UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended March 31, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to _________
Commission File Number: 000-33167
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
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(Exact name of small business issuer as specified in its charter)
Utah 84-0448400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17700 Castleton Street, Suite 589, City of Industry, California 91748
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(Address of principal executive offices)
Issuer's telephone number: (626) 964-3232
Tintic Gold Mining Company
3131 Teton Drive, Salt Lake City, Utah 84109
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(Former name, former address and former fiscal year, if changed
since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 2004, the Company had 34,930,248 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX
PART I. FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements..................................................3
Condensed Consolidated Balance Sheets - March 31, 2004
(Unaudited) and December 31, 2003.....................................3
Condensed Consolidated Statements of Operations (Unaudited)-
Three Months Ended March 31, 2004 and 2003, and June 5, 2002
(Inception) to March 31, 2004 (Cumulative)............................5
Condensed Consolidated Statement of Stockholders' Equity
(Deficiency) -June 5, 2002 (Inception) to March 31, 2004
(Cumulative)..........................................................6
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 2004 and 2003, and June 5, 2002
(Inception) to March 31, 2004 (Cumulative)............................9
Notes to Condensed Consolidated Financial Statements
(Unaudited) Three Months Ended March 31, 2004 and 2003,
and June 5, 2002 (Inception) to March 31, 2004 (Cumulative)..........11
Item 2. Management's Discussion and Analysis or Plan of Operation............18
Item 3. Controls and Procedures..............................................30
PART II. OTHER INFORMATION....................................................31
Item 4. Changes in Securities, Use of Proceeds and Small Business
Issuer Purchases of Equity Securities................................31
Item 5. Exhibits and Reports on Form 8-K.....................................31
SIGNATURES....................................................................32
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash ................................... $ 10,910 $ 48,730
Restricted cash ........................ 200,000 300,000
Accounts receivable .................... 60,408 45,235
Inventories ............................ 144,757 135,201
Due from related party ................. -- 30,574
Other current assets ................... 283,224 109,811
----------- -----------
Total current assets ..................... 699,299 669,551
----------- -----------
Property and equipment:
Buildings .............................. 1,045,549 1,045,599
Machinery and equipment ................ 314,297 312,784
Automobiles ............................ 97,480 97,485
Construction in process ................ 52,403 45,108
Office equipment ....................... 11,639 11,640
----------- -----------
1,521,368 1,512,616
Less accumulated depreciation .......... (54,178) (35,468)
----------- -----------
1,467,190 1,477,148
----------- -----------
Total assets ............................ $ 2,166,489 $ 2,146,699
=========== ===========
(continued)
3
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets (continued)
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable and accrued
expenses ................................. $ 768,473 $ 737,636
Short-term loans ........................... 193,304 283,930
Due to related party ....................... 69,426 --
Convertible notes payable -
Related party ............................ -- 100,000
Unrelated party .......................... 500,000 --
Current portion of long-term
liabilities .............................. 133,390 133,298
----------- -----------
Total current liabilities .................... 1,664,593 1,254,864
----------- -----------
Long-term liabilities, less
current portion:
Unsecured notes payable .................. 1,087,337 1,063,226
Bank notes payable ....................... 36,549 39,732
----------- -----------
1,123,886 1,102,958
----------- -----------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $0.001 par value -
Authorized - 50,000,000 shares issued
and outstanding - 34,930,248 shares and
30,891,676 shares at March 31, 2004 and
December 31, 2003, respectively ............ 34,930 30,892
Additional paid-in capital ................... 2,794,450 1,184,108
Deficit accumulated during the
development stage .......................... (3,076,370) (1,426,123)
Deferred interest expense .................... (375,000) --
----------- -----------
Total stockholders' deficiency ............... (621,990) (211,123)
----------- -----------
Total liabilities and
stockholders' deficiency ................... $ 2,166,489 $ 2,146,699
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 5, 2002
March 31, (Inception) to
---------------------------- March 31, 2004
2004 2003 (Cumulative)
------------ ------------ ------------
Net sales ...................... $ 53,458 $ -- $ 93,489
Cost of sales .................. 31,011 -- 61,305
------------ ------------ ------------
Gross profit ................... 22,447 -- 32,184
------------ ------------ ------------
Operating expenses:
Consulting and professional
fees ....................... 29,887 -- 597,490
Directors' compensation ...... 8,699 3,624 356,715
General and administrative ... 74,545 43,717 443,482
Research and development ..... 12,540 9,720 82,139
Depreciation and amortization 9,138 1,900 28,028
Reverse merger costs ......... 1,397,981 -- 1,448,317
------------ ------------ ------------
Total costs and expenses ..... 1,532,790 58,961 2,956,171
------------ ------------ ------------
(1,510,343) (58,961) (2,923,987)
------------ ------------ ------------
Interest income (expense), net . (14,904) 311 (27,383)
Amortization of beneficial
conversion feature of
convertible note payable ..... (125,000) -- (125,000)
------------ ------------ ------------
Net loss ....................... $ (1,650,247) $ (58,650) $ (3,076,370)
============ ============ ============
Net loss per common share -
basic and diluted ............ $ (0.05) $ --
============ ============
Weighted average number
of common shares
outstanding -
basic and diluted ............ 31,564,771 12,356,670
============ ============
See accompanying notes to condensed consolidated financial statements.
5
Kiwa Bio-tech Products Group and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency) (Unaudited)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------- Paid-in Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- --------- --------- ----------- -------- -------------
Issuance of
common stock 12,356,670 $ 12,357 $ 452,643 $ -- $ -- $ 465,000
Net loss for the
period from
June 5, 2002
(Inception) to
December 31,
2002 -- -- -- (70,884) -- (70,884)
---------- -------- ---------- ----------- --------- ----------
Balance,
December 31,
2002 12,356,670 12,357 452,643 (70,884) -- 394,116
Shares issued
to consultants
for services 10,503,170 10,503 414,497 -- -- 425,000
Shares issued to
directors as
directors'
compensation 8,031,836 8,032 316,968 -- -- 325,000
Net loss for the
year ended
December 31,
2003 -- -- -- (1,355,239) -- (1,355,239)
---------- -------- ---------- ----------- --------- ----------
Balance,
December 31,
2003 30,891,676 30,892 1,184,108 (1,426,123) (211,123)
(continued)
6
Kiwa Bio-tech Products Group and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency) (Unaudited) (continued)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------- Paid-in Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- --------- --------- ----------- -------- -------------
Shares retained
by public
shareholders
in March 2004
reverse merger
transaction 4,038,572 $ 4,038 $ (4,038) $ -- $ -- $ --
Issuance of
warrants in
conjunction
with March
2004 reverse
merger
transaction -- -- 943,380 -- -- 943,380
Issuance of
stock options
to consultant
in conjunction
with March 2004
reverse merger
transaction -- -- 171,000 -- -- 171,000
Beneficial
conversion
feature of
convertible
notes payable -- -- 500,000 -- (500,000) --
(continued)
7
Kiwa Bio-tech Products Group and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency) (Unaudited) (continued)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------- Paid-in Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- --------- --------- ----------- -------- -------------
Amortization
of beneficial
conversion
feature of
convertible
note payable -- $ -- $ -- $ -- $ 125,000 $ 125,000
Net loss for the
three months
ended March 31,
2004 -- -- -- (1,650,247) -- (1,650,247)
---------- -------- --------- ----------- --------- ----------
Balance,
March 31, 2004 34,930,248 $ 34,930 $2,794,450 $(3,076,370) $(375,000) $ (621,990)
========== ======== ========== =========== ========= ==========
See accompanying notes to condensed consolidated financial statements.
8
Kiwa Bio-tech Products Group and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 5, 2002
March 31, (Inception) to
-------------------------- March 31, 2004
2003 2004 (Cumulative)
----------- ----------- -----------
Cash flows from operating
activities:
Net loss .......................... $(1,650,247) $ (58,650) $(3,076,370)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Issuance of common stock for
to consultants for services ... -- -- 425,000
Issuance of common stock for
directors' compensation ....... -- -- 325,000
Issuance of securities for
reverse merger costs .......... 1,114,380 -- 1,114,380
Depreciation and amortization ... 18,710 1,915 54,178
Amortization of beneficial
conversion feature of
convertible note payable ...... 125,000 -- 125,000
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable ......... (15,173) -- (60,408)
Inventories ................. (9,556) (9,198) (144,757)
Other current assets ........ (173,413) (20,802) (283,224)
Deposits .................... -- 25,794 --
Due from related party ...... -- -- (57,476)
Increase (decrease) in:
Accounts payable and
accrued liabilities ....... 30,836 (2,227) 768,472
Due to related party ........ -- 10,128 26,902
----------- ----------- -----------
Net cash used in operating
activities ...................... (559,463) (53,040) (783,303)
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment ..................... (8,752) (388,848) (1,521,368)
----------- ----------- -----------
Net cash used in investing
activities ...................... (8,752) (388,848) (1,521,368)
----------- ----------- -----------
(continued)
9
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended June 5, 2002
March 31, (Inception) to
--------------------------- March 31, 2004
2003 2004 (Cumulative)
----------- ----------- -----------
Cash flows from financing
activities:
(Increase) decrease in
restricted cash ............ $ 100,000 $ -- $ (200,000)
Proceeds from short-term
loans ....................... 283,930
Repayment of short-term
loans ....................... (90,626) -- (90,626)
Proceeds from convertible
notes payable .............. 500,000 -- 600,000
Increase in long-term
borrowings, net ............ 21,021 300,328 1,257,277
Proceeds from sale of
common stock ............... -- -- 465,000
----------- ----------- -----------
Net cash provided by
financing activities ......... 530,395 300,328 2,315,581
----------- ----------- -----------
Cash:
Net increase (decrease) ...... (37,820) (141,560) 10,910
At beginning of period ....... 48,730 522,057 --
----------- ----------- -----------
At end of period ............. $ 10,910 $ 380,497 $ 10,910
=========== =========== ===========
Supplemental Disclosures of
Cash Flow Information:
Cash paid for interest ......... $ 3,593 $ -- $ 12,114
=========== =========== ===========
Cash paid for taxes ............ $ -- $ -- $ --
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
10
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2004 and 2003,
and June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
1. Organization and Basis of Presentation
Organization - On March 12, 2004, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated as of March 11, 2004, by and among Tintic Gold
Mining Company, a Utah corporation ("Tintic" or "Kiwa"), TTGM Acquisition
Corporation, a Utah corporation and wholly-owned subsidiary of Tintic ("Merger
Sub"), and Kiwa Bio-Tech Products Group Ltd., a privately-held corporation
organized in the British Virgin Islands ("Kiwa Bio-Tech"), Merger Sub merged
with and into Kiwa Bio-Tech with Kiwa Bio-Tech surviving as a wholly-owned
subsidiary of Tintic (the "Merger"). 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 (after giving effect to a 4-to-1
stock split effective as of March 29, 2004). 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. Tintic also assumed 1,852,501 stock
options issuable by Kiwa Bio-Tech at March 12, 2004. On March 17, 2004, Tintic
changed its name to Kiwa Bio-tech Products Group Corporation.
At the closing of the Merger Agreement, Tintic transferred all of its pre-merger
assets, consisting primarily of its interest in certain mining claims situated
in the State of Utah, subject to all of its pre-merger liabilities, to a
newly-formed, wholly-owned subsidiary, Tintic Gold Mining Company, a Nevada
corporation ("Tintic Nevada"). The shares of Tintic Nevada were transferred to
an escrow agent to be held in escrow for the benefit of the pre-merger
stockholders of Tintic until such time as the distribution of such shares has
been registered under the Securities Act of 1934 and any applicable state
securities laws.
The Merger resulted in a change of control of Tintic, with the former
stockholders of Kiwa Bio-Tech acquiring approximately 88.4% of Tintic's common
stock immediately following the closing of the Merger. Accordingly, this
transaction was accounted for as a recapitalization of Kiwa Bio-Tech, pursuant
to which the accounting basis of Kiwa Bio-Tech continued unchanged subsequent to
the transaction date. Accordingly, the pre-transaction financial statements of
Kiwa Bio-Tech are now the historical financial statements of the Company. The
stockholders' equity (deficiency) section of the balance sheet has been
retroactively restated for all periods presented to reflect the post-transaction
equity received by the Kiwa Bio-Tech stockholders as a result of the
recapitalization.
Kiwa Bio-Tech was incorporated on June 5, 2002 in the British Virgin Islands as
a holding company. On October 11, 2002, Kiwa Bio-Tech established a wholly-owned
subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. ("Kiwa-SD") in Zoucheng
City, Shandong Province, People's Republic of China (the "PRC").
Unless the context indicates otherwise, Kiwa and its wholly-owned subsidiaries,
Kiwa Bio-Tech and Kiwa SD, are referred to herein collectively as the "Company".
Business - The Company intends to develop, manufacture, distribute and market
innovative, cost-effective and environmentally safe bio-technological products
for the agricultural, natural resources and environmental protection, primarily
in the PRC. 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 and identification of strategic acquisitions. The
Company's first product, a photosynthesis biological catalyst, was introduced in
the PRC agricultural market in November 2003. The Company is a development stage
entity.
As the Company's principal operations are conducted in the PRC, 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 the PRC. The Company's
results of operations may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in
11
governmental policies with respect to laws and regulations, among other things.
In addition, all of the Company's transactions undertaken in the PRC are
denominated in Renminbi ("RMB"), which must be converted into other currencies
before remittance out of the PRC may be considered. Both the conversion of RMB
into foreign currencies and the remittance of foreign currencies abroad require
the approval of the PRC government.
Basis of Presentation - The condensed consolidated financial statements include
the operations of Kiwa Bio-tech Products Group Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The interim condensed consolidated financial statements are unaudited, but in
the opinion of management of the Company, contain all adjustments, which include
normal recurring adjustments, necessary to present fairly the financial position
at March 31, 2004, the results of operations for the three months ended March
31, 2004 and 2003, and the cash flows for the three months ended March 31, 2004
and 2003. The consolidated balance sheet as of December 31, 2003 is derived from
the Company's audited financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Certain information
and footnote disclosures normally included in financial statements that have
been presented in accordance with generally accepted accounting principles in
the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission with respect to
interim financial statements, although management of the Company believes that
the disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Current Report on Form 8-K dated March 12, 2004, as amended, as filed
with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2004.
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 financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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. The Company incurred a net loss of $1,650,247 and
$1,355,239 during the three months ended March 31, 2004 and the year ended
December 31, 2003, respectively, and the Company's current liabilities exceeded
its current assets by $965,294 and $585,313 and it had a stockholders'
deficiency of $621,990 and $211,123 at March 31, 2004 and December 31, 2003,
respectively. In addition, the Company is still in the development stage and
will require additional capital to fund its business plan, and is continuing to
develop its manufacturing facility and has not generated significant revenues
from its planned principal operations. These factors create substantial doubt
about the Company's ability to continue as a going concern.
The Company's independent certified public accountants, in their independent
auditors' report on the consolidated financial statements as of and for the year
ended December 31, 2003, have expressed substantial doubt about the Company's
ability to continue as a going concern.
As of March 31, 2004, the Company had obtained non-interest bearing loans from
the local PRC government of approximately $1,200,000 on favorable repayment
terms. During the year ending December 31, 2004, the Company intends to raise
additional capital through the
12
issuance of debt or equity securities to fund the development of its planned
business operations, although there can be no assurances that the Company will
be successful in this regard. There can be no assurances that the Company will
be able to obtain sufficient funds to allow it to continue its operations during
the remainder of 2004.
To the extent that the Company is unable to successfully raise the capital
necessary to fund its future cash requirements on a timely basis and under
acceptable terms and conditions, the Company will not have sufficient cash
resources to maintain operations, and may have to curtail operations and
consider a formal or informal restructuring or reorganization.
Foreign Currency Translation - The functional currency of the Company is the
Renminbi ("RMB"). Transactions denominated in foreign currencies are translated
into RMB at the unified exchange rates quoted by the People's Bank of China,
prevailing at the transaction dates. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable unified
exchange rates prevailing at the balance sheet date.
Translations of amounts from RMB into United States Dollars ("US$") were at
approximately US $1.00 = RMB 8.28 for all periods presented. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
that rate or at any other rate. Due to the stability of the RMB during the
periods covered by the consolidated financial statements, no material exchange
differences exist.
Net Loss Per Common Share - Basic loss per common share is calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per common share reflects the potential dilution
that would occur if dilutive securities (stock options, warrants and convertible
debt) were exercised. These potentially dilutive securities were not included in
the calculation of loss per share for the periods presented because the Company
incurred a loss during such periods and thus their effect would have been
anti-dilutive. Accordingly, basic and diluted loss per common share is the same
for all periods presented. As of March 31, 2004, potentially dilutive securities
aggregated 4,047,000 shares of common stock, respectively. The loss per common
share calculation for the three months ended March 31, 2003 reflects the
retroactive restatement of the stockholders' equity (deficiency) section of the
balance sheet to reflect the March 2004 recapitalization of Kiwa Bio-Tech.
The Company effected a 4-for-1 forward split of its outstanding shares of common
stock effective March 29, 2004, in conjunction with the reverse merger
transaction with Kiwa Bio-Tech described above. Unless otherwise indicated, all
share and per share amounts presented herein have been adjusted to reflect the
forward stock split.
Comprehensive Income (Loss) - The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general purpose financial statements. SFAS No. 130 defines
comprehensive income (loss) to include all changes in equity except those
resulting from investments by owners and distributions to owners, including
adjustments to minimum pension liabilities, accumulated foreign currency
translation, and unrealized gains or losses on marketable securities.
The Company's only component of comprehensive income (loss) is foreign currency
translation income (loss). Comprehensive income (loss) was not material for all
periods presented.
Stock-Based Compensation - The Company periodically issues shares of common
stock for services rendered or for financing costs. Such shares are valued based
on the market price on the transaction date.
The Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock-based compensation plans.
The provisions of SFAS No. 123 allow companies to either record an expense in
the
13
financial statements to reflect the estimated fair value of stock options or
warrants to employees, or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", but to disclose on an annual basis the pro forma effect on
net income (loss) and net income (loss) per common share had the fair value of
the stock options and warrants been recorded in the financial statements. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies to disclose in
interim financial statements the pro forma effect on net income (loss) and net
income (loss) per common share of the estimated fair market value of stock
options or warrants issued to employees. The Company has elected to continue to
account for stock-based compensation plans utilizing the intrinsic value method.
Accordingly, compensation cost for stock options and warrants is measured as the
excess, if any, of the fair market price of the Company's common stock at the
date of grant above the amount an employee must pay to acquire the common stock.
In accordance with SFAS No. 123, the cost of stock options and warrants issued
to non-employees is measured at the grant date based on the fair value of the
award. The fair value of the stock-based award is determined using the
Black-Scholes option-pricing model. The resulting amount is charged to expense
on the straight-line basis over the period in which the Company expects to
receive benefit, which is generally the vesting period.
The Company did not issue any stock options to its officers or management during
the three months ended March 31, 2004.
2. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on the Company's financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on the Company's consolidated financial statement
presentation or disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research
14
Bulletin No. 51, "Consolidated Financial Statements", relating to consolidation
of certain entities. In December 2003, the FASB issued a revised version of FIN
46 ("FIN 46R") that replaced the original FIN 46. FIN 46R requires
identification of a company's participation in variable interest entities
("VIEs"), which are defined as entities with a level of invested equity that is
not sufficient to fund future activities to permit it to operate on a standalone
basis. For entities identified as a VIE, FIN 46R sets forth a model to evaluate
potential consolidation based on an assessment of which party to the VIE (if
any) bears a majority of the exposure to its expected losses, or stands to gain
from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even if
consolidation is not required. The Company is not currently participating in, or
invested in any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Company's
consolidated financial statement presentation or disclosures.
3. Inventories
Inventories consisted of the following at March 31, 2004 and December 31, 2003:
March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials $ 35,310 $ 23,497
Work in progress 24,386 111,390
Finished goods 85,061 314
------- -------
$144,757 $135,201
======== ========
4. Short-Term Loans
As of March 31, 2004 and December 31, 2003, short-term loans consisted of bank
loans that mature on various dates through June 2004, with interest rates
ranging from 5.04% to 6.9% per annum. The short-term loans are secured by
restricted cash in the form of a bank certificate of deposit denominated in
United States dollars.
5. Convertible Note Payable
On January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures 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.
The lender is an unrelated party located outside the United States.
The fair value of this beneficial conversion feature was determined to be
$500,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and has been presented as deferred interest expense in the
balance sheet at March 31, 2004 and is being charged to operations as interest
expense from January 25, 2004 through September 25, 2004, which resulted in a
charge to operations of $125,000 for the three months ended March 31, 2004.
6. Related Party Transactions with China Star Investment Group
China Star Investment Group is a company which is 10% owned by a major
stockholder of the Company. The balance due to China Star at December 31, 2002
of $26,902 was primarily related to pre-operating costs that China Star paid on
behalf of the Company before it was incorporated in the PRC. The balance due
from China Star at December 31, 2003 of $30,574 resulted from unsecured,
non-interest bearing cash advances which are due on demand.
15
In October 2003, the Company obtained a $100,000 loan from China Star. The loan
was scheduled to mature on October 20, 2004, and bears interest at 12% per
annum, payable at maturity. As part of the loan terms, China Star had the right
to convert the loan into shares of the Company's common stock at $0.25 per share
at any time prior to the maturity date, subject to the Company completing a
reverse merger transaction in the United States, which was accomplished in March
2004. China Star has waived this conversion right.
During the three months ended March 31, 2004, the $30,574 due from China Star
was offset against the $100,000 loan payable to China Star, resulting in a
liability to China Star of $69,426 at March 31, 2004.
7. Equity-Based Transactions
From June 5, 2002 (Inception) to March 31, 2004 (Cumulative), the Company has
engaged in the following equity-based transactions:
The Company was initially capitalized on June 5, 2002 through the sale of
12,356,670 shares of common stock for $465,000.
On December 31, 2003, the Company issued 18,535,006 shares of common stock in
exchange for consulting services provided by various consultants and directors
of the Company.
In conjunction with the March 2004 reverse merger transaction (see 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 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 three months ended March 31,
2004.
e. Effective March 30, 2004, the Company issued a stock option to a consultant
to purchase 300,000 shares of common stock exercisable at $0.20 per share
for ten years. The fair value of this option was determined to be
approximately $0.57 per share pursuant to the Black-Scholes option pricing
model. The aggregate fair value of such option of $171,000 was charged to
operations as reverse merger costs during the three months ended March 31,
2004.
8. Major Customers and Suppliers
One customer accounted for 100% of the Company's net sales for the three months
ended March 31, 2004. The Company did not have any sales for the three months
ended March 31, 2003.
Three suppliers accounted for 21%, 21%, and 10% of the Company's net purchases
for the three months ended March 31, 2004. The Company did not have any
purchases for the three months ended March 31, 2003.
9. Subsequent Events
On March 12, 2004, the Company entered into a convertible loan agreement for
$200,000, with interest at 12%, payable at maturity. The loan matures 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 lender is an unrelated party located outside the United States. The loan was
not funded until April 7, 2004.
16
The fair value of this beneficial conversion feature was determined to be
$200,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and will be charged to operations as interest expense during
the three months ending June 30, 2004.
On April 6, 2004, the Company entered into a subscription agreement to issue
6,000,000 shares of common stock at $0.40 per share for gross proceeds of
$2,400,000. The investor is an unrelated party located outside the United
States. The transaction was scheduled to close on April 30, 2004. The Company
has granted the investor a 60 day extension to close the transaction.
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 is approximately $720,612, of which $60,408
was paid at signing of the agreement and an additional $30,204 will be paid
within five days of the completion of the issuance of a notice regarding the
patent right holder alternate registration by the PRC Patent Bureau. In
addition, the Company will issue 1,000,000 shares of common stock at an
agreed-upon value of $0.63 per share, the fair market value on April 12, 2004
(aggregate value $630,000) within two months of the completion of the issuance
of a notice regarding the patent right holder alternate registration by the PRC
Patent Bureau.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-QSB for the quarterly period ended March 31,
2004 contains "forward-looking" statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding its working capital requirements, financing
requirements, its business, growth prospects, competition and results of
operations, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. The forward-looking statements in this
Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2004
involve known and unknown risks, uncertainties and other factors that could
cause the actual results, performance or achievements of the Company to differ
materially from those expressed in or implied by the forward-looking statements
contained herein.
Overview:
The Company intends to develop, manufacture, distribute and market innovative,
cost-effective and environmentally safe bio-technological products for the
agricultural, natural resources and environmental protection, primarily in the
PRC. 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 and identification of strategic acquisitions. The
Company's first product, a photosynthesis biological catalyst, was introduced in
the PRC agricultural market in November 2003. The Company is a development stage
entity.
Major Customers and Suppliers:
One customer accounted for 100% of the Company's net sales for the three months
ended March 31, 2004. The Company did not have any sales for the three months
ended March 31, 2003.
Three suppliers accounted for 21%, 21%, and 10% of the Company's net purchases
for the three months ended March 31, 2004. The Company did not have any
purchases for the three months ended March 31, 2003.
Going Concern:
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. The Company incurred a net loss of $1,650,247 and
$1,355,239 during the three months ended March 31, 2004 and the year ended
December 31, 2003, respectively, and the Company's current liabilities exceeded
its current assets by $965,294 and $585,313 and it had a stockholders'
deficiency of $621,990 and $211,123 at March 31, 2004 and December 31, 2003,
respectively. In addition, the Company is still in the development stage and
will require additional capital to fund its business plan, and is continuing to
develop its manufacturing facility and has not generated significant revenues
from its planned principal operations. These factors create substantial doubt
about the Company's ability to continue as a going concern.
The Company's independent certified public accountants, in their independent
auditors' report on the consolidated financial statements as of and for the year
ended December 31, 2003, have expressed substantial doubt about the Company's
ability to continue as a going concern.
As of March 31, 2004, the Company had obtained non-interest bearing loans from
the local PRC government of approximately $1,200,000 on favorable repayment
terms. During the year
18
ending December 31, 2004, the Company intends to raise additional capital
through the issuance of debt or equity securities to fund the development of its
planned business operations, although there can be no assurances that the
Company will be successful in this regard. There can be no assurances that the
Company will be able to obtain sufficient funds to allow it to continue its
operations during the remainder of 2004.
To the extent that the Company is unable to successfully raise the capital
necessary to fund its future cash requirements on a timely basis and under
acceptable terms and conditions, the Company 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:
The Company prepared the 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 the Company's consolidated financial
statements.
Accounts Receivable
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. The Company believes that the accounts receivable balance at
March 31, 2004 is fully collectible.
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.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". Sales represent the invoiced value of goods, net of value added
tax, supplied to customers, and are recognized upon delivery of goods and
passage of title.
Impairment of Assets
The Company's long-lived assets consist of property and equipment. At March 31,
2004, 2003, the net value of property and equipment was $1,467,190, which
represented approximately 67% of the Company's total assets. At December 31,
2003, the net value of property and equipment was $1,477,148, which represented
approximately 69% of the Company's total assets.
The Company periodically evaluates its investment in long-lived assets,
including property and equipment, for recoverability whenever events or changes
in circumstances indicate the net carrying amount may not be recoverable. The
Company's 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, the Company makes
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, the Company may be required to record
impairment charges for these assets.
19
Income Taxes
The Company records a valuation allowance to reduce its deferred tax assets
arising from net operating loss carryforwards to the amount that is more likely
than not to be realized. In the event the Company was to determine that it would
be able to realize its deferred tax assets in the future in excess of its
recorded amount, an adjustment to the deferred tax assets would be credited to
operations in the period such determination was made. Likewise, should the
Company determine that it would not be able to realize all or part of its
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to operations in the period such determination was made.
Results of Operations:
Three Months Ended March 31, 2004 and 2003:
Net Sales. Net sales were $53,458 for the three months ended March 31, 2004. The
Company did not have any sales for the three months ended March 31, 2003. The
increase in net sales is the result of the Company's first product being
introduced to the market in November 2003.
Cost of Sales. Cost of sales was $31,011 for the three months ended March 31,
2004, including depreciation and amortization of $9,572.
Gross Profit. Gross profit was $22,447 or 42% of net sales for the three months
ended March 31, 2004.
Consulting and Professional Fees. Consulting and professional fees were $29,887
for the three months ended March 31, 2004. The Company did not have any
consulting and professional fees for the three months ended March 31, 2003. The
increase in consulting and professional fees in 2004 is primarily attributable
to activities relating to fundraising.
Directors' Compensation. Directors' compensation was $8,699 for the three months
ended March 31, 2004, as compared to $3,624 for the three months ended March 31,
2003.
General and Administrative. General and administrative expense was $74,545 for
the three months ended March 31, 2004, as compared to $43,717 for the three
months ended March 31, 2003, an increase of $30,828 or 71%, primarily as a
result of increased personnel-related costs in the PRC reflecting an increased
level of business activity and increased costs associated with being a public
company. General and administrative expenses include salaries, travel and
entertainment, rent, office expense, telephone expense and insurance costs.
Research and Development. Research and development expense increased $2,820, or
29%, to $12,540 for the three months ended March 31, 2004, as compared to $9,720
for the three months ended March 31, 2003. This increase is the result of
preparation for new product testing and development.
Depreciation and Amortization. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $7,238, or
381%, to $9,138 for the three months ended March 31, 2004, as compared to $1,900
for the three months ended March 31, 2003. This increase is the result of
completion of Phase I manufacturing facility construction in later 2003.
Reverse Merger Costs. Reverse merger costs relating to the Company's March 2004
merger with a United States public company were $1,397,981 for the three months
ended March 31, 2004, including non-cash costs relating to the issuance of stock
options and warrants of $1,114,380. The Company did not have any reverse merger
costs for the three months ended March 31, 2003.
Interest Income (Expense), Net. Interest expense increased $14,592, or 4,692%,
to $14,903 for the three months ended March 31, 2004, as compared to interest
income of $311 for the three months ended March 31, 2003. This increase is due
to increased borrowing during the three months ended March 31, 2004.
20
Amortization of Beneficial Conversion Feature of Convertible Note Payable. On
January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures 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.
The fair value of this beneficial conversion feature was determined to be
$500,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and is being charged to operations as interest expense from
January 25, 2004 through September 25, 2004, which resulted in a charge to
operations of $125,000 for the three months ended March 31, 2004.
Net Loss. Net loss increased $1,591,597 to $1,650,247 for the three months ended
March 31, 2004, as compared to $58,650 for the three months ended March 31,
2003. The increased net loss in the current period is primarily the result of
charges related to the reverse merger, consulting and professional fees, and
convertible notes.
June 5, 2002 (Inception) to March 31, 2004 (Cumulative):
Net Sales. Net sales were $93,489 for the period June 5, 2002 (Inception) to
March 31, 2004 (Cumulative).
Cost of Sales. Cost of sales was $61,305 for the period June 5, 2002 (Inception)
to March 31, 2004 (Cumulative), including depreciation and amortization of
$26,150.
Gross Profit. Gross profit was $32,184 or 34% of net sales for the period June
5, 2002 (Inception) to March 31, 2004 (Cumulative).
Consulting and Professional Fees. Consulting and professional fees were $597,490
for the period June 5, 2002 (Inception) to March 31, 2004 (Cumulative),
including non-cash costs relating to the issuance of common stock in December
2003 of $425,000.
Directors' Compensation. Directors' compensation was $356,715 for the period
June 5, 2002 (Inception) to March 31, 2004 (Cumulative), including non-cash
costs relating to the issuance of common stock in December 2003 of $325,000.
General and Administrative. General and administrative expense was $443,482 for
the period June 5, 2002 (Inception) to March 31, 2004 (Cumulative). General and
administrative expense includes salaries, travel and entertainment, rent, office
expense, telephone expense and insurance costs.
Research and Development. Research and development expense was $82,139 for the
period June 5, 2002 (Inception) to March 31, 2004 (Cumulative).
Depreciation and Amortization. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, was $28,028 for the
period June 5, 2002 (Inception) to March 31, 2004 (Cumulative).
Reverse Merger Costs. Reverse merger costs relating to the Company's March 2004
merger with a United States public company were $1,448,317 for the period June
5, 2002 (Inception) to March 31, 2004 (Cumulative), including non-cash costs
relating to the issuance of stock options and warrants of $1,114,380.
Interest Income (Expense), Net. Interest expense was $27,383 for the period June
5, 2002 (Inception) to March 31, 2004 (Cumulative).
Amortization of Beneficial Conversion Feature of Convertible Note Payable. On
January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures 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.
The fair value of this beneficial conversion feature was determined to be
$500,000, consisting of the aggregate fair value of the difference between the
$0.25
21
conversion price and the fair market value of the Company's common stock
of $0.60 per share, and is being charged to operations as interest expense from
January 25, 2004 through September 25, 2004, which resulted in a charge to
operations of $125,000 for the period June 5, 2002 (Inception) to March 31, 2004
(Cumulative).
Net Loss. Net loss was $3,076,370 for the period June 5, 2002 (Inception) to
March 31, 2004 (Cumulative).
Liquidity and Capital Resources:
Since inception in 2002, the Company has relied on the proceeds from the sale of
its equity securities and loans from both unrelated and related parties to
provide the resources necessary to fund the development of its business plan and
operations. During the three months ended March 31, 2004, the Company raised
$500,000 in the form a convertible note payable.
The Company is in the development stage and will require additional capital to
fund its business plan, and is continuing to develop its manufacturing facility
and has not generated significant revenues from its planned principal
operations.
During the year ending December 31, 2004, the Company intends to raise
additional capital through the issuance of debt or equity securities to fund the
development of its planned business operations, although there can be no
assurances that the Company will be successful in this regard. There can be no
assurances that the Company will be able to obtain sufficient funds to allow it
to continue its operations during the remainder of 2004.
At March 31, 2004 and December 31, 2003, the Company had cash of $10,910 and
$48,730, respectively. At March 31, 2004 and December 31, 2003, the Company's
net working capital deficiency was $965,294 and $585,313, respectively,
reflecting current ratios of .42:1 and .53:1, respectively, at such dates.
During April 2004, the Company borrowed $200,000 pursuant to a three-month
convertible note payable.
During the three months ended March 31, 2004, the Company's operations utilized
cash of $559,463, as compared to $53,040 for the three months ended March 31,
2004, as a result of an increased level of business activity and the costs
associated with operating a public company. For the period June 5, 2002
(Inception) to March 31, 2004 (Cumulative), the Company's operations utilized
cash of $783,303.
During the three months ended March 31, 2004, the Company utilized $8,752 in
investing activities, as compared to $388,848 for the three months ended March
31, 2003, for the purchase of property and equipment. For the period June 5,
2002 (Inception) to March 31, 2004 (Cumulative), the Company utilized $1,521,268
in investing activities for the purchase of property and equipment.
During the three months ended March 31, 2004, the Company generated $530,395
from financing activities, consisting of the proceeds from a convertible note
payable of $500,000, a decrease in restricted cash of $100,000 and an increase
in long-term borrowings of $21,021, offset in part by the repayment of
short-term loans of $90,626.
During the three months ended March 31, 2003, the Company generated $300,328
from financing activities through an increase in long-term borrowings.
For the period June 5, 2002 (Inception) to March 31, 2004 (Cumulative), the
Company generated $2,315,581 from financing activities, consisting of the
proceeds from the sale of common stock of $465,000, the proceeds from
convertible notes payable of $600,000, the proceeds from short-term borrowings
of $283,930 and the proceeds from long-term borrowings of $1,257,277, offset in
part by the repayment of short-term loans of $90,626 and an increase in
restricted cash of $200,000.
The short-term loans are secured by restricted cash in the form of a bank
certificate of deposit denominated in United States dollars.
Long-term borrowings consist primarily of unsecured, non-interest bearing notes
payable to the local PRC government that do not mature until three years after
the Company's PRC operations reach defined levels of profitability.
22
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. The
success of the Company 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. The Company conducts virtually all of its business
in China and, accordingly, the sale of its products is settled primarily in RMB.
As a result, devaluation or currency fluctuation of the RMB against the USD
would adversely affect the Company's financial performance when measured in USD.
Although prior to 1994 the RMB experienced significant devaluation against the
USD, 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.
As China has recently been admitted as a member of the World Trade Organization,
the central government of China is expected to adopt a more rigorous approach to
partially deregulate currency conversion restrictions, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, the Company does not
believe that such an action would have a detrimental effect on the Company's
operations, since the Company conducts virtually all of its business in China,
and the sale of its products is settled in RMB.
Although prior to 1994 the RMB experienced significant devaluation against the
US$, the RMB has remained fairly stable since then. The exchange rate was
approximately US$1.00 to RMB 8.30 at March 31, 2004 and December 31, 2003.
Commitments and Contingencies:
The Company has the following material contractual obligations and capital
expenditure commitments:
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 is approximately $720,612, of which $60,408
was paid at signing of the agreement and an additional $30,204 will be paid
within five days of the completion of the issuance of a notice regarding the
patent right holder alternate registration by the PRC Patent Bureau. In
addition, the Company will issue 1,000,000 shares of common stock at an
agreed-upon value of $0.63 per share, the fair market value on April 12, 2004
(aggregate value $630,000) within two months of the completion of the issuance
of a notice regarding the patent right holder alternate registration by the PRC
Patent Bureau.
Off-Balance Sheet Arrangements:
At March 31, 2004, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
Recent Accounting Pronouncements:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on the Company's financial statement presentation or disclosures.
23
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on the Company's consolidated financial statement
presentation or disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even if
consolidation is not required. The Company is not currently participating in, or
invested in any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Company's
consolidated financial statement presentation or disclosures.
Related Party Transactions:
China Star Investment Group is a company which is 10% owned by a major
stockholder of the Company. The balance due to China Star at December 31, 2002
of $26,902 was primarily related to pre-operating costs that China Star paid on
behalf of the Company before it was incorporated in the PRC. The balance due
from China Star at December 31, 2003 of $30,574 resulted from unsecured,
non-interest bearing cash advances which are due on demand.
In October 2003, the Company obtained a $100,000 loan from China Star. The loan
was scheduled to mature on October 20, 2004, and bears interest at 12% per
annum, payable at maturity. As part of the loan terms, China Star had the right
to convert the loan into shares of the Company's common stock at $0.25 per share
at any time prior to the maturity date, subject to the Company completing a
reverse merger transaction in the United States, which was accomplished in March
2004. China Star has waived this conversion right.
During the three months ended March 31, 2004, the $30,574 due from China Star
was offset against the $100,000 loan payable to China Star, resulting in a
liability to China Star of $69,426 at March 31, 2004.
24
Cautionary Statements and Risk Factors:
The Company operates in a market environment that is difficult to predict and
that involves significant risks and uncertainties, many of which will be beyond
the combined company's control. Additional risks and uncertainties not presently
known to us, or that are not currently believed to be important to you, if they
materialize, also may adversely affect the combined company. The accompanying
information contained in these Risk Factors identifies important factors that
could cause such differences.
RISKS RELATED TO OUR BUSINESS
INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS DUE TO OUR SHORT
OPERATING HISTORY. We have been recently organized and have only been operating
our current business since November 2003, providing a limited period for
investors to evaluate its business model. Because of this lack of operating
history and the uncertain nature of the rapidly changing markets that we serve,
we believe the prediction of future results of operation is difficult. We have
generated no revenue and incurred net operating losses since inception. We
expect to continue to have operating losses for the foreseeable future as it
furthers its research and continues to conduct product tests. 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 its working capital needs. Furthermore, our prospects must be
evaluated in light of risks, uncertainties, expenses and difficulties frequently
encountered by companies in the early stage of their development.
OUR BUSINESS IS SUBJECT TO FLUCTUATIONS WHICH MAY RESULT IN VOLATILITY OR HAVE
AN ADVERSE EFFECT ON THE MARKET PRICE OF THE REGISTRANT'S STOCK. Our business is
subject to seasonal fluctuations due to growing seasons in different markets.
Our past operating results have been, and its future operating results will be,
subject to fluctuations resulting from a number of factors, including: 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; market acceptance of enhanced
versions of our products; the availability and cost of key components; the
availability of development capacity; and fluctuations in general economic
conditions. We may also choose to reduce prices or to increase spending in
response to competition or to pursue new market opportunities, all of which may
have a material adverse effect on our business, financial condition and results
of operations. This fluctuation may result in volatility or have an adverse
effect on the market price of our common stock.
OUR SUCCESS DEPENDS IN PART ON ITS SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
IN THE RESEARCH AND DEVELOPMENT STAGE. Many of our product candidates are in the
research and development stage. The successful development of new products is
uncertain and subject to a number of significant risks. Potential products that
appear to be promising at early states of development may not reach the market
for a number of reasons, including but not limited to, the cost and time of
development. Potential products may be found to be ineffective or cause harmful
side effects, fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale or be uneconomical or fail to achieve market
acceptance. Our proprietary products may not be commercially available for a
number of years, 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 its 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 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.
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
25
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 its 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 and key product development personnel, including without
limitation, Wei Li, Da-chang Ju, Lian-jun Luo and James Nian Zhan. 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. There is no assurance that we will be able to retain these
personnel, and it may be time consuming and costly to recruit qualified
personnel.
WE CURRENTLY DO NOT HAVE SUFFICIENT REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND, IF OPERATING LOSSES CONTINUE, WE MAY NOT BE ABLE TO SECURE ADDITIONAL
FINANCING TO OPERATE OUR BUSINESS. We require substantial working capital to
fund our business. Because we currently do not have sufficient revenues to
support our business activities, and if operating losses continue, we may be
required to raise 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. Any equity financing could result
in dilution to the existing stockholders. Debt financing will result in interest
expense, and if convertible into equity, could also dilute then-existing
stockholders. We may also be subject to various restrictive covenants which
could significantly limit our operating and financial flexibility and may limit
our ability to respond to changes in our business or competitive environment. If
we are unable to obtain necessary financing in the amounts and on terms deemed
acceptable, we may have to limit, delay, scale back or eliminate our research
and development activities or future operations. Any of the foregoing may
adversely affect our business.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO EFFECTIVELY RECEIVE
AND USE OUR REVENUE. Because almost all of our future revenues may be in the
form of 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 in 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
CHANGES IN CHINA'S POLITICAL, SOCIAL, ECONOMIC OR LEGAL SYSTEMS COULD MATERIALLY
HARM OUR BUSINESS. All of our manufacturing and production is conducted 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. Our operations and prospects would be materially and
adversely affected by the failure of such governmental entities to grant
necessary approvals or honor existing contracts, and, if breached, it might be
difficult to enforce these contracts in China. In addition, the legal system of
China relating to foreign investments is both new and continually evolving, and
currently
26
there can be no certainty as to the application of its laws and regulations in
particular instances. In addition, our Shandong facility currently enjoys
favorable governmental treatment and support. There is no guarantee that such
preferential treatment and support will continue.
A SLOW-DOWN IN THE CHINESE ECONOMY MAY SLOW DOWN OUR GROWTH AND PROFITABILITY.
The growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any recessionary conditions will not have a negative
effect on our business. Several years ago, the Chinese economy experienced
deflation, which may reoccur in the foreseeable future. In addition, if an
outbreak of SARS recurs, it may cause a decrease in the level of economic
activity and may adversely affect economic growth in China, Asia and elsewhere
in the world. The performance of the Chinese economy overall affects our
profitability as expenditures for agricultural technological products may
decrease due to slowing domestic demand.
OUR ABILITY TO GENERATE REVENUES COULD SUFFER IF THE CHINESE AG-BIOTECHNOLOGY
MARKET DOES NOT DEVELOP AS ANTICIPATED. The agriculture-biotechnology market in
China, the primary market in which we do business, is in its infant stage. It is
expected that though the market opportunity looks promising, it will take time
to develop the market. Successful development of the ag-biotechnology market in
China depends on the following: continuation of governmental and consumer trends
favoring the use of products and technologies designed to create sustainable
agriculture; educating the Chinese agricultural community and consumers about
the uses of ag-biotechnology products; and 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. 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 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 its technology, to
preserve our trade secrets and to operate without infringing on the proprietary
rights of third parties. We have filed several patents with the Chinese
government and plan to file several patents with the U.S. Patent &Trademark
Office. We may file other patent applications as it deems appropriate. There can
be no assurance that the patents applied for will be reviewed in a timely
manner, that any additional patents will issue 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 its patents. There also can be no assurance that the technology
ultimately used by us will be covered in any additional patent issued from its
pending patent application or other patent applications which it 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, its 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
27
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.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY LITIGATION, THE DEFENSE OF WHICH
COULD ADVERSELY IMPACT OUR BUSINESS OPERATIONS. 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 would harm the businesses and 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 Ph-BC 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 produce such products at lower costs than our
competitors, nor that our technology will be able to commercially produce such
products at consistent levels.
RISKS RELATED TO CAPITAL STRUCTURE
IF AN ACTIVE TRADING MARKET FOR THE REGISTRANT'S SECURITIES DOES NOT REMAIN IN
EXISTENCE, THE MARKET PRICE OF THE REGISTRANT'S SECURITIES MAY DECLINE AND
SHAREHOLDERS' LIQUIDITY MAY BE REDUCED. Although our common stock trades on the
OTC Bulletin Board, a regular trading market for the securities may not be
sustained in the future. The OTC Bulletin Board is an inter-dealer,
Over-The-Counter market that provides significantly less liquidity than the
NASD's automated quotation system (the "NASDAQ Stock Market"). Quotes for stocks
included on the OTC Bulletin Board are not listed in the financial sections of
newspapers as are those for the NASDAQ Stock Market. Therefore, prices for
securities traded solely on the OTC Bulletin Board may be difficult to obtain
and holders of common stock may be unable to resell their securities at or near
their original offering price or at any price. Market prices for our common
stock will be influenced by a number of factors, including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by competitors of
new products or services or significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
28
o the depth and liquidity of the market for Registrant's common stock;
o investor perceptions of our company and the ag-biotechnology industry
generally; and
o general economic and other conditions.
THE POTENTIAL DESIGNATION OF THE REGISTRANT'S COMMON STOCK AS "PENNY STOCK"
COULD IMPACT THE TRADING MARKET FOR THE REGISTRANT'S COMMON STOCK. Our common
stock could be considered to be a "penny stock" if it meets one or more of the
definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the
Securities Exchange Act of 1934, as amended. These include but are not limited
to the following: (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; or (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.
BROKER-DEALER REQUIREMENTS IMPOSED BY THE DESIGNATION OF THE REGISTRANT'S COMMON
STOCK AS "PENNY STOCK" MAY AFFECT THE TRADING MARKET FOR THE REGISTRANT'S COMMON
STOCK. Section 15(g) of the Securities Exchange Act of 1934, as amended, and
Rule 15g-2 promulgated thereunder by the SEC 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 the Registrant's common stock to resell their shares to
third parties or to otherwise dispose of them in the market or otherwise.
29
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to management, including its principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its principal executive and
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting
or in other factors that could have significantly affected those controls
subsequent to the date of the Company's most recent evaluation.
30
PART II. OTHER INFORMATION
ITEM 4. CHANGES IN SECURITIES, USE OF PROCEEDS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
On March 12, 2004, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") dated as of March 11, 2004, by and among Kiwa (formerly Tintic Gold
Mining Company), TTGM Acquisition Corporation, a Utah corporation and
wholly-owned subsidiary of Kiwa ("Merger Sub"), and Kiwa Bio-Tech Products Group
Ltd., a privately-held corporation organized in the British Virgin Islands
("Kiwa Bio-Tech"), Merger Sub merged with and into Kiwa Bio-Tech with Kiwa
Bio-Tech surviving as a wholly-owned subsidiary of Tintic (the "Merger"). 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.
The Company assumed 1,852,501 stock options issuable by Kiwa Bio-Tech at March
12, 2004.
In conjunction with the March 2004 reverse merger transaction, the Company
issued the following equity-based consideration:
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 six
years.
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 shares of common stock, stock options and warrants were issued without
registration in reliance upon the exemption afforded by Section 4(2) of the
Securities Act of 1933, as amended, based on certain representations made to the
Company by the recipients.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
Three Months Ended March 31, 2004:
Current Report on Form 8-K filed on March 29, 2004 (Event date: March 12, 2004),
reporting Item 1, 2 and 7.
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
----------------------------------------
(Registrant)
/s/ WEI LI
Date: May 19, 2004 By: ___________________________
Wei Li
Chief Executive Officer
/s/ LIAN-JUN LUO
Date: May 19, 2004 By: ___________________________
Lian-jun Luo
Chief Financial Officer
32
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
2.1 Agreement and Plan of Merger dated as of March 12, 2004, by and among
Tintic Gold Mining Company, TTGM Acquisition Corporation and Kiwa
Bio-Tech Products Group Ltd., previously filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated March 12, 2004, and
incorporated herein by reference.
3.1 Second Amended and Restated Articles of Incorporation of Kiwa Bio-tech
Products Group Corporation (formerly Tintic Gold Mining Company).
3.2 Articles of Amendment of Articles of Incorporation of Kiwa Bio-tech
Products Group Corporation.
10.1 Common Stock Warrant issued March 11, 2004 to Westpark Capital, Inc.
to purchase 1,747,000 shares of common stock.
10.2 Convertible Loan Agreement dated January 25, 2004 for $500,000 between
Kiwa Bio-Tech Products Group Corporation and Kao Ming Investment
Company.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
33