[Stubbs, Alderton JOSEPH STUBBS
& Markiles LLP Letterhead] Partner
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November 22, 2004
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
RE: KIWA BIO-TECH PRODUCTS GROUP CORPORATION
RESPONSES TO STAFF COMMENTS OF NOVEMBER 3, 2004
WITH RESPECT TO:
AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM SB-2
FILE NO. 333-117868, FILED OCTOBER 8, 2004
Ladies and Gentlemen:
On behalf of Kiwa Bio-Tech Products Group Corporation (the "COMPANY"),
we have enclosed for filing one copy with exhibits of Amendment No. 2 to
Registration Statement on Form SB-2, File No. 333-117868 (the "SB-2 AMENDMENT").
In addition to filing the SB-2 Amendment, we hereby provide
supplementally the following responses in reply to the Staff's comment letter,
dated November 3, 2004 (the "COMMENT LETTER"). The factual information provided
herein relating to the Company has been made available to us by the Company.
Paragraph numbering used for each supplemental response set forth below
corresponds to the numbering used in the Comment Letter.
FORM SB-2
GENERAL
1. WE NOTE YOUR RESPONSE TO COMMENT 1 AND REISSUE THE COMMENT IN
PART. PLEASE UPDATE THE AMOUNT OF THE LOANS YOU HAVE OUTSTANDING WITH THE
PEOPLE'S REPUBLIC OF CHINA GOVERNMENT AS OF A MORE RECENT DATE. AT PRESENT, THE
DATE IS AS OF MARCH 31, 2004.
The Company has updated the information in the SB-2 Amendment in
response to the Staff's comments, including updating the amount of the loans to
the People's Republic of China to as of September 30, 2004, the end of the
Company's most recently completed fiscal quarter.
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Securities and Exchange Commission
November 22, 2004
Page 2
COVER PAGE
2. WE NOTE YOUR RESPONSE TO COMMENT 4 AND REISSUE THE COMMENT.
YOUR COVER PAGE STILL CONTAINS TOO MANY DETAILS. PLEASE LIMIT THE INFORMATION IN
THE COVER PAGE THAT IS REQUIRED BY ITEM 501 OF REGULATION SB. FOR EXAMPLE,
PLEASE REVISE THE COVER PAGE TO DELETE THE FOURTH AND FIFTH SENTENCES OF THE
SECOND PARAGRAPH BEGINNING "ALL COSTS ASSOCIATED....," AND THE PARAGRAPH
BEGINNING WITH "THE SELLING STOCKHOLDERS CONSIST OF ...." PLEASE REVISE YOUR
COVER PAGE ACCORDINGLY.
The Company has revised the cover page in response to the Staff's
comments.
TABLE OF CONTENTS
3. PLEASE REMOVE THE LAST PARAGRAPH ON THIS PAGE TO SOMEWHERE
AFTER THE RISK FACTOR SECTION.
The Company has moved the paragraph to after the risk factor section of
the SB-2 Amendment.
RISK FACTORS
4. WE NOTE YOUR STATEMENT IN THE INTRODUCTORY PARAGRAPH OF THE
RISK FACTOR SECTION PROVIDING, "[A]DDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US, OR THAT ARE CURRENTLY BELIEVED TO BE IMPORTANT TO YOU, IF
THEY MATERIALIZE, ALSO MAY ADVERSELY EFFECT US." PLEASE ELIMINATE THIS SENTENCE
AS IT IMPLIES THAT THERE ARE OTHER RISKS THAT THE INVESTOR SHOULD CONSIDER
BEFORE INVESTING IN YOUR COMPANY WHEN THE RISK FACTOR SECTION SHOULD LIST ALL OF
THE RISKS KEY TO AN INVESTMENT DECISION.
The Company has deleted this sentence from the SB-2 Amendment.
"INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS DUE TO OUR....,"
PAGE 3
5. WE NOTE YOUR RESPONSE TO COMMENT 18 AND YOUR REVISED
DISCLOSURE. PLEASE REVISE YOUR SUBHEADING TO REFERENCE YOUR AUDITORS' GOING
CONCERN OPINION ABOUT THE COMPANY.
The Company has revised the risk factor subheading in response to the
Staff's comments.
Securities and Exchange Commission
November 22, 2004
Page 3
6. PLEASE DISCUSS HOW LONG YOU ANTICIPATE REMAINING OPERATIONAL
GIVEN YOUR CURRENT FINANCIAL RESOURCES AND EXPENSES.
The Company has added disclosure to the risk factor in response to the
Staff's comments.
"OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN ....,"
PAGE 4
7. PLEASE EXPLAIN WHY YOU EXPECT THE SECOND AND THIRD QUARTERS TO
BE STRONGER THAN THE FIRST AND FOURTH QUARTERS. PLEASE ALSO PROVIDE SIMILAR
DISCLOSURE IN YOUR BUSINESS SECTION.
The Company expects the second and third quarters to be stronger than
the first and fourth quarters because the second and third quarters coincide
with the agricultural growing seasons in the Company's primary markets in China.
It is during these times when application of the Company's fertilizer products
would be most beneficial to growers, and therefore the Company expects that
demand will be greater in those periods.
The Company has added a similar explanation in the risk factor and in
the Business section of the SB-2 Amendment.
"WE DEPEND ON A FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE ....,"
PAGE 9
8. WE NOTE YOUR RESPONSE TO COMMENT 15. TO THE EXTENT ANY OF THE
THREE MAJOR CUSTOMERS CONSTITUTED INDIVIDUALLY OR WITH AFFILIATES MORE THAN 10%
OF YOUR REVIEW, YOU SHOULD IDENTIFY THEM. PLEASE ADVISE US OR REVISE YOUR
DISCLOSURE ACCORDINGLY.
The Company has revised the disclosure in the risk factor and elsewhere
in the SB-2 Amendment to identify each major customer who accounted for more
than 10%, individually or with affiliates, of its revenues in the applicable
periods.
9. IN ADDITION, PLEASE INDICATE IF YOU MAINTAIN ANY AGREEMENTS
WITH ANY OF THESE CUSTOMERS. IF SO, PLEASE FILE THEM AS AGREEMENTS TO YOUR
REGISTRATION STATEMENT. PLEASE ALSO DESCRIBE IN YOUR BUSINESS SECTION THE
MATERIAL TERMS OF THIS AGREEMENT, INCLUDING THE TERMINATION DATE OF THE
AGREEMENT.
The Company does not have agreements with any of its customers.
Purchases are generally made on an order-by-order basis. The Company has
included disclosure regarding the lack of any agreements in the risk factor.
Securities and Exchange Commission
November 22, 2004
Page 4
"OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO RETAIN AND RECRUIT KEY
PERSONNEL," PAGE 5
10. WE NOTE YOUR RESPONSE TO COMMENT 28. PLEASE FILE THESE
EMPLOYMENT AGREEMENTS AS EXHIBITS. IN ADDITION, IN THE SECTION ENTITLED
EXECUTIVE COMPENSATION OR SOME OTHER APPROPRIATE PLACE IN THE DOCUMENT, PLEASE
EXPAND THE DISCUSSION OF THE EMPLOYMENT AGREEMENTS AND DESCRIBE ALL MATERIAL
TERMS OF THESE AGREEMENTS, INCLUDING ANY RESTRICTIVE COVENANTS AND OBLIGATIONS.
The Company has filed the employment agreements as Exhibit 10.13 and
Exhibit 10.14 to the SB-2 Amendment. In addition, the Company has added
disclosure to the Executive Compensation section of the SB-2 Amendment
describing the material terms of the agreements.
"WE MAY NOT BE ABLE TO ACCESS SUFFICIENT UNDER THE EQUITY LINE OF CREDIT. . ..,"
PAGE 13
11. IN RESPONSE TO COMMENT 50, YOU SUPPLEMENTALLY INDICATED THAT
YOU MAY AVOID ISSUING SHARES TO CORNELL CAPITAL UNDER CERTAIN CIRCUMSTANCES.
PLEASE REVISE THIS RISK FACTOR TO DISCLOSE THOSE CIRCUMSTANCES YOU DESCRIBED TO
US.
The Company has revised the risk factor disclosure in response to the
Staff's comments.
USE OF PROCEEDS, PAGE 14
12. WE NOTE YOUR RESPONSE TO COMMENT 50 AND YOUR SUPPLEMENTAL
RESPONSE. PLEASE REVISE YOUR DISCLOSURE TO INCLUDE THE RESPONSE YOU PROVIDED US
REGARDING THE INCREASE IN GENERAL ADMINISTRATIVE AND OPERATION EXPENSES AND WHY
THE GREATER PROCEEDS MAY LIKELY RESULT IN YOU INCURRING A GREATER AMOUNT OF SUCH
EXPENSES.
The Company has revised the disclosure in response to the Staff's
comments.
EQUITY LINE OF CREDIT
SUMMARY, PAGE 16
13. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 62 AND YOUR
SUPPLEMENTAL RESPONSE. PLEASE REVISE YOUR DISCLOSURE IN THIS SECTION AND
ELSEWHERE IN THE PROSPECTUS TO PROVIDE THAT YOU WILL BE RECEIVING 95% OF THE
DEFINED MARKET PRICE OF THE COMMON STOCK FROM EACH ADVANCE.
The Company has revised the disclosure in the Equity Line of Credit,
Summary section and throughout the prospectus in response to the Staff's
comments.
Securities and Exchange Commission
November 22, 2004
Page 5
14. WE NOTE YOUR SUPPLEMENTAL RESPONSE TO COMMENT 65 AND YOUR
REVISED DISCLOSURE. IN YOUR RESPONSE TO COMMENT 50, YOU SUPPLEMENTALLY INDICATED
THAT UNDER CERTAIN CIRCUMSTANCES YOU WERE ABLE TO AVOID ISSUING THE SHARES TO
CORNELL CAPITAL. PLEASE PROVIDE SIMILAR DISCLOSURE IN THIS SECTION.
The Company has revised the disclosure in response to the Staff's
comments.
DESCRIPTION OF BUSINESS
15. WE NOTE YOUR STATEMENT THAT IN CONNECTION WITH YOUR
ACQUISITION OF A PATENT RIGHT, THE CHINA AGRICULTURAL UNIVERSITY HAS AGREED TO
PROVIDE "FREE RESEARCH AND TECHNOLOGY SUPPORT SERVICES" IF YOU DETERMINE TO USE
THE PATENT TO PRODUCE COMMERCIAL PRODUCTS. BASED ON YOUR DISCLOSURE THAT YOU
INTEND TO INTRODUCE IN THE MARKETS IN EARLY 2005 CERTAIN PRODUCTS STEMMING FROM
THIS PATENT, PLEASE DISCLOSE WHAT SPECIFIC RESEARCH AND TECHNOLOGY SUPPORT
SERVICES THE UNIVERSITY WILL PROVIDE YOU. IN ADDITION, PLEASE DISCLOSE WHEN SUCH
SERVICES WOULD COMMENCE.
The Company has revised the disclosure in the Business section and
elsewhere in the SB-2 Amendment in response to the Staff's comments.
16. IN ADDITION, PLEASE EXPAND YOUR DESCRIPTION OF THE AGREEMENT
WITH THE CHINA AGRICULTURAL UNIVERSITY TO DESCRIBE ANY MATERIAL RIGHTS AND
OBLIGATIONS PURSUANT TO THE AGREEMENT, INCLUDING WHETHER YOU HAVE ANY RECOURSE
IF THE UNIVERSITY DOES NOT PROVIDE THE "FREE RESEARCH AND TECHNOLOGY SUPPORT
SERVICES" YOU ARE ENTITLED TO.
The Company has revised the disclosure regarding its agreement with
China Agricultural University in response the Staff's comments. We note
supplementally that the Company's recourse against China Agricultural University
for failure to perform obligations under the agreement would be to bring a
lawsuit for breach of contract to recover damages.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
17. REFER TO YOUR RESPONSE TO COMMENT 77. PLEASE EXPLAIN TO US
WHAT YOU MEAN BY "ACCOUNTS RECEIVABLE WILL BE HIGH BASED ON CLIENTS FOR WHOM WE
MAKE SHIPMENTS IMMEDIATELY SUBSEQUENT TO THE CLOSE OF THE QUARTER." THAT SOUNDS
LIKE YOU RECOGNIZED THE RECEIVABLE AND PRESUMABLY THE REVENUE BEFORE DELIVERY
AND PASSAGE OF TITLE.
The initial response to comment 77 was incorrect due to and inadvertent
error. The statement should have read that the Company's accounts receivable
will be high based on clients for whom the Company makes quarterly shipments
immediately PRIOR to the close of the quarter. More specifically, the Company
records a receivable and
Securities and Exchange Commission
November 22, 2004
Page 6
recognizes revenue only upon delivery to and subsequent acceptance by the
customer of the applicable products, consistent with the guidelines established
by SAB No. 101.
18. REFER TO YOUR RESPONSE AND REVISED DISCLOSURE FOR OUR PRIOR
COMMENT 78. IT APPEARS THAT YOU WILL USE APRIL 12, 2004 AS THE MEASUREMENT DATE
FOR VALUING THE 1,000,000 SHARES THAT WILL BE ISSUED FOR THE PATENT AND RESULTS
IN A VALUE OF $630,000 WHEN YOU RECORD THE ACQUISITION OF THE PATENT. PLEASE
TELL US HOW APRIL 12, 2004 MEETS THE CRITERIA IN ISSUE 1 IN EITF 96-18.
With respect to the valuation of the 1,000,000 shares of common stock
issuable in conjunction with the Company's acquisition of a patent in 2004, the
Company has reviewed the guidelines to determine the measurement date as
discussed in Issue 1 of EITF 96-18 and has further reviewed the underlying
transaction documentation.
EITF 96-18 states that the Company should measure the fair value of the
shares of common stock using the stock price as of the earlier of either: (1)
the date at which a commitment for performance by the counterparty to earn the
common stock is reached (subject to the existence of defined disincentives for
non-performance), or (2) the date at which the counterparty's performance is
complete.
On April 12, 2004, the Company entered into the 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". This patent was originally granted by the PRC Patent Bureau on
July 12, 1996. Based on the guidelines provided by EITF 96-18, since the PRC
government approval authorizing the registration of the patent in the name of
the Company was issued on July 20, 2004, the Company determined to utilize the
market price of its common stock on July 20, 2004 of $0.42 per share to
calculate the value of the 1,000,000 shares of common stock, resulting in an
aggregate value of $420,000. The Company's September 30, 2004 interim financial
statements reflect this valuation.
19. REFER TO YOUR RESPONSE TO OUR PRIOR COMMENT 79. WE NOTE YOUR
EXPANDED DISCUSSION RELATING TO AGRICULTURAL POLICY, FISCAL AND MONETARY POLICY,
FOREIGN INVESTMENT POLICY AND FOREIGN EXCHANGE POLICY. HOWEVER, WE WERE UNABLE
TO LOCATE WHERE YOU DISCUSSED THE RELATED IMPACT OF THESE POLICIES ON THE
COMPANY'S LIQUIDITY AND CAPITAL RESOURCES, AS REQUESTED IN OUR ORIGINAL COMMENT.
PLEASE REFER BACK TO OUR PREVIOUS COMMENT 79 AND PROVIDE THIS DISCLOSURE OR TELL
US WHERE IT IS LOCATED IN THE FILING.
The Company has revised the disclosure related to these matters in
response to the Staff's comment.
Securities and Exchange Commission
November 22, 2004
Page 7
LIQUIDITY AND CAPITAL RESOURCES
20. PLEASE REVISE TO DISCLOSE THE NUMBER OF SHARES OF COMMON
STOCK, BASED ON YOUR CURRENTLY OUTSTANDING SHARES, THAT YOU COULD ISSUE TO
CORNELL GIVEN THE 9.9% RESTRICTION DISCUSSED ON PAGE 18 AND THE MAXIMUM AMOUNT
OF PROCEEDS THAT WOULD RESULT BASED ON THE CURRENT PRICE OF YOUR STOCK. CONSIDER
ADDITIONAL REVISIONS ELSEWHERE IN THE FILING AS APPROPRIATE, PARTICULARLY IN THE
USE OF PROCEEDS SECTION, THAT PORTRAYS ISSUANCE OF A NUMBER OF SHARES THAT WOULD
APPEAR TO FAR EXCEED 9.9%.
The Company has the disclosure in the Liquidity and Capital Resources
and Use of Proceeds sections of the SB-2 Amendment in response to the Staff's
comments.
21. WE NOTE YOUR RESPONSES TO COMMENT 83 AND REISSUE THE COMMENT
IN PART. PLEASE FILE THE LOAN AGREEMENTS AS EXHIBITS TO YOUR REGISTRATION
STATEMENT. TO THE EXTENT FILING WOULD BE IMPRACTICABLE OR NOT NECESSARY, PLEASE
SUPPLEMENTALLY EXPLAIN TO US THE REASONS.
As of September 30, 2004, the Company's borrowings consisted of the
following:
o $1,087,390 in outstanding borrowings made from November 28,
2002 to February 1, 2004 from the local government in Zoucheng
City in Shandong, China. A copy of the agreement pursuant to
which these loans were made was filed as Exhibit 10.7 to the
SB-2 Amendment.
o $304,000 in borrowings made in June 2004 from the local
government in Zoucheng City in Shandong, China. A copy of the
agreement pursuant to which these loans were made was filed as
Exhibit 10.6 to the SB-2 along with Amendment No. 1.
o $72,433 in outstanding borrowings from China Star Investment
Group pursuant to a convertible loan agreement entered into in
October 2003 and amended in August 2004. A copy of this
convertible loan agreement was filed as Exhibit 10.8 to the
SB-2 along with Amendment No. 1.
o $50,500 in outstanding borrowings from China Star Investment
Group pursuant to a loan agreement entered into in July 2004.
A copy of this loan agreement is being filed as Exhibit 10.15
to the SB-2 Amendment.
o $350,000 in outstanding borrowings pursuant to a convertible
loan agreement entered into with Young San Kim and Song N.
Bang in September 2004. A copy of this convertible loan
agreement has been filed as Exhibit 10.10 to the SB-2
Amendment.
Securities and Exchange Commission
November 22, 2004
Page 8
o $17,760 outstanding pursuant to an auto loan entered into in
November 2002. The Company believes that due to the small
amount of this obligation, the agreement is not material and
therefore has elected not to file a copy of this agreement as
an exhibit to the SB-2.
o $12,749 outstanding pursuant to an auto loan entered into in
June 2003. The Company believes that due to the small amount
of this obligation, the agreement is not material and
therefore has elected not to file a copy of this agreement as
an exhibit to the SB-2.
As described above, a copy of each loan agreement that the Company
believes is material has been filed as an exhibit to the SB-2 Amendment. In
addition, the Liquidity and Capital Resources section of the SB-2 Amendment
includes disclosure regarding the material terms of each of these borrowing
arrangements.
COMPENSATION OF DIRECTORS, PAGE 44
22. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 88 AND REQUEST THAT
YOU FURTHER CLARIFY YOUR DISCLOSURE OF THE COMPENSATION ARRANGEMENTS WITH YOUR
DIRECTORS, BOTH EMPLOYEE DIRECTORS AND NON-EMPLOYEE DIRECTORS. FOR EXAMPLE,
PLEASE REVISE YOUR DISCLOSURE TO PROVIDE INFORMATION REGARDING DIRECTOR
COMPENSATION ARRANGEMENTS PRIOR 2004, AND INCLUDE THE TYPE OF COMPENSATION, AS
WELL AS ANY PLANS FOR DIRECTOR COMPENSATION IN THE CURRENT AND FUTURE PERIODS.
The Company has revised the disclosure in response to the Staff's
comments.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS, F-4
23. PLEASE INCLUDE THE ACCRETION OF BENEFICIAL CONVERSION AND THE
CHARGE AT THE TIME OF CONVERSION FOR THE AMOUNT NOT YET ACCRETED WITHIN INTEREST
EXPENSE AS REQUIRED BY EITF 98-5 AND 00-27.
In response to the Staff's comment, the Company has prepared the
statements of operations for the three months and nine months ended September
30, 2004, included in the SB-2 Amendment to include the accretion of beneficial
conversion and the charge at the time of conversion for the amount not yet
accreted within interest expense.
In conjunction with the amendment of the Company's Quarterly Reports on
Forms 10-QSB for the periods ended March 31, 2004 and June 30, 2004 (as noted in
the response to comment 24 below) the Company will also revise the statements of
operations contained in those reports documents to include the beneficial
conversion and
Securities and Exchange Commission
November 22, 2004
Page 9
the charge at the time of conversion for the amount not yet accreted within
interest expense.
NOTE 5. CONVERTIBLE NOTE PAYABLE, PAGES F-15 AND F-16
24. REFER TO YOUR RESPONSE TO COMMENT 90. PLEASE LABEL THE
FINANCIAL STATEMENTS IN THE AMENDED FORMS 10-QSB FOR THE QUARTERS ENDED MARCH 31
AND JUNE 30, 2004 AS "RESTATED" AND PROVIDE CORRESPONDING FOOTNOTE DISCLOSURE AS
REQUIRED BY PARAGRAPH 37 OF APB 20. PROVIDE SIMILAR DISCLOSURES IN FORM SB-2.
In response to the Staff's comment, the Company is amending its
Quarterly Reports on Forms 10-QSB for the periods ended March 31, 2004 and June
30, 2004 to label the financial statements as "restated" and to provide
appropriate footnote disclosure describing the restatement. The Company has not
provided similar disclosures in the SB-2 Amendment, as the interim financial
statements included therein are not restated.
We hope the above has been responsive to the Staff's comments. If you
have any questions or require any additional information or documents, please
telephone me at (818) 444-4507.
Sincerely,
/s/ Joseph Stubbs
--------------------
Joseph Stubbs
Enclosures
cc: James Zhan