As filed with the Securities and Exchange
Commission on October 8, 2004 Registration No. 333-117868
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Name of Small Business Issuer in its Charter)
Delaware 8731 87-0448400
(State or Jurisdiction (Primary Standard Industrial (I.R.S Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
17700 CASTLETON STREET, SUITE 589
CITY OF INDUSTRY, CALIFORNIA 91748
(626) 964-3232
(Address and Telephone Number of Principal Executive Offices)
17700 CASTLETON STREET, SUITE 589
CITY OF INDUSTRY, CALIFORNIA 91748
(Address of Principal Place of Business or intended Place of Business)
JAMES NIAN ZHAN, SECRETARY
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
17700 CASTLETON STREET, SUITE 589
CITY OF INDUSTRY, CALIFORNIA 91748
(626) 964-3232
Copy to:
V. JOSEPH STUBBS, ESQ.
STUBBS ALDERTON & MARKILES, LLP
15821 VENTURA BOULEVARD, SUITE 525
ENCINO, CALIFORNIA 91436
(818) 444-4500
(Name, Address and Telephone Number of Agent for Service)
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, Check
the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION - OCTOBER 8, 2004
PROSPECTUS
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
Up to 45,277,605 shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up
to 45,277,605 shares of common stock of Kiwa Bio-Tech Products Group Corporation
by certain persons who are stockholders of Kiwa. The selling stockholders may
sell common stock from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. Cornell
Capital Partners, LP, Newbridge Securities Corporation and WestPark Capital,
Inc. are each an underwriter within the meaning of the Securities Act of 1933 in
connection with its sale of shares pursuant to this prospectus. The other
selling stockholders may be deemed underwriters of the shares of common stock
which they are offering.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. We will, however,
receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement which was entered into on July 6, 2004, between Cornell
Capital Partners, LP and us. We have agreed to pay Cornell Capital Partners, LP
4% of the proceeds that we receive under the Standby Equity Distribution
Agreement. All costs associated with this registration will be borne by us. As
of the date of this Prospectus, we have issued 704,038 shares of common stock to
Cornell Capital Partners, LP pursuant to the Standby Equity Distribution
Agreement.
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol KWBT. The shares of our common stock are being offered
for sale by the selling stockholders at prices established on the OTC Bulletin
Board during the term of this offering. On October 7, 2004, the last reported
sale price of our common stock was $0.08 per share.
The selling stockholders consist of (a) stockholders who were issued
shares (i) under the Standby Equity Distribution Agreement, and (ii) pursuant to
the conversion of convertible notes, and (b) a stockholder who will be issued
shares upon the exercise of a common stock warrant.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
NEITHER THE SELLING STOCKHOLDERS NOR KIWA MAY SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
The date of this prospectus is ___________________.
- i -
TABLE OF CONTENTS
PART I
PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................3
USE OF PROCEEDS..............................................................13
DILUTION.....................................................................14
SELLING STOCKHOLDERS.........................................................14
EQUITY LINE OF CREDIT........................................................17
PLAN OF DISTRIBUTION.........................................................19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............21
DESCRIPTION OF SECURITIES....................................................23
INTEREST OF NAMED EXPERTS AND COUNSEL........................................24
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITY............................................24
DESCRIPTION OF BUSINESS......................................................25
MANAGEMENT'S DISCUSSION AND ANAYLSYS OR PLAN OF OPERATION....................31
DESCRIPTION OF PROPERTY......................................................41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................41
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................42
EXECUTIVE COMPENSATION.......................................................43
HOW TO GET MORE INFORMATION..................................................45
INDEX TO FINANCIAL STATEMENTS................................................F-1
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YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO GIVE YOU INFORMATION DIFFERENT THAN THAT CONTAINED
IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE,
REGARDLESS OF THE TIME YOU RECEIVE THIS PROSPECTUS.
- ii -
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the notes to the financial
statements. As used throughout this prospectus, the terms "Kiwa," the "Company,"
"we," "us," and "our" refer to Kiwa Bio-Tech Products Group Corporation.
OVERVIEW
We are a development stage company that aims to build a platform to
commercialize bio-technological research and development results for
applications in agriculture and environmental protection. In this respect, we
are working on developing cooperative research relationships with several
universities in China and the United States. We are also planning to acquire
innovative technologies to reduce research and development costs and shorten
commercialization cycles for bio-technological products. We are currently
developing technologies related to applications of photosynthesis bacteria,
biologic catalyst, and synergetic enzyme, and are preparing to file patent
applications in the United States. These technologies have applications in the
agricultural, natural resources and environmental conservation and drug
manufacturing sectors. We may also acquire similar technologies from third
parties in both China and the United States.
We were originally incorporated in the State of Utah on June 14, 1933,
under the name Tintic Gold Mining Company to perform mining operations in Utah.
On March 12, 2004, pursuant to an Agreement and Plan of Merger dated as of March
11, 2004, by and among Tintic Gold Mining Company, TTGM Acquisition Corporation,
a Utah corporation and wholly-owned subsidiary of Tintic Gold Mining Company,
and Kiwa Bio-Tech Products Group Ltd., a British Virgin Islands international
business company, TTGM Acquisition Corporation merged with and into Kiwa
Bio-Tech Products Group Ltd. Each share of Kiwa Bio-Tech Products Group Ltd.
common stock was converted into 1.5445839 shares of Tintic Gold Mining Company
Common Stock, with Kiwa Bio-Tech Products Group Ltd. surviving as Tintic Gold
Mining Company's wholly-owned subsidiary. The merger resulted in a change of
control of Tintic Gold Mining Company, with former Kiwa Bio-Tech Products Group
Ltd. stockholders owning approximately 89% of Tintic Gold Mining Company on a
fully diluted basis. Subsequent to the merger, Tintic Gold Mining Company
changed its name to Kiwa Bio-Tech Products Group Corporation. On July 22, 2004,
we completed our reincorporation in the State of Delaware.
OVERVIEW OF FINANCIAL CONDITION AND GOING CONCERN
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $2,407,201 and $1,355,239 during the six
months ended June 30, 2004 and the year ended December 31, 2003, respectively,
and our current liabilities exceeded our current assets by $133,548 and $585,313
for the same periods, respectively. We had a stockholders' deficiency of $70,194
and $211,123 at June 30, 2004 and December 31, 2003, respectively. In addition,
we are still in the development stage and will require additional capital to
fund our business plan. We continue to develop our manufacturing facility and
have not generated significant revenues from our planned principal operations.
These factors create substantial doubt about our ability to continue as a going
concern.
Our 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 our ability to
continue as a going concern.
As of March 31, 2004, we had obtained non-interest bearing loans from
the local People's Republic of China government of approximately $1,200,000.
During the year ending December 31, 2004, in addition to funds generated under
the Standby Equity Distribution Agreement, we intend to raise additional capital
through the issuance of debt or equity securities to fund the development of our
planned business operations. However, there can be no assurances that we will be
able to obtain sufficient funds to allow us to continue our operations during
the remainder of 2004.
1
To the extent that we are unable to successfully raise the capital
necessary to fund our future cash requirements on a timely basis and under
acceptable terms and conditions, we will not have sufficient cash resources to
maintain operations, and may have to curtail operations and consider a formal or
informal restructuring or reorganization.
ABOUT US
Our principal executive offices are located at 17700 Castleton Street,
Suite 589, City of Industry, California 91748. Our telephone number is (626)
964-3232.
THE OFFERING
This offering relates to the sale of our common stock by certain
persons who are, or are beneficially deemed to be, our stockholders. Cornell
Capital Partners, LP intends to sell up to 40,704,038 shares of common stock,
40,000,000 of which will be received under the Standby Equity Distribution
Agreement and 704,038 of which were received from us as a one-time commitment
fee under the Standby Equity Distribution Agreement. Newbridge Securities
Corporation intends to sell up to 26,567 shares of common stock which were
received from us as a fee for serving as placement agent in connection with the
Standby Equity Distribution Agreement. Holders of common stock issued upon
conversion of convertible notes intend to sell up to 2,800,000 shares of common
stock. The holder of a common stock warrant, upon exercise of such warrant,
intends to sell up to 1,747,000 shares of common stock.
On July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Under the Standby Equity
Distribution Agreement, we may, at our discretion, periodically issue and sell
to Cornell Capital Partners, LP common stock for a total purchase price of up to
$10,000,000. The purchase price for the shares is equal to 99% of their market
price, which is defined in the Standby Equity Distribution Agreement as the
lowest volume weighted average price of the common stock during the five trading
days following the notice date. In addition, for each advance, we must pay
Cornell Capital Partners, LP a fee equal to 4% of the advance. The amount of
each cash advance is subject to a maximum advance amount of $500,000, with no
cash advance occurring within seven trading days of a prior advance. Cornell
Capital Partners, LP received a one-time commitment fee of 704,038 shares of our
common stock. On July 6, 2004, we also entered into the Placement Agent
Agreement with Newbridge Securities Corporation, a registered broker-dealer.
Pursuant to the Placement Agent Agreement, we paid a one-time placement agent
fee of 26,567 restricted shares of common stock equal to approximately $10,000
based on the volume weighted average price of our Common Stock as quoted by
Bloomberg, LP on the date of the Placement Agent Agreement.
COMMON STOCK OFFERED..............Up to 45,277,605 shares by selling
stockholders
OFFERING PRICE....................Market price
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING...............40,353,710 shares as of October 1, 2004
USE OF PROCEEDS...................We will not receive any proceeds of the
shares offered by the selling
stockholders. Any proceeds we receive
from the sale of common stock under the
Standby Equity Distribution Agreement
will be used for general business
purposes. See "Use of Proceeds."
RISK FACTORS......................The securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
OVER-THE-COUNTER
BULLETIN BOARD SYMBOL.............KWBT
2
RISK FACTORS
We operate in a market environment that is difficult to predict and
that involves significant risks and uncertainties, many of which will be beyond
our control. 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 us. The accompanying information contained in these
Risk Factors identifies important factors that could cause such differences.
RISK RELATED TO OUR BUSINESS
INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS DUE TO OUR SHORT
OPERATING HISTORY, LACK OF SIGNIFICANT REVENUE AND LIMITED PRODUCT OFFERINGS.
DUE TO THIS SHORT OPERATING HISTORY, WE HAVE NOT YET GENERATED ANY PROFITS AND
WILL REQUIRE ADDITIONAL FUNDING TO IMPLEMENT OUR BUSINESS PLAN.
We have only been operating our current business since June 2002,
providing a limited period for investors to evaluate our 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 insignificant revenue, have not been
profitable, and incurred net operating losses during our recent operating
history. From the inception of our current business on June 5, 2002 to June 30,
2004, we had accumulated losses of $3,833,324. We expect to continue to have
operating losses for the foreseeable future as we further our research and
continue to conduct product tests.
We currently have two commercial product lines, a bio-fertilizer and a
water treatment and pathogen suppression agent, and plan to market another three
to four products in the agriculture market in the next six to twelve months.
There can be no assurances that any of the intellectual property or products
intended to be developed by us will be marketed successfully or that ultimately
we can develop a sufficiently large production capacity and sufficiently large
customer demand to operate on a profitable basis. In addition, we are generally
required to obtain a license from China Agriculture Department, which can take
three to six months, prior to selling a new product. Until sufficient cash flow
is generated from operations, we will have to utilize our capital resources or
external sources of funding to satisfy our working capital needs. Furthermore,
our prospects must be evaluated in light of risks, uncertainties, expenses and
difficulties frequently encountered by companies in the early stage of their
development.
Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with our financial statements for the year
ended December 31, 2003, which states that the financial statements raise
substantial doubt as to our ability to continue as a going concern. As of June
30, 2004, we had accumulated net loss of approximately $3.8 million. Our ability
to make operations profitable or obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS.
Historically, our operating results and our industry have been subject
to seasonal trends when measured on a quarterly basis. This trend is dependent
on numerous factors, including the markets in which we operate, growing seasons,
customer demand, climate, economic conditions and numerous other factors beyond
our control. Generally, we expect the second and third quarters are stronger
than the first and fourth quarters. There can be no assurance that the historic
operating patterns will continue in future periods.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN
VOLATILITY OR HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.
We have experienced, and expect to continue to experience, substantial
variation in our net sales and operating results from quarter to quarter. Our
business is subject to seasonal fluctuations due to growing seasons in different
markets. We believe the factors this influence this variability of quarterly
results include:
3
o the timing and size of orders from major customers;
o budgeting and purchasing cycles of customers;
o the timing of enhancements to products or new products
introduced by us or our competitors;
o changes in pricing policies made by us, our competitors or
suppliers, including possible decreases in average selling
prices of products in response to competitive pressures; and
o fluctuations in general economic conditions.
We may also choose to reduce prices or to increase spending in response
to competition or to pursue new market opportunities. Due to fluctuations in our
revenue and operating expenses, we believe that period-to-period comparisons of
our results of operations are not a good indication of our future performance.
It is possible that in some future quarter or quarters, our operating results
will be below the expectations of securities analysts or investors. In that
case, our stock price could fluctuate significantly or decline.
Since January 1, 2002, the market price for our comment stock as quoted
on the OTC Bulletin Board has ranged from $0.05 to $1.00 (adjusted for stock
splits). High volatility in the market price of our common stock may result in
lower prices for our common stock, making it more difficult for us to obtain
equity financing on terms and conditions which are favorable to the us, if at
all. We expect to continue to incur losses in the near future as we develop and
market our initial products. As a result, we will be dependent on additional
debt or equity financing to fund our operations. If such financing is not
available on terms which are acceptable to us, we may have to delay development
of new products and/or reduce sales and marketing efforts for our existing
products. Such actions may have an adverse effect on our results of operations.
In addition, uncertainties with respect to our ability to raise additional
capital would make operational planning more difficult for management.
REVOCATION OF OUR RIGHT TO USE PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS
COULD ADVERSELY IMPACT THE GROWTH OF OUR BUSINESS.
We have recently acquired a patent, titled "Highly Effective Composite
Bacteria for Enhancing Yield and the Related Methodology for Manufacturing,"
from China Agricultural University. While we do not yet have any commercial
products utilizing the technology covered by this patent, we plan to use the
patent to develop a new series of products that compliment our current products.
If our rights under this patent are challenged or if we default on our
obligations under applicable Chinese regulatory requirements, our right to use
that patent could be revoked and we would no longer be permitted to use that
patent in our research, development and sales activities. Such a revocation or
default could have an adverse impact on the growth of our business by reducing
the introduction of new products, and consequently, sales.
OUR SUCCESS DEPENDS IN PART ON OUR SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
CURRENTLY IN THE RESEARCH AND DEVELOPMENT STAGE.
We currently have two commercial products based on photosynthesis
bacteria technology. The first is a bio-fertilizer called Photosynthesis
Biological Catalyst and the second is a water treatment and pathogen suppression
agent. We commenced sales of the powdered form Photosynthesis Biological
Catalyst in January 2004 and the liquid form in April 2004. We commenced sales
of our water treatment and pathogen suppression agent in April 2004. Many of our
product candidates are still in the research and development stage. The
successful development of new products is uncertain and subject to a number of
significant risks. Potential products that appear to be promising at early
states of development may not reach the market for a number of reasons,
including but not limited to, the cost and time of development. Potential
products may be found to be ineffective or cause harmful side effects, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale or be uneconomical or fail to achieve market acceptance. Our failure to
successfully develop and sell new products may delay or eliminate future
acquisition plans and would most likely slow our development. Our 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
4
upon our ability to develop and market our products on a timely basis. There can
be no assurance that we will be successful in developing or marketing such
products or taking advantage of the perceived demand for such products. In
addition, there can be no assurance that products or technologies developed by
others will not render our products or technologies non-competitive or obsolete.
The China bio-fertilizer market is still in a very early stage and is very
fragmented with many potential customers, but with no single producer or small
of group of producers dominating the market. To some extend, however, we also
competition from large chemical fertilizer manufacturers in China, such as
Sino-Arabic Chemical Fertilizer Company in national markets as well as Red Sun
Group in Shandong and Jiangsu markets. These chemical fertilizer manufacturers
have provided chemical fertilizers to farmers in China for several years and
customers are more accustomed to using their established products as compared to
new products.
FAILURE TO ADEQUATELY EXPAND TO ADDRESS EXPANDING MARKET OPPORTUNITIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We anticipate that a significant expansion of operations will be
required to address potential market opportunities. There can be no assurances
that we will expand our operations in a timely or sufficiently large manner to
capitalize on these market opportunities. The anticipated substantial growth is
expected to place a significant strain on our managerial, operational and
financial resources and systems. While management believes it must implement,
improve and effectively use our operational, management, research and
development, marketing, financial and employee training systems to manage
anticipated substantial growth, there can be no assurances that these practices
will be successful.
OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO RETAIN AND RECRUIT KEY
PERSONNEL.
Our success is highly dependent upon the continued services of our
executive officers key product development personnel and key scientific
personnel, including without limitation, Wei Li, Da-chang Ju, Lian-jun Luo,
James Nian Zhan., Dr. Daniel Qu, Yuhong Pang, and Professor Guisheng Chen. Given
the intense competition for qualified management and product development
personnel in our industry, the loss of the services of any key management or
product development personnel may significantly and detrimentally affect our
business and prospects. We maintain employment agreements with two of our key
personnel in China: Lian-jun Luo and Qu Bin. The material terms of these
employment agreements include three-year terms, provision for annual bonuses and
stock option grants based on performance, and severance of three month's base
salary if these executives are laid off without cause. We do not have employment
agreements with any other members of management or key personnel. While we have
not experienced difficulty in attracting and maintaining key personnel, there
can be no assurance that we will be able to retain these personnel, and it may
be time consuming and costly to recruit qualified replacement personnel.
WE CURRENTLY DO NOT HAVE SUFFICIENT REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND, IF OPERATING LOSSES CONTINUE, WE WILL REQUIRE ADDITIONAL FINANCING WHICH WE
MAY NOT BE ABLE TO SECURE.
We require substantial working capital to fund our business. In the
short term, we plan to continue building out our manufacturing facility, adjust
our product formula to improve product stability and optimize our product
offerings, expand our sales and marketing efforts in China, expand our
distribution base in China, introduce new products, and acquire 2 to 3 small or
medium sized bio-technology companies in the Chinese agricultural and/or
environmental markets. Over the next 24 months, we estimate that we will require
approximately $2.5 million for completion of construction of our manufacturing
facility and equipment investment, $1 million to consummate our planned
acquisitions, $600,000 in working capital and $500,000 in administrative and
operations expenses. In the long term, we plan to become a commercialization
platform for world-class biotechnological research and development results for
applications in agriculture, natural resources conservation and environmental
protection, launch our products in the United States and other markets, continue
our introduction of new products, create formal strategic alliances with
selected United States companies to co-develop and/or co-market products in the
United States and China, form an international biotechnology research center in
China for the research and development of agricultural, environmental and
medical applications.
5
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. If we are unable to obtain necessary
financing in the amounts and on terms deemed acceptable, we may have to limit,
delay, scale back or eliminate our research and development activities or future
operations. Any of the foregoing may adversely affect our business.
ENTERING INTO EQUITY OR DEBT FINANCINGS COULD RESULT IN DILUTION TO EXISTING
STOCKHOLDERS.
We may be required to raise additional capital to fund our operations
and finance our research and development activities through a public or private
offering of debt or equity. Any equity financing could result in dilution to the
existing stockholders as a direct result of our issuance of additional shares of
our capital stock. Debt financings will result in interest expense and likely
subject us to negative covenants that would limit our operational flexibility,
and if convertible into equity, could also dilute then-existing stockholders.
THE RISKS ASSOCIATED WITH RAISING CAPITAL THROUGH COLLABORATIONS AND LICENSING
AGREEMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
We may be required to raise additional capital to fund our operations
and finance our research and development activities through collaborative and/or
licensing agreements. Under these agreements, we may be subject to various
restrictive covenants which could significantly limit our operating and
financial flexibility and may limit our ability to respond to changes in our
business or competitive environment. If we are unable to obtain necessary
financing in the amounts and on terms deemed acceptable, we may have to limit,
delay, scale back or eliminate our research and development activities or future
operations. Any of the foregoing may adversely affect our business.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO EFFECTIVELY RECEIVE
AND USE OUR REVENUE.
Because almost all of our future revenues may be in the form of
Renminbi, China's currency which is denominated RMB, 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.
We may also be subject to foreign exchange risk and foreign ownership
restrictions. The Chinese government is loosening its control on foreign
exchange transactions. More liberal foreign exchange policies will reduce our
foreign exchange risk by increasing the liquidity of revenues generated in
Renminbi. We do anticipate conducting operations in any countries other than
China and the United States over the next twenty-four months. Fluctuations in
the exchange rate of the Renminbi relative to the U.S. Dollar could adversely
affect our results of operations by affecting our reported earnings for any
given period. In addition, foreign ownership restrictions could also impact our
ability to expand our business through investment and acquisition opportunities.
If we are unable to pursue such strategic opportunities due to foreign ownership
regulations, the growth of our business could be limited.
CHANGES IN CHINA'S POLITICAL, SOCIAL, ECONOMIC OR LEGAL SYSTEMS COULD MATERIALLY
HARM OUR BUSINESS.
All of our manufacturing, production and sales occur in China.
Consequently, an investment in our common stock may be adversely affected by the
political, social and economic environment in China. Under its current
6
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be significantly altered
from time to time.
Our business and prospects are dependent upon agreements and regulatory
approval with various entities controlled by Chinese governmental
instrumentalities. Historically, our operations in China have received
relatively favorable treatment from these instrumentalities as a result of the
Chinese government's policies of encouraging economic development and
innovation, especially in underdeveloped regions. However, our operations and
prospects would be materially and adversely affected by a change in China's
economic policies, which could make it more difficult for us to obtain necessary
approvals from governmental authorities and to obtain economic incentives from
governmental authorities. In addition, if the Chinese government elects not to
honor certain contracts as a result of political change, it might be difficult
to enforce these contracts against such governmental entities in China. In
addition, the legal system of China relating to foreign investments is both new
and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances.
A SLOW-DOWN IN THE CHINESE ECONOMY MAY ADVERSELY EFFECT OUR GROWTH AND
PROFITABILITY.
The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any recessionary conditions will not have
a negative effect on our business. Several years ago, the Chinese economy
experienced deflation, which may reoccur in the foreseeable future. In addition,
if an outbreak of SARS recurs, it may cause a decrease in the level of economic
activity and may adversely affect economic growth in China, Asia and elsewhere
in the world. The performance of the Chinese economy overall affects our
profitability as expenditures for agricultural technological products may
decrease due to slowing domestic demand.
OUR ABILITY TO GENERATE REVENUES COULD SUFFER IF THE CHINESE AG-BIOTECHNOLOGY
MARKET DOES NOT DEVELOP AS ANTICIPATED.
The agriculture-biotechnology market in China, the primary market in
which we do business, is in the early stages of development. While we believe
the market opportunity looks promising, we expect that the market will take
several years to develop. While it is difficult to project exactly how long it
will take to develop the ag-biotechnology industry in China, we anticipate that
it will take at least ten years to reach a level of development which is similar
to the current state of the industry in the United States. Successful
development of the ag-biotechnology market in China depends on the following:
o continuation of governmental and consumer trends favoring the
use of products and technologies designed to create
sustainable agriculture;
o educating the Chinese agricultural community and consumers
about the uses of ag-biotechnology products; and
o certain institutional developments such as governmental
agricultural subsidies designed to promote the use of
environmentally friendly ag-biotechnological products.
There are no assurances that these trends will continue, governmental
subsidies will be offered, or that the Chinese agricultural community and
consumers will be successfully educated about the uses of ag-biotechnology
products. The conduct of business in the ag-biotechnology market involves high
risks. There can be no assurances that the ag-biotechnology market in China will
develop sufficiently to facilitate our profitable operation. While we believe
that we will benefit from our first-mover advantage in a growing market,
existing competitors and new entrants in the ag-biotechnology market are
expected to create fierce competition in the future as the market evolves.
Competitors and new entrants may introduce new products into the market that may
detrimentally affect sales of our existing products, and consequently our
revenues. We intend to fund operations through sales, debt and equity financings
until such time as the ag-biotechnology market in China is sufficiently
developed to support our profitable operation.
7
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
MAY BE EXPOSED TO INFRINGEMENT CLAIMS FROM THIRD PARTIES.
Our success will depend in part on our ability to obtain patent
protection for our technology, to preserve our trade secrets and to operate
without infringing on the proprietary rights of third parties. We have several
trademarks registered in China, which will be protected by the trademark laws in
China for 10 years and are renewable at the expiration of the initial 10 year
term. In addition, we have recently acquired a patent from the China
Agricultural University entitled "Highly Effective Composite Bacteria for
Enhancing Yield and the Related Methodology for Manufacturing," which has a
remaining term of 9 years.
We may also file patents with the Chinese government and/or the U.S.
Patent and Trademark Office as we deem appropriate. There can be no assurance
that the patents applied for will be reviewed in a timely manner, that any
additional patents will 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
our patents. There also can be no assurance that the technology ultimately used
by us will be covered in any additional patent issued from our pending patent
application or other patent applications which we may file. We do not believe
that our technology infringes on the patent rights of third parties. However,
there can be no assurance that certain aspects of our technology will not be
challenged by the holders of other patents or that we will not be required to
license or otherwise acquire from third parties the right to use additional
technology. The failure to overcome such challenges or obtain such licenses or
rights on acceptable terms could have a material adverse affect on us, our
business, results of operations and financial condition.
The processes and know-how of importance to our technology are
dependent upon the skills, knowledge and experience of our technical personnel,
consultants and advisors and such skills, knowledge and experience are not
patentable. To help protect our rights, we require employees, significant
consultants and advisors with access to confidential information to enter into
confidentiality and proprietary rights agreements. There can be no assurance,
however, that these agreements will provide adequate protection for our trade
secrets, know-how or proprietary information in the event of any unauthorized
use or disclosure. There can be no assurance that we will be able to obtain a
license for any technology that we may require to conduct our business or that,
if obtainable, such technology can be licensed at a reasonable cost. The cost of
obtaining and enforcing patent protection and of protecting proprietary
technology may involve a substantial commitment of our resources. Any such
commitment may divert resources from other areas of our operations. We may be
required to license or sublicense certain technology or patents in order to
commence operations. There can be no assurance that we will be able to obtain
any necessary licenses or to do so on satisfactory terms. In addition, we could
incur substantial costs in defending ourselves against suits brought by other
parties for infringement of intellectual property rights.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY LITIGATION, THE DEFENSE OF WHICH
COULD ADVERSELY IMPACT OUR BUSINESS OPERATIONS.
Currently we have one patent in China (Patent #: ZL93 1 01635.5 and
International patent classification #: A01N 63/00), which covers six different
species of bacillus which have been tested as bio-fertilizers to enhance yield
and plant health as well as the production methods of the six species. Our
current products are not based on this patent, but are based on trade secrets
and know-how developed in-house. However our bio-organic fertilizer products in
development will be based on the patent and those products are expected be
introduced to the market in the early 2005. The patent will expire on February
19, 2013.
While we have not received any allegations, complaints or threats of
litigation relating to any intellectual property rights, we may, from time to
time, become involved in litigation regarding patent and other intellectual
property rights. From time to time, we may receive notices from third parties of
potential infringement and claims of potential infringement. Defending these
claims could be costly and time consuming and would divert the attention of
management and key personnel from other business issues. The complexity of the
technology involved and the uncertainty of intellectual property litigation
increase these risks. Claims of intellectual property
8
infringement also might require us to enter into costly royalty or license
agreements. However, we may be unable to obtain royalty or license agreements on
terms acceptable to us, or at all. In addition, third parties may attempt to
appropriate the confidential information and proprietary technologies and
processes used in our business, which we may be unable to prevent and which
would harm the businesses and our prospects.
WE FACE TECHNICAL RISKS ASSOCIATED WITH COMMERCIALIZING OUR TECHNOLOGY WHICH
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS RESULTS AND OPERATIONS.
A key to our future success is the ability to produce our 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.
WE DEPEND ON A FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE.
Three customers accounted for approximately 68% of our net sales for
the second quarter of fiscal year 2004. The loss of any of our significant
customers would result in a material reduction in our sales and results of
operations. There can be no assurances that we will be able to retain these
customers or further expand our customer base to reduce our dependence on a
small number of customers. Our inability to generate new customers could
negatively impact our business and our ability to continue as a going concern.
RISK RELATED TO OUR COMMON STOCK
IF AN ACTIVE TRADING MARKET FOR OUR SECURITIES DOES NOT REMAIN IN EXISTENCE, THE
MARKET PRICE OF OUR SECURITIES MAY DECLINE AND STOCKHOLDERS' LIQUIDITY MAY BE
REDUCED.
Although our common stock is quoted 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.
According to Yahoo! Finance, the average volume for our common stock for the
last three months was 78,991 shares per day. 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 quoted
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. As of September 21, 2004, we had 383
stockholders of record. As of October 6, 2004, the closing price per share of
common stock was $0.07 and the average daily trading volume for the previous
three months was 82,247 shares. Market prices for our common stock will be
influenced by a number of factors, including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by
competitors of new products or services or significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the ag-biotechnology
industry generally; and
o general economic and other conditions.
9
WE ARE CONTROLLED BY TWO EXISTING STOCKHOLDERS WHO POSSESS SUFFICIENT VOTING
POWER TO PREVENT OR FRUSTRATE ATTEMPTS TO REPLACE OR REMOVE OUR CURRENT
MANAGEMENT OR TO ENGAGE IN CHANGE OF CONTROL TRANSACTIONS.
Our principal stockholders are All Star Technology Inc. and InvestLink
(China) Limited. Wei Li, our Chief Executive Officer and Chairman, is a
principal shareholder of All Star Technology Inc. Da-chang Ju, one of our
directors, is a principal stockholder of InvestLink (China) Limited. All Star
Technology Inc., together with InvestLink (China) Limited, currently
beneficially own approximately 56% of the outstanding shares of our common
stock. Accordingly, All Star Technology Inc., together with InvestLink (China)
Limited, currently have the ability to determine the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including election of directors, mergers, consolidations and the sale of all or
substantially all of our assets. Our principal stockholders will also have the
power to prevent or cause a change in control. The interests of these
stockholders may differ from other stockholders' interests.
THE DESIGNATION OF OUR COMMON STOCK AS "PENNY STOCK" COULD IMPACT THE TRADING
MARKET FOR OUR COMMON STOCK DUE TO BROKER-DEALER REQUIREMENTS IMPOSED BY THE
DESIGNATION OF OUR COMMON STOCK AS "PENNY STOCK."
Our common stock is a "penny stock" as defined in Rules 15g-2 through
15g-6 promulgated under Section 15(g) of the Securities Exchange Act of 1934, as
amended, as it meets the following definitions: (i) the stock trades at a price
less than $5.00 per share; (ii) it is NOT traded on a "recognized" national
exchange; (iii) it is NOT quoted on the NASDAQ Stock Market, or even if so, has
a price less than $5.00 per share; and (iv) is issued by a company with net
tangible assets less than $2.0 million, if in business more than a continuous
three years, or with average revenues of less than $6.0 million for the past
three years. The principal result or effect of being designated a "penny stock"
is that securities broker-dealers cannot recommend the stock but must trade in
it on an unsolicited basis.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and
Rule 15g-2 promulgated thereunder by the Securities and Exchange Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account.
Potential investors in our common stock are urged to obtain and read
such disclosure carefully before purchasing any shares that are deemed to be
"penny stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.
PROVISIONS IN OUR CHARTER AND THE CORPORATE LAW OF OUR STATE OF INCORPORATION
COULD DETER OR PREVENT AN ACQUISITION OR CHANGE OF CONTROL.
Provisions of our certificate of incorporation may deter or prevent a
change in control of management. Specifically, our certificate of incorporation
allows our Board of Directors to issue 20,000,000 shares of preferred stock, in
one or more series and with such rights and preferences including voting rights,
without further stockholder approval. In the event that the Board of Directors
designates additional series of preferred stock with rights and preferences,
including super-majority voting rights, and issues such preferred stock, the
preferred stock could make our acquisition by means of a tender offer, a proxy
contest or otherwise, more difficult, and could also make the removal of
incumbent officers and directors more difficult. As a result, these provisions
may have an anti-takeover effect. The preferred stock authorized in our
certificate of incorporation may inhibit changes of control that are not
approved by our Board of Directors.
10
In addition, we are subject to the provisions of Section 203 of the
Delaware General Corporation Law. That section provides, with some exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of the person, who is an
"interested stockholder" for a period of three years from the date that the
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
These provisions could also limit the price that future investors might
be willing to pay in the future for our common stock. This could have the effect
of delaying, deferring or preventing a CHANGE IN CONTROL of our Company and/or a
change in the members our Board of Directors. The issuance of preferred stock
could also effectively limit or dilute the voting power of our stockholders.
According, such provisions of our articles of incorporation, as amended, may
discourage or prevent an acquisition or disposition of our business that could
otherwise be in the best interest of our shareholders.
INVESTORS SHOULD NOT RELY ON AN INVESTMENT IN OUR COMMON STOCK FOR DIVIDEND
INCOME AS WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. We intend to retain any earnings to finance the growth
of our business. We cannot assure you that we will ever pay cash dividends.
Therefore, investors should not rely on an investment in our common stock if
they require dividend income. The only income in the foreseeable future such
investors will receive from an investment in our common stock will come from
increases in the market price of our common stock. There can be no assurances
that the market price of our common stock will increase or continue to increase,
and such increases will most likely be uncertain and unpredictable. Whether we
pay any cash dividends in the future will depend on the financial condition,
results of operations and other factors that the Board of Directors will
consider.
IT MAY BE DIFFICULT TO FOR INVESTORS TO ENFORCE A SERVICE OF PROCESS OR ENFORCE
LIABILITIES AGAINST US.
We are incorporated in the State of Delaware, and our principal
executive offices are located in the State of California. However, substantially
all our fixed assets and operations are located in the People's Republic of
China. In addition, some of our directors and officers are Chinese citizens and
residents. As a result, it may be more difficult for investors or other third
parties to attach our assets in enforcement of a judgment against us or to
enforce liabilities and obligations against us in certain circumstances. It may
also be difficult to enforce service of process against directors and officers
in China.
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY NEGATIVELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. As of
October 1, 2004, we had 40,353,710 shares of common stock outstanding,
approximately 3,983,300 of which are freely tradable to our knowledge and
36,370,410 of which are "restricted securities" subject to Rule 144. We are
currently registering up to 45,277,605 shares of common stock for resale by the
selling stockholders.
11
EXISTING STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT.
The sale of shares pursuant to the Standby Equity Distribution
Agreement will have a dilutive impact on our stockholders. Our net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price, the more shares of common
stock we will have to issue in order to receive the maximum cash advance allowed
under the Standby Equity Distribution Agreement. If our stock price is lower,
then our existing stockholders would experience greater dilution. We are
currently registering up to 45,277,605 shares of common stock for resale by the
selling stockholders. On September 28, 2004, the closing price of our common
stock was $0.11, as quoted on the OTC Bulletin Board. If we draw down on the
entire $10 million available under the Standby Equity Distribution Agreement,
assuming a per share price of $0.11, we would issue approximately 90,909,091
shares of our common stock.
CORNELL CAPITAL PARTNERS, LP WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE
OF OUR COMMON STOCK UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT.
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 1% discount to the lowest volume weighted average
price for the five days immediately following the notice date of an advance. In
addition, Cornell Capital Partners, LP will retain 4% the amount of each advance
as a fee. These discounted sales could cause the price of our common stock to
decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE.
The selling stockholders intend to sell in the public market 45,277,605
shares of common stock being registered in this offering. That means that up to
45,277,605 shares may be sold pursuant to this registration statement. Such
sales may cause our stock price to decline. Our officers and directors and those
stockholders who are significant stockholders as defined by the Securities and
Exchange Commission will continue to be subject to the provisions of various
insider trading and Rule 144 regulations.
THE SALE OF OUR STOCK UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT COULD
ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE
DECLINE OF OUR STOCK PRICE.
In many circumstances the provision of financing based on the
distribution of equity for companies that are quoted on the OTC Bulletin Board
has the potential to cause a significant downward pressure on the price of
common stock. This is especially the case if the shares being placed into the
market exceed the market's ability to take up the increased stock or if we have
not performed in such a manner to show that the equity funds raised will be used
to grow our business. Such an event could place further downward pressure on the
price of our common stock. Under the terms of the Standby Equity Distribution
Agreement, we may request numerous cash advances. Even if we use the cash
advances to grow our revenues and profits or invest in assets that are
materially beneficial to us, the opportunity exists for short sellers and others
to contribute to the future decline of our stock price. If there are significant
short sales of stock, the price decline that would result from this activity
will cause the share price to decline more so which in turn may cause long
holders of the stock to sell their shares thereby contributing to sales of stock
in the market. If there is an imbalance on the sell side of the market for the
stock the price will decline.
It is not possible to predict if the circumstances exist under which
short sales could materialize or to what level our stock price could decline. In
some companies that have been subjected to short sales the stock price has
dropped to near zero.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED.
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the Standby Equity
Distribution Agreement under which we may draw down a maximum amount of
$10,000,000. No assurances can be given that such financing will be available in
sufficient amounts or at all when needed, in part, because we are limited to a
maximum cash advance of $500,000 during any seven trading
12
day period. In addition, if the actual average price at which we sell shares of
common stock under the Standby Equity Distribution Agreement falls, we may need
to register additional shares to fully utilize the funds available under the
Standby Equity Distribution Agreement.
WE MAY NOT BE ABLE TO OBTAIN A CASH ADVANCE UNDER THE STANDBY EQUITY
DISTRIBUTION AGREEMENT IF, SUBSEQUENT TO THE ADVANCE, CORNELL CAPITAL PARTNERS,
LP WOULD HOLD IN EXCESS OF 9.9% OF OUR COMMON STOCK.
We will be unable to obtain a cash advance under the Standby Equity
Distribution Agreement where the number of shares of common stock issuable under
an advance would cause Cornell Capital Partners, LP to own in excess of 9.9% of
our then-outstanding common stock. A possibility exists that Cornell Capital
Partners, LP may own approximately 9.9% of our outstanding common stock at a
time when we would otherwise plan to make an advance under the Standby Equity
Distribution Agreement. In that event, if we are unable to obtain additional
external funding or generate revenue from the sale of our products, we could be
forced to curtail or cease our operations.
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis" and "Description of Business," as well as in this prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this prospectus
will in fact occur.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, LP under the Standby Equity Distribution Agreement.
The purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 99% of the market price which is defined as the
lowest volume weighted average price of our common stock on the OTC Bulletin
Board for the five days immediately following the notice date. In addition, for
each advance, we must pay Cornell Capital Partners, LP a fee equal to 4% of the
advance.
Pursuant to the Standby Equity Distribution Agreement, we cannot
receive a cash advance for more than $500,000 in any period of seven trading
days or more than $1,500,000 in the aggregate in any thirty-day calendar period.
We may issue 40,704,038 shares of common stock under this registration statement
in connection with the Standby Equity Distribution Agreement. Pursuant to the
Standby Equity Distribution Agreement, we should receive up to $10,000,000 in
net proceeds. Based on the assumed offering price of $0.25 per share, we would
have to issue to Cornell Capital Partners, LP 40,000,000 shares in order to
receive the entire $10,000,000 available to us under the Standby Equity
Distribution Agreement.
For illustrative purposes only, we have set forth below our intended
use of proceeds for the range of net proceeds indicated below to be received
under the Standby Equity Distribution Agreement. The table assumes
13
estimated offering expenses of 0.5%, plus a 4% retention fee payable to Cornell
Capital Partners, LP under the Standby Equity Distribution Agreement. The
figures below are estimates only, and may be changed due to various factors,
including the timing of the receipt of the proceeds.
GROSS PROCEEDS......................... $5,000,000 $7,500,000 10,000,000
NET PROCEEDS........................... $4,775,000 $7,162,500 $9,550,000
(AFTER OFFERING EXPENSES AND FEES)
USE OF PROCEEDS AMOUNT AMOUNT AMOUNT
Manufacturing Facility Construction.... $2,500,000 $3,000,000 $3,500,000
General Working Capital................ $600,000 $800,000 $1,000,000
General Administrative and Operation
Expenses............................ $575,000 $762,500 $950,000
Repayment of Short-term Loan........... $100,000 $100,000 $100,000
Future Acquisitions.................... $1,000,000 $2,500,000 $4,000,000
TOTAL.................................. $4,775,000 $7,162,500 $9,550,000
We have planned to divide the construction of our primary manufacturing
facility in Shandong province in China into three separate phases. Phase I,
which commenced in October of 2002, has been completed at a cost of
approximately $1.5 million. We plan to begin Phase II and III on the same site
in Shandong, China as soon as possible after raising sufficient additional
capital. The total cost for final two phases of construction of the
manufacturing facility construction is estimated to be at least $2.5 million. We
estimate that, assuming sufficient capital is available, we could complete Phase
II and III of the construction project within approximately eighteen months.
The short term loan in the amount of $100,000 was borrowed from the
China Star Investment Group in October 2003, pursuant to a convertible note
which accrues interest at the rate of 12% per annum and was initially due in
October 2004. We used the proceeds of this loan for working capital purposes. In
May of 2004, China Star Investment Group to waive the right to convert the note
into equity and at the same time the maturity date was amended to June 31, 2004.
The Company and China Star Investment Group subsequently agreed to extend the
maturity until December 31, 2004. As of June 31, 2004, the outstanding balance
of this loan was $71,020.
DILUTION
Sales of the shares of our common stock will not result in any change
to the net tangible book value per share before and after the distribution of
shares by the selling stockholders. There will be no change in the net tangible
book value per share attributable to cash payments made by purchasers of the
shares being offered by the selling stockholders. Prospective investors in the
shares held by the selling stockholders should be aware, however, that the price
of shares being offered by the selling stockholders may not bear any rational
relationship to our net tangible book value per share.
SELLING STOCKHOLDERS
The following table sets forth: (1) the name of each of the
stockholders for whom we are registering shares under this registration
statement; (2) the number of shares of our common stock beneficially owned by
each such
14
stockholder prior to this offering (including all shares of common stock
issuable pursuant to the Standby Equity Distribution Agreement or upon the
exercise of a warrant as described below, whether or not exercisable within 60
days of the date hereof); (3) the number of shares of our common stock offered
by such stockholder pursuant to this prospectus; and (4) the number of shares,
and (if one percent or more) the percentage of the total of the outstanding
shares, of our common stock to be beneficially owned by each such stockholder
after this offering, assuming that all of the shares of our common stock
beneficially owned by each such stockholder and offered pursuant to this
prospectus are sold and that each such stockholder acquires no additional shares
of our common stock prior to the completion of this offering. Such data is based
upon information provided by each selling stockholder.
PERCENTAGE
SHARES SHARES OF SHARES
BENEFICIALLY SHARES TO BE BENEFICIALLY BENEFICIALLY
OWNED BEFORE SOLD IN THE OWNED AFTER OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERING OFFERING OFFERING (1)
------------------- -------- -------- -------- ------------
Cornell Capital Partners, LP (2) 704,038 40,704,038 0 --
Tze Ming Hsu 2,000,000 2,000,000 0 --
Westpark Capital, Inc. (3) 1,747,000 1,747,000 0 --
Shu-chen Wang 280,000 280,000 0 --
Wen-Jen Lee 205,000 205,000 0 --
Wai Sun Chan 200,000 200,000 0 --
Zheng Wang 115,000 115,000 0 --
Newbridge Securities
Corporation (4) 26,567 26,567 0 --
----------
(1) Applicable percentage of ownership is based on 40,353,710 shares of
common stock outstanding as of the date of this prospectus.
(2) Yorkville Advisors, LLC, Cornell Capital Partners, LP's general partner,
exercises voting and investment authority over the shares held by Cornell
Capital Partners, LP. Mark Angelo controls Yorkville Advisors, LLC and
exercises voting and investment authority over the shares held by Cornell
Capital Partners, LP.
(3) WestPark Holdings, LLC exercises voting and investment authority over the
shares held by Westpark Capital, Inc. Richard Rappaport controls WestPark
Holdings, LLC and exercises voting and investment authority over the
shares held by WestPark Capital, Inc.
(4) Guy S. Amico exercises voting and investment authority over the shares
held by Newbridge Securities Corporation.
The following information contains a description of each selling
stockholder's relationship to us and how each selling stockholder acquired the
shares to be sold in this offering. None of the selling stockholders have held a
position or office, or had any other material relationship, with us, except as
follows:
STANDBY EQUITY DISTRIBUTION AGREEMENT
On July 6, 2004, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, a private equity fund. Under the
Standby Equity Distribution Agreement, we may issue and sell to Cornell Capital
Partners, LP common stock for a total purchase price of up to $10,000,000.
Cornell Capital Partners, LP will pay us 99% of the market price of our common
stock, which is defined as the lowest volume weighted average price of the
common stock during the five trading days following the notice date. In
addition, for each advance, we must pay Cornell Capital Partners, LP a fee equal
to 4% of the advance. The amount of each advance is subject to an aggregate
maximum advance amount of $500,000, with no advance occurring within seven
trading days of a prior advance. Cornell Capital Partners, LP also received a
one-time commitment fee in the form of 704,038 shares of our common stock. The
4% advance fee and the 704,038 shares of common stock are underwriting discounts
payable to Cornell Capital Partners, LP.
This offering will terminate twenty-four months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
On July 6, 2004, we entered into the Placement Agent Agreement with
Newbridge Securities Corporation, a registered broker-dealer, in connection with
the Standby Equity Distribution Agreement. Pursuant to the Placement
15
Agent Agreement, we paid Newbridge Securities Corporation a one-time placement
agent fee of 26,567 shares of common stock equal to approximately $10,000 based
on the volume weighted average price of our common stock as quoted by Bloomberg,
LP on the date of the Placement Agent Agreement.
ISSUANCE OF WARRANT
On March 11, 2004, we issued a Common Stock Warrant to Westpark
Capital, Inc., a registered broker-dealer, to purchase 1,747,000 shares of our
common stock at an exercise price per share of $0.20. Based on the closing price
of $0.08 per share of our common stock on October 7, 2004, the aggregate dollar
value of the 1,747,000 shares of common stock to be issued upon the exercise of
the warrant is $139,760. The Common Stock Warrant was issued for financial
advisory services rendered to us in connection with our reverse merger
transaction which was completed in March 2004. The Common Stock Warrant has a
term of six years and was fully vested upon issuance. We granted Westpark
Capital, Inc. "piggy-back" registration rights with respect to the shares of
common stock issuable upon exercise of the warrants.
ISSUANCE OF CONVERTIBLE LOANS
On January 25, 2004, we entered into a convertible loan agreement with
Kao Ming Investment Company, a foreign company located in Taiwan. The
convertible loan had a principal amount of $500,000, with an interest rate of
12%, and was due and payable on September 25, 2004. Pursuant to the terms of the
convertible loan agreement, the lender had the right to convert the loan into
shares of our common stock at $0.25 per share at any time prior to the maturity
date, subject to our consummation of a reverse merger transaction which was
accomplished in March 2004. The lender exercised its conversion right on June 8,
2004 and a total of 2,000,000 shares of our common stock were issued to Tze Ming
Hsu per the lender's instruction. Based on closing price of $0.08 per share of
our common stock on October 7, 2004, the aggregate dollar value of the 2,000,000
shares of common stock issued to Tze Ming Hsu is $160,000.
On March 12, 2004, we entered into a convertible loan agreement with
JZU HSIANG Trading Co. Ltd., a foreign company located in Taiwan. The
convertible loan had a principal amount of $200,000, with an interest rate of
12%, and was due and payable on July 7, 2004. Pursuant to the terms of the
convertible loan agreement, the lender had the right to convert the loan into
shares of our common stock at $0.25 per share at any time prior to the maturity
date, subject to our consummation of a reverse merger transaction which was
accomplished in March 2004. The lender exercised its conversion right on June 8,
2004, and a total of 800,000 shares of our common stock were issued to the
following individuals in the following amounts per the lender's instruction:
STOCKHOLDER: AMOUNT:
Sue-Chen Wang 280,000
Wen-Jen Lee 205,000
Wai Sun Chan 200,000
Zheng Wang 115,000
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act, and Regulation D promulgated under the Securities Act. In each
instance, the purchaser had access to sufficient information regarding our
company so as to make an informed investment decision. More specifically, we had
a reasonable basis to believe that each purchaser was an "accredited investor"
as defined in Regulation D of the Securities Act and otherwise had the requisite
sophistication to make an investment in our securities.
Any change in the selling stockholders will be identified in a
prospectus supplement prior to the sale or transfer of securities.
16
Brokers or dealers effecting transactions in these shares should
confirm that the shares are registered under the applicable state law or that an
exemption from registration is available.
EQUITY LINE OF CREDIT
SUMMARY
On July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners, LP shares of common stock for a total purchase price of up to
$10,000,000. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners, LP will pay us 99% of the
lowest volume weighted average price of our common stock on the Over-the-Counter
Bulletin Board or other principal market on which our common stock is traded for
the five days immediately following the notice date. The number of shares
purchased by Cornell Capital Partners, LP for each cash advance is determined by
dividing the amount of each advance by the purchase price for the shares of
common stock. Cornell Capital Partners, LP will retain 4% of each cash advance
we receive under the Standby Equity Distribution Agreement. Cornell Capital
Partners, LP is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. In addition, we
engaged Newbridge Securities Corporation, a registered broker-dealer, as our
placement agent in connection with the Standby Equity Distribution Agreement.
For its services, Newbridge Securities Corporation received 26,567 shares of our
common stock, valued at approximately $10,000 based on the volume weighted
average price of our Common Stock as quoted by Bloomberg, LP on the date of the
Placement Agent Agreement. The sale of the shares under the Standby Equity
Distribution Agreement is conditioned upon us registering the shares of common
stock with the Securities and Exchange Commission and obtaining all necessary
permits or qualifying for exemptions under applicable state laws. The costs
associated with this registration will be borne by us.
There are no other significant closing conditions to cash advances under the
Standby Equity Distribution Agreement.
The shares of common stock registered under this registration
statement, assuming all 45,277,605 shares were issued and outstanding, would
represent approximately 53% of our total outstanding shares.
Prior to entering the arrangement with Cornell Capital Partners, we
explored several alternative financing arrangements. In this process, we had
discussions with venture capital firms, institutional funds and high net worth
individuals. We did not pursue alternative funding sources for various reasons,
including high cost, relatively smaller funding commitments and complicated
structures. We ultimately entered into the Standby Equity Distribution Agreement
with Cornell Capital Partners, LP because we believe the arrangement offers the
flexibility of being able to draw-down only when we determine it is necessary or
advantageous, a reasonable overall cost and a sufficient funding commitment to
meet our expected liquidity needs for the next 24 months.
EQUITY LINE OF CREDIT EXPLAINED
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically sell shares of common stock to Cornell Capital
Partners, LP to raise capital to fund our working capital needs. The periodic
sale of shares is known as an advance. We may request an advance no more than
every seven trading days. A closing will be held the first trading day after the
pricing period at which time we will deliver shares of common stock and Cornell
Capital Partners, LP will pay the advance amount. There are no closing
conditions imposed on us for any of the advances or which would enable Cornell
Capital Partners, LP to avoid its obligation to purchase shares in connection
with any advance, except that:
o the shares of common stock to be issued in the advance must be
registered for resale by Cornell Capital Partners, LP;
o we must have filed our periodic and other reports with the
Securities and Exchange Commission;
o we must have delivered the shares of common stock for the
applicable advance;
17
o the trading of our common stock must not have been suspended;
and
o we have not undergone a fundamental change (as that term is
defined in the agreement).
We may request cash advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request cash advances until Cornell
Capital Partners, LP has advanced us a total amount of $10,000,000 or 24 months
after the effective date of the this registration statement, whichever occurs
first.
The amount of each advance is subject to a maximum amount of $500,000,
and we may not submit a request for an advance within seven trading days of a
prior advance. The amount available under the Standby Equity Distribution
Agreement is not dependent on the price or volume of our common stock. Our
ability to request advances is conditioned upon us registering the shares of
common stock with the Securities and Exchange Commission. In addition, we may
not request cash advances if the shares to be issued in connection with such
advances would result in Cornell Capital Partners, LP owning more than 9.9% of
our outstanding common stock. We would be permitted to make draws on the Standby
Equity Distribution Agreement only so long as Cornell Capital Partners, LP's
beneficial ownership of our common stock remains lower than 9.9% and, therefore,
a possibility exists that Cornell Capital Partners, LP may own more than 9.9% of
our outstanding common stock at a time when we would otherwise plan to make an
advance under the Standby Equity Distribution Agreement.
We do not have any agreements with Cornell Capital Partners, LP
regarding the distribution of such stock, although Cornell Capital Partners, LP
has indicated that it intends to promptly sell any stock received under the
Standby Equity Distribution Agreement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Based on the assumed
offering price of $0.25 per share, we would have to issue to Cornell Capital
Partners, LP 40,000,000 shares in order to receive the entire $10,000,000
available to us under the Standby Equity Distribution Agreement. Pursuant to the
Standby Equity Distribution Agreement, we could receive up to approximately
$9,600,000 in net proceeds.
There is an inverse relationship between our stock price and the number
of shares to be issued under the Standby Equity Distribution Agreement. That is,
as our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement,
assuming the receipt of aggregate proceeds of $10,000,000, at a recent price of
$0.25 per share and 75%, 50% and 25% discounts to the assumed sales price of
$0.25.
PURCHASE PRICE $0.25 $0.1875 $0.125 $0.0625
NO. OF SHARES 40,000,000 53,333,333 80,000,000 160,000,000
Proceeds received under the Standby Equity Distribution Agreement will
be used in the manner set forth in the "Use of Proceeds" section of this
prospectus. We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to receive. Cornell Capital Partners, LP has the ability to permanently
terminate its obligation to purchase shares of our common stock under the
Standby Equity Distribution Agreement if there shall occur any stop order or
suspension of the effectiveness of this registration statement for an aggregate
of 50 trading days other than due to acts by Cornell Capital Partners, LP or if
we fail materially to comply with certain terms of the Standby Equity
Distribution Agreement (subject to a 30-day cure period).
18
All fees and expenses under the Standby Equity Distribution Agreement
will be borne by us. In connection with the Standby Equity Distribution
Agreement, Cornell Capital Partners, LP received a one-time commitment fee in
the form of 704,038 shares of common stock. In addition, we issued 26,567 shares
of common stock to Newbridge Securities Corporation, an unaffiliated registered
broker-dealer, as compensation for its services as a placement agent.
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or on any other market in which the price of our shares
of common stock is quoted or (ii) in transactions otherwise than in the
over-the-counter market or in any other market on which the price of our shares
of common stock is quoted. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved).
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Under the Standby Equity Distribution Agreement, we may issue and sell
common stock to Cornell Capital Partners, LP for a total purchase price of up to
$10,000,000. Cornell Capital Partners, LP will pay us 99% of the lowest volume
weighted average price of our common stock on the OTC Bulletin Board or other
principal trading market on which our common stock is traded for the five days
immediately following our request for an advance. In addition, Cornell Capital
Partners, LP will receive a cash fee equal to 4% of each advance to us under the
Standby Equity Distribution Agreement, and received a one-time commitment fee in
the form of 704,038 shares of common stock. The 4% advance fee and the 704,038
shares of common stock are underwriting discounts. In addition, we engaged
Newbridge Securities Corporation, an unaffiliated registered broker-dealer, to
act as our placement agent in connection with the Standby Equity Distribution
Agreement. We issued 26,567 shares of common stock to Newbridge Securities
Corporation as compensation for its services as a placement agent.
Cornell Capital Partners, LP was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners, LP is a domestic hedge fund in
the business of investing in and financing public companies. Cornell Capital
Partners, LP does not intend to make a market in our stock or to otherwise
engage in stabilizing or other transactions intended to help support the stock
price. Prospective investors should take these factors into consideration before
purchasing our common stock.
Cornell Capital Partners, LP, Newbridge Securities Corporation and
WestPark Capital, Inc. are each an underwriter within the meaning of the
Securities Act of 1933 in connection with its sale of shares pursuant to this
prospectus. The other selling stockholders and any broker-dealers or agents that
are involved in selling the shares may be deemed underwriters of the shares of
common stock which they are offering. In such event, any commissions received by
such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
The selling stockholders have informed us that they do not have any
agreement or understanding, directly or indirectly, with any person to
distribute the common stock. To the extent that we become aware that any selling
stockholders did not acquire their securities in the ordinary course of business
or did have such an agreement or understanding, we will file an amendment to
this registration statement to designate such selling stockholder as an
19
"underwriter" within the meaning of the Securities Act. Any change in selling
stockholders will also be identified in prospectus supplements, as applicable,
prior to the sale or transfer of securities.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and we have complied with them.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public other than commissions, fees
and discounts of underwriters, brokers, dealers and agents. If any of these
other expenses exist, we expect the selling stockholders to pay these expenses.
We have agreed to indemnify Cornell Capital Partners, LP and its controlling
persons against certain liabilities, including liabilities under the Securities
Act. We will not receive any proceeds from the sale of any of the shares of
common stock by the selling stockholders. We will, however, receive proceeds
from the sale of common stock under the Standby Equity Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. Accordingly, the selling stockholders are not
permitted to cover short sales by purchasing shares while the distribution is
taking place. The selling stockholders are advised that if a particular offer of
common stock is to be made on terms constituting a material change from the
information set forth above with respect to the Plan of Distribution, then, to
the extent required, a post-effective amendment to the accompanying registration
statement must be filed with the Securities and Exchange Commission.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following presents information as of September 30, 2004, regarding
our executive officers and directors.
NAME POSITION
---- --------
Wei Li.................. Chief Executive Officer and Chairman of the
Board
Lian-jun Luo............ Chief Financial Officer and Director
James Nian Zhan......... Secretary and Director
Da-Chang Ju............. Director
Yun-long Zhang.......... Director
Wei Li, age 42, became our Chief Executive Officer and Chairman of the
Board on March 12, 2004. Mr. Li was the acting Chief Executive Officer of Kiwa
Bio-Tech Products Group Ltd. since January 1, 2004 prior to the reverse merger.
Mr. Li founded Kiwa Bio-Tech Products Group Ltd. to capitalize on the fast
growth of the ag-biotechnology industry in China. Prior to founding Kiwa
Bio-Tech Products Group Ltd., Mr. Li founded China Star Investment Group, an
entity which provides integrated financing services and/or venture investments
to growth businesses in China. Mr. Li served as President of China Star
Investment Group from June 1993 to January 2004. In 1989, Mr. Li founded Xinhua
International Market Development Ltd., a company which engaged in investing in
China's high tech, pharmaceutical, medical device, media, entertainment and real
estate industries. Mr. Li has been a successful entrepreneur in the past 15
years of experience in founding companies and investing in China's growth
industries. Mr. Li holds a B.S. in finance from Hunan Finance and Economics
University.
20
Lian-jun Luo, age 33, became our Chief Financial Officer on March 12,
2004, and one of our directors on March 27, 2004. Mr. Luo served as the Chief
Executive Officer of Kiwa Bio-Tech Products Group Ltd. from October 2002 to
December 2003. From January 2002 to October 2002, Mr. Luo served as the Chief
Financial Officer of China Star Investment Group. From August 2000 to December
2001, Mr. Luo served as manager of Security Department and Assistant of
President at Jilin HengFa Group Ltd, a Chinese drug manufacturing company,
responsible for the Company's preparation for an aborted IPO and for M&A
activities. From May 1998 to July 2000, Mr. Luo worked as manager of Investment
Department and Associate General Manager for Hongli Enterprise Ltd, a Chinese
investment company on M&A transactions. Mr. Luo obtained his law degree from
China University of Politics and Law in 1993. Mr. Luo is a certified public
accountant and lawyer in China.
James Nian Zhan, age 39, became our Secretary on March 12, 2004, and
one of our directors on March 27, 2004. Mr. Zhan has 15 years of business
experience in the areas of financial management, investment banking, operations
and information systems, both in the United States and China, including
experience with United States public companies. Mr. Zhan most recently worked
with Cornerstone Propane L.P. (NYSE: CNO/OTC: CNPP), the 6th largest propane
distributor in the United States, from April 2002 to August 2004. From November
1999 to December 2001, Mr. Zhan was Senior Analyst at RSM Equico, a leading
United States Investment Banking firm in mergers and acquisitions for
middle-market companies, where he focused on advising corporate clients on
valuation, corporate restructuring and mergers & acquisitions. Mr. Zhan holds an
MBA degree from the Olin School of Business at Washington University in St.
Louis.
Da-chang Ju, age 63, became one of our directors on March 12, 2004.
From 1987 to 1999, Mr. Ju worked as General Manager of XinShen Company, a
leading investment firm in China. He was responsible for the company's daily
operations and investment decision making. Mr. Ju retired after 1999. He served
as a member of Kiwa Bio-Tech Products Group Ltd.'s Board of Directors since 2003
and a member of the Board of Directors of China Star Investment Group from 1999
to 2000. The two companies are not listed companies. Mr. Ju holds a B.S. in
mathematics from a major university in Beijing, China.
Yun-long Zhang, age 41, became one of our directors on March 27, 2004.
From May 2000 to present, Mr. Zhang has been the General Manager of China Star
Investment Group, responsible for the group's daily operations. From 1994 to
2000, Mr. Zhang served as the head of the Investment Department at China
National Economic and Systems Reform Research and Services Center, an economic
reform thinking tank for central government. Mr. Zhang holds a degree in
statistics.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have an audit committee. Our Board of Directors performs some
of the same functions of an audit committee, including recommending a firm of
independent certified public accountants to audit our annual financial
statements, reviewing the independent auditors independence, our financial
statements and their audit report, and reviewing management's administration of
the system of internal accounting controls. We do not currently have a written
audit committee charter or similar document.
The Board of Directors has determined that none of its members qualify
as an audit committee financial expert as defined in Item 401 of Regulation S-B.
We are a development stage company and have only recently become a
publicly-traded company. We have not been able to identify a suitable candidate
for our Board of Directors that would qualify as an audit committee financial
expert.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 1, 2004, certain
information known to us with respect to the beneficial ownership of our common
stock by (i) each of our directors and executive officers, (ii) each person who
is known by us to own of record or beneficially more than 5% of the outstanding
common stock, and (iii) all of our directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders can be reached at our
principal executive offices located at 17700 Castleton Street, Suite 589, City
of Industry, California 91748.
21
SHARES BENEFICIALLY OWNED (1)
BENEFICIAL OWNER NUMBER PERCENT (%)
---------------- ---------- -----------
(i) Directors and Executive Officers
Wei Li (2)
Chairman of the Board and CEO............... 12,356,672 30.6
Da-chang Ju (3)
Director.................................... 10,062,088 24.9
Lian-jun Luo
Chief Financial Officer and Director........ 308,916 *
James Nian Zhan
Secretary and Director...................... 308,916 *
Yun-long Zhang
Director.................................... 308,916 *
(ii) 5% Holders
All Star Technology Inc. (2)................ 12,356,672 30.6
InvestLink (China) Limited (3).............. 10,062,088 24.9
De-jun Zou.................................. 3,089,168 7.7
Times Crossword Investment, Ltd. (4)........ 3,089,168 7.7
Tze Ming Hsu
9th Floor, #101 Fu-Shin N.
Taipei, Taiwan, R.O.C....................... 2,000,000 5.0
(iii) Management as a Group
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP (FIVE PERSONS)................... 23,345,508 57.9
----------
* Less than 1%.
(1) Gives effect to the shares of Common Stock issuable upon the exercise
of all options exercisable within 60 days of September 30, 2004 and
other rights beneficially owned by the indicated stockholders on that
date. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. Unless otherwise indicated,
the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned. Percentage
ownership is calculated based on 40,353,710 shares of the Common Stock
outstanding as of September 30, 2004. All information is as of
September 30, 2004 and is based upon information furnished by the
persons listed, contained in filings made by them with the Securities
and Exchange Commission or otherwise available to us.
(2) Consists of shares held by All Star Technology Inc., a British Virgin
Islands international business company. Wei Li exercises voting and
investment control over the shares held by All Star Technology Inc. Wei
Li is a principal stockholder of All Star Technology Inc. and may be
deemed to beneficially own such shares, but disclaims beneficial
ownership in such shares held by All Star Technology Inc. except to the
extent of his pecuniary interest therein.
(3) Consists of 6,178,336 shares of common stock held directly by
InvestLink (China) Limited and 3,883,752 shares of common stock held by
InvestLink (China) Limited as custodian for Gui-sheng Chen. Da-chang Ju
exercises voting and investment control over the shares held by
InvestLink (China) Limited. Da-chang Ju is a principal stockholder of
InvestLink (China) Limited and may be deemed to beneficially own such
shares, but disclaims beneficial ownership in such shares held by
InvestLink (China) Limited except to the extent of his pecuniary
interest therein.
22
(4) Mr. Yi Mao exercises voting and investment control over the shares held
by Times Crossword Investment, Ltd.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.001 per share and 20,000,000 shares of preferred stock, of
which 40,353,710 shares of common stock and no shares of preferred stock were
issued and outstanding as of October 1, 2004. Set forth below is a description
of certain provisions relating to our capital stock. For additional information
regarding our stock please refer to our Certificate of Incorporation and Bylaws.
COMMON STOCK
Each share of common stock entitles the holder thereof to one vote on
each matter that may come before a meeting of the stockholders. There is no
right to cumulative voting thus, the holders of fifty percent or more of the
shares outstanding can, if they choose to do so, elect all of the directors. In
the event of a voluntary or involuntary liquidation, all stockholders are
entitled to a pro rata distribution after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the common stock. The holders of the common stock have no preemptive rights with
respect to future offerings of shares of common stock. Holders of common stock
are entitled to dividends if, as and when declared by the Board out of the funds
legally available therefor. It is our present intention to retain earnings, if
any, for use in our business. The payment of dividends on our common stock is,
therefore, unlikely in the foreseeable future.
PREFERRED STOCK
Our preferred stock may be issued from time to time in one or more
series. Our Certificate of Incorporation authorizes our Board of Directors to
fix or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of preferred stock and the number of
shares constituting any such series and the designation thereof, and to increase
or decrease the number of shares of any series prior or subsequent to the issue
of shares of that series, but not below the number of shares of such series then
outstanding.
ANTI-TAKEOVER PROVISIONS
Certain provisions of our articles of incorporation and Delaware law
may have the effect of delaying, deferring or discouraging another person from
acquiring control of our company.
CHARTER AND BYLAW PROVISIONS
Our certificate of incorporation allows our Board of Directors to issue
20,000,000 shares of preferred stock, in one or more series and with such rights
and preferences including voting rights, without further stockholder approval.
In the event that the Board of Directors designates additional series of
preferred stock with rights and preferences, including super-majority voting
rights, and issues such preferred stock, the preferred stock could make our
acquisition by means of a tender offer, a proxy contest or otherwise, more
difficult, and could also make the removal of incumbent officers and directors
more difficult. As a result, these provisions may have an ANTI-TAKEOVER effect.
The preferred stock authorized in our certificate of incorporation may inhibit
changes of control that are not approved by our Board of Directors. These
provisions could limit the price that future investors might be willing to pay
in the future for our common stock. This could have the effect of delaying,
deferring or preventing a CHANGE IN CONTROL of our Company. The issuance of
preferred stock could also effectively limit or dilute the voting power of our
stockholders. According, such provisions of our articles of incorporation, as
amended, may discourage or prevent an acquisition or disposition of our business
that could otherwise be in the best interest of our shareholders.
DELAWARE LAW
In addition, Delaware has enacted the following legislation that may
deter or frustrate takeovers of Delaware corporations, such as our company:
23
AUTHORIZED BUT UNISSUED STOCK. The authorized but unissued shares of
our common stock are available for future issuance without shareholder approval.
These additional shares may be used for a variety of corporate purposes,
including future public offering to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of common stock may enable our Board of Directors to issue
shares of stock to persons friendly to existing management.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. We are subject to
the provisions of Section 203 of the Delaware General Corporation Law. That
section provides, with some exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate, or associate of the person, who is an "interested stockholder" for a
period of three years from the date that the person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is Fidelity Transfer Company.
Its address is 1800 South West Temple, Suite 301, Salt Lake City, Utah 84115,
and its telephone number is (801) 484-7222.
LISTING
Our common stock is quoted on the Over-The-Counter Bulletin Board under
the trading symbol "KWBT."
INTERESTS OF NAMED EXPERTS AND COUNSEL
The financial statements for Kiwa Bio-Tech Products Group Ltd. for the
year ended December 31, 2003 and the year ended December 31, 2002, included in
this prospectus, and incorporated by reference in this registration statement,
have been audited by Grobstein, Horwath & Company LLP, independent auditors, as
stated in their report appearing with the financial statements and incorporated
by reference in this registration statement. These financial statements are
included in reliance upon the report of Grobstein, Horwath & Company LLP, given
upon their authority as experts in accounting and auditing.
Stubbs Alderton and Markiles, LLP will pass on the validity of the
shares of common stock offered hereby.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation includes an indemnification provision
under which we have agreed to indemnify our directors and officers from and
against certain claims arising from or related to future acts or omissions as
our directors or officers. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
24
DESCRIPTION OF BUSINESS
We are a development stage company that develops, manufactures,
distributes and markets innovative, cost-effective and environmentally safe
bio-technological products for agriculture, natural resources and environmental
conservation. Our products are designed to enhance the quality of human life by
increasing the value, quality and productivity of crops and decreasing the
negative environmental impact of chemicals and other wastes.
We were originally incorporated in the State of Utah on June 14, 1933,
under the name Tintic Gold Mining Company to perform mining operations in Utah.
On March 12, 2004, pursuant to an Agreement and Plan of Merger dated as of March
11, 2004, by and among Tintic Gold Mining Company, TTGM Acquisition Corporation,
a Utah corporation and wholly-owned subsidiary of Tintic Gold Mining Company,
and Kiwa Bio-Tech Products Group Ltd., a British Virgin Islands international
business company, TTGM Acquisition Corporation merged with and into Kiwa
Bio-Tech Products Group Ltd. Each share of Kiwa Bio-Tech Products Group Ltd.
common stock was converted into 1.5445839 shares of Tintic Gold Mining Company
Common Stock, with Kiwa Bio-Tech Products Group Ltd. surviving as Tintic Gold
Mining Company's wholly-owned subsidiary. The merger resulted in a change of
control of Tintic Gold Mining Company, with former Kiwa Bio-Tech Products Group
Ltd. stockholders owning approximately 89% of Tintic Gold Mining Company on a
fully diluted basis. Subsequent to the merger, Tintic Gold Mining Company
changed its name to Kiwa Bio-Tech Products Group Corporation. On July 22, 2004,
we completed our reincorporation in the State of Delaware.
In 2002, Kiwa Bio-Tech Products Group Ltd. chartered Kiwa Bio-Tech
Products (Shandong) Co. Ltd., a wholly-owned subsidiary organized under the laws
of China, as its offshore manufacturing base to capitalize on low cost, high
quality manufacturing advantages available in China. In October 2003, Kiwa
Bio-Tech Products Group Ltd. completed Phase I construction of its
state-of-the-art manufacturing facility. In November 2003, Kiwa Bio-Tech
Products Group Ltd. began shipping its first commercial product, a
bio-fertilizer, to the agricultural market in China. We are currently working on
existing product improvement and new product development while we continue our
three-phase facility build-up.
BUSINESS AND OPERATIONS
Our goal is to build a platform to commercialize bio-technological
research and development results for applications in agriculture and
environmental protection. In this respect, we are working on developing
cooperative research relationships with several universities in China and the
United States. We are also acquiring technologies to reduce research and
development costs and shorten commercialization cycles. Specifically, on April
12, 2004, we entered into an agreement with China Agricultural University to
acquire patent no. ZL 93101635.5 entitled "Highly Effective Composite Bacteria
for Enhancing Yield and the Related Methodology for Manufacturing" from China
Agricultural University. The purchase consideration under the agreement is
approximately $690,408, of which $30,204 was paid at signing of the agreement
and an additional $30,204 was due on August 2004. In addition, we agreed to
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 July 30, 2004. The 1,000,000 were issued in September 2004. The
patent will expire on February 9, 2013. In connection with our acquisition of
the patent rights, the university agreed to provide free research and technology
support services if we determine to use the patent to produce commercial
products.
In addition, we may file patent applications in China and or the United
States for technologies we are currently developing related to applications of
photosynthesis bacteria, biologic catalyst, and synergetic enzymes. These
technologies have applications in the agricultural, natural resources and
environmental conservation and drug manufacturing sectors. We also plan to
explore acquisition of similar technologies both in China and the United States
In addition, our broad plan includes launching our products in the United States
and other markets, introducing of new products, creating formal strategic
alliances with selected United States companies to co-develop and/or co-market
products in the United States and China, and forming an international
biotechnology research center in China for the research and development of
agricultural, environmental and medical applications.
We currently have two commercial products. Our first commercial
product, based on the photosynthesis bacteria technology, is a bio-fertilizer
called Photosynthesis Biological Catalyst. This product is distributed and sold
25
in both powdered and liquid forms. The powdered form of this bio-fertilizer is
sold under the ZHIGUANGYOU trademark. This product has fifteen different
formulas for different types of crops, mainly including grain crops, economic
row crops, leafy vegetables, fruits, and ornament plants. The products work as
foliar bio-fertilizer to help increase agricultural production yield and improve
plant quality by raising the photosynthetic capacity of plants and increasing
the capacity to absorb nutrition from the soil. We formally started commercial
sales in Shandong and Jiangshu Provinces in China in January 2004. We will
target all major agricultural provinces in China over the next 18 months. The
liquid form of the Photosynthesis Biological Catalyst is sold under the
PUGUANGFU trademark. We started to offer this series of products in April 2004
to target lower-end markets mainly in our local region in Shandong Province in
China. The liquid form of the product is used as foliar and as soil-applied
bio-fertilizer. We currently have a temporary license from the Chinese
Agriculture Department to sell this product series and expect to receive a
permanent license shortly.
Field tests conducted by Chinese government and research institutions
over the past three years have confirmed that the Photosynthesis Biological
Catalyst product stimulates plant growth and increases crop yields, including
vegetables, fruits and other economic plants, by 10% to 25%.
Our second product is a water treatment liquid under the PUGUANGFU
trademark. This product is used in aquaculture as a water treatment and pathogen
suppression agent. We started to offer this product in the Shandong and Jiangshu
Provinces in China in April of 2004. We currently have a temporary license from
the Chinese government to sell this product series and expect to receive a
permanent license within the next several months.
We plan to market another three to four products in the agriculture
market in the next six to twelve months. These products are humus related
products that can help increase soil fertility and play a vital role in plant
nutrition. These products include the following:
1. A soil applied compound fertilizer with amino acids and humic
acids. This product will work as a supplementary product to
chemical fertilizers. We are applying for a temporary sales
license in Shandong Province in China which we expect to
receive in November or December of 2004 and intend to start
commercial sales when we receive the sales license.
2. A soil applied bio-organic fertilizer with Bacillus species.
We are applying for a sales licenses from the Chinese
Agriculture Department and expect to receive the license in
April or May of 2005. We will launch this product once we
receive the license and will target regional markets in China
and possibly U.S. markets in California, Florida and Texas in
2006. We intend to submit applications for sales permit to the
applicable regulatory authority in each State in which we
might sell the products in the United States.
3. We are testing three products from United States and Canadian
ag-biotechnology manufacturing companies and are applying for
sales permit for these products from the Chinese government.
We expect to finish the testing and registration process in
May 2005, after which time we may act as a reseller of these
products in China. These three products are: Bio-fungicide
from 1st EnviroSafety, a Canadian company, Vitazyme, a
bio-stimulant, from Vital Earth Resources, a Texas based
company, and Mycorrhiza, and a nutrition product for new
forest plantation, mine reclamation and erosion control, from
Reforestation Technologies International, Inc., a California
based company.
In addition, we plan to expand the markets for our water-cleansing
product based on the photosynthesis bacteria technology in the natural resources
conservation market. We plan to actively pursue strategic alliances with
bio-technology companies in the United States to maximize use of our strong
marketing network in China's vast agricultural market.
We currently satisfy all of our own manufacturing needs at our
facilities in China. We do not have any agreements with third parties for the
manufacture of our products. We purchase our raw materials from a variety of
suppliers, does not rely any individual or group of suppliers, and do not have
any agreements with such suppliers. The key raw materials used in production of
our products are widely available from a wide variety supply sources.
Historically, we have not experienced in difficulty in procuring adequate
quantities of raw materials.
26
Historically, our operating results have been subject to seasonal
trends when measured on a quarterly basis. This trend is dependent on numerous
factors, including the markets in which we operate, growing seasons, climate,
economic conditions and numerous other factors beyond our control. Generally,
the second and third quarters are stronger than the first and fourth quarters.
There can be no assurance that the historic operating patterns will continue in
future periods.
We currently employ 69 full-time employees in China and three in the
US. We have 43 seasonal employees in China and one part-time employee in the US.
We believe our labor relations are good and our turnover rate is relatively low.
STRATEGIES
With the world's largest population to feed, China's demand for
agricultural products is immense. Problems with pollution and soil contamination
have increased pressure on the Chinese government to conserve land and enhance
environmental protection. China thus faces an urgent need to improve unit land
yield and reduce pollution. We plan to address this need through the development
of our ag-biotechnology products which increase agricultural productivity in
environmentally friendly ways. To capture this opportunity, our core strategies
are as follows:
o Build a commercialization platform for world-class
biotechnological research and development results for
applications in agriculture, natural resources conservation
and environmental protection;
o Establish strategic alliances for research and development,
sales and distribution and customer acquisition with
complimentary entities in the biological-agriculture and
natural resources conservation industry;
o Complete our manufacturing facility in Shandong Province, one
of the largest agricultural provinces in China;
o Offer flexible investment structure that does not take high
risks in the research and development process, thus being able
to manage commercialization risks and capture value; and
o Enhance overall management systems, operational structure and
corporate governance.
Our sales strategy involves utilizing both a direct sales force and
distribution networks. Our distribution efforts are expected to include the
following:
o Leveraging government support and existing rural area
distribution networks to more effectively reach end-users;
o Cooperating with special fertilizer distributors who also help
farmers resell their products;
o Focusing on large-to-medium size wholesalers of farm
fertilizers at provincial and municipal levels;
o Establishing a three-level distribution network consisting of
a company centralized sales office, provincial and city/county
level agents; and
o Leveraging existing sales channel network of affiliates'
products to save costs of building the network from scratch.
We plan to target major agricultural companies and growers as customers
that can realize significant financial benefits from using our products
including:
27
o High value crop (such as fruits and vegetables) growers in
China that supply to major cities;
o Agricultural producers in China who export to Japanese, Korean
and other regional markets; and
o "Green" or organic growers of produce throughout the world.
Our sales efforts in the year 2004 are focused on the following
geographic markets in China:
o Shandong Province - where our manufacturing facility is based
and its products are tested. This province is a significant
agricultural market and close to the Japanese and Korean
markets;
o Jiangsu and Zhejiang Provinces - two large provinces that are
close to Shanghai. Currently, we have entered into an
exclusive distribution arrangement with one of the largest
fertilizer and related product distributors in Jiangsu
Province which is distributing our series of products to the
local farmers;
o Hebei Province - a vegetable supplier base for the neighboring
capital city of Beijing. We are partnering with government
affiliated entities in Hebei Province to facilitate faster
market penetration; and
o Xinjiang Autonomous Region - which is one of the largest
agricultural provinces in China and the largest base for
growing cotton and tomatoes in China.
Given the global trend of customers favoring environmentally safe
organically grown food and growers' need for higher crop yields and better
quality, we also foresee strong market needs in the United States and other
international markets including East and Southeast Asia. We are currently
exploring entering the California and Florida markets in the United States,
where farmers grow more "green" or organic high value crops such as fruits and
vegetables. We are also in discussions with fertilizer manufacturers and
distributors in Taiwan to distribute our products in the Taiwanese market and
other Southeast Asian markets.
In addition, we also have on-going talks with universities in the
United States, such as the University of California at Riverside and at Davis as
well as the University of Wisconsin, and universities in China, such as China
Agricultural University, Nanjing Agricultural University and Shandong
University, pursuant to which we are exploring relationships for research and
development projects. However, we current have a formal agreement with China
Agricultural University, the material terms of which were discussed in the
Business and Operations section above.
Under the agreement with China Agricultural University, we have the
right to require the university to list our research and application projects as
a top priority, to ask opinions on projects and new developments in the industry
from the scientists at the university, to share the university's library, use
labs and employ research capacity including faculty and research staff, and to
use the university's name in our publication and marketing materials. There is
no payment required for research projects and information inquiries. However,
once a project generates commercial profits, we will receive no less than 60% of
the profits, and the university will receive the remainder of the profits. In
addition, expensing on large projects will be decided on a case by case basis.
There is no expiration date on the agreement unless both sides decide to
terminate the agreement. There is no potential payment under this agreement.
MARKET OVERVIEW
Modern agricultural practices largely rely on heavy use of chemical
fertilizers and pesticides which cause tremendous harm to the environment and
soils. Such practices have been under increasing scrutiny across the world,
leading to consumer demand for agricultural practices that are more
environmentally friendly. China has only 9.1%(1)
(1) Total area of cultivated land of China is 127,082,000 hectares - as cited on
page 385 in "China Statistical Yearbook" published by National Bureau of
Statistics of China (September 2002). Total area of world cultivated land is
1,401,700,000 hectares - as cited on page 17 in "Summary of Food and
Agricultural Statistics 2003" published by Food and Agricultural Organization of
the United Nations (2003).
28
of the world's agricultural land but needs to feed over 1.2(2) billion people,
or approximately 21.1%(3) of the world's population. To increase the overall
crop yield, farmers in China use vast amounts of chemical fertilizers. According
to the China Statistics Bureau and the Food & Agriculture Organization of the
United Nations, the use of chemical fertilizers in China increased 64.2%(4) in
the past decade and is now the largest and accounted for one third of the total
consumption of the world(5). Long-term excessive use of chemical fertilizers in
China has led to severe soil contamination and pollution. If the situation
continues unchanged, the largest population in the world could potentially face
severe food and water shortages and an increasingly polluted living environment.
One solution to the environmental problem is bio-fertilizer, an
environmental friendly fertilizer. China's current consumption of bio-fertilizer
consists of only 2.3%(6) of the total fertilizer consumption. The Chinese
agricultural industry has started to recognize the importance of bio-fertilizers
to sustainable long-term agriculture in China. Our first commercialized product,
Photosynthesis Biological Catalyst, capitalizes on this market trend and we hope
to become one of the leaders in developing green technologies for productive,
more sustainable agriculture in China.
COMPETITION
Due to the unique products that we offer and very early stage of the
bio-fertilizer market in China, there is little direct competition for our
products in the Chinese marketplace. With respect to existing products that are
similar to Photosynthesis Biological Catalyst and their manufacturers,
management believes that we have product differentiation and cost advantages
(cost to customer) which will enable us to outperform our competitors, in terms
of profitability, for the following reasons, among others:
o High effectiveness in increasing crop yield and quality while
being environmentally friendly;
o Lower price point and higher return on investment to end
users;
o Powder-based form making transportation and storage easier;
and
o Complimentary to existing use of chemical fertilizer which
will help to minimize switching costs for end users.
We have conducted detailed research and analysis of the competitive
landscape in the marketplace. From a broader view, there are about 10 companies,
in different stages and of varied sizes of operations, which have or are
producing similar photosynthesis related, microbial bio-fertilizer products in
China, according to the categorization records from the Agriculture Fertilizer
License Authority in China. The products of these companies are all in liquid
form. Below is a summary of these 10 companies:
(2) Calculated based on data published in "China Statistical Yearbook" published
by National Bureau of Statistics of China (September 2002), page 927.
(3) Calculated based on data published in the "China Statistical Yearbook"
published by National Bureau of Statistics of China (September 2002), page 927.
(4) Calculated based on data published in the "China Statistical Yearbook"
published by National Bureau of Statistics of China (September 2002), page 389.
(5) Calculated based on data published in "Current Agriculture Situation and
Chemical Fertilizer Demand in China," by Gao Xiangzhao, Ma Shangbao and Du Sen,
published by Science Publication House (July 2004), page 73.
(6) Bio-fertilizer production and consumption of 100x104 metric tons, as cited
on page 1 of " Bio-Fertolizer Present and Future," by Linfeng Li, published by
Jiangxi Agricultural University. Aggregate fertilizer consumption of 4339x104,
as cited on page 73 pf "Current Agriculture Situation and Chemical Fertilizer
Demand in China," by Gao Xiangzhao, Ma Shangbao and Du Sen, published by Science
Publication House (July 2004).
29
COMPANY NAME CURRENT STATUS
----------------------------------- ------------------------------------------
Shanxi Kelin Environment Protection The products are still in the experimental
Center, Shanxi Province stage.
----------------------------------- ------------------------------------------
Xinjin Microbial Products Factory Only sells in part of Sichuan Province
of Sichuan Agriculture University, with a relatively low sales volume.
Sichuan Province
----------------------------------- ------------------------------------------
Shenyang Fengyuan Bio-tech Products A wholly-owned Japanese company.
Co., Ltd., Liaoning Province
3 years in production of photosynthesis-
based fertilizer product.
Annual production of 2,000 tons (liquid).
----------------------------------- ------------------------------------------
Shanghai Pudong Yiyijou Bio- In business since 1999.
engineering Co., Ltd., Shanghai
Covers more than 10 provincial markets.
----------------------------------- ------------------------------------------
Chongyi Bio-technology Development A county-level plant.
Center, She County, Hebei Province
Small production scale.
Products are sold in Linxi County in
Shandong Province nearby.
----------------------------------- ------------------------------------------
Bierfu Bio-engineering Co., Ltd., Products mostly sold in Jinan and
Weihai, Shandong Province Shouguang areas in Shandong Province.
Sales branches in Hebei, Nanjing & Fujian.
Annual sales of 100 tons.
----------------------------------- ------------------------------------------
North Design Institute, Protection Has no commercial production.
Sub-Institute
Owns the related intellectual property
rights.
----------------------------------- ------------------------------------------
Wuhan Shiruifu Bio-Technology Co., Its target market is in Hubei Province.
Ltd., Wuhan, Hubei Province
Annual production of 3,000 tons (liquid).
----------------------------------- ------------------------------------------
Harbin Tianye Bio-Technology Co., For details, refer to the following
Ltd., Harbin, Heilongjiang Province section.
----------------------------------- ------------------------------------------
Beijing Feishite Bio-engineering Expected to establish two photosynthesis
Co., Ltd., Beijing bacteria fertilizer production bases in
Beijing with annual production of 5,000
tons (liquid).
In addition, we face competition from large chemical fertilizer
manufacturers in China, such as Sino-Arabic Chemical Fertilizer Company in
national markets as well as Red Sun Group in Shandong and Jiangsu markets. These
chemical fertilizer manufacturers have provided chemical fertilizers to farmers
in China for several years and customers are more accustomed to using their
established products as compared to our products.
FACILITIES AND EQUIPMENT
We are in the process of constructing a manufacturing facility on 15.7
acres of land in Shandong Province, China. The right of land use has been
approved by the local government for up to 10 years without land use costs. In
the event our Chinese subsidiary becomes profitable, it will have the option to
acquire the land use rights for a period of up to 50 years. Phase I of a
three-phase construction plan has been completed. We expect the facility to be
fully operational in 2005. Our manufacturing will take place in our Shandong
China facility. We do not have any outsourcing agreements.
Our principal executive offices are located at 17700 Castleton Street,
Suite 589, City of Industry, California 91748.
30
SOURCES OF RAW MATERIALS
The major raw materials for photosynthetic bacteria production are
photosynthetic bacteria, sodium acetate, glucose, diammonium phosphate, and
dipotassium hydrogen phosphate. Other chemicals are also used in the growth
media. These materials are either cultured by our technicians or purchased from
local markets.
Four suppliers accounted for 19.0%, 15.4%, 12.9% and 9.2% of our net
purchases and 17.9%, 15.4%, 12.9% and 12.3% of our net purchases for the three
months and six months ended June 30, 2004, respectively. They are Sichuan Jiahe
Enterprise, Pangshu Qun, Hangzhou Jintian Chemical Factory and Jining Fast
Printing Company, respectively. Historically these suppliers have sufficiently
met our needs. In addition, the raw materials used in our products are available
from a variety of alternative sources.
We do not have agreements with our suppliers due to the availability of
numerous suppliers who have the ability to supply our raw materials on fairly
short notice. We currently maintain a list of 92 qualified suppliers. We place
purchase orders when we need supplies.
DEPENDENCE ON CUSTOMERS
We currently have 17 customers. Zhongzheng Agriculture-Technology
Product Promotion Co. accounted for 53.5% and 62.0% of our net sales for the
three months and six months ended June 30, 2004, respectively, and was the only
customer to account for more than 10% of our revenues. We hope to expand our
customer base to reduce our reliance on any single customer.
REGULATORY CONCERNS
Our production needs to follow bio-fertilizer and photosynthetic
bacteria standard production and testing procedures issued by the Chinese
Ministry of Agriculture. We comply with the applicable standard production and
testing procedures.
ENVIRONMENTAL MATTERS
The bacteria used in our products are naturally occurring in many water
bodies and have been extensively tested for environmental safety. They have been
recognized as group beneficiary bacteria that can digest small inorganic and
organic molecules for water cleaning and other water treatment purpose. They are
environmental friendly and are not known to cause any environmental problems.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We intend to develop, manufacture, distribute and market innovative,
cost-effective and environmentally safe bio-technological products for the
agricultural, natural resources and environmental protection markets located
primarily in the People's Republic of China. We intend to improve existing
products and to develop new products. Our activities to date have included
conducting research and development, acquiring and developing intellectual
property, raising capital, developing of a manufacturing facility and
identifying strategic acquisitions. Our first product, a photosynthesis
biological catalyst, was introduced in the People's Republic of China's
agricultural market in November 2003. We are a development stage entity.
In March 2004, we entered into a merger with Kiwa Bio-Tech Products
Group Ltd., a privately-held British Virgin Islands corporation, through a newly
formed wholly-owned subsidiary, with Kiwa Bio-Tech Products Group Ltd. surviving
as our wholly-owned subsidiary. For accounting purposes this transaction was
treated as an acquisition of the public company and a recapitalization of Kiwa
Bio-Tech Products Group Ltd. and its wholly owned subsidiary, KIWA Bio-Tech
Products (Shandong) Co., Ltd. For accounting purposes, Kiwa Bio-Tech Products
Group Ltd. is considered the acquirer in this transaction. The statements of
operations and cash flows subsequent to the merger will be those of Kiwa
Bio-Tech Products Group Ltd.
31
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the People's Republic of China
Patent Bureau on July 12, 1996. The patent covers six different species of
bacillus which have been tested as bio-fertilizers to enhance yield and plant
health. The production methods of the six species are also patented. The
purchase consideration under the agreement is approximately $690,408, of which
$30,204 was paid at signing of the agreement and an additional $30,204 was due
in August 2004. We plan to pay the August payment the fourth quarter when our
cash position improves. In addition, we agreed to 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, the signing date of the purchase agreement (aggregate value
$630,000) within two months of July 30, 2004, which shares were issued in
September 2004. The patent will expire on February 9, 2013. The university will
also provide free research and technology support services in the event we
decide to use the patent to produce commercial products. After the patent title
transfer is completed, the 1,000,000 shares of common stock will be recorded at
their aggregate fair market value on the measurement date, which we have
determined to be April 12, 2004, the date on which we entered into the agreement
with China Agricultural University to acquire patent no. ZL 93101635.5. Since
the quoted market price of our common stock on April 12, 2004 was $0.63 per
share, the 1,000,000 shares of common stock will be valued at $630,000 and
recorded as patent acquisition cost. We expect to invest $500,000 (included in
manufacturing facility construction and working capital spending plans) to
complete the patent's commercialization and anticipate to generate between $1
million to $1.5 million in revenue from the commercial products under the patent
for the next 5 to 8 years. There are no limitations on our exclusive use of the
patent.
MAJOR CUSTOMERS AND SUPPLIERS
We currently have 17 customers. Three customers accounted for 53.5%,
8.9% and 5.6% of our net sales and 62.0%, 7.3% and 4.6% of our net sales for the
three months and six months ended June 30, 2004 respectively. We did not have
any sales for the three months and six months ended June 30, 2003.
Four suppliers accounted for 19.0%, 15.4%, 12.9% and 9.2% of our net
purchases and 17.9%, 15.4%, 12.9% and 12.3% of our net purchases for the three
months and six months ended June 30, 2004, respectively. We had minimal
purchases for the three months and six months ended June 30, 2003. In addition,
the raw materials used in our products are available from a variety of
alternative sources.
GOING CONCERN
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $756,955, $2,407,201 and $1,355,239 during the
three months and six months ended June 30, 2004 and the year ended December 31,
2003, respectively, and our current liabilities exceeded our current assets by
$133,548 and $585,313 and we had a stockholders' deficiency of $70,194 and
$211,123 at June 30, 2004 and December 31, 2003, respectively. In addition, we
are still in the development stage and will require additional capital to fund
its business plan, and are continuing to develop our manufacturing facility and
have not generated significant revenues from our planned principal operations.
These factors create substantial doubt about our ability to continue as a going
concern.
As of June 30, 2004, we had obtained non-interest bearing loans from
the local PRC government of approximately $1,390,000. These loans require us to
begin repayment of the outstanding balance of these loans, approximately
$1,060,000 at June 30, 2004, as our Chinese subsidiary becomes profitable and
for the entire balance to be paid within three years.
As of July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP for the sale and issuance of up to
$10,000,000 of our common stock. We plan to use these funds to finance our
operations.
32
During the year ending December 31, 2004, we intend 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 we will be successful in this regard. To the extent that we are
unable to successfully raise the capital necessary to fund our future cash
requirements on a timely basis and under acceptable terms and conditions, we
will not have sufficient cash resources to maintain operations, and may have to
curtail operations and consider a formal or informal restructuring or
reorganization.
TRENDS AND UNCERTAINTIES IN REGULATION AND GOVERNMENT POLICY IN PEOPLE'S
REPUBLIC OF CHINA
AGRICULTURAL POLICY CHANGES IN CHINA
After over ten years of economic growth, China now faces an imbalance
between urban and rural environments as well as the manufacturing and
agricultural industries. On February 10, 2004, the Chinese central government
issued a new policy to correct the imbalance by offering favorable taxation of
agricultural products. Existing agricultural products will be taxed at a rate of
1%. We should benefit from this favorable taxation rate as farmers will retain
more of their income and will most likely spend some of that income on our
products. In addition, we anticipate receiving additional governmental support
in marketing our products to farmers due to additional procedural changes
included with the new policy.
GENERAL FISCAL AND MONETARY POLICY CHANGES IN CHINA
Recently China adopted restricted fiscal and monetary policies to fight
potential inflation. However, "People's Daily," the Chinese communist party's
major news paper, stated on August 10, 2004, that the agricultural area has been
one of a few industries which will continue to enjoy expansionary policy. The
article noted that the Chinese government will continue to increase investment
in agricultural development. We have previously benefited from these policies,
as evidenced by our receipt of a non-interest bearing loan from the government
in the amount of approximately $304,000 in June 2004.
FOREIGN INVESTMENT POLICY CHANGES
The Chinese government is considering changes to its currently policy,
which provides favorable tax treatment to foreign invested enterprises as
compared to Chinese domestic business. The new policy under consideration will
treat the foreign invested enterprises the same as Chinese domestic enterprises.
As a result, new foreign invested enterprises will no longer enjoy the favorable
tax treatment as in effect under current tax laws (no income taxes for the first
two years of operations and, and income taxed at one half of the normal rate for
the next three years) previously given to foreign invested enterprises. However,
the proposed new policy is not expected to have an impact on companies like
ours, which have already been granted such tax treatment.
FOREIGN EXCHANGE POLICY CHANGES
China is considering allowing its currency to be freely exchangeable
for other major currencies. This change will result in greater liquidity for
revenues generated in Renminbi. We would benefit by having easier access to and
greater flexibility with capital generated in and held in the form of Renminbi.
The majority of our assets are located in China and all of our earnings are
currently generated in China, and are therefore denominated in Renminbi. Changes
in the exchange from Renminbi to U.S. Dollars will have impact on our reported
results of operations and financial condition. In the event that Renminbi
appreciates over the next year as compared to the U.S. Dollar, our earnings will
benefit from the appreciation of the Renminbi. However, if we have to use U.S.
Dollars to invest in our Chinese operations, we will suffer from the
depreciation of U.S. Dollars against the Renminbi. On the other hand, if the
value of the Renminbi were to depreciate compared to the U.S. Dollar, then our
reported earnings and financial condition would be adversely effected when
converted to U.S. Dollars.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepared our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates
33
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our
customers and intend to establish an allowance for doubtful accounts when
amounts are not considered fully collectable. As of June 30, 2004, receivables
between the ages of 1-30 days accounted for 74.04%; receivables between the ages
of 31-60 days accounted for 2.49%; and receivables between the ages of 61-90
days accounted for 23.45% of total accounts receivable. We believe that the
accounts receivable balance at June 30, 2004 is fully collectible.
We require our customers to pay between 20% and 60% of the purchase
price of an order placed, depending on the results of our credit investigations,
prior to shipment. The remaining balance is due within 90 days, unless other
terms are approved by management. We maintain a policy that all sales are final
we do not allow returns. However, in the event of defective products, we may
allow customers to exchange the defective products for new products within 90
days of delivery and prior to the product's expiration date. In the event of any
exchange, the customers pay all transportation expenses and 10% of packing costs
for the exchange.
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. We recognize 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. Our long-lived assets consist of property and
equipment. At June 30, 2004, the net value of property and equipment was
$1,455,937, which represented approximately 61% of our total assets. At December
31, 2003, the net value of property and equipment was $1,477,148, which
represented approximately 69% of our total assets
We periodically evaluate our investment in long-lived assets, including
property and equipment, for recoverability whenever events or changes in
circumstances indicate the net carrying amount may not be recoverable. Our
judgments regarding potential impairment are based on legal factors, market
conditions and operational performance indicators, among others. In assessing
the impairment of property and equipment, we make assumptions regarding the
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or the related assumptions change in the
future, we may be required to record impairment charges for these assets.
INCOME TAXES. We record a valuation allowance to reduce our deferred
tax assets arising from net operating loss carryforwards to the amount that is
more likely than not to be realized. In the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of our
recorded amount, an adjustment to the deferred tax assets would be credited to
operations in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
to operations in the period such determination was made.
34
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003:
NET SALES. Net sales were $239,759 for the three months ended June 30,
2004. We did not have any sales for the three months ended June 30, 2003. The
increase in net sales is the result of our series of new products being
introduced to the market during the three months ended June 30, 2004.
Net sales were $293,217 for the six months ended June 30, 2004. We did
not have any sales for the six months ended June 30, 2003. The increase in net
sales is the result of our products being introduced to the market in November
2003.
COST OF SALES. Cost of sales was $76,290 for the three months ended
June 30, 2004, which includes depreciation and amortization of $10,619.
Cost of sales was $107,301 for the six months ended June 30, 2004,
which includes depreciation and amortization of $20,191.
GROSS PROFIT. Gross profit was $185,916, or 63% of net sales, for the
six months ended June 30, 2004.
Gross profit was $163,469, or 68% of net sales, for the three months
ended June 30, 2004.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were
$69,573 for the three months ended June 30, 2004. We did not have any consulting
and professional fees for the three months ended June 30, 2003. The increase in
consulting and professional fees in the three months ended June 30, 2004 is
primarily attributable to activities relating to fundraising, investor relations
and public company operations.
Consulting and professional fees were $99,460 for the six months ended
June 30, 2004. We did not have any consulting and professional fees for the six
months ended June 30, 2003. The increase in consulting and professional fees in
2004 is primarily attributable to activities relating to fundraising, investor
relations and public company operations.
DIRECTORS' COMPENSATION. Directors' compensation was $11,599 for the
three months ended June 30, 2004, as compared to $13,931 for the three months
ended June 30, 2003.
Directors' compensation was $20,298 for the six months ended June 30,
2004, as compared to $17,555 for the six months ended June 30, 2003.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was $201,444 for the three months ended June 30, 2004, as compared to $42,705
for the three months ended June 30, 2003, an increase of $158,739 or 372%,
primarily as a result of increased personnel-related costs in China reflecting
an increased level of business activities, start of the operations in the United
States in April 2004 and increased costs associated with being a public company.
General and administrative expenses mainly include salaries, travel and
entertainment, rent, office expense, telephone expense and insurance costs.
General and administrative expense was $275,988 for the six months
ended June 30, 2004, as compared to $86,422 for the six months ended June 30,
2003, an increase of $189,566 or 219%, primarily as a result of increased
personnel-related costs in China reflecting an increased level of business
activities, start of the operations in the United States in April 2004 and
increased costs associated with being a public company. General and
administrative expenses mainly include salaries, travel and entertainment, rent,
office expense, telephone expense and insurance costs.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
$14,210 for the three months ended June 30, 2004, as compared to $17,184 for the
three months ended June 30, 2003.
35
Research and development expense was $26,751 for the six months ended
June 30, 2004, as compared to $26,904 for the six months ended June 30, 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $6,636, or
377%, to $8,397 for the three months ended June 30, 2004, as compared to $1,761
for the three months ended June 30, 2003. This increase is the result of
completion of Phase I of our manufacturing facility construction in late 2003.
Depreciation and amortization, excluding depreciation and amortization
included in cost of sales, increased $13,874, or 379%, to $17,535 for the six
months ended June 30, 2004, as compared to $3,661 for the six months ended June
30, 2003. This increase is the result of completion of Phase I of our
manufacturing facility construction in late 2003.
REVERSE MERGER COSTS. Reverse merger costs relating to our March 2004
merger with a United States public company were $19,453 incurred for the three
months ended June 30, 2004. We did not have any reverse merger costs for the
three months ended June 30, 2003.
Reverse merger costs relating to March 2004 merger were $1,417,434 for
the six months ended June 30, 2004, including non-cash costs relating to the
issuance of stock options and warrants of $1,114,380. We did not have any
reverse merger costs for the six months ended June 30, 2003.
INTEREST EXPENSE. Interest expense increased $21,045, or 7,086%, to
$20,748 for the three months ended June 30, 2004, as compared to interest income
of $297 for the three months ended June 30, 2003. This increase is due to
increased borrowing during the three months ended June 30, 2004.
Interest expense increased $36,260, or 5,954%, to $35,651 for the six
months ended June 30, 2004, as compared to interest income of $609 for the six
months ended June 30, 2003. This increase is due to increased borrowing during
the six months ended June 30, 2004.
AMORTIZATION OF BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES
PAYABLE. On January 25, 2004, we entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan was scheduled to
mature on September 25, 2004. As part of the loan terms, the lender had the
right to convert the loan into shares of our common stock at $0.25 per share at
any time prior to the maturity date, subject to our completion of a reverse
merger transaction in the United States, which was accomplished in March 2004.
On June 8, 2004, the lender converted the $500,000 loan into 2,000,000 shares of
our common stock at the agreed upon conversion price of $0.25 per share. The
lender is an unrelated party located outside the United States. The fair value
of the beneficial conversion feature of this convertible loan was determined to
be $500,000, consisting of the aggregate fair value of the difference between
the $0.25 conversion price and the fair market value of our common stock of
$0.60 per share, and was recorded as a reduction to convertible notes payable
and charged to operations as interest expense from January 25, 2004 through the
conversion date (June 8, 2004), which resulted in a charge to operations of
$156,250 for the three months ended June 30, 2004 and charge to operations of
$281,250 for the six months ended June 30, 2004. The unamortized deferred
interest expense of $218,750 as of the conversion date was charged to
operations.
On March 12, 2004, we entered into a convertible loan agreement for
$200,000, with interest at 12%, payable at maturity. The loan was scheduled to
mature three months after funding. As part of the loan terms, the lender had the
right to convert the loan into shares of our common stock at $0.25 per share at
any time prior to the maturity date, subject to our completion of a reverse
merger transaction in the United States, which was accomplished in March 2004.
The loan was not funded until April 7, 2004. On June 8, 2004, the lender
converted the $200,000 loan into 800,000 shares of our common stock at the
agreed upon conversion price of $0.25 per share. The lender is an unrelated
party located outside the United States. The fair value of the beneficial
conversion feature of this convertible loan was determined to be $200,000,
consisting of the aggregate fair value of the difference between the $0.25
conversion price and the fair market value of our common stock of $0.60 per
share, and was recorded as a reduction to convertible notes payable and charged
to operations as interest expense from April 7, 2004 through the conversion date
(June 8, 2004), which resulted in a charge to operations of $133,333 for the
three months ended June 30, 2004 and a charge to operations of $133,333 for the
six months ended June 30,
36
2004. The unamortized deferred interest expense of $66,667 as of the conversion
date was charged to operations.
NET LOSS. Net loss increased $681,672 to $756,955 for the three months
ended June 30, 2004, as compared to $75,284 for the three months ended June 30,
2003. The increased net loss in the current period is primarily the result of
charges related to increased consulting and professional fees in the amount of
$69,573, convertible notes expense of $575,000, and start of operations in the
United States in April 2004.
Net loss increased $2,273,268 to $2,407,201 for the six months ended
June 30, 2004, as compared to $133,933 for the six months ended June 30, 2003.
The increased net loss in the current period is primarily the result of charges
related to the reverse merger in the amount of $1,417,434, increased consulting
and professional fees in the amount of $99,460, convertible notes expense of
$700,000, and start of operations in the United States in April 2004.
TWELVE MONTHS ENDED DECEMBER 31, 2003 AND 2002:
NET SALES. Net sales were $40,031 for the twelve months ended December
31, 2003. We did not have any sales for the twelve months ended December 31,
2002. The increase in net sales is the result of our first product being
introduced to the market in November 2003.
COST OF SALES. Cost of sales was $30,294 for the twelve months ended
December 31,2003, including depreciation and amortization of $16,578.
GROSS PROFIT. Gross profit was $9,737 or 24.3% of net sales for the
twelve months ended December 31, 2003.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were
$545,787 and $21,816 for the twelve months ended December 31, 2003 and 2002,
respectively. The increase in consulting and professional fees in 2003 is
primarily attributable to activities relating to implementing a strategy to
become a publicly traded company through reverse merger.
DIRECTORS' COMPENSATION. Directors' compensation was $347,110 for the
twelve months ended December 31, 2003, as compared to $906 for the same period
of 2002. In 2002 directors worked almost free for the company. In 2003 we issued
stock to compensate director's compensation due to increasing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$327,501 for the twelve months ended December 31, 2003, as compared to $41,435
for the same period of 2002, an increase of 286,066 or 690.4%, primarily as a
result of a short operation history in 2002 and increased personnel-related
costs in the People's Republic of China 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
$57,269, or 928.94%, to $6,165 for the twelve months ended December 31, 2003, as
compared to $6,165 for the twelve months ended December 31, 2002. This increase
is due to the incorporation in June 2002 and minimum research and development
activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $18,280, or
almost sixty times, to $18,585 for the twelve months ended December 31, 2003, as
compared to $305 for the same period of 2002. This increase is the result of a
short operational history in 2002.
REVERSE MERGER COSTS. Reverse merger costs relating to a proposed
reverse merger were $50,336 for the twelve months ended December 31, 2003 due to
implementing a strategy to become a publicly-traded company through reverse
merger. We did not have any reverse merger costs for the twelve months ended
December 31, 2002.
37
INTEREST INCOME (EXPENSE), NET. Interest expense increased $11,966, or
4,656%, to $12,223 for the twelve months ended December 31, 2003, as compared to
interest income of $257 for the same period of 2002. This increase is due to
increased borrowing in 2003.
NET LOSS. Net loss increased $1,284,355 to $1,355,239 for the twelve
months ended December 31, 2003, as compared to $70,844 for the same period of
2002. The increased net loss in 2003 is primarily the result of the increase in
consulting and professional fees as well as director's compensation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception in 2002, we have relied on the proceeds from the sale
of our equity securities and loans from both unrelated and related parties to
provide the resources necessary to fund the development of our business plan and
operations. During the six months ended June 30, 2004, we raised $700,000 in the
form of two convertible notes payable and obtained a government preferential
note of approximately $304,000.
We are in the development stage and will require additional capital to
fund our business plan, and are continuing to develop our manufacturing facility
and have not generated significant revenues from our planned principal
operations. During the remainder of the fiscal year ending December 31, 2004, we
intend to raise additional capital through the issuance of debt or equity
securities to fund the development of our planned business operations, although
there can be no assurances that we will be successful in this regard. There can
be no assurances that we will be able to obtain sufficient funds to allow us to
continue its operations during the remainder of 2004.
At June 30, 2004 and December 31, 2003, we had cash of $296,808 and
$48,730, respectively. At June 30, 2004 and December 31, 2003, our net working
capital deficiency was $133,548 and $585,313, respectively, reflecting current
ratios of .90:1 and .53:1, respectively, at such dates.
During the six months ended June 30, 2004, our operations utilized cash
of $711,093, as compared to $362,291 utilized for the six months ended June 30,
2003, as a result of an increased level of business activity and the costs
associated with operating a public company. For the years ended December 31,
2003 and 2002, our operations utilized cash of $186,503 and $37,337,
respectively. For the period June 5, 2002 (Inception) to June 30, 2004
(Cumulative), our operations utilized cash of $934,034.
During the six months ended June 30, 2004, we utilized $16,516 in
investing activities, as compared to $654,868 for the six months ended June 30,
2003, for the purchase of property and equipment. For the years ended December
31, 2003 and 2002, we utilized $1,448,668 and $63,948, respectively, in
investing activities for the purchase of property and equipment. For the period
June 5, 2002 (Inception) to June 30, 2004 (Cumulative), we utilized $1,529,131
in investing activities for the purchase of property and equipment.
During the six months ended June 30, 2004, we generated $975,687 from
financing activities, consisting of the proceeds from two convertible notes
payable of $700,000, a decrease in restricted cash of $300,000 and an increase
in long-term borrowings of $259,617, offset in part by the repayment of
short-term loans of $283,930. During the six months ended June 30, 2003, we
generated $ 817,955 from financing activities through an increase in short-term
loans and long-term borrowings.
For the years ended December 31, 2003 and 2002, we generated $1,161,844
and $623,342, respectively, from financing activities, consisting of the
proceeds from the sale of common stock of $465,000, the proceeds from
convertible notes payable of $100,000, the proceeds from short-term borrowings
of $283,930 and the proceeds from long-term borrowings of $1,236,256, offset by
an increase in restricted cash of $300,000.
For the period June 5, 2002 (Inception) to June 30, 2004 (Cumulative),
we generated $2,760,873 from financing activities, consisting of the proceeds
from the sale of common stock of $465,000, the proceeds from convertible notes
payable of $800,000, and the proceeds from long-term borrowings of $1,566,497.
We continue to develop our manufacturing facility and have not
generated significant revenues from our planned principal operations. We have
invested approximately $1,403,491 in Phase I of our new manufacturing
38
facility, including $1,090,707 in buildings and $312,782 in equipment. The
estimated total investment for the completion of Phases II and III of the
construction of our manufacturing facility will be at least $2.5 million.
In October 2003, we entered into a convertible loan agreement with
China Star Investment Group, pursuant to which we borrowed $100,000 from the
China Star Investment Group. The loan bears interest at the rate of 12% per
annum and was originally due and payable in October 2004. In May of 2004, China
Star Investment Group agreed to waive the conversion right in exchange for
acceleration of the maturity date to June 31, 2004. The maturity date has been
subsequently extended to December 31, 2004. As of June 31, 2004, the outstanding
balance of this loan was $71,020.
Additional short-term borrowings are secured by restricted cash in the
form of a bank certificate of deposit denominated in U.S. Dollars.
Long-term borrowings consist primarily of unsecured, non-interest
bearing notes payable to the local government authorities in the People's
Republic of China that do not mature until three years after our People's
Republic of China operations reach defined levels of profitability. As of June
30, 2004, we have the following long-term loans from the government:
o From November 28, 2002 to February 1, 2004, we borrowed an
aggregate of approximately U.S.$1,087,390 from the local
government in Zoucheng City in Shandong, China. This is an
interest free loan with an unfixed repayment period. The terms
provide that repayment will begin in the first year after our
Chinese subsidiary becomes profitable and will be repaid in
full within three years after the repayment obligations begin.
o On June 21, 2004, we borrowed approximately U.S.$304,000 from
the local government in Zoucheng City in Shandong, China. This
is an interest free loan with an unfixed repayment period. The
terms provide that repayment will begin in the first year
after our Chinese subsidiary becomes profitable, we will be
required to pay 10% of annual net profit of the subsidiary to
the lender until the loan is repaid in full.
We qualified for the non-interest bearing loans under a government
sponsored program to encourage economic development in certain industries and
locations. To qualify for the favorable loan terms, a company must meet the
following criteria: (1) a technology company with innovative technology or
product (as determined by the Science Bureau of central government); (2) operate
in specific industries, such as agriculture, environmental, education, and
others, which the government has determined to encourage development; and (3) be
located in undeveloped areas such as Zoucheng Shandong where our facility
located.
In November of 2002 and June 2003, we entered two auto loans with a
local bank in Shandong, China in the amount of $38,694 and $31,898, with
interest rates of 5.32% and 5.02%, respectively, and maturity dates of October
2007 and March 2008, respectively. The combined balance of these loans was
$33,344 as of June 31, 2004.
We do not anticipate generating sufficient positive internal operating
cash flow to fund our planned operations until such time as we generate
substantial revenues, which may take the next few years to fully realize. In the
event we cannot obtain the necessary capital to pursue our strategic plan, we
may have to cease or significantly curtail our operations.
Over the next twelve months, we believe that existing capital and
anticipated funds from operations will not be sufficient to sustain operations
and planned expansion. However, our near term cash requirements are anticipated
to be offset through the receipt of funds through the Standby Equity
Distribution Agreement with Cornell Capital Partners, LP and through other
private placement offerings and loans obtained through private sources. Once
this registration statement becomes effective we anticipate being able to use
the cash advances from Cornell Capital Partners, LP to finance our operations.
If, however, these cash advances are unavailable, we will be required to seek
additional capital in the future to fund growth and expansion through additional
equity or debt financing or credit facilities. No assurance can be made that
such financing would be available, and such financing, if available, could have
a negative impact on our financial condition.
39
INFLATION AND CURRENCY MATTERS
In the most recent decade, the Chinese economy has experienced periods
of rapid economic growth as well as relatively high rates of inflation, which in
turn has resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Our
success depends in substantial part on the continued growth and development of
the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. We conduct virtually all of
our business in China and, accordingly, the sale of our products is settled
primarily in Renminbi. As a result, devaluation or currency fluctuation of the
Renminbi against the U.S. Dollar would adversely affect our financial
performance when measured in U.S. Dollars. Although prior to 1994 the Renminbi
experienced significant devaluation against the U.S. Dollar, the Renminbi has
remained fairly stable since then. In addition, the Renminbi is not freely
convertible into foreign currencies, and the ability to convert the Renminbi is
subject to the availability of foreign currencies. Effective December 1, 1998,
all foreign exchange transactions involving the Renminbi 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 Renminbi. Should
there be any major change in the central government's currency policies, we do
not believe that such an action would have a detrimental effect on our
operations, since we conduct virtually all of our business in China, and the
sale of our products is settled in Renminbi.
Although prior to 1994 the Renminbi experienced significant devaluation
against the U.S. Dollar, the Renminbi has remained fairly stable since then. The
exchange rate was approximately $1.00 to RMB 8.30 at June 30, 2004 and December
31, 2003.
COMMITMENTS AND CONTINGENCIES
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing," which was originally granted by the People's Republic of China
Patent Bureau on July 12, 1996. The purchase consideration is approximately
$720,612, of which $30,204 was paid at signing of the agreement and an
additional $30,204 will be paid within five days after the completion of the
issuance of a notice regarding the patent right holder alternate registration by
the People's Republic of China Patent Bureau. In addition, we agreed to 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 People's Republic of China Patent Bureau, which
shares were issued in September 2004.
OFF-BALANCE SHEET ARRANGEMENTS
At June 30, 2004, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, we are not exposed to
any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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
40
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 our 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 our 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. We implemented
the disclosure provisions of FIN 45 in our 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 our 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. We are 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 our
consolidated financial statement presentation or disclosures.
DESCRIPTION OF PROPERTY
We are in the process of constructing a manufacturing facility on 15.7
acres of land in Shandong Province, China. The right of land use has been
approved by the local government for up to 10 years without land use costs. In
the event our Chinese subsidiary becomes profitable, it will have the option to
acquire the land use rights for a period of up to 50 years. The first phase of a
three-phase construction plan has been completed. We expect the facility to be
fully operational in 2005.
We lease our principal executive offices located at 17700 Castleton
Street, Suite 589, City of Industry, California 91748. The lease has a term of 2
years and expires on June 11, 2005. We currently expect that we will renew this
lease upon its expiration.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as disclosed below, neither our directors or named executive
officers, nor any shareholder owning more than five percent of our issued
shares, nor any of their respective associates or affiliates, had any material
41
interest, direct or indirect, in any material transaction to which we were a
party during the last two years, or which is presently proposed, in which the
amount involved in the transaction exceeded $60,000.
China Star Investment Group is a company which is 10% owned by one of
our major stockholders. The balance due to China Star Investment Group at
December 31, 2002 of $26,902 was primarily related to pre-operating costs that
China Star paid on our behalf before it was incorporated in the People's
Republic of China. 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, we entered into a convertible loan agreement with
China Star Investment Group, pursuant to which we borrowed $100,000 from the
China Star Investment Group. The loan bears interest at the rate of 12% per
annum and was originally due and payable in October 2004. In May of 2004, China
Star Investment Group agreed to waive the conversion right in exchange for
acceleration of the maturity date to June 31, 2004. The maturity date has been
subsequently extended to December 31, 2004. As of June 31, 2004, the outstanding
balance of this loan was $71,020.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.
The Board of Directors believes, based on its reasonable judgment, that
the terms of each of the foregoing transactions or arrangements between us on
the one hand and our affiliates, officers, directors or shareholders which were
parties to such transactions on the other hand, were, on an overall basis, at
least as favorable to our Company as could then have been obtained from
unrelated parties.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since January 31, 2002, we have been eligible to participate in the OTC
Bulletin Board, an electronic quotation medium for securities traded outside of
the Nasdaq Stock Market, and prices for our common stock are published on the
Over-the-Counter Bulletin under the trading symbol "KWBT." The market for shares
of our common stock is extremely limited and no assurance can be given that the
present limited market for our common stock will continue or will be maintained.
The potential sale of our common stock pursuant to Rule 144 of the Commission by
officers and directors may have a substantial adverse impact on any such public
market. As of October 7, 2004 the closing price was $0.08.
The following table sets forth the quarterly high and low trade prices
for our common stock since we have been eligible to participate in the OTC
Bulletin Board as reported by the National Quotations Bureau. The quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission, and
may not necessarily represent actual transactions. These prices also take into
account the 4-for-1 stock split that occurred during the first quarter of 2004,
and the 1-for-10 reverse stock split that occurred during the first quarter of
2003.
YEAR 2002 HIGH TRADE LOW TRADE
--------- ---------- ---------
Quarter Ended March 31, 2002 $0.25 $0.12
Quarter Ended June 30, 2002 $0.25 $0.12
Quarter Ended September 30, 2002 $0.25 $0.12
Quarter Ended December 31, 2002 $0.25 $0.12
42
YEAR 2003 HIGH TRADE LOW TRADE
--------- ---------- ---------
Quarter Ended March 31, 2003 $0.22 $0.05
Quarter Ended June 30, 2003 $0.12 $0.12
Quarter Ended September 30, 2003 $0.12 $0.12
Quarter Ended December 31, 2003 $0.12 $0.12
YEAR 2004 HIGH TRADE LOW TRADE
--------- ---------- ---------
Quarter Ended March 31, 2004 $0.12 $0.12
Quarter Ended June 30, 2004 $0.80 $0.31
HOLDERS OF OUR COMMON STOCK
As of October 1, 2004, we had approximately 383 stockholders of record
of our common stock and 40,353,710 shares of our common stock were issued and
outstanding.
DIVIDENDS
We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. We intend to retain any earnings to finance the growth
of the business. We cannot assure you that we will ever pay cash dividends.
Whether we pay any cash dividends in the future will depend on the financial
condition, results of operations and other factors that the Board of Directors
will consider.
AUTHORIZED AND UNISSUED STOCK
The authorized but unissued shares of our capital stock are available
for future issuance without our stockholders' approval. These additional shares
may be utilized for a variety of corporate purposes including but not limited to
future public or direct offerings to raise additional capital, corporate
acquisitions and employee incentive plans. In the event of an unsolicited tender
offer or takeover proposal, the increased number of shares could give us greater
opportunity to issue shares to persons who are friendly to management. The
shares might also be available to make acquisitions or enter into other
transactions that might frustrate potential offerors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer,
information concerning all compensation paid for services to us in all
capacities for each of the three years ended December 31 indicated below. No
other executive officer received total annual salary and bonus in excess of
$100,000 for each of the three years ended December 31 indicated below. All
share numbers have been adjusted for recapitalizations and stock splits.
43
LONG TERM COMPENSATION
ANNUAL COMPENSATION
FISCAL YEAR RESTRICTED ALL
NAME ENDED STOCK AWARDS OTHER
PRINCIPAL POSITION DECEMBER 31, SALARY BONUS ($) COMPENSATION
------------------ ------------ ------ ----- --- ------------
Wei Li (1)................... 2003 17,561 0 0 0
Chief Executive Officer 2002 0 0 0 0
& Chairman
George Christopulos (2)...... 2003 0 0 8,139 (3) 0
President, Chief Executive 2002 0 0 7,875 (4) 0
Officer & Chief Financial 2001 0 0 6,900 (5) 0
Officer of Tintic Gold
Mining Company
----------
(1) Mr. Li has served as Chief Executive Officer of the Company and its
predecessor, Kiwa Bio-Tech Products Group, Ltd., since inception in
June 2002.
(2) Mr. Christopulos served as President, Chief Executive Officer and Chief
Financial Officer of Tintic Gold Mining Company prior to the
reverse-merger transaction between the Company and Kiwa Bio-Tech
Products Group, Ltd. in March 2004. Mr. Christopulos resigned from all
offices as of March 12, 2004.
(3) 81,391 shares of restricted stock valued at $0.10 per share were issued
to Mr. Christopulos as compensation for services rendered to Tintic
Gold Mining Company during the fiscal year ended December 31, 2003.
(4) 45,000 shares of restricted stock valued at $0.175 per share were
issued to Mr. Christopulos as compensation for services rendered to
Tintic Gold Mining Company during the fiscal year ended December 31,
2002.
(5) 23,000 shares of restricted stock valued at $0.30 per share were issued
to Mr. Christopulos as compensation for services rendered to Tintic
Gold Mining Company during the fiscal year ended December 31, 2001.
COMPENSATION OF DIRECTORS
At present, we do not have a policy for compensation of non-employee
directors for their service on the Board of Directors. The Board of Directors
may in the future establish a policy for compensation of non-employee directors,
which may include cash payments, option or stock grants and/or reimbursement of
expenses.
EMPLOYMENT AGREEMENTS
At present, there are no employment contracts between any named
executive officers and us. There are no compensatory plans or arrangements with
respect to a named executive officer that would result in payments or
installments in excess of $100,000 upon the resignation, retirement or other
termination of such executive officer's employment with us or from a
change-in-control.
2004 STOCK INCENTIVE PLAN
On May 10, 2004, our Board of Directors determined that it was in our
best interest to provide equity incentives to certain of our directors, officers
and employees and or consultants. Pursuant to that end, our Board of Directors
adopted and approved, subject to shareholder approval, our 2004 Stock Incentive
Plan. The 2004 Stock Incentive Plan reserves 1,047,907 shares of our common
stock for issuance to qualifying participants of options and stock purchase
rights. This key aspect of our compensation program is designed to attract,
retain, and motivate the highly qualified individuals required for our long-term
success. Approval of the Plan required the affirmative vote of the majority of
the outstanding shares of our common stock on the record date. As of June 3,
2004, holders of a majority of our common stock had approved the 2004 Stock
Incentive Plan. As of October 6, 2004, we have not made any grants under our
2004 Stock Incentive Plan.
44
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission in
Washington, DC, a registration statement on Form SB-2 under the Securities Act
with respect to the shares we are offering. This prospectus does not contain all
of the information set forth in the registration statement, as permitted by the
rules and regulations of the Securities and Exchange Commission. Reference is
hereby made to this registration statement and exhibits hereto for further
information with respect to Kiwa Bio-Tech Products Group Corporation and the
shares to which this prospectus relates. Copies of the registration statement
and other information filed by Kiwa with the Securities and Exchange Commission
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission in Washington, DC at 450 Fifth Street, NW,
Washington, DC 20549. In addition, the Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy statements and
other information regarding registrants such as Kiwa which filed electronically
with the Securities and Exchange Commission at the following Internet address:
(http:www.sec.gov).
45
FINANCIAL STATEMENTS
TABLE OF CONTENTS
FINANCIAL STATEMENTS AS OF JUNE 30, 2004
(UNAUDITED)..................................................................F-1
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004
(UNAUDITED) AND DECEMBER 31,
2003................................................................F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) -
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003, AND
JUNE 5, 2002 (INCEPTION) TO JUNE 30, 2004 (CUMULATIVE)..............F-4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY) - JUNE 5, 2002 (INCEPTION) TO JUNE 30, 2004
(CUMULATIVE)........................................................F-5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -
SIX MONTHS ENDED JUNE 30, 2004 AND 2003, AND JUNE 5, 2002
(INCEPTION) TO JUNE 30, 2004 (CUMULATIVE)...........................F-8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - THREE AND SIX MONTHS ENDED JUNE 30, 2004
AND 2003, AND JUNE 5, 2002 (INCEPTION) TO JUNE 30, 2004
(CUMULATIVE).......................................................F-10
FINANCIAL STATEMENTS OF KIWA BIO-TECH PRODUCTS GROUP LTD....................F-18
REPORT OF GROBSTEIN, HORWATH & COMPANY LLP, INDEPENDENT
AUDITORS...........................................................F-18
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND
2002...............................................................F-19
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE DEVELOPMENT STAGE FOR THE YEAR ENDED DECEMBER 31, 2003,
PERIOD ENDED DECEMBER 31, 2002, AND FROM JUNE 5, 2002 (INCEPTION)
THROUGH DECEMBER 31, 2003..........................................F-20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR
THE YEAR ENDED DECEMBER 31 AND THE PERIOD ENDED DECEMBER 31,
2002...............................................................F-21
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 2003, PERIOD ENDED DECEMBER 31, 2002, AND FROM
JUNE 5, 2002 (INCEPTION) THROUGH DECEMBER 31, 2003 AND 2002........F-22
NOTES TO FINANCIAL STATEMENTS......................................F-23
F-1
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash ................................... $ 296,808 $ 48,730
Restricted cash ........................ -- 300,000
Accounts receivable..................... 236,159 45,235
Inventories ............................ 129,313 135,201
Due from related party ................. -- 30,574
Other current assets ................... 222,269 109,811
----------- -----------
Total current assets ..................... 884,549 669,551
----------- -----------
Property and equipment:
Buildings .............................. 1,045,599 1,045,599
Machinery and equipment ................ 320,951 312,784
Automobiles ............................ 101,321 97,485
Construction in process ................ 44,535 45,108
Office equipment ....................... 16,725 11,640
----------- -----------
1,529,131 1,512,616
Less accumulated depreciation .......... (73,194) (35,468)
----------- -----------
1,455,937 1,477,148
----------- -----------
Deposits................................ 30,204 -
----------- -----------
Total assets ............................ $ 2,370,690 $ 2,146,699
=========== ===========
(continued)
F-2
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable and accrued
expenses ................................. $ 873,991 $ 737,636
Short-term loans ........................... -- 283,930
Due to related party ....................... 71,020 --
Convertible notes payable -
Related party ............................ -- 100,000
Current portion of long-term
liabilities .............................. 73,086 133,298
----------- -----------
Total current liabilities .................... 1,018,097 1,254,864
----------- -----------
Long-term liabilities, less current portion:
Unsecured notes payable .................. 1,389,443 1,063,226
Bank notes payable ....................... 33,344 39,732
----------- -----------
1,422,787 1,102,958
----------- -----------
Commitments and contingencies
Stockholders' deficiency:
Common stock, $0.001 par value -
Authorized - 50,000,000 shares
Issued and outstanding - 37,805,248
shares and 30,891,676 shares at
June 30, 2004 and December 31,
2003, respectively ....................... 37,805 30,892
Additional paid-in capital ................... 3,725,325 1,184,108
Deficit accumulated during the
development stage .......................... (3,833,324) (1,426,123)
----------- -----------
Total stockholders' deficiency ............... (70,194) (211,123)
----------- -----------
Total liabilities and
stockholders' deficiency ................... $ 2,370,690 $ 2,146,699
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-3
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
June 5, 2002
Three Months Ended June 30, Six Months Ended June 30, (Inception) to
------------------------------ ---------------------------- June 30, 2004
2004 2003 2004 2003 (Cumulative)
------------ ------------ ------------ ------------ ------------
Net sales ...................... $ 239,759 $ -- $ 293,217 $ -- $ 333,248
Cost of sales .................. 76,290 -- 107,301 -- 137,595
------------ ------------ ------------ ------------ ------------
Gross profit ................... 163,469 -- 185,916 -- 195,653
------------ ------------ ------------ ------------ ------------
Operating expenses:
Consulting and professional
fees ....................... 69,573 -- 99,460 -- 667,063
Directors' compensation ...... 11,599 13,931 20,298 17,555 368,314
General and administrative ... 201,444 42,705 275,988 86,422 644,924
Research and development ..... 14,210 17,184 26,751 26,904 96,350
Depreciation and amortization. 8,397 1,761 17,535 3,661 36,425
Reverse merger costs ......... 19,453 -- 1,417,434 -- 1,467,770
------------ ------------ ------------ ------------ ------------
Total costs and expenses ..... 324,676 75,581 1,857,466 134,542 3,280,846
------------ ------------ ------------ ------------ ------------
(161,207) (75,581) (1,671,550) (134,542) (3,085,193)
------------ ------------ ------------ ------------ ------------
Interest income (expense), net.. (20,748) 297 (35,651) 609 (48,131)
Amortization of beneficial
conversion feature of
convertible notes payable .... (575,000) -- (700,000) -- (700,000)
------------ ------------ ------------ ------------ ------------
Net loss ....................... $ (756,955) $ (75,284) $ (2,407,201) $ (133,933) $ (3,833,324)
============ ============ ============ ============ ============
Net loss per common share -
basic and diluted ............ $ (0.02) $ (0.01) $ (0.07) $ (0.01)
============ ============ ============ ============
Weighted average number
of common shares
outstanding -
basic and diluted ............ 35,669,259 12,356,670 33,617,015 12,356,670
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-4
KIWA BIO-TECH PRODUCTS GROUP AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
June 5, 2002 (Inception) to June 30, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Stockholders'
------------------------- Paid-in Development Equity
Shares Amount Capital Stage (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)
F-5
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 June 30, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Stockholders'
------------------------- Paid-in Development Equity
Shares Amount Capital Stage (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
note payable
funded on
January 25, 2004 -- -- 500,000 -- 500,000
(continued)
F-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 June 30, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Stockholders'
------------------------- Paid-in Development Equity
Shares Amount Capital Stage (Deficiency)
---------- --------- --------- ----------- -------------
Beneficial
conversion
feature of
convertible
note payable
funded on
April 7, 2004 -- -- 200,000 -- 200,000
Shares issued
upon conversion
of convertible
notes payable 2,800,000 2,800 697,200 -- 700,000
Shares issued
to a consultant
for services 75,000 75 33,675 -- 33,750
Net loss for the
six months
ended June 30,
2004 -- -- -- (2,407,201) (2,407,201)
---------- -------- --------- ----------- ----------
Balance,
June 30, 2004 37,805,248 $ 37,805 $3,725,325 $(3,833,324) $ (70,194)
========== ======== ========== =========== ==========
See accompanying notes to condensed consolidated financial statements.
F-7
KIWA BIO-TECH PRODUCTS GROUP AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 5, 2002
June 30, (Inception) to
-------------------------- June 30, 2004
2004 2003 (Cumulative)
----------- ----------- -----------
Cash flows from operating activities:
Net loss .......................... $(2,407,201) $ (133,933) $(3,833,324)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Issuance of common stock
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 ... 37,726 4,223 73,194
Amortization of prepaid
consulting fee ................ 3,538 -- 3,538
Amortization of beneficial
conversion feature of
convertible notes payable...... 700,000 -- 700,000
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable ......... (190,924) -- (236,159)
Inventories ................. 5,888 (40,800) (129,313)
Other current assets ........ (111,225) (191,658) (221,036)
Deposits .................... (30,204) 25,794 (30,204)
Due from related party ...... 30,574 -- (26,902)
Increase (decrease) in:
Accounts payable and
accrued liabilities ....... 136,355 985 873,991
Due to related party ........ -- (26,902) 26,902
----------- ----------- -----------
Net cash used in operating
activities ...................... (711,093) (362,291) (934,934)
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment ..................... (16,516) (654,868) (1,529,131)
----------- ----------- -----------
Net cash used in investing
activities ...................... (16,516) (654,868) (1,529,131)
----------- ----------- -----------
(continued)
F-8
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Six Months Ended June 5, 2002
June 30, (Inception) to
--------------------------- June 30, 2004
2004 2003 (Cumulative)
----------- ----------- -----------
Cash flows from financing activities:
Decrease in restricted cash .. 300,000 -- --
Proceeds from (repayment of)
short-term loans ............ (283,930) 96,657 --
Proceeds from convertible
notes payable ............... 700,000 -- 800,000
Proceeds from long-term
borrowings ................. 326,415 725,124 1,566,497
Repayment of long-term
borrowings ................. (66,798) (3,826) (70,624)
Proceeds from sale of
common stock ............... -- -- 465,000
----------- ----------- -----------
Net cash provided by
financing activities ......... 975,687 817,955 2,760,873
----------- ----------- -----------
Cash:
Net increase (decrease) ...... 248,078 (199,204) 296,808
Balance at beginning of period 48,730 522,057 --
----------- ----------- -----------
Balance at end of period ..... $ 296,808 $ 322,853 $ 296,808
=========== =========== ===========
Supplemental Disclosures of
Cash Flow Information:
Cash paid for interest ......... $ 7,085 $ -- $ 15,606
========== ========== ==========
Cash paid for taxes ............ $ -- $ -- $ --
========== ========== ==========
Non-cash investing and financing activities:
Issuance of common stock for
convertible notes payable .... $ 700,000 $ -- $ 700,000
========== ========== ==========
Beneficial conversion feature of
convertible notes payable .... $ 700,000 $ -- $ 700,000
========== ========== ==========
Transfer from convertible notes
payable to due to related
party ........................ $ 100,000 $ -- $ 100,000
========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
F-9
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
NOTE 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").
On June 3, 2004, a majority of the Company's stockholders approved by written
consent the Company's reincorporation from Utah to Delaware. The reincorporation
became effective on July 22, 2004.
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 markets,
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, identification of strategic
acquisitions and execution of sales in selected major agricultural markets in
the PRC. The Company's first product, a photosynthesis biological catalyst, was
introduced in the PRC agricultural market in November 2003. The Company is still
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
F-10
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
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 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 June 30, 2004, the results of operations for the three months and six months
ended June 30, 2004 and 2003, and the cash flows for the six months ended June
30, 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 and six months ended June 30,
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 consolidated 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 $756,955, $2,407,201
and $1,355,239 during the three months and six months ended June 30, 2004 and
the year ended December 31, 2003, respectively, and the Company's current
liabilities exceeded its current assets by $133,548 and $585,313 and it had a
stockholders' deficiency of $70,194 and $211,123 at June 30, 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.
As a result of the aforementioned conditions, the Company's registered
independent public accountants, in their independent auditors' report on the
consolidated financial statements as of and for the year ended December 31,
F-11
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
2003, have included an explanatory paragraph in their opinion indicating that
there is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not contain any adjustments that might
result from the outcome of this uncertainty.
As of June 30, 2004, the Company had obtained non-interest bearing loans from
the local PRC government of approximately $1,390,000 on favorable repayment
terms. These loans require the Company to begin repayment of the outstanding
balance of these loans of approximately $1,060,000 at June 30, 2004 as our
Chinese subsidiary becomes profitable and for the entire balance to be paid
within three years. During the year ending December 31, 2004, the Company
intends to raise additional capital through the issuance of debt or equity
securities to fund the development of its planned business operations, although
there can be no assurances that the Company will be successful in this regard.
There can be no assurances that the Company will be able to obtain sufficient
funds to allow it to continue its operations during the remainder of 2004.
To the extent that the Company is unable to successfully raise the capital
necessary to fund its future cash requirements on a timely basis and under
acceptable terms and conditions, the Company will not have sufficient cash
resources to maintain operations, and may have to curtail operations and
consider a formal or informal restructuring or reorganization.
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company is the
Renminbi ("RMB"). Transactions denominated in foreign currencies are translated
into RMB at the unified exchange rates quoted by the People's Bank of China,
prevailing at the transaction dates. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable unified
exchange rates prevailing at the balance sheet date.
Translations of amounts from RMB into United States Dollars ("US$") 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 June 30, 2004, potentially dilutive securities
aggregated 2,047,000 shares of common stock. The loss per common share
calculation for the three months and six months ended June 30, 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.
F-12
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
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 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 six months ended June 30, 2004.
NOTE 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
F-13
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
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.
NOTE 3. INVENTORIES
Inventories consisted of the following at June 30, 2004 and December 31, 2003:
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited)
Raw materials $ 29,545 $ 23,497
Work in progress 25,780 111,390
Finished goods 73,988 314
------- -------
$129,313 $135,201
======== ========
NOTE 4. 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.
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. At June 30, 2004, there is a
balance due to China Star of $71,020.
F-14
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
NOTE 5. EQUITY-BASED TRANSACTIONS
From June 5, 2002 (Inception) to June 30, 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.
On January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan was scheduled to
mature on September 25, 2004. As part of the loan terms, the lender has the
right to convert the loan into shares of the Company's common stock at $0.25 per
share at any time prior to the maturity date, subject to the Company completing
a reverse merger transaction in the United States, which was accomplished in
March 2004. On June 8, 2004, the lender converted the $500,000 loan into
2,000,000 shares of the Company's common stock at the agreed upon conversion
price of $0.25 per share. The lender is an unrelated party located outside the
United States.
The fair value of the beneficial conversion feature of this convertible loan was
determined to be $500,000, 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 was recorded as a reduction to
convertible notes payable and charged to operations as interest expense from
January 25, 2004 through the conversion date (June 8,2004), which resulted in a
charge to operations of $281,250 for the six months ended June 30, 2004. The
unamortized deferred interest expense of $218,750 as of the conversion date was
charged to operations.
On March 12, 2004, the Company entered into a convertible loan agreement for
$200,000, with interest at 12%, payable at maturity. The loan was scheduled to
mature three months after funding. As part of the loan terms, the lender has the
right to convert the loan into shares of the Company's common stock at $0.25 per
share at any time prior to the maturity date, subject to the Company completing
a reverse merger transaction in the United States,
F-15
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
which was accomplished in March 2004. The loan was not funded until April 7,
2004. On June 8, 2004, the lender converted the $200,000 loan into 800,000
shares of the Company's common stock at the agreed upon conversion price of
$0.25 per share. The lender is an unrelated party located outside the United
States.
The fair value of the beneficial conversion feature of this convertible loan was
determined to be $200,000, 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 was recorded as a reduction to
convertible notes payable and charged to operations as interest expense from
April 7, 2004 through the conversion date (June 8, 2004), which resulted in a
charge to operations of $133,333 for the six months ended June 30, 2004. The
unamortized deferred interest expense of $66,667 as of the conversion date was
charged to operations.
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 $690,409, of which $30,204
was paid at signing of the agreement and an additional $30,204 is due to be paid
within five days of the completion of the issuance of a notice regarding the
patent right holder alternation 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 alternation registration by the
PRC Patent Bureau. The application for the patent right holder alternation
registration was approved on July 30, 2004. The Company plans to utilize the
patent to develop a new series of products that complement to its current
products and create a comprehensive product pipeline. The $30,204 initial
payment has been classified as a deposit in the condensed consolidated balance
sheet at June 30, 2004.
On May 24, 2004, the Company entered into a contract with Cinapsys, Inc. to
provide investor relations services. The engagement is for a period of twelve
months and provides for a monthly retainer of $4,000 and the issuance of 75,000
shares of common stock. The Company recorded a prepaid expense of $33,750 based
on the closing price of its common stock on the effective date of the agreement
and is amortizing such amount to operations over the 12 month contract period.
NOTE 6. MAJOR CUSTOMERS AND SUPPLIERS
Three customers accounted for 53.5%, 8.9% and 5.6% of the Company's net sales
and 62.0%, 7.3% and 4.6% of the Company's net sales for the three months and six
months ended June 30, 2004 respectively. The Company did not have any sales for
the three months and six months ended June 30, 2003.
Four suppliers accounted for 19.0%, 15.4%, 12.9% and 9.2% of the Company's net
purchases and 17.9%, 15.4%, 12.9% and 12.3% of the Company's net purchases for
the three months and six months ended June 30, 2004. The Company had minimal
purchases for the three months and six months ended June 30, 2003.
NOTE 7. SUBSEQUENT EVENTS
On July 6, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Under the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically issue
and sell to Cornell Capital Partners, LP common stock for a total purchase price
of up to $10,000,000. The purchase price for the shares is equal to 99% of the
market price, which is defined in the Standby Equity Distribution Agreement as
the lowest volume weighted average price of the common stock during the five
trading days following the notice date. The amount of each cash advance is
subject to a maximum advance amount of $500,000, with no cash advance occurring
within seven trading days of a prior advance. Cornell Capital Partners, LP
received a one-time commitment fee of 704,038 shares of the Company's common
stock following execution of the Agreement. Cornell Capital Partners, LP will be
paid a fee equal to 4% of each advance, which is retained by Cornell Capital
Partners, LP from each advance. In connection with the Standby Equity
Distribution Agreement, the Company also entered into the Placement Agent
Agreement with Newbridge Securities Corporation, a registered broker-dealer.
Pursuant to the Placement Agent Agreement, the Company will pay a one-time
placement agent fee of 26,567 shares of common stock with a value equal to
approximately $10,000 based on the volume weighted average price of the
Company's common stock as quoted by Bloomberg, LP on the date of the Placement
Agent Agreement. The sale of shares under the Standby Equity Distribution
Agreement is conditioned upon the Company's registering the shares of common
stock with the Securities and Exchange Commission.
F-16
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and
2003, and June 5, 2002 (Inception) to June 30, 2004
(Cumulative)
On June 3, 2004, a majority of the Company's stockholders approved the following
items by written consent:
(1) Approval of an amendment to the Company's Second Restated and
Amended Articles of Incorporation to (a) increase from
50,000,000 to 100,000,000 the authorized number of shares of
the Company's common stock and (b) authorize 20,000,000 shares
of "blank check" preferred stock (the rights, preferences,
privileges and restrictions to be determined by the board of
directors). The amendment was effective on July 16, 2004.
(2) Adoption of the Company's 2004 Stock Incentive Plan. The plan
reserved 1,047,907 shares of the Company's common stock for
the issuance of stock options and stock purchase rights under
the plan, of which not more than 350,000 shares may be granted
to any participant in any fiscal year.
(3) Reincorporation of the Company from the State of Utah to the
State of Delaware. The reincorporation was effective on July
22, 2004.
F-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Kiwa Bio-Tech Products Group Ltd.
We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech
Products Group Ltd. and subsidiary (a development stage company) as of December
31, 2003 and 2002, and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for the year ended December
31, 2003, the period from June 5, 2002 (inception) to December 31, 2002, and the
period from June 5, 2002 (inception) through December 31, 2003 (cumulative).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kiwa Bio-Tech
Products Group Ltd. and subsidiary (a development stage company) as of December
31, 2003 and 2002, and the consolidated results of their operations and their
cash flows for the year ended December 31, 2003, the period from June 5, 2002
(inception) to December 31, 2002, and the period from June 5, 2002 (inception)
through December 31, 2003 (cumulative), in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has been in the development stage
since its inception, has suffered recurring losses from operations, and has a
working capital deficit and a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Grobstein, Horwath & Company, LLP
Sherman Oaks, California
March 19, 2004, except for Notes 13 and 16
which are as of April 30, 2004
F-18
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND DECEMBER 31, 2002
2003 2002
----------- -----------
Assets
Current Assets
Cash and cash equivalents ................... $ 48,730 $ 522,057
Restricted cash ............................. 300,000 --
Accounts receivable ......................... 45,235 --
Inventories ................................. 135,201 6,295
Due from related party ...................... 30,574 --
Other current assets ........................ 109,811 6,433
----------- -----------
Total Current Assets ............................. 669,551 534,785
----------- -----------
Property, Plant and Equipment - net .............. 1,477,148 63,643
Deposits ......................................... -- 25,794
----------- -----------
Total Assets ..................................... $ 2,146,699 $ 624,222
=========== ===========
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities
Short-term loans ............................ $ 283,930 $ --
Due to related party ........................ -- 26,902
Convertible note payable to related party ... 100,000 --
Accounts payable and accrued liabilities .... 737,636 44,862
Current portion of long-term liabilities .... 133,298 6,996
----------- -----------
Total Current Liabilities ........................ 1,254,864 78,760
----------- -----------
Long-Term Liabilities, less current portion ...... 1,102,958 151,346
Stockholders' (Deficit) Equity
Common stock - par value $0.001 per share,
50,000,000 shares authorized, 30,891,676
shares and 12,356,670 shares issued and
outstanding at December 31, 2003 and 2002,
respectively .............................. 30,892 12,357
Additional paid-in capital .................. 1,184,108 452,643
Deficit accumulated during the development
stage ..................................... (1,426,123) (70,884)
----------- -----------
Total Stockholders' Equity (Deficiency) .......... (211,123) 394,116
----------- -----------
Total Liabilities and Stockholders' Equity
(Deficiency) .................................. $ 2,146,699 $ 624,222
=========== ===========
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-19
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
FOR THE PERIOD FROM
PERIOD FROM JUNE 5, 2002
JUNE 5, 2002 (INCEPTION)
(INCEPTION) THROUGH
YEAR ENDED THROUGH DECEMBER 31,
DECEMBER 31, DECEMBER 31, 2003
2003 2002 (CUMULATIVE)
------------ ------------ ------------
Net Sales .............................. $ 40,031 $ -- $ 40,031
Cost of Sales .......................... 30,294 -- 30,294
------------ ------------ ------------
Gross Profit ........................... 9,737 -- 9,737
------------ ------------ ------------
Operating Expenses:
Consulting and professional fees .... 545,787 21,816 567,603
Directors' compensation ............. 347,110 906 348,016
Salaries ............................ 97,534 12,393 109,927
Other ............................... 87,733 3,537 91,270
Travel and entertainment ............ 68,182 11,540 79,722
Research and development ............ 63,434 6,165 69,599
Reverse merger costs ................ 50,336 -- 50,336
Rent ................................ 27,570 1,800 29,370
Office and telephone expense ........ 27,477 9,227 36,704
Insurance ........................... 19,005 2,938 21,943
Depreciation ........................ 18,585 305 18,890
------------ ------------ ------------
1,352,753 70,627 1,423,380
------------ ------------ ------------
Loss Before Interest Expense and
Provision for Income Taxes .......... (1,343,016) (70,627) (1,413,643)
Interest Expense ....................... 12,223 257 12,480
------------ ------------ ------------
Loss Before Provision for Income Taxes . (1,355,239) (70,884) (1,426,123)
Provision for Income Taxes ............. -- -- --
------------ ------------ ------------
Net Loss ............................... (1,355,239) (70,884) (1,426,123)
============ ============ ============
Net Loss per Common Share - Basic
and Diluted ......................... $ (0.11) $ (0.01)
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted ..... 12,356,670 12,356,670
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-20
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FROM JUNE 5, 2002 (INCEPTION) THROUGH DECEMBER 31, 2003
(CUMULATIVE)
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE STOCKHOLDERS'
------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIENCY)
----------- ----------- ----------- ----------- -----------
Balance, June 5, 2002 (Inception) -- $ -- $ -- $ -- $ --
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)
=========== =========== =========== =========== ===========
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-21
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE
FOR THE PERIOD FROM
PERIOD FROM JUNE 5, 2002
JUNE 5, 2002 (INCEPTION)
(INCEPTION) THROUGH
YEAR ENDED THROUGH DECEMBER 31,
DECEMBER 31, DECEMBER 31, 2003
2003 2002 (CUMULATIVE)
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss ..................................... $(1,355,239) $ (70,884) $(1,426,123)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of common stock for services ........ 425,000 -- 425,000
Issuance of common stock for directors'
compensation ............................. 325,000 -- 325,000
Depreciation and amortization ................ 35,163 305 35,468
Sources and (uses) of cash from changes
in operating assets and liabilities:
Accounts receivable .......................... (45,235) -- (45,235)
Inventories .................................. (128,906) (6,295) (135,201)
Other current assets ......................... (103,378) (6,433) (109,811)
Deposits ..................................... 25,794 (25,794) --
Accounts payable and accrued liabilities ..... 692,774 44,862 737,636
Due (from) to related party .................. (57,476) 26,902 (30,574)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........ (186,503) (37,337) (223,840)
----------- ----------- -----------
INVESTING ACTIVITIES
Expenditures for property and equipment .. (1,448,668) (63,948) (1,512,616)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ........ (1,448,668) (63,948) (1,512,616)
----------- ----------- -----------
FINANCING ACTIVITIES
Increase in restricted cash ............... (300,000) -- (300,000)
Proceeds from sale of common stock ........ -- 465,000 465,000
Proceeds from short-term loans ............ 283,930 -- 283,930
Proceeds from convertible note due to a
related party .......................... 100,000 -- 100,000
Proceeds from long-term borrowings ........ 1,077,914 158,342 1,236,256
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 1,161,844 623,342 1,785,186
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................... (473,327) 522,057 48,730
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 522,057 -- --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..... $ 48,730 $ 522,057 $ 48,730
=========== =========== ===========
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-22
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
KIWA Bio-Tech Products Group Ltd. ("KIWA") was incorporated on June 5, 2002 in
the British Virgin Islands ("BVI"). KIWA has been a development stage enterprise
since its inception as defined under Statement of Financial Accounting Standards
No. 7, "Accounting and Reporting by Development Stage Enterprises". On October
11, 2002, KIWA established a wholly-owned subsidiary, KIWA Bio-Tech Products
(Shandong) Co., Ltd. ("KIWA-SD") in Zoucheng City, Shandong Province, People's
Republic of China ("PRC").
Through KIWA-SD, KIWA intends to develop, manufacture, distribute and market
innovative, cost-effective, and environmentally safe bio-technological products
for the agriculture, natural resources and environmental protection markets,
primarily in the PRC. Activities to date have included conducting research and
development, acquiring and developing intellectual property, raising capital,
and identifying strategic acquisitions.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of KIWA
and its wholly-owned subsidiary (collectively, the "Company"). All significant
inter-company balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements". Sales represent the
invoiced value of goods, net of value added tax ("VAT"), supplied to customers,
and are recognized upon delivery of goods and passage of title.
All of the Company's sales made in the PRC are subject to the PRC value-added
tax at rates ranging from 13% to 17% ("output VAT"). Such output VAT is payable
after offsetting VAT paid by the Company on purchases ("input VAT").
USE OF ESTIMATES
The preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
COUNTRY RISK
As the Company's principal operations are conducted in 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 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
F-23
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
RMB into foreign currencies and the remittance of foreign currencies abroad
require the approval of the PRC government.
CASH AND CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less at the time of
acquisition are considered to be cash equivalents.
CREDIT RISK
The Company performs ongoing credit evaluations of its customers and intends to
establish an allowance for doubtful accounts when amounts are not considered
fully collectable. Management of the Company believes the accounts receivable
balance as of December 31, 2003 will be fully collected.
INVENTORIES
Inventories, which include raw materials, work-in-progress, finished goods and
low-value consumables, are stated at the lower of cost, determined on the
weighted-average method, or net realizable value. Net realizable value is the
estimated selling price in the ordinary course of business, less estimated costs
to complete and dispose.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Major renewals and improvements are capitalized while minor replacements,
maintenance and repairs are charged to expense as incurred. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets after taking into account the estimated residual value. The estimated
useful lives are as follows:
Buildings 30-35 years
Machinery and equipment 3-10 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company tests 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.
CONSTRUCTION IN PROGRESS
Construction in progress ("CIP") includes all costs incurred during the
preparation period before commencement of construction and until the asset is
ready for its intended use. CIP is transferred to fixed assets when the asset is
substantially ready for its intended use. The imputation of interest or
capitalization of interest during the construction period is not considered
applicable to the Company because the Company obtained construction financing on
an interest free basis from the local PRC government. In addition, repayment of
a substantial portion of the loans are to be determined based on achieving
specified levels of future profitability. Therefore, the loans do not have a
determinable repayment date.
ADVERTISING
The Company charges all advertising costs to expense as incurred. Advertising
expense for the year ended December 31, 2003 was $4,788. The Company did not
incur any advertising expense for the period from June 5, 2002 (Inception) to
December 31, 2002.
F-24
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
OPERATING LEASES
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.
INCOME TAXES
Income taxes are computed using the asset and liability method. Deferred income
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements' carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in the years in
which these temporary differences are expected to reverse. Valuation allowances
are provided against deferred tax assets that are not expected to be realized.
There were no material deferred tax assets or liabilities as of December 31,
2003 and 2002.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Renminbi ("RMB"). Transactions
denominated in foreign currencies are translated into RMB at the unified
exchange rates quoted by the People's Bank of China, prevailing at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable unified exchange rates
prevailing at the balance sheet date.
Translations of amounts from RMB into United States ("US$") were at US $1.00 =
RMB 8.3 for the year ended December 31, 2003 and for the period from June 5,
2002 (Inception) to December 31, 2002. No representation is made that the RMB
amounts could have been, or could be, converted into US$ 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, such as stock options, warrants and convertible debt, were
exercised. There were no potentially dilutive securities outstanding at December
31, 2002 and 2003. Accordingly, basic and diluted loss per common share is the
same for all periods presented. The loss per common share calculation for all
periods presented herein reflects the retroactive restatement of the
stockholders' equity (deficiency) section of the balance sheet to reflect the
March 2004 recapitalization of KIWA (see Note 16).
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN45").
FIN45 elaborates on the existing disclosure for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, a company must recognize an initial liability for
the fair market value of 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 has
F-25
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
implemented the disclosure provisions of FIN45 in its December 31, 2002 and 2003
financial statements, without significant impact.
In January 2003 (as revised in December 2003), the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest Entities", an interpretation of
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements"
("FIN46"). FIN46, as revised, addresses consolidation by business enterprises of
variable interest entities, which have one or both or the following
characteristics: (i) the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional subordinated support
from other parties, which is provided through other financial interests that
will absorb some or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest: the direct or indirect ability to make decisions
about the entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses.
FIN46, as revised, also requires expanded disclosures by the primary beneficiary
(as defined) of a variable interest entity and by an enterprise that holds a
significant variable interest in a variable interest entity but is not the
primary beneficiary.
The consolidation requirements of FIN46 are required to be implemented for any
variable interest entity created on or after January 31, 2003. In addition,
FIN46 requires disclosure of information regarding guarantees or exposures to
loss relating to any variable interest entity existing prior to January 31, 2003
in financial statements issued after January 31, 2003. The implementation of the
provisions of FIN46, as revised, is not expected to have a significant effect on
the Company's consolidated financial statement presentation or disclosure.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
changes the accounting for certain financial instruments with characteristics of
both liabilities and equity that, under previous pronouncements, could be
accounted for as equity. SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type includes put options and forward purchase contracts, which involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under SFAS No. 150 are obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or which vary inversely with the value of the issuers'
shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of SFAS No. 150 are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. 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, except for mandatorily
redeemable financial instruments of a non-public entity, as to which the
effective date is for fiscal periods beginning after December 15, 2003.
The adoption of SFAS No. 150 is not expected to have a material impact on the
Company's consolidated financial statement presentation or disclosure.
F-26
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 2 - DEVELOPMENT ACTIVITIES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern and
the realization of assets and the liquidation of liabilities in the normal
course of business. However, during the year ended December 31, 2003, the
Company incurred a net loss of $1,355,239, and at December 31, 2003, the
Company's current liabilities exceeded its current assets by $585,313 and it had
a stockholders' deficiency of $211,123. In addition, the Company continues to
develop its manufacturing facility, and has not generated significant revenues
from its planned principal operations. Those factors create uncertainty about
the Company's ability to continue as a going concern.
As of December 31, 2003, the Company has obtained non-interest bearing loans
from the local PRC government of approximately $1,183,000 on favorable repayment
terms. In March 2004, the Company initiated a reverse merger transaction with a
publicly held shell company in the United States. During the next 12 months, to
the extent the Company cannot generate sufficient working capital from product
sales to fund its business operations, the Company intends to raise capital from
the sale of debt or equity securities (see Note 16). As the Company is still in
the development stage, there can be no assurances that the Company will be able
to obtain funds sufficient to continue its operations during the next 12 months.
NOTE 3 - INVENTORIES
Inventories consisted of the following at December 31:
2003 2002
----------- -----------
Raw materials.................. $ 23,497 $ 2,295
Work in progress............... 111,390 4,000
Finished goods................. 314 -
----------- -----------
$ 135,201 $ 6,295
=========== ===========
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31:
2003 2002
----------- -----------
Advances........................ $ 66,002 $ -
Deposits........................ 31,644 6,433
VAT receivable.................. 7,127 -
Prepaid expenses................ 5,038 -
----------- -----------
$ 109,811 $ 6,433
=========== ===========
Advances consisted of petty cash and travel advances to our employees for
business purposes, and the prepayment for expenses associated with the reverse
merger transaction in the United States (see Note 16).
Deposits consisted of various deposits for raw materials, utilities,
telecommunications and insurance.
VAT receivable consisted of the balance of input VAT that is greater than output
VAT as of December 31, 2003
F-27
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
2003 2002
------------- ------------
Buildings...................... $1,045,599 $ -
Machinery and equipment........ 312,784 3,850
Autos.......................... 97,485 56,247
Construction in progress....... 45,108 2,500
Office equipment............... 11,640 1,351
------------- ------------
1,512,616 63,948
Less: accumulated depreciation. (35,468) (305)
------------- ------------
$ 1,477,148 $ 63,643
============= ============
Depreciation expense for the year ended December 31, 2003 and for the period
from June 5, 2002 (Inception) through December 31, 2002 was $35,163 and $305,
respectively.
NOTE 6 - LAND USE RIGHTS
Private ownership of land is not allowed in the PRC. Rather, entities acquire
the right to use the land for a designated term. In accordance with an agreement
signed by the local government in Zoucheng City, Shandong Province, PRC, and
KIWA-SD, the land underlying the Company's manufacturing facility was assigned
to KIWA-SD for up to a 10-year period free of land use costs. In the event
KIWA-SD becomes profitable, it will have the option to acquire the land use
rights for a period up to 50 years. In accordance with the agreement, the
consideration to acquire the land use rights will not exceed RMB 8,000,000
(approximately $966,569 at the exchange rate of RMB 8.3 = US$1.00). Such land
use rights cannot be mortgaged or resold without full payment of the above
consideration. As of December 31, 2003, KIWA-SD has not exercised its option to
acquire the land use rights.
NOTE 7 - SHORT-TERM LOANS
As of December 31, 2003, short-term loans consisted of RMB bank loans secured by
a US dollar deposit of $300,000, maturing on various dates through June 2004,
with interest rates ranging from 5.04% to 6.9% per annum.
NOTE 8 - CONVERTIBLE NOTE PAYABLE TO RELATED PARTY
The Company obtained an unsecured loan of $100,000 from China Star Investment
Group ("China Star"), a company which is 10% owned by a major stockholder of the
Company. China Star has the right to convert the note into shares of the
Company's common stock based on an agreed-upon conversion price of $0.25 per
share at any time prior to the repayment date, after the Company completes a
reverse merger transaction in the United States (see Note 16). The note is
scheduled to mature on October 20, 2004 and bears interest at 12% per annum,
payable on the maturity date of the note or on the date China Star exercises its
conversion right. In March 2004, China Star waived its rights to convert the
loan into shares of the Company's common stock.
NOTE 9 - ADVANCES TO AND FROM RELATED PARTY
The Company has participated in various transactions with China Star. The
balance due from China Star at December 31, 2003 of $30,574 results from
unsecured, non-interest bearing cash advances which are due on demand. The
balance due to China Star at December 31, 2002 of $26,902 was mainly related to
pre-operating expenses that China Star paid on behalf of the Company before it
was incorporated in the PRC.
F-28
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 10 - LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at December 31:
2003 2002
---------- ----------
Unsecured note payable to the local PRC government,
non-interest bearing, becoming due within three
years from KIWA-SD's first profitable year on a
formula basis, interest has not been imputed due
to the undeterminable repayment date ............... $1,063,226 $ 120,814
Unsecured note payable to the local PRC government,
non-interest bearing, 50% of the loan balance
becomes due in October 2004, thereafter, the
remaining balance is due on demand, interest has
not been imputed due to the undeterminable
repayment date ..................................... 120,821 --
Note payable to a bank, payable in monthly
installments of $735 secured by an automobile,
bearing an interest rate of 5.32% per annum,
maturing in October 2007 ........................... 30,536 37,528
Note payable to a bank, payable in monthly
installments of $425, secured by an automobile,
bearing an interest rate of 5.02% per annum,
maturing in March 2008 ............................. 21,673 --
---------- ----------
$1,236,256 $ 158,342
========== ==========
Maturities of notes payable as of December 31, 2003 are as follows:
Years Ending December 31,
2004............................................... $ 133,298
2005............................................... 12,879
2006............................................... 13,303
2007............................................... 12,276
2008............................................... 1,274
Thereafter......................................... 1,063,226
-----------
$ 1,236,256
NOTE 11 - LEASE COMMITMENTS
The Company leases an office facility under an operating lease expiring in May
2004 with an aggregate monthly lease payment of approximately $2,880. Rent
expense under the operating lease for the year ended December 31, 2003 was
$27,570. At December 31, 2003, the Company's future minimum lease payments
required under the operating lease are $12,551 for the year ending December 31,
2004.
NOTE 12 - TAXATION
In accordance with the relevant tax laws in the PRC, KIWA-SD would normally be
subject to a corporate income tax rate of 30% on its taxable income. However, in
accordance with the relevant tax laws in the PRC, KIWA-SD is exempt from
corporate income taxes for its first two profit making years and is entitled to
a 50% tax reduction for the
F-29
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
succeeding three years. KIWA-SD has not provided for any corporate income taxes
since it had no taxable income for the year ended 2003 and the period from June
5, 2002 (Inception) through December 31, 2002.
In accordance with the relevant tax laws in the BVI, KIWA, as an International
Business Company, is exempt from income taxes.
NOTE 13 - COMMON STOCK ISSUED FOR SERVICES
On December 31, 2003, the Company issued shares of common stock in exchange for
consulting services provided by our various consultants and directors as
follows:
AMOUNTS
NUMBER OF -------------------------
SHARES ISSUED TO SHARES CONSULTANTS DIRECTORS
----------- ----------- -----------
InvestLink (China) Limited (formerly
known as Peace Land Venture Ltd.)
for services in corporate and product
development ............................. 6,178,334 $ 250,000 $ --
Guisheng Chen, Director, for services
in controlling product formulas and
guiding technology development .......... 4,633,751 -- 187,500
Dejun Zou, Director, for services
in fundraising with the People's Republic
of China government agents .............. 3,089,168 -- 125,000
Times Crossword Investment Ltd., for
services in fundraising ................. 3,089,168 125,000 --
Lianjun Luo, Director, for services in
accounting and finance management ....... 308,917 -- 12,500
Bin Qu, for services in research and
development ............................. 308,917 12,500 --
Nian James Zhan, for services in strategic
business development .................... 308,917 12,500 --
Yunlong Zhang, for services in marketing
and distribution channel development .... 308,917 12,500 --
Yuhong Pang, for services in product
and technology development .............. 308,917 12,500 --
----------- ----------- -----------
18,535,006 $ 425,000 $ 325,000
=========== =========== ===========
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18"), the Company has accounted for the consulting services
performed based on the fair market value of the Company's common stock at the
date of its issuance. Management has estimated the fair market value of the
F-30
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Company's common stock as of December 31, 2003 to be $0.25 per share.
Management's estimate is based upon the conversion price option of the
convertible loan agreement entered into in January 2004 with a non-US investor
(see Note 16). For the year ended December 31, 2003, the Company charged to
expense a total of $425,000 associated with these consulting agreements.
On December 31, 2003, the Company's Board of Directors approved a compensation
arrangement for certain directors who performed services on behalf of the
Company during 2003. The Company issued 8,031,836 shares of common stock to
certain directors for such services. The value of such services has been
determined as set forth in the preceding paragraph. For the year ended December
31, 2003, the Company charged to expense a total of $325,000 associated with
directors' compensation.
NOTE 14 - MAJOR CUSTOMERS AND SUPPLIERS
Two customers accounted for 66% and 34% of the Company's net sales for the year
ended December 31, 2003.
Four suppliers accounted for 23%, 16%, 15% and 13%, respectively, of the
Company's net purchases for the year ended December 31, 2003.
NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year ended December 31, 2003 and the period from June 5,
2002 (Inception) through December 31, 2002 was as follows:
2003 2002
----------- -----------
Interest.......................... $ 8,181 $ 340
Income taxes...................... -- --
The Company issued common stock for consulting services and directors'
compensation of $425,000 and $325,000, respectively, during the year ended
December 31, 2003.
NOTE 16 - SUBSEQUENT EVENTS
CONVERTIBLE LOAN AGREEMENTS
In January and March 2004, KIWA entered into convertible loan agreements with
two individual non-US investors in the amounts of $500,000 and $200,000,
respectively, with each loan bearing an interest rate of 12% per annum. The
principal and interest payments on the January 2004 loan are due in September
2004, and the principal and interest payments due on the March 2004 loan are due
in June 2004. Prior to the respective maturity dates, both lenders were offered
an option to convert the loan amounts into common stock at a conversion price of
$0.25 per share.
REVERSE MERGER TRANSACTION
In March 2004, Tintic Gold Mining Company ("TTGM") issued 30,891,676 shares of
common stock in exchange for 100% of the outstanding shares of common stock of
KIWA. In connection with the transaction, TTGM changed its name to Kiwa Bio-tech
Products Group Corporation ("KBPGC"). For accounting purposes, this transaction
was treated as an acquisition of KBPGC and a recapitalization of KIWA.
Accordingly, KBPGC is considered the legal acquirer and KIWA is considered the
accounting acquirer. As a result of the reverse merger transaction, the
stockholders' equity (deficiency) section of the balance sheet, as well as all
share and per share amounts presented herein, have been retroactively restated
for all periods presented to reflect the reverse merger transaction.
F-31
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
STOCK SPLIT
KBPGC 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
described above. All share and per share amounts presented herein have been
adjusted to reflect the forward stock split.
SUBSCRIPTION AGREEMENT
On April 6, 2004, KBPGC signed a subscription agreement with a non-US investor
to sell 6,000,000 shares of the Company's restricted common stock at $0.40 per
share, for gross proceeds of $2,400,000. The transaction was expected to settle
on April 30, 2004. On April 28, 2004, the investor requested an extension of
time of 30 to 60 days to settle the transaction. The Company is considering the
request and may grant the extension.
F-32
-------------------------------------- --------------------------------------
45,277,605 Shares
Common Stock
KIWA BIO-TECH PRODUCTS
GROUP CORPORATION
----------------
PROSPECTUS
----------------
___________, 2004
-------------------------------------- --------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bylaws authorize us to indemnify, and our Certificate of
Incorporation include an indemnification provision under which we have agreed to
indemnify, to the fullest extent permitted by the Delaware General Corporation
Law, our directors and officers from and against certain claims arising from or
related to future acts or omissions as one of our directors or officers. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. We will pay all of the expenses in connection with this
offering.
Registration Fee - Securities and
Exchange Commission ...................... $ 1,434.17
Accounting Fees and Expenses ................ 8,000.00
Legal Fees and Expenses ..................... 20,000.00
Miscellaneous ............................... 2,000.00
-------------
TOTAL ....................................... $ 31,434.17
=============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following securities in the past three years without
registering them under the Securities Act:
On June 8, 2004, Kao Ming Investment Company converted a $500,000
convertible note into 2,000,000 shares of our common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued to Tze Ming Hsu. Kao
Ming Investment Company is an unrelated party located outside the United States.
On June 8, 2004, JZU HSIANG Trading Co. Ltd converted a $200,000
convertible note into 800,000 shares of our common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued to Sue-Chen Wang,
Wen-Jen Lee, Wai Sun Chan and Zheng Wang. JZU HSIANG Trading Co. Ltd is an
unrelated party located outside the United States.
On May 24, 2004, in connection with our engagement of Cinapsys, Inc.
for investor relations services, we agreed to issue a one-time stock payment of
75,000 shares or our common stock at an agreed upon value of $0.45 per share,
the closing price on May 24, 2004, for an aggregate value of $33,750. We have
agreed with Cinapsys, Inc. to issue the stock at the end of the engagement.
On 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 $30,204
was paid at signing of the agreement and an
II-1
additional $30,204 will be paid within five days of the completion of the
issuance of a notice regarding the patent right holder alternation registration
by the PRC Patent Bureau. In addition, the Company agreed to 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. The application for the patent
right holder alternation registration has been completed and the 1,000,000
shares of common stock were issued in September 2004.
On March 30, 2004, the Company granted a non-statutory stock option to
a consultant to purchase 300,000 shares of common stock exercisable at $0.20 per
share for ten years in consideration of services rendered. Upon exercise of the
option, the Company would receive gross proceeds of $60,000. The fair value of
this option was determined to be approximately $0.57 per share pursuant to the
Black-Scholes option pricing model.
Effective March 11, 2004, the Company issued WestPark Capital, Inc., a
financial advisor to the Company, a warrant to purchase 1,747,000 shares of
common stock exercisable at $0.20 per share for a term of six years in
consideration of financial advisory services rendered. Upon exercise of the
option, the Company would receive gross proceeds of $349,400. The fair value of
this warrant was determined to be approximately $0.54 per share pursuant to the
Black-Scholes option-pricing model.
Pursuant to that certain Agreement and Plan of Merger, dated March 11,
2004, in exchange for 100% of the issued and outstanding shares of Kiwa Bio-Tech
Products Group Limited, the Kiwa Bio-Tech Products Group Limited shareholders
were issued 30,891,676 shares of the Company's common stock. Based on the
closing price of the Company's common stock on the closing date of the merger as
reported on the OTC Bulletin Board, the aggregate value of the shares of common
stock issued to the former Kiwa Bio-Tech Products Group Limited shareholders was
$3,861,460.
In December 2003, the Company issued 228,304 shares of common stock for
services rendered valued at approximately $5,708 or $.025 per share.
In February 2003, the Company issued 2,146,444 shares of common stock
to members of the board of directors, the Company's legal counsel and
stockholders for services rendered valued at approximately $53,661, or $.025 per
share.
In December 2002, the Company issued 536,612 shares of common stock for
services rendered valued at approximately $23,477 or $.04375 per share.
In December 2001, the Company issued 200,024 shares of common stock for
services rendered valued at approximately $15,000 or $.075 per share.
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act, and Regulation D promulgated under the Securities Act. In each
instance, the purchaser had access to sufficient information regarding our
company so as to make an informed investment decision. More specifically, we had
a reasonable basis to believe that each purchaser was an "accredited investor"
as defined in Regulation D of the Securities Act and otherwise had the requisite
sophistication to make an investment in our securities.
II-2
ITEM 27. EXHIBITS
The following exhibits are included as part of this Form SB-2:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- --------------------------------------------------------------
3.1 Certificate of Incorporation, effective as of July 21, 2004.*
3.2 Bylaws, effective as of July 22, 2004.*
5.1 Opinion and Consent of Stubbs Alderton & Markiles, LLP.*
10.1 Standby Equity Distribution Agreement, dated July 6, 2004,
between Cornell Capital Partners, LP and Kiwa Bio-Tech
Products Group Corporation.*
10.2 Placement Agent Agreement, dated July 6, 2004, between
Newbridge Securities Corporation and Kiwa Bio-Tech Products
Group Corporation.*
10.3 Registration Rights Agreement, dated July 6, 2004, between
Cornell Capital Partners, LP and Kiwa Bio-Tech Products Group
Corporation.*
10.4 Warrant Purchase Agreement, dated March 11, 2004, issued to
Westpark Capital, Inc. (incorporated herein by reference to
our Quarterly Report on Form 10-QSB filed May 20, 2004).
10.5 Patent Transfer Agreement dated April 12, 2004, between the
Company and China Agricultural University.
10.6 Contract of Project of Venture Capital of Zhoucheng Science &
Technology Plan (Contract No.: 2004) among KIWA Bio-Tech
Products (Shandong) Company, Zoucheng Science & Technology
Bureau and Zhoucheng Branch of China Commercial Bank of ICBC.
10.7 Contract of Project of Venture Capital of Zhoucheng Science &
Technology Plan (Contract No.: 2002) among KIWA Bio-Tech
Products (Shandong) Company, Zoucheng Science & Technology
Bureau and Zhoucheng Branch of China Commercial Bank of ICBC.
10.8 Convertible Loan Agreement dated October 20, 2003 between
China Star Investment Group and Kiwa Bio-Tech Products Group
Ltd., including letter amendment thereto dated August 1, 2004.
10.9 Commercial Lease Agreement dated April 1, 2004 between Kiwa
Bio-Tech Products Group Corporation and China Star Investment
Company.
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stubbs Alderton & Markiles, LLP (see Exhibit 5.1).*
----------
* Previously filed.
II-3
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time as the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the City of
Industry, State of California, on October 8, 2004.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
/S/ WEI LI
--------------------------------------------
Wei Li
Chief Executive Officer
/S/ LIAN-JUN LUO
--------------------------------------------
Lian-jun Luo
Chief Financial Officer and Chief Accounting
Officer
Each person whose signature appears below constitutes and appoints Wei
Li and James Nian Zhan, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Signature Date Title
/S/ WEI LI October 8, 2004 Chief Executive Officer and
----------------------- Chairman of the Board
Wei Li
/S/ LIAN-JUN LUO October 8, 2004 Chief Financial Officer and
----------------------- Director (Principal Accounting
Lian-jun Luo and Financial Officer) and
Director
/S/ JAMES NIAN ZHAN October 8, 2004 Secretary and Director
-----------------------
James Nian Zhan
/S/ DA-CHANG JU October 8, 2004 Director
-----------------------
Da-chang Ju
/S/ YUN-LONG ZHANG October 8, 2004 Director
-----------------------
Yun-long Zhang
II-5
EXHIBIT INDEX
The following exhibits are included as part of this Form SB-2.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- --------------------------------------------------------------
3.1 Certificate of Incorporation, effective as of July 21, 2004.*
3.2 Bylaws, effective as of July 22, 2004.*
5.1 Opinion and Consent of Stubbs Alderton & Markiles, LLP.*
10.1 Standby Equity Distribution Agreement, dated July 6, 2004,
between Cornell Capital Partners, LP and Kiwa Bio-Tech
Products Group Corporation.*
10.2 Placement Agent Agreement, dated July 6, 2004, between
Newbridge Securities Corporation and Kiwa Bio-Tech Products
Group Corporation.*
10.3 Registration Rights Agreement, dated July 6, 2004, between
Cornell Capital Partners, LP and Kiwa Bio-Tech Products Group
Corporation.*
10.4 Warrant Purchase Agreement, dated March 11, 2004, issued to
Westpark Capital, Inc. (incorporated herein by reference to
our Quarterly Report on Form 10-QSB filed May 20, 2004).
10.5 Patent Transfer Agreement dated April 12, 2004, between the
Company and China Agricultural University.
10.6 Contract of Project of Venture Capital of Zhoucheng Science &
Technology Plan (Contract No.: 2004) among KIWA Bio-Tech
Products (Shandong) Company, Zoucheng Science & Technology
Bureau and Zhoucheng Branch of China Commercial Bank of ICBC.
10.7 Contract of Project of Venture Capital of Zhoucheng Science &
Technology Plan (Contract No.: 2002) among KIWA Bio-Tech
Products (Shandong) Company, Zoucheng Science & Technology
Bureau and Zhoucheng Branch of China Commercial Bank of ICBC.
10.8 Convertible Loan Agreement dated October 20, 2003 between
China Star Investment Group and Kiwa Bio-Tech Products Group
Ltd., including letter amendment thereto dated August 1, 2004.
10.9 Commercial Lease Agreement dated April 1, 2004 between Kiwa
Bio-Tech Products Group Corporation and China Star Investment
Company.
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stubbs Alderton & Markiles, LLP (see Exhibit 5.1).*
----------
* Previously filed.
II-6