UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER: 000-33167
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 84-0448400
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17700 CASTLETON STREET, SUITE 589, CITY OF INDUSTRY, CALIFORNIA 91748
(Address of principal executive offices)
Issuer's telephone number: (626) 964-3232
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 2004, the Company had 37,805,248, shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX
PART I. FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements..................................................3
Condensed Consolidated Balance Sheets - June 30, 2004
(Unaudited) and December 31, 2003.....................................3
Condensed Consolidated Statements of Operations (Unaudited)-
Three Months and Six Months Ended June 30, 2004 and 2003,
and June 5, 2002 (Inception) to June 30, 2004 (Cumulative)............5
Condensed Consolidated Statement of Stockholders' Equity
(Deficiency) -June 5, 2002 (Inception) to June 30, 2004
(Cumulative)..........................................................6
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).............................9
Notes to Condensed Consolidated Financial Statements
(Unaudited)- Six Months Ended June 30, 2004 and 2003,
and June 5, 2002 (Inception) to June 30, 2004 (Cumulative)...........11
Item 2. Management's Discussion and Analysis or Plan of Operation............18
Item 3. Controls and Procedures..............................................29
PART II. OTHER INFORMATION....................................................30
Item 2. Changes in Securities, Use of Proceeds and Small Business
Issuer Purchases of Equity Securities................................30
Item 4. Submission of Matters to a Vote of Security Holders..................30
Item 6. Exhibits and Reports on Form 8-K.....................................30
SIGNATURES....................................................................31
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
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)
3
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.
4
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.
5
KIWA BIO-TECH PRODUCTS GROUP AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
June 5, 2002 (Inception) to June 30, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------- Paid-in Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
----------- ----------- ----------- ----------- -------- -----------
Issuance of
common stock .... 12,356,670 $ 12,357 $ 452,643 $ -- $ -- $ 465,000
Net loss for the
period from
June 5, 2002
(Inception) to
December 31, 2002 -- -- -- (70,884) -- (70,884)
----------- ----------- ----------- ----------- -------- -----------
Balance,
December 31, 2002 12,356,670 12,357 452,643 (70,884) -- 394,116
Shares issued to
consultants for
services ........ 10,503,170 10,503 414,497 -- -- 425,000
Shares issued to
directors as
directors'
compensation .... 8,031,836 8,032 316,968 -- -- 325,000
Net loss for the
year ended
December 31, 2003 -- -- -- (1,355,239) -- (1,355,239)
----------- ----------- ----------- ----------- -------- -----------
Balance,
December 31, 2003 30,891,676 30,892 1,184,108 (1,426,123) -- (211,123)
(continued)
6
KIWA BIO-TECH PRODUCTS GROUP AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited) (Continued)
June 5, 2002 (Inception) to June 30, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------- Paid-in Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
----------- ----------- ----------- ----------- -------- -----------
Shares retained
by public
shareholders
in March 2004
reverse merger
transaction ........ 4,038,572 4,038 (4,038) -- -- --
Issuance of warrants
in conjunction
with March 2004
reverse merger
transaction ........ -- -- 943,380 -- -- 943,380
Issuance of stock
options to
consultant in
conjunction with
March 2004 reverse
merger transaction . -- -- 171,000 -- -- 171,000
Beneficial
conversion feature
of convertible note
payable funded on
January 25, 2004 ... -- -- 500,000 -- (500,000) --
(continued)
7
KIWA BIO-TECH PRODUCTS GROUP AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited) (Continued)
June 5, 2002 (Inception) to June 30, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------- Paid-in Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
----------- ----------- ----------- ----------- ----------- -----------
Beneficial
conversion
feature of
convertible
note payable
funded on
April 7, 2004 .. -- -- 200,000 -- (200,000) --
Amortization
of beneficial
conversion
feature of
convertible
notes payable .. -- -- -- -- 700,000 700,000
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.
8
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)
9
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
Transfer from convertible notes
payable to due to related
party ........................ $ 100,000 $ -- $ 100,000
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
10
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and 2003, and June 5, 2002
(Inception) to June 30, 2004 (Cumulative)
1. Organization and Basis of Presentation
Organization - On March 12, 2004, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated as of March 11, 2004, by and among Tintic Gold
Mining Company, a Utah corporation ("Tintic" or "Kiwa"), TTGM Acquisition
Corporation, a Utah corporation and wholly-owned subsidiary of Tintic ("Merger
Sub"), and Kiwa Bio-Tech Products Group Ltd., a privately-held corporation
organized in the British Virgin Islands ("Kiwa Bio-Tech"), Merger Sub merged
with and into Kiwa Bio-Tech with Kiwa Bio-Tech surviving as a wholly-owned
subsidiary of Tintic (the "Merger"). In exchange for 100% of the issued and
outstanding shares of Kiwa Bio-Tech, the Kiwa Bio-Tech stockholders were issued
30,891,676 shares of Tintic's common stock (after giving effect to a 4-to-1
stock split effective as of March 29, 2004). The stockholders of Tintic retained
their 4,038,572 shares of common stock which were issued and outstanding prior
to the consummation of the Merger Agreement. Tintic also assumed 1,852,501 stock
options issuable by Kiwa Bio-Tech at March 12, 2004. On March 17, 2004, Tintic
changed its name to Kiwa Bio-Tech Products Group Corporation.
At the closing of the Merger Agreement, Tintic transferred all of its pre-merger
assets, consisting primarily of its interest in certain mining claims situated
in the State of Utah, subject to all of its pre-merger liabilities, to a
newly-formed, wholly-owned subsidiary, Tintic Gold Mining Company, a Nevada
corporation ("Tintic Nevada"). The shares of Tintic Nevada were transferred to
an escrow agent to be held in escrow for the benefit of the pre-merger
stockholders of Tintic until such time as the distribution of such shares has
been registered under the Securities Act of 1934 and any applicable state
securities laws.
The Merger resulted in a change of control of Tintic, with the former
stockholders of Kiwa Bio-Tech acquiring approximately 88.4% of Tintic's common
stock immediately following the closing of the Merger. Accordingly, this
transaction was accounted for as a recapitalization of Kiwa Bio-Tech, pursuant
to which the accounting basis of Kiwa Bio-Tech continued unchanged subsequent to
the transaction date. Accordingly, the pre-transaction financial statements of
Kiwa Bio-Tech are now the historical financial statements of the Company. The
stockholders' equity (deficiency) section of the balance sheet has been
retroactively restated for all periods presented to reflect the post-transaction
equity received by the Kiwa Bio-Tech stockholders as a result of the
recapitalization.
Kiwa Bio-Tech was incorporated on June 5, 2002 in the British Virgin Islands as
a holding company. On October 11, 2002, Kiwa Bio-Tech established a wholly-owned
subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. ("Kiwa-SD") in Zoucheng
City, Shandong Province, People's Republic of China (the "PRC").
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 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.
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)
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,
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 $1,060,000 at June 30, 2004 as our
Chinese subsidiary becomes profitable and for the entire balance to be paid
within three years. During the year ending December 31, 2004, the Company
intends to raise additional capital through the issuance of debt or equity
securities to fund the development of its planned business operations, although
there can be no assurances that the Company will be successful in this regard.
There can be no assurances that the Company will be able to obtain sufficient
funds to allow it to continue its operations during the remainder of 2004.
12
KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and 2003, and June 5, 2002
(Inception) to June 30, 2004 (Cumulative)
To the extent that the Company is unable to successfully raise the capital
necessary to fund its future cash requirements on a timely basis and under
acceptable terms and conditions, the Company will not have sufficient cash
resources to maintain operations, and may have to curtail operations and
consider a formal or informal restructuring or reorganization.
Foreign Currency Translation - The functional currency of the Company is the
Renminbi ("RMB"). Transactions denominated in foreign currencies are translated
into RMB at the unified exchange rates quoted by the People's Bank of China,
prevailing at the transaction dates. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable unified
exchange rates prevailing at the balance sheet date.
Translations of amounts from RMB into United States Dollars ("US$") 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, respectively. 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.
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.
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)
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.
2. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on the Company's financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on the Company's consolidated financial statement
presentation or disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research 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.
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)
3. Inventories
Inventories consisted of the following at June 30, 2004 and December 31, 2003:
June 30, 2004 December 31,
(Unaudited) 2003
-------- --------
Raw materials $ 29,545 $ 23,497
Work in progress 25,780 111,390
Finished goods 73,988 314
-------- --------
$129,313 $135,201
======== ========
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.
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
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)
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 deferred interest
expense 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, 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 deferred interest
expense 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.
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.
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)
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.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2004 contains "forward-looking" statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, among others, statements concerning our
expectations regarding our working capital requirements, financing requirements,
its business, growth prospects, competition and results of operations, and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements in this Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 2004 involve known and
unknown risks, uncertainties and other factors that could cause our actual
results, performance or achievements to differ materially from those expressed
in or implied by the forward-looking statements contained herein.
OVERVIEW:
Kiwa Bio-Tech Products Group Corporation 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 Peoples 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, development of a
manufacturing facility and identification of strategic acquisitions and
execution of sales in selected major agricultural markets in China. Our first
product, a photosynthesis biological catalyst, was introduced in the China
agricultural market in November 2003. We are a development stage entity.
MAJOR CUSTOMERS AND SUPPLIERS:
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. We had minimal purchases for the three months
and six months ended June 30, 2003.
GOING CONCERN:
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 a result of the aforementioned conditions, our registered independent public
accountants, in their independent auditors' report on the consolidated financial
statements as of and for the year ended December 31, 2003, have included an
explanatory paragraph in their opinion indicating that there is substantial
doubt about our ability to continue as a going concern. The financial statements
do not contain any adjustments that might result from the outcome of this
uncertainty.
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 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,
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 our operations during the remainder of 2004.
To the extent that we are unable to successfully raise the capital necessary to
fund its 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.
18
CRITICAL ACCOUNTING POLICIES:
We prepared the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated 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. We believe that the accounts receivable balance at June 30, 2004 is
fully collectible.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is
determined on the weighted average method. Inventories include raw materials,
work-in-progress, finished goods and low-value consumables. Net realizable value
is the estimated selling price in the ordinary course of business, less
estimated costs to complete and dispose.
REVENUE RECOGNITION
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 its recorded amount, an
adjustment to the deferred tax assets would be credited to operations in the
period such determination was made. Likewise, should we determine that we would
not be able to realize all or part of our deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to operations in the
period such determination was made.
RESULTS OF OPERATIONS:
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003:
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.
19
Cost of sales was $76,290 for the three months ended June 30, 2004, including
depreciation and amortization of $10,619.
Cost of sales was $107,301 for the six months ended June 30, 2004, including
depreciation and amortization of $20,191.
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 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 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 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 was $14,210 for the three months ended June 30,
2004, as compared to $17,184 for the three months ended June 30, 2003.
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, 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 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 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.
20
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 Note 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 has 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 deferred interest expense 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 deferred interest expense 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, 2004. The
unamortized deferred interest expense of $66,667 as of the conversion date was
charged to operations.
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 consulting and professional fees, convertible notes, 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, consulting and professional fees, convertible
notes, and start of operations in the United States in April 2004.
JUNE 5, 2002 (INCEPTION) TO JUNE 30, 2004 (CUMULATIVE):
Net sales were $333,248 for the period June 5, 2002 (Inception) to June 30, 2004
(Cumulative).
Cost of sales was $137,595 for the period June 5, 2002 (Inception) to June 30,
2004 (Cumulative), including depreciation and amortization of $36,769.
Gross profit was $195,653 or 59% of net sales for the period June 5, 2002
(Inception) to June 30, 2004 (Cumulative).
Consulting and professional fees were $667,063 for the period June 5, 2002
(Inception) to June 30, 2004 (Cumulative), including non-cash costs relating to
the issuance of common stock in December 2003 of $425,000.
Directors' compensation was $368,314 for the period June 5, 2002 (Inception) to
June 30, 2004 (Cumulative), including non-cash costs relating to the issuance of
common stock in December 2003 of $325,000.
General and administrative expense was $644,924 for the period June 5, 2002
(Inception) to June 30, 2004 (Cumulative). General and administrative expense
mainly includes salaries, travel and entertainment, rent, office expense,
telephone expense and insurance costs.
Research and development expense was $96,350 for the period June 5, 2002
(Inception) to June 30, 2004 (Cumulative).
Depreciation and amortization, excluding depreciation and amortization included
in cost of sales, was $36,425 for the period June 5, 2002 (Inception) to June
30, 2004 (Cumulative).
21
Reverse merger costs relating to our March 2004 merger with a United States
public company were $1,467,770 for the period June 5, 2002 (Inception) to June
30, 2004 (Cumulative), including non-cash costs relating to the issuance of
stock options and warrants of $1,114,380.
Interest expense was $48,131 for the period June 5, 2002 (Inception) to June 30,
2004 (Cumulative).
Amortization of Beneficial Conversion Feature of Convertible Note 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 deferred interest expense 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
period June 5, 2002 (Inception) to June 30, 2004 (Cumulative). 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 deferred interest expense 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 period June 5, 2002 (Inception) to June
30, 2004 (Cumulative). The unamortized deferred interest expense of $66,667 as
of the conversion date was charged to operations.
Net loss was $3,833,324 for the period June 5, 2002 (Inception) to June 30, 2004
(Cumulative).
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 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 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 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.
22
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 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.
Long-term borrowings consist primarily of unsecured, non-interest bearing notes
payable to the local Chinese government that do not mature until three years
after our Chinese operations reach defined levels of profitability and other
government non-interest bearing notes payable that do not mature until our
Chinese operations earn a profit.
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 its business in China
and, accordingly, the sale of our products is settled primarily in RMB. As a
result, devaluation or currency fluctuation of the RMB against the U.S. Dollars
would adversely affect our financial performance when measured in U.S. Dollars.
Although prior to 1994 the RMB experienced significant devaluation against the
U.S, Dollars, the RMB has remained fairly stable since then. In addition, the
RMB is not freely convertible into foreign currencies, and the ability to
convert the RMB is subject to the availability of foreign currencies. Effective
December 1, 1998, all foreign exchange transactions involving the RMB must take
place through authorized banks or financial institutions in China at the
prevailing exchange rates quoted by the People's Bank of China.
As China has recently been admitted as a member of the World Trade Organization,
the central government of China is expected to adopt a more rigorous approach to
partially deregulate currency conversion restrictions, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, 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 its products is
settled in RMB.
Although prior to 1994 the RMB experienced significant devaluation against the
US$, the RMB has remained fairly stable since then. The exchange rate was
approximately US$1.00 to RMB 8.30 at June 30, 2004 and December 31, 2003.
COMMITMENTS AND CONTINGENCIES:
We have the following material contractual obligations and capital expenditure
commitments:
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration 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, 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 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.
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.
23
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 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 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 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. 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 tour
consolidated financial statement presentation or disclosures.
RELATED PARTY TRANSACTIONS:
China Star Investment Group is a company which is 10% owned by a major
stockholder of our 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
our behalf before our subsidiary was incorporated in 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 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 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. China
Star has waived this conversion right. At June 30, 2004, there is a balance due
to China Star of $71,020.
CAUTIONARY STATEMENTS AND RISK FACTORS:
We operate in a market environment that is difficult to predict and that
involves significant risks and uncertainties, many of which will be beyond the
combined company's control. Additional risks and uncertainties not presently
known to us, or that are not currently believed to be important to you, if they
materialize, also may adversely affect the combined company. The accompanying
information contained in these Risk Factors identifies important factors that
could cause such differences.
24
RISKS RELATED TO OUR BUSINESS
INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS DUE TO OUR SHORT
OPERATING HISTORY. We have been recently organized and have only been operating
our current business since 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 and incurred net operating losses during our recent
operating history. We expect to continue to have operating losses for the
foreseeable future as we further our research and continue to conduct product
tests. There can be no assurances that any of the intellectual property or
products intended to be developed by us will be marketed successfully or that
ultimately we can develop a sufficiently large production capacity and
sufficiently large customer demand to operate on a profitable basis. Until
sufficient cash flow is generated from operations, we will have to utilize our
capital resources or external sources of funding to satisfy 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.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FOR THE YEAR ENDED DECEMBER
31, 2003 FROM OUR REGISTERED INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE CAN BECOME PROFITABLE OR OBTAIN
ADDITIONAL FUNDING. Our registered independent auditors have added an
explanatory paragraph to their audit opinion issued in connection with our
consolidated financial statements for the year ended December 31, 2003, which
states that the consolidated financial statements raise substantial doubt as to
our ability to continue as a going concern. Our ability to make operations
profitable or obtain additional funding will determine our ability to continue
as a going concern. Our consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
OUR BUSINESS IS SUBJECT TO FLUCTUATIONS WHICH MAY RESULT IN VOLATILITY OR HAVE
AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK. Our business is
subject to seasonal fluctuations due to growing seasons in different markets.
Our past operating results have been, and our future operating results will be,
subject to fluctuations resulting from a number of factors, including: the
timing and size of orders from major customers; budgeting and purchasing cycles
of customers; the timing of enhancements to products or new products introduced
by us or our competitors; changes in pricing policies made by us, our
competitors or suppliers, including possible decreases in average selling prices
of products in response to competitive pressures; market acceptance of enhanced
versions of our products; the availability and cost of key components; the
availability of development capacity; and fluctuations in general economic
conditions. We may also choose to reduce prices or to increase spending in
response to competition or to pursue new market opportunities, all of which may
have a material adverse effect on our business, financial condition and results
of operations. This fluctuation may result in volatility or have an adverse
effect on the market price of our common stock.
OUR SUCCESS DEPENDS IN PART ON OUR SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
IN THE RESEARCH AND DEVELOPMENT STAGE. 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 proprietary products may not be commercially available
for a number of years, if at all.
There can be no assurance that any of our intended products will be successfully
developed or that we will achieve significant revenues from such products even
if they are successfully developed. Our success is dependent upon 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 taking
advantage of the perceived demand for such products. In addition, there can be
no assurance that products or technologies developed by others will not render
our products or technologies non-competitive or obsolete.
FAILURE TO ADEQUATELY EXPAND TO ADDRESS EXPANDING MARKET OPPORTUNITIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS. We
anticipate that a 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 and key product development personnel, including without
limitation, Wei Li, Da-chang Ju, Lian-jun Luo and James Nian Zhan. Given the
intense competition for qualified management and
25
product development personnel in our industry, the loss of the services of any
key management or product development personnel may significantly and
detrimentally affect our business and prospects. There is no assurance that we
will be able to retain these personnel, and it may be time consuming and costly
to recruit qualified personnel.
WE CURRENTLY DO NOT HAVE SUFFICIENT REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND, IF OPERATING LOSSES CONTINUE, WE MAY NOT BE ABLE TO SECURE ADDITIONAL
FINANCING TO OPERATE OUR BUSINESS. We require substantial working capital to
fund our business. Because we currently do not have sufficient revenues to
support our business activities, and if operating losses continue, we may be
required to raise additional capital to fund our operations and finance our
research and development activities. Funding, whether from a public or private
offering of debt or equity, a bank loan or a collaborative agreement, may not be
available when needed or on favorable terms. Any equity financing could result
in dilution to the existing stockholders. Debt financing will result in interest
expense, and if convertible into equity, could also dilute then-existing
stockholders. We may also be subject to various restrictive covenants which
could significantly limit our operating and financial flexibility and may limit
our ability to respond to changes in our business or competitive environment. If
we are unable to obtain necessary financing in the amounts and on terms deemed
acceptable, we may have to limit, delay, scale back or eliminate our research
and development activities or future operations. Any of the foregoing may
adversely affect our business.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO EFFECTIVELY RECEIVE
AND USE OUR REVENUE. Because almost all of our future revenues may be in the
form of Renminbi, any future restrictions on currency exchanges may limit our
ability to use revenue generated in Renminbi to fund our business activities
outside China or to make dividend or other payments in U.S. Dollars. Although
the Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that foreign
invested enterprises may only buy, sell and/or remit foreign currencies at those
banks authorized to conduct foreign exchange business after providing valid
commercial documents. In addition, conversion of Renminbi for capital account
items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the Renminbi, especially with respect to foreign
exchange transactions.
CHANGES IN CHINA'S POLITICAL, SOCIAL, ECONOMIC OR LEGAL SYSTEMS COULD MATERIALLY
HARM OUR BUSINESS. All of our manufacturing and production is conducted in
China. Consequently, an investment in our common stock may be adversely affected
by the political, social and economic environment in China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be significantly altered
from time to time. Our business and prospects are dependent upon agreements and
regulatory approval with various entities controlled by Chinese governmental
instrumentalities. Our operations and prospects would be materially and
adversely affected by the failure of such governmental entities to grant
necessary approvals or honor existing contracts, and, if breached, it might be
difficult to enforce these contracts in China. In addition, the legal system of
China relating to foreign investments is both new and continually evolving, and
currently 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 stage of
development. It is expected that though the market opportunity looks promising,
it will take time to develop. Successful development of the ag-biotechnology
market in China depends on the following: continuation of governmental and
consumer trends favoring the use of products and technologies designed to create
sustainable agriculture; educating the Chinese agricultural community and
consumers about the uses of ag-biotechnology products; and certain institutional
developments such as governmental agricultural subsidies designed to promote the
use of environmentally friendly ag-biotechnological products. There are no
assurances that these trends will continue, governmental subsidies will be
offered, or that the Chinese agricultural community and consumers will be
successfully educated about the uses of ag-biotechnology products. The conduct
of business in the ag-biotechnology market involves high risks. There can be no
assurances that the ag-biotechnology market in China will develop sufficiently
to facilitate our profitable operation. Existing competitors and new entrants in
the ag-biotechnology market are expected to create fierce competition in the
future as the market evolves. Competitors and new entrants may introduce new
products into the market that may detrimentally affect sales of our existing
products, and consequently our revenues.
26
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 filed several patents with the Chinese
government and plan to file several patents with the U.S. Patent &Trademark
Office. We may file other patent applications as 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. We may, from time to time,
become involved in litigation regarding patent and other intellectual property
rights. From time to time, we may receive notices from third parties of
potential infringement and claims of potential infringement. Defending these
claims could be costly and time consuming and would divert the attention of
management and key personnel from other business issues. The complexity of the
technology involved and the uncertainty of intellectual property litigation
increase these risks. Claims of intellectual property infringement also might
require us to enter into costly royalty or license agreements. However, we may
be unable to obtain royalty or license agreements on terms acceptable to us, or
at all. In addition, third parties may attempt to appropriate the confidential
information and proprietary technologies and processes used in our business,
which we may be unable to prevent and which would harm the businesses and our
prospects.
WE FACE TECHNICAL RISKS ASSOCIATED WITH COMMERCIALIZING OUR TECHNOLOGY WHICH
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS RESULTS AND OPERATIONS. A
key to our future success is the ability to produce our Ph-BC series of products
at lower costs than our competitors. Although we are currently utilizing our
proprietary technology to produce such products at lower costs, our method for
producing such products on a commercial basis has only recently begun. Further,
although results from recent independent tests and our early production results
have been encouraging, the ability of our technology to commercially produce
such products at consistent levels is still being evaluated. There can be no
assurance that we will continue to produce such products at lower costs than our
competitors, nor that our technology will be able to commercially produce such
products at consistent levels.
RISKS RELATED TO 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 trades on the OTC Bulletin Board, a regular
trading market for the securities may not be sustained in the future. The OTC
Bulletin Board is an inter-dealer, Over-The-Counter market that provides
significantly less liquidity than the NASD's automated quotation system. Quotes
for stocks included on the OTC Bulletin Board are not listed in the financial
sections of newspapers as are those for the NASDAQ Stock Market. Therefore,
prices for securities traded solely on the OTC Bulletin Board may be difficult
to obtain and holders of common stock may be unable to resell their securities
at or near their original offering price or at any price. Market prices for our
common stock will be influenced by a number of factors, including:
27
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by
competitors of new products or services or significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the ag-biotechnology
industry generally; and
o general economic and other conditions.
WE ARE CONTROLLED BY TWO EXISTING STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM
OTHER STOCKHOLDERS' INTERESTS. 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 58.3% 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. In addition, this
concentration of ownership may delay, prevent, or deter a change in control and
could deprive other stockholders of an opportunity to receive a premium for
their common stock as part of a sale of our business.
THE POTENTIAL DESIGNATION OF OUR COMMON STOCK AS "PENNY STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK. Our common stock could be considered to be
a "penny stock" if it meets one or more of the definitions in Rules 15g-2
through 15g-6 promulgated under Section 15(g) of the Securities Exchange Act of
1934, as amended. These include but are not limited to the following: (i) the
stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a
"recognized" national exchange; (iii) it is NOT quoted on the NASDAQ Stock
Market, or even if so, has a price less than $5.00 per share; or (iv) is issued
by a company with net tangible assets less than $2.0 million, if in business
more than a continuous three years, or with average revenues of less than $6.0
million for the past three years. The principal result or effect of being
designated a "penny stock" is that securities broker-dealers cannot recommend
the stock but must trade in it on an unsolicited basis.
BROKER-DEALER REQUIREMENTS IMPOSED BY THE DESIGNATION OF OUR COMMON STOCK AS
"PENNY STOCK" MAY AFFECT THE TRADING MARKET FOR OUR COMMON STOCK. 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.
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. 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.
28
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to management, including its principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its principal executive and
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting
or in other factors that could have significantly affected those controls
subsequent to the date of the Company's most recent evaluation.
29
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
On June 8, 2004, Kao Ming Investment Company converted a $500,000 convertible
note into 2,000,000 shares of the Company's common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued in the name of Tze
Ming Hsu. Kao Ming Investment Company is an unrelated party located outside the
United States.
On June 8, 2004, JZU GSIANG Trading Co. Ltd converted a $200,000 convertible
note into 800,000 shares of the Company's common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued in the name of
Sue-Chen Wang, Wen-Jen Lee, Wai Sun Chan and Zheng Wang. JZU GSIANG Trading Co.
Ltd is an unrelated party located outside the United States.
On May 24, 2004, the Company issued 75,000 shares of restricted common stock to
Cinapsys, Inc. an investor relations firm, for investor relations services with
a per share value of $0.45 and an aggregate value of $33,750.
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 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 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 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 shares of common stock, stock options and warrants were issued without
registration in reliance upon the exemption afforded by Section 4(2) of the
Securities Act of 1933, as amended, based on certain representations made to the
Company by the recipients. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective as of June 3, 2004 our stockholders approved the following actions by
written consent in lieu of a meeting: (i) an amendment to the Company's Second
Restated and Amended Articles of Incorporation, as amended, increasing the
Company's total authorized common capital stock from 50,000,000 shares to
100,000,000 shares and authorizing the creation of 20,000,000 shares of
preferred stock (the rights, preferences, privileges and restrictions to be
determined by the Board of Directors); (ii) adoption of the Company's 2004 Stock
Incentive Plan; and (iii) the Company's reincorporation in the State of
Delaware. The number of shares consenting in writing to each of these actions
was 21,624,176, out of a total of 34,930,248 shares of common stock issued and
outstanding on June 3, 2004. The amendment to the Company's Articles of
Incorporation was effective as of July 16, 2004 and the Company's
reincorporation to Delaware was effective as of July 22, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
Three Months Ended June 30, 2004:
Current Report on Form 8-K filed on April 1, 2004 (Event date: March 17, and
March 31, 2004) reporting Items 5 and 7.
Current Report on Form 8-K filed on May 10, 2004 (Event date: May 5, 2004)
reporting Items 4 and 7.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Registrant)
/S/ WEI LI
DATE: AUGUST 20, 2004 BY: ________________________
WEI LI
CHIEF EXECUTIVE OFFICER
/S/ LIAN-JUN LUO
DATE: AUGUST 20, 2004 BY: ________________________
LIAN-JUN LUO
CHIEF FINANCIAL OFFICER
31
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
10.1 Convertible Loan Agreement dated March 12, 2004 for $200,000 between
Kiwa Bio-Tech Products Group Corporation and Jzu Hsiang Trading Co.,
Ltd.
10.2 Kiwa Bio-Tech Products Group Corporation 2004 Stock Incentive Plan.
(Incorporated herein by reference to Appendix A of our Definitive
Information Statement on Schedule 14C, filed on June 24, 2004).
10.3 Engagement agreement between Kiwa Bio-Tech Products Group Corporation
and Cinapsys Inc. dated May 24, 2004.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32