000 to present, Mr. Zhang
has been the General Manager of China Star, responsible for the group’s daily
operations. From 1994 to 2000, Mr. Zhang served as the head of the Investment
Department at China National Economic and Systems Reform Research and Services
Center, an economic reform think tank for the central government. Mr. Zhang
holds a degree in statistics.
Johnson
Shun-Pong Lau
became
our Chief Operating Officer on July 19, 2005. Mr.
Lau
served as the Vice President - Finance of a company listed on the OTC Bulletin
Board from August 2004 to April 2005. Prior to that, Mr. Lau worked in the
audit
department of the Hong Kong and Beijing offices of Deloitte Touche Tohmatsu
for
over seven years. Mr. Lau received his bachelor’s degree of commerce from Monash
University, Australia in 1996. He is a Certified Public Accountant in Hong
Kong
Institute of Certified Public Accountants (HKICPA) and a Certified Practising
Accountant of CPA Australia.
Qi
Wang became
our Vice President - Technical on July 19, 2005. Mr. Wang served as a Professor
and Advisor for Ph.D students in Department of Plant Pathology, China
Agricultural University (“CAU”) since January 2005. Prior to that, he served as
an assistant professor and lecturer of CAU since June 1997. He obtained his
master degree and Ph.D in agricultural science from CAU in July 1994 and July
1997, respectively. Mr. Wang received his bachelor’s degree of science from
Inner Mongolia Agricultural University in July 1989. He is a committee member
of
various scientific institutes in China, including the National Research and
Application Center for Increasing-Yield Bacteria, Chinese Society of Plant
Pathology, Chinese Association of Animal Science and Veterinary
Medicine.
Family
Relationships
There
are
no family relationships among our directors or executive officers.
Section
16(a) Beneficial Ownership Compliance
Code
of Ethics
We
have
adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to
all employees, consultants and members of the Board of Directors, including
the
Chief Executive Officer, Chief Financial Officer and Secretary. This Code
embodies our commitment to conduct business in accordance with the highest
ethical standards and applicable laws, rules and regulations. We will provide
any stockholder a copy of the Code, without charge, upon written request to
the
Company’s Secretary.
Board
Composition and Audit Committee
The
board
of directors is currently composed of four members, including Wei Li, Lian
jun
Luo, Da chang Ju and Yun long Zhang. All board actions require the approval
of a
majority of the directors in attendance at a meeting at which a quorum is
present.
We
currently do not have an audit committee. We intend, however, to establish
an
audit committee of the board of directors as soon as practicable. We envision
that the audit committee will be primarily responsible for reviewing the
services performed by our independent auditors, evaluating our accounting
policies and our system of internal controls.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
Our
chief
executive officer did not earn any compensation during 2005 and 2004. We had
no
officers or directors in 2004 and 2005 whose total annual salary and bonus
during 2005 and 2004 exceeded $100,000.
|
|
Annual
Compensation
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
All
Other Compensation ($)
|
|
Securities
Underlying Options
|
|
Wei
Li(1)
|
|
|
2005
2004
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(1) Appointed
Chief Executive Officer and a director of the Company in June 2004.
Compensation
of Directors
At
this
time, we do not have any arrangement or policy for compensation of directors
for
their services on our Board of Directors. If any at any time we do compensate
directors, we do not anticipate paying employee directors additional
compensation for their service above their compensation as an
employee.
In
2005,
there were no other arrangements pursuant to which any director was compensated
for services provided as a director.
Employment
Contracts and Termination of Employment and Change of Control
Arrangements
On
July
31, 2006, we entered into an employment agreement with our Chief Executive
Officer, Wei Li, for a three-year term, commencing on January 1, 2006. Pursuant
to this agreement, Mr. Li will receive a salary at the rate of RMB768,000
(approximately $96,000) per annum, of which RMB600,000 will be paid in equal
monthly installments of RMB50,000 during the period of employment, prorated
for
any partial employment period, and RMB168,000 will be paid as an annual
performance bonus in three months after each employment year. Mr. Li will
receive such annual increases in salary as may be determined by our Board of
Directors at our annual meeting. Mr. Li is also entitled to an annual grant
of
stock options under our employee stock option plan as determined by the Board
of
Directors. Mr. Li is entitled to three-month’s severance if his employment is
terminated without cause.
On
July
31, 2006, we entered into an employment agreement with our Chief Financial
Officer, Lianjun Luo, for a three-year term, commencing on January 1, 2006.
Pursuant to this 2006 agreement, we will pay Mr. Luo an annual salary at the
rate per annum of RMB480,000 (approximately $60,000), of which RMB384,000 will
be paid in equal monthly installments of RMB32,000 during the period of
employment, prorated for any partial employment period, and RMB96,000 will
be
paid as an annual performance bonus in three months after each employment year
for the successful completion of all goals and objectives of that year and
is
entitled to an annual grant of stock options under our employee stock option
plan as determined by the Board of Directors. Mr. Luo is entitled to three
month’s severance if his employment is terminated without cause.
Except
as
set forth above, we do not have employment agreements with any other members
of
management or key personnel. In addition, there are no compensatory plans or
arrangements with respect to a named executive officer that would result in
payments or installments in excess of $100,000 upon the resignation, retirement
or other termination of such executive officer's employment with us or from
a
change-in-control.
TRANSACTIONS
WITH MANAGEMENT AND OTHERS
Except
as
disclosed in Note 8 to the Condensed Consolidated Financial Statements as of
and
for the period ended June 30, 2006 and Note 10 to the Consolidated Financial
Statements as of and for the fiscal years ended December 31, 2005 and 2004,
neither our directors or named executive officers, nor any stockholder owning
more than five percent of our issued shares, nor any of their respective
associates or affiliates, had any material interest, direct or indirect, in
any
material transaction to which we were a party during the last two years, or
which is presently proposed, in which the amount involved in the transaction
exceeded $60,000.
The
Board
of Directors believes, based on its reasonable judgment, that the terms of
each
of the foregoing transactions or arrangements between us on the one hand and
our
affiliates, officers, directors or stockholders which were parties to such
transactions on the other hand, were, on an overall basis, at least as favorable
to our Company as could then have been obtained from unrelated
parties.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 100,000,000 shares of common stock, par
value $0.001 per share and 20,000,000 shares of preferred stock, of which
64,285,930 shares of common stock and no shares of preferred stock were issued
and outstanding as of August 8, 2006. A proposal to amend our Certificate of
Incorporation increase the number of authorized shares of common stock, from
100,000,000 shares to 200,000,000 shares will be submitted to our stockholders
at our annual meeting scheduled for September 12, 2006. The amendment will
not
affect the authorized number of shares of preferred stock, which will remain
at
20,000,000.
Set
forth
below is a description of certain provisions relating to our capital stock.
For
additional information regarding our stock please refer to our Certificate
of
Incorporation and Bylaws.
Common
Stock
Each
share of common stock entitles the holder thereof to one vote on each matter
that may come before a meeting of the stockholders. There is no right to
cumulative voting thus, the holders of fifty percent or more of the shares
outstanding can, if they choose to do so, elect all of the directors. In the
event of a voluntary or involuntary liquidation, all stockholders are entitled
to a pro rata distribution after payment of liabilities and after provision
has
been made for each class of stock, if any, having preference over the common
stock. The holders of the common stock have no preemptive rights with respect
to
future offerings of shares of common stock. Holders of common stock are entitled
to dividends if, as and when declared by the Board out of the funds legally
available therefor. It is our present intention to retain earnings, if any,
for
use in our business. The payment of dividends on our common stock is, therefore,
unlikely in the foreseeable future.
Preferred
Stock
Our
preferred stock may be issued from time to time in one or more series. Our
Certificate of Incorporation authorizes our Board of Directors to fix or alter
the rights, preferences, privileges and restrictions granted to or imposed
upon
any wholly unissued series of preferred stock and the number of shares
constituting any such series and the designation thereof, and to increase or
decrease the number of shares of any series prior or subsequent to the issue
of
shares of that series, but not below the number of shares of such series then
outstanding.
Anti-takeover
Provisions
Certain
provisions of our articles of incorporation and Delaware law may have the effect
of delaying, deferring or discouraging another person from acquiring control
of
our company.
Charter
and Bylaw Provisions
Our
certificate of incorporation allows our Board of Directors to issue 20,000,000
shares of preferred stock, in one or more series and with such rights and
preferences including voting rights, without further stockholder approval.
In
the event that the Board of Directors designates additional series of preferred
stock with rights and preferences, including super-majority voting rights,
and
issues such preferred stock, the preferred stock could make our acquisition
by
means of a tender offer, a proxy contest or otherwise, more difficult, and
could
also make the removal of incumbent officers and directors more difficult. As
a
result, these provisions may have an anti-takeover
effect.
The preferred stock authorized in our certificate of incorporation may inhibit
changes of control that are not approved by our Board of Directors. These
provisions could limit the price that future investors might be willing to
pay
in the future for our common stock. This could have the effect of delaying,
deferring or preventing a change
in control
of our
Company. The issuance of preferred stock could also effectively limit or dilute
the voting power of our stockholders. According, such provisions of our articles
of incorporation, as amended, may discourage or prevent an acquisition or
disposition of our business that could otherwise be in the best interest of
our
stockholders.
Delaware
Law
In
addition, Delaware has enacted the following legislation that may deter or
frustrate takeovers of Delaware
corporations, such
as
our company:
Authorized
but Unissued Stock.
The
authorized but unissued shares of our common stock are available for future
issuance without stockholder approval. These additional shares may be used
for a
variety of corporate purposes, including future public offering to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares of common stock may enable our
Board
of Directors to issue shares of stock to persons friendly to existing
management.
Section
203 of the Delaware General Corporation Law.
We are
subject to the provisions of Section 203 of the Delaware General Corporation
Law. That section provides, with some exceptions, that a Delaware corporation
may not engage in any of a broad range of business combinations with a person
or
affiliate, or associate of the person, who is an “interested stockholder” for a
period of three years from the date that the person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the board
of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of
the
corporation’s outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An “interested
stockholder” is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person
is
an interested stockholder.
Transfer
Agent and Registrar
The
transfer agent for our common stock is Fidelity Transfer Company. Its address
is
1800 South West Temple, Suite 301, Salt Lake City, Utah 84115, and its telephone
number is (801) 484-7222.
Listing
Our
common stock is quoted on the OTC Bulletin Board under the trading symbol
“KWBT.OB”
Indemnification
Our
Bylaws authorize us to indemnify, and our Certificate of Incorporation include
an indemnification provision under which we have agreed to indemnify, to the
fullest extent permitted by the Delaware General Corporation Law, our directors
and officers from and against certain claims arising from or related to future
acts or omissions as one of our directors or officers. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth as of August 8, 2006 certain information with respect
to the beneficial ownership of our common stock by (i) each of our directors
and
executive officers, (ii) each person who is known by us to beneficially own
more
than 5% of our outstanding common stock, and (iii) all of our directors and
executive officers as a group. The numbers for each stockholder listed below
include shares of our common stock issuable upon the exercise of options or
any
other rights beneficially owned by such person or entity that are exercisable
within 60 days of August 8, 2006. Percentage ownership is calculated based
on
64,285,930 shares of our common stock outstanding as of August 8, 2006. None
of
the shares listed below are issuable pursuant to stock options, SARs or
warrants.
Name
|
|
Number
of Shares
|
|
Percent
of Class
|
|
Wei
Li (1)
|
|
|
12,356,672
|
|
|
20.9
|
%
|
Da
chang Ju (2)
|
|
|
10,062,088
|
|
|
17.0
|
%
|
Lian
jun Luo
|
|
|
308,916
|
|
|
*
|
|
Yun
long Zhang
|
|
|
308,916
|
|
|
*
|
|
Johnson
Shun-Pong Lau
|
|
|
196,000
|
|
|
*
|
|
All
Star Technology Inc. (1)
|
|
|
12,356,672
|
|
|
20.9
|
%
|
InvestLink
(China) Limited (2)
|
|
|
10,062,088
|
|
|
17.0
|
%
|
De
jun Zou
|
|
|
3,089,168
|
|
|
5.2
|
%
|
Times
Crossword Investment Ltd. (3)
|
|
|
3,089,168
|
|
|
5.2
|
%
|
Yi
Mao (3)
|
|
|
3,089,168
|
|
|
5.2
|
%
|
All
officers and directors as a group (6 persons)
|
|
|
23,541,508
|
|
|
39.7
|
%
|
*
|
Less
than 1%.
|
|
|
(1)
|
Consists
of shares held by All Star Technology Inc., a British Virgin Islands
international business company. Wei Li exercises voting and investment
control over the shares held by All Star Technology Inc. Wei Li is
a
principal stockholder of All Star Technology Inc. and may be deemed
to
beneficially own such shares, but disclaims beneficial ownership
in such
shares held by All Star Technology Inc. except to the extent of his
pecuniary interest therein.
|
|
|
(2)
|
Consists
of 7,812088 shares of common stock held directly by InvestLink (China)
Limited (“Investlink”) and 2,250,000 shares of common stock held by
InvestLink as custodian for Gui sheng Chen. InvestLink has the sole
power
to vote or direct the vote and dispose or direct the disposition
of
10,062,088 shares but
disclaims beneficial ownership of such shares except to the extent
of its
pecuniary interest therein. Da chang Ju exercises voting and investment
control over the shares held by InvestLink. Da chang Ju is a principal
stockholder of InvestLink and may be deemed to beneficially own such
shares, but disclaims beneficial ownership in such shares held by
InvestLink except to the extent of his pecuniary interest
therein.
|
|
|
(3)
|
Mr.
Yi Mao exercises voting and investment control over the shares held
by
Times Crossword Investment, Ltd.
|
Under
the
terms of the 6% Notes and 6% Note Warrants, the notes and warrants are
exercisable by any holder only to the extent that the number of shares of common
stock issuable pursuant to such securities, together with the number of shares
of common stock owned by such holder and its affiliates (but not including
shares of common stock underlying unconverted shares of callable secured
convertible notes or unexercised portions of the warrants) would not exceed
4.99% of the then outstanding common stock as determined in accordance with
Section 13(d) of the Exchange Act. Therefore, the table does not include AJW
Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, New Millenium
Capital Partners II, LLC, Double U Master Fund LP, and Nite Capital
LP.
SHARES
ELIGIBLE FOR FUTURE SALE
We
have
64,285,930 shares outstanding as of August 8, 2006, of which 2,846,646 are
included in the shares being registered hereunder and of which we estimate
30,120,000 shares held more than two years may be sold under the provisions
of
Rule 144 promulgated under the Securities Act of 1933, as amended.
In
general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who owns shares that were purchased from us, or any
affiliate, at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three-month period, a number
of
shares that does not exceed the greater of:
§ |
1%
of the then outstanding shares of our common stock;
or
|
§ |
the
average weekly trading volume of our common stock during the four
calendar
weeks preceding the date on which notice of the sale is filed with
the
SEC.
|
Sales
under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the
90 days preceding a sale, and who owns shares within the definition of
"restricted securities" under Rule 144 under the Securities Act that were
purchased from us, or any affiliate, at least two years previously, is entitled
to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
Future
sales of restricted common stock under Rule 144 or otherwise or of the
shares that we are registering under this prospectus could negatively impact
the
market price of our common stock. We are unable to estimate the number of shares
that may be sold in the future by our existing stockholders or the effect,
if
any, that sales of shares by such stockholders will have on the market price
of
our common stock prevailing from time to time. Sales of substantial amounts
of
our common stock by existing stockholders could adversely affect prevailing
market prices.
SELLING
STOCKHOLDERS
This
prospectus relates to the offering and sale, from time to time, of up to
48,805,784 shares of our common stock held by the stockholders named in the
table below. In some cases, the common shares included in the table below
consist of common shares issuable upon presently exercisable warrants or common
shares issuable upon conversion of convertible warrants. All of the selling
stockholders named below beneficially acquired their shares of our common stock
directly from us in a private transaction as described below. These securities
were offered and sold in reliance upon exemptions from registration pursuant
to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
thereunder.
The
table
below provides information regarding the beneficial ownership of our common
stock held by each of the selling stockholders as of August 8, 2006. As used
in
the table beneficial ownership of common stock includes shares of our common
stock that are held directly, or may be issued to selling stockholders upon
the
conversion of notes or exercise of warrants. Except as otherwise indicated
in
the footnotes to the table, the selling stockholders have not held any position
or office or had any material relationship with our company or any of its
subsidiaries within the past three years, the selling stockholders possess
sole
voting and investment power with respect to the shares shown, and, except for
Lane Capital Markets, LLC, no selling stockholder is a broker-dealer, or an
affiliate of a broker-dealer. All of the broker-dealers and their respective
affiliates included in the table below have represented to us that they acquired
the securities to be resold in the ordinary course of business and had no
agreements or understandings, directly or indirectly, with any person to
distribute the securities at the time of purchase.
Selling
Stockholder
|
|
Shares
Owned Before the Offering
|
|
|
Shares
to be Sold in the Offering
|
|
Shares
Owned after the Offering (1)
|
|
Percent
Owned after the Offering (1)
|
AJW
Offshore, Ltd. (2)
|
|
19,635,194
|
|
|
19,635,194
(3)
|
|
0
|
|
0%
|
AJW
Partners, LLC (2)
|
|
3,154,507
|
|
|
3,154,507
(3)
|
|
0
|
|
0%
|
AJW
Qualified Partners, LLC (2)
|
|
8,980,686
|
|
|
8,980,686
(3)
|
|
0
|
|
0%
|
New
Millennium Capital Partners II, LLC (2)
|
|
418,455
|
|
|
418,455
(3)
|
|
0
|
|
0%
|
Double
U Master Fund LP (4)
|
|
2,414,162
|
|
|
2,414,162
(3)
|
|
0
|
|
0%
|
Nite
Capital LP (5)
|
|
4,828,327
|
|
|
4,828,327
(3)
|
|
0
|
|
0%
|
Lane
Capital Markets, LLC
|
|
980,000
|
|
|
980,000
(6)
|
|
0
|
|
0%
|
Zhonghua
Chen
|
|
205,000
|
|
|
205,000
(7)
|
|
0
|
|
0%
|
Jian
Liu
|
|
75,000
|
|
|
75,000
(7)
|
|
0
|
|
0%
|
Baizhu
Chen
|
|
20,000
|
|
|
20,000
(7)
|
|
0
|
|
0%
|
Yong
Sam Kim
|
|
900,000
|
|
|
900,000
(8)
|
|
0
|
|
0%
|
Song
N. Bang
|
|
50,000
|
|
|
50,000
(9)
|
|
0
|
|
0%
|
Donald
Worthly
|
|
750,000
|
|
|
750,000
(10)
|
|
0
|
|
0%
|
Gertrude
Yip
|
|
350,000
|
|
|
350,000
(11)
|
|
0
|
|
0%
|
Hiro
and Elaine Sugimura
|
|
1,273,537
|
|
|
1,273,537
(12)
|
|
0
|
|
0%
|
China
Star Investment Co. Ltd.
|
|
1,190,847
|
|
|
1,190,847
(13)
|
|
0
|
|
0%
|
Wei
Li
|
|
783,423
|
|
|
783,423
(14)
|
|
0
|
|
0%
|
Lianjun
Luo
|
|
996,646
|
|
|
996,646
(15)
|
|
0
|
|
0%
|
Fisher
Capital Partners Limited (16)
|
|
1,800,000
|
|
|
1,800,000
|
|
0
|
|
0%
|
(1) |
The
number or percentage of shares owned in this column assumes the sale
of
all shares of common stock registered pursuant to this prospectus,
although the selling stockholders are under no obligations known
to us to
sell any shares of common stock at this
time.
|
(2) |
AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and
New
Millennium Capital Partners II, LLC are affiliates of each other
because
they are under common control. AJW Partners, LLC is a private investment
fund that is owned by its investors and managed by SMS Group, LLC.
SMS
Group, LLC, of which Mr. Corey S. Ribotsky is the fund manager, has
voting
and investment control over the shares listed below owned by AJW
Partners,
LLC. AJW Offshore, Ltd., formerly known as AJW/New Millennium Offshore,
Ltd., is a private investment fund that is owned by its investors
and
managed by First Street Manager II, LLC. First Street Manager II,
LLC, of
which Corey S. Ribotsky is the fund manager, has voting and investment
control over the shares owned by AJW Offshore, Ltd. AJW Qualified
Partners, LLC, formerly known as Pegasus Capital Partners, LLC, is
a
private investment fund that is owned by its investors and managed
by AJW
Manager, LLC, of which Corey S. Ribotsky and Lloyd A. Groveman are
the
fund managers, have voting and investment control over the shares
listed
below owned by AJW Qualified Partners, LLC. New Millennium Capital
Partners II, LLC, is a private investment fund that is owned by its
investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager,
has
voting and investment control over the shares owned by New Millennium
Capital Partners II, LLC.
|
(3) |
Represents
an estimate of the maximum number of shares receivable upon conversion
of
the 6% Convertible Notes, and therefore, an estimate of the number
of
shares of common stock that could be offered by 6% Note Holders.
The
actual number of shares of common stock issuable upon conversion
of the 6%
Notes and exercise of the warrants is indeterminate, is subject to
adjustment and could be materially less or more than such estimated
number
depending on factors which cannot be predicted by us at this time
including, among other factors, the future market price of the common
stock. Under the terms of the 6% Notes, if the 6% Notes had actually
been
converted on August 8, 2006, the conversion price would have been
$0.1398.
Under the terms of the 6% Notes and the related warrants, the 6%
Notes are
convertible and the warrants are exercisable by any holder, as per
the
convertibility provisions of their only to the extent that the number
of
shares of common stock issuable pursuant to such securities, together
with
the number of shares of common stock owned by such holder and its
affiliates (but not including shares of common stock underlying
unconverted shares of notes or unexercised portions of the warrants)
would
not exceed 4.99% of the then outstanding common stock as determined
in
accordance with Section 13(d) of the Exchange Act. Accordingly, the
number
of shares of common stock set forth in the table for the 6% Note
Holders
exceeds the number of shares of common stock that the 6% Note Holders
could own beneficially at any given time through their ownership
of the 6%
Notes and the warrants.
|
(4) |
Double
U Master Fund L.P. is a master fund in a master-feeder structure
whose
general partner is B&W Equities LLC. Isaac Winehouse is the manger of
B&W Equities LLC and has ultimate responsibility for trading with
respect to Double U Master Fund L.P. Mr. Winehouse disclaims beneficial
ownership of the shares being registered
hereunder.
|
(5) |
Nite
Capital, LP is a limited partnership. Nite Capital, LLC is the
general partner of Nite Capital, LP and Keith Goodman is managing
member
of Nite Capital, LLC.
|
(6) |
Represents
980,000 shares underlying warrants issued as compensation for investment
banking services in connection with the sale of the 6% Notes. Lane
Capital
Markets, LLC is a registered
broker-dealer.
|
(7) |
Represents
300,000 shares underlying warrants issued as compensation for investment
banking services in connection with our reverse merger transaction
in
March 2004. The investment bank that received the shares assigned
them to
the following three individuals: Zhonghua Chen, Jian Liu and Baizhu
Chen.
|
(8) |
Represents
900,000 shares underlying warrants issued on September 23,
2004.
|
(9) |
Represents
50,000 shares after
cashless exercise of warrants for 150,000 shares
issued on September 23, 2004.
|
(10) |
Represents
750,000 shares underlying warrants issued on May 30, 2005.
|
(11) |
Represents
350,000 shares underlying warrants issued on June 1, 2005.
|
(12) |
Represents
500,000 shares underlying warrants issued on June 17, 2005 and 773,537
conversion shares
|
(13) |
Represents
1,190,847 shares underlying warrants issued in connection with Advance
Agreements for borrowed money dated June 29, 2005, September 30,
2006,
December 31, 2005 and March 31, 2006.
|
(14) |
Represents
783,423 shares underlying warrants issued in connection with Advance
Agreement for borrowed money dated May 23, 2005. Mr. Li is the Company’s
Chief Executive Officer.
|
(15) |
Represents
996,646 shares issued to Lianjun Luo as compensation for services
pursuant
to an employment agreement dated March 18, 2003. Mr. Luo is the Company’s
Chief Financial Officer.
|
(16) |
Represents
1,800,000 shares issued to Fisher Capital Partners Limited as
compensation.
|
Terms
of 6% Secured Convertible Notes and Warrants
On
June
29, 2006, we entered into a securities purchase agreement with six institutional
investors (collectively, the "6% Note Holders") for the issuance and sale of
(1)
6% secured convertible notes, due three years from the date of issue, in the
aggregate principal amount of $2,450,000 (the "6% Notes"), convertible into
shares of the our common stock, and (2) warrants (the "6% Note Warrants") to
purchase 12,250,000 shares of our common stock, in exchange for $2.45 million.
In
conjunction with the sale and issuance of the 6% Notes, we entered into a
registration rights agreement with the 6% Note Holders pursuant to which we
are
required to file within 45 days a registration statement under the Securities
Act covering the resale of the shares issued upon conversion of the 6% Notes.
The registration rights agreement imposes financial penalties if we do not
timely complete the filing, or the registration statement is not declared
effective within 120 days of being filed. The penalties are capped at 10% of
the
outstanding principal amount of the 6% Notes.
The
closing for the sale of the 6% Notes is to occur in three stages. A first sale
of 6% Notes with a principal amount of $857,500 closed on June 29, 2006.
Additional 6% Notes with a principal amount of $735,000 are to be issued and
sold within two days of the filing of the registration statement, and additional
6% Notes with a principal amount of $857,500 are to be issued and sold within
two days of the registration statement being declared effective.
The
conversion price of the 6% Notes is based on an average of the trading price
of
our common stock on the OTC Bulletin Board. The conversion price is discounted
50% before the registration statement is filed, 45% after it is filed if filed
before the 45-day deadline, and 40% if the registration statement becomes
effective before the 120-day deadline. The conversion price is also adjusted
for
certain subsequent issuances of any equity securities of the Company at prices
below the conversion price then in effect. The 6% Notes contain a volume
limitation that prohibits the holder from converting further 6% Notes if by
doing so would cause the holder and its affiliates to hold more than 4.99%
of
our outstanding common stock. In addition, the holder agrees that it will not
convert more than $120,000 principal amount of 6% Notes per calendar
month.
The
exercise price of the 6% Note Warrants is $0.45 per share, subject to
anti-dilution adjustments pursuant to a broad-based weighted average formula
for
subsequent issues of equity securities by the Company below the trading price
of
the shares. The purchase agreement requires us to maintain a reserve of
authorized common stock equal to 110% of the number of shares issuable upon
full
conversion of the 6% Notes and exercise of the 6% Note Warrants. The Purchase
Agreement imposes financial penalties if the authorized number of shares of
common stock is insufficient to satisfy the reserve requirements.
The
financial penalty is equal to 2% of the outstanding amount of the 6%
Notes
per months plus accrued and unpaid interest on the notes, prorated for partial
months. The
6%
Notes and the 6% Note Warrants also impose a financial penalty on us if we
fail
to timely deliver common stock upon conversion of the 6% Notes and exercise
of
the 6% Note Warrants, respectively.
The
6%
Notes requires us to procure the 6% Note Holder’s consent to take certain
actions including to pay dividends, repurchase stock, incur debt, guaranty
obligations, merge or restructure the Company, or sell significant
assets.
Our
obligations under the 6% Notes and the 6% Note Warrants are secured by a first
priority security interest in our intellectual property pursuant to an
intellectual property security agreement with the 6% Note Holders, and by a
first priority security interest in all of our other assets pursuant to a
security agreement with the 6% Note Holders. In addition, the our Chief
Executive Officer has pledged all of his common stock of the Company as
collateral security for the Company’s obligations under the 6% Notes and the 6%
Note Warrants.
Terms
of Warrants under the 2005 Convertible Secured Promissory Note Agreements
We
entered into three convertible secured promissory note agreements, for the
aggregate note amount of $320,000, with Donald Worthly, Gertrude Yip, and Hiro
and Elaine Sugimura on May 30, 2005, June 1, 2005 and June 17, 2005,
respectively. Pursuant to the terms of the convertible secured promissory note
agreement, the lenders were given a right to convert their respective notes
into
shares of common stock upon the maturity date of the notes, which is three
months from the execution date of the agreements. The lenders were also granted
detachable warrants to purchase an aggregate of 1,600,000 shares of Common
Stock
in the form warrants pursuant to purchase agreements entered into
contemporaneously by the parties. The exercise prices of the warrants are
$0.023, 0.022 and $0.018 respectively. As of the day of this prospectus, the
balance of $320,000 on these convertible secured promissory note agreements
is
currently outstanding. We are required under the terms of the note agreements
to
register the shares underlying the warrants within six months from the date
of
issue or as soon as practicable at our expense. In addition, the lenders were
granted unlimited piggyback rights.
On
August
8, 2006, Hiro and Elaine Sugimura agreed to convert both the principle and
accrued interests into 773,537 shares of our common stock, based on the the
closing price $0.245 at August 7, 2006, times 0.60 (a 40% discount) which was
U$0.147 per share. Pursuant to the Debt Conversion Agreement, Hiro and Elaine
Sugimura be entitled to the piggy-back registration rights for the Conversion
Shares.
Terms
of Common Stock Option Purchase Agreement with Transworld Consulting Group
Corporation
On
March
30, 2004, we entered into an option purchase agreement with Transworld
Consulting Group Corporation,
a
financial consultant. Pursuant to the agreement Transworld Consulting was issued
a stock option to purchase 300,000 shares of common stock exercisable at $0.20
per share. Transworld Consulting was granted piggy-back registration rights
exercisable during the six-year period from the effective date of the agreement.
Transworld has assigned the warrants to Zhonghua Chen, Jian Liu, Baizhu
Chen.
Terms
of Warrants Issued to Kim and Bang under the 2004 Convertible
Note Agreements
On
September 23, 2004, we entered into two convertible note agreements, for the
aggregate principal amount of $350,000,
with Yong Sam Kim and Song N. Bang. The principal and interest have been settled
in cash. In connection with the convertible note agreements, Messrs. Kim and
Bang were issued warrants to purchase 900,000 and 150,000 shares of common
stock, respectively. Each warrant entitled the holders to subscribe for one
share of common stock at an exercise price of $0.20 per share through September
23, 2007. Pursuant to the convertible note agreements, Messrs. Kim and Bang
were
granted piggy-back registration rights exercisable during the three-year period
from the effective date of the agreements. In July 2006, Bang exercised his
warrants by cashless exercise for 50,000 shares of our common
stock.
Terms
of Warrants Issued to China Star and Wei Li under the Advance Agreements
Pursuant
to advance agreements dated June 29, 2005, September 30, 2006, December 31,
2005
and March 31, 2006
we
borrowed money China
Star Investment Co. Ltd for
a
total amount of $238,169. The money was borrowed pursuant to 27 advances between
April 4, 2005 and March 25, 2005. The advances were unsecured, bore interest
at
12% per annum and were initially due in 180 days from the date of draw down.
In
conjunction with the advance agreements we detachable warrants to China Star
to
purchase an aggregate of 1,190,847 shares of common stock. The exercise price
of
the warrants varies from $0.0080
to
0.0300 per share. China
Star was granted unlimited piggy-back registration rights. China
Star is a company which is 28% owned by our Chief Executive Officer, Wei Li.
Mr.
Yun
long Zhang, one of our directors, is also General Manager of China Star and
is
responsible for its daily operations.
Pursuant
to and advance agreement dated May 23, 2005
we
borrowed money from
We
Li for
a
total amount of $168,333. The money was borrowed pursuant to advances between
April 4, 2005 and March 25, 2005. The advances were unsecured, bore interest
at
12% per annum and were initially due in 180 days from the date of draw down.
In
conjunction with the advance agreements we detachable warrants to Mr. Li to
purchase an aggregate of 783,423 shares of common stock. The exercise price
of
650,000 of the warrants is $0.0110
and of 133,423
of the warrants is 0.0481
per share. Li
was
granted unlimited piggy-back registration rights.
PLAN
OF DISTRIBUTION
The
selling stockholders may, from time to time, sell any or all of their shares
of
common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
· |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
· |
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
· |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
· |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
· |
privately
negotiated transactions;
|
· |
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
· |
a
combination of any such methods of sale;
and
|
· |
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
The
selling stockholders may also engage in puts and calls and other transactions
in
our securities or derivatives of our securities and may sell or deliver shares
in connection with these trades.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder.
The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this
prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed a supplement to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amending the list
of
selling stockholders to include the pledgee, transferee or other successors
in
interest as selling stockholders under this prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares of common stock may be deemed to be "underwriters" within
the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. We have agreed to indemnify some of the selling stockholders
against certain claims, damages and liabilities, including liabilities under
the
Securities Act.
The
selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed
sale
of shares of common stock by any selling stockholder. If we are notified by
any
selling stockholder that any material arrangement has been entered into with
a
broker-dealer for the sale of shares of common stock, if required, we will
file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
The
anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the selling
stockholders.
LEGAL
MATTERS
Certain
legal matters with respect to the shares of our common stock offered hereby
will
be passed upon for us by Preston Gates & Ellis LLP, Seattle,
Washington.
EXPERTS
We
have
included the
financial statements as of December 31, 2005 and 2004 in this prospectus in
reliance upon the reports
of Mao
&
Company CPAs, Inc. and Grobstein, Horwath & Company, LLP,
independent registered certified public accountants (which express unqualified
opinion and include an explanatory paragraph referring to going concern issue)
given on the authority of these firm as experts in accounting and
auditing.
CHANGES
IN ACCOUNTANTS
On
March
13, 2006, Grobstein, Horwath & Company LLP informed us by written letter
that it was resigning as the certifying accounting firm for the Company and
its
subsidiaries effective immediately. Effective March 14, 2006, our board of
directors approved the selection of Mao & Company, CPAs, Inc. as our
certifying accounting firm for the fiscal year ending December 31,
2005.
During
March 2004, we completed a stock exchange transaction with the stockholders
of
Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”) resulting in Kiwa Bio-Tech
becoming a wholly owned subsidiary of the Company. This stock exchange
transaction also resulted in a recapitalization of
the
Company with Kiwa BVI becoming
the
surviving entity of the transaction for accounting purposes. Grobstein, Horwath
& Company, LLP audited Kiwa Bio-Tech’s financial statements for the period
from June 5, 2002 (date of inception) to December 31, 2002 and the fiscal year
ended December 31, 2003. Grobstein, Horwath & Company, LLP’s reports for
those periods did not contain an adverse opinion or a disclaimer of opinion,
and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
During
our fiscal year ended December 31, 2004, for which audit services were provided
by Grobstein, Horwath & Company, LLP, and through March 13, 2006, there were
no disagreements with Grobstein, Horwath & Company, LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, which, if not resolved to the satisfaction of Grobstein,
Horwath & Company, LLP, would have caused them to make reference to the
subject matter in their report.
Prior
to
Mao & Company CPAs, Inc. becoming our independent registered public
accounting firm, neither we, nor anyone on our behalf, consulted with Mao &
Company, CPAs, Inc. regarding either
the
application of accounting
principles to a specific or contemplated
transaction or the type of audit opinion that might be rendered on our financial
statements.
WHERE
YOU CAN FIND MORE INFORMATION
We
are
subject to the informational requirements of the Securities Exchange Act of
1934
and, in accordance therewith, file reports, proxy statements and other
information with the SEC. Our reports, proxy statements and other information
filed pursuant to the Securities Exchange Act of 1934 may be inspected and
copied at the public reference facilities maintained by the SEC at 100 F.
Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330. In addition, the SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of the SEC’s Web site is
http://www.sec.gov.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act of 1933 with respect to the common stock offered hereby. As permitted by
the
rules and regulations of the SEC, this prospectus, which is part of the
registration statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. Copies of the registration
statement and the exhibits are on file with the SEC and may be obtained from
the
SEC’s Web site or upon payment of the fee prescribed by the SEC, or may be
examined, without charge, at the offices of the SEC set forth above. For further
information, reference is made to the registration statement and its
exhibits.
KIWA
BIO-TECH PRODUCTS GROUP CORPORATION AND ITS SUBSIDIARIES
Index
to Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
|
Report
of Mao & Company CPAs, Inc. dated April 14, 2006
|
|
|
F-2
|
|
|
|
|
|
|
Report
of Grobstein, Horwath & Company, LLP dated February 25 ,
2005
|
|
|
F-3
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income for the years ended
December 31, 2005 and 2004
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficiency) for the period from
January 1, 2004 through December 31, 2005
|
|
|
F-6
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005 and
2004
|
|
|
F-7
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-8
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2006 (Unaudited) and December 31,
2005
(Audited)
|
|
|
F-22
|
|
|
|
|
|
|
Unaudited
Consolidated Statements of Operations and Comprehensive Income for
the
three months and six months ended June 30, 2006 and 2005
|
|
|
F-23
|
|
|
|
|
|
|
Unaudited
Consolidated Statements of Stockholders’ Equity (Deficiency) for the
period from January 1, 2006 through June 30, 2006
|
|
|
F-24
|
|
|
|
|
|
|
Unaudited
Consolidated Statements of Cash Flows for the six months ended June
30,
2006 and 2005
|
|
|
F-25
|
|
|
|
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
|
|
F-26
|
|
REPORT
OF INDEPENDENT AUDITOR, MAO & COMPANY CPAS, INC.
To
the
Board of Directors and Stockholders of
Kiwa
Bio-Tech Products Group Corporation
We
have
audited the accompanying consolidated balance sheet of Kiwa Bio-Tech Products
Group Corporation and Subsidiary (the “Company”) as of December 31, 2005, and
the related consolidated statements of operations, stockholders’ equity
(deficiency) and cash flows for the year ended December 31, 2005. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that
we plan and perform the audit to obtain reasonable assurance about whether
the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal controls over financial reporting. Our audit included consideration
of
internal controls over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Kiwa Bio-Tech Products
Group
Corporation and Subsidiary as of December 31, 2005 and the consolidated results
of their operations and their cash flows for the year ended December 31, 2005,
in conformity with accounting principles generally accepted in the United States
of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficit and a net capital deficiency
that
raise substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
Mao
& Company CPAs, Inc.
New
York,
New York
April
14,
2006
REPORT
OF INDEPENDENT AUDITOR, GROBSTEIN, HORWATH & COMPANY
LLP
To
the
Board of Directors and Stockholders of
Kiwa
Bio-Tech Products Group Corporation
We
have
audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products
Group Corporation and Subsidiary (the “Company”) as of December 31, 2004, and
the related consolidated statements of operations, stockholders’ equity
(deficiency) and cash flows for the year ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with generally accepted auditing standards
as
established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits
to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor
were
we engaged to perform, an audit of its internal controls over financial
reporting. Our audit included consideration of internal controls over financial
reporting as a basis for designing audit procedures that are appropriate in
the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audit
provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Kiwa Bio-Tech Products
Group
Corporation and Subsidiary as of December 31, 2004 and the consolidated result
of their operations and their cash flows for the year ended December 31, 2004,
in conformity with accounting principles generally accepted in the United States
of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficit and a net capital deficiency
that
raise substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
Grobstein, Horwath & Company, LLP
Sherman
Oaks, California
February
25, 2005
Consolidated
Balance Sheets
Kiwa
Bio-Tech Products Group Corporation and Subsidiaries
Consolidated
Balance Sheets
|
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14,576
|
|
$
|
17,049
|
|
Accounts
receivable
|
|
|
701,486
|
|
|
963,403
|
|
Other
receivable
|
|
|
-
|
|
|
157,495
|
|
Inventories
|
|
|
495,597
|
|
|
83,677
|
|
Prepaid
expenses
|
|
|
1,962
|
|
|
131,600
|
|
Other
current assets
|
|
|
27,186
|
|
|
26,340
|
|
Total
current assets
|
|
|
1,240,807
|
|
|
1,379,564
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
Buildings
|
|
|
1,012,219
|
|
|
986,965
|
|
Machinery
and equipment
|
|
|
447,361
|
|
|
218,250
|
|
Automobiles
|
|
|
103,914
|
|
|
101,321
|
|
Office
equipment
|
|
|
57,423
|
|
|
49,688
|
|
Computer
software
|
|
|
8,940
|
|
|
8,717
|
|
|
|
|
1,629,857
|
|
|
1,364,941
|
|
Less:
accumulated depreciation
|
|
|
(192,991
|
)
|
|
(109,847
|
)
|
Property
plant and equipment - net
|
|
|
1,436,866
|
|
|
1,255,094
|
|
Construction
in progress
|
|
|
33,429
|
|
|
32,595
|
|
Intangible
asset-net
|
|
|
410,586
|
|
|
463,730
|
|
Total
assets
|
|
$
|
3,121,688
|
|
$
|
3,130,983
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,000,477
|
|
$
|
560,874
|
|
Construction
costs payable
|
|
|
372,338
|
|
|
370,453
|
|
Short-term
loans
|
|
|
-
|
|
|
50,000
|
|
Due
to related parties
|
|
|
454,193
|
|
|
128,884
|
|
Convertible
notes payable-unrelated party
|
|
|
407,135
|
|
|
312,104
|
|
Current
portion of bank notes payables
|
|
|
13,647
|
|
|
12,879
|
|
Total
current liabilities
|
|
|
2,247,790
|
|
|
1,435,194
|
|
Long-term
liabilities, less current portion:
|
|
|
|
|
|
|
|
Unsecured
loans payable
|
|
|
1,424,996
|
|
|
1,389,443
|
|
Bank
notes payable
|
|
|
13,895
|
|
|
26,853
|
|
Total
long-term liabilities
|
|
|
1,438,891
|
|
|
1,416,296
|
|
Stockholders’
equity (deficiency)
|
|
|
|
|
|
|
|
Common
stock -$0.001 par value
Authorized
100,000,000 shares and 50,000,000 shares at December 31, 2005 and
2004, respectively
Issued
and outstanding 59,235,930 shares and 40,873,711 shares at
December 31, 2005 and 2004, respectively
|
|
|
59,236
|
|
|
40,874
|
|
Preferred
stock -$0.001 par value
Authorized
20,000,000 shares and nil shares at December 31, 2005 and 2004,
respectively
Issued
and outstanding nil shares at December 31, 2005 and
2004
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
4,835,968
|
|
|
4,393,415
|
|
Deficit
Accumulated
|
|
|
(5,482,555
|
)
|
|
(4,154,796
|
)
|
Accumulated
other comprehensive income
|
|
|
22,358
|
|
|
|
|
Total
stockholders’ equity (deficiency)
|
|
|
(564,993
|
)
|
|
279,493
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
3,121,688
|
|
$
|
3,130,983
|
|
Consolidated
Statements of Operations
and Comprehensive Income
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
631,794
|
|
$
|
1,300,251
|
|
Cost
of sales
|
|
|
232,692
|
|
|
641,236
|
|
Gross
profit
|
|
|
399,102
|
|
|
659,015
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Consulting
and professional fees
|
|
|
614,532
|
|
|
448,442
|
|
Officers’
compensation
|
|
|
38,727
|
|
|
77,398
|
|
General
and administrative
|
|
|
664,637
|
|
|
598,492
|
|
Research
and development
|
|
|
11,264
|
|
|
49,622
|
|
Depreciation
and amortization
|
|
|
106,283
|
|
|
52,798
|
|
Reverse
merger costs
|
|
|
-
|
|
|
1,417,434
|
|
Total
costs and expenses
|
|
|
1,435,443
|
|
|
2,644,186
|
|
Operating
loss
|
|
|
(1,036,341
|
)
|
|
(1,985,171
|
)
|
Interest
expense, net
|
|
|
(293,834
|
)
|
|
(803,913
|
)
|
Other
income
|
|
|
2,416
|
|
|
60,411
|
|
Net
loss
|
|
$
|
(1,327,759
|
)
|
$
|
(2,728,673
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
22,358
|
|
|
-
|
|
Comprehensive
loss
|
|
$
|
(1,305,401
|
)
|
$
|
(2,728,673
|
)
|
Net
loss per common share
-basic
and diluted
|
|
$
|
(0.026
|
)
|
$
|
(0.074
|
)
|
Weighted
average number of common shares outstanding
-basic
and diluted
|
|
|
50,957,995
|
|
|
36,887,339
|
|
Consolidated
Statement of Stockholders’ Equity (Deficiency)
Kiwa
Bio-Tech Products Group Corporation and Subsidiaries
Consolidated
Statement of Stockholders’ Equity (Deficiency)
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficits
|
|
Other
Comprehensive
Income
|
|
Total
Stockholders’
Equity
(Deficiency)
|
|
|
|
Shares
|
|
Amount
|
|
Balance,
January 1, 2004
|
|
|
30,891,676
|
|
|
30,892
|
|
|
1,184,108
|
|
|
(1,426,123
|
)
|
|
-
|
|
|
(211,123
|
)
|
Shares
retained by public stockholders in March 2004 reverse merger transaction
|
|
|
4,038,572
|
|
|
4,038
|
|
|
(4,038
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of warrants valued at $0.54 per share on March 30, 2004 in conjunction
with March 2004 reverse merger transaction
|
|
|
-
|
|
|
-
|
|
|
943,380
|
|
|
-
|
|
|
-
|
|
|
943,380
|
|
Issuance
of stock options valued at $0.57 per share on March 30, 2004 to consultant
in conjunction with March 2004 reverse merger transaction
|
|
|
-
|
|
|
-
|
|
|
171,000
|
|
|
-
|
|
|
-
|
|
|
171,000
|
|
Beneficial
conversion feature of convertible note payable funded on January
25, 2004
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
Beneficial
conversion feature of convertible note payable funded on April 7,
2004
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
Restricted
shares issued to a consultant for services at $0.45 per share on
May 24,
2004.
|
|
|
75,000
|
|
|
75
|
|
|
33,675
|
|
|
-
|
|
|
-
|
|
|
33,750
|
|
Shares
issued upon conversion of convertible notes payable at $0.25 per
share on
June 8, 2004
|
|
|
2,800,000
|
|
|
2,800
|
|
|
697,200
|
|
|
-
|
|
|
-
|
|
|
700,000
|
|
Shares
issued to China Agricultural University in conjunction with April
2004
Patent Transfer Agreement at $0.42 per share on July 19,
2004
|
|
|
1,000,000
|
|
|
1,000
|
|
|
419,000
|
|
|
-
|
|
|
-
|
|
|
420,000
|
|
Shares
issued to consultant in conjunction with July 2004 Standby Equity
Distribution transaction at $0.001 per share on July 29,
2004
|
|
|
26,567
|
|
|
27
|
|
|
(27
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares
issued for commitment fee in conjunction with July 2004 Standby Equity
Distribution transaction at $0.001 per share on July 29,
2004
|
|
|
704,039
|
|
|
704
|
|
|
(704
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares
issued to lawyer for legal services at $0.014 per share on September
14,
2004
|
|
|
892,857
|
|
|
893
|
|
|
124,107
|
|
|
-
|
|
|
-
|
|
|
125,000
|
|
Issuance
of warrants on September 23, 2004 in conjunction with September 2004
convertible notes payable
|
|
|
-
|
|
|
-
|
|
|
82,559
|
|
|
-
|
|
|
-
|
|
|
82,559
|
|
Shares
issued to consultants for services at $0.10 per share on October
1,
2004
|
|
|
415,000
|
|
|
415
|
|
|
41,085
|
|
|
-
|
|
|
-
|
|
|
41,500
|
|
Issuance
of restricted common stock to a consultant as final compensation
at $0.07
per share on November 19, 2004
|
|
|
30,000
|
|
|
30
|
|
|
2,070
|
|
|
-
|
|
|
-
|
|
|
2,100
|
|
Net
loss for the year ended December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,728,673
|
)
|
|
-
|
|
|
(2,728,673
|
)
|
Balance,
December 31, 2004
|
|
|
40,873,711
|
|
|
40,874
|
|
|
4,393,415
|
|
|
(4,154,796
|
)
|
|
-
|
|
|
279,493
|
|
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
|
|
|
294,503
|
|
|
-
|
|
|
-
|
|
|
312,865
|
|
Issuance
of detachable warrants in conjunction with the issuance of convertible
promissory notes to the holders in June 2005
|
|
|
-
|
|
|
-
|
|
|
21,700
|
|
|
-
|
|
|
-
|
|
|
21,700
|
|
Beneficial
conversion feature of the convertible promissory notes funded in
June
2005
|
|
|
-
|
|
|
-
|
|
|
106,666
|
|
|
-
|
|
|
-
|
|
|
106,666
|
|
Issuance
of detachable warrants in conjunction with the advance agreement
with a
director dated May 23, 2005
|
|
|
-
|
|
|
-
|
|
|
8,633
|
|
|
-
|
|
|
-
|
|
|
8,633
|
|
Issuance
of detachable warrants in conjunction with the advance agreement
with a
related party dated June 29, 2005
|
|
|
-
|
|
|
-
|
|
|
5,417
|
|
|
-
|
|
|
-
|
|
|
5,417
|
|
Issuance
of detachable warrants in conjunction with the advance agreement
with a
director dated September 30, 2005
|
|
|
-
|
|
|
-
|
|
|
5,021
|
|
|
-
|
|
|
-
|
|
|
5,021
|
|
Issuance
of detachable warrants in conjunction with the advance agreement
with a
director dated December 31, 2005
|
|
|
|
|
|
|
|
|
613
|
|
|
|
|
|
|
|
|
613
|
|
Net
loss for the year ended December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,327,759
|
)
|
|
-
|
|
|
(1,327,759
|
)
|
Translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
22,358
|
|
|
(22,358
|
)
|
Balance,
December 31, 2005
|
|
|
59,235,930
|
|
|
59,236
|
|
|
4,835,968
|
|
|
(5,482,555
|
)
|
|
22,358
|
|
|
(564,993
|
)
|
Consolidated
Statements of Cash Flows
Kiwa
Bio-Tech Products Group Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,327,759
|
)
|
$
|
(2,728,673
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
202,350
|
|
Issuance
of securities for reverse merger costs
|
|
|
-
|
|
|
1,114,380
|
|
Depreciation
and amortization
|
|
|
146,932
|
|
|
91,061
|
|
Amortization
of detachable warrants
|
|
|
78,447
|
|
|
44,663
|
|
Amortization
of beneficial conversion feature
of
convertible notes payable
|
|
|
106,666
|
|
|
700,000
|
|
(Gain)/Loss
on disposal of Property, Plant and Equipment
|
|
|
-
|
|
|
121,268
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)decrease
in :
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
261,917
|
|
|
(918,168
|
)
|
Inventories
|
|
|
(411,920
|
)
|
|
51,524
|
|
Other
receivable
|
|
|
157,495
|
|
|
(157,495
|
)
|
Prepaid
expenses
|
|
|
129,638
|
|
|
(131,600
|
)
|
Other
current assets
|
|
|
(846
|
)
|
|
83,471
|
|
Due
from related party
|
|
|
-
|
|
|
30,574
|
|
Increase(decrease)in:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
439,603
|
|
|
499,781
|
|
Construction
cost payable
|
|
|
-
|
|
|
(153,045
|
)
|
Net
cash used in operating activities
|
|
|
(419,827
|
)
|
|
(1,149,909
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(229,989
|
)
|
|
(159,234
|
)
|
Acquisition
of intangible asset
|
|
|
-
|
|
|
(60,411
|
)
|
Net
cash used in investing activities
|
|
|
(229,989
|
)
|
|
(219,645
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
-
|
|
|
300,000
|
|
Proceeds
from short-term loans
|
|
|
-
|
|
|
50,000
|
|
Repayment
of short-term loans
|
|
|
(50,000
|
)
|
|
(283,930
|
)
|
Proceeds
from related parties
|
|
|
488,501
|
|
|
28,884
|
|
Repayment
to related parties
|
|
|
(163,741
|
)
|
|
-
|
|
Proceeds
from convertible notes payable
|
|
|
720,000
|
|
|
1,050,000
|
|
Repayment
of convertible notes payable
|
|
|
(350,000
|
)
|
|
-
|
|
Proceeds
from long-term borrowings
|
|
|
-
|
|
|
265,806
|
|
Repayment
of long-term borrowings
|
|
|
(12,190
|
)
|
|
(72,887
|
)
|
Net
cash provided by financing activities
|
|
|
632,570
|
|
|
1,337,873
|
|
Foreign
currency translation
|
|
|
14,773
|
|
|
-
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Net
decrease
|
|
|
(2,473
|
)
|
|
(31,681
|
)
|
Balance
at beginning of year
|
|
|
17,049
|
|
|
48,730
|
|
Balance
at end of year
|
|
$
|
14,756
|
|
$
|
17,049
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash flow Information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
6,354
|
|
$
|
57,966
|
|
Cash
paid for taxes
|
|
|
-
|
|
|
-
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Issuance
of common stock for convertible notes payable
|
|
|
312,865
|
|
|
700,000
|
|
Beneficial
conversion feature of convertible notes payable
|
|
|
106,666
|
|
|
700,000
|
|
Transfer
from convertible notes due to related party
|
|
|
-
|
|
|
100,000
|
|
Issuance
of common stock in exchange for patent
|
|
|
-
|
|
|
420,000
|
|
Issuance
of detachable warrants in conjunction
with
issuance of convertible notes payable
|
|
$
|
41,384
|
|
$
|
82,559
|
|
Notes
to Consolidated Financial Statements
1.
Background 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. The Company has completed the development stage
in fourth quarter of 2004 as the Company generated substantial revenue from
planned principal operations.
Basis
of Presentation
- The
consolidated financial statements include the operations of Kiwa Bio-Tech
Products Group Corporation and its wholly-owned subsidiaries, and are presented
in accordance with generally accepted accounting principles in the United
States. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use
of Estimates
- The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Country
Risk - As
the
Company’s principal operations are conducted in China, the Company is subject to
special considerations and significant risks not typically associated with
companies in North America and Western Europe. These risks include, among
others, risks associated with the political, economic and legal environments
and
foreign currency exchange limitations encountered in China. The Company’s
results of operations may be adversely affected by changes in the political
and
social conditions in China, and by changes in governmental policies with respect
to laws and regulations, among other things.
In
addition, all of the Company’s transactions undertaken in China are denominated
in RMB, which must be converted into other currencies before remittance out
of
China may be considered. Both the conversion of RMB into foreign currencies
and
the remittance of foreign currencies abroad require the approval of the Chinese
government.
Credit
Risk - The
Company performs ongoing credit evaluations of its customers and intends to
establish an allowance for doubtful accounts when amounts are not considered
fully collectable. According to the Company’s credit policy, the Company
provides 100% bad debt provision for the amounts outstanding over 365 days,
which management believes is consistent with industry practice in the China
region.. Though we have no conclusive indication of insolvency from any of
our
customers, for the sake of prudence, we accrued bad debt allowance $82,942
for
the long outstanding balance. Management of the Company believes that the
accounts receivable balance as of December 31, 2004 will be fully
collected.
Going
Concern
- The
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 consolidated financial statements do not purport to represent
the realizable or settlement values. We incurred a net loss of $1,327,759 and
$2,728,673 during the fiscal year ended December 31, 2005 and 2004,
respectively, and our current liabilities exceeded our current assets by
$1,006,983 and $55,630 at December 31, 2005 and 2004, respectively. These
factors create substantial doubt about our ability to continue as a going
concern.
In
March
2006 the Company entered into a purchase agreement to issue 5,000,000 shares
of
common stock for the proceeds of approximately $750,000. As of the April 13,
2006, the Company had received approximately $350,000, which represented47%
of
the total proceeds. The Company and the investors have agreed to defer funding
of the remaining commitment to April 30, 2006 (See Note 21). In April 2006,
we
are in negotiation but not yet concluded the issuance of convertible notes
with
two investors for the aggregate amount of up to $4 million. Company
management continues
to
evaluate the Company’s
cash
needs
and
the availability of
debt and
equity financing to fund
the
Company’s
operations.
As
a
result of the aforementioned conditions, the Company’s registered independent
public accountants, in their independent auditors’ reports on the consolidated
financial statements as of and for the year ended December 31, 2005 and
2004, have included an explanatory paragraph in their opinion indicating that
there is substantial doubt about the Company’s ability to continue as a going
concern. The financial statements do not contain any adjustments that might
result from the outcome of this uncertainty.
Revenue
Recognition
- The
Company recognizes sales in accordance with Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in
Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”. Sales
represent the invoiced value of goods, net of value added tax (“VAT”), supplied
to customers, and is recognized upon delivery of goods and passage of
title.
All
of
the Company’s sales made in China are subject to the Chinese value-added tax at
rates ranging from 13% to 17% (“output VAT”). Such output VAT is payable after
offsetting VAT paid by the Company on purchases (“input VAT”).
Net
Loss Per Common Share
- Basic
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 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
December 31, 2005, potentially dilutive securities aggregated 21,669,116 shares
of common stock. The loss per common share calculation for fiscal year ended
December 31, 2005 and 2004 reflect the March 2004 recapitalization of Kiwa
Bio-Tech.
The
Company effected a 4-for-1 split of its outstanding shares of common stock
effective March 29, 2004, in conjunction with the reverse merger transaction
with Kiwa Bio-Tech as described above. Unless otherwise indicated, all share
and
per share amounts presented herein have been adjusted to reflect the stock
split.
Advertising
- The
Company charges all advertising costs to expense as incurred. Advertising
expenses for the years ended December 31, 2005 and 2004 were $30,141 and
$17,416, respectively.
Research
and development
- Research
and development costs are charged to expense as incurred.
Cash
and Cash Equivalents
- Highly
liquid investments with a maturity of three months or less at the time of
acquisition are considered to be cash equivalents.
Financial
Instruments and Fair Value
- The
Company accounts for financial instruments under the provisions of Statement
of
Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, which requires that all derivative
financial instruments be recognized in the consolidated financial statements
and
maintained at fair value regardless of the purpose or intent for holding them.
Changes in fair value of derivative financial instruments are either recognized
periodically in income or stockholders’ equity (as a component of comprehensive
income), depending on whether the derivative is being used to hedge changes
in
fair value or cash flows. The adoption of SFAS No. 133 did not have a material
impact on the Company’s consolidated financial position or its results of
operations because the Company does not currently hold any derivative financial
instruments and does not engage in hedging activities. The carrying amounts
for
cash and cash equivalents, accounts receivable, other receivables, deposits
and
prepayments, short-term borrowings, accounts payable, other payables and
accruals approximate their fair values because of the short maturity of those
instruments.
Inventories
-
Inventories are stated at the lower of cost, determined on a weighted average
basis, and net realizable value. Work in progress and finished goods are
composed of direct material, direct labor and a portion of manufacturing
overhead. Net realizable value is the estimated selling price, in the ordinary
course of business, less estimated costs to complete and dispose. Management
believes that there is no obsolete
inventory.
Property,
Plant and Equipment
-
Property, Plant and Equipment are stated at cost. Major expenditures for
betterments and renewals are capitalized while ordinary repairs and maintenance
costs are expensed as incurred. Depreciation and amortization is provided using
the straight-line method over the estimated useful lives of the assets after
taking into account the estimated residual value. The estimated useful lives
are
as follows:
Buildings
|
|
|
20-35
years
|
|
Machinery
and equipments
|
|
|
4
-12 years
|
|
Automobiles
|
|
|
8
years
|
|
Office
equipment
|
|
|
5
years
|
|
Computer
software
|
|
|
3
years
|
|
Construction
in progress represents factory and office buildings under construction. The
Company capitalizes interest during the construction phase of qualifying assets
in accordance with SFAS No. 34, “Capitalization of Interest Cost”. No interest
was capitalized during 2005 and 2004 as the construction in progress was
minimal.
We
periodically evaluate our investment in long-lived assets, including property
and equipment, for recoverability whenever events or changes in circumstances
indicate the net carrying amount may not be recoverable. Our judgments regarding
potential impairment are based on legal factors, market conditions and
operational performance indicators, among others. In assessing the impairment
of
property and equipment, we make assumptions regarding the estimated future
cash
flows and other factors to determine the fair value of the respective assets.
If
these estimates or the related assumptions change in the future, we may be
required to record impairment charges for these assets. The Company has
determined that there was no impairment of long-lived assets at December 31,
2005.
Income
Taxes
- The
Company accounts for income taxes under the provisions of SFAS No. 109,
“Accounting for Income Taxes”, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns. Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets
and
liabilities are measured using the enacted tax rate expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company establishes a valuation when it is more likely
than
that the assets will not be recovered.
Operating
Leases
-
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.
Foreign
Currency Translation
- The
functional currency of the Company is 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 December 31, 2005, the prevailing exchange rate of the
US
dollar against the RMB was 8.0702), 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 stockholders’ 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 and
comprehensive income.
Comprehensive
(Loss) Income
- The
Company has adopted the 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.
Stock
Issued for Compensation and Financing
- The
Company from time to time 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 fiscal years ended December 31, 2005
and 2004.
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 year audited financial statements - Certain
prior year comparative figures have been reclassified to conform with the
current year presentation.
2.
Recent Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material. SFAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have
a
material impact on our consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 123-R, “Share Based Payments”, which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. The cost will be measured based on the estimate fair
value
of the equity or liability instruments issued. SFAS 123-R covers a wide range
of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Management believes the adoption of this pronouncement will
not
have a material effect on our consolidated financial statements.
Also,
in
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. The
amendments made by SFAS No. 153 are based on the principle that the exchange
of
nonmonetary assets should be measured using the estimated fair market value
of
the assets exchanged. SFAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets, and replaces it with a
broader exception for exchanges of nonmonetary assets do not have commercial
substance. A nonmonetary exchange has “commercial substance” if the future cash
flows of the entity are expected to change significantly as a result of the
transaction. This pronouncement is effective for monetary exchanges in fiscal
periods beginning after June 15, 2005. Management believes the adoption of
this
pronouncement will not have a material effect on our consolidated financial
statements.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections”. This statement requires entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods’
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, “Accounting Changes”, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period’s net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
“retrospective application” of an accounting principle and the “restatement” of
financial statements to reflect the correction of an error. SFAS No. 154 applies
to accounting changes and error corrections that are made in fiscal years
beginning after December 15, 2005. Management believes the adoption of this
statement will not have an immediate material impact on the consolidated
financial statements of the Company.
In
March
2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for
Conditional Asset Retirement Obligations”. FIN 47 clarifies that the term
“conditional asset retirement obligation,” which as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations”, refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within
the
control of the entity. The entity must record a liability for a “conditional”
asset retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The adoption of this statement does not have an
immediate material impact on the consolidated financial statements of the
Company.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.
3.
Inventories
Inventories
consisted of the following at December 31, 2005 and 2004:
|
|
December 31,
2005
|
|
December 31,
2004
|
|
Raw
materials
|
|
$
|
417,237
|
|
$
|
36,248
|
|
Work
in progress
|
|
|
-
|
|
|
32,295
|
|
Finished
goods
|
|
|
78,360
|
|
|
15,134
|
|
Total
|
|
$
|
495,597
|
|
$
|
83,677
|
|
4.
Other receivable
The
other
receivable consists of a right to receive the repayment of an advance of
$157,495 previously made to an unrelated U.S. incorporated entity, Kiwa Bio-Tech
Products, Inc. (“KBPI”), for payment of merger costs in March 2004. KBPI has
fully repaid the amount during 2005.
As
of
December 31, 2004, the prepaid expenses mainly consisted of $63,750 prepaid
to
KBPI for one-year of marketing service. According to the marketing service
agreement, KBPI would be entitled to receive a royalty of 8% of the gross
profits derived from the products or services sold by the Company which are
referred by KBPI. The Company did not pay any royalty fee to KBPI since it
did
not successfully refer any sales to the Company throughout the term of the
agreement.
Other
consulting fees included $45,000 prepaid to a consultant for public relation
services and sourcing of equity and debt financing for the Company over a
one-year consulting period. The Company prepaid $6,850 to another consultant
for
public relation services over six months. In addition, $16,000 in 2004 was
prepaid to a placement agent of the Company to raise bridge
financing..
As
of
December 31, 2005, the prepaid expenses amounted $1,962, including prepaid
rental, web hosting fee and insurance.
Prepaid
expenses consisted of the following at December 31, 2005 and 2004:
|
|
December
31, 2005
|
|
December 31,
2004
|
|
Marketing
service fee
|
|
|
-
|
|
$
|
63,750
|
|
Fees
for public relations and sourcing of financing
|
|
|
-
|
|
|
51,850
|
|
Others
|
|
|
1,962
|
|
|
-
|
|
Place
agent fee
|
|
|
-
|
|
|
16,000
|
|
Total
|
|
$
|
1,962
|
|
$
|
131,600
|
|
6.
Property Plant and Equipment
The
total
gross amount of property, plant and equipment was $1,629,857 and $1,364,941
as
of December 31, 2005 and 2004, respectively. The increase of $264,916 is
mainly due to research and development equipment purchased during 2005 for
$223,067. The research and development equipment has various uses.
Depreciation
expense was approximately $83,144 and $74,379 for the fiscal years ended
December 31, 2005 and 2004, respectively.
7.
Intangible Assets
The
Company’s intangible asset as of December 31, 2005 consisted of the
following:
|
|
Expected
Amortization
Period
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangible
asset,
Net
|
|
Patent
|
|
|
8.5
years
|
|
$
|
480,411
|
|
$
|
69,825
|
|
$
|
410,586
|
|
The
following table presents future expected amortization expense related to the
patent:
|
|
Amount
|
|
2006
|
|
$
|
56,518
|
|
2007
|
|
|
56,518
|
|
2008
|
|
|
56,518
|
|
2009
|
|
|
56,518
|
|
2010
|
|
|
56,518
|
|
Thereafter
|
|
|
127,996
|
|
|
|
$
|
410,586
|
|
8
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following at December 31, 2005
and
2004:
|
|
2005
|
|
2004
|
|
Consulting
and professional payables
|
|
$
|
411,360
|
|
$
|
140,566
|
|
Payables
to material suppliers
|
|
|
211,903
|
|
|
230,618
|
|
Interest
payable
|
|
|
106,880
|
|
|
23,430
|
|
Salary
payable
|
|
|
92,557
|
|
|
35,325
|
|
Insurance
payable
|
|
|
81,553
|
|
|
47,711
|
|
Office
rent payable
|
|
|
39,007
|
|
|
-
|
|
Payables
to equipment suppliers
|
|
|
13,761
|
|
|
13,417
|
|
Others
|
|
|
43,456
|
|
|
69,807
|
|
Total
|
|
$
|
1,000,477
|
|
$
|
560,874
|
|
9.
Construction Costs Payable
Construction
costs payable represents remaining amounts to be paid for the first phase of
the
construction project.
10.
Related Party Transactions
Amounts
due to related parties consisted of the following at December 31, 2005 and
2004:
|
|
Notes
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
Mr.
Wei Li (“Mr. Li”)
|
|
|
(i)
|
|
$
|
191,861
|
|
$
|
16,779
|
|
China
Star (“China Star Investment Group”)
|
|
|
(ii)
|
|
|
263,165
|
|
|
112,105
|
|
Unamortized
fair value of warrants issued to China Star
|
|
|
|
|
|
(833
|
)
|
|
-
|
|
Total
|
|
|
|
|
$
|
454,193
|
|
$
|
128,884
|
|
(i)
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 a loan agreement with Mr. Li for various
advances amounting to the aggregate of $156,685. The advances were unsecured
and
bore interest at 12% per annum with the period of 180 days since the date of
draw down. The due dates of the advances have been extended to June 30, 2006.
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 fiscal year ended December 31,
2005. The 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. This 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.
Mr.
Li
also executed a guarantee of repayment of the 10% Loan and the 12% Loans
(described at Note 12 to the Financial Statements as of and for the fiscal
years
ended Deceember 31, 2005 and 2004). On December 31, 2005, the 10% Loan was
repaid in full and retired and the 12% Loans had an outstanding balance of
$320,000.
In
December 2004 we entered into an agreement with Mr. Li, pursuant to which
Mr. Li leases the Company a motor vehicle. The monthly rental
payment
is $1,812 and the Company made no payments of rental expenses for the fiscal
year ended December 31, 2005.
(ii)
China Star
China
Star is a company which is 28% owned by Mr. Li. Mr.
Yun
long Zhang, one of our directors, is also General Manager of China Star, who
is
responsible
for its daily operations.
On
June
29, September 30, and December 31, 2005, the Company entered into advance
agreements with China Star for advances of $94,845, $91,071 and $13,598,
respectively. The advances were drawn down in stages over the second and third
quarters of 2005, respectively. The advances were unsecured, bore interest
at
12% per annum and were initially due in 180 days from the date of draw down.
The
due dates on all of the advances have been extended to June 2006. The Company
has also granted detachable warrants to China Star to purchase the aggregate
of
997,571 shares of common stock. As of December 31, 2005, the Company had an
outstanding balance due to China Star of $263,165.
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 fiscal year ended December 31,
2005. The fair 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.
Additionally,
we lease an office in the United States under a commercial lease agreement
with
China Star that expired in June 2005 with an aggregate
monthly
lease payment of approximately $2,560. Pursuant to the lease agreement dated
April 1, 2004, rent expenses for the fiscal year ended December 31, 2005
were $15,360. We paid the rental expenses amounted to $15,360 under the lease
in
2005. We did not renew the lease when it expired in 2005.
11.
Short-Term Loans
As
of
December 31, 2004, short term loans consisted of loans of $50,000 from
Greater China Securities Inc. The loans were unsecured, non-interest bearing
and
were repaid in February 2005.
12.
Convertible Notes Payable
The
balance
of
convertible notes payable as of December 31, 2005 and 2004 was $407,135 and
$312,104, respectively.
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 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 fiscal
year ended December 31, 2005. The fair 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. This fair value has been recorded as a
reduction to the convertible loan and has been credited to additional paid-in
capital, and is being amortized on the straight-line basis over the term of
the
loan with the amounts amortized being recognized as interest expense. Any
unamortized discount remaining at the date of conversion of the loan will be
recognized as interest expense in the period the conversion takes place. In
addition, the Company’s Chief Executive Officer, Mr. Li, also executed a
guarantee of repayment of the loan which is secured by shares of the Company’s
common stock that he owns.
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, bore interest at a rate of 10% per annum
and had a term of 290 days. The Company’s obligations under the Cornell Note
could be paid from proceeds the Company received pursuant to the Standby Equity
Distribution Agreement entered into with Cornell Capital on July 6, 2004..
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 served as escrow agent in connection with the advance notices and
shares that were deposited in escrow pursuant to the Cornell Note. To the extent
the Cornell Note was not repaid in cash by the Company, the escrow agent
released requests for advances to Cornell Capital and Cornell Capital, at its
discretion, could apply the proceeds from the advances to the outstanding
balance on the Cornell Note. As of December 31, 2005, the escrow agent had
released 32 such advances for an aggregate of 18,362,219 shares of common stock
with repayment of $312,865. The balance of principal due on the Cornell Note
as
of December 31, 2005 was $87,135.
As
of
March 31, 2006 the Company settled the Cornell Note with a payment of $110,176,
constituting all outstanding principal and accrued interest on the Cornell
Note
(See
Note
21).
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. 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. The Company did not
pay the 12% Loans by the extended maturity date. In April 2006 the Company
received notice from one of the lenders of its intention to convert $150,000
of
the 12% Loans to the Company’s common stock. On August 7, $100,000
and accrued interest of $13,710
of the
12% Loans were converted into 773 537 shares of our common stock, leaving the
remaining principle balance of the 12% Loans at $220,000. The Company is
negotiating with the other lenders to defer the payment date. The Company has
not received from the lenders any notice of default or demand for immediate
payment.
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 fiscal year ended
December 31, 2005. The fair 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.
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 fiscal year ended December
31,
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.
Other
Loans
On
January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan was scheduled
to
mature on September 25, 2004. As part of the loan terms, the lender has 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. On June 8, 2004, the lender converted the $500,000 loan into
2,000,000 shares of the Company’s common stock at the agreed upon conversion
price of $0.25 per share. The lender is an unrelated party located outside
the
United States.
The
fair
value of the beneficial conversion feature of this convertible loan was
determined to be $500,000, based on a formula that takes the lower of
outstanding loan principal and the difference between the $0.25 conversion
price
and the fair market value of the Company’s common stock of $0.60 per share. The
fair value of $500,000 was recorded as a reduction to convertible notes payable
and charged to operations as interest expense from January 25, 2004 through
the
conversion date (June 8, 2004), which resulted in a charge to operations of
$281,250 before the conversion date. The unamortized deferred interest expense
of $218,750 as of the conversion date was charged to operations.
On
March 12, 2004, the Company entered into a convertible loan agreement for
$200,000, with interest at 12%, payable at maturity. The loan was scheduled
to
mature three months after funding. As part of the loan terms, the lender has
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. The loan was not funded until April 7, 2004. On June 8, 2004,
the lender converted the $200,000 loan into 800,000 shares of the Company’s
common stock at the agreed upon conversion price of $0.25 per share. The lender
is an unrelated party located outside the United States.
The
fair
value of the beneficial conversion feature of this convertible loan was
determined to be $200,000, based
on
a formula that takes the lower of outstanding loan principal and
the
difference between the $0.25 conversion price and the fair market value of
the
Company’s common
stock of
$0.60 per share. The fair value of $200,000 was recorded as a reduction to
convertible notes payable and charged to operations as interest expense from
April 7, 2004 through the conversion date (June 8, 2004), which resulted in
a
charge to operations of $133,333 before the conversion date. The unamortized
deferred interest expense of $66,667 as of the conversion date was charged
to
operations.
13.
Unsecured loans payable
Unsecured
loans payable consisted of the following at December 31, 2005 and
2004:
|
|
Notes
|
|
December
31, 2005
|
|
December
31, 2004
|
Unsecured
loan payable to Zoucheng Municipal
Government,
non-interest bearing, becoming due within three years from Kiwa-SD’s first
profitable year on a formula basis, interest has not been imputed
due to
the undeterminable repayment date
|
|
(i)
|
|
$1,115,214
|
|
$1,087,390
|
Unsecured
loan payable to Zoucheng Science & Technology Bureau, non-interest
bearing, it is due in Kiwa-SD’s first profitable year, interest has not
been imputed due to the undeterminable repayment date
|
|
(ii)
|
|
309,782
|
|
302,053
|
Total
|
|
|
|
$1,424,996
|
|
$1,389,443
|
Note:(i)
|
The
unsecured loan payable consists of amounts borrowed under a project
agreement with Zoucheng Municipal Government, whereby the Company
is
allowed to borrow up to $1.2 million. The loan is non-interest bearing,
becoming due within three years from Kiwa-SD’s first profitable year on a
formula basis. Interest has not been imputed due to the undeterminable
repayment date.
|
|
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 $60,197 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 December 31, 2005, the Company invested
approximately $1.4 million for the project. Management believes that
neither the Company nor management will be liable for compensation
or
penalty if such commitment is not fulfilled. |
|
(ii) The amount was borrowed from Zoucheng
Science & Technology Bureau in 2004. It is non-interest bearing,
unsecured and due in Kiwa-SD’s first profitable year. Interest has not
been imputed due to the undeterminable repayment
date. |
The
Company qualifies for non-interest bearing loans under a government sponsored
program to encourage economic development in certain industries and locations.
To qualify for the favorable loan terms, a company must meet the following
criteria: (1) be a technology company with innovative technology or product
(as
determined by the Science Bureau of the central government); (2) operate in
specific industries, such as agriculture, environmental, education, and others,
which the government has determined are important to encourage development;
and
(3) be located in undeveloped areas such as Zoucheng, Shandong Province where
the manufacturing facility of the Company is located.
14.
Bank notes payable
Bank
notes payable (including current portion) consisted of the following at
December 31 of the years indicated:
|
|
2005
|
|
2004
|
|
Note
payable to a bank, payable in monthly installments of $735 up to
October
2007 secured by an automobile, bearing an interest rate of 5.32%
per
annum.
|
|
$
|
11,768
|
|
$
|
23,159
|
|
Note
payable to a bank, payable in quarterly installments of principal
equal to
$1,275 up to March 2008, secured by an automobile, bearing an interest
rate of 5.02% per annum.
|
|
|
15,774
|
|
|
16,573
|
|
Total
|
|
$
|
27,542
|
|
$
|
39,732
|
|
Maturities
of notes payable as of December 31, 2005 are as follows:
Years
Ending December 31
|
|
|
Amount
|
|
2006
|
|
$
|
13,647
|
|
2007
|
|
|
12,590
|
|
2008
|
|
|
1,305
|
|
Total
|
|
$
|
27,542
|
|
15.
Equity-Based Transactions
(a) |
Authorized
share capital
|
On
June
3, 2004, a majority of the Company’s stockholders approved an amendment to the
Company’s Second Restated and Amended Articles of Incorporation to (a) increase
from 50,000,000 to 100,000,000 the authorized number of shares of the Company’s
common stock and (b) authorize 20,000,000 shares of preferred stock (the rights,
preferences, privileges and restrictions to be determined by the Board of
Directors). The amendment was effective on July 16, 2004.
(b) |
Issued
and outstanding share
capital
|
From
January 1, 2004 to December 31, 2005, the Company has engaged in the
following equity-based transactions:
In
conjunction with the March 2004 reverse merger transaction (see under
“Organization” in Note 1), 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;
and
e.
Effective March 30, 2004, the Company issued a stock option to a consultant
to purchase 300,000 shares of common stock exercisable at $0.20 per share for
ten years. The fair value of this option was determined to be approximately
$0.57 per share pursuant to the Black-Scholes option pricing model. The
aggregate fair value of such option of $171,000 was charged to operations as
reverse merger costs during the year ended December 31, 2004.
On
April
12, 2004, the Company entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled “Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing,” which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration was $480,411, of which $30,205 was paid
at
signing of the agreement and an additional $30,205 was paid in December 2004.
In
addition, the Company issued 1,000,000 shares of common stock valued at $0.42
per share based on its fair market value on July 19, 2004 (aggregate value
$420,000), the date when the application for the patent right holder alternation
registration was approved.
On
May
24, 2004, the Company entered into a contract with Cinapsys Inc. to provide
investor relations services. The engagement 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 which was terminated on March 31, 2006. Under the Standby Equity
Distribution Agreement, the Company could, 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.
Under
the
Standby Equity Distribution Agreement, the formula for calculating the purchase
price for shares issued is equal to 99% of the market price, which is defined
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 was paid a fee equal to 4% of each advance, which
was retained from each advance. As
a
result, our proceeds from the sale of shares under the Standby Equity
Distribution Agreement were 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 was permitted to sell under the Standby Equity
Distribution Agreement at one time was 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 could 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.
In
total,
before the Standby Equity Distribution Agreement was terminated, the escrow
agent released 32 advances or an aggregate of 18,362,219 shares of common stock
with repayment of $312,865. The balance due on the Cornell Note as of December
31, 2005 was $87,135. On March 31, 2006, the Company paid of all outstanding
principal and interest on the Cornell Note ($110,176)
and
terminated the Standby Equity Distribution Agreement. See Note 12 regarding
termination of the agreement.
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
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 December 31, 2005, no stock options
or
stock purchase rights had been granted under the Plan.
16.
Major Customers and Suppliers
Two
customers accounted for 51.3%, 45.3% of our net sales for the fiscal year ended
December 31, 2005. No other single customer accounted for more than 3% of
our revenues. All of the revenues are generated from Chinese customers in 2005.
Three customers accounted for 46.1%, 26.3% and 18.5% of our net sales for the
fiscal year ended December 31, 2004. The revenue from Chinese and
South-East Asian customers accounted for 53.9% and 46.1% in 2004
respectively.
Three
suppliers accounted for 64.0%, 17.2% and 12.5% of our net purchases for the
fiscal year ended December31, 2005. Three suppliers accounted for 49.2%, 27.6%,
and 4.1% of our net purchases for the fiscal year ended December 31, 2004.
The raw materials used in our products are available from a variety of
alternative sources.
17.
Other Income
During
the year ended December 31, 2005, the Company received a grant from municipal
government in Shandong Province
of China amounted to $2,416, because the Company is a high-tech enterprise
qualified by the local government. The subsidy is non-recurring.
In
2004,
the Company had other income of $60,411 attributable to the forgiveness by
Zoucheng Science & Technology Bureau in Shandong Province, China of a loan
borrowed in 2003.
18.
Taxation
As
of
December 31, 2005 and 2004, the Company has no material deferred tax
assets, since the Company has incurred operating losses and has established
a
valuation allowance equal to the total deferred tax asset. In addition, there
was also no material deferred tax liability as of December 31, 2005 and 2004.
In
accordance with the relevant tax laws in China, Kiwa-SD would normally be
subject to a corporate income tax rate of 33% on its taxable income. However,
in
accordance with the relevant tax laws in China, Kiwa-SD is exempt from corporate
income taxes for its first two profit making years and is entitled to a 50%
tax
reduction for the succeeding three years. Kiwa-SD has not provided for any
corporate income taxes since it had no taxable income for the years ended
December 31, 2005 and 2004.
In
accordance with the relevant tax laws in the British Virgin Islands, Kiwa
Bio-Tech Products Group Ltd., as an International Business Company, is exempt
from income taxes.
A
reconciliation of the provision for income taxes determined at the statutory
average state and local income taxes to the Company’s effective income tax rate
is as follows:
|
|
Year
ended December 31,
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Statutory
income tax
|
|
|
33%
|
|
|
33%
|
|
Impact
of effective tax exemption
|
|
|
(33%)
|
|
|
(33%)
|
|
Effective
rate
|
|
|
-
|
|
|
-
|
|
19.
Lease Commitments
The
Company has the following material contractual obligations:
Operating
lease commitments - The Company previously leased an office in Beijing under
an
operating lease that expired in April 2005 with an aggregate monthly lease
payment of approximately $2,882. This operating lease was replaced by another
operating lease expiring in March 2008 with an aggregate monthly lease payment
of approximately $4,990. Rent expense under the operating leases for the fiscal
year ended December 31, 2005 and 2004 was $52,416 and $31,703
respectively.
The
Company previously leased an office in the United States under a commercial
lease agreement with China Star expired 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 the fiscal year ended December 31, 2005 and 2004
was $20,763 and $21,904, respectively. At December 31, 2005, the remaining
minimum lease payments amounted to $29,833.
Lease
commitments under the foregoing lease agreements are as follows:
Fiscal
year
|
|
|
Amount
|
|
2006
|
|
$
|
72,114
|
|
2007
|
|
|
72,114
|
|
2008
|
|
|
21,004
|
|
Total
|
|
$
|
165,232
|
|
20.
Retirement Plan
As
stipulated by the regulations of the Chinese government, Kiwa-SD has defined
contribution retirement plans for their employees. The Chinese government is
responsible for the pension liability to these retired employees. The Company
was required to make specified contributions to the state-sponsored retirement
plan at 20% of the local average salary cost. Each of the employees of the
PRC
subsidiaries of the Company is required to contribute 8% of his/her basic
salary. For the fiscal years ended December 31, 2005 and 2004, accrued
contributions made by the Company were $32,210 and $26,146,
respectively.
21.
Subsequent Events
On
March
10, 2006, the Company entered into a Stock Purchase Agreement with two Chinese
citizens, pursuant to which the Company agreed to issue 5,000,000 shares of
our
common stock in exchange for RMB 6,000,000 (RMB1.20 per share). The Stock
Purchase Agreement was disclosed on the Company’s 8-K filed on March 10, 2006.
(On March 10, 2006 the US$-RMB exchange rate as published by the State
Administration of Foreign Exchange of the PRC was $1.00 US$ per 8.0492RMB.)
In
issuing the stock, the Company relied on Section 4(2) of the Securities Act
of
1993 and Rule 506 of Regulation D promulgated under the act for its exemption
from the registration requirements of the act. No underwriters or brokers were
used in the transaction and no underwriting or broker fees were paid. The
purchaser was granted "piggy-back" registration rights in the event that the
Company undertakes to register any of its shares. The registration rights,
which
are set forth in Exhibit A to the Stock Purchase Agreement expire four years
from the effective date of the Stock Purchase Agreement. Pursuant to the
agreement, 30% of the total purchase price for the stock is due in 10 days
from
the effective date and the balance must be paid in 20 days. As of April 13,
2006, the Company had received proceeds under the agreement of approximately
$350,000. The Company will issue certificates for the 5,000,000 subscribed-for
shares when the balance of the purchase price has been paid, which the parties
have agreed will occur on or before April 30, 2006.
Pursuant
to a Termination Agreement dated March 31, 2006, the Company terminated the
following agreements with Cornell Capital: the Standby Equity Distribution
Agreement dated July 6, 2004; the Registration Rights Agreement dated July
6,
2004; the Placement Agent Agreement dated July 6, 2004 and the Promissory Note
in favor of Cornell Capital dated January 4, 2005 (all of the foregoing, the
"Financing Agreements"). Prerequisite to termination of the Financing
Agreements, the Company paid Cornell Capital $110,176, constituting all
outstanding principal and accrued interest on the Cornell Note. In the
conjunction with the termination and settlement, Cornell Capital returned
5,864,357 shares of our common stock that were held as collateral under the
Standby Equity Distribution Agreement. These shares were cancelled and converted
to authorized but unissued shares of the Company.
FINANCIAL
STATEMENTS AS OF JUNE 30, 2006 (UNAUDITED)
Condensed
Consolidated Balance Sheets
(Unaudited)
Kiwa
Bio-Tech Products Group Corporation and Subsidiaries
Condensed
Consolidated Balance Sheet
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
673,371
|
|
$
|
14,576
|
|
Accounts
receivable, net of allowance for doubtful account
$86,041
and $ 82,942 as at June 30, 2006 and December 31, 2005,
respectively
|
|
|
709,526
|
|
|
701,486
|
|
Note
receivable
|
|
|
157,500
|
|
|
-
|
|
Inventories
|
|
|
487,837
|
|
|
495,597
|
|
Prepaid
expenses
|
|
|
1,039
|
|
|
1,962
|
|
Other
current assets
|
|
|
35,200
|
|
|
27,186
|
|
Total
Current Assets
|
|
|
2,064,473
|
|
|
1,240,807
|
|
Property
plant and equipment:
|
|
|
|
|
|
|
|
Buildings
|
|
|
1,021,663
|
|
|
1,012,219
|
|
Machinery
and equipment
|
|
|
451,535
|
|
|
447,361
|
|
Automobiles
|
|
|
104,883
|
|
|
103,914
|
|
Office
equipment
|
|
|
57,959
|
|
|
57,423
|
|
Computer
software
|
|
|
9,024
|
|
|
8,940
|
|
|
|
|
1,645,064
|
|
|
1,629,857
|
|
Less:
Accumulated depreciation
|
|
|
(248,927
|
)
|
|
(192,991
|
)
|
Property
plant and equipment - net
|
|
|
1,396,137
|
|
|
1,436,866
|
|
Construction
in progress
|
|
|
33,740
|
|
|
33,429
|
|
Intangible
assets-net
|
|
|
385,164
|
|
|
410,586
|
|
Deferred
financing cost
|
|
|
49,954
|
|
|
|
|
Total
assets
|
|
$
|
3,929,468
|
|
$
|
3,121,688
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,267,487
|
|
$
|
1,000,477
|
|
Construction
costs payable
|
|
|
375,812
|
|
|
372,338
|
|
Due
to related party
|
|
|
107,842
|
|
|
454,193
|
|
Convertible
notes payable-unrelated party
|
|
|
320,000
|
|
|
407,135
|
|
Current
portion of bank notes payable
|
|
|
14,011
|
|
|
13,647
|
|
Total
current liabilities
|
|
|
2,085,152
|
|
|
2,247,790
|
|
Long-term
liabilities, less current portion:
|
|
|
|
|
|
|
|
Unsecured
loans payable
|
|
|
1,438,291
|
|
|
1,424,996
|
|
Bank
notes payable
|
|
|
6,956
|
|
|
13,895
|
|
Long-term
convertible notes payable
|
|
|
857,500
|
|
|
-
|
|
Discount
on beneficial conversion feature
|
|
|
(308,556
|
)
|
|
-
|
|
Total
long-term liabilities
|
|
|
1,994,191
|
|
|
1,438,891
|
|
Shareholders'
(Deficit) Equity
|
|
|
|
|
|
|
|
Common
stock -$0.001 par value
|
|
|
64,236
|
|
|
59,236
|
|
Authorized
100,000,000 shares at June 30, 2006 and December 31, 2005,
respectively
Issued
and outstanding 64,235,930 and 59,235,930 shares at June 30, 2006
and
December 31, 2005, respectively
|
|
|
-
|
|
|
-
|
|
Preferred
stock -$0.001 par value
Authorized
20,000,000 shares at June 30, 2006 and December 31, 2005
Issued
and outstanding no shares at June 30, 2006 and December 31, 2005
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
6,525,030
|
|
|
4,835,968
|
|
Stock-based
compensation reserve
|
|
|
(93,215
|
)
|
|
-
|
|
Deficit
accumulated
|
|
|
(6,684,481
|
)
|
|
(5,482,555
|
)
|
Accumulated
other comprehensive income
|
|
|
38,555
|
|
|
22,358
|
|
Total
stockholders' equity (deficiency)
|
|
|
(149,875
|
)
|
|
(564,993
|
)
|
Total
liabilities and stockholders' equity
|
|
$
|
3,929,468
|
|
$
|
3,121,688
|
|
See
accompanying notes to condensed consolidated financial
statements.
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 (Unaudited)
|
|
|
|
Three
months ended June 30,
|
|
Six
months ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
sales
|
|
$
|
13,351
|
|
$
|
607,611
|
|
$
|
24,374
|
|
$
|
1,018,303
|
|
Cost
of sales
|
|
|
12,545
|
|
|
205,945
|
|
|
19,955
|
|
|
280,918
|
|
Gross
profit
|
|
|
806
|
|
|
401,666
|
|
|
4,419
|
|
|
737,385
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
and professional fees
|
|
|
243,914
|
|
|
209,824
|
|
|
288,314
|
|
|
346,397
|
|
Officers'
compensation
|
|
|
109,102
|
|
|
16,632
|
|
|
115,070
|
|
|
24,982
|
|
General
and administrative
|
|
|
99,261
|
|
|
114,334
|
|
|
171,483
|
|
|
362,134
|
|
Research
and development
|
|
|
8,461
|
|
|
1,143
|
|
|
16,362
|
|
|
8,423
|
|
Depreciation
and amortization
|
|
|
37,069
|
|
|
21,694
|
|
|
70,232
|
|
|
51,189
|
|
Total
costs and expenses
|
|
|
497,808
|
|
|
363,627
|
|
|
661,461
|
|
|
793,125
|
|
Operating
profit (loss):
|
|
|
(497,002
|
)
|
|
38,039
|
|
|
(657,042
|
)
|
|
(55,740
|
)
|
Changes
in fair value of warrants
|
|
|
53,652
|
|
|
|
|
|
53,652
|
|
|
|
|
Interest
expense, net
|
|
|
(574,132
|
)
|
|
(66,842
|
)
|
|
(598,536
|
)
|
|
(134,246
|
)
|
Other
income
|
|
|
|
|
|
2,416
|
|
|
|
|
|
2,416
|
|
Net
loss
|
|
|
(1,017,482
|
)
|
|
(26,387
|
)
|
|
(1,201,926
|
)
|
|
(187,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
9,556
|
|
|
-
|
|
|
16,197
|
|
|
-
|
|
Comprehensive
loss
|
|
$
|
(1,007,927
|
)
|
$
|
(26,387
|
)
|
$
|
(1,185,729
|
)
|
$
|
(187,570
|
)
|
Net
loss per common share
-
basic and diluted
|
|
|
(0.016
|
)
|
|
(0.001
|
)
|
|
(0.020
|
)
|
|
(0.004
|
)
|
Weighted
average number of common shares
-
basic and diluted
|
|
|
61,598,567
|
|
|
47,776,005
|
|
|
60,423,775
|
|
|
44,771,631
|
|
See
accompanying notes to condensed consolidated financial
statements.
Condensed
Consolidated Statement of Stockholders’ Equity (Deficiency)
(Unaudited)
Kiwa
Bio-Tech Products Group Corporation
Consolidated
Statement of Stockholders' Equity (Deficiency)
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Stock-based
Compensation
Reserve
|
|
Accumulated
Deficits
|
|
Other
Comprehensive income
|
|
Total
Stockholders’
Equity
(Deficiency)
|
|
|
|
Shares
|
|
Amount
|
|
Balance,
January 1, 2006
|
|
|
59,235,930
|
|
|
59,236
|
|
|
4,835,968
|
|
|
|
|
|
(5,482,555
|
)
|
|
22,358
|
|
|
(564,993
|
)
|
Issuance
of detachable warrants in conjunction with the advances from a
related
party dated March 31, 2006
|
|
|
-
|
|
|
-
|
|
|
5,145
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,145
|
|
Issuance
of 5 million shares of common stock pursuant to the Stock Purchase
Agreement dated as of March 10, 2006
|
|
|
5,000,000
|
|
|
5,000
|
|
|
740,416
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
745,416
|
|
Beneficial
conversion feature of convertible notes payable funded on June
29,
2006
|
|
|
-
|
|
|
-
|
|
|
312,023
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
312,023
|
|
Issuance
of detachable warrants in conjunction with the issuance of convertible
promissory notes in June 29, 2006
|
|
|
-
|
|
|
-
|
|
|
545,477
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
545,477
|
|
Issuance
of warrants to a financing consultant in June 2006
|
|
|
-
|
|
|
-
|
|
|
93,301
|
|
|
(93,215
|
)
|
|
-
|
|
|
-
|
|
|
86
|
|
Fair
value of shares as compensation to an employee
|
|
|
-
|
|
|
-
|
|
|
46,352
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
46,352
|
|
Changes
in fair value of warrants
|
|
|
-
|
|
|
-
|
|
|
(53,652
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(53,652
|
)
|
Net
loss for six months ended June 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,201,926
|
)
|
|
-
|
|
|
(1,201,926
|
)
|
Other
comprehensive income-Translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,197
|
|
|
16,197
|
|
Balance,
June 30, 2006
|
|
|
64,235,930
|
|
$
|
64,236
|
|
$
|
6,525,030
|
|
$
|
(93,215
|
)
|
$
|
(6,684,481
|
)
|
$
|
38,555
|
|
$
|
(149,875
|
)
|
See
accompanying notes to condensed consolidated financial
statements.
Condensed
Consolidated Statements of Cash Flows (Unaudited)
Kiwa
Bio-Tech Products Group Corporation and
Subsidiaries
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
Six
months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,201,926
|
)
|
$
|
(187,570
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
81,405
|
|
|
74,075
|
|
Amortization
of detachable warrants
|
|
|
549,365
|
|
|
48,131
|
|
Amortization
of beneficial conversion feature of convertible notes
|
|
|
3,467
|
|
|
27,333
|
|
Provision
for doubtful debt
|
|
|
3,099
|
|
|
-
|
|
Changes
in fair value of warrants
|
|
|
(53,652
|
)
|
|
|
|
Fair
value of shares as compensation to an employee
|
|
|
46,352
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)decrease
in :
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(11,139
|
)
|
|
(278,321
|
)
|
Inventories
|
|
|
7,760
|
|
|
39,325
|
|
Other
receivable
|
|
|
-
|
|
|
157,495
|
|
Prepaid
expenses
|
|
|
923
|
|
|
53,667
|
|
Other
current assets
|
|
|
(8,014
|
)
|
|
(3,950
|
)
|
Deferred
financing cost
|
|
|
(50,000
|
)
|
|
-
|
|
Increase(decrease)in:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
267,009
|
|
|
190,465
|
|
Construction
cost payable
|
|
|
-
|
|
|
(7,405
|
)
|
Net
cash used in operating activities
|
|
|
(365,351
|
)
|
|
113,245
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
-
|
|
|
(6,749
|
)
|
Acquisition
of intangible asset
|
|
|
-
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
-
|
|
|
(6,749
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
745,416
|
|
|
-
|
|
Repayment
of short-term loans
|
|
|
-
|
|
|
(50,000
|
)
|
Proceeds
from related parties
|
|
|
75,633
|
|
|
251,529
|
|
Repayment
to related parties
|
|
|
(420,641
|
)
|
|
(30,634
|
)
|
Proceeds
from convertible notes payable
|
|
|
-
|
|
|
720,000
|
|
Repayment
of convertible notes payable
|
|
|
(87,135
|
)
|
|
(350,000
|
)
|
Proceeds
from long-term convertible notes payable
|
|
|
700,000
|
|
|
-
|
|
Repayment
of long-term borrowings
|
|
|
(6,574
|
)
|
|
(6,388
|
)
|
Net
cash provided by financing activities
|
|
|
1,006,699
|
|
|
534,507
|
|
Foreign
currency translation
|
|
|
17,447
|
|
|
-
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Net
increase
|
|
|
658,795
|
|
|
641,003
|
|
Balance
at beginning of period
|
|
|
14,576
|
|
|
17,049
|
|
Balance
at end of period
|
|
$
|
673,371
|
|
$
|
658,052
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash flow Information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
23,306
|
|
$
|
22,327
|
|
Cash
paid for taxes
|
|
|
-
|
|
|
-
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible notes payable
|
|
$
|
312,023
|
|
$
|
106,666
|
|
Issuance
of common stock for convertible notes payable
|
|
|
|
|
$
|
180,822
|
|
Issuance
of detachable warrants in conjunction with issuance
of
convertible notes payable
|
|
$
|
710,566
|
|
$
|
35,570
|
|
See
accompanying notes to condensed consolidated financial
statements.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
References
herein to “we”, “us”, “our” or “the Company” refer to Kiwa
Bio-Tech Products Group Corporation
and its
wholly-owned subsidiaries unless the context specifically states or implies
otherwise.
1.
Background
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
-
Our
business plan is to develop, manufacture, distribute and market innovative,
cost-effective and environmentally safe bio-technological products for
agriculture, stockbreeding markets located primarily in China. The Company’s
product initiatives can be divided into three primary categories -
bio-fertilizers, and related products; biologically enhanced feed for livestock;
and an animal flu disinfector delivered by aerosol. We intend to improve
existing products and to develop new products. Our activities to date have
included conducting research and development, acquiring and developing
intellectual property, raising capital, developing a manufacturing facility,
entering into strategic relationships, and marketing our products.
Bio-fertilizer.
We have
developed a number of bio-fertilizer and other products for plants and are
developing more. Our first product, a photosynthetic bacteria-based biological
catalyst, was introduced in China’s agricultural market in November 2003. We had
significant sales of this product in 2004 and the first half of 2005, but sales
have been significantly reduced since then due to the temporary shutdown of
our
manufacturing facility. In the second half of 2005 we interrupted production
at
our manufacturing facility with the intention of upgrading the facility to
produce a new, potentially lucrative series of bacillus-bacteria based
fertilizer. Unfortunately an anticipated financing in the second half of 2005
did not close, which contributed to a shortage of working capital and prevented
us from upgrading our facility as planned. Our sales volume in the second half
of 2005 declined severely as a result of the temporarily closing of our
manufacturing facility and the delay of the launching of the new bacillus
fertilizer product as planned. In the first half of 2006, we have begun to
increase our production levels, but the volume of production and sales remains
low.
Our
photosynthetic bacteria based fertilizers are protected by trade secret. Our
bacillus-based fertilizers are protected by patents. On April 12, 2004, we
entered into an agreement with China Agricultural University to acquire patent
Number ZL 93101635.5 entitled “Highly Effective Composite Bacteria for Enhancing
Yield and the Related Methodology for Manufacturing,” which was originally
granted by the PRC Intellectual Property Bureau on July 12, 1996. There are
no
limitations under this agreement on our exclusive use of the patent. The patent
covers six different species of bacillus which have been tested as
bio-fertilizers to enhance yield and plant health. The production methods of
the
six species are also patented. The patent will expire on February 9, 2013.
We
have
obtained four Fertilizer Registration Certificates from the Chinese government
-
one covering our photosynthetic bacteria fertilizer, and three covering our
bacillus bacteria fertilizer. Some of our products contains ingredients of
both
photosynthesis and bacillus bacteria.
Currently
our manufacturing facility has the capability to produce leaf fertilizer
(ZHIGUANGYOU, JINPENGJIABAO, PENDUOSHOU), additional fertilizer (YIMULING,
CHAOFEIBAO, ZHIGUANGYOU) and ground fertilizer (ZHIGUANGYOU II). By now, due
to
the lack of our own bacillus production capability, we purchased
semi-manufactured bacillus goods and reprocessed our products with other
fertilizer components according to our particular fertilizer prescriptions.
When
we have sufficient resources, we plan is to upgrade our facility to 1,000 ton.
These upgrades are expected to cost $300,000.
Livestock
Feed.
On
July
11, 2006, the Company and Tianjin Challenge Feed Co., Ltd. (“Challenge Feed”)
completed the formation of a joint venture to engage in the developing,
manufacturing and marketing of biologically enhanced feed for livestock. The
joint venture will be located in Tianjin, China and operated through Tianjin
Kiwa Feed Co., Ltd. (“TKF”), a jointly-owned limited liability company organized
under the laws of the PRC. Pursuant to a joint venture agreement we agreed
to
invest $480,000 in cash for 80% of the equity of TKF. For 20% equity of TKF,
Challenge Feed agreed to invest machinery and equipment used in bio-feedstuff
production lines with an agreed value of $120,000. Under the joint venture
agreement, both we and Challenge Feed are required to make our capital
contributions within six months of the date that TKF receives its business
license. As of July 31, 2006, we had contributed $150,000 of our capital
contribution commitment.
TKF’s
total annual production capacity is expected to be approximately 40,000 metric
tons of concentrated and supportive feeds and it is expected to produce sales
starting in August 2006.
Avian
Flu Disinfector.
On May
8, 2006 we entered into a Technology Transfer Agreement with Jinan Kelongboao
Bio-Tech Co., Ltd. ("JKB"). Pursuant to the agreement, JKB agreed to transfer
its AF-01 Anti-Viral Aerosol technology for veterinary medicine applications
to
the Company. The AF-01 aerosol technology is a broad-spectrum antiviral agent
with potent inhibitory and/or viricidal effects on a variety of RNA viruses
found in animals and fowls such as bird flu. We acquired the exclusive
production right and other related rights to produce an anti-viral aerosol
drug
for use with animals. Our hope is to develop a commercialized product in the
form of spray for applying in fowl houses and other animal holding facilities
to
prevent and cure virus-caused diseases.
We
are
now in the process of applying for a new animal medicine certification for
the
AF-01 technology. Before marketing this product, we will need to: (1)
successfully complete a safety evaluation, pre-clinical study, pharmacological
and toxicological test, clinical trial report, stability test report,
environmental impact report and other obligatory experiments by statutory
authorities; (2) acquire a company or factory with GMP qualification and submit
the new drug application in the name of the acquired company to the
Administrative Department for Veterinary Medicine of State Council (the
“Administrative Department”); (3) pass an evaluation by the veterinary drug
evaluation institution established by the Administrative Department and pass
a
sample quality retrial by a test institution established by the Administrative
Department after the application is accepted; (4) acquire a Administrative
Certificate of New Veterinary Drug from the Administrative Department compliant
with its drug qualification standards; and (5) pass an evaluation of
manufacturing requirements by the Administrative Department and procure a
Veterinary Drug Manufacturing License.
Basis
of Presentation
- The
consolidated financial statements include the operations of the Company and
its
wholly-owned subsidiaries, and are presented in accordance with generally
accepted accounting principles in the United States. All significant
intercompany balances and transactions have been eliminated in consolidation.
The financial statements are unaudited and do not include all information or
notes necessary for a complete presentation of financial condition, results
of
operations and cash flows.
Use
of Estimates
- The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant accounting estimates include bad debt provision,
depreciation and amortization, fair value of warrant and beneficial conversion
feature of convertible bonds.
Country
Risk - As
the
Company’s principal operations are conducted in China, the Company is subject to
special considerations and significant risks not typically associated with
companies in North America and Western Europe. These risks include, among
others, risks associated with the political, economic and legal environments
and
foreign currency exchange limitations encountered in China. The Company’s
results of operations may be adversely affected by changes in the political
and
social conditions in China, and by changes in governmental policies with respect
to laws and regulations, among other things.
In
addition, all of the Company’s transactions undertaken in China are denominated
in Renminbi (“RMB”), which must be converted into other currencies before
remittance out of China may be considered. Both the conversion of RMB into
foreign currencies and the remittance of foreign currencies abroad require
the
approval of the Chinese government.
Credit
Risk - The
Company performs ongoing credit evaluations of its customers and intends to
establish an allowance for doubtful accounts when amounts are not considered
fully collectable. According to the Company’s credit policy, the Company
generally provides 100% bad debt provision for the amounts outstanding over
365
days after the deduction of the amount subsequently settled after the balance
sheet date, which management believes is consistent with industry practice
in
the China region.
As
of
June 30, 2006, there was $790,479 in accounts receivable over 365 days old.
However, we have established repayment schedules with certain major customers
in
April 2006 to extend their credit periods. These customers are currently making
repayments on schedule. Subsequent to balance sheet date as at June, 30, 2006
amount of RMB 3,000,000 (approximately $375,000) was collected against those
receivables. Though we have no conclusive indication of insolvency from any
of
our customers, for the sake of prudence, we accrued a bad debt allowance of
$86,041, which represents the total outstanding accounts receivables over 365
days old apart from those covered in the repayment schedules which have been
in
effect since April 2006.
The
management of the Company expects that the remaining uncollected balance of
those receivables can be collected according to agreed repayment
schedule.
Going
Concern
- The
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 consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $1,201,926 and $187,570 during the six months
ended June 30, 2006 and 2005, respectively, and our total liabilities
exceeded our assets by $149,875 and $564,993 at June 30, 2006 and
December 31, 2005, respectively. Included in net loss were non-cash
expenses of $615,764 and $87,880 for the six months ended June 30, 2006 and
2005. Although the Company has recently closed a financing of 6% convertible
notes (see Note 11, below), it is likely that the available resources are
insufficient to allow the Company to execute its business plan and it will
be
necessary to procure further sources of capital to sustain the Company’s
operations. These factors create substantial doubt about our ability to continue
as a going concern.
The
Company’s registered independent public accountants, in their independent
auditors’ reports on the consolidated financial statements as of and for the
year ended December 31, 2005 and 2004 contained in the Company’s Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2005, have included
an explanatory paragraph in their opinion indicating that there is substantial
doubt about our ability to continue as a going concern. The financial statements
do not contain any adjustments that might result from the outcome of this
uncertainty.
Revenue
Recognition
- The
Company recognizes sales in accordance with Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in
Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”. Sales
represent the invoiced value of goods, net of value added tax (“VAT”), supplied
to customers, and is recognized upon delivery of goods and passage of
title.
All
of
the Company’s sales made in China are subject to the Chinese value-added tax at
rates ranging from 13% to 17% (“output VAT”). Such output VAT is payable after
offsetting VAT paid by the Company on purchases (“input VAT”).
Net
Loss Per Common Share
- Basic
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 loss
per
common share reflects the potential dilution that would occur if dilutive
securities (stock options, warrants, convertible debt, stock subscription and
other stock commitments issuable) 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 June 30,
2006, potentially dilutive securities aggregated 20,712,016 shares of common
stock.
Advertising
- The
Company charges all advertising costs to expense as incurred.
Research
and development - Research
and development costs are charged to expense as incurred.
Cash
and Cash Equivalents
- Highly
liquid investments with a maturity of three months or less at the time of
acquisition are considered to be cash equivalents.
Financial
Instruments and Fair Value
- The
Company accounts for financial instruments under the provisions of Statement
of
Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, which requires that all derivative
financial instruments be recognized in the consolidated financial statements
and
maintained at fair value regardless of the purpose or intent for holding them.
Changes in fair value of derivative financial instruments are either recognized
periodically in income or stockholders’ equity (as a component of comprehensive
income), depending on whether the derivative is being used to hedge changes
in
fair value or cash flows.
The
carrying amounts for cash and cash equivalents, accounts receivable, other
receivables, deposits and prepayments, short-term borrowings, accounts payable,
other payables and accruals approximate their fair values because of the short
maturity of those instruments.
Inventories
-
Inventories are stated at the lower of cost, determined on a weighted average
basis, and net realizable value. Work in progress and finished goods are
composed of direct material, direct labor and a portion of manufacturing
overhead. Net realizable value is the estimated selling price, in the ordinary
course of business, less estimated costs to complete and dispose. Management
believes that there is no obsolete inventory.
Property,
Plant and Equipment
-
Property, Plant and Equipment are stated at cost. Major expenditures for
betterments and renewals are capitalized while ordinary repairs and maintenance
costs are expensed as incurred. Depreciation and amortization is provided using
the straight-line method over the estimated useful lives of the assets after
taking into account the estimated residual value. The estimated useful lives
are
as follows:
Buildings
|
|
|
20-35
years
|
|
Machinery
and equipments
|
|
|
4
-12 years
|
|
Automobiles
|
|
|
8
years
|
|
Office
equipment
|
|
|
5
years
|
|
Computer
software
|
|
|
3
years
|
|
Construction
in progress represents factory and office buildings under construction. The
Company capitalizes interest during the construction phase of qualifying assets
in accordance with SFAS No. 34, “Capitalization of Interest Cost”. No interest
was capitalized during six months ended June 30, 2006 and 2005 as the
construction in progress was minimal.
We
periodically evaluate our investment in long-lived assets, including property
and equipment, for recoverability whenever events or changes in circumstances
indicate the net carrying amount may not be recoverable. Our judgments regarding
potential impairment are based on legal factors, market conditions and
operational performance indicators, among others. In assessing the impairment
of
property and equipment, we make assumptions regarding the estimated future
cash
flows and other factors to determine the fair value of the respective assets.
If
these estimates or the related assumptions change in the future, we may be
required to record impairment charges for these assets. The Company has
determined that there was no impairment of long-lived assets at June 30,
2006.
Income
Taxes
- The
Company accounts for income taxes under the provisions of SFAS No. 109,
“Accounting for Income Taxes”, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns. Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets
and
liabilities are measured using the enacted tax rate expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company establishes a valuation when it is more likely
than
not that the assets will not be recovered.
Operating
Leases
-
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.
Foreign
Currency Translation
- The
functional currency of the Company is RMB of China, which is the primary medium
of exchange where Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa-SD”)
operate. The Company reports its financial results in United States dollars
(“U.S. dollars” or “US$”).
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 8.00. The Company translates Kiwa-SD’s assets and liabilities into U.S.
dollars using the rate of exchange prevailing at the balance sheet date (on
June
30, 2006, the prevailing exchange rate of the U.S. dollar against the RMB was
7.9956), 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 U.S. dollars 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 and comprehensive income.
Comprehensive
(Loss) Income
- The
Company has adopted the 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.
Stock
Issued for Compensation and Financing
-
As
of
December 15, 2005, SFAS No. 123R, “Share-Based
Payment”,
superseded SFAS No. 123 and APB No. 25, and began with the first interim or
annual period after December 15, 2005. Under SFAS No. 123R, compensation cost
is
calculated on the date of grant using the fair value of the option as determined
using the Black-Scholes method. The Black-Scholes valuation calculation requires
the Company to estimate key assumptions such as expected term, volatility and
forfeiture rates to determine the fair value of a stock option. The estimate
of
these key assumptions is based on historical information and judgment regarding
market factors and trends. The compensation cost is amortized straight-line
over
the vesting period.
Prior
to
December 31, 2005, the Company accounted for stock options under the recognition
and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued
to Employees”, and related Interpretations, as permitted by FASB Statement No.
123, “Accounting for Stock-Based Compensation”.
Reclassification
from Prior Year Financial Statements - Certain
prior year comparative figures have been reclassified to conform to the current
year presentation.
2.
Recent
Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material. SFAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have
a
material impact on our consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 123-R, “Share Based Payments”, which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. The cost will be measured based on the estimate fair
value
of the equity or liability instruments issued. SFAS 123-R covers a wide range
of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Management believes the adoption of this pronouncement will
not
have a material effect on our consolidated financial statements.
Also,
in
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. The
amendments made by SFAS No. 153 are based on the principle that the exchange
of
nonmonetary assets should be measured using the estimated fair market value
of
the assets exchanged. SFAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets, and replaces it with a
broader exception for exchanges of nonmonetary assets do not have commercial
substance. A nonmonetary exchange has “commercial substance” if the future cash
flows of the entity are expected to change significantly as a result of the
transaction. This pronouncement is effective for monetary exchanges in fiscal
periods beginning after June 15, 2005. Management believes the adoption of
this
pronouncement will not have a material effect on our consolidated financial
statements.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections”. This statement requires entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods’
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, “Accounting Changes”, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period’s net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
“retrospective application” of an accounting principle and the “restatement” of
financial statements to reflect the correction of an error. SFAS No. 154 applies
to accounting changes and error corrections that are made in fiscal years
beginning after December 15, 2005. Management believes the adoption of this
statement will not have an immediate material impact on the consolidated
financial statements of the Company.
In
March
2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for
Conditional Asset Retirement Obligations”. FIN 47 clarifies that the term
“conditional asset retirement obligation,” which as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations”, refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within
the
control of the entity. The entity must record a liability for a “conditional”
asset retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Management believes the adoption of this statement
does
not have an immediate material impact on the consolidated financial statements
of the Company.
The
adoption of EITF Issue No. 03-13, “Applying the Conditions in Paragraph 42
of FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in Determining Whether to Report Discontinued Operations” in
the first quarter of 2005 did not have a material impact on the Company’s
results of operations and financial condition.
In
October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to
the Application of Grant Date as Defined in FASB Statement No. 123(R)”,
which provides clarification of the concept of mutual understanding between
employer and employee with respect to the grant date of a share-based payment
award. This FSP provides that a mutual understanding of the key terms and
conditions of an award shall be presumed to exist on the date the award is
approved by management if the recipient does not have the ability to negotiate
the key terms and conditions of the award and those key terms and conditions
will be communicated to the individual recipient within a relatively short
time
period after the date of approval. This guidance shall be applied upon initial
adoption of SFAS 123R. The Company does not expect the adoption of the FSP
will
have a material impact on its consolidated results of operations and financial
condition.
In
November 2005, the FASB issued FSP FAS 123(R)-3, “Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards”, which
provides a practical transition election related to accounting for the tax
effects of share-based payment awards to employees. An entity must follow either
the transition guidance for the APIC pool in SFAS 123R or the alternative
transition method described in the FSP. The alternative method comprises a
computational component that establishes a beginning balance of the APIC pool
and a simplified method to determine the subsequent impact on the APIC pool
of
awards that are fully vested and outstanding upon the adoption of SFAS 123R.
The
impact on the APIC pool of awards partially vested upon, or granted after,
the
adoption of SFAS 123R should be determined in accordance with the guidance
in
that statement. The FSP was effective November 10, 2005. As described in
the FSP, an entity will be permitted to take up to one year to determine its
transition alternatives to make its one-time election. The Company does not
expect the adoption of the FSP will have a material impact on its consolidated
results of operations and financial condition.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140.”
SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” to permit fair value remeasurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on
a
fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, to allow a qualifying
special-purpose entity (“SPE”) to hold a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 applies to all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006, with earlier application allowed. The Company does not
expect the adoption of SFAS No. 155 to have a material impact on its
consolidated results of operations and financial condition.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets-an amendment of FASB Statement No. 140." SFAS No. 156 requires that
all
separately recognized servicing rights be initially measured at fair value,
if
practicable. In addition, this Statement permits an entity to choose between
two
measurement methods (amortization method or fair value measurement method)
for
each class of separately recognized servicing assets and liabilities. This
new
accounting standard is effective January 1, 2007. The adoption of SFAS 156
is
expected to have no material impact on our financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.
3.
Inventories
Inventories
consisted of the following as of June 30, 2006 and December 31,
2005:
|
|
June
30, 2006
(Unaudited)
|
|
December
31, 2005
|
|
Raw
materials
|
|
$
|
419,774
|
|
$
|
417,237
|
|
Finished
goods
|
|
|
68,063
|
|
|
78,360
|
|
Total
|
|
$
|
487,837
|
|
$
|
495,597
|
|
4. Property,
Plant and Equipment
The
total
gross amount of property, plant and equipment was $1,645,064 and $1,629,857
as
of June 30, 2006 and December 31, 2005, respectively. The increase of
$15,207 is due to appreciation of RMB. All of our property, plant and equipment
is located in China and recorded in RMB.
Depreciation
expense was approximately $55,936 and $38,947 for six months ended June 30,
2006
and 2005, respectively.
All
of
our property, plant and equipment have been used as collateral to secure our
performance of our 6% long-term convertible notes issued pursuant to a
securities purchase agreement dated June 29, 2006 (See Note 11 to the Condensed
Consolidated Financial Statements as of and for the three and six months ended
June 30, 2006). They had also been used as collateral for three convertible
promissory notes in May and June of 2005 (See Note 9 to the Condensed
Consolidated Financial Statements as of and for the three and six months ended
June 30, 2006). The holders of these notes have agreed to subordinate their
security interests to the security interests of the holders of our 6% long-term
convertible notes.
5.
Intangible
Asset
The
Company’s intangible asset as of June 30, 2006 consisted of the
following:
|
|
Expected
Amortization
Period
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangible
Asset,
Net
|
|
Patent
|
|
|
8.5
years
|
|
$
|
480,411
|
|
$
|
95,247
|
|
$
|
385,164
|
|
The
following table presents future expected amortization expense related to the
patent:
|
|
Amount
|
|
2006
|
|
$
|
29,252
|
|
2007
|
|
|
58,505
|
|
2008
|
|
|
58,505
|
|
2009
|
|
|
58,505
|
|
2010
|
|
|
58,505
|
|
Thereafter
|
|
|
121,892
|
|
|
|
$
|
385,164
|
|
This
patent has been used as collateral to secure our performance on our 6% long-term
convertible notes issued pursuant to a securities purchase agreement dated
June
29, 2006 (See Note 11 to the Condensed Consolidated Financial Statements as
of
and for the three and six months ended June 30, 2006). The patent had also
been
used as collateral for three convertible promissory notes in May and June of
2005 (See Note 9 to the Condensed Consolidated Financial Statements as of and
for the three and six months ended June 30, 2006). The holders of these notes
have agreed to subordinate their security interests to the security interests
of
the holders of our 6% long-term convertible notes.
6. Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following at June 30, 2006 and
December 31, 2005:
|
|
June
30, 2006
(Unaudited)
|
|
December
31, 2005
|
|
Consulting
and professional payables
|
|
$
|
533,246
|
|
$
|
411,360
|
|
Payables
to material suppliers
|
|
|
197,602
|
|
|
211,903
|
|
Interest
payable
|
|
|
126,452
|
|
|
106,880
|
|
Salary
payable
|
|
|
158,542
|
|
|
92,557
|
|
Insurance
payable
|
|
|
86,198
|
|
|
81,553
|
|
Office
rental payable
|
|
|
70,011
|
|
|
39,007
|
|
Payables
to equipment suppliers
|
|
|
14,804
|
|
|
13,761
|
|
Others
|
|
|
80,632
|
|
|
43,456
|
|
Total
|
|
$
|
1,267,487
|
|
$
|
1,000,477
|
|
7.
Construction
Costs Payable
Construction
costs payable represents remaining amounts to be paid for the first phase of
construction of our bio-fertilizer facility in Shandong.
8.
Related
Party Transactions
Amounts
due to related parties consisted of the following as of June 30, 2006 and
December 31, 2005:
|
|
Notes
|
|
June
30, 2006
(Unaudited)
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
Mr.
Wei Li (“Mr. Li”)
|
|
|
(i)
|
|
$
|
60,446
|
|
$
|
191,861
|
|
China
Star Investment Management Co. Ltd. (“China Star”)
|
|
|
(ii)
|
|
|
49,572
|
|
|
263,165
|
|
Unamortized
fair value of warrants issued to China Star
|
|
|
|
|
|
(2,176
|
)
|
|
(833
|
)
|
Total
|
|
|
|
|
$
|
107,842
|
|
$
|
454,193
|
|
(i)
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.
In
December 2004, we entered into an agreement with Mr. Li, pursuant to which
Mr. Li leases to the Company a motor vehicle. The monthly rental payment is
$1,876 and $1,871 and the Company made no payments of rental expenses for the
six months ended June 30, 2006 and 2005 respectively.
On
May
23, 2005, the Company entered into a loan agreement with Mr. Li for various
advances amounting in aggregate to $156,685. The advances were unsecured, bore
interest at 12% per annum, and were initially due 180 days from the date of
draw
down. The Company has also granted 783,423 shares of detachable warrants to
Mr.
Li.
During
the first half of 2006, Mr. Li advanced an additional $11,648 to the Company,
and repaid $143,063 to him in June 2006. As of June 30, 2006, the remaining
balance due to Mr. Li was $60,446; the due date has been extended to September
30, 2006.
Mr.
Li
also executed without any compensation from the Company a guarantee of repayment
of the 10% Loan and the 12% Loans (described in Note 9 to the Condensed
Consolidated Financial Statements as of and for the three and six months ended
June 30, 2006).
In
2005, the 10% Loan was repaid in full and
retired.
As of June 30, 2006, the 12% Loans had an outstanding balance of $320,000.
On
August 7, 2006, the principal of $100,000
and accrued interest of $13,710
of the
12% Loans were converted into 773,537 shares of our common stock, leaving the
remaining principal balance of the 12% Loans at $220,000.
In
addition, Mr. Li has pledged without any compensation from the Company all
of
his common stock of the Company as collateral security for the Company’s
obligations under the 6% secured convertible notes in the aggregate principal
amount of $2,450,000 and the warrants to purchase 12,250,000 shares of the
Company’s common stock (described in Note 11 to the Condensed Consolidated
Financial Statements).
(ii)
China Star
China
Star is a company which is 28% owned by Mr. Li. Mr.
Yun
long Zhang, one of our directors, is also General Manager of China Star and
is
responsible for its daily operations.
In
2005,
the Company entered into three advance agreements with China Star for combined
advances of $199,514. The advances were unsecured, bore interest at 12% per
annum and were initially due in 180 days from the date of draw down. In
conjunction with the advance agreements the Company has granted detachable
warrants to China Star to purchase an aggregate of 997,571 shares of common
stock.
The
balance due to China Star was $49,572 and $263,165 as June 30, 2006 and December
31, 2005, respectively. In the first half of 2006, China Star advanced an
additional $63,985 to the Company and the
Company had repaid $277,578 to China Star.
On
March
31, 2006, the Company entered into an advance agreement with China Star for
advances of $38,655. The advances were drawn down in stages over the first
quarter of 2006. The advances were unsecured, bore interest at 12% per annum
and
were initially due 180 days from the date of draw down. The Company has also
granted detachable warrants to China Star to purchase an aggregate of 193,276
additional shares of common stock. During the second quarter of 2006, China
Star
has advanced an additional $25,529 to the Company. As
of
June 30, 2006, the outstanding balance due to China Star was $49,572.
The due date has been extended to September 30, 2006. In issuing the warrants,
the
Company relied on Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 of Regulation D promulgated under the Securities
Act for its exemption from the registration requirements of the Securities
Act.
Each
warrant attached to the advances 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. The warrants expire two years
from the date of issue. None of the detachable warrants were exercised as of
June 30, 2006. The fair value of the detachable warrants at the time of their
issuance was determined pursuant to the Black-Scholes option pricing model.
The
Company previously rented an office in the United States under a commercial
lease agreement with China Star with an aggregate monthly lease payment of
approximately $2,560. The lease expired in June 2005 and was replaced by another
operating lease with a third party. Pursuant to the lease agreement, rent
expense for the six and three months ended June 30, 2005 was $15,360 and $7,680,
respectively.
9.
Convertible
Notes Payable
The
balance of convertible notes payable as of June 30, 2006 and December 31, 2005
was $320,000 and $407,135 respectively.
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 three months from the date of draw down, but the final maturity
dates were extended for another three months. The 12% Loans are secured by
the
property, plant and equipment and other assets of the Company and its subsidiary
in China, subordinate to bank debt. 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
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.
The
Company did not pay the 12% Loans by the extended maturity date. As of June
30,
2006 and December 31, 2005, the balance of the 12% Loans was $320,000 and
$320,000, respectively. On August 7, 2006, the principal of $100,000 and
accrued interest of $13,710 of the 12% Loans were converted into 773,537 shares
of our common stock, leaving the remaining principal balance of the 12% Loans
at
$220,000. The Company is now negotiating with the other lenders to defer the
payment date. The Company has not received from the lenders any notice of
default or demand for immediate payment.
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 as of June 30, 2006. The fair 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.
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 charged to operations as interest
expense.
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 were amortized on the straight-line method
over the term of the 12% Loans, 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 issued a promissory note (the “Cornell Note”) in the
original principal amount of $400,000 to Cornell Capital Partners, LP (“Cornell
Capital”), and received an advance of $400,000 (before deduction of expenses and
fees). The Cornell Note bore interest at a rate of 10% per annum and had a
term
of 290 days.
In
2005,
the Company issued an aggregate of 18,362,219 shares of common stock with
repayment of $312,865 to Cornell Capital, pursuant to the Standby Equity
Distribution Agreement dated as of July 6, 2004. The balance of principal due
on
the Cornell Note as of December 31, 2005 was $87,135.
On
March
31, 2006, the Company settled the Cornell Note with a payment of $110,176,
constituting all outstanding principal $87,135 and accrued interest on the
Cornell Note,
and
signed a
Termination Agreement with Cornell Capital, pursuant to which the Company
terminated all the agreements with Cornell Capital, including the Standby Equity
Distribution Agreement dated July 6, 2004.
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. Mr. Wei Li, the Company’s Chief Executive Officer, also
executed a guarantee of repayment of the loan which is secured by shares of
the
Company’s common stock that he owns. Prior to June 8, 2005, the Company made
payments to the lender in the amount of $359,991, which included a penalty
interest payment and was released 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 as of June
30, 2006. The fair value of the detachable warrants at the time of their
issuance was determined to be $82,559, and was fully amortized as interest
expense.
10.
Unsecured
loans payable
The
balance of unsecured loans payable as of June 30, 2006 and December 31, 2005
was
$1,438,291 and $1,424,996, respectively.
The
difference of $13,295 was caused by the different exchange rates prevailing
at
the two dates. Unsecured loans payable consisted of the following at June 30,
2006 and December 31, 2005:
|
|
Notes
|
|
June
30, 2006
(Unaudited)
|
|
December
31, 2005
|
|
Unsecured
loan payable to Zoucheng Municipal Government,
non-interest bearing, becoming due within three years from Kiwa-SD’s first
profitable year on a formula basis, interest has not been imputed
due to
the undeterminable repayment date
|
|
|
(i
|
)
|
$
|
1,125,619
|
|
$
|
1,115,214
|
|
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
|
|
|
|
|
|
312,672
|
|
|
309,782
|
|
Total
|
|
|
|
|
$
|
1,438,291
|
|
$
|
1,424,996
|
|
Note:
(i) |
The
unsecured loan payable consists of amounts borrowed under a project
agreement with Zoucheng Municipal Government whereby the Company
is
allowed to borrow up to $1.2 million.
|
|
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 $62,500 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 June 30, 2006, 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 Chinese government
sponsored program to encourage economic development in certain industries and
locations in China. 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 Chinese
government); (2) operate in specific industries, such as agriculture,
environmental, education, and others, which the Chinese government has
determined are important to encourage development; and (3) be located in
undeveloped areas such as Zoucheng, Shandong Province where the manufacturing
facility of the Company is located.
11.
Long-term
convertible notes payable
On
June
29, 2006, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with six institutional investors (collectively, the
“Purchasers”) for the issuance and sale of (1) 6% secured convertible notes, due
three years from the date of issue, in the aggregate principal amount of
$2,450,000 (the “6% Notes”), convertible into shares of the Company’s common
stock, and (2) warrants (the “Warrants”) to purchase 12,250,000 shares of the
Company’s common stock.
In
conjunction with the sale and issuance of the 6% Notes, the Company entered
into
a Registration Rights Agreement with the Purchasers pursuant to which the
Company is required to file within 45 days a registration statement under the
Securities Act covering the resale of the shares issued upon conversion of
the
6% Notes. The Registration Rights Agreement imposes financial penalties if
the
Company does not timely complete the filing, or the registration statement
is
not declared effective within 120 days after being filed. The penalties are
capped at 10% of the outstanding principal amount of the 6% Notes.
The
closing for the sale of the 6% Notes is to occur in three stages. A first sale
of 6% Notes with a principal amount of $857,500 closed on June 29, 2006.
Additional 6% Notes with a principal amount of $735,000 are to be issued and
sold within two days of the filing of the registration statement, and additional
6% Notes with a principal amount of $857,500 are to be issued and sold within
two days of the registration statement being declared effective. As of June
30,
2006, the Company has received $700,000 from the first sales of the 6% Notes.
The remaining $157,500 was recorded as note receivable and subsequently received
in July 2006.
The
conversion price of the 6% Notes is based on an average of the trading price
of
the Company’s common stock on the OTC Bulletin Board. The conversion price is
discounted 50% before the registration statement is filed, 45% after it is
filed
if filed before the 45-day deadline, and 40% if the registration statement
becomes effective before the 120-day deadline. The conversion price is also
adjusted for certain subsequent issuances of any equity securities of the
Company at prices below the conversion price then in effect. The 6% Notes
contain a volume limitation that prohibits the holder from converting further
6%
Notes if by doing so would cause the holder and its affiliates to hold more
than
4.99% of the Company’s outstanding common stock. In addition, the holder agrees
that it will not convert more than $120,000 principal amount of 6% Notes per
calendar month.
The
exercise price of the Warrants is $0.45 per share, subject to anti-dilution
adjustments pursuant to a broad-based weighted average formula for subsequent
issues of equity securities by the Company below the trading price of the
shares. The Purchase Agreement requires the Company to maintain a reserve of
authorized common stock equal to 110% of the number of shares issuable upon
full
conversion of the 6% Notes and exercise of the Warrants. The Purchase Agreement
imposes financial penalties in cash (equal to 2% of the number of shares that
the Purchaser is entitled to multiplied by the market price for each day) if
the
authorized number of shares of common stock is insufficient to satisfy the
reserve requirements. The 6% Notes and the Warrants also impose financial
penalties on the Company if it fails to timely deliver common stock upon
conversion of the 6% Notes and exercise of the Warrants, respectively.
To
enable
reservation of a sufficient amount of authorized shares that may be issued
pursuant to conversion of the 6% Notes and exercise of the Warrants, the Company
must amend its Certificate of Incorporation to increase the number of authorized
shares of common stock. The Purchase Agreement requires the Company to file
with
the SEC a proxy statement to solicit shareholder approval to increase the number
of authorized shares of common stock no later than August 1, 2006, and to use
its best efforts to obtain shareholder approval by November 1, 2006. The Company
incurs a financial penalty in cash or shares at the option of the Company (equal
to 2% of the outstanding amount of the Notes per months plus accrued and unpaid
interest on the Notes, prorated for partial months.) if it breaches this or
other affirmative covenants in the Purchase Agreement.
The
6%
Notes require the Company to procure the Purchaser’s consent to take certain
actions including to pay dividends, repurchasing stock, incur debt, guaranty
obligations, merge or restructuring the Company, or selling significant
assets.
The
Company’s obligations under the 6% Notes and the Warrants are secured by a first
priority security interest in the Company’s intellectual property pursuant to an
Intellectual Property Security Agreement with the Purchasers, and by a first
priority security interest in all of the Company’s other assets pursuant to a
Security Agreement with the Purchasers. In addition, the Company’s Chief
Executive Officer has pledged all of his common stock of the Company as
collateral security for the Company’s obligations under the 6% Notes and the
Warrants.
The
Purchasers are accredited investors as defined under the Securities Act and
the
6% Notes and the Warrants and the underlying common stock upon conversion and
exercise will be issued without registration under the Securities Act in
reliance on the exemption provided by Rule 506 under Regulation D under the
Securities Act.
The
fair
value of the Warrants underlying the first sale of the 6% Notes (amounted to
4,287,500 shares) at the time of their issuance was determined to be $545,477,
calculated pursuant to the Black-Scholes option pricing model. The fair value
of
the beneficial conversion feature of the 6% Notes was determined to be $312,023.
The fair value of $857,500 was recorded as a reduction to 6% Notes payable.
Pursuant to EITF98-5, the discount assigned to the convertible instrument should
be amortized over the period to the security's earliest conversion date. The
warrants are exercisable immediately, and the fair value of the warrants was
charged in full to operations as interest expense at the grant date. According
to the Purchase Agreement, the conversion may commence 90 days from closing;
therefore the discount on the beneficial conversion feature will be amortized
to
operations as interest expense over 90 days.
The
Purchasers of the 6% Notes and Warrants were procured with the assistance of
an
investment bank pursuant to an engagement letter agreement with the
Company. Pursuant to the engagement, the investment bank is entitled
to a cash fee equal to 8% of the aggregate proceeds raised in the financing
and to warrants in the quantity equal to 8% of the securities issued in the
financing. The Company recorded the cash fee and other direct costs incurred
for
the issuance of the convertible loan in aggregate of $30,000 as deferred debt
issuance costs. Debt issuance costs were amortized on the straight-line method
over the term of the 6% Notes, with the amounts amortized being recognized
as
interest expense.
The
warrants issued to the investment bank in connection with the first sale of
6%
Notes (amounted to 343,000 shares) are exercisable for three years and will
have
an exercise price equal to 105% of the purchase price of the 6% Notes and
Warrants. The fair value of these warrants at the time of their issuance was
determined to be $93,301, calculated pursuant to the Black-Scholes option
pricing mode.
12.
Equity-Based
Transactions
(d) |
Authorized
share capital
|
The
Company’s authorized capital consists of 100,000,000 shares of common stock and
20,000,000 shares of preferred stock. At the Company’s 2006 annual meeting,
scheduled for September 12, 2006, an amendment to the Company’s Certificate of
Incorporation will be submitted to the Company’s stockholders for approval to
that would increase the number of shares of authorized common stock to
200,000,000.
(e) |
Issued
and outstanding share
capital
|
As
of
June 30, 2006 and December 31, 2005, the Company had 64,235,930 and 59,235,930
shares of common stock issued and outstanding, respectively. From January 1,
2005 to June 30, 2006, the Company has engaged in the following equity-based
transactions:
On
January 4, 2005, the Company issued the Cornell Note in the original principal
amount of $400,000 to Cornell Capital, and received an advance of $400,000.
In
the first nine months of 2005, the Company issued an aggregate of 18,362,219
shares of common stock (released from escrow in 32 separate transactions),
with
repayment of $312,865 of the Cornell Note. The balance due on the Cornell Note
as of December 31, 2005 was $87,135. On March 31, 2006, the Company paid all
outstanding principal and interest on the Cornell Note ($110,176)
and
terminated the Standby Equity Distribution Agreement. See Note 9 regarding
the
Cornell Note and the Termination Agreement.
On
March
10, 2006, the Company entered into a stock purchase agreement (“Stock Purchase
Agreement”) with two Chinese citizens, pursuant to which the Company agreed to
issue 5,000,000 shares of our common stock in exchange for RMB 6,000,000 at
RMB1.20 per share (On March 10, 2006 the US$-RMB exchange rate as published
by
the State Administration of Foreign Exchange of the PRC was $1.00 US$ per
RMB8.0492). In issuing the stock, the Company relied on Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act
for its exemption from the registration requirements of the Securities Act.
No
underwriters or brokers were used in the transaction and no underwriting or
broker fees were paid. The purchaser was granted “piggy-back” registration
rights in the event that the Company undertakes to register any of its shares
after16 months from the date of the Stock Purchase Agreement. The registration
rights expire four years from the effective date of the Stock Purchase
Agreement. As of June 30, 2006, the Company has received the proceeds in full
and issued 5,000,000 shares of common stock.
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 1,047,907 shares of
the Company’s common stock reserved 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 Company’s Board of Directors
has approved an amendment to the Plan to increase the number of shares reserved
for options and other stock awards under it to 3,047,907, and to increase the
limit on the number of shares that may be granted to any participant in a fiscal
year to 500,000. The amendment will be effected if it is approved by the
Company’s stockholders at its annual meeting, which has been scheduled for
September 12, 2006. The proposed amendment is described in the Company’s
preliminary proxy statement, which was filed with the SEC on July 28,
2006.
The
options granted under 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 June 30, 2006, no stock options or stock
purchase rights had been granted under the Plan.
13. Commitments
and Contingencies
The
Company has the following material contractual obligations:
Operating
lease commitments
-The
Company previously leased an office in Beijing under an operating lease that
expired in April 2005 with an aggregate monthly lease payment of approximately
$2,882. This operating lease was replaced by another operating lease expiring
in
March 2008 with an aggregate monthly lease payment of approximately $5,107.
Rent
expense under the operating leases for the six months ended June 30, 2006 and
2005 was $30,642 and $18,647, respectively.
The
Company previously leased an office in the United States under a commercial
lease agreement with China Star with an aggregate monthly lease payment of
approximately $2,560. The lease expired in June 2005 and 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 the six months ended June 30, 2006 and 2005 was $6,000 and
$15,360, respectively.
The
Company leased an office in the United States under a commercial lease agreement
with a third party expiring in June 2008 with an aggregate monthly lease payment
of approximately $1,000.
Lease
commitments under the foregoing lease agreements are as follows:
Fiscal
year
|
|
Amount
|
|
Remaining
6 months of 2006
|
|
$
|
36,642
|
|
2007
|
|
|
73,284
|
|
2008
|
|
|
21,321
|
|
Total
|
|
$
|
101,247
|
|
Technology
acquisition-On
May 8,
2006 the Company entered into a Technology Transfer Agreement with Jinan
Kelongboao Bio-Tech Co. Ltd. ("JKB"). Pursuant to the Agreement, JKB agreed
to
transfer its AF-01 Anti-viral Aerosol technology for veterinary medicines to
the
Company. Pursuant to the agreement the Company will pay JKB a transfer fee
of
RMB10 million (approximately $1.247 million), of which RMB 6 million will be
paid in cash and RMB 4 million will be paid in stock. The cash portion will
be
paid in installments, the first RMB 3 million installment was set for May 23,
2006 initially, and both parties have agreed to extend it to August 31, 2006.
Three other installments of RMB 1 million are due upon the achievement of
certain milestones, the last milestone being the issuance by the PRC Ministry
of
Agriculture of a new medicine certificate in respect of the technology. The
RMB
4 million stock payment will be due 90 days after the AF-01 technology is
approved by the appropriate PRC department for use as a livestock disinfector
for preventing bird flu.
Investment
in manufacturing and research facilities in Zoucheng, Shandong Province in
China
-
According
to the Project Agreement with Zoucheng Municipal Government in 2002, the Company
committed to invest approximately $18 million to $24 million for developing
the
manufacturing and research facilities in Zoucheng, Shandong Province. As of
June
30, 2006, 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 (See Note 10 to
the
Condensed Consolidated Financial Statements as of and for the three and six
months ended June 30, 2006).
14.
Subsequent
Events
On
July
11, 2006, the Company and Tianjin Challenge Feed Co., Ltd. (“Challenge Feed”)
completed the formation of Tianjin Kiwa Feed Co., Ltd. (“TKF”) to engage in the
developing, manufacturing and marketing of bio-feedstuff. TKF is located in
Tianjin, China and organized under the laws of the PRC. The annual production
capacity of TKF is expected to be approximately 40,000 metric tons of
concentrated and supportive feeds.
Pursuant
to the joint venture agreement between the Company and Challenge Feed, the
Company agreed to invest $480,000 in cash for 80% of the equity of TKF. For
20%
of the equity of TKF, Challenge Feed agreed to invest machinery and equipment
used in bio-feedstuff production lines with an agreed value of $120,000. Under
the joint venture agreement, both of the Company and Challenge Feed are required
to make their capital contributions within six months of the date when TKF
receives its business license. As of July 31, 2006, the Company had contributed
$150,000 of its committed capital to TKF.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
24. INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
Our
Bylaws authorize us to indemnify, and our Certificate of Incorporation include
an indemnification provision under which we have agreed to indemnify, to the
fullest extent permitted by the Delaware General Corporation Law, our directors
and officers from and against certain claims arising from or related to future
acts or omissions as one of our directors or officers. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM
25. OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth estimated expenses we expect to incur in connection
with the resale of the shares being registered. All such expenses are estimated
except for the SEC registration fee.
Registration
Fee - Securities and Exchange Commission
|
|
$
|
1,217
|
|
Accounting
Fees and Expenses
|
|
|
12,600
|
|
Legal
Fees and Expenses
|
|
|
30,000
|
|
Miscellaneous
|
|
|
2,000
|
|
TOTAL
|
|
$
|
45,817
|
|
ITEM
26. RECENT
SALES OF UNREGISTERED SECURITIES.
Set
forth
below is information regarding the issuance and sales of our securities without
registration for the past three years from the date of this registration
statement. With respect to the sale of unregistered securities referenced below,
all transactions were exempt from registration pursuant to Section 4(2) of
the
Securities Act, and Regulation D promulgated under the Securities Act. In each
instance, the purchaser had access to sufficient information regarding our
company so as to make an informed investment decision. More specifically, we
had
a reasonable basis to believe that each purchaser was an “accredited investor”
as defined in Regulation D of the Securities Act and otherwise had the requisite
sophistication to make an investment in our securities.
On
June
29, 2006, we entered into a securities purchase agreement with six institutional
investors for the issuance and sale of (1) 6% secured convertible notes, due
three years from the date of issue, in the aggregate principal amount of U.S.
$2,450,000, convertible into shares of the Company's common stock and (2)
warrants to purchase 12,250,000 shares of the Company's common stock.
The
issuance of detachable warrants to the Purchasers to purchase the aggregate
of
12,250,000 shares of common stock of the Company, in connection with the
securities
purchase agreement dated
June 29, 2006 and the issuance of detachable warrants to the investment bank
procured with the securities
purchase agreement
were an
unregistered sale of equity securities under the Securities Act.
On
May 8,
2006, we entered into a Technology Transfer Agreement with Jinan Kelongboao
Bio-Tech Co., Ltd. (“JKB”) on the technology transfer and relating technical
service for the AF-01 Anti-viral Aerosol. The aggregate purchase consideration
under the agreement is $749,157 (RMB 6 million) in cash and common stocks valued
$499,438 (RMB 4 million).
On
March
10, 2006, we entered into a Stock Purchase Agreement with two Chinese investors
to issue 5,000,000 shares of our common stock in a private placement for
Renminbi 6,000,0000 (approximately $750,000). As of April 13, 2006, we had
received approximately $350,000 of the amount committed to under the purchase
agreement, which represents 47% of the total commitment. We have agreed with
the
investors to defer funding of the remaining commitment to April 30, 2006.
In
May
2006, we received the proceeds in full and issued 5,000,000 shares of common
stock pursuant to the Stock Purchase Agreement dated March 10, 2006. The
purchaser was granted “piggy-back” registration rights in the event that the
Company undertakes to register any of its shares after16 months from the date
of
the Stock Purchase Agreement. The registration rights expire four years from
the
effective date of the Stock Purchase Agreement.
The
issuance of detachable warrants to China Star to purchase the aggregate of
1,190,847
shares
of our common stock, in connection with the advance agreements with China Star
dated June
29,
2005, September 30, 2006, December 31, 2005 and March
31,
2006 was unregistered sales of equity securities under the Securities Act.
In
issuing the warrants, we
relied
on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act for its exemption from the registration requirements
of
the Securities Act.
The
issuance of detachable warrants to Wei Li to purchase the aggregate of
783,423
of our warrant stock, in connection with Advance Agreement for borrowed money
dated May 23, 2005 was
an
unregistered sale of equity securities under the Securities Act. In issuing
the
warrants, we
relied
on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act for its exemption from the registration requirements
of
the Securities Act..
We
entered into three convertible secured promissory note agreements, for the
aggregate note amount of $320,000, with Donald Worthly, Gertrude Yip, and Hiro
and Elaine Sugimura on May 30, 2005, June 1, 2005 and June 17, 2005,
respectively. The lenders were also granted detachable warrants to purchase
an
aggregate of 1,600,000 shares of Common Stock in the form warrants pursuant
to
purchase agreements entered into contemporaneously by the parties. The exercise
prices of the warrants are $0.023, 0.022 and $0.018 respectively. In addition,
the lenders were granted unlimited piggyback rights.
On
October 1, 2004, the Company entered into 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.
On
October 1, 2004, the Company entered into 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.
On
October 1, 2004, the Company entered into a Consulting Agreement with Barry
R.
Clark to provide investor relations services. The engagement was actually
executed for one month of service and the Company issued to Barry R. Clark
30,000 shares of restricted stock.
On
September 23, 2004, we entered into two convertible note agreements, for the
aggregate principal amount
of
$350,000, with Yong Sam Kim and Song N. Bang. The principal and interest have
been settled in cash. In connection with the convertible note agreements,
Messrs. Kim and Bang were issued warrants to purchase 900,000 and 150,000 shares
of common stock, respectively. Each warrant entitled the holders to subscribe
for one share of common stock at an exercise price of $0.20 per share through
September 23, 2007. Pursuant to the convertible note agreements, Messrs. Kim
and
Bang were granted piggy-back registration rights exercisable during the
three-year period from the effective date of the agreements. In July 2006,
Bang
exercised his warrants by cashless exercise for 50,000 shares of our common
stock.
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
April
12, 2004, we 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 in cash at signing of
the
agreement and an additional $30,206 cash payment was still outstanding and
accrued at September 30, 2004. In addition, as part of the purchase price,
we
issued 1,000,000 shares of common stock in September 2004, valued at $0.42
per
share based on its fair market value on July 20, 2004 (aggregate value $420,000)
which is the date when the application for the patent right holder alternation
registration was approved.
On
May
24, 2004, in connection with our engagement of Cinapsys, Inc. for investor
relations services, we agreed to issue a one-time stock payment of 75,000 shares
or our common stock at an agreed upon value of $0.45 per share, the closing
price on May 24, 2004, for an aggregate value of $33,750. We have agreed with
Cinapsys, Inc. to issue the stock at the end of the engagement.
On
March
30, 2004, the Company granted a non-statutory stock option to a consultant
to
purchase 300,000 shares of common stock exercisable at $0.20 per share for
ten
years in consideration of services rendered. Upon exercise of the option, the
Company would receive gross proceeds of $60,000.
Pursuant
to that certain Agreement and Plan of Merger, dated March 11, 2004, in exchange
for 100% of the issued and outstanding shares of Kiwa Bio-Tech Products Group
Limited, the Kiwa Bio-Tech Products Group Limited stockholders were issued
30,891,676 shares of the Company's common stock. Based on the closing price
of
the Company's common stock on the closing date of the merger as reported on
the
OTC Bulletin Board, the aggregate value of the shares of common stock issued
to
the former Kiwa Bio-Tech Products Group Limited stockholders was
$3,861,460.
ITEM
27. EXHIBITS.
Exhibit
No.
|
|
Description
OF Exhibits
|
|
Incorporated
by Reference in Document
|
|
Exhibit
No. in Incorporated Document
|
2.1
|
|
Agreement
and Plan of Merger, dated March 11, 2004, by and among Tintic Gold
Mining
Company, TTGM Acquisition Corporation, and Kiwa
Bio-Tech
Products Group Ltd.
|
|
Form
8-K filed on March 29, 2004
|
|
2.1
|
|
|
|
|
|
|
|
2.2
|
|
Agreement
and Plan of Merger, dated July 22, 2004, between Kiwa Bio-Tech Products
Group Corporation, a Utah corporation, and Kiwa Bio-Tech Products
Group
Corporation.
|
|
Form
8-K filed on July
23,
2004
|
|
2.1
|
|
|
|
|
|
|
|
3.1
|
|
Certificate
of Incorporation, effective as of July 21, 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
|
|
|
|
|
|
|
|
5.1
|
|
Opinion
of Preston Gates & Ellis LLP
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Standby
Equity Distribution Agreement, dated July 6, 2004, between Cornell
Capital
Partners, LP and Kiwa Bio-Tech Products Group Corporation.
|
|
Form
SB-2 filed August 2, 2004
|
|
10.1
|
|
|
|
|
|
|
|
10.2
|
|
Placement
Agent Agreement, dated July 6, 2004, between Newbridge Securities
Corporation and Kiwa Bio-Tech Products Group Corporation.
|
|
Form
SB-2 filed August 2, 2004
|
|
10.2
|
|
|
|
|
|
|
|
10.3
|
|
Registration
Rights Agreement, dated July 6, 2004, between Cornell Capital Partners,
LP
and Kiwa Bio-Tech Products Group Corporation.
|
|
Form
SB-2 filed August 2, 2004
|
|
10.3
|
|
|
|
|
|
|
|
Exhibit
No.
|
|
Description
OF Exhibits
|
|
Incorporated
by Reference in Document
|
|
Exhibit
No. in Incorporated
Document
|
10.4
|
|
Warrant
Purchase
Agreement, dated March 12,
2004, issued to Westpark Capital, Inc.
|
|
Form
10-QSB filed May 20, 2004
|
|
10.1
|
|
|
|
|
|
|
|
10.5
|
|
Convertible
Loan Agreement, dated January 25, 2004 between Kiwa Bio-tech Products
Group Ltd. and Kao Ming Investment Company
|
|
Form
10-QSB filed May 20, 2004
|
|
10.2
|
|
|
|
|
|
|
|
10.6
|
|
Convertible
Loan Agreement dated March 12, 2004 for $200,000 between Kiwa Bio-Tech
Products Group Corporation and Jzu Hsiang Trading Co.,
Ltd.
|
|
Form
10-QSB filed August 20, 2004
|
|
10.1
|
|
|
|
|
|
|
|
10.7
|
|
Engagement
agreement between Kiwa Bio-Tech Products Group Corporation and Cinapsys
Inc. dated May 24, 2004
|
|
Form
10-QSB filed August 20, 2004
|
|
10.3
|
|
|
|
|
|
|
|
10.8
|
|
Patent
Transfer Agreement dated April 12, 2004, between Kiwa Bio-Tech Products
(Shandong) Co., Ltd. and China Agricultural University.
|
|
Form
SB-2/A filed October 8, 2004
|
|
10.5
|
|
|
|
|
|
|
|
10.9
|
|
Patent
Transfer Contract, dated April 12, 2004, between Kiwa Bio-Tech Products
Group Corporation and China Agricultural University
|
|
Form
SB-2/A filed November 23, 2004
|
|
10.5
|
|
|
|
|
|
|
|
10.10
|
|
Contract
of Project of Venture Capital of Zoucheng Science & Technology Plan
(Contract No.: 2004) among KIWA Bio-Tech Products (Shandong) Company,
Science & Technology Bureau and Zoucheng Branch of China Commercial
Bank of ICBC dated April 2004.
|
|
Form
SB-2/A filed October 8, 2004
|
|
10.6
|
|
|
|
|
|
|
|
10.11
|
|
Contract
of Project of Venture Capital of Zoucheng Science & Technology Plan
(Contract No. 2002) among KIWA Bio-Tech Products (Shandong) Company,
Zoucheng Science & Technology Bureau and Zoucheng Branch of China
Commercial Bank of ICBC dated November 2002.
|
|
Form
SB-2/A filed October 8, 2004
|
|
10.7
|
|
|
|
|
|
|
|
10.12
|
|
Contract
of Project of Venture Capital of Zoucheng Science & Technology Plan
(Contract No. 2002) among KIWA Bio-Tech Products Group Limited, Zoucheng
Municipal People’s Government Bureau
and Zoucheng Branch of China Commercial Bank of ICBC dated May 26,
2002.
|
|
Form
SB-2/A filed November 23, 2004
|
|
10.7
|
|
|
|
|
|
|
|
10.13
|
|
PBC
Project Investment Agreement between KIWA Bio-Tech Products Group
Limited
and Zoucheng Municipal Government dated June 25, 2002
|
|
Form
10-KSB filed April 13, 2005
|
|
10.13
|
|
|
|
|
|
|
|
10.14
|
|
Employment
Agreement dated March 18, 2003 between Kiwa Bio-Tech Products Group
and
Lian jun Luo
|
|
Form
SB-2/A filed November 23, 2004
|
|
10.13
|
|
|
|
|
|
|
|
10.15
|
|
Employment
Agreement dated March 18, 2003 between Kiwa Bio-Tech Products Group
and
Bin Qu
|
|
Form
SB-2/A filed November 23, 2004
|
|
10.14
|
|
|
|
|
|
|
|
10.16
|
|
Convertible
Loan Agreement dated October 20, 2003 between China Star Investment
Group
and Kiwa Bio-Tech Products Group Ltd., as amended by letter agreement
dated August 1, 2004
|
|
Form
SB-2/A filed October 8, 2004
|
|
10.8
|
|
|
|
|
|
|
|
10.17
|
|
Loan
Agreement dated July 26, 2004 between China Star Investment Group
and Kiwa
Bio-Tech Products Group Corporation
|
|
Form
SB-2/A filed November 23, 2004
|
|
10.15
|
|
|
|
|
|
|
|
10.18
|
|
Commercial
Lease Agreement dated April 1, 2004 between Kiwa Bio-Tech Products
Group
Corporation and China Star Investment Company.
|
|
Form
SB-2/A filed October 8, 2004
|
|
10.10
|
|
|
|
|
|
|
|
10.19
|
|
Convertible
Note
Agreement dated September
23,
2004 among Kiwa Bio-Tech Products Group Corporation and Young San
Kim and
Song N. Bang
|
|
Form
10-QSB filed November 15, 2004
|
|
10.4
|
|
|
|
|
|
|
|
Exhibit
No.
|
|
Description
OF Exhibits
|
|
Incorporated
by Reference in Document
|
|
Exhibit
No. in Incorporated
Document
|
10.20
|
|
Amendment,
dated April 7, 2005, to Convertible Note Agreement dated September
23,
2004 among Kiwa Bio-Tech Products Group Corporation and Young San
Kim and
Song N. Bang
|
|
Form
10-KSB filed April 13, 2005
|
|
10.20
|
|
|
|
|
|
|
|
10.21
|
|
Common
Stock Warrant dated September 23, 2004, issued by Kiwa Bio-Tech Products
Group Corporation to Young San Kim
|
|
Form
10-QSB filed November 15, 2004
|
|
10.5
|
|
|
|
|
|
|
|
10.22
|
|
Common
Stock Warrant dated September 23, 2004, issued by Kiwa Bio-Tech Products
Group Corporation to Song N. Bang
|
|
Form
10-QSB filed November 15, 2004
|
|
10.6
|
|
|
|
|
|
|
|
10.23
|
|
Promissory
Note
of Kiwa Bio-Tech Products Group Corporation, principal amount
$400,000,
issued to Cornell Capital Partners, LP on January 4, 2005, as amended
by
letter agreements dated March 21, 2005 and April 5, 2005.
|
|
Form
10-KSB filed April 13, 2005
|
|
10.23
|
|
|
|
|
|
|
|
10.24
|
|
Payment
Acknowledgment and Release, dated June 8, 2005, among Kiwa Bio-Tech
Products Group Corporation and Young San Kim and Song N.
Bang
|
|
Form
10-QSB filed May 20, 2005
|
|
10.1
|
|
|
|
|
|
|
|
10.25
|
|
Advance
Agreement, dated May 23, 2005, between Kiwa Bio-Tech Products Group
Corporation and Mr. Wei Li.
|
|
Form
10-QSB filed August 15, 2005
|
|
10.2
|
|
|
|
|
|
|
|
10.26
|
|
Promissory
Note of Kiwa Bio-Tech Products Group Corporation, principal amount
$150,000, issued to Donald Worthly dated May 30, 2005, as amended
June 1,
2005.
|
|
Form
8-K filed on August 12, 2005
|
|
10.1
|
|
|
|
|
|
|
|
10.27
|
|
Promissory
Note of Kiwa Bio-Tech Products Group Corporation, principal amount
$70,000, issued to Gertrude Yip dated May 30, 2005, as
amended.
|
|
Form
8-K filed on August 12, 2005
|
|
10.2
|
|
|
|
|
|
|
|
10.28
|
|
Promissory
Note of Kiwa Bio-Tech Products Group Corporation, principal amount
$100,000, issued to Hiro Sugimura and Elaine Sugimura dated June
16,
2005.
|
|
Form
8-K filed on August 12, 2005
|
|
10.3
|
|
|
|
|
|
|
|
10.29
|
|
Advance
Agreement, dated June 29, 2005, between Kiwa Bio-Tech Products (Shandong)
Co. Ltd. and China Star Investment Management Co. Ltd.
|
|
Form
10-QSB filed August 15, 2005
|
|
10.7
|
|
|
|
|
|
|
|
10.30
|
|
Advance
Agreement, dated September 30, 2005, between Kiwa Bio-Tech Products
(Shandong) Co. Ltd. and China Star Investment Management Co.
Ltd.
|
|
Form
10-QSB filed November 21, 2005
|
|
10.1
|
|
|
|
|
|
|
|
10.31
|
|
Advance
Agreement, dated December 31, 2005, between Kiwa Bio-Tech Products
(Shandong) Co. Ltd. and China Star Investment Management Co.
Ltd.
|
|
Form
10-KSB filed April 17, 2006
|
|
10.31
|
|
|
|
|
|
|
|
10.32
|
|
Stock
Purchase Agreement dated March 10, 2006 between Kiwa Bio-Tech Products
Group Corporation and Guilian Li Ziyang Zong
|
|
Form
8-K filed on March 15, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.33
|
|
Termination
Agreement between Kiwa Bio-Tech Products Group Corporation and Cornell
Capital dated on March 31, 2006
|
|
Form
8-K filed on April 4, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.34
|
|
Amendment,
dated April 13, 2006 to Stock Purchase Agreement dated March 10,
2006
|
|
Form
10-KSB filed April 17, 2006
|
|
10.34
|
|
|
|
|
|
|
|
10.35
|
|
Technology
Transfer Agreement between the Company and Jinan Kelongboao Bio-Tech
Co.
Ltd., dated May 8, 2006
|
|
Form
8-K filed on May 8, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.36
|
|
Acquisition
Framework Agreement between the Company and Beijing Huasheng Medicine
Co.,
dated May 10, 2006
|
|
Form
8-K filed on May 8, 2006
|
|
10.2
|
|
|
|
|
|
|
|
10.37
|
|
Supplementary
Agreement for Stock Purchase Agreement dated May 12, 2006
|
|
Form
10-QSB filed May
16, 2006
|
|
10.35
|
|
|
|
|
|
|
|
Exhibit
No.
|
|
Description
OF Exhibits
|
|
Incorporated
by Reference in Document
|
|
Exhibit
No. in Incorporated
Document
|
10.38
|
|
Advance
Agreement, dated March 31, 2006, between Kiwa Bio-Tech Products (Shandong)
Co. Ltd. and China Star Investment Management Co. Ltd.
|
|
Form
10-QSB filed May
16, 2006
|
|
10.36
|
|
|
|
|
|
|
|
10.39
|
|
Securities
Purchase Agreement, dated as of June 29, 2006 between Kiwa Bio-Tech
Products Group Corporation and AJW Partners, LLC, AJW Offshore, Ltd.,
AJW
Qualified Partners, LLC, New Millennium Capital Partners II, LLC,
Double U
Master Fund LP, and Nite Capital LP (collectively, the
“Purchasers”)
|
|
Form
8-K filed on June 29, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.40
|
|
Registration
Rights Agreement, dated as of June 29, 2006 between Kiwa Bio-Tech
Products
Group Corporation and the Purchasers
|
|
Form
8-K filed on June 29, 2006
|
|
10.2
|
|
|
|
|
|
|
|
10.41
|
|
Security
Agreement, dated as of June 29, 2006, between Kiwa Bio-Tech Products
Group
Corporation and the Purchasers
|
|
Form
8-K filed on June 29, 2006
|
|
10.3
|
|
|
|
|
|
|
|
10.42
|
|
Intellectual
Property Security Agreement, dated as of June 29, 2006, between Kiwa
Bio-Tech Products Group Corporation and the Purchasers
|
|
Form
8-K filed on June 29, 2006
|
|
10.4
|
|
|
|
|
|
|
|
10.43
|
|
Pledge
Agreement, dated as of June 29, 2006, among Kiwa Bio-Tech Products
Group
Corporation, Wei Li, and the Purchasers
|
|
Form
8-K filed on June 29, 2006
|
|
10.5
|
|
|
|
|
|
|
|
10.44
|
|
Form
of Callable Secured Convertible Note, dated as of June 29, 2006,
issued by
Kiwa Bio-Tech Products Group Corporation to the Purchasers
|
|
Form
8-K filed on June 29, 2006
|
|
10.6
|
|
|
|
|
|
|
|
10.45
|
|
Form
of Stock Purchase Warrant, dated as of June 29, 2006, issued by Kiwa
Bio-Tech Products Group Corporation to the Purchasers
|
|
Form
8-K filed on June 29, 2006
|
|
10.7
|
|
|
|
|
|
|
|
10.46
|
|
Contract
for Joint Venture, dated July 11, 2006 between Kiwa Bio-Tech Products
Group Corporation and Tianjin Challenge Feed Co., Ltd.
|
|
Form
8-K filed on July 11, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.47
|
|
Contract
for urea dated July 28, 2006 between Kiwa Bio-Tech Products Group
Ltd. and
China Hua Yang Roneo Corporation.
|
|
Form
8-K filed on August 2, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.48
|
|
Contract
for urea dated July 31, 2006 between Kiwa Bio-Tech Products Group
Ltd. and
Shengkui Technologies, Inc.
|
|
Form
8-K filed on August 2, 2006
|
|
10.2
|
|
|
|
|
|
|
|
10.49
|
|
Employment
Agreement dated July 31, 2006 between Kiwa Bio-Tech Products Group
Ltd.
and Wei Li
|
|
Form
8-K filed on August 7, 2006
|
|
10.1
|
|
|
|
|
|
|
|
10.50
|
|
Employment
Agreement dated July 31, 2006 between Kiwa Bio-Tech Products Group
Ltd.
and Lianjun Luo
|
|
Form
8-K filed on August 7, 2006
|
|
10.2
|
|
|
|
|
|
|
|
21
|
|
List
of Subsidiaries
|
|
Form
10-QSB filed May 20, 2005
|
|
21
|
|
|
|
|
|
|
|
23.1
|
|
Consent
of Preston Gates & Ellis LLP (included in Exhibit 5.1 attached
hereto)
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
|
23.2
|
|
Consent
of Mao & Company, CPAs, Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
|
|
23.3
|
|
Consent
of Grobstein, Horwath & Company, LLP
|
|
Filed
herewith.
|
|
|
ITEM
28. UNDERTAKINGS.
(a) The
undersigned Registrant hereby undertakes:
(1) To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
|
(i)
|
Include
any prospectus required by Section 10(a)(3) of the Securities Act
of
1933;
|
|
(ii)
|
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and notwithstanding the forgoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant
to
Rule
424(b)
if, in the aggregate, the changes in the volume and price represent
no
more than a 20% change in the maximum aggregate offering price set
forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
|
|
(iii) |
Include
any additional or changed material information on the plan of
distribution. |
|
(2)
|
For
determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the
initial
bona fide offering.
|
|
|
To
file a post-effective amendment to remove from registration any of
the
securities that remain unsold at the end of the
offering.
|
|
|
For
determining liability of the undersigned registrant under the Securities
Act to any purchaser in the initial distribution of the securities,
the
undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities
to the
purchaser, if the securities are offered or sold to such purchaser
by
means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer
or sell
such securities to such purchaser:
|
|
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to
Rule 424;
|
|
|
Any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant
or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
(b) Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described herein, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission
such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
(c) That,
for
the purpose of determining liability under the Securities Act to
any
purchaser:
(1)
If the
registrant is relying on Rule 430B:
|
(i)
|
Each
prospectus filed by the undersigned registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the
date
the filed prospectus was deemed part of and included in the registration
statement; and
|
|
(ii)
|
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii),
or (x)
for the purpose of providing the information required by section
10(a) of
the Securities Act shall be deemed to be part of and included in
the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the
issuer
and any person that is at that date an underwriter, such date shall
be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be
deemed
to be the initial bona fide offering thereof. Provided, however,
that no
statement made in a registration statement or prospectus that is
part of
the registration statement or made in a document incorporated or
deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser
with a
time of contract of sale prior to such effective date, supersede
or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date; or
|
(2)
If
the
registrant is subject to Rule 430C, include the following:
Each
prospectus filed pursuant to Rue 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing on Form SB-2 and authorized this Registration Statement on Form SB-2
to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Beijing, China on August 11, 2006.
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KIWA
BIO-TECH
PRODUCTS GROUP CORPORATION |
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/s/ Wei
Li |
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Wei
Li
Chief
Executive Officer
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/s/ Lianjun
Luo |
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Lian-jun
Luo
Chief
Financial Officer and Chief Accounting Officer
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Each
person whose signature appears below constitutes and appoints Wei Li and
Lian-jun Luo, and each of them, as his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and his
name,
place and stead, in any and all capacities, to sign any or all amendments
(including post effective amendments) to this Registration Statement and a
new
Registration Statement filed pursuant to Rule 462(b) of the Securities Act
of
1933 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorneys-in-fact and agents, and each of them, full power and authority
to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as fully to all intents and purposes as he might
or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and
on the dates stated:
Signature
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Title
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/s/
Wei Li
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August
11, 2006
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Chief
Executive Officer and Chairman of the Board
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Wei
Li
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/s/
Lianjun Luo
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August
11, 2006
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Chief
Financial Officer and Director (Principal Accounting and Financial
Officer)
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Lian-jun
Luo
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and
Director |
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/s/
Dachang Ju
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August
11, 2006
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Director
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Da-chang
Ju
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/s/
Yunlong Zhang
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August
11, 2006
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Director
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Yun-long
Zhang
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