UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 20172018

 

[  ]TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)

 

Nevada 77-0632186

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   

3200 Guasti Road, Suite #100,

Ontario, California

 91761
(Address of principal executive offices) (Zip Code)

 

(909) 456-8828

(Registrant’s telephone number, including area code)

 

3200 Guasti Road, Suite #100

Ontario, CA 91761

(Former address)

Ontario, CA 91761

(Former address)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ]
  

Non-accelerated filer [  ]

Smaller reporting company [X]
(Do not check if a smaller reporting company)

Smaller reporting company [X]

Emerging growth company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of December 22, 2017,November 19, 2018, the Company had 12,557,870shares16,939,862 shares of common stock, $0.001 par value, issued and outstanding.

 

 

 

 

 

Table of contents

 

 Page
PART I. FINANCIAL INFORMATION 
  
Item 1. UNAUDITED CONDENSED CONSOLIDATED Financial Statements3
  
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS2429
  
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK3650
  
Item 4. Controls and Procedures3650
  
PART II. OTHER INFORMATION 
  
Item 1. Legal Proceedings3750
  
ITEM 1A. RISK FACTORS3751
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds3751
  
Item 3. Defaults Upon Senior Securities3851
  
Item 4. Mine safety disclosures3851
  
Item 5. Other Information3851
  
Item 6. Exhibits3851
  
SIGNATURES3952

 

 2 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  September 30, 2018  December 31, 2017 
  (Unaudited)    
ASSETS        
Current assets        
Cash and cash equivalents $11,094  $1,083,539 
Accounts receivable  6,764,523   28,620 
Prepaid expenses  2,858,367   2,474,272 
Rent deposits and other receivables  469,201   44,423 
Advance to suppliers  13,223,623   12,660,793 
Due from related parties - non-trade  12,726   19,017 
Inventory  1,645,333   2,745,991 
Deferred cost of goods sold  4,924,421   16,726 
Total current assets  29,909,288   19,073,381 
OTHER ASSETS        
Property, plant and equipment - net  54,912   90,500 
Rent deposits-non-current  613   72,631 
Deposit for Long-Term Investment  728,173   768,074 
Total non-current assets  783,698   931,205 
Total assets $30,692,986  $20,004,586 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Accounts payable $1,228,634  $1,800,614 
Advances from customers  521,852   543,581 
Due to related parties-non-trade  553,434   320,199 
Convertible notes payable, net of discount of $171,716 and $1,977 at September 30, 2018 and December 31, 2017, respectively.  882,471   273,200 
Derivative liabilities  3,437   247,933 
Notes payable  360,000   360,000 
Salaries payable  737,757   291,401 
Taxes payable  2,401,760   1,142,973 
Interest payable  1,935,240   1,756,275 
Other payables and accruals  2,822,095   2,108,873 
Deferred revenue  6,741,075   28,620 
Total current liabilities  18,187,755   8,873,669 
Convertible note payable – non-current, net of discount of $0 and $384,799 at September 30, 2018 and December 31, 2017, respectively.  -   460,082 
Total Liabilities  18,187,755   9,333,751 
         
Stockholders’ equity        
Preferred stock - $0.001 par value, Authorized 20,000,000 shares. Series A - Issued and outstanding 500,000 and 500,000 shares at September 30, 2018, 2018 and December 31, 2017, respectively;
Series B - Issued and outstanding 811,148 and 811,148 shares at September 30, 2018 and December 31, 2017, respectively.
  1,311   1,311 
Common stock - $0.001 per value. Authorized 100,000,000 shares. Issued and outstanding 16,939,862 and 15,202,965 shares at September 30, 2018, and December 31, 2017, respectively.  16,940   15,203 
Additional paid-in capital  27,098,224   24,455,291 
Statutory Reserve  458,334   458,334 
Accumulated deficit  (14,542,119)  (14,583,080)
Accumulated other comprehensive income  (527,459)  323,776 
Total stockholders’ equity  12,505,231   10,670,835 
Total liabilities and stockholders’ equity $30,692,986  $20,004,586 

  September 30, 2017  December 31, 2016 
   (Unaudited)     
ASSETS        
Current assets        
Cash and cash equivalents $23,275  $13,469 
Accounts receivable, net  15,245,255   1,122,754 
Prepaid expenses  1,214,261   1,417,554 
Rent deposit and other receivable  127,419   38,897 
Advance to suppliers  2,979,664   1,880,044 
Due from related party- non-trade  963,846   - 
Inventory  10,826   - 
Deferred cost of goods sold  10,274,930   - 
Total current assets  30,839,476   4,472,718 
OTHER ASSETS        
Property, plant and equipment, net  84,453   55,319 
Rent deposit – non-current  38,003   34,519 
Due from related party- non-trade  -   1,522,434 
Deposit for Long-Term investment  751,050   - 
Deferred tax asset  246,872   - 
Total non-current assets  1,120,378   1,612,272 
Total assets $31,959,854  $6,084,990 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY(DEFICIENCY)        
Current liabilities        
Accounts payable $8,869,452  $1,073,094 
Advances from customers  32,686   - 
Due to related parties  130,199   261,259 
Convertible notes payable, net of discount of $13,466
at September 30, 2017
  286,992   150,250 
Derivative liabilities  370,733   - 
Notes payable  360,000   360,000 
Salary payable  1,315,413   1,154,921 
Taxes payable  -   414,970 
Interest payable  1,733,544   1,524,988 
Other payables and accruals  1,640,889   924,875 
Deferred revenue  14,996,057   - 
Current liabilities of discontinued operation  -   4,464,685 
Total current liabilities  29,735,965   10,329,042 
Convertible note payable – non-current, net of discount of $ 455,827 at September 30, 2017  370,321   - 
Total Liabilities  30,106,286   10,329,042 
         
Shareholder’s equity (deficiency)        
Preferred stock - $0.001 par value, Authorized 20,000,000 shares. Issued and outstanding 500,000 and 500,000 shares at September 30, 2017 and December 31, 2016, respectively.  500   500 
Common stock - $0.001 per value. Authorized 100,000,000 shares. Issued and outstanding 11,167,719 and 8,728,981 shares at September 30, 2017 and December 31, 2016, respectively  11,168   8,729 
Additional paid-in capital  18,733,056   15,234,878 
Statutory Reserve  127,473   127,473 
Accumulated deficit  (17,072,416)  (19,561,255)
Accumulated other comprehensive gain (loss)  53,787   (54,377)
Total shareholders’ equity (deficiency)  1,853,568   (4,244,052)
Total liabilities and shareholder’s equity $31,959,854  $6,084,990 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2018  2017  2018  2017 
Revenue $7,725,583  $31,025  $21,811,804  $30,411 
                 
Cost of goods sold  (5,452,125)  (19,697)  (15,632,191)  (19,308)
                 
Gross Profit  2,273,458   11,328   6,179,613   11,103 
                 
Operating expenses                
Selling expense  36,748   37,469   115,291   110,194 
Research and development  64,094   147,782   409,661   236,252 
General and administrative  961,509   1,068,446   4,040,537   2,073,035 
Total operating expenses  1,062,351   1,253,697   4,565,489   2,419,481 
                 
Operating income (loss)  1,211,107   (1,242,369)  1,614,124   (2,408,378)
                 
Other income/(expense), net                
Change in fair value of derivative liabilities  42,125   205,612   244,496   199,051 
Interest expense  (151,518)  (168,573)  (459,445)  (356,256)
Other income/(expense)  21   372,711   (884)  373,512 
Exchange gain (loss)  36,026   (18,257)  54,279   (35,342)
Total other income/(expense), net  (73,346)  391,493   (161,554)  180,965 
                 
Income (loss) from continuing operations before income taxes  1,137,761   (850,876)  1,452,570   (2,227,413)
                 
(Provision) benefit for income taxes                
Current  (514,400)  -   (1,411,609)  - 
Deferred  -   123,068   -   220,860 
Total (provision) benefit for income taxes  (514,400)  123,068   (1,411,609)  220,860 
                 
Income (loss) from continuing operations  623,361   (727,808)  40,961   (2,006,553)
                 
Income from discontinued operations, net of taxes  -   -   -   4,495,392 
                 
Net income (loss)  623,361   (727,808)  40,961   2,488,839 
                 
Other comprehensive income (loss)                
Foreign currency translation adjustment  (569,528)  39,845   (851,235)  108,164 
Total comprehensive income (loss) $53,833  $(687,963) $(810,274) $2,597,003 
                 
Earnings per share – Basic:                
Loss from continuing operations  0.04   (0.07)  (0.00)  (0.20)
Discontinued operations  -   -   -   0.46 
Net Income (loss) $0.04  $(0.07) $(0.00) $0.26 
                 
Earnings per share – Diluted:                
Loss from continuing operations  0.04   (0.07)  (0.00)  (0.15)
Discontinued operations  -   -   -   0.38 
Net Income (loss)  0.04   (0.07)  (0.00)  0.21 
                 
Weighted average number of common shares outstanding - basic  16,757,163   10,640,453   16,388,438   9,846,791 
Weighted average number of common shares outstanding - diluted  18,314,713   10,640,453   16,388,438   11,891,678 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  Nine Months Ended September 30, 
  2018  2017 
       
Cash flows from continuing operating activities:        
Net income (loss) $40,961  $2,488,839 
Income from discontinued operations, net of taxes  -   (4,495,392)
Net income (loss) from continuing operations  40,961   (2,006,553)
Adjustments to reconcile net income to net cash used in continuing operating activities:        
Bed Debt      237,998 
Depreciation  24,381   29,527 
Accrued interest  459,445   356,256 
Stock compensation expense  1,832,592   - 
Consulting fee  -   474,301 
(Gain) loss on derivative liabilities  (244,496)  (199,051)
Deferred income tax  -   (241,452)
Changes in continuing operating assets and liabilities:        
Accounts receivable  (7,102,323)  (14,002,636)
Prepaid expenses  44,787   47,169 
Rent deposit and other receivables  (378,085)  (86,938)
Advance to suppliers  (1,286,661)  (1,071,968)
Due from related party – non-trade  5,590   611,155 
Inventory  1,009,897   (10,588)
Deferred cost of goods sold  (5,174,438)  (10,049,349)
Accounts payable  (504,355)  7,579,497 
Salary payable  473,289   157,968 
Taxes payable  1,389,562   (409,408)
Advances from customers  6,863   31,968 
Due to related parties      110,690 
Other payables and accruals  775,814   407,319 
Deferred revenue  7,077,606   14,666,825 
Net cash used in operating activities  (1,549,571)  (3,367,270)
         
Cash flows from investing activities:        
Purchase of property, plant and equipment  (4,774)  (58,427)
Payment of deposit for long-term investment  -   (734,561)
Net cash used in investing activities  (4,774)  (792,988)
         
Cash flows from financing activities:        
Borrowings from related parties, net  235,219   30,346 
Proceeds from sale of common stock  307,600   3,221,127 
Proceeds from convertible notes  -   976,356 
Net cash provided by financing activities  542,819   4,227,829 
         
Effect of exchange rate change  (60,919)  (57,765)
         
Cash and cash equivalents:        
Net increase  (1,072,445)  9,806 
Balance at beginning of period  1,083,539   13,469 
Balance at end of period $11,094  $23,275 
         
Non-cash financing activities:        
Issuance of common stock for consulting services $2,242,050  $234,396 
Issuance of common stock for financing related services $-  $1,022,156 
Supplemental Disclosures of Cash Flow Information:        
Cash paid for interest $-  $- 
Cash paid for income taxes $-  $457,564 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  3

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(LOSS)
(Unaudited)

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
             
Revenue $31,025  $1,185,309  $30,411  $1,185,310 
                 
Cost of goods sold  (19,697)  (770,451)  (19,308)  (770,451)
                 
Gross Profit  11,328   414,858   11,103   414,859 
                 
Operating expenses                
Research and development expenses  37,469   37,303   110,194   112,580 
Selling expenses  147,782   -   236,252   - 
General and administrative expenses  1,068,446   181,333   2,073,035   375,915 
Total operating expenses  1,253,697   218,636   2,419,481   488,495 
                 
Operating Income (Loss)  (1,242,369)  196,222   (2,408,378)  (73,636)
                 
Other income/(expense), net                
Trademark license income-related party  -   76,235   -   786,329 
Change in fair value of derivative liabilities  205,612   -   199,051   - 
Interest expense  (168,573)  (47,745)  (356,256)  (142,296)
Other income  372,711   -   373,512   - 
Foreign exchange loss  (18,257)  -   (35,342)  - 
Total other income/(expense), net  391,493   28,490   180,965   644,033 
                 
Income (loss) from continuing operations before income taxes  (850,876)  224,712   (2,227,413)  570,397 
                 
Provision (benefit) for income taxes                
Current  -   78,945   -   78,945 
Deferred  (123,068)  -   (220,860)  - 
Total provision (benefit) for income taxes  (123,068)  78,945   (220,860)  78,945 
                 
Income (loss) from continuing operations  (727,808)  145,767   (2,006,553)  491,452 
                 
Discontinued operations:                
Loss from discontinued operations, net of taxes  -   (52,166)  (16,790)  (159,745)
Gain on disposal of discontinued operations, net of taxes  -   -   4,512,182   - 
Income (loss) from discontinued operations, net of taxes  -   (52,166)  4,495,392   (159,745)
                 
Net Income (loss)  (727,808)  93,601   2,488,839   331,707 
                 
Other comprehensive income (loss)                
Foreign currency translation adjustment  39,845   9,765   108,164   103,870 
Total comprehensive income (loss) $(687,963) $103,366  $2,597,003  $435,577 
                 
Earnings per share – Basis:                
Income (loss) from continuing operations  (0.07)  0.03   (0.20)  0.12 
Discontinued operations  -   (0.01)  0.46   (0.04)
Net Income (loss)  (0.07)  0.02   0.26   0.08 
                 
Earnings per share – Diluted:                
Income (loss) from continuing operations  (0.07)  0.03   (0.15)  0.06 
Discontinued operations  -   (0.01)  0.38   (0.02)
Net Income (loss)  (0.07)  0.02   0.23   0.04 
                 
Weighted average number of common shares outstanding - basic  10,640,453   5,447,326   9,846,791   4,133,119 
Weighted average number of common shares outstanding - diluted  11,581,789   6,442,528   11,891,678   9,555,574 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 4

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  Nine Months Ended September 30, 
  2017  2016 
Cash flows from continuing operating activities:        
Net income $2,488,839  $331,707 
(Income) loss from discontinued operations, net of taxes  (4,495,392)  159,745 
Net Income (loss) from continuing operations  (2,006,553)  491,452 
Adjustments to reconcile net income to net cash used in continuing operating activities:        
Bad debt  237,998   - 
Depreciation  29,527   13,039 
Accrued interest  356,256   142,296 
Stock compensation for consulting fee  474,301   57,717 
Gain on derivative liabilities  (199,051)  - 
Deferred income tax  (241,452)  - 
Changes in continuing operating assets and liabilities:        
Accounts receivable  (14,002,636)  (1,240,550)
Prepaid expenses  47,169   (7,500)
Rent deposit and other receivable  (86,938)  (37,809)
Advance to suppliers  (1,071,968)  (1,700,605)
Due from related party – non-trade  611,155   - 
Inventory  (10,588)  - 
Deferred cost of goods sold  (10,049,349)    
Accounts payable  7,579,497   794,868 
Advance from customers  31,968   - 
Due to related parties  110,690   150,411 
Salary payable  157,968   93,993 
Taxes payable  (409,408)  78,945 
Other payables and accruals  407,319   425,985 
Deferred revenue  14,666,825     
Net cash used in continuing operating activities  (3,367,270)  (737,758)
Net cash used by discontinued operations  -   - 
Net cash used in operating activities  (3,367,270)  (737,758)
         
Cash flows from investing activities:        
Payment of deposit for Long-Term investment  (734,561)  - 
Purchase of property, plant and equipment  (58,427)  (79,604)
Net cash used in investing activities  (792,988)  (79,604)
         
Cash flows from financing activities:        
Working capital borrowed from related parties, net of payments to related parties  30,346   51,500 
Proceeds from sale of common stock  3,221,127   766,281 
Proceeds from convertible notes  976,356   - 
Net cash provided by financing activities  4,227,829   817,781 
         
Effect of exchange rate change  (57,765)  (595)
         
Cash and cash equivalents:        
Net increase  9,806   (176)
Balance at beginning of period  13,469   721 
Balance at end of period $23,275  $545 
         
Non-cash financing activities:        
Issuance of common stock for debt settlements $-  $3,191,974 
Issuance of common stock for consulting services $234,396  $- 
Issuance of common stock for financing services $1,022,156  $- 
Supplemental Disclosures of Cash flow Information:        
Cash paid for interest $-  $- 
Cash paid for income taxes $457,564  $- 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5 

 

KIWA BIO-TECH PRODUCTS GROUP CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.Description of Business and Organization

 

Organization

 

Kiwa Bio-Tech Products Group Corporation (“the Company”) is the result of a share exchange transaction accomplished on March 12, 2004 between the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company originally organized under the laws of the British Virgin Islands on June 5, 2002 and Tintic Gold Mining Company (“Tintic”), a corporation originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah. The share exchange resulted in a change of control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on a fully diluted basis and Kiwa BVI surviving as a wholly-owned subsidiary of Tintic. Subsequent to the share exchange transaction, Tintic changed its name to Kiwa Bio-Tech Products Group Corporation. On July 21, 2004, the Company completed its reincorporation in the State of Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.

 

The Company operates through a series of subsidiaries in the Peoples Republic of China as detailed in the following Organizational Chart. The Company had previously operated its business through its subsidiaries Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”) and Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin”). Kiwa Tianjin has beenwas dissolved sinceon July, 11, 2012. On February 11, 2017, the Company entered an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) to transfer all of shareholders’ right, title and interest in Kiwa Shandong to the Transferee for RMB1.00. Onwas disposed on April 12, 2017, the government processing of transfer has been completed.2017. Currently, the Company mainly operates its business through its subsidiaries Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. (“Kiwa Beijing”), which was acquired in January 2016, Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), which was incorporated in China in November 2016, and Kiwa Bio-Tech Products (Hebei) Co., Ltd. (“Kiwa Hebei”), which was incorporated in China in December 2016.2016, and Kiwa Beijing was acquired from a group of unrelated third parties in January 2016 together with its holding company HK Baina Group Holding Company for approximately $34,000 (RMB 220,000) and renamed to Kiwa Baiao Bio-Tech (Beijing)Products (Shenzhen) Co., Ltd. from Oriental Baina Co.Xian Branch Company, (“Kiwa Xian”), Ltd.which was incorporated in February 2016. HK Baina Group Holding Company and Oriental Baina Co., Ltd. have no operations prior to the acquisition and the purchase price was initially recorded as goodwill and fully impaired at the year end of 2016.China in December 2017. In July 2017, the Company established Kiwa Bio-Tech Asia Holding (Shenzhen) Ltd. (“Kiwa Asia”) to be the direct holding company of Kiwa Beijing, Kiwa Shenzhen, Kiwa Xian and Kiwa Hebei. The Company established Inner Mongolia Jing Nong Investment & Management, Ltd. (“Kiwa Jing Nong”) in August 2017.

 6

The Company established Kiwa Bio-Tech (Shanxi) Engineering Co., Ltd. (“Kiwa Shanxi”) in February 2018. The Company established Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”) and The Institute of Kiwa-Yangling Ecological Agriculture and Environment Research Co., Ltd. (“Kiwa Institute”) in March 2018.

 

Business

 

The Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological products for agricultural use. Our products are designed to enhance the quality of human life by increasing the value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes.

 

Prior to August 2016,2. Going Concern

In assessing the Company’s liquidity, the Company did notmonitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. The unaudited condensed consolidated financial statements have any licensebeen 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 Company engages in the business for organically bio-fertilizer and its customers are mainly agricultural cooperative company and distributors who then resell its products to sellindividual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay the Company’s distributors. The Company’s current payment terms on these customers are ranging from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers. As a result, the Company’s accounts receivable turnover ratio is normally low due to the nature of the Company’s business. In addition, the Company’s business is capital intensive as the Company needs to make advance payment to its bio-technological fertilizer productssuppliers to secure timely delivery and current market price of raw materials. Debt financing in Chinathe form of notes payable and could not generate direct sales on its own. Insteadloans from related parties have been utilized to finance the working capital requirements of the Company. As of September 30, 2018, the Company’s working capital was approximately $11.7 million and the Company had been licensingcash of approximately $11,000, with remaining current assets mainly composed of accounts receivable and advance to suppliers.

Although the Company believes that it can realize its trademarkcurrent assets in the normal course of business, the Company’s ability to Kangtan Gerui (Beijing) Bio-Tech Co., Ltd. (“Gerui”), a related party (see Note 10),repay its current obligations will depend on the future realization of its current assets and the future operating revenues generated from its products. Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, the Company expects its revenues from its innovated and highly effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow in its business. In addition, the Company’s marketing team is expanding to the Western areas of China and Hainan province and it expects its revenues will continue to sell fertilizers.grow in 2019. Meanwhile, the Company expects to continue to gain market shares in its existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry. The Company charged Gerui 10%believes these factors will enable it sufficiently to support its working capital needs for the next twelve months.

Management has considered its historical experience, the economic environment, trends in the Agricultural industry, the realization of net salesthe accounts receivables and advance to suppliers as of fertilizers bearingSeptember 30, 2018. The Company expects to realize the balance of its current assets within the normal operating cycle of a twelve-month period. If the Company is unable to realize its current assets within the normal operating cycle of a twelve-month period, the Company may have to consider supplementing its available sources of funds through the following sources:

the Company will continuously seek additional equity financing to support its working capital;
other available sources of financing from PRC banks and other financial institutions;
financial support and credit guarantee commitments from the Company’s major shareholder.

The Company has incurred recurring losses and does not have enough cash to support the operation without raising additional capital, within the one year from the date of the issuance of these financial statements. 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 may not have sufficient liquidity to maintain operations and repay its liabilities for the next twelve months. These circumstances, among others, raise substantial doubt about the Company’s trademark.ability to continue as a going concern. The trademark license income was recorded inaccompanying unaudited condensed financial statements do not include any adjustments that might result from the captioned “Trademark license income-related party” in theoutcome of this uncertainty. The accompanying unaudited condensed consolidated financial statements also do not include any adjustments relating to the recoverability and classification of operationsrecorded asset amounts or amounts and comprehensive income. In August 2016,classifications of liabilities that might be necessary should the Company obtainedbe unable to continue as a fertilizer sales permit from the Chinese government.going concern. As a result, the Company ceasedmay be unable to implement its cooperation with Gerui and begancurrent plans for expansion, repay its debt obligations or respond to sell products directly to customerscompetitive pressures, any of which would have a material adverse effect on its own.business, prospects, financial condition and results of operations.

 

2.3. Summaries of Significant Accounting Policies

 

BasicBasis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).

 

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary to give a fair presentation have been included. Interim results are not necessarily indicative of results of a full year. The information in this Form 10-Q should be read in conjunction with information included in the annual report for the fiscal year ended December 31, 20162017 on Form 10-K/A10-K filed with the SEC on November 22, 2017.March 30, 2018.

Principle of Consolidation

 

These consolidated unaudited condensed financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Kiwa BVI, Hong Kong Baina Group HoldingKiwa Asia Holdings Company, Kiwa Beijing, Kiwa Shandong, Kiwa Shenzhen, Kiwa Hebei, Kiwa Asia, Kiwa Yangling, Kiwa Shanxi, Kiwa Institute and Kiwa Jing Nong. All significant inter-company balances or transactions are eliminated on consolidation.

 

 7

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates include the valuation of securities issued, derivative liabilities, deferred tax assets and related valuation allowance.

Certain of our estimates, including evaluating the collectability of accounts receivable and the fair market value of long-lived assets, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our accounting estimates annually based on these conditions and record adjustments when necessary.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable represent customer accounts receivables. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience, the economic environment, trends in the microbial fertilizer industry, and a review of the current status of trade accounts receivable. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. Such allowances, if any, would be recorded in the period the impairment is identified. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted.

 

Inventory

 

Inventories are stated at the lower of cost, determined on the weighted average method, and net realizable value. Work in progress and finished goods are composed of direct materials, direct labor and a portion of manufacturing overhead. Net realizable value is the estimated based on selling price in the ordinary course of business, less estimated costs to complete and dispose.

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:

  Useful Life 
  (In years) 
Buildings  30 - 35 
Machinery and equipment  5 - 10 
Automobiles  8 
Office equipment  2 - 5 
Computer software  3 
Leasehold improvementThe shorter of the
lease term and
useful life
 

 8

Impairment of Long-Lived Assets

 

The Company’s long-lived assets consist of property, plant and equipment. The Company evaluates its investment in long-lived assets, including property and equipment, for recoverability whenever events or changes in circumstances indicate the net carrying amount may not be recoverable. It is possible that these assets could become impaired as a result of legal factors, market conditions, operational performance indicators, technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Financial Instruments

 

The Company analyzes all financial instruments with features of both liabilities and equity under FASB Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity” and FASB ASC Topic 815 “Derivatives and Hedging”.

 

Embedded conversion features of convertible debentures not considered to be derivative instruments

 

The embedded conversion features of convertible debentures not considered to be derivative instruments provide for a rate of conversion that is below market value. Such feature is normally characterized as a “beneficial conversion feature” (“BCF”). The relative fair values of the BCF were recorded as discounts from the face amount of the respective debt instrument. The Company amortized the discount using the straight-line method which approximates the effective interest method through maturity of such instruments.

 

Embedded conversion features of convertible debentures that are classified as derivative liabilities

 

The embedded conversion features of convertible debentures that are classified as derivative liabilities are recorded at fair value as a discount from the face amount of the respective debt instrument. The discount is being amortized to interest expense over the life of the note using the straight-line method, which approximates the effective interest method. These instruments are accounted for as derivative liabilities and marked-to-market each reporting period. The change in the value of the derivative liabilities is charged against or credited to income in the captioned “change in fair value of derivative liabilities” in the accompanying unaudited condensed consolidated statements of operations and comprehensive income.

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820- 10-35-37820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value with U.S. GAAP and expands disclosures about fair value measurements.

 

To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

 Level 1: quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
   
 Level 2: pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
   
 Level 3: Pricing inputs that are generally observable inputs and not corroborated by market data.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

 9

The carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalent, prepaid expenses, accounts payable and accrued expenses, approximate their fair value because of the short maturity of those instruments. Derivative instruments are carried at fair value, estimated using the Black Scholes Merton model.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

It is not however practical to determine the fair value of advances from stockholders, if any, due to their related party nature.

 

Revenue Recognition

 

The Company applies paragraph 605-10-S99-1 of the FASBOn January 1, 2018 we adopted Accounting Standards CodificationUpdate (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when allcontracts that were not completed as of the following criteria are met: (i) persuasive evidence ofJanuary 1, 2018. This did not result in an arrangement exists, (ii) the product has been shipped or the services have been renderedadjustment to the customer, (iii)retained earnings upon adoption of this new guidance as the sales price is fixed or determinable, and (iv) collectability is reasonably assured.Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.

 

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time.

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

The Company derivescontinues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of thesales contract and there is no separate sales rebate, discount, or volume incentive. The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company to consider control of goods are transferred to its customer and collectability of payment is reasonably assured.

The Company’s revenues are recognized at a point in time after all performance obligations are satisfied.

The Company’s customers are mainly agricultural cooperative company and distributors who then resell the Company’s products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, for some co-ops and distributors, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay them. As a result, for the sales contracts with these customers, the collectability of payment is highly dependent on the successful harvest of corps and the customers’ ability to collect money from farmers. The Company deemed the collectability of payment may not be reasonably assured until after the Company get paid. For thoseCollectability is a necessary condition for the contract to be accounted for to meet the criteria of the first step “identifying the contract with the customer” under the new revenue guidance in ASC 606. As a result, these sales contracts thatare not considered a contract under ASC 606, thus the Company has shipped its products butshipments under these contracts are not recognized as revenue until all criteria for “identifying the payment is contingent on collections of payments fromcontract with the downstream customers, the Company considers thecustomer” and revenue recognition criteria are not met and therefore defersusing the revenue and cost of goods sold until payments are collected. These revenue and cost of goods sold are classified in the captioned “Deferred revenue” and “Deferred cost of goods sold” in the accompanying unaudited condensed consolidated balance sheets. For other customers whose repayment term is within normal business course and not dependent on the harvest of corps, the Company recognized revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company.

five-step model.

 

Deferred Revenue and Deferred Cost of Goods Sold

 

Deferred revenue and deferred cost of goods sold result from transactions where the Company has shipped product for which all revenue recognition criteria under the five-step model have not yet been met. Though these contracts are not considered a contract under ASC 606, they are legally enforceable, and the Company has an unconditional and immediate right to payment after the Company has shipped products, therefore, the Company recognizes a receivable and a corresponding deferred revenue upon shipment. Deferred cost of goods sold related to deferred product revenues includes direct inventory costs. Once all revenue recognition criteria under the five-step model have been met, the deferred revenues and associated cost of goods sold are recognized.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation when it is more likely than not that the assets will not be recovered.

 

FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. United States federal, state and local income tax returns prior to 20142015 are not subject to examination by any applicable tax authorities. PRC tax returns filed for 2014, 2015, 2016 and 20162017 are subject to examination by any applicable tax authorities.

 

Stock Based Compensation

 

The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period. The Company records stock-based compensation expense at fair value on the grant date and recognizes the expense over the employee’s requisite service period. The Company’s expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on the Company’s current and expected dividend policy.

The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as an expense as the goods or services are received.

 10

 

Foreign Currency Translation and Other Comprehensive Income

 

The Company uses United States dollars (“US Dollar” or “US$” or “$”) for financial reporting purposes. However, the Company maintains the books and records in its functional currency, Chinese Renminbi (“RMB”) and Hong Kong Dollar (“HKD”), being the functional currency of the economic environment in which its operations are conducted. In general, the Company translates its assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of comprehensive loss and the statement of cash flow are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

 

Other comprehensive income for the three and nine months ended September 30, 20172018 and 20162017 represented foreign currency translation adjustments and were included in the unaudited condensed consolidated statements of operations and comprehensive income.

 

The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the unaudited condensed consolidated financial statements were as follows:

 

  As of
September 30, 2017
  As of
December 31, 2016
 
Balance sheet items, except for equity accounts  6.6574   6.9472 
  As of
September 30, 2018
  As of
December 31, 2017
 
Balance sheet items, except for equity accounts  6.8665   6.5098 

 

  Three months ended September 30, 
  2017  2016 
Items in the statements of comprehensive income  6.6721   6.6702 
  Three months ended September 30, 
  2018  2017 
Items in the statements of comprehensive income  6.8031   6.6721 

 

  Nine months ended September 30, 
  2017  2016 
Items in the statements of comprehensive income  6.8068   6.5806 
  Nine months ended September 30, 
  2018  2017 
Items in the statements of comprehensive income  6.5137   6.8068 

 

The exchange rates used to translate amounts in HKD into U.S. Dollars for the purposes of preparing the consolidated financial statements were as follows:

 

  As of
September 30, 2018
  As of
December 31, 2017
 
Balance sheet items, except for equity accounts  7.8278   7.8149 

  Three months ended September 30, 
  2018  2017 
Items in the statements of comprehensive income  7.8446   7.8143 

  Nine months ended September 30, 
  2018  2017 
Items in the statements of comprehensive income  7.8398   7.7868 

 As of
September 30, 2017
As of
December 31, 2016
Balance sheet items, except for equity accounts7.8107   -13 

  Three months ended September 30, 
  2017  2016 
Items in the statements of comprehensive income  7.8143   - 

  Nine months ended September 30, 
  2017  2016 
Items in the statements of comprehensive income  7.7868   - 

Earnings Per Common Share

 

Net income per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

 

Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants. Common stock equivalents having an anti-dilutive effect on earnings per share are excluded from the calculation of diluted earnings per share.

 

 11

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unassured claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unassured claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

Cash Flow Reporting

 

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of :

(a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments;

(b) all items that are included in net income that do not affect operating cash receipts and payments.

 

The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

 

  1214 

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015, Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. While no significant impact is expected upon adoption of the new guidance, the Company will not be able to make that determination until the time of adoption based upon outstanding contracts at that time. In September 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-13,“Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09. The effective date for the Company is the same as the effective date and transition requirements for the amendments for ASU 2014-09 beginning in January 1, 2018.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December IS,15, 2018, including interim periods within those fiscal years. Early application is permitted. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. The Company has not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s unaudited condensed consolidated financial statement presentation or disclosures.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this guidance are clarifying the definition of a business to assist entities when determining whether an integrated set of assets and activities meets the definition of a business. The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this new guidance is not expected to have a material impact on our unaudited condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.

 

 13

In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (ASU 2017-09), Compensation — Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 which will become effective for annual periods beginning after December 15, 2017 and for interim periods within those annual periods, is not expected to have any impact on the Company’s unaudited condensed consolidated financial statement presentation or disclosures.

 

In July 2017, the FASB issued Accounting Standards Update No. 2017-11 (ASU 2017-11), Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The adoption of ASU 2017-11 which will become effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods. The Company elected to early adopt ASU 2017-11 when preparing these unaudited condensed consolidated financial statements and no effect on the Company’s unaudited condensed consolidated financial statements.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive income for which the nine months ended September 30, 2017.related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU will have a material effect on the Company’s unaudited condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification (“ASC”) 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not believe the adoption of this ASU will have a material effect on the Company’s unaudited condensed consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s unaudited condensed consolidated financial statement presentation or disclosures.

 

3. Going Concern4. Accounts Receivable, net

The unaudited condensed 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.

 

As of September 30, 2017, the Company had an accumulated deficit of $17,072,416, and net cash used in continuing operating activities of $3,367,270. These circumstances, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. The accompanying unaudited condensed consolidated financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Though the Company is generating additional revenuebut not cash flow while seeking additional equity financing, the Company does not have enough cash to support the operation without raising additional capital, within the one year from the date of the issuance of these financial statements. 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 may not have sufficient liquidity to maintain operations and repay its liabilities for the next twelve months. As a result, the Company may be unable to implement its current plans for expansion, repay its debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations.

4. Accounts Receivable, net

As of September 30, 20172018, and December 31, 2016,2017, we had approximately $15.2 million$6,764,523 and $1.1 million,$28,620, respectively, of accounts receivable from the Company’s customers. Since the Companyobtained a fertilizer sales permit from the Chinese government in August 2016 and began to sell the products directly to its customers in September 2016, the Company’s strategy was to gain market shares in thebio-fertilizermarket by extending longer credit term to its customers. As a result, the Company’s accounts receivable increased from approximately $1.1 million at December 31, 2016 to approximately $15.2 million at September 30, 2017.The Company’s current payment terms on these customers are ranging typically from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers.Thesecustomers are either agricultural cooperative company or distributors who then resell the Company’s products to individual farmers. The reason the Company decides to extend credit for up to 9 months is mainly because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay us. It is very common for cooperative farms and distributors to request longer sales credit under these circumstances.

Based on the evaluation of the collectability of these accounts receivable, the Company has provided allowance for doubtful accounts of approximately $0.3 million as of September 30, 2017. As of the date of this report, the Company has subsequently collected approximately $8.7 million or 56% of these outstanding accounts receivable as of September 30, 2017. The Company expects to fully collect the remaining balance of approximately $6.8 million of these accounts receivable by December 31, 2017.

 

The Company’s provision on allowance for doubtful accounts is based on historical collection experience, the economic environment, trends in the microbial fertilizer industry, and a review of the current status of trade accounts receivable and come up with an aging allowance method. Currently, the Company provides a provision of 1%-6% of the allowance for doubtful accounts for accounts receivable balance that are more than 180 days old but less than one year old, 50% of the allowance for doubtful accounts for accounts receivable from one to one and half years old, 100% of the allowance for doubtful accounts for accounts receivable beyond one and half years old, plus additional amount as necessary, which the Company’s collection department had determined the collection of the full amount is remote with the approval from its management to provide a 100% provision allowance for doubtful accounts. The Company’s management has continued to evaluate the reasonableness of the valuation allowance policy and update it if necessary.

 

Accounts receivable consisted of the following:

 

  September 30, 2018  December 31, 2017 
Accounts receivable $6,764,523  $83,860 
Less: Allowance for doubtful accounts  -   (55,240)
Accounts receivable, net $6,764,523  $28,620 

 

  September 30, 2017  December 31, 2016 
Accounts receivable $15,543,835  $1,177,994 

Less: Allowance for doubtful accounts

  (298,580)  (55,240)
Accounts receivable, net $15,245,255  $1,122,754 

16

 

Movement of allowance for doubtful accounts is as follows:

  Nine months ended September 30, 2017  Year ended
December 31, 2016
 
       
Beginning balance $55,240  $- 
Provision for doubtful accounts  237,998   55,240 
Less: write-off  -   - 
Exchange rate effect  5,342   - 
Ending balance $298,580  $55,240 

5. Prepaid Expense

 

Prepaid expenses consisted of the following:

 

  Notes  September 30, 2017  December 31, 2016 
Prepaid office rent     $21,080  $12,504 
Prepaid government filing expense      33,036   5,000 
Prepaid consulting expenses  (1)   1,160,145   1,400,050 
      $1,214,261  $1,417,554 

 14

  Notes  September 30, 2018  December 31, 2017 
Prepaid office rent     $11,168  $41,487 
Prepaid license Fee (for fertilizer)      -   26,115 
Prepaid government filing expense      9,500   5,000 
Prepaid consulting expenses  (1)  2,818,354   2,392,273 
Others      19,345   9,397 
Total     $2,858,367  $2,474,272 

 

(1) Prepaid consulting expense for issuance of common stock

As of September 30, 2017, the Company issued a total of 1,825,916 shares of common stock to three consulting companies for investor relation consulting services, one individual for financing service, one consulting company for IT service and four individuals for the growth and development strategy consulting service in China, which represents the amount of $1,922,696 based on quoted price at issuance.prepaid services. Pursuant to the indemnification terms of the services agreements, the Company has the rights to demand the full services being accomplished as scheduled during the service period and to enforce the consultants to pay pro-rata penalties if the consultants do not fulfill the contract services within the services periods. As of September 30, 2017,2018, the Company evaluated the performance of the consultants and concluded all the contracts were on schedule of delivery. The Company recorded the prepaid consulting expenses totally $1,922,696 andcompany amortized the consulting fee over the service periods per agreements based on the progress of services delivered. For the ninethree months ended September 30, 20172018 and 2016,2017, the amortization of consulting expense was $474,301$547,509 and $57,717,$164,599, respectively. For the nine months ended September 30, 2018 and 2017, the amortization of consulting expense was $1,815,969 and $474,301, respectively.

 

6. Advance to suppliers

 

Since currentlyAdvance to suppliers are mainly funds deposited for future raw material purchases. As a common practice in China’s agriculture industry, many of these vendors require a certain amount to be deposited with them as a guarantee that the Company does not have manufacturing facility, it has contracted with several third parties to produce fertilizer products.These third parties producewill complete its purchases on a timely basis as well as securing the fertilizer products in accordance with the product formula and specification instructed by the Company.Pursuant to the agreements entered bycurrent agreed upon purchase price. Since the Company anticipates the price of raw materials is on the rise in 2018, it entered large amount of purchase agreements with its major raw materials supplier and those third-party companies, the Company was required to make partiallymade prepayments in advance of securing the purchases or completion of productions onto secure a lower purchase price and timely basis.delivery. As of September 30, 20172018 and December 31, 2016,2017, such advance to suppliers was $ 2,979,664$13,223,623 and $1,880,044,$12,660,793, respectively.

 

7. Inventory

Inventory consisted of the following:

  September 30, 2018  December 31, 2017 
Raw materials $1,360,285  $2,745,991 
Finished goods  253,686   - 
Packing materials  31,362   - 
Total $1,645,333  $2,745,991 

8. Property, Plant and Equipment

 

Property, plant and equipment, net consisted of the following:

 

 September 30, 2017  December 31, 2016  September 30, 2018  December 31, 2017 
Property, Plant and Equipment                
Office equipment $14,270  $896  $17,468  $15,899 
Furniture  22,813   7,838   24,522   23,331 
Leasehold improvement  74,251   66,896   86,850   91,609 
Construction in progress  26,137   -   25,340   26,729 
Others  1,082   -   554   1,106 
Property, plant and equipment - total $138,553  $75,630  $154,734  $158,674 
Less: accumulated depreciation  (54,100)  (20,311)  (99,822)  (68,174)
Property, plant and equipment - net $84,453  $55,319  $54,912  $90,500 

 

Depreciation expense was $11,878$3,930 and $10,045$11,878 for the three months ended September 30, 2018 and 2017, and 2016,$24,381 and $29,527 and $ 13,039 for the nine months ended September 30, 20172018 and 2016,2017, respectively.

8.9. Deposit for Long-Term Investment

 

On June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000 (approximately US$ 2.22.3 million). As of September 30, 2017,2018, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately $751,050)$0.8 million).

 15

Due to certain administrative approval process from the Chinese government, the closing of the equity purchase agreement has been delayed. RMB 6,500,000 (approximately $1.0 million) will be paid upon completion of the land use rights ownership transfer and RMB 3,500,000 (approximately $0.5 million) will be paid upon completion of the business licenses transfer. The Company estimated the completion of the transfer will be sometime in March 2019.

 

9. Salary10. Salaries payable

 

  September 30, 2018  December 31, 2017 
Ms. Yvonne Wang (“Ms. Wang”) $238,000  $175,000 
Other Employees  499,757   116,401 
Total $737,757  $291,401 

There were $1,208,492 and $1,145,492 as at September 30, 2017 and December 31, 2016, respectively, among the balance of salary payable which were due to the former Chairman of the Board and CEO Mr. Li, and the current Chairman of the Board and CEO Ms. Wang. Mr. Li was the Chairman of the Board until November 2015 and was the Chief Executive Officer of the Company until July 2015. No salary was paid to Mr. Li during his service period. Ms. Wang served as Chairman of the Board since November 2015 and served as CEO since August 2016.

No salary was paid to Ms. Wang since December 2015. The Company expects to be in negotiations with both partiesMs. Wang to settle these obligations.

 

10.11. Related Party Transactions

Due from related parties – non-trade

 

Amounts due from related parties consisted of the following as of September 30, 20172018 and December 31, 2016:2017:

 

Item Nature Notes  September 30, 2017 December 31, 2016  Nature Notes  September 30, 2018  December 31, 2017 
                  
Kangtan Gerui (Beijing) Bio-Tech Co., Ltd. (“Gerui”)  Non-trade  (1)  $963,846 $1,522,434 
Mr. Wei Li  Non-trade   (1)  -   19,017 
Mr. Xiaoqiang Yu  Non-trade   (2)  12,726   - 
Total        $963,846 $1,522,434          $12,726  $19,017 

 

(1) GeruiMr. Wei Li

 

Ms. FengDuring the year ended December 31, 2017, Mr. Wei Li, a member of the Company’s board of directorsformer chairman and CEO, founder and major shareholder of the Company, (Ms. Li held approximately 20% of the Company’s Common Stock and 50% of the Company’s Series A Preferred Stock), is alsoobtained a 23% shareholder of Gerui. According to the agreement betweencash advance from the Company and Gerui, all the balances will be paid off before June 30,for operational purpose. The balance was repaid in March 2018.

(1) Mr. Xiaoqiang Yu

During the ninethree months ended September 30, 2017,2018, Mr. Xiaoqiang Yu, the general manager of the operations division of the Company, collected $558,588obtained a cash advance from Gerui and the remaining balance was $963,846 as at September 30, 2017. The management has determined that no allowanceCompany for doubtful debts was necessary.operational purpose.

Due to related parties– non-trade

 

Amounts due to related parties consisted of the following as of September 30, 20172018 and December 31, 2016:2017:

 

Item Nature  Notes  September 30, 2017  December 31, 2016 
             
Ms. Yvonne Wang (“Ms. Wang”)  Non-trade   (1)   130,199   100,798 
Subtotal          130,199   100,798 
                 
CAAS IARRP and IAED Institutes  Trade   (2)   -   160,461 
Subtotal          -   160,461 
Total amount due to related parties          130,199   261,259 
Item Nature  Notes  September 30, 2018  December 31, 2017 
             
Ms. Wang  Non-trade   (1)  517,025   320,199 
Ms. Feng Li (“Ms. Li”)  Non-trade   (2)  36,409   - 
Total amount due to related parties         $553,434  $320,199 

 

(1) Ms. Wang

 

Effective as of November 20, 2015, the Company appointed Ms. Wang as the Chairman of the Board and effective as of August 11, 2016, the Company’s Board of Directors has assigned Ms. Wang the additional titles of Acting President, Acting Chief Executive Officer and Acting Chief Financial Officer. On April 15, 2018, Ms. Wang turned over the Acting Chief Financial Officer to her successor.

 

During the nine months ended September 30, 2018 and 2017, Ms. Wang paid various expenses on behalf of the Company. As of September 30, 2018, and December 31, 2017, the amount due to Ms. Wang was $130,199.$517,025 and $320,199, respectively.

 

(2) CAAS IARRP and IAED InstitutesMs. Feng Li

 

On November 5, 2015, the Company signedMs. Feng Li is a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute of Agricultural Economy & Development (“IAED”). The term of the Agreement was three years that began on November 20, 2015 and ends on November 19, 2018.

Pursuant to the agreement, Kiwa agree to fund RMB 1 million (approximately $160,000) each year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. Professor Yong Chang Wu, the authorized representative of CAAS IARRP, is also onemember of the Company’s board of directors effective since November 20, 2015 until March 13, 2017.

The Company recorded $37,469 and $37,303 researchshareholder of the Company. Ms. Li held approximately 20% of the Company’s Common Stock and development50% of the Company’s Series A Preferred Stock. Ms. Feng Li paid various expenses related toon behalf of the institutes, for the three months endedCompany. As of September 30, 2018, and December 31, 2017, the amount due to Ms. Feng Li was $36,409 and 2016, respectively, and $110,194 and $112,580 research and development expenses for the nine months ended September 30, 2017 and 2016,$0, respectively.

 

 16

The amount due to CAAS IARRP and IAED Institutes was reclassified to other payables and accruals at September 30, 2017 since Professor Yong Chang Wu is no longer the Company’s director from March 13, 2017. See note 13.

11.12. Convertible Notes Payable

 

Convertible notes payable consisted of the following:

  September 30, 2018  December 31, 2017 
6% secured convertible notes – FirsTrust Group Inc. (1) $107,562  $121,562 
15% convertible notes- Mr. Geng Liu (1)  145,635   153,615 
15% convertible notes- Mr. Junwei Zheng (1)  800,990   844,881 
Less: notes discount  (171,716)  (386,776)
Convertible notes payable - total  882,471   733,282 
Non-current  -   (460,082)
Current $882,471  $273,200 

(1)Convertible Notes Payable - Current

 

Convertible notes payable - current consists of $ 150,250$107,562 of 6% secured convertible notes issued to FirsTrust Group Inc. on June 29, 2006, and $136,742$145,635 (face amount $150,208$145,635 net of discount of $13,466)$0) of 15% convertible note issued to Mr. Geng Liu on January 17, 2017, and $629,274 (face amount $800,990 net of discount of $171,716) of 15% convertible note issued to Mr. Junwei Zheng on May 9, 2017.

 

6% secured convertible notes – FirsTrust Group Inc.

 

On June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional investors (collectively, the “Purchasers”) for the issuance and sale of 6% secured convertible notes, due three years from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Convertible Notes”), convertible into shares of the Company’s common stock.

 

On August 12, 2013, the Company, entered into a Settlement Agreement and Release (the “Release”) with the holders (the “Holders”) of the “6% Convertible Notes” in the aggregate principal amount of $2,000,000. Pursuant to the terms of the Release, the Company paid the Holders $75,000 for a full release, including the forgiveness of past defaults of unpaid principal amounts, interests and penalties. During the course of the time, certain notes had been converted as well. On March 18, 2008, FirsTrust Group, Inc. (“FirsTrust”) purchased the three remaining 6% Convertible Notes, totaling $168,000 ($59,100, $50,400 and $59,100 respectively), from Nite Capital, one of the six institutional investors which purchased a total of $300,000 of the Note in three tranches ($105,000, $90,000, $105,000 respectively), for a cash payment of $100,000. After the Release and conversion, FirsTrust is the only holder of the outstanding 6% Convertible Note with outstanding principal amount of $150,250.

On June 29, 2009, the 6% Notes were due. The Company informed the Purchasers of its inability to repay the outstanding balance on the due date. Therefore, the 6% Notes are in default and the default interest rate of 15% per annum is being charged on the 6% Notes.

 

TheOn October 19, 2017, the Company issued total 14,151 common shares at $1.04 per share price to FirsTrust Group, Inc. for the conversion price of convertible note. According to the Notesconvertible note agreement, the conversion price is based on a 40% discount to the average of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period. Theperiod per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled to the fair value of the 14,151 common shares at $2.25 per share, no gain or loss were recognized upon this conversion.

On December 13, 2017, the Company issued total 105,095 common shares at $0.75 per share price to FirsTrust Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price is also adjusted for certain subsequent issuances of equity securitiesbased on a 40% discount to the average of the lowest three days trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period per the convertible notes agreement. As the carrying value of the notes and the intrinsic value of that conversion feature equaled to the fair value of the 105,095 common shares at $2.3 per share, no gain or loss were recognized upon this conversion.

On April 27, 2018, the Company issued total 126,045 common shares at prices below$0.62 per share price to FirsTrust Group, Inc. for the conversion of convertible note. According to the convertible note agreement, the conversion price then in effect. The Notes containis based on a volume limitation that prohibits40% discount to the holder from further convertingaverage of the 6% Notes if doing so would cause the holder and its affiliates to hold more than 4.99%lowest three days trading price of the Company’s outstanding common stock.

The Company has elected to early adoptstock on the guidance in ASU 2017-11.OTC Bulletin Board over a 20-day trading period per the convertible notes agreement. As a result, the Company has concludedcarrying value of the notes and the intrinsic value of that the conversion feature equaled to the fair value of the Notes is indexed to its own stock and would be classified and recorded as equity. The Company retrospectively applied the guidance to the above Notes and determined that the impact of the conversion feature for the above Notes is immaterial.126,045 common shares at $1.3 per share, no gain or loss were recognized upon this conversion.

 

The Company also incurs a financial liquidated damages in cash or shares at the option of the Company (equal to 2% of the outstanding amount of the Notes per month plus accrued and unpaid interest on the Notes, prorated for partial months) if it breaches any affirmative covenants in the Purchase Agreement, including a covenant to maintain a sufficient number of authorized shares under its Certificate of Incorporation to cover at least 110% of the stock issuable upon full conversion of the Notes. Pursuant to the relevant provisions for liquidated damages in Purchase Agreement, the Company has accrued the amounts of $61,730$52,006 and $57,672$61,730 for liquidated damages for the nine months ended September 30, 20172018 and 2016,2017, respectively. The Company also accrued $16,857$12,654 and $16,919$16,857 for interest at the rate of 15% per annum for the nine months ended September 30, 20172018 and 2016,2017, respectively. The total 15% interest accrued was $200,218$173,113 and $177,681$182,858 at September 30, 20172018 and 2016,at December 31, 2017, respectively. The total accrued liquidated damages were $544,056$532,263 and $462,423$522,257 at September 30, 20172018 and 2016,at December 31, 2017, respectively.

 

 17

The Company’s obligations under the Notes are secured by a first priority security interest in the Company’s intellectual property pursuant to an Intellectual Property Security Agreement with the Holders. In addition, Mr. Li, the Company’s former Chief Executive Officer, until July 1, 2015, has pledged all of his common stock of the Company as collateral for the Company’s obligations under the 6% Convertible Notes.

 

On September 19, 2018, the Company has entered a Settlement Agreement and Release with FirsTrust to settle the 6% secured convertible notes and interest and penalties. The Company has agreed to allow FirsTrust to effect a conversion in accordance with the terms of the 6% Note by October 18, 2018, and to make a cash payment of $500,000 by December 17, 2018. If the payment is not timely made, then FirsTrust shall be permitted to immediately effect further conversion in accordance with the terms of the 6% Notes into the Company’s shares, and the Company shall make a final cash payment of $340,000 by February 28, 2019. As of the date of this filing, the Settlement Agreement has not been carried out by the Company as agreed. The interest and penalties on this Note are continuously accrued in accordance with the original terms.

20

15% convertible notes- Mr. Geng Liu

 

On January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng Liu with principal of RMB 3 million. The note bears interest at 15% per annum and will mature on January 16, 2018. Before the maturity date, the Note holder has an option to convert partial or all of the outstanding principal to the Company’s common shares with a conversion price of $0.90 per share. As of September 30, 2017,Subsequently, the Company has received partial principal totaled RMB 1 million ($150,208 equivalentrevalued as at September 30, 2017).reached an agreement with Mr. Geng Liu that the maturity date will be extended to December 31, 2018.

 

The notes are convertible into shares of the common stock, at conversion price is $0.9$0.90 which is lower than the price of the Company’s common stock on the date of issue. Therefore, the conversion feature embedded in the convertible note meet the definition of beneficial conversion feature (“BCF”). The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date. The relative fair values of the BCF were recorded into additional paid in capital, and the remainder proceeds of $99,850 from issuance of the convertible note was allocated to convertible notes payable.

 

For the nine months ended September 30, 2018 and 2017, the Company recorded interest expense of $19,477 and $45,535 on the note, including the amortization of the debt discount resulting from the value of beneficial conversion feature, and the carrying value of the note as at September 30, 20172018 was $136,742 .

(2) Convertible Notes Payable - Non-current and derivative liabilities

Convertible notes payable – non-current consists $826,148 of 15% convertible note issued to Mr. Junwei Zheng on May 9, 2017.$145,635.

 

15% convertible notes- Mr. Junwei Zheng

 

On May 9, 2017, the Company entered a Convertible Note Agreement with Mr. Junwei Zheng with principal of RMB 30 million. The note bears interest at 15% per annum and will mature on May 8, 2019. Before the maturity date, the Note holder has an option to convert partial or all of the outstanding principal and accrued interest to the Company’s common shares with a conversion price of $3.5 per share. As of September 30,In May 2017, the Company has received partial principal totaled RMB 5.5 million ($826,148800,990 equivalentrevalued USD at September 30, 2017).2018) out of the RMB 30 million Convertible Note Agreement. In August 2017, Mr. Junwei Zheng informed the Company that he will not purchase the remaining convertible notes of RMB 24.5 million.

 

The notes are convertible into shares of the common stock, at conversion price is $3.5 which is higher than the price of the Company’s common stock on the date of issue, therefore the conversion feature embedded in the note was out of money at the issue date thus did not meet the definition of BCF. The Company determined that conversion option embedded in the note meet the definition of a derivative instrument. Since the embedded conversion price of the conversion feature is denominated in U.S. dollar, a currency other than the convertible note payable currency. As a result, the embedded conversion feature is not considered indexed to the Company’s own stock due to the variable exchange rate between U.S. Dollar and RMB, and as such, the Company determined that the embedded conversion feature to be carried as a liability and remeasured at fair value at each financial reporting date until such time as the conversion feature is exercised or expired. The Company evaluated the fair value of the embedded conversion feature at the issue date and recorded the amount into as discount to convertible note payable. The discount to convertible note payable is being amortized to interest expense over the life of the note using the straight-line method, which approximates the effective interest method.

 

The fair value of embedded conversion feature werewas calculated using the BlackScholesMerton model based on the following variables at inception on May 9, 2017:

 

 Strike price of $3.5, for the conversion options
   
 Expected volatility of 260.8% calculated using the Company’s historical price of its common stock
   
 Expected dividend yield of 0%
   
 Risk-free interest rate of 1.37%, for the conversion options
   
 Expected lives of 2.0 years
   
 Market price at issuance date of $2.7

The fair value of embedded conversion feature were calculated using the BlackScholesMerton model based on the following variables on September 30,December 31, 2017:

 

 Strike price of $3.5, for the conversion options
   
 Expected volatility of 158.1%151.9% calculated using the Company’s historical price of its common stock
   
 Expected dividend yield of 0%
   
 Risk-free interest rate of 1.43%1.80%, for the conversion options
   
 Expected lives of 1.581.33 years
Market price at issuance date of $2.0

The fair value of embedded conversion feature was calculated using the BlackScholesMerton model based on the following variables on September 30, 2018:

Strike price of $3.5, for the conversion options
Expected volatility of 107.27% calculated using the Company’s historical price of its common stock
Expected dividend yield of 0%
Risk-free interest rate of 2.40%, for the conversion options
Expected lives of 0.58 years
   
 Market price at remeasurement date of $2.5$0.75

 

On May 9, 2017, the Company recorded $569,784 as derivative liability for fair value of the conversion option. The initial carrying value of the Notes was $227,051. On September 30,December 31, 2017, the fair value of derivative liabilities was recalculated at $370,733.$247,933. On September 30, 2018, the fair value of derivative liabilities was recalculated at $3,437. For the three months and nine months ended September 30, 2017,2018, the Company recognized a gain of $205,612$42,125 and $199,051,$244,496, respectively, in change in fair value of derivative liabilities.

 

For the three and nine months ended September 30, 2017,2018, the Company recorded interest expense of $162,520$102,374 and $307,915 on the note, including the amortization of the debt discount resulting from the value of the embedded conversion feature, and the carrying value of the note as of September 30, 20172018 was $370,321.$629,274.

 

12.13. Note Payable

 

On May 29, 2007, the Company issued a $360,000 promissory note (the “Promissory Note”) to an unrelated individual (the “Original Note holder”). This note bears interest at 18% per annum and was due on July 27, 2007. This note is currently in default and bears interest of 25% per annum (the “Default rate”) until paid in full. This note is secured by a pledge of shares of the Company’s common stock owned by Investlink (China) Limited (the “Pledged Shares”). The Company accrued $22,500 and 22,500 interest expense on note payable for the three months ended September 30, 2017 and 2016, respectively, and $67,500 and $67,500 interest expense on note payable for the nine months ended September 30, 2018 and 2017, and 2016, respectively.

 18

 

As of December 31, 2016, the Original Note holder informed the Company that all right, title and interests in the Promissory Note has been assigned and transferred to FirsTrust. As of September 30, 2017,2018, all of $360,000 of Promissory Note to FirsTrust is still outstanding, and total accrued interest of the Promissory Note is $ 926,800.$1,016,800.

On September 19, 2018, the Company has entered a Settlement Agreement and Release with Firs Trust to settle the Notes and interest. The Company has begun preliminary discussion withagreed to make a cash payment of $200,000 and issue 300,000 Shares to FirsTrust with regardsby October 18, 2018 and to make a potential settlementfinal cash payment of $260,000 by February 28, 2019. However, the Note, but no agreementCompany has been reached yet.not performed its obligations in the Settlement Agreement and considered the payment terms as default and continued to accrue its interest after September 19, 2018.

22

 

13.14. Other Payables and accruals

 

Other payable consisted of the following:

 

 Notes  September 30, 2017 December 31, 2016  Notes  September 30, 2018  December 31, 2017 
Stock subscription proceeds received in advance  (1) $1,310,522  $460,617   (1) $1,693,106  $1,718,642 
Investment received in advance  (2)  -   79,168 
Accrued expenses     59,216   385,090       209,347   36,240 
R&D expense payable     271,151   -       423,565   309,555 
Others      496,077   44,436 
    $1,640,889  $924,875      $2,822,095  $2,108,873 

 

(1). The Company received RMB 3.2 million (approximately $466,030 as at September 30, 2018) in 2016 and RMB 5.5 million for the nine months ended September 30, 2017 from fourtwo unrelated potential investors, which was approximately $1,310,522.and additionally received RMB 8 million (approximately $1,227,075 as at September 30, 2018) in 2017 from one unrelated potential investors pending for stock issuances. The Company has subsequently issued 38,000is in the process of negotiating the issuance price per shares of commonthese stock to one investor forsubscriptions with the amount $ 76,000 (RMB 0.5 million) and the other investment agreements have not been finalized yet for the remaining part.

(2). The Company received the investment funds in advance in 2016 from Mr. Geng Liu, which amount was approximately $79,168. Subsequently on January 17, 2017, the Company entered a Convertible Note Agreement with Mr. Geng. The note bears interest at 15% per annum and will mature on January 16, 2018. See Note 12.investors.

 

14.15. Stockholders’ Equity (Deficiency)

 

Preferred stock

 

On December 14, 2015, the Company issued 500,000 shares of preferred stock series A for the aggregate amount of $1,000,000 as debt cancellation owed to two related party individuals.

 

Reverse Split

On January 14, 2016,These shares of Series A Preferred Stock shall have voting rights equal to aggregate of 75% of total shares entitled to vote by both (i) the Company filed a Certificateholders of Amendmentall of its Certificate of Incorporation with the State of Delaware with reference to a 1-for-200 reverse stock split with respect to its Common Stock with effective date of January 28, 2016. In connection with the reverse split, the Company’s authorized capital was amended to be 120,000,000 shares, comprising 100,000,000then outstanding shares of Common Stock par value $0.001(whether or not such holders vote) and 20,000,000(ii) the holders of all of the then outstanding shares of the Company. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. The Company shall have the right to redeem the Series A Preferred Stock, par value $0.001. All relevant information relatingplus any accrued and unpaid dividends at a cash redemption price equal to numbersthe aggregate issuance price of $2.0 per share.

On December 28, 2017, the Company issued 811,148 shares of preferred stock series B for the aggregate amount of $1,054,492 as debt cancellation owed to one related party individual.

These shares of Series B Preferred Stock have a liquidation preference which is same with the Company’s Series A Preferred Stock and is entitled to vote on an as-converted basis as the holder of common stock and is convertible into the Company’s common stock on a one-for-one basis at any time at the option of the holder. The holders of preferred stock are entitled to receive noncumulative dividends, when and if declared by the board of directors. Dividends are not mandatory and shall not accrue. The Company shall have the right to redeem the Series B Preferred Stock, plus any accrued and unpaid dividends at a cash redemption price equal to the aggregate issuance price of $1.3 per share information have been retrospectively adjustedshare.

In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, distributions to reflect the reversestockholders of the Company should firstly go to the holders of Series A and B preferred stock. After the payment of the full Series A and B liquidation preference, the remaining assets of the Company legally available for distribution shall be distributed ratably to the holders of the common stock splitin an amount equal to the full payment of the full Series A and B liquidation preference, after such distributions to the holders of the Common stock , the remaining assets of the Company legally available for all periods presented.distribution shall be distributed ratably among the holders of Series A and B preferred stock and the holders of the common stock.

 

Common stock

 

During the nine months ended September 30, 2017,2018, the Company issued 1,674,900247,700 common shares to sixfive individuals residing in China for net proceeds of $2,410,654.$307,600. The sales were completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933, as amended.

On JuneDuring the nine months ended September 30, 2017,2018, the Company entered into ten consulting agreements and issued 97,8501,347,918 shares of common sharesstock to ten employeesconsultants for cash at $1.95 per share for an aggregate price to $190,807. The difference $102,273IR, Training system, and business development services based on market price of the calculation between stockshares at the transaction dates. The valuation of the shares utilized an average issuance price and employee purchase price was recognized as expense of employee benefits and accordingly, credited the same amount to APIC.$1.66 per share.

 19

 

During the nine months ended September 30, 2018, the Company issued 15,234 common shares to one officer for salary payment based on the average stock price of his service period which valued at $16,622.

Conversion of convertible note

As disclosed in Note 13(1), on October 19, 2017, the Company entered into ten consulting agreements and issued 665,988total 14,151 common shares at $1.04 per share price to FirsTrust Group, Inc. for the conversion of convertible note.

As disclosed in Note 13(1), on December 13, 2017, the Company issued total 105,095 common stocksshares at $0.75 per share price to consultantsFirsTrust Group, Inc. for financing, business development services and IT services basedthe conversion of convertible note.

As disclosed in Note 13(1), on marketApril 27, 2018, the Company issued total 126,045 common shares at $0.62 per share price to FirsTrust Group, Inc. for the conversion of issuance.convertible note.

 

Additional paid-in-capital

 

As disclosed in Note 11(1)13(1), on January 17, 2017, the Company issued RMB 1 million ($144,944 equivalent).Convertible. Convertible Note to Mr. Geng Liu with BCF embedded. The Company evaluated the intrinsic value of the BCF as $45,094 at the issue date and recorded the amount into additional paid in capital. All other amounts recorded in additional paid in capital are derived from issuance of preferred shares or common shares as disclosed in the above.

 

15.16. Stock-based Compensation

 

On March 15, 2017, the Board of Directors approved a new stock option plan with ten years’ term. As of September 30, 2017,2018, the Company has not granted any incentive compensation under this plan.

 

16.17. Fair Value Measurements

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities recorded at fair value on recurring basis that were accounted for at fair value as of:

 

September 30, 2018

Recurring Fair Value Measures Level 1  Level 2  Level 3  Total 
Derivative liabilities       $3,437  $3,437 
Total       $3,437  $3,437 

December 31, 2017

 

Recurring Fair Value Measures Level 1  Level 2  Level 3  Total 
Derivative liabilities       $370,733  $370,733 
Total       $370,733  $370,733 

Recurring Fair Value Measures Level 1  Level 2  Level 3  Total 
Derivative liabilities       $247,933  $247,933 
Total       $247,933  $247,933 

The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 20172018 and for the year ended December 31, 2016:2017:

 

 Nine months ended September 30, 2017 

Year ended

December 31, 2016

  Nine months ended September 30, 2018 Year ended
December 31, 2017
 
          
Beginning balance $-  $     -  $247,933  $- 
Fair value of derivative liabilities at inception  569,784   -   -   569,784 
Change in fair value of derivative liabilities  (199,051)  -   (244,496)  (321,851)
Ending balance $370,733  $-  $3,437  $247,933 

 

17.18. Income Tax

 

In accordance with the current tax laws in the U.S., the Company is subject to a corporate tax rate of 34%21% on its taxable income. No provision for taxes is made for U.S. income tax for the three and nine months ended September 30, 20172018 and 20162017 as it has no taxable income in the U.S.

On December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. Accordingly, we have remeasured our deferred tax assets on net operating loss carryforwards in the U.S at the lower enacted cooperated tax rate of 21%. However, this re-measurement has no effect on the Company’s income tax expenses as the Company has provided a 100% valuation allowance on its deferred tax assets previously.

Additionally, the 2017 Tax Act implemented a modified territorial tax system and imposing a tax on previously untaxed accumulated earnings and profits (“E&P”) of foreign subsidiaries (the “Toll Charge”). The Toll Charge is based in part on the amount of E&P held in cash and other specific assets as of December 31, 2017. The Toll Charge can be paid over an eight-year period, starting in 2018, and will not accrue interest. The 2017 Tax Act also imposed a global intangible low-taxed income tax (“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. As a fiscal-year taxpayer, certain provisions of the 2017 Tax Act may impact the Company in fiscal 2018, including the Toll Charge, while other provisions, including the GILTI, will be effective starting at the beginning of fiscal 2018.

On December 22, 2017, the Securities and Exchange Commission Staff issued Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that extends beyond one year from the 2017 Tax Act’s enactment date for registrants to complete the accounting under ASC 740. In accordance with SAB 118, a registrant must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a registrant’s accounting for certain income tax effects of the 2017 Tax Act is incomplete, but the registrant is able to determine a reasonable estimate, the registrant must record a provisional estimate to be included in its financial statements. If a registrant is unable to determine a reasonable estimate and record a provisional estimate, the registrant should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.

The Company has determined that this one-time Toll Charge has no effect on the Company’s income tax expenses as the Company has no undistributed foreign earnings prior to December 31, 2017 since the Company has cumulative foreign losses as of December 31, 2017.

The Company determined that there is no impact of GILTI for the year ending December 31, 2018, which the Company believes that it will be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax, which may result in no additional US federal income tax being due.

 

In accordance with the current tax laws in China, Kiwa Shandong, Kiwa Beijing, Kiwa Shenzhen, Kiwa Xian, and Kiwa Hebei, Kiwa Shanxi, and Kiwa Yangling is subject to a corporate income tax rate of 25% on its taxable income. Kiwa ShandongXian, Kiwa Hebei, Kiwa Shenzhen, and Kiwa Shanxi has not provided for any corporate income taxes since it had no taxable income for the three and nine months ended September 30, 2017 and 2016. Kiwa Shenzhen and Kiwa Hebei has not provided for any corporate income taxes since it had no taxable income for2018. For the three andmonths ended September 30, 2018, Kiwa Beijing recorded no income tax provision; Kiwa Yangling recorded RMB 3,483,206 or approximately $514,000 income tax provision. For the nine months ended September 30, 2017 and 2016. For the three and nine months ended September 30, 2017,2018, Kiwa Beijing recorded no currentRMB 3,074,370 or approximately $472,000 income tax provision; Kiwa Yangling recorded RMB 6,120,407 or approximately $940,000 income tax provision.

In accordance with the relevant tax laws in the British Virgin Islands, Kiwa BVI, as an International Business Company, is exempt from income taxes.

 

A reconciliation of the provision for income taxes from continuing operation determined at the local income tax rate to the Company’s effective income tax rate is as follows:

 

  Three months ended
September 30,
  Nine months ended
September 30,
 
  2017  2016  2017  2016 
             
Pre-tax income (loss) from continuing operation $(850,876) $224,712  $(2,227,413) $570,397 
                 
U.S. federal corporate income tax rate  34%  34%  34%  34%

Income tax expense (benefit) computed at U.S. federal corporation income tax rate

  (289,298)  76,402   (757,320)  193,935 
Reconciling items:                
Rate differential for PRC earnings  85,840   (32,403)  133,249   (28,419)
Change of valuation allowance  73,251   60,880   381,789   180,581 
Effect of tax exempted income in BVI  7,139   (25,934)  21,422   (267,152)
Effective tax expenses (benefits) $(123,068) $78,945  $(220,860) $78,945 

 20

  Three months ended
September 30,
  Nine months ended
September 30,
 
  2018  2017  2018  2017 
             
Pre-tax income (loss) from continuing operation $1,137,761  $(850,876) $1,452,570  $(2,227,413)
                 
U.S. federal corporate income tax rate  21%  34%  21%  34%
Income tax expense (benefit) computed at U.S. federal corporation income tax rate  238,930   (289,298)  305,040   (757,320)
Reconciling items:                
Rate differential for PRC earnings  75,311   85,840   155,581   133,249 
Change of valuation allowance  193,880   73,251   934,250   381,789 
Effect of tax exempted income in BVI  6,279   7,139   16,738   21,422 
Deferred tax used to offset tax liability  -   -   -   - 
Effective tax expenses (benefits) $514,400  $(123,068) $1,411,609  $(220,860)

 

The Company had deferred tax assets from continuing operation as follows:

 

  September 30, 2017  December 31, 2016 
       
Net operating losses carried forward by the Company and its China subsidiaries except for Kiwa Beijing $2,814,453  $2,555,064 
Less: Valuation allowance  (2,814,453)  (2,555,064)
Bad debt allowance  63,244   - 
Net operating losses carried forward by Kiwa Beijing  183,628   - 
         
Net deferred tax assets $246,872  $- 
  September 30, 2018  December 31, 2017 
       
Net operating losses carried forward by parent Company in the US $2,098,681  $1,746,802 
Net operating losses carried forward by China Subsidiaries except for Kiwa Beijing  630,161   311,925 
Less: Valuation allowance  (2,728,842)  (2,058,727)
         
Net deferred tax assets $-  $- 

 

As of September 30, 20172018 and December 31, 2016,2017, the Company had approximately $8.3$13.0 million and $7.5$9.5 million net operating loss carryforwards available to reduce future taxable income. Net operating loss of the parent Company could be carried forward and taken against any taxable income for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the Internal Revenue Code of 1986, as amended. The net operating loss of Kiwa Shenzhenthe Company’s PRC subsidiaries could be carried forward for a period of not more than five years from the year of the initial loss pursuant to relevant PRC tax laws and regulations. It is more likely than not that the deferred tax assets cannot be utilized in the future because there will not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.

 

As of September 30, 2017, the Company had approximately $0.1 million deferred tax assets on bad debt allowance. Bad debt allowance must be approved by the PRC tax authority prior to being deducted as an expense item on the tax return.

As of September 30, 20172018, and December 31, 2016,2017, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the ninethree and six months ended September 30, 20172018 and December 31, 2016,2017, and no provision for interest and penalties is deemed necessary as of September 30, 20172018 and December 31, 2016.2017.

26

 

18.19. Commitments and Contingencies

 

The Company has the following material contractual obligations:

 

(1) Investment in manufacturing facilities in Penglai City, Shandong Province in China

 

As disclosed in Note 8,9, on June 8, 2017, Kiwa Hebei entered an equity purchase agreement with the shareholders of Yantai Peng Hao New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao for approximately RMB 15,000,000 (approximately US$ 2.22.3 million). As of September 30,December 31, 2017, Kiwa Hebei has made deposit payment of RMB 5,000,000 (approximately $751,050)$0.8 million) and is committed to pay the remaining RMB10,000,000 based on the payment milestone in the equity purchase agreement. RMB 6,500,000 (approximately $1.0 million) will be paid upon completion of the land use rights ownership transfer and RMB 3,500,000 (approximately $0.5 million) will be paid upon completion of the business licenses transfer.

 

(2) Strategic cooperation with the institutes in China

 

On November 5, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute of Agricultural Economy & Development (“IAED”). Pursuant to the Agreement, the Company will form a strategic partnership with the two institutes and establish an “International Cooperation Platform for Internet and Safe Agricultural Products”. To fund the cooperation platform’s R&D activities, the Company will provide RMB 1 million (approximately $160,000) per year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. The term of the Agreement is for three years beginning November 20, 2015 and will expire on November 19, 2018. However, the Company is only liable for the annual funds to be provided to the extent of the contract obligations performed by CAAS IARRP and IAED, and the agreement is terminable before the three years’ commitment date based on negotiations of both parties. (3) Guarantee

 21

 

(3) Guarantee for Huinong Wanjia Hebei Agricultural Technology Service Co., Ltd.

On June 21, 2018, Shandong Ronghua Bio-Tech Co., Ltd. (“the supplier”) entered into a Purchase Agreement with Huinong Wanjia Hebei Agricultural Technology Service Co., Ltd (“the purchaser”), wherein the purchaser agreed to purchase 5,000 tons of Bio-Organic fertilizer for an aggregate purchase amount of US$571,667 dollars (RMB 3,700,000). This arrangement was supported by the Company’s guarantee that the supplier would fulfill all terms specified in the purchase agreement.

(4) Lease payments

 

(a) On March 21, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd.The Company entered an officevarious lease agreement with two-year term. Monthly lease payment fee totaled RMB 68,133 or approximately USD $10,536.

(b) On November 20, 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. entered an apartment lease agreementagreements for its employees. The lease term is one year with monthly lease payment of RMB 6,000 or approximately USD $896. This lease was terminated on May 31, 2017 upon mutual agreement.

(c) On March 1, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd, a newly established subsidiary entered an office lease agreement with one-year term. Monthly lease payment is RMB 29,000 or approximately of USD $4,320. This lease was terminated on August 31, 2017.

(d) On June 20, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd, a newly established subsidiary entered an office lease agreement with two-year term. Monthly lease payment is RMB 117,221 or approximately of USD $17,213 for the first year and RMB 124,254 or approximately of USD $18,245 for the second year. And the previous lease agreement terminated automatically since the landlord is the same one.

(e) On September 1, 2017, Kiwa Bio-Tech (Shenzhen) Co., Ltd. entered a storage lease agreement with one-year term. Monthly lease payment fee totaled RMB 4,800 or approximately USD $721.

(f) On May 5, 2017, Kiwa Bio-Tech Products Group Corporation entered an office lease agreement with 13 months term. Monthly lease payment totaled USD $781.15.

(g) On July 1, 2017, Kiwa Bio-Tech Products Group Corporation entered an office lease agreement with one-year term. Monthly lease payment totaled USD $1,087.

(h) On July 4, 2017, Kiwa Bio-Tech (Hebei) Co., Ltd, a newly established subsidiary entered an office lease agreement with one-year term. Monthly lease payment is RMB 2,000 or approximately of USD $301.

(i) On September 1, 2017, Kiwa Bio-Tech (Hebei) Co., Ltd, entered an apartment lease agreement for its employees. The lease term is one year with monthly lease payment of RMB 1,060 or approximately USD $161.

business purpose. The future lease payments at September 30, 20172018 are summarized below.below:

 

Twelve months ending September 30, 2018 $314,214 
Twelve months ending September 30, 2019 $167,976  $53,356 
Twelve months ending September 30, 2020  12,632 
Twelve months ending September 30, 2021  4,709 
Thereafter  -   - 
Total minimum lease payment $482,190  $70,697 

 

19.20. Concentration of Risk

 

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of September 30, 20172018, and December 31, 2016, $23,275,2017, $11,094, and $13,469$1,083,539 were deposited with various major financial institutions located in the PRC, respectively. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.

 

Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

Customer and vendor concentration risk

 

For the three months ended September 30, 2018, one customer accounted for 99% for the Company’s total sales. For the nine months ended September 30, 2018, four customers accounted for 36%, 32%, 20% and 10% for the Company’s total sales. For the three and nine months ended September 30, 2017, five customers accounted for 23%, 14%, 14%, 14% and 14% offor the Company’s total sales. For the nine months ended September 30, 2016, one customer accounted for 100% of the Company’s revenues.

 

As of September 30, 2017,2018, three customers accounted for 45%42%, 30% and 12%27% of the Company’s accounts receivable. As of December 31, 2016, one customer2017, three customers accounted for 100%52%, 22% and 14% of the Company’s accounts receivable.

 

For the three months ended September 30, 2018, one supplier accounted for 94% of the Company’s total purchases. For the nine months ended September 30, 2018, three suppliers accounted for 53%, 24% and 17% of the Company’s total purchases.

For the three months ended September 30, 2017, one supplier accounted for 93% of the Company’s total purchase. For the nine months ended September 30, 2017, one supplier accounted for 93% of the Company’s total purchases. For the nine months ended September 30, 2016, one supplier accounted for 91% of the Company’s total purchases.purchase.

 

As of September 30, 2018, three suppliers accounted for 76%, 13% and 11% of the Company’s accounts payable, respectively. As of December 31, 2017, two suppliers accounted for 81%67% and 13%27% of the Company’s accounts payable.payable, respectively.

As of September 30, 2018, two suppliers accounted for 55% and 44% and of the Company’s advance to suppliers. As of December 31, 2016, two suppliers2017, one supplier accounted for 57% and 43%97% of the Company’s accounts payable.

20. Discontinued Operation

On February 11, 2017, the Company executed an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) whereby the Company transferred all of its right, title and interest in Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Shandong”)advance to the Transferee for the RMB 1.00. The government approval and processing of the transaction was completed on April 12, 2017. This transaction was considered as completed and effective on April 12, 2017.suppliers.

The following table summarizes the assets and liabilities of the discontinued operation, excluding intercompany balances eliminated in consolidation, at April 12, 2017 and December 31, 2016, respectively:

  April 12, 2017  December 31, 2016 
Assets held for sale:        
Property, plant and equipment – Original cost  2,117,324   2,117,324 
Less: accumulated depreciation  (765,598)  (765,598)
Less: impairment  (1,351,726)  (1,351,726)
Deferred tax assets  1,013,365   1,013,365 
Less: Deferred tax assets allowance  (1,013,365)  (1,013,365)
Total assets of business held for sale $-  $- 
         
Liabilities of business held for sale:        
Accounts Payable  253,208   251,466 
Advances from customers  12,972   12,883 
Salary payable  537,127   533,432 
Accrued expense  29,035   28,835 
Other payable  102,291   101,588 
Due to related party-trade  1,130,534   1,122,754 
Loan payable  1,666,813   1,655,343 
Construction cost payable  257,309   255,539 
Tax payable  522,893   502,845 
Total liabilities of business held for sale $4,512,182  $4,464,685 

 22

The income statements for the three and nine months ended September 30, 2017 and 2016 reflected the Kiwa Shandong business segment as a discontinued operation. The following results of operations of Kiwa Shandong are presented as a loss from a discontinued operation in the unaudited condensed consolidated statements of operations:

  Three months ended September 30,  Nine months ended September 30, 
  2017  2016  2017  2016 
             
Net sales  -   -   -   - 
Gross profit  -   -   -   - 
Operating expense  -   52,166   16,790   159,745 
Income tax  -   -   -   - 
Loss from discontinued operations $-  $52,166  $16,790  $159,745 

The following is the calculation of the gain on the sale of Kiwa Shandong:

Selling price $- 
Net assets (liabilities) transferred at the transaction date $(4,512,182)
Gain on sale of discontinued operations $4,512,182 

 23

 

21. Subsequent Events

 

On October 24, 2017,12, 2018, Kiwa Bio-Tech Products Group Corp. got the Company issued 38,000 sharesapproval for the use of restricted common stock at $2.00 per sharea parcel of land from the Administrative Committee of Yangling Agricultural High-tech Industry Demonstration Zone to Erli Weiconstruct a new manufacturing facility to help meet the growing demand in China for an aggregate amountbio-fertilizers. Yangling Free Trade Zone has agreed to offer Kiwa Bio-Tech approximately US$432,975 (3,000,000 RMB) in incentives and provide tax preferences for the first three years of $76,000. The Company has received the full amount.production.

 

On October 19, 2017,The manufacturing facility will specialize in developing and producing Kiwa Bio-Tech’s core microbes, the Company issuedfundamental components for making high-quality bio-fertilizers. The total 14,151 common shares at $1.04 per share price to FirsTrust Group, Inc. for the conversion of convertible note.According to the convertible note agreement, the conversion pricefacility construction area is based onapproximately 8.77 acres, and will include fermentation and production terminals, agricultural produce sorting facilities and storage, a 40% discount to the averageresearch and development institute and corresponding ancillary facilities. The construction of the lowest three days trading pricemanufacturing facility is expected to be completed in 2020 and have a production capacity of the Company’s common stock on the OTC Bulletin Board60,000 tons of Kiwa Bio-Tech’s core microbes. The annual production value is expected to be over a 20-day trading period per the convertible notes agreement.US$65 million (approximately 462 million RMB).

 

On October 24, 2017, the Company issued a total of 1,338,000 common shares to nine individuals for their consulting services to assist the Company in marketing and financing projects. The number of shares was determined based on the fair value of the services. The agreements have terms ranging from one to three years.

28

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 20172018 contains “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, 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, 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-Q for the three and nine months ended September 30, 20172018 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

 

The Company took its present corporate form in March 2004 when shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company originally organized under the laws of the British Virgin Islands on June 5, 2002 and Tintic Gold Mining Company (“Tintic”), a corporation originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah, entered into a share exchange transaction. The share exchange transaction left the shareholders of Kiwa BVI owning a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic. For accounting purposes this transaction was treated as an acquisition of Tintic by Kiwa BVI in the form of a reverse triangular merger and a recapitalization of Kiwa BVI and its wholly owned subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”). On July 21, 2004, we completed our reincorporation in the State of Delaware. On March 8, 2017, we completed our reincorporation in the State of Nevada.

 

On November 30, 2015, we entered into an acquisition agreement (the “Agreement”) with the shareholders of Caber Holdings LTD, whose Chinese name is Hong Kong Baina Group Co., Ltd, located in Hong Kong (“Baina Hong Kong”), and Oriental Baina Co. Ltd. (hereinafter referred to as “Baina Beijing”), Baina Hong Kong’s wholly-owned subsidiary in Beijing, China. Kiwa will rename Baina Beijing toThe Company currently mainly operates its business through its subsidiaries Kiwa Baiao Co. Ltd. Kiwa Baiao Co. Ltd will replace Kiwa’s current subsidiary in China - Kiwa Bio-Tech (Shandong) Co., Ltd (“Kiwa Shandong”) - to operate Kiwa’s bio-fertilizer market expansion and become Kiwa’s platform for future acquisitions of new agricultural-related projects in China. In accordance with the terms of the Agreement, Kiwa agreed to pay approximately $34,000 (RMB 220,000) to the Baina Hong Kong Shareholders, a group of unrelated third parties, for the acquisition of 100% of the equity of Baina Hong Kong. The acquisition was completed on January 7, 2016. Both Baina Hong Kong and Baina Beijing had no activities before the acquisition date and had no assets and liabilities. The purpose of this acquisition was to acquire Baina Hong Kong’s corporation registration in Hong Kong and in China.

We previously established a subsidiary in China, Kiwa Shandong in 2002, a wholly-owned subsidiary, engaging in the bio-fertilizer business. Formerly, our subsidiary Tianjin Kiwa Feed(Beijing) Co., Ltd. (“Kiwa Tianjin”Beijing”) which was acquired in January 2016, Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. (“Kiwa Shenzhen”), which was engagedincorporated in the bio-enhanced feed business. At the end of 2009,China in November 2016, Kiwa Tianjin could no longer use its assets including machineryBio-Tech Products (Hebei) Co., Ltd. (“Kiwa Hebei”), which was incorporated in China in December 2016, and inventoryKiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch Company, (“Kiwa Xian”), which was incorporated in the normal course of operations. Kiwa Tianjin has been dissolved sinceChina in December 2017. In July 11, 2012. On February 11, 2017, the Company entered an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co.established Kiwa Bio-Tech Asia Holding (Shenzhen) Ltd. (“Transferee”Kiwa Asia”) to transfer allbe the direct holding company of shareholders’ right, titleKiwa Beijing, Kiwa Shenzhen, Kiwa Xian and interestKiwa Hebei. The Company established Inner Mongolia Jing Nong Investment & Management, Ltd. (“Kiwa Jing Nong”) in August 2017. The Company established Kiwa ShandongBio-Tech (Shanxi) Engineering Co., Ltd. (“Kiwa Shanxi”) in February 2018. The Company established Kiwa Bio-Tech (Yangling) Co., Ltd. (“Kiwa Yangling”) and The Institute of Kiwa-Yangling Ecological Agriculture and Environment Research Co., Ltd. (“Kiwa Institute”) in March 2018.

The Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological products for agricultural use. Our products are designed to enhance the Transfereequality of human life by increasing the value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes.

On October 12, 2018, the Company got the approval from the Administrative Committee of Yangling Agricultural High-tech Industry Demonstration Zone to obtain land to construct a new manufacturing facility to help meet the growing demand in China for RMB1.00. On April 12, 2017,bio-fertilizers. Yangling Free Trade Zone has agreed to offer the government processingCompany approximately US$432,975 (3,000,000 RMB) in incentives and provide tax preferences for the first three years of transfer has been completed.production. The manufacturing facility will specialize in developing and producing Kiwa Bio-Tech’s core microbes, the fundamental components for making high-quality bio-fertilizers. The total facility construction area is approximately 8.77 acres, and will include fermentation and production terminals, agricultural produce sorting facilities and storage, a research and development institute and corresponding ancillary facilities. The construction of the manufacturing facility is expected to be completed in 2020 and have a production capacity of 60,000 tons of Kiwa Bio-Tech’s core microbes. The annual production value is expected to be over US$65 million (approximately 462 million RMB).

 

  2429 

 

Principal Factors Affecting Our Financial Performance

 

We believe that the following factors that would affect our financial performance:

 

We believe that the following factors could affect our financial performance:

 Change in the Chinese Government Policy on agricultural industry.industry. The Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry. Below areis a list of government policies issued by the Chinese Government to promote green environment and these policies are either directly or indirectly to encourage the end users of the bio-fertilizer to use more organic related products. Unfavorable changes to these policies could affect demand of our products that we produce and could materially and adversely affect the results of operations. Although we have generally benefited from these policies by using our bio-fertilizer to enhances the capacity of plants to transform inorganic materials to organic products, to boost overall plant health and productivity and not to deteriorate landfall soil.

 

 o

In April 2008, the Ministry of Finance of PRC issued Circular No. 2008-56 to tax-exempt value-added taxes on all organically fertilizer related products effectively from June 1, 2008.

 o
In January 2016, the PRC State Council official website issued statements to fasten the agricultural modernization process.
 o
In June 2016, the PRC State Council issued Circular No. 2016-31 to prevent further deterioration of landfall soil action plan.
 o
In February 2017, the PRC State Council official website issued statements to promote agricultural structural reform on accelerating the cultivation in the agricultural development.
 o

In February 2017, the Ministry of Agriculture of PRC issued Circular No. 2017-02 to carry out replacement of chemical bio-fertilizers by organically bio-fertilizers action plan on vegetables, fruits and teas planting.

 o

In April 2017, the Ministry of Agriculture of PRC issued Circular No. 2017-06 to implementing five major action plans on agriculture green development with one of thean action plan offor replacing chemical bio-fertilizers bywith organically bio-fertilizers on vegetables, fruits and teas planting under action plan No. 2-2.

In April 2018, at the second meeting of the 13th National People’s Congress meeting, the Minister of the Agriculture and Rural Affairs has pronoun that the Chinese government will continue to promote green environment, to ensure food safety and food qualify for the people in the PRC, and to provide more education and training cause to the farmer in the Agriculture industry. Follow up with the second meeting, in July 2018, the Chinese government is in the process of setting up some government grants to these companies or individuals, including but not limited, organic fertilizer production companies, organic fertilizer raw materials (livestock and poultry excrement) storage and transportation companies, users of organic fertilizer, and users of organic fertilizer production machinery.

 

 Innovation Efforts. We strive to produce the most technically and scientifically advanced products for our customers and maintained close relationships with institutes in the PRC.

 

 oWe signed a strategic cooperation agreement with China Academy of Agricultural Science’s Institute of Agricultural Resources & Regional Planning and Institute of Agricultural Economy & Development. Pursuant to the Agreement, we will form a strategic partnership with the two institutes and establish an “International Cooperation Platform for Internet and Safe Agricultural Products”. To fund the cooperation platform’s R&D activities, we will provide RMB 1 million (approximately $160,000) per year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. The term of the Agreement is for three years beginning November 20, 2015 and will expire on November 19, 2018.
 o

Meanwhile,

In March 2018, Kiwa Bio-Tech has established a Research Institute of Ecological Agriculture and Environmental Research. Based on February 23, 2017,cooperation with various Universities including the Company enteredChina Agriculture University, Northwest University, Northwest A&F University, Harbin Institute of Technology and Tsinghua University, we believe that it can secure a strategic relationship with ETS (Tianjin) Biological Science and Technology Development Co., Ltd. (“ETS”). ETS technology was first establishedleading position in the U.S., and commercialized and improvedKETS technology in Japan for nearly 30the next thirty years. In 2013,comparison to our existing technology, Ecology Technological Sustainability (“KETS”) technology is comprised of microorganisms with a larger scale of micro-flora. The micro-flora could significantly increase the ETS technology was introduced into Mainland China. It has been widely accepted that the application of ETS biotechnology facilitates agricultural sustainability and helps to protectbeneficial microorganism in the soil that enhances the yield of the plant crops and improve grain output.prevents soil ecological problems. The newly upgraded technology focuses on keeping soil healthy by restoring healthy microbes that are naturally present in healthy soils. As the technology gains worldwide recognition, it is imperative to popularize bio-fertilizer in developing countries to fulfill the needs of growing populations and promote environmentally friendly agriculture. The cooperation will include the deployment and strategic use of ETS biotechnology to produce of bio-fertilizers for use in both China and internationally. The cooperation will bring technological transformation and support for Kiwa to improve its existing manufacturing techniques. Kiwa and ETS will also collaborate to establish a comprehensive platform for producing, supplying, and marketing in China. Ultimately, Kiwa would look to introduce these productsbe applied to the international market, including the United States.

main crop planting areas and presently-polluted arable areas for soil restoration.

 Experienced Management. Management’s technical knowledge and business relationships give us the ability to secure more sales orders with our customers. If there were to be any significant turnover in our senior management, it could deplete the institutional knowledge held by our existing senior management team.
   
 

Large Scale Customer Relationship. We have contracts with major customers that are distributors of our products. Our sales efforts focus on these distributors which place large recurring orders and present less credit risk to us. For the ninethree months ended September 30, 2017, five2018, one customers accounted for approximately 23%, 14%, 14%, 14%, and 12% of our98% for the Company’s total sales. Should we lose any large scale customerslarge-scale customer in the future and are unable to obtain additional customers, our revenues will suffer.

   
 Competition. Our competition includes a number of publicly traded companies in the PRC and privately-held PRC-based companies that produce and sell products similar to ours. We compete primarily on the basis of quality, technological innovation and price. Some of our competitors have achieved greater market penetration but with less sophisticated technological innovation than our products as there were in the transition period from being the chemical bio-fertilizer producers to the organically bio-fertilizer producers. We believe that we have a better competitive advantage over them as we are the pioneer within our markets. Some of our competitors competed within our markets have lesser financial and other resources than us as they have established their companies a few years behind us. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.

 

 25

Results of Operations

 

Three months ended September 30, 20172018 and September 30, 20162017

 

The following table summarizes the results of our operations during the three months periods ended September 30, 20172018 and 2016,2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

(All amounts, other than percentages, in thousands of U.S. dollars)

  Three months Ended
September 30,
  

Amount

Increase

  

Percentage

Increase 

 
Statement of Operations Data: 2017  2016  (Decrease)  (Decrease) 
             
Revenues $31  $1,185  $(1,154)  (97)%
Cost of goods sold  (20)  (770)  (750)  (97)%
Gross profit  11   415   (404)  (97)%
Operating expenses                
Research and development expense  37   37   -   -%
Selling expenses  148   -   148   100%
General and administrative expenses  1,068   182   886   487%
Total operating expenses  1,253   219   1,034   472%
Operating Income (Loss)  (1,242)  196   (1,438)  (734)%
Other income/(expense), net                
Trademark license income-related party  -   76   (76)  (100)%
Change in fair value of derivative liabilities  205   -   205   100%
Interest expense  (169)  (47)  122   260%
Other income  373   -   373   100%
Exchange loss  (18)  -   18   100%
Total other income/(expense), net  391   29   362   1,248%
Income (loss) from continuing operations before income taxes  (851)  225   (1,076)  (478)%
                 
Provision (benefit) for income taxes                
Current  -   79   (79)  (100)%
Deferred  (123)  -   123   100%
Total provision (benefit) for income taxes  (123)  79   (202)  (256%)
                 
Income (loss) from continuing operations  (728)  146   (874)  (599)%
Discontinued operations:                
Loss from discontinued operations, net of taxes  -   (52)  (52)  (100)%
Gain on disposal of discontinued operations, net of taxes  -   -   -   -%
Income (loss) from discontinued operations, net of taxes  -   (52)  (52)  (100)%
Net Income (loss) $(728) $94  $(822)  (874)%

  Three months Ended
September 30,
  Change  Change 
Statement of Operations Data: 2018  2017  (Amount)  (Percentage) 
             
Revenues $7,725,583  $31,025  $7,694,558   24,801%
Cost of goods sold  (5,452,125)  (19,697)  (5,432,428)  27,580%
Gross profit  2,273,458   11,328   2,262,130   19,969%
Operating expenses                
Research and development  36,748   37,469   (721)  (2)%
Selling expenses  64,094   147,782   (83,688)  (57)%
General and administrative  961,509   1,068,446   (106,937)  (10)%
Total operating expenses  1,062,351   1,253,697   (191,346)  (15)%
Operating Income (Loss)  1,211,107   (1,242,369)  2,453,476   (197)%
Other income/(expense), net                
Change in fair value of derivative liabilities  42,125   205,612   (163,487)  (80)%
Interest expense  (151,518)  (168,573)  17,055   (10)%
Other income/ (expense)  21   372,711   (372,690)  (100)%
Exchange gain (loss)  36,026   (18,257)  54,283   (297)%
Total other income/(expense), net  (73,346)  391,493   (464,839)  (119)%
Income (loss) from continuing operations before income taxes  1,137,761   (850,876)  1,988,637   (234)%
                 
(Provision) benefit for income taxes                
Current  (514,400)  -   (514,400)  (100)%
Deferred  -   123,068   (123,068)  (100)%
Total (provision) benefit for income taxes  (514,400)  123,068   (637,468)  (518)%
                 
Income (loss) from continuing operations  623,361   (727,808)  1,351,169   (186)%
Income from discontinued operations, net of taxes  -   -   -   - 
Net Income (loss) $623,361  $(727,808) $1,351,169   (186)%

 

  2631 

Revenue

 

Revenue decreasedincreased by approximately $1.2$7.7 million or 97%24,801%, to approximately $31,000$7.7 million in the three months ended September 30, 20172018 from approximately $1.2 million$31,025 in the three monthmonths ended September 30, 2016.2017. The decreaseincrease is mainly due to: 1) more sales are achieved due to approximately $5.9 millionthe good quality of our revenues isproducts and more reputation gained in the agricultural industry; 2) more sales are achieved in different regions of the PRC, such as Hainan Province, Guangdong Province and Shanxi Province upon establishment of our sales office in different regions, and 3) introduction of our new product, Bio-water soluble fertilizer and Microbial Agent, during the three months ended September 30, 2018. As a result, our revenue increased significantly for the three months ended September 30, 2018 as compared to the same period in 2017. In addition, there are no revenue being deferred for the three months ended September 30, 2018, as compared to $5.9 million of our revenues being deferred for the three months ended September 30, 2017, as discusses in the non-GAAP analysis section below.

We currently realized revenue in four major product categories of Biological Organic Fertilizer, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer. We sold and shipped Compound Microbial Fertilizer in the third quarter of 2017 and recorded the shipment amount in deferred revenue as our revenue recognition criteria has not been met. Our revenues from our major product category are summarized as follows:

  For the three months ended
September 30, 2018
  For the three
months ended
September 30, 2017
  Change  Change (%) 
             
Biological Organic Fertilizer                
Revenue in USD $3,812,127  $31,025  $3,781,102   12,187%
Quantity sold in tons  21,529   162   21,367   13,189%
Average selling price $177.07  $191.51  $(14.44)  (8)%
                 
Compound Microbial Fertilizer                
Sold and shipped in USD $2,048,318  $-  $2,048,318   100%
Quantity sold in tons  6,530   -   6,530   100%
Average selling price $313.68  $-  $313.68   100%
                 
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,851,723  $-  $1,851,723   100%
Quantity sold in tons  2,656   -   2,656   100%
Average selling price $697.18  $-  $697.18   100%
                 
Microbial Inoculum Fertilizer                
Sold and shipped in USD $13,415  $-  $13,415   100%
Quantity sold in tons  18   -   18   100%
Average selling price $745.28  $-  $745.28   100%

Revenue from Biological Organic Fertilizer, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer and Microbial Inoculum Fertilizer increased by approximately $3.8 million, $2.0 million, $1.9 million and $13,415 or 12,187%, 100%, 100% and 100% to $3.8 million, $2.0 million, $1.9 million and $13,415, respectively, in the three months ended September 30, 2018 from $31,025, $0, $0, and $0 in the three months ended September 30, 2017. In August 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd obtained a fertilizerThe increase is mainly due to more sales permit from the Chinese government and began to sell the products directly to customers in Northern areas of China. Dueare achieved due to the good quality of our products we have gainedand more reputation gained in the agricultural industry and weretherefore we can be able to attract more customers.customers and we have deferred most of our revenue to be recognized for products shipped during the three months ended September 30, 2017.

Compound Microbial Fertilizer is adding appropriate amount of nitrogen, phosphorus, potassium and other nutrients into Biological Organic Fertilizer. Through the action of organic matter and beneficial microorganisms, the utilization rate of nitrogen, phosphorus, potassium can be significantly improved. The Bio-Water Soluble Fertilizer is mainly another form of the biological fertilizer that we firstly introduced in the first quarter of 2018. It is in the form of powder which has high water solubility, and it is convenient for the farmers to use during the drop irrigation. Microbial Inoculum Fertilizer is an environment-friendly biological soil conditioner that made of compound high-silicon, calcium, and mineral raw materials, on the basis of dissolving-phosphorus, dissolving-potassium, and disease-resistant microbial agents. It is rich in highly active microorganisms, which can improve the micro-ecological environment in the soil, transform and reduce heavy metal toxicity, release the plant growth stimulants, promote crop growth, and enhance the stress resistance. Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally contain more microorganism and have a higher effectiveness on the productivity of crops and increasing the value and quality of the crops harvested than Biological Organic Fertilizer. As a result, our Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher average selling price as compared to Biological Organic Fertilizer.

Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer will continue to grow in a higher rate than that from Biological Organic Fertilizer. Our Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher effectiveness on the productivity of crops that are suitable for promoting green environment. In addition, our marketing team is expanding to the Western areas of China and Hainan province and we established Kiwa Bio-Tech Products (Shenzhen) Co., Ltd.expect our revenues will continue to grow in November 2016the fourth quarters of 2018. Meanwhile, we expect to supportcontinue to gain more market shares in our existing sales channel bases in the Northern and the Southern areas of China. China due to the good quality of the products and better reputation in the industry.

Non-GAAP analysis

Ourstrategy on the expansion of our business was to gain market shares in thebio-fertilizermarket, thereby, we have extended credit to our customers.Our current payment terms on these customers are ranging from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers.Thesecustomers are mainly agricultural cooperative company and distributors who then resell our products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay our distributors. As a result, for the sales contracts with these customers, the collectability of payment is highly dependent on the successful harvest of corps and the customers'customers’ ability to collect money from farmers. The Company deemed the collectability of payment may not be reasonably assured until after the Company get paid. Starting in March 2018, the Company began to use a supply chain financing model, which the Company’s customers engage with third party financing companies to advance the Company’s accounts receivable on its behalf without recourse to the Company. The Company’s customers are required to purchase an insurance product to cover the risk of bad weather or any other reason which they are not able to harvest crops and to realize profits of repaying the third-party financing companies. This model allows the Company to collect its accounts receivables sooner than the 3 to 9 months crop growing period. The Company deemed the collectability of payment may not be reasonably assured until after the Company get paid from these financing companies. For those sales contracts that the Company has shipped its products but the payment is contingent on collections of payments from the downstream customers or is contingent on the approval of the financing companies to advance payment on behalf of the Company’s customers, the Company considers the revenue recognition criteria using the five-step model under the new guidance are not met and therefore defers the revenue and cost of goods sold until payments are collected.

We have sold and shipped approximately $7.7 million of our products and collected cash during the three months ended September 30, 2018, thus all of the revenue recognition criteria were met. We have sold and shipped approximately $5.9 million of our products during the three months ended September 30, 2017, for whichhowever the collectability criteria of revenue recognition criteria of collectability of payments is reasonably assured hashave not yet been met, andthus we have deferred approximately $5.9 millionmajority of these revenues to be recognized in the future periods when our collectability of payments will be assured. As a result, our revenue decreased accordingly for the three months ended September 30, 2017 as compared to the same period in 2016.

 

We currently only realized revenue in one major product categories of Biological Organic Fertilizer. We sold and shipped another product category of Compound Microbial Fertilizer in the third quarter of 2017 and recorded the selling amount in deferred revenue. We plan to launch another product category of Bio-Water Soluble Fertilizer in 2018. Our revenues from our major product category are summarized as follows:

  For the three months ended
September 30, 2017
  For the three months ended
September 30, 2016
  Change  Change (%) 
             
Biological Organic Fertilizer                
Revenue in USD $31,025  $1,185,309  $(1,154,284)  -97.4%
Quantity sold in tons  162   6,500   (6,338)  -97.5%
Average selling price $191.51  $182.36  $9.15   5.0%

Revenue from Biological Organic Fertilizer decreased by approximately $1.2 million or 97.4%, to approximately $31,000 in the three months ended September 30, 2017 from approximately $1.2 million in the three month ended September 30, 2016. The decrease is mainly due to approximately $2.3 million of our revenues is being deferred as discussed above. Average selling prices increased by $9.15 or 5.0% during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 was mainly due to the revenue that we generated for the three months September 30, 2017 are mainly from our individual customers who purchased from us with a slightly higher price.

Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow in a higher rate than that from Biological Organic Fertilizer. Our Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer generally have a higher effectiveness on the productivity of crops that are suitable for promoting green environment. In addition, our marketing team is expanding to the Western areas of China and Hainan province and we expect our revenues will continue to grow in the fourth quarter of 2017 and in 2018. Meanwhile, we expect to continue to gain more market shares in our existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry.

Non-GAAP analysis

Our selling and shipment from our two major products categories are summarized as follows including revenue recognized and deferred under U.S. GAAP:

 

  For the three months ended
September 30, 2017
  For the three months ended
September 30, 2016
  Change  Change (%) 
             
Biological Organic Fertilizer                
Sold and shipped in USD $2,369,119  $1,185,309  $1,183,810   99.9%
Quantity sold in tons  13,162   6,500   6,662   102.5%
Average selling price $180.00  $182.36  $(2.36)   (1.3)%
                 
Compound Microbial Fertilizer                
Sold and shipped in USD $3,528,125  $-  $3,528,125   100.0%
Quantity sold in tons  10,700   -   10,700   100.0%
Average selling price $329.73  $-  $329.73   100.0%

Compound Microbial Fertilizer is adding appropriate amount of nitrogen, phosphorus, potassium and other nutrients into Biological Organic Fertilizer. Through the action of organic matter and beneficial microorganisms, the utilization rate of nitrogen, phosphorus, potassium can be significantly improved. The Bio-Water Soluble Fertilizer is mainly another form of the biological fertilizer. It is in the form of powder which has high water solubility, and it is convenient for the farmers to use during the drop irrigation. Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer generally contain more bacteria and have a higher effectiveness on the productivity of crops and increasing the value and quality of the crops harvested than Biological Organic Fertilizer. As a result, our Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer generally have a higher average selling price.

  For the three months ended
September 30, 2018
  For the three
months ended
September 30, 2017
  Change  Change (%) 
             
Biological Organic Fertilizer                
Revenue in USD $3,812,127  $2,369,119  $1,443,008   61%
Quantity sold in tons  21,529   13,162   8,367   64%
Average selling price $177.07  $180.00  $(2.92)  (2)%
                 
Compound Microbial Fertilizer                
Sold and shipped in USD $2,048,318  $3,528,125  $(1,479,807)  (42)%
Quantity sold in tons  6,530   10,700   (4,170)  (39)%
Average selling price $313.68  $329.73  $(16.05)  (5)%
                 
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,851,723  $-  $1,851,723   100%
Quantity sold in tons  2,656   -   2,656   100%
Average selling price $697.18  $-  $697.18   100%
                 
Microbial Inoculum Fertilizer                
Sold and shipped in USD $13,415  $-  $13,415   100%
Quantity sold in tons  18   -   18   100%
Average selling price $745.28  $-  $745.28   100%

 

The soldsales and shipped amountshipment of Biological Organic Fertilizerall our products increased by approximately $1.2 million or 99.9%, to approximately $2.4 million in the three months ended September 30, 2017 from approximately $1.2 million in the three month ended September 30, 2016. The increase was mainly because we have gained more reputation in the agricultural industry and were able to attract more customers during the three months ended September 30, 20172018 as compared to the three months ended September 30, 2016 during which2017. The increase is mainly due to more sales are achieved due to the good quality of our products and more reputation gained in the agricultural industry, and we just obtainedadded more diversity of our products, and therefore we can be able to attract more customers as discussed above. In addition, the increase is also attributable to more sales are achieved in different region of the PRC, such as Hainan Province, Guangdong Province and Shanxi Province upon establishment of our sales office in different regions. The increase is also slightly attributable to the introduction of our new product, Bio-water soluble fertilizer sales permit from the Chinese government and began to sell the products during the period. Microbial Inoculum Fertilizer, in 2018.

Average selling prices for both periods remained stable. The slight decrease of $2.36Biological Organic Fertilizers decreased by $2.92 or 1.3% was mainly due to the effect of exchange rate.

The sold and shipped amount of Compound Microbial Fertilizer increased by approximately $3.5 million or 100.0%2% in the three months ended September 30, 20172018 as we did not sell this product category duringcompared with the same period of 2017. In the third quarter of 2018, our headquarters moved to Yangling, China, and our marketing team is expanding to the western region. We lowered our average selling prices in order to quickly occupy the market and gain more market shares through the four newly established four sales channels in Shanxi Province. In additional, our customers are willing to cooperate with our supply chain financing model as discussed above, which they cooperated with the third-party financing companies to obtain approval of advancing and paying off our accounts receivable without waiting for 2016.the downstream customers of harvesting crops and realizing their profits to repay us in approximately 3 to 9 months as compared to the same period in 2017. By cooperating with our supply chain financing model, our customers will have to bear additional cost on interest and insurance expenses. As a result, we intend to slightly decrease the selling price as we were able to receive our accounts receivable sooner than the 3 to 9 months period.

Average selling prices of Compound Microbial Fertilizer products are our new productsdecreased by $16.05 or 5% in the three months ended September 30, 2018 as compared with higher effectiveness on the productivitysame period of crops and increasing2017 mainly due to the value and quality of the crops harvested that we firstly introduced in March 2017reason as discussed above.

 27

 

Cost of Revenue

Our cost of revenues from our major product category are summarized as follows:

 For the three months ended
September 30, 2017
 For the three months ended
September 30, 2016
 Change Change (%)  For the three months ended
September 30, 2018
 For the three
months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                         
Cost of Revenue in USD $19,697 $770,451 $(750,754) (97.4)%
Cost of sold and shipped in USD $2,578,292  $19,697  $2,558,595   12,990%
Quantity sold and shipped in tons  21,529   162   21,367   13,190%
Average unit cost $119.76  $121.59  $(1.82)  (1)%
                
Compound Microbial Fertilizer                
Cost of sold and shipped in USD $1,607,258  $-  $1,607,258   100%
Quantity sold and shipped in tons  6,530   -   6,530   100%
Average unit cost $246.13  $-  $246.13   100%
                
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,254,140  $-  $1,254,140   100%
Quantity sold in tons 162 6,500 (6,338) (97.5)%  2,656   -   2,656   100%
Average unit cost $121.59 $118.53 $3.06 2.6% $472.19  $-  $472.19   100%
                         
Microbial Inoculum Fertilizer                
Sold and shipped in USD $12,435  $-  $12,435   100%
Quantity sold in tons  18   -   18   100%
Average unit cost $690.83  $-  $690.83   100%

 

Cost of revenue from Biological Organic Fertilizer, decreasedCompound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer increased by approximately $0.8$2.6 million, $1.6 million, 1.3 million, and $12,435 or 97.4%12,990%, 100%, 100% and 100% to approximately $20,000$2.6 million, $1.6 million, $1.3 million, and $12,435 in the three months ended September 30, 20172018 from approximately $0.8 million$19,697, $0, $0, and $0 in the three month ended September 30, 2016. The decrease in cost of revenue during the period which is in line with the decrease in revenue from Biological Organic Fertilizer. We were able to stabilize our average unit production cost within a reasonable range of 2.6% increase. The increase of $3.06 or 2.6% of average unit production cost is mainly due to the increase of price for raw materials (mainly includes nitrogen, phosphorus and potassium) used in the products for the three months ended September 30, 2017.

The increase is mainly due to more sales are achieved due to the good quality of our products and more reputation gained in the agricultural industry and therefore we can be able to attract more customers and we have deferred all of our revenue to be recognized for products shipped during the three months ended September 30, 2017. As a result, our cost of revenue increased accordingly along with our sales.

Non-GAAP analysis

 

Our cost of shipping togoods sold for our two major products categories are summarized as follows including cost of goods sold recognized and deferred under U.S. GAAP:

 For the three months ended
September 30, 2017
 For the three months ended
September 30, 2016
 Change Change (%)  For the three months ended
September 30, 2018
 For the three
months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                                
                
Cost of sold and shipped in USD $1,639,315  $770,451  $868,864   112.8% $2,578,292  $1,639,315  $938,977   57%
Quantity sold and shipped in tons  13,162   6,500   6,662   102.5%  21,529   13,162   8,367   64%
Average unit cost $124.55  $118.53  $6.02   5.1% $119.76  $124.55  $(4.79)  (4)%
                                
Compound Microbial Fertilizer                                
Cost of sold and shipped in USD $2,413,924  $-  $2,413,924   100.0% $1,607258  $2,413,924  $(806,666)  (33)%
Quantity sold and shipped in tons  10,700   -   10,700   100.0%  6,530   10,700   (4,170)  (39)%
Average unit cost $225.60  $-  $225.60   100.0% $246.13  $225.60  $20.53   9%
                
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,254,140  $-  $1,254,140   100%
Quantity sold in tons  2,659   -   2,659   100%
Average unit cost $471.66  $-  $471.66   100%
                
Microbial Inoculum Fertilizer                
Sold and shipped in USD $12,435  $-  $12,435   100%
Quantity sold in tons  18   -   18   100%
Average unit cost $690.83  $-  $690.83   100%

 

CostThe costs of goods sold and shipped from Biological Organic Fertilizerof all of our products increased by approximately $0.9 million or 112.8%, to approximately $1.6 million in the three months ended September 30, 2017 from approximately $0.8 million in the three month ended September 30, 2016. The increase during the period is in line with the increase in the selling amount of Biological Organic Fertilizer. We were able2018 as compared to stabilize our average unit production cost within a reasonable range of 5.1% increase. The increase of $6.02 or 5.1% of average unit production cost is mainly due to the increase of price for raw materials (mainly includes nitrogen, phosphorus and potassium) used in the products for the three months ended September 30, 2017. The increase is mainly due to more sales are achieved due to the good quality of our products and more reputation gained in the agricultural industry and therefore we can be able to attract more customers as discussed above. As a result, our cost of revenue increased accordingly along with our sales.

 

CostAverage unit cost of sold and shipped fromBiological Organic Fertilizers decreased by $4.79 or 4% in the three months ended September 30, 2018 as compared with the same period of 2017 mainly due to increase in unit production causing the overhead cost allocation to each unit become lower. Average unit of Compound Microbial Fertilizer increased by $20.53 or 9% in the three months ended September 30, 2018 as compared with the same period of 2017 mainly due to the ingredient mix of raw material price increase of approximately $2.4 million or 100.0%16%. The increase wasChinese government has implemented strict environmental protection policies, resulting in line witha variety of raw material prices increased, therefore, the increase in the selling amount of Compound Microbial Fertilizer. We plan to launch the Bio-Water Soluble Fertilizer products in 2018.average unit cost goes higher.

 

Gross Profit

 

Our gross profit from our major product category are summarized as follows:

  For the three months ended
September 30, 2017
  For the three months ended
September 30, 2016
  Change  Change (%) 
             
Biological Organic Fertilizer                
Gross Profit $11,327  $414,858  $(403,531)   (97.3)%
Gross Profit Percentage  36.5%  35.0%  1.5%   4.3%

  For the three months ended
September 30, 2018
  For the three
months ended
September 30, 2017
  Change  Change (%) 
             
Biological Organic Fertilizer                
Gross Profit $1,233,835  $11,327  $1,222,508   10,793%
Gross Profit Percentage  32.4%  36.5%  (4.1)%  (11)%
                 
Compound Microbial Fertilizer                
Gross Profit $441,060  $-  $441,060   100%
Gross Profit Percentage  21.5%  -   21.5%  100%
                 
Bio-Water Soluble Fertilizer                
Gross Profit $597,583  $-  $597,583   100%
Gross Profit Percentage  32.3%  -   32.3%  100%
                 
Microbial Inoculum Fertilizer                
Gross Profit $980  $-  $980   100%
Gross Profit Percentage  7.3%  -   7.3%  100%

Gross profit percentage for Biological Organic Fertilizerfour of our products increased from 35.0%by 10,793%, 100%, 100% and 100% for the three months ended September 30, 20162018 as compared to 36.5% for the three months ended September 30, 2017 mainly due to more sales are achieved due to the increase in our unit selling pricegood quality of our products at a rate higher thanand more reputation gained in the increase in raw materials priceagricultural industry and therefore we can be able to attract more customers and we have deferred most of our revenue to be recognized for products shipped during the products for the reason as discussed above.three months ended September 30, 2017.

 

Non-GAAP analysis

 

Our total gross profit from our two major products categories are summarized as follows including the gross profit recognized and deferred under U.S. GAAP:

 For the three months ended
September 30, 2017
 For the three months ended
September 30, 2016
 Change Change (%)  For the three months ended
September 30, 2018
 For the three
months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                         
Gross Profit $729,804 $414,858 $314,946 75.9% $1,233,835  $729,804  $504,031   69%
Gross Profit Percentage 30.8% 35.0% (4.2%) (12%)  32.4%  30.8%  1.6%  5%
                         
Compound Microbial Fertilizer                         
Gross Profit $1,114,200 $- $1,114,200 100.0% $441,060  $1,114,200  $(673,140)  (60)%
Gross Profit Percentage 31.6% - 31.6% 100.0%  21.5%  31.6%  (10.1)%  (32)%
                
Bio-Water Soluble Fertilizer                
Gross Profit $597,583  $-  $597,583   100%
Gross Profit Percentage  32.3%  -   32.3%  100%
                
Microbial Inoculum Fertilizer                
Gross Profit $980  $-  $980   100%
Gross Profit Percentage  7.3%  -   7.3%  100%

 

Gross profit percentage for Biological Organic Fertilizer decreasedincreased from 35.0% for the three months ended September 30, 2016 to 30.8% for the three months ended September 30, 2017 to 32.4% for the three months ended September 30, 2018 mainly due to the increaseaverage unit cost is slightly lower than decrease in raw materialsselling price of the products for the reason as discussed above.

 

Gross profit percentage for Compound Microbial decreased from 31.6% for the three months ended September 30, 2017 to 21.5% for the three months ended September 30, 2018 mainly due to the decrease in selling price of our products is higher than the decrease in unit cost as discussed above. In the third quarter of 2018, the company headquarters base moved to Yangling, China, and our marketing team is expanding to the western region. We lowered our average selling prices in order to quickly occupy the market and gain more market shares through the four newly established four sales channels in Shanxi Province.

Although the raw material prices remained the same during the three months ended September 30, 2018 as compared to the same period of 2017, the average selling prices decreases in order to quickly occupy the market and gain more market shares through the four newly established four sales channels in Shanxi Province. In additional, our customers are willing to cooperate with our supply chain financing model as discussed above, which they cooperated with the third-party financing companies to obtain approval of advancing and paying off our accounts receivable without waiting for the downstream customers of harvesting crops and realizing their profits to repay us in approximately 3 to 9 months as compared to the same period in 2017. By cooperating with our supply chain financing model, our customers will have to bear additional cost on interest and insurance expenses. As a result, we intend to slightly decrease the selling price as we were able to receive our accounts receivable sooner than the 3 to 9 months period.

Research and Development Expenses

 

Research and development expenses was approximately $37,000 (RMB 250,000) for the three months ended September 30, 2017,2018, keeping the same as the prior comparable period.period of RMB 250,000 in RMB and approximately $37,000 in USD. On November 20, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute of Agricultural Economy & Development (“IAED”). Pursuant to the Agreement, the Company will form a strategic partnership with the two institutes and establish an “International Cooperation Platform for Internet and Safe Agricultural Products”. To fund the cooperation platform’s R&D activities, the Company will provide RMB 1 million (approximately $160,000) per year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. The term of the Agreement is for three years beginning November 20, 2015 and will expire on November 19, 2018. However, the Company is only liable for the annual funds to be provided to the extent of the contract obligations performed by CAAS IARRP and IAED, and the agreement is terminable before the three years’ commitment date based on negotiations of both parties. The Company contributed approximately $37,000 (RMB 250,000) for the three months ended September 30, 2017 and September 30, 2016.2018. The Company plans to contribute the remaining balance quarterly until the date of the Agreement expired on November 19, 2018.

 

Selling Expenses

 

Selling expenses for the three months ended September 30, 2018 and 2017 were $64,094 and 2016 were approximately $148,000 and $0,$147,782, respectively. Selling expenses include salaries of sales personnel, sales commission, travel and entertainment as well as freight out expenses. The increasedecrease in selling expenses is mainly because we have started hiring sales managers in the fourth quarter of 2016 for the marketing of our products. During the three months ended September 30, 2016, there was no designated sales personnel since Kiwa Beijing just obtained the permit to sell bio-fertilizer in September 2016. With business expansion, we have hired more sales managers in Kiwa Beijing and in Kiwa Shenzhen to manage our sales activities in different regions of China from October 2016 to September 2017. In addition, the increase of sales also leddue to the increasedecrease of freight out expense, resultingsalary expenses because the labor cost is lower in the increase of selling expense.Yangling than Shenzhen and Beijing.

 28

 

General and Administration Expenses

 

General and administrative expenses increaseddecreased by approximately 487%10% from approximately $0.2$1.1 million in the three monthmonths period ended September 30, 20162017 to approximately $1.1$0.9 million in the same period in 2017.2018. General and administrative expenses include professional fees, officers’ compensation, depreciation and amortization, salaries, travel and entertainment, rent, office expense and telephone expense. In the third quarter 2018, our headquarter base moved to Yangling. Beijing and Shenzhen office were downsizing. The average cost of running a business in Yangling is significantly lower, which reduced the general and administration expenses in general. The decrease in general and administration expenses was approximately $0.5 million, which offset by an increase of consulting expense andfor approximately $0.3 million in 2018. Therefore, the like. The increase in general and administrative expenses is mainly attributed to business expansion and the establishment of Kiwa Shenzhen in November, 2016, Kiwa Hebei in December 2016 and Kiwa Asia in July 2017.

decreased.

Right-to-use Trademark Income

Trademark license income totaled $0 for the three months ended September 30, 2017, compared with $76,235 for the same period of 2016, reflecting a decrease of 100% from the same period of last year. Income was generated from licensing our trademark to Gerui. We signed the license agreement with Gerui to allow Gerui to sell fertilizer using our trademark in December 2015. We charged Gerui 10% of net sales of fertilizers bearing Kiwa trademark for using our trademark. Gerui began to sell fertilizers bearing Kiwa trademark in 2016. In August 2016, the Company obtained the government approval of selling fertilizers in China. As a result, we ceased the licensing arrangement cooperation with Gerui and started to sell our own bio-fertilizers from September 2016.

Other Income

Other income increased by approximately $0.4 million from $0 in the three month period ended September 30, 2016 to approximately $0.4 million in the same period in 2017. The increase is mainly attributable the accrued professional fees which were unclaimed for more than ten years and we have evaluated and reached the decision to discharge these liabilities.

Interest Expense

 

Net interest expense was $168,573$151,518 and $47,745$168,573 for the three months ended September 30, 20172018 and 2016,2017, respectively, representing an increasedecrease of approximately $0.1 million$17,055 or 253%10%. Interest expense included accrued interest on convertible note and other note payable, and the amortization of the convertible note discount for the three months ended September 30, 20172018 and 2016.2017. The increasedecrease in interest expenses is mainly attributed to newly issuancethe fluctuation of two 15% convertible notes for the nine months ended September 30, 2017.exchange rate.

 

Loss from discontinued operations, net of taxesNet Income (loss)

 

Loss from discontinued operations, net of taxes was $-0- and $52,166Net income (loss) for the three months ended September 30, 2017 and 2016, respectively, which results in a decrease of $52,166 from discontinued operations, net of taxes for the three months ended September 30, 2017 to the same period of 2016. Due to suffering from losses for several years, On February 11, 2017, the Company executed an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) whereby the Company transferred all of its right, title and interest in Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Shandong”) to the Transferee for RMB 1.00. The government processing of the transaction was completed on April 12, 2017. Therefore, it’s resulted in the decrease of loss from discontinued operations, net of taxes.

Net Income

Net income for the three months ended September 30, 2017 decreased2018 increased by approximately 874%186% from approximatelya loss of $727,808 to a profit of $94,000 to loss of approximately $728,000.$623,361. Such change was the result of the combination of the changes as discussed above.

 29

Results of Operations for Nine Months Endedmonths ended September 30, 20172018 and 2016September 30, 2017

 

The following table summarizes the results of our operations during the nine monthmonths periods ended September 30, 20172018 and 2016,2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

(All amounts, other than percentages, in thousands of U.S. dollars)

  Nine months Ended
September 30,
  Amount Increase  

Percentage

Increase

 
Statement of Operations Data: 2017  2016  (Decrease)  (Decrease) 
             
Revenues $30  $1,185  $(1,155)  (97)%
Cost of goods sold  (19)  (770)  (751)  (98)%
Gross profit  11   415   (404)  (97)%
Operating expenses                
Research and development expense  110   113   (3)  (3)%
Selling expenses  236   -   236   100%
General and administrative expenses  2,073   376   1,697   451%
Total operating expenses  2,419   489   1,930   395%
Operating Income (Loss)  (2,408)  (74)  2,334   3,154%
Other income/(expense), net                
Trademark license income-related party  -   786   (786)  (100)%
Change in fair value of derivative liabilities  199   -   199   100%
Interest expense  (356)  (142)  214   151%
Other income  373   -   373   100%
Exchange loss  (35)  -   35   100%
Total other income/(expense), net  181   644   (463)  (72)%
Income (loss) from continuing operations before income taxes  (2,227)  570   (2,797)  (491)%
                 
Provision (benefit) for income taxes                
Current  -   79   (79)  (100)%
Deferred  (221)  -   221   100%
Total provision (benefit) for income taxes  (221)  79   (300)  (380)%
                 
Income (loss) from continuing operations  (2,006)  491   (2,497)  (509)%
Discontinued operations:                
Loss from discontinued operations, net of taxes  (17)  (159)  142   (89)%
Gain on disposal of discontinued operations, net of taxes  4,512   -   4,512   100%
Income (loss) from discontinued operations, net of taxes  4,495   (159)  4,654   2,927%
Net income (loss) $2,489  $332  $2,157   650%

 30

  Nine months Ended
September 30,
  Change  Change 
Statement of Operations Data: 2018  2017  (Amount)  (Percentage) 
             
Revenues $21,811,804  $30,411  $21,781,393   71,623%
Cost of goods sold  (15,632,191)  (19,308)  (15,612,883)  80,862%
Gross profit  6,179,613   11,103   6,168,510   55,557%
Operating expenses                
Research and development  115,291   110,194   5,097   5%
Selling expenses  409,661   236,252   173,409   73%
General and administrative  4,040,537   2,073,035   1,967,502   95%
Total operating expenses  4,565,489   2,419,481   2,146,008   89%
Operating Income (Loss)  1,614,124   (2,408,378)  4,022,502   (167)%
Other income/(expense), net                
Change in fair value of derivative liabilities  244,496   199,051   45,445   23%
Interest expense  (459,445)  (356,256)  (103,189)  29%
Other income/ (expense)  (884)  373,512   (374,396)  (100)%
Exchange gain (loss)  54,279   (35,342)  89,621   (254)%
Total other income/(expense), net  (161,554)  180,965   (342,519)  (189)%
Income (loss) from continuing operations before income taxes  1,452,570   (2,227,413)  3,679,983   (165)%
                 
(Provision) benefit for income taxes                
Current  (1,411,609)  -   (1,411,609)  (100)%
Deferred  -   220,860   (220,860)  (100)%
Total (provision) benefit for income taxes  (1,411,609)  220,860   (1,632,469)  (739)%
                 
Income (loss) from continuing operations  40,961   (2,006,553)  2,047,514   (102)%
Income from discontinued operations, net of taxes  -   4,495,392   (4,495,392)  (100)%
Net Income (loss) $40,961  $2,488,839  $(2,447,878)  (98)%

 

Revenue

 

Revenue decreasedincreased by approximately $1.2$21.8 million or 97%71,623%, to approximately $30,000 in the nine months ended September 30, 2017 from approximately $1.2$21.8 million in the nine months ended September 30, 2016.2018 from $30,411 in the nine months ended September 30, 2017. The decreaseincrease is mainly due to: 1) more sales are achieved due to the good quality of our products and more reputation gained in the agricultural industry; 2) more sales are achieved in different regions of the PRC, such as Hainan Province, Guangdong Province and Shanxi Province upon establishment of our sales office in different regions, and 3) introduction of our new product, Bio-water soluble fertilizer and Microbial Inoculum Fertilizer, during the nine months ended September 30, 2018. As a result, our revenue increased significantly for the nine months ended September 30, 2018 as compared to the same period in 2017. In addition, approximately $7.1 million and $14.7 million of our revenues iswas being deferred for the nine months ended September 30, 2017. In August 2016, Kiwa Baiao Bio-Tech (Beijing) Co., Ltd obtained a fertilizer sales permit from the Chinese government2018 and began to sell the products directly to customers in Northern areas of China. Due to the good quality of our products, we have gained more reputation in the agricultural industry and were able to attract more customers. In addition, we established Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. in November 2016 to support sales in Southern areas of China. Ourstrategy on the expansion of our business was to gain market shares in thebio-fertilizermarket, thereby, we have extended credit to our customers.Our current payment terms on these customers are ranging from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers.Thesecustomers are mainly agricultural cooperative company and distributors who then resell our products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay our distributors. As a result, for the sales contracts with these customers, the collectability of payment is highly dependent on the successful harvest of corps and the customers’ ability to collect money from farmers. The Company deemed the collectability of payment may not be reasonably assured until after the Company get paid. For those sales contracts that the Company has shipped its products but the payment is contingent on collections of payments from the downstream customers, the Company considers the revenue recognition criteria are not met and therefore defers the revenue and cost of goods sold until payments are collected. We have sold and shipped approximately $14.7 million of our products during the nine months ended September 30, 2017 for which the revenue recognition criteria of collectability of payments is reasonably assured has not yet been met, and we have deferred approximately $14.7 million of revenues to be recognizedrespectively, as discusses in the future periods when our collectability of payments will be assured. As a result, our revenue decreased accordingly for the nine months ended September 30, 2017 as compared to the same period in 2016.

non-GAAP analysis section below.

 

We currently only realized revenue in onethree major product categories of Biological Organic Fertilizer, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer. We sold and shipped another product category ofBiological Organic Fertilizer and Compound Microbial Fertilizer in the third quarterfirst three quarters of 2017 and recorded the selling amount in deferred revenue. We plan to launch another product category of Bio-Water Soluble Fertilizer in 2018.revenue as our revenue recognition criteria has not been met. Our revenues from our major product categoriescategory are summarized as follows:

 For the nine months ended
September 30, 2017
  For the nine months ended
September 30, 2016
  Change  Change (%)  For the nine months ended
September 30, 2018
 For the nine
months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                                
Revenue in USD $30,411  $1,185,310  $(1,154,899)  (97.4)% $10,938,259  $30,411  $10,907,848   35,868%
Quantity sold in tons  162   6,500   (6,338)  (97.5)%  59,231   162   59,069   36,462%
Average selling price $187.72  $182.36  $5.36   2.9% $184.67  $187.72  $(3.05)  (2)%
                
Compound Microbial Fertilizer                
Sold and shipped in USD $8,978,185  $-  $8,978,185   100%
Quantity sold in tons  26,579   -   26,579   100%
Average selling price $337.79  $-  $337.79   100%
                
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,881,945  $-  $1,881,945   100%
Quantity sold in tons  2,731   -   2,731   100%
Average selling price $689.10  $-  $689.10   100%
                
Microbial Inoculum Fertilizer                
Sold and shipped in USD $13,415  $-  $13,415   100%
Quantity sold in tons  18   -   18   100%
Average selling price $745.28  $-  $745.28   100%

 

Revenue from Biological Organic Fertilizer, decreasedCompound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer increased by approximately $1.2$10.9 million, $9.0 million, $1.9 million, and $13,415 or 97.4%35,868%, 100%, 100% and 100% to approximately $30,000$10.9 million, $9.0 million, $1.9 million, and $13,415, respectively, in the nine months ended September 30, 20172018 from approximately $1.2 million$30,411, $0, $0, and $0 in the nine monthmonths ended September 30, 2016.2017. The decreaseincrease is mainly due to approximately $8.0 millionmore sales are achieved due to the good quality of our revenues is beingproducts and more reputation gained in the agricultural industry and therefore we can be able to attract more customers and we have deferred as discussed above. Average selling prices increased by $5.36 or 2.9%most of our revenue to be recognized for products shipped during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was mainly due to the revenue that we generated for the nine months September 30, 2017 are mainly from our individual customers who purchased from us with a slightly higher price.2017.

Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow in a higher rate than that from Biological Organic Fertilizer. Our Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer generally have a higher effectiveness on the productivity of crops that are suitable for promoting green environment. In addition, our marketing team is expanding to the Western areas of China and Hainan province and we expect our revenues will continue to grow in the fourth quarter of 2017 and in 2018. Meanwhile, we expect to continue to gain market shares in our existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry.

Non-GAAP analysis

Our sales and shipment from our two major products categories are summarized as follows including revenue recognized and deferred under U.S. GAAP:

  For the nine months ended
September 30, 2017
  For the nine months ended
September 30, 2016
  Change  Change (%) 
             
Biological Organic Fertilizer                
Sold and shipped in USD $8,016,554  $1,185,310  $6,831,244   576.3%
Quantity sold in tons  45,462   6,500   38,962   599.4%
Average selling price $176.34  $182.36  $(6.02)  (3.3%)
                 
Compound Microbial Fertilizer                
Sold and shipped in USD $6,680,682  $-  $6,680,682   100.0%
Quantity sold in tons  20,720   -   20,720   100.0%
Average selling price $322.43  $-  $322.43   100.0%

 

Compound Microbial Fertilizer is adding appropriate amount of nitrogen, phosphorus, potassium and other nutrients into Biological Organic Fertilizer. Through the action of organic matter and beneficial microorganisms, the utilization rate of nitrogen, phosphorus, potassium can be significantly improved. The Bio-Water Soluble Fertilizer is mainly another form of the biological fertilizer.fertilizer that we firstly introduced in the first quarter of 2018. It is in the form of powder which has high water solubility, and it is convenient for the farmers to use during the drop irrigation. Microbial Inoculum Fertilizer is an environment-friendly biological soil conditioner that made of compound high-silicon, calcium, and mineral raw materials, on the basis of dissolving-phosphorus, dissolving-potassium, and disease-resistant microbial agents. It is rich in highly active microorganisms, which can improve the micro-ecological environment in the soil, transform and reduce heavy metal toxicity, release the plant growth stimulants, promote crop growth, and enhance the stress resistance. Compound Microbial Fertilizer, and Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally contain more bacteriamicroorganism and have a higher effectiveness on the productivity of crops and increasing the value and quality of the crops harvested than Biological Organic Fertilizer. As a result, our Compound Microbial Fertilizer, and Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher average selling price.price as compared to Biological Organic Fertilizer.

Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer will continue to grow in a higher rate than that from Biological Organic Fertilizer. Our Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher effectiveness on the productivity of crops that are suitable for promoting green environment. In addition, our marketing team is expanding to the Western areas of China and Hainan province and we expect our revenues will continue to grow in the fourth quarters of 2018. Meanwhile, we expect to continue to gain more market shares in our existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry.

Non-GAAP analysis

We have sold and shipped approximately $29.0 million of our products during the nine months ended September 30, 2018, approximately $7.1 million of which the collectability criteria of revenue recognition have not yet been met, thus we deferred these revenues until when our collectability of payments will be assured. We have sold and shipped $14.7 million of our products during the nine months ended September 30, 2017, for almost all of which the collectability criteria of revenue recognition has not yet been met, thus we have deferred those revenues until when our collectability of payments will be assured.

Our sales and shipment from our two major products categories are summarized as follows including revenue recognized and deferred under U.S. GAAP:

  For the nine months ended
September 30, 2018
  For the nine
months ended
September 30, 2017
  Change  Change (%) 
             
Biological Organic Fertilizer                
Revenue in USD $14,300,609  $8,016,544  $6,284,065   78%
Quantity sold in tons  92,403   45,462   46,941   103%
Average selling price $154.76  $176.34  $(21.58)  (12)%
                 
Compound Microbial Fertilizer                
Sold and shipped in USD $12,693,441  $6,680,682  $6,012,759   90%
Quantity sold in tons  44,579   20,720   23,859   115%
Average selling price $284.74  $322.43  $(37.69)  (12)%
                 
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,881,945  $-  $1,881,945   100%
Quantity sold in tons  2,731   -   2,731   100%
Average selling price $689.10  $-  $689.10   100%
                 
Microbial Inoculum Fertilizer                
Sold and shipped in USD $13,415  $-  $13,415   100%
Quantity sold in tons  18   -   18   100%
Average selling price $745.28  $-  $745.28   100%

 

The soldsales and shipped amountshipment of Biological Organic Fertilizerall our products increased by approximately $6.8 million or 576.3%, to approximately $8.0 million in the nine months ended September 30, 2017 from approximately $1.2 million in the nine month ended September 30, 2016. The increase was mainly because we have gained more reputation in the agricultural industry and were able to attract more customers during the nine months ended September 30, 20172018 as compared to the nine months ended September 30, 2016 during which2017. The increase is mainly due to more sales are achieved due to the good quality of our products and more reputation gained in the agricultural industry and we just obtainedadded more diversity of our products, and therefore we can be able to attract more customers as discussed above. In addition, the increase is also attributable to more sales are achieved in different region of the PRC, such as Hainan Province, Guangdong Province and Shanxi Province upon establishment of our sales office in different regions. The increase is also slightly attributable to the introduction of our new products, Bio-water soluble fertilizer sales permit from the Chinese government and began to sell the products during the period. Microbial Inoculum fertilizer, in 2018.

Average selling prices for both periods remained stable with a decrease of $6.02Biological Organic Fertilizers decreased by $21.58 or 3.3% mainly due to the effect of exchange rate.

The sold and shipped amount of Compound Microbial Fertilizer increased by approximately $6.7 million or 100.0%12% in the nine months ended September 30, 2017 from $02018 as compared with the same period of 2017. In the third quarter of 2018, our headquarters moved to Yangling, China, and our marketing team is expanding to the western region. We lowered our average selling prices in order to quickly occupy the market and gain more market shares through the four newly established sales channels in Shanxi Province. In additional, our customers are willing to cooperate with our supply chain financing model as discussed above, which they cooperated with the third-party financing companies to obtain approval of advancing and paying off our accounts receivable without waiting for the downstream customers of harvesting crops and realizing their profits to repay us in approximately 3 to 9 months as compared to the same period in 2017. By cooperating with our supply chain financing model, our customers will have to bear additional cost on interest and insurance expenses. As a result, we slightly decreased the selling price as we were able to receive our accounts receivable sooner than the 3 to 9 months period.

Average selling prices of Compound Microbial Fertilizer increased by $37.69 or 12% in the nine monthmonths ended September 30, 20162018 as we did not sell this product category duringcompared with the same period for 2016. Compound Microbial Fertilizer products are our new products with higher effectiveness onof 2017 mainly due to the productivity of crops and increasingsame reason as discussed above. Therefore, the value and quality of the crops harvested that we firstly introduced in March 2017.average selling prices goes lower.

 

Cost of Revenue

 

Our cost of revenues from our major product category are summarized as follows:

 

 For the nine months ended
September 30, 2017
 For the nine months ended
September 30, 2016
 Change Change (%)  For the nine months ended
September 30, 2018
 For the nine months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                         
Cost of Revenue in USD $19,308 $770,451 $(751,143) (97.5)%
Cost of sold and shipped in USD $7,412,374  $19,308  $7,393,066   38,290%
Quantity sold and shipped in tons  59,231   162   59,069   36,462%
Average unit cost $125.14  $119.19  $5.95   5%
                
Compound Microbial Fertilizer                
Cost of sold and shipped in USD $6,933,138  $-  $6,933,138   100%
Quantity sold and shipped in tons  26,579   -   26,579   100%
Average unit cost $260.85  $-  $260.85   100%
                
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,274,244  $-  $1,274,244   100%
Quantity sold in tons 162 6,500 (6,338) (97.5)%  2,731   -   2,731   100%
Average unit cost $119.18  $118.53  $0.65 0.5% $466.59  $-  $466.59   100%
                
Microbial Inoculum Fertilizer                
Sold and shipped in USD $12,435  $-  $12,435   100%
Quantity sold in tons  18   -   18   100%
Average unit cost $690.83  $-  $690.83   100%

 

Cost of revenue from Biological Organic Fertilizer, decreasedCompound Microbial Fertilizer, Bio-Water Soluble Fertilizer and Microbial Inoculum Fertilizer increased by approximately $0.8$7.4 million, $6.9 million, $1.3 million, and $12,435 or 97.5%38,290%, 100%, 100% and 100% to approximately $19,000$7.4 million, $6.9 million, $1.3 million, and $12,435 in the nine months ended September 30, 20172018 from approximately $0.8 million$19,308, $0, $0, and $0 in the nine monthmonths ended September 30, 2016.2017. The decreaseincrease is mainly due to more sales are achieved due to the good quality of our products and more reputation gained in costthe agricultural industry and therefore we can be able to attract more customers and we have deferred most of our revenue to be recognized for products shipped during the period which is in line with the decrease in revenue from Biological Organic Fertilizer. The average unit production cost of Biological Organic Fertilizer increased by $0.65 or 0.5% in the nine months ended September 30, 2017 as compared to in the nine months ended September 30, 2016. The reason2017. As a result, our cost of the slight increase is mainly due to the increase of price for raw materials (mainly includes nitrogen, phosphorus and potassium) used in the products, offsetting by the appreciation of Renminbi against U.S. Dollar of approximately 4.2%.

 31

revenue increased accordingly along with our sales.

Non-GAAP analysis

 

Our cost of goods sold and shipped fromfor our two major products categories are summarized as follows including cost of goods sold recognized and deferred under U.S. GAAP:

 

 For the nine months ended
September 30, 2017
 For the nine months ended
September 30, 2016
 Change Change (%)  For the nine months ended
September 30, 2018
 For the nine months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                         
Cost of sold and shipped in USD $5,419,723 $770,451 $4,649,272 603.4% $9,679,008  $5,419,723  $4,259,285   79%
Quantity sold and shipped in tons 45,462 6,500 38,962 599.4%  92,403   45,462   46,941   103%
Average unit cost $119.21 $118.53 $0.68  0.6% $104.75  $119.21  $(14.46)  (12)%
                         
Compound Microbial Fertilizer                         
Cost of sold and shipped in USD $4,648,934 $- $4,648,934 100.0% $9,843,482  $4,648,934  $5,194,548   112%
Quantity sold and shipped in tons 20,720 - 20,720 100.0%  44,579   20,720   23,859   115%
Average unit cost $224.37 $- $224.37 100.0% $220.81  $224.37  $(3.56)  (2)%
                
Bio-Water Soluble Fertilizer                
Sold and shipped in USD $1,274,704  $-  $1,274,704   100%
Quantity sold in tons  2,731   -   2,731   100%
Average unit cost $466.75  $-  $466.75   100%
                
Microbial Inoculum Fertilizer                
Sold and shipped in USD $12,435  $-  $12,435   100%
Quantity sold in tons  18   -   18   100%
Average unit cost $690.83  $-  $690.83   100%

 

CostThe costs of goods sold and shipped from Biological Organic Fertilizerof all of our products increased by approximately $4.6 million or 603.4%, to approximately $5.4 million in the nine months ended September 30, 2017 from approximately $0.8 million in2018 as compared to the nine monthmonths ended September 30, 2016.2017. The increase duringis mainly due to more sales are achieved due to the period which is in line with the increasegood quality of our products and more reputation gained in the selling amountagricultural industry and therefore we can be able to attract more customers as discussed above. As a result, our cost of Biological Organic Fertilizer. The averagerevenue increased accordingly along with our sales.

Average unit production cost of Biological Organic Fertilizer increasedFertilizers decreased by $0.68$14.46 or 0.6%12% in the nine months ended September 30, 20172018 as compared with the same period of 2017 mainly due to increase in unit production causing the overhead cost allocation to each unit become lower.

Average unit of Compound Microbial Fertilizer decreased by $3.56 or 2% in the nine months ended September 30, 2016. The reason2018 as compared with the same period of the slight increase is2017 mainly due to the increase of price for raw materials (mainly includes nitrogen, phosphorus and potassium) used in the products, offsetting by the appreciation of Renminbi against U.S. Dollar of approximately 4.2%.

Cost of sold and shipped from Compound Microbial Fertilizer increased by approximately $4.6 million or 100.0%. The increase were in line with the increase in the selling amount of from Compound Microbial Fertilizer. We plan to launch the Bio-Water Soluble Fertilizer products in 2018.same reason as discussed above.

 

Gross Profit

 

Our gross profit from our major product category are summarized as follows:

 

  For the nine months ended
September 30, 2017
  For the nine months ended
September 30, 2016
  Change  Change (%) 
             
Biological Organic Fertilizer                
Gross Profit $11,103  $414,859  $(403,756)   (97.3)%
Gross Profit Percentage  36.5%  35.0%  1.5%   4.3%
                 

  For the nine months ended
September 30, 2018
  For the nine months ended
September 30, 2017
  Change  Change (%) 
             
Biological Organic Fertilizer                
Gross Profit $3,525,885  $10,103  $3,515,782   34,799%
Gross Profit Percentage  32.2%  36.5%  (4.3)%  (12)%
                 
Compound Microbial Fertilizer                
Gross Profit $2,045,047  $-  $2,045,047   100%
Gross Profit Percentage  22.8%  -   22.8%  100%
                 
Bio-Water Soluble Fertilizer                
Gross Profit $607,701  $-  $607,701   100%
Gross Profit Percentage  32.3%  -   32.3%  100%
                 
Microbial Inoculum Fertilizer                
Gross Profit $980  $-  $980   100%
Gross Profit Percentage  7.3%  -   7.3%  100%

Gross profit percentage for Biological Organic Fertilizerall four of our products increased from 35.0%34,799%, 100%, 100%, and 100% for the nine months ended September 30, 20162018 as compared to 36.5% for the nine months ended September 30, 2017 mainly due to more sales are achieved due to the increase in our unit selling pricegood quality of our products at a rate higher thanand more reputation gained in the increase in raw materials priceagricultural industry and therefore we can be able to attract more customers and we have deferred most of our revenue to be recognized for products shipped during the products for the reasonnine months ended September 30, 2017 as discussed above.

 

Non-GAAP analysis

 

Our total gross profit from our two major products categories are summarized as follows including the gross profit recognized and deferred under U.S. GAAP:

 

 For the nine months ended
September 30, 2017
 For the nine months ended
September 30, 2016
 Change Change (%)  For the nine months ended
September 30, 2018
 For the nine months ended
September 30, 2017
 Change Change (%) 
                  
Biological Organic Fertilizer                                
Gross Profit $2,596,831  $414,859  $2,181,972   526.0% $4,621,601  $2,596,821  $2,024,780   78%
Gross Profit Percentage  32.4%  35.0%  (2.6%)  (7.4%)  32.3%  32.4%  (0.1)%  (0)%
                                
Compound Microbial Fertilizer                                
Gross Profit $2,031,748  $-  $2,031,748   100.0% $2,849,959  $2,031,748  $818,211   40%
Gross Profit Percentage  30.4%  -   30.4%  100.0%  22.5%  30.4%  (8.0)%  (26)%
                
Bio-Water Soluble Fertilizer                
Gross Profit $607,241  $-  $607,241   100%
Gross Profit Percentage  32.3%  -   32.3%  100%
                
Microbial Inoculum Fertilizer                
Gross Profit $980  $-  $980   100%
Gross Profit Percentage  7.3%  -   7.3%  100%

 

Gross profit percentage for Biological Organic Fertilizer decreased from 35.0% for the nine months ended September 30, 2016 to 32.4% for the nine months ended September 30, 2017. The decrease in gross profit were2017 to 32.3% for the nine months ended September 30, 2018 mainly attributabledue to the decrease in selling price of theour products andis greater than the increase in unit production cost as discussed above.

 

Gross profit percentage for Compound Microbial decreased from 30.4% for the nine months ended September 30, 2017 to 22.5% for the nine months ended September 30, 2018 mainly due to the decrease in selling price of our products is greater than the decrease in unit cost as discussed above.

In the third quarter of 2018, our headquarters moved to Yangling, China, and our marketing team is expanding to the western region. We lowered our average selling prices to quickly occupy the market and gain more market shares through the four newly established sales channels in Shanxi Province. In addition, our customers are willing to cooperate with our supply chain financing model as discussed above, which they cooperated with the third-party financing companies to obtain approval of advancing and paying off our accounts receivable without waiting for the downstream customers of harvesting crops and realizing their profits to repay us in approximately 3 to 9 months as compared to the same period in 2017. By cooperating with our supply chain financing model, our customers will have to bear additional cost on interest and insurance expenses. As a result, we decide to sell at a lightly lower rate per unit as we were able to receive our accounts receivable sooner than the 3 to 9 months period.

Research and Development Expenses

 

Research and development expenses was approximately $110,000$115,000 (RMB 750,000) for the nine months ended September 30, 2017, compared to approximately $113,000 (RMB 750,000) for2018, keeping the same as the prior comparable period.period of RMB 750,000 and approximately $110,000 in USD. On November 20, 2015, the Company signed a strategic cooperation agreement (the “Agreement”) with China Academy of Agricultural Science (“CAAS”)’s Institute of Agricultural Resources & Regional Planning (“IARRP”) and Institute of Agricultural Economy & Development (“IAED”). Pursuant to the Agreement, the Company will form a strategic partnership with the two institutes and establish an “International Cooperation Platform for Internet and Safe Agricultural Products”. To fund the cooperation platform’s R&D activities, the Company will provide RMB 1 million (approximately $160,000) per year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. The term of the Agreement is for three years beginning November 20, 2015 and will expire on November 19, 2018. However, the Company is only liable for the annual funds to be provided to the extent of the contract obligations performed by CAAS IARRP and IAED, and the agreement is terminable before the three years’ commitment date based on negotiations of both parties. The Company contributed approximately $113,000$115,000 (RMB 750,000) for the nine months ended September 30, 2017 and September 30, 2016.2018. The Company plans to contribute the remaining balance quarterly until the date of the Agreement expired on November 19, 2018.

Selling Expenses

 

Selling expenses for the nine months ended September 30, 20172018 and 20162017 were approximately $236,252$410,000 and $0,$236,000, respectively. Selling expenses include salaries of sales personnel, sales commission, travel and entertainment as well as freight out expenses. The increase in selling expenses is mainly because we have started hiring sales managersdue to the increase of salary expenses. The increase in the fourth quarter of 2016 for the marketing of our products. During the nine months ended September 30, 2016, there was no designated sales personnel since Kiwa Beijing just obtained the permit to sell bio-fertilizer in September 2016. With business expansion,salary expenses is mainly because we have hired more sales managers in Kiwa Beijing and in Kiwa Shenzhenthe first half year of 2018 for the marketing of our products offset by the reduction of salary expenses during the third quarter of 2018 due to manage our sales activities in different regions of China from October 2016 to September 2017. In addition, the increase of sales also ledrelocation to the increasecity of freight out expense, resulting in the increase of selling expense.Yanglin.

 32

 

General and Administration Expenses

 

General and administrative expenses increased by approximately 451%95% from approximately $0.4$2.1 million in the nine months period ended September 30, 20162017 to approximately $2.1$4.0 million in the same period in 2017.2018. General and administrative expenses include professional fees, officers’ compensation, depreciation and amortization, salaries, travel and entertainment, rent, office expense and telephone expense and the like.expense. The increase in general and administrative expenses is mainly attributed to business expansion and the establishment of Kiwa Shenzhen in November, 2016, Kiwa HebeiXian in December 20162017, Kiwa Shanxi in February 2018, and Kiwa AsiaYangling in July 2017.

Right-to-use Trademark Income

Right-to-use Trademark income totaled $0 forMarch 2018 where we did not have such expenses in the nine months ended September 30, 2017, compared with $786,329 forwhich contributed approximately $1.0 million increase. In addition, approximately $1.4 million increase of G&A expenses are attributable to the same periodincrease of 2016, reflecting a decrease of 100% from the same period of last year. Income was generated from licensing our trademark to Gerui. We signed the license agreement with Gerui to allow Gerui to sell fertilizer using our trademark in December 2015. We charged Gerui 10% of net sales of fertilizers bearing Kiwa trademark for using our trademark. Gerui began to sell fertilizers bearing Kiwa trademark in 2016. In August 2016, the Company obtained the government approval of selling fertilizers in China. As a result, we ceased the cooperation with Gerui and started to sell our own bio-fertilizers from September 2016.

Other Income

Other income increased by approximately $0.4 million from $0 in the nine months ended September 30, 2016 to approximately $0.4 million in the same period in 2017. The increase is mainly attributable the accrued professional fees, which were unclaimedsuch as attorneys, auditors, financial consultants, IT consultants, and business strategic and development consultants as we need more professional to assist and support us for more than ten years and we have evaluated and reached the decision to discharge these liabilities.our business expansion.

 

Interest Expense

 

Net interest expense was $356,256$459,445 and $142,296$356,256 for the nine months ended September 30, 20172018 and 2016,2017, respectively, representing an increase of $213,960approximately $103,189 or 150%29%. Interest expense included accrued interest on convertible note and other note payable, and the amortization of the convertible note discount for the nine months ended September 30, 20172018 and 2016.2017. The increase in interest expenses is mainly attributed to newly issuance of twoa 15% convertible note issued in the middle of May 2017 where we incurred only four-and-a-half-month interest expense during the nine months ended September 30, 2017 on the notes for the nine months ended September 30, 2017.

 

LossIncome from discontinued operations, net of taxes

 

LossGain from discontinued operations, net of taxes was approximately $17,000$0 and approximately 159,000$4,495,392 for the threenine months ended September 30, 20172018 and 2016,2017, respectively, which results in an increase of approximately $142,000$4,495,392 from discontinued operations, net of taxes for the threenine months ended September 30, 20172018 to the same period of 2016.2017. Due to suffering from losses for several years, On February 11, 2017, the Company executed an Equity Transfer Agreement with Dian Shi Cheng Jing (Beijing) Technology Co. (“Transferee”) whereby the Company transferred all of its right, title and interest in Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Shandong”) to the Transferee for RMB 1.00. The government processing of the transaction was completed on April 12, 2017. Therefore, it’s resulted inThis transaction was completed and effective on April 12, 2017. The Company recorded a net gain of approximately $4.5 million during the decreasenine months ended September 30, 2017 based on the discharge of loss from discontinued operations, netthe excess liabilities over the assets of taxes.

the Kiwa Shandong.

Net Income (loss)

 

Net income for the nine months ended September 30, 2017 increased2018 decreased by approximately 650%98% from approximately $332,000$2,488,839 to approximately $2, 489,000.$40,961. Such change was the result of the combination of the changes as discussed above.

 

Critical Accounting Policies and Estimates

 

We prepared our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

 

 33

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. In addition, you should refer to our accompanying unaudited condensed consolidated balance sheets as of September 30, 2017,2018, and the unaudited condensed consolidated statements of operations and comprehensive income, and cash flows for the three and nine months ended September 30, 2017,2018, and the related notes thereto, for further discussion of our accounting policies.

 

Revenue Recognition

 

On January 1, 2018 we adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. We did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations.

The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time.

The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.

The Company applies paragraph 605-10-S99-1continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of the FASB Accounting Standards Codification for revenue recognition.sales contract and there is no separate sales rebate, discount, or volume incentive. The Company recognizes revenue when it is realized or realizabletitle and earned. The Company considers revenue realized or realizable and earned when allownership of the following criteriagoods are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been renderedtransferred upon shipment to the customer (iii)by the sales price is fixed or determinable,Company to consider control of goods are transferred to its customer and (iv) collectability of payment is reasonably assured.

The Company’s current payment terms on credits to its customersrevenues are ranging from 60 days to 9 monthsrecognized at a point in time after receipts of the goods depending on the creditworthiness of its customers.all performance obligations are satisfied.

The Company’scustomers are mainly agricultural cooperative company and distributors who then resell the Company’s products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry for some of these Co-ops and distributors, will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay the resellers. As a result, for the sales contracts with these customers, the collectability of payment is highly dependent on the successful harvest of corps and the customers’ ability to collect money from farmers. The Company deemed the collectability of payment may not be reasonably assured until after the Company get paid. For thoseCollectability is a necessary condition for the contract to be accounted for to meet the criteria of the first step “identifying the contract with the customer” under the new revenue guidance in ASC 606. As a result, the sales contracts thatwith these customers are not considered a contract under ASC 606, thus the Company has shipped its products butshipments under these contracts are not recognized as revenue until all criteria for “identifying the payment is contingent on collections of payments fromcontract with the downstream customers, the Company considers thecustomer” and revenue recognition criteria are not met and therefore defersusing the revenue and cost of goods sold until payments are collected. These revenue and cost of goods sold are classified in the captioned “Deferred revenue” and “Deferred cost of goods sold” in the accompanying unaudited condensed consolidated balance sheets. For other customers whose repayment is within normal business course and not highly dependent on the succession of corps being harvested, the Company recognized revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company.   

five-step model.

 

Deferred Revenue and Deferred Cost of Goods Sold

 

Deferred revenue and deferred cost of goods sold result from transactions where the Company has shipped product for which all revenue recognition criteria under the five-step model have not yet been met. Though these contracts are not considered a contract under ASC 606, they are legally enforceable, and the Company has an unconditional and immediate right to payment after the Company has shipped products, therefore, the Company recognizes a receivable and a corresponding deferred revenue upon shipment. Deferred cost of goods sold related to deferred product revenues includes direct inventory costs. Once all revenue recognition criteria under the five-step model have been met, the deferred revenues and associated cost of goods sold are recognized.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable represent customer accounts receivables. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience, the economic environment trends in the microbial fertilizer industry, and a review of the current status of trade accounts receivable. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. Such allowances, if any, would be recorded in the period the impairment is identified. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Uncollectible accounts receivables are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets consist of property and equipment. The Company evaluates its investment in long-lived assets for recoverability whenever events or changes in circumstances indicate the net carrying amount may not be recoverable. It is possible that these assets could become impaired as a result of legal factors, market conditions, operational performance indicators, technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions. Pursuant to Section 850-10-20 the related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly Influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the consolidated financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation when it is more likely than not that the assets will not be recovered.

 

ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.

 

 34

Liquidity and Capital Resources

 

Since inception ofIn assessing our agriculture-biotech business in 2002,liquidity, we have relied on the proceeds from the sale ofmonitor and analyze our equity securities and loans from both unrelated and related parties to provide the resources necessary to fund our operations and the execution of our business plan.

Our current assets as of September 30, 2017 were approximately $30.8 million,cash on-hand and our current liabilities were approximately $29.7 million, which resulted in a current ratio of approximately 1.04. Total equity as of September 30, 2017 was approximately $1.9 million. Most of our current assetsoperating and capital expenditure commitments. Our liquidity needs are in the form of accounts receivable generated from our sales. We have subsequently collected approximately $8.7 million of our $15.2 million outstanding accounts receivables as of September 30, 2017. We expect to collect the remaining balance of these accounts receivable by the end of December 31, 2017.

While we had netmeet its working capital of approximately $1.1 million at September 30, 2017requirements, operating expenses and a small net income from our continued operations,capital expenditure obligations. The unaudited condensed consolidated financial statements have been prepared assuming that we used approximately $3.4 million net cash in our operating activities and we had very little cash on hand as of September 30, 2017. These circumstances, among others, raise substantial doubt about the Company’s ability towill continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Our business is capital intensive as we believe is sufficientneed to supportmake advance payment to our suppliers to secure timely delivery and current market price of raw materials. Debt financing in the form of notes payable and loans from related parties have been utilized to finance our working capital needs for the next twelve months.

Our ability to repay its current obligations will depend on the future operating revenues generated from our products and seeking additional equity financing. Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer, will continue to grow in our business. In addition, our marketing team is expanding to the Western areas of China and Hainan province and we expect our revenues will continue to grow in the fourth quarter of 2017 and in 2018. Meanwhile, we expect to continue to gain market shares in our existing sales channel bases in the Northern and the Southern areas of China due to the good quality of the products and better reputation in the industry. We believe these factors will enable us sufficiently to support our working capital needs for the next twelve months. However, if management is unable to execute our revenue plan as expected, there would be likely being a material effect on our operations.

Furthermore, our management already raised additional equity for approximately $76,000 and reduced our convertible debts for approximately $15,000 in October 2017. Management is currently and will continuously seeking additional equity financing to support our working capital. To the extent that we are unable to successfully raise the capital necessary to fund our future cash requirements on a timely basis and under acceptable terms and conditions, we may not have sufficient liquidity to maintain operations and repay our liabilities for the next twelve months. As a result, we may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition and results of operations.

Accounts receivable

requirements. As of September 30, 2017,2018, our working capital was approximately $11.7 million and we had cash of approximately $15.2 million$11,000, with remaining current assets mainly composed of accounts receivables from our customers. Since weobtained a fertilizer sales permit from the Chinese government in August 2016 and beganreceivable, advance to sell the products directly to customers in September 2016, our strategy was to gain market shares in the bio-fertilizer market by extending longer credit to our customers. As a result, our accounts receivable increased from approximately $1.1 million at December 31, 2016 to approximately $15.2 million at September 30, 2017. Our current payment terms on these customers are ranging from 60 days to 9 months after receipts of the goods depending on the creditworthiness of these customers. These customers are either agricultural cooperative company or distributors who then resell our products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry, it will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay us. Based on our evaluation of the collectability of our trade accounts receivable, we have provided allowance for doubtful accounts of approximately $0.3 million as of September 30, 2017. As of the date of this report, we have subsequently collected approximately $8.7 million or 56% of the outstanding accounts receivable as of September 30, 2017. We expect to collect the remaining balance of approximately $6.8 million of these outstanding accounts receivable by the end of December 31, 2017.

Our provision on allowance for doubtful accounts is based on historical collection experience, the economic environment, trends in the microbial fertilizer industry, and a review of the current status of trade accounts receivable and come up with an aging allowance method. Currently, we provide a provision of 1%-6% of the allowance for doubtful accounts for accounts receivable balance that are more than 180 days old but less than one year old, 50% of the allowance for doubtful accounts for accounts receivable from one to one and half years old, 100% of the allowance for doubtful accounts for accounts receivable beyond one and half years old, plus additional amount as necessary, which our collection department had determined the collection of the full amount is remote with the approval from our management to provide a 100% provision allowance for doubtful accounts. Our management have continued to evaluate the reasonableness of the valuation allowance policy and update it if necessary.

Deferred revenuesuppliers and deferred cost of goods soldsold.

 

AsWe may have to consider supplementing our available sources of September 30, 2017, we had approximately $15.0 million of deferred revenue and approximately $10.3 million of deferred cost of goods soldbecause these transactions resulted from where we have shipped our productsfunds for which all revenue recognition criteria have not yet been met.As ofoperations through the date of this report, we have subsequently collected approximately $8.7 million or 56% of the outstanding deferred revenues as of September 30, 2017. As a result, we expect to recognize approximately $8.7 million of deferred revenue and approximately $6.0 million of deferred cost of goods sold in the fourth quarter of 2017.following sources:

 

We will continuously seek additional equity financing to support our working capital;
other available sources of financing from PRC banks and other financial institutions; and
financial support and credit guarantee commitments from our major shareholder

The following table set forth summary of our cash flows for the periods indicated:

 

(All in amounts in thousands of U.S. dollars)

  For the nine months ended
September 30,
 
  2018  2017 
Net cash provided by (used in) operating activities $(1,549,571) $(3,367,270)
Net cash used in investing activities  (4,774)  (792,988)
Net cash provided by financing activities  542,819   4,227,829 
Effect of exchange rate changes on cash  (60,919)  (57,765)
Net increase in cash  (1,072,445)  9,806 
Cash, beginning of period  1,083,539   13,469 
Cash, end of period $11,094  $23,275 

 

  Nine Months Ended 
  2017  2016 
Net cash (used) in continuing operating activities $(3,367) $(738)
Net cash (used) in continuing investing activities  (793)  (79)
Net cash provided by continuing financing activities  4,228   818 
Net cash used in discontinued operations  -   - 
Effect of exchange rate changes on cash  (58)  (1)
Net increase (decrease) in cash  10   (0)
Cash, beginning of nine month period  13   1 
Cash, end of nine month period $23  $1 

 35

Operating Activities

 

Net cash used in continuing operating activities was approximately $3.4$1.5 million infor the nine months ended September 30, 2017,2018, compared to cash used in operating activities of approximately $0.7$3.4 million for the same period in 2016. The increase in net2017. Net cash used in operating activities for the nine months ended September 30, 2018 was primarily attributable to 1) increase of approximately $14.0$7.1 million of accounts receivable as our strategy is to gainmarket shares inwe shipped out approximately $7.1 million products and pending for collection during thebio-fertilizermarket by extending credit to our customers; period; 2) increaseincreased of approximately $1.1of $1.3 million of advance to suppliersas we need topreviously secure current market price of raw materials purchases aswhich we arewere anticipating the raw materials price is on the rise in the near future;future and we have received significant portion of the inventory for production and shipment accordingly during the period; 3) decreased of approximately of $0.5 million account payables to paid our suppliers; 4) increase of approximately $10.0$0.4 million of rent deposit and other receivables; offset by 5) increase of approximately $7.1 million of deferred revenue and increase of approximately $5.2 million of deferred cost of goods sold offset by 4)as we deferred our revenues and cost of goods sold due to our evaluation of the collectability with our customers until all revenue recognition criteria under the five-step model have been met; 6) approximately $1.8 million of non-cash stock compensation issued for consulting fees and officer salaries; 7) increase of approximately $7.6$1.4 million of accountstaxes payable as we incurred more taxes payables from our operations; 8) decrease of approximately $1.0 million of inventory as we have increasedshipped out more products on our purchases to fulfill more sales orders ininventory that we previously stocked up for productions during the nine months ended September 30, 2017 and 5)period; 9) increase of approximately $14.7$0.8 million of deferred revenue.other payables and accruals as we incurred more payables from our operations and 10) increase of approximately $0.5 million of salary payables as we incurred more payables to employees.

 

Investing Activities

 

Net cash used in continuing investing activities was approximately $0.8 million$4,800 in the nine months ended September 30, 2017, and net2018, which was mainly attributable to purchase of office equipment. Net cash used in investing activities was approximately $0.08$0.8 million for the nine months period ended September 30, 2016. The net cash used in investing activities was mainly attributable to deposit of investment. The Company entered an equity purchase agreement with the shareholders of Yantai Peng Hao New Materials Technology Co. Ltd. (“Peng Hao”) to acquire 100% interest in Peng Hao on June 8, 2017. As of September 30, 2017, the Company has made deposit payment of RMB 5,000,000 (approximately $751,050).

 

Financing Activities

 

Net cash provided continuingby financing activities was approximately $0.5 million for the nine months ended September 30, 2018 and net cash provided by financing activities was approximately $4.2 million for the nine months ended September 30, 2017 and net cash provided by financing activities was approximately $0.8 million for the nine months period ended September 30, 2016.2017. The cash inflow for the nine months ended September 30, 20172018 was mainly resulted from $0.2 million which we borrowed from our related parties for working capital purpose and $0.3 million from sale of common stocks of approximately $3.2 million and from issuing of our convertible note of approximately $1 million.

stocks.

Trends and Uncertainties in Regulation and Government Policy in China

 

Foreign Exchange Policy Changes

 

China is considering allowing its currency to be freely exchangeable for other major currencies. This change will result in greater liquidity for revenues generated in Renminbi (“RMB”). We would benefit by having easier access to and greater flexibility with capital generated in and held in the form of RMB. The majority of our assets are located in China and most of our earnings are currently generated in China and are therefore denominated in RMB. Changes in the RMB-U.S. Dollar exchange rate will impact our reported results of operations and financial condition. In the event that RMB appreciates over the next year as compared to the U.S. Dollar, our earnings will benefit from the appreciation of the RMB. However, if we have to use U.S. Dollars to invest in our Chinese operations, we will suffer from the depreciation of U.S. Dollars against the RMB. On the other hand, if the value of the RMB were to depreciate compared to the U.S. Dollar, then our reported earnings and financial condition would be adversely affected when converted to U.S. Dollars.

 

On July 21, 2005, the People’s Bank of China announced it would appreciate the RMB, increasing the RMB-U.S. Dollar exchange rate from approximately US$1.00 = RMB 8.28 to approximately US$1.00 = RMB 8.11. So far the trend of such appreciation continues. The exchange rate of U.S. Dollar against RMB on September 30, 20172018 was US$1.00 = RMB 6.6574.6.8665.

 

Commitments and Contingencies

 

See Note 1719 to the Unaudited Condensed Consolidated Financial Statements under Item 1 in Part I.

 

Off-Balance Sheet Arrangements

 

At September 30, 2017,2018, 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, 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period covered by this report, have concluded that our disclosure controls and procedures are not effective to reasonably ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s Rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The principal basis for this conclusion is the lack ofdue to (i) failure to engage sufficient resources in regard to our accounting and skilled accounting personnel with an appropriate level of technical accounting knowledgereporting obligations and experience in the application of US GAAP(ii) failure to fully document our internal control policies and the lack of audit committee oversight.procedures.

 

(b) Changes in Internal Control over Financial Reporting

 

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606). There have not been any other changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the current quarter ended September 30, 2017,2018 to have materially affected the Company’s internal control over financial reporting.

 

 36

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

ITEM 1A. RISK FACTORS

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following is a list of securitiesshares of Company Common Stock issued for cash, or converted withthe conversion of convertible debentures or as stock compensation to consultants during the period from January 1, 20172018 through December 22, 2017,November 19, 2018, which were not registered under the Securities Act:

 

Name of PurchaserStock Purchase for cashIssue DateSecuritySharesConsideration247,700 shares
JUNWEI ZHENG3/3/17Common920,000Stock Purchase
YUAN WANG3/3/17Common80,000Stock Purchase
YUAN WANG3/3/17Common70,000Consultant Fees
HAIPING LIU6/13/17Common19,380Consultant Fees
YANG YANG6/13/17Common96,900Stock Purchase
YUAN ZENG6/30/17Common21,100Stock Purchase
BAOYU OUYANG6/30/17Common17,000Stock Purchase
HONGHUA ZHANG6/30/17Common15,000Stock Purchase
WEIQIANG XU6/30/17Common10,000Stock Purchase
JIALIN XIONG6/30/17Common3,750Stock Purchase
KUN WEI6/30/17Common3,000Stock Purchase
YANYU GUO6/30/17Common2,000Stock Purchase
YANJIAO GUO6/30/17Common1,000Stock Purchase
MENGSHA YUAN6/30/17Common10,000Stock Purchase
MO HAN6/30/17Common15,000Stock Purchase
HEBE HAN6/30/17Common15,108Stock Purchase
QUANZHEN SHEN8/1/17Common98,000Stock Purchase
QUANZHEN SHEN8/1/17Common49,000Consultant Fees
YUAN WANG8/1/17Common39,000Consultant Fees
JUNWEI ZHENG8/1/17Common245,000Stock Purchase
YANWU ZHU8/18/17Common67,500Consultant Fees
ZHEN LIN8/18/17Common50,000Consultant Fees
HAIPENG LIU8/18/17Common50,000Consultant Fees
YANAN FU8/18/17Common206,000Consultant Fees
XIAOCHUN ZHANG8/18/17Common100,000Consultant Fees
YUEFENG SU8/18/17Common135,000Stock Purchase
ZHEN LIN8/18/17Common50,000Stock Purchase
HAIPENG LIU8/18/17Common50,000Stock Purchase
FIRSTTRUSTGROUP, INC.10/19/17Common14,151Conversion of Note
DONGQING ZHAO10/24/17Common50,000Consultant Fees
LIYA WANG10/24/17Common50,000Consultant Fees
MING JI10/24/17Common50,000Consultant Fees
SHUMIN E10/24/17Common50,000Consultant Fees
XIUFANG GAO10/24/17Common50,000Consultant Fees
YUFANG YANG10/24/17Common50,000Consultant Fees
GENG LIU10/24/17Common500,000Consultant Fees
XUAN ZHANG10/24/17Common500,000Consultant Fees
HAIRONG CHEN10/24/17Common38,000Consultant Fees
ERLI WEI10/24/17Common38,000Stock Purchase
Total:3,828,889  

Consultant Fees1,347,918 shares
  37
Conversion of Convertible Note126,045 shares
 
Salary Compensation15,234 shares
Total1,736,897 shares

 

There were no other sales of unregistered securities not already reported on the Company’s quarterly filings on Form 10-Q or on a Current Report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine safety disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No. Description
   
31.1/31.2 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule15d-14(a) of the Securities Exchange Act of 1934, as amended
   
32.1/32.2 Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 38

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 KIWA BIO-TECH PRODUCTS GROUP CORPORATION
  
December 22, 2017November 19, 2018By:/s/ Yvonne Wang
  

Yvonne Wang, Interim

Chief Executive Officer and

Interim Chief Financial Officer

 39