As filed with the Securities and Exchange
Commission on August 2, 2004 Registration No. 333-_________
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Name of Small Business Issuer in its Charter)
Delaware 8731 87-0448400
(State or Jurisdiction (Primary Standard Industrial (I.R.S Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
17700 CASTLETON STREET, SUITE 589
CITY OF INDUSTRY, CALIFORNIA 91748
(626) 964-3232
(Address and Telephone Number of Principal Executive Offices)
17700 CASTLETON STREET, SUITE 589
CITY OF INDUSTRY, CALIFORNIA 91748
(Address of Principal Place of Business or intended Place of Business)
JAMES NIAN ZHAN, SECRETARY
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
17700 CASTLETON STREET, SUITE 589
CITY OF INDUSTRY, CALIFORNIA 91748
(626) 964-3232
Copy to:
V. JOSEPH STUBBS, ESQ.
STUBBS ALDERTON & MARKILES, LLP
15821 VENTURA BOULEVARD, SUITE 525
ENCINO, CALIFORNIA 91436
(818) 444-4500
(Name, Address and Telephone Number of Agent for Service)
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, Check
the following box. [_]
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum
of Securities Amount To Be Offering Price Aggregate Offering Amount Of
To Be Registered Registered (1) Per Unit (2) Price(2) Registration Fee
- -------------------------------------------- -------------- ---------------- ------------------ ----------------
Common Stock, par value $.0001 per share (3) 40,704,038 $0.25 $10,176,009.50 $1,289.30
Common Stock, par value $.0001 per share 2,800,000 $0.25 $700,000.00 $88.69
Common Stock, par value $.0001 per share (4) 1,747,000 $0.25 $436,750.00 $55.34
Common Stock, par value $.0001 per share (5) 26,567 $0.25 $6,641.75 $0.84
- -------------------------------------------- -------------- ---------------- ------------------ ----------------
TOTAL 45,277,605 $0.25 $11,319,401.25 $1,434.17
============================================ ============== ================ ================== ================
<FN>
(1) In the event of a stock split, stock dividend, or other similar
transaction involving the Registrant's common stock, in order to prevent
dilution, the number of shares registered shall automatically be increased
to cover the additional shares in accordance with Rule 416(a) under the
Securities Act.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act solely for the purpose of
calculating the Registration Fee.
(3) Represents shares underlying Standby Equity Distribution Agreement,
including 704,038 of which were issued as a one-time commitment fee to
Cornell Capital Partners, LP.
(4) Represents shares issuable upon exercise of a common stock warrant.
(5) Represents shares issued as a fee to Newbridge Securities Corporation for
acting as exclusive placement agent under the Standby Equity Distribution
Agreement.
</FN>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION - AUGUST 2, 2004
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
45,277,605 shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up
to 45,277,605 shares of common stock of Kiwa Bio-Tech Products Group Corporation
by certain persons who are stockholders of Kiwa. The selling stockholders may
sell common stock from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock
which they are offering.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. We will, however,
receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement which was entered into on July 6, 2004, between Cornell
Capital Partners, LP and us. We have agreed to pay Cornell Capital Partners, LP
4% of the proceeds that we receive under the Standby Equity Distribution
Agreement. All costs associated with this registration will be borne by us.
Our common stock is currently traded on the Over-The-Counter Bulletin
Board under the symbol KWBT. The shares of our common stock are being offered
for sale by the selling stockholders at prices established on the OTC Bulletin
Board during the term of this offering. On July 30, 2004, the last reported sale
price of our common stock was $0.19 per share.
The selling stockholders consist of (a) stockholders who were issued
shares (i) under the Standby Equity Distribution Agreement, and (ii) pursuant to
the conversion of convertible notes, and (b) a stockholder who will be issued
shares upon the exercise of a common stock warrant.
Cornell Capital Partners, LP is an "underwriter" within the meaning of
the Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners, LP will pay us
99% of the market price of our common stock, which is defined as the lowest
volume weighted average price of the common stock during the five trading days
following the notice date. In addition, Cornell Capital Partners, LP will retain
4% of each advance under the Standby Equity Distribution Agreement. Cornell
Capital Partners, LP also received a one-time commitment fee in the form of
704,038 shares of common stock. The 4% retention and the 704,038 shares of
common stock are underwriting discounts payable to Cornell Capital Partners, LP.
In addition, we entered into a Placement Agent Agreement on July 6, 2004, with
Newbridge Securities Corporation, a registered broker-dealer. Pursuant to the
Placement Agent Agreement we paid Newbridge Securities Corporation a one-time
placement agent fee of 26,567 shares of common stock for its services.
Brokers or dealers effecting transactions in these shares should
confirm that the shares are registered under the applicable state law or that an
exemption from registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 3.
With the exception of Cornell Capital Partners, LP, which is an
"underwriter" within the meaning of the Securities Act, no other underwriter or
person has been engaged to facilitate the sale of shares of common stock in this
offering. This offering will terminate twenty-four months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
NEITHER THE SELLING STOCKHOLDERS NOR KIWA MAY SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
The date of this prospectus is August 2, 2004.
ii
TABLE OF CONTENTS
PART I
PROSPECTUS SUMMARY............................................................1
OVERVIEW.............................................................1
OVERVIEW OF FINANCIAL CONDITION AND GOING CONCERN....................1
ABOUT US.............................................................2
THE OFFERING.........................................................2
RISK FACTORS..................................................................3
RISKS RELATED TO OUR BUSINESS........................................3
RISKS RELATED TO OUR COMMON STOCK....................................7
RISKS RELATED TO THIS OFFERING.......................................8
FORWARD LOOKING STATEMENTS...........................................10
USE OF PROCEEDS...............................................................10
DILUTION......................................................................11
SELLING STOCKHOLDERS..........................................................11
EQUITY LINE OF CREDIT.........................................................13
SUMMARY..............................................................13
EQUITY LINE OF CREDIT EXPLAINED......................................14
PLAN OF DISTRIBUTION..........................................................15
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..................16
DIRECTORS AND EXECUTIVE OFFICERS.....................................16
AUDIT COMMITTEE FINANCIAL EXPERT.....................................17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................17
DESCRIPTION OF SECURITIES.....................................................19
INTEREST OF NAMED EXPERTS AND COUNSEL.........................................19
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITY.............................................19
DESCRIPTION OF BUSINESS.......................................................19
BUSINESS AND OPERATIONS..............................................20
STRATEGIES...........................................................20
MARKET OVERVIEW......................................................22
COMPETITION..........................................................22
FACILITIES AND EQUIPMENT.............................................23
SOURCES OF RAW MATERIALS.............................................23
DEPENDENCE ON CUSTOMERS..............................................24
REGULATORY...........................................................24
ENVIRONMENTAL MATTERS................................................24
MANAGEMENT'S DISCUSSION AND ANAYLSYS OR PLAN OF OPERATION.....................24
OVERVIEW.............................................................24
MAJOR CUSTOMERS AND SUPPLIERS........................................24
GOING CONCERN........................................................24
CRITICAL ACCOUNTING POLICIES.........................................25
RESULTS OF OPERATIONS................................................26
iii
LIQUIDITY AND CAPITAL RESOURCES......................................28
INFLATION AND CURRENCY MATTERS.......................................29
COMMITMENTS AND CONTINGENCIES........................................30
OFF-BALANCE SHEET ARRANGEMENTS.......................................30
RECENT ACCOUNTING PRONOUNCEMENTS.....................................30
DESCRIPTION OF PROPERTY.......................................................31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................31
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................31
MARKET INFORMATION...................................................31
HOLDERS OF COMMON STOCK..............................................32
DIVIDENDS............................................................32
EQUITY COMPENSATION PLAN INFORMATION.................................32
AUTHORIZED AND UNISSUED STOCK........................................32
EXECUTIVE COMPENSATION........................................................33
SUMMARY COMPENSATION TABLE...........................................33
COMPENSATION OF DIRECTORS............................................33
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS..................................33
2004 STOCK INCENTIVE PLAN............................................33
HOW TO GET MORE INFORMATION...................................................34
FINANCIAL STATEMENTS..........................................................35
PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................................66
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION...................................66
RECENT SALES OF UNREGISTERED SECURITIES.......................................66
EXHIBITS......................................................................67
UNDERTAKINGS..................................................................68
iv
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the notes to the financial
statements. As used throughout this prospectus, the terms "Kiwa," the "Company,"
"we," "us," and "our" refer to Kiwa Bio-Tech Products Group Corporation.
OVERVIEW
We are a development stage company that aims to build a platform to
commercialize bio-technological research and development results for
applications in agriculture and environmental protection. In this respect, we
are working on developing cooperative research relationships with several
universities in China and the U.S. We are also planning to acquire innovative
technologies to reduce research and development costs and shorten
commercialization cycles for bio-technological products. We have filed patent
applications in China for technologies related to applications of photosynthesis
bacteria, biologic catalyst, and synergetic enzyme, and are preparing to file
patent applications in the U.S. These technologies have applications in the
agricultural, natural resources and environmental conservation and drug
manufacturing sectors. We also plan to acquire similar technologies both in
China and the U.S.
We were originally incorporated in the State of Utah on June 14, 1933,
under the name Tintic Gold Mining Company to perform mining operations in Utah.
On March 12, 2004, pursuant to an Agreement and Plan of Merger dated as of March
11, 2004, by and among Tintic Gold Mining Company, TTGM Acquisition Corporation,
a Utah corporation and wholly-owned subsidiary of Tintic Gold Mining Company,
and Kiwa Bio-Tech Products Group Ltd., a British Virgin Islands international
business company, TTGM Acquisition Corporation merged with and into Kiwa
Bio-Tech Products Group Ltd. Each share of Kiwa Bio-Tech Products Group Ltd.
common stock was converted into 1.5445839 shares of Tintic Gold Mining Company
Common Stock, with Kiwa Bio-Tech Products Group Ltd. surviving as Tintic Gold
Mining Company's wholly-owned subsidiary. The merger resulted in a change of
control of Tintic Gold Mining Company, with former Kiwa Bio-Tech Products Group
Ltd. stockholders owning approximately 89% of Tintic Gold Mining Company on a
fully diluted basis. Subsequent to the merger, Tintic Gold Mining Company
changed its name to Kiwa Bio-Tech Products Group Corporation. On July 22, 2004,
we completed our reincorporation in the State of Delaware.
OVERVIEW OF FINANCIAL CONDITION AND GOING CONCERN
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $1,650,247 and $1,355,239 during the three
months ended March 31, 2004 and the year ended December 31, 2003, respectively,
and our current liabilities exceeded our current assets by $965,294 and $585,313
for the same periods, respectively. We had a stockholders' deficiency of
$621,990 and $211,123 at March 31, 2004 and December 31, 2003, respectively. In
addition, we are still in the development stage and will require additional
capital to fund our business plan. We continue to develop our manufacturing
facility and have not generated significant revenues from our planned principal
operations. These factors create substantial doubt about our ability to continue
as a going concern.
Our independent certified public accountants, in their independent
auditors' report on the consolidated financial statements as of and for the year
ended December 31, 2003, have expressed substantial doubt about our ability to
continue as a going concern.
As of March 31, 2004, we had obtained non-interest bearing loans from
the local People's Republic of China government of approximately $1,200,000.
During the year ending December 31, 2004, in addition to funds generated under
the Standby Equity Distribution Agreement, we intend to raise additional capital
through the issuance of debt or equity securities to fund the development of our
planned business operations. There can be no
1
assurances that we will be able to obtain sufficient funds to allow us to
continue our operations during the remainder of 2004.
To the extent that we are unable to successfully raise the capital
necessary to fund our future cash requirements on a timely basis and under
acceptable terms and conditions, we will not have sufficient cash resources to
maintain operations, and may have to curtail operations and consider a formal or
informal restructuring or reorganization.
ABOUT US
Our principal executive offices are located at 17700 Castleton Street,
Suite 589, City of Industry, California 91748. Our telephone number is (626)
964-3232.
THE OFFERING
This offering relates to the sale of our common stock by certain
persons who are, or are beneficially deemed to be, our stockholders. Cornell
Capital Partners, LP intends to sell up to 40,704,038 shares of common stock,
40,000,000 of which will be received under the Standby Equity Distribution
Agreement and 704,038 of which were received from us as a one-time commitment
fee under the Standby Equity Distribution Agreement. Newbridge Securities
Corporation intends to sell up to 26,567 shares of common stock which were
received from us as a one-time commitment fee for serving as sole placement
agent under the Standby Equity Distribution Agreement. Holders of common stock
issued upon conversion of convertible notes intend to sell up to 2,800,000
shares of common stock. The holder of a common stock warrant, upon exercise of
such warrant, intends to sell up to 1,747,000 shares of common stock.
On July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Under the Standby Equity
Distribution Agreement, we may, at our discretion, periodically issue and sell
to Cornell Capital Partners, LP common stock for a total purchase price of up to
$10,000,000. The purchase price for the shares is equal to 99% of their market
price, which is defined in the Standby Equity Distribution Agreement as the
lowest volume weighted average price of the common stock during the five trading
days following the notice date. The amount of each cash advance is subject to a
maximum advance amount of $500,000, with no cash advance occurring within seven
trading days of a prior advance. Cornell Capital Partners, LP received a
one-time commitment fee of 704,038 shares of our common stock. Cornell Capital
Partners, LP will be paid a fee equal to 4% of each advance, which is retained
by Cornell Capital Partners, LP from each advance. On July 6, 2004, we also
entered into the Placement Agent Agreement with Newbridge Securities
Corporation, a registered broker-dealer. Pursuant to the Placement Agent
Agreement, we paid a one-time placement agent fee of 26,567 restricted shares of
common stock equal to approximately $10,000 based on the volume weighted average
price of our Common Stock as quoted by Bloomberg, LP on the date of the
Placement Agent Agreement.
COMMON STOCK OFFERED..............45,277,605 shares by selling stockholders
OFFERING PRICE....................Market price
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING...............38,460,853 shares as of July 30, 2004
USE OF PROCEEDS...................We will not receive any proceeds of the
shares offered by the selling
stockholders. Any proceeds we receive
from the sale of common stock under the
Standby Equity Distribution Agreement
will be used for general business
purposes. See "Use of Proceeds."
RISK FACTORS......................The securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
OVER-THE-COUNTER
BULLETIN BOARD SYMBOL.............KWBT
2
RISK FACTORS
We operate in a market environment that is difficult to predict and
that involves significant risks and uncertainties, many of which will be beyond
our control. Additional risks and uncertainties not presently known to us, or
that are not currently believed to be important to you, if they materialize,
also may adversely affect us. The accompanying information contained in these
Risk Factors identifies important factors that could cause such differences.
RISKS RELATED TO OUR BUSINESS
INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS DUE TO OUR SHORT
OPERATING HISTORY.
We have only been operating our current business since June 2002,
providing a limited period for investors to evaluate our business model. Because
of this lack of operating history and the uncertain nature of the rapidly
changing markets that we serve, we believe the prediction of future results of
operation is difficult. We have generated insignificant revenue and incurred net
operating losses during our recent operating history. We expect to continue to
have operating losses for the foreseeable future as we further our research and
continue to conduct product tests. There can be no assurances that any of the
intellectual property or products intended to be developed by us will be
marketed successfully or that ultimately we can develop a sufficiently large
production capacity and sufficiently large customer demand to operate on a
profitable basis. Until sufficient cash flow is generated from operations, we
will have to utilize our capital resources or external sources of funding to
satisfy our working capital needs. Furthermore, our prospects must be evaluated
in light of risks, uncertainties, expenses and difficulties frequently
encountered by companies in the early stage of their development.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FOR THE YEAR ENDED DECEMBER
31, 2003 FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS UNLESS WE CAN BECOME PROFITABLE OR OBTAIN ADDITIONAL
FUNDING.
Our independent auditors have added an explanatory paragraph to their
audit opinion issued in connection with our financial statements for the year
ended December 31, 2003, which states that the financial statements raise
substantial doubt as to our ability to continue as a going concern. Our ability
to make operations profitable or obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
OUR BUSINESS IS SUBJECT TO FLUCTUATIONS WHICH MAY RESULT IN VOLATILITY OR HAVE
AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.
Our business is subject to seasonal fluctuations due to growing seasons
in different markets. Our past operating results have been, and our future
operating results will be, subject to fluctuations resulting from a number of
factors, including:
o the timing and size of orders from major customers;
o budgeting and purchasing cycles of customers;
o the timing of enhancements to products or new products introduced by us
or our competitors;
o changes in pricing policies made by us, our competitors or suppliers,
including possible decreases in average selling prices of products in
response to competitive pressures;
o market acceptance of enhanced versions of our products;
o the availability and cost of key components;
o the availability of development capacity; and
o fluctuations in general economic conditions.
3
We may also choose to reduce prices or to increase spending in response
to competition or to pursue new market opportunities, all of which may have a
material adverse effect on our business, financial condition and results of
operations. This fluctuation may result in volatility or have an adverse effect
on the market price of our common stock.
OUR SUCCESS DEPENDS IN PART ON OUR SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
CURRENTLY IN THE RESEARCH AND DEVELOPMENT STAGE.
Many of our product candidates are still in the research and
development stage. The successful development of new products is uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early states of development may not reach the market for a number
of reasons, including but not limited to, the cost and time of development.
Potential products may be found to be ineffective or cause harmful side effects,
fail to receive necessary regulatory approvals, be difficult to manufacture on a
large scale or be uneconomical or fail to achieve market acceptance. Our
proprietary products may not be commercially available for a number of years, if
at all.
There can be no assurance that any of our intended products will be
successfully developed or that we will achieve significant revenues from such
products even if they are successfully developed. Our success is dependent upon
our ability to develop and market our products on a timely basis. There can be
no assurance that we will be successful in developing or marketing such products
or taking advantage of the perceived demand for such products. In addition,
there can be no assurance that products or technologies developed by others will
not render our products or technologies non-competitive or obsolete.
FAILURE TO ADEQUATELY EXPAND TO ADDRESS EXPANDING MARKET OPPORTUNITIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We anticipate that a significant expansion of operations will be
required to address potential market opportunities. There can be no assurances
that we will expand our operations in a timely or sufficiently large manner to
capitalize on these market opportunities. The anticipated substantial growth is
expected to place a significant strain on our managerial, operational and
financial resources and systems. While management believes it must implement,
improve and effectively use our operational, management, research and
development, marketing, financial and employee training systems to manage
anticipated substantial growth, there can be no assurances that these practices
will be successful.
OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO RETAIN AND RECRUIT KEY
PERSONNEL.
Our success is highly dependent upon the continued services of our
executive officers and key product development personnel, including without
limitation, Wei Li, Da-chang Ju, Lian-jun Luo and James Nian Zhan. Given the
intense competition for qualified management and product development personnel
in our industry, the loss of the services of any key management or product
development personnel may significantly and detrimentally affect our business
and prospects. There is no assurance that we will be able to retain these
personnel, and it may be time consuming and costly to recruit qualified
personnel.
WE CURRENTLY DO NOT HAVE SUFFICIENT REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND, IF OPERATING LOSSES CONTINUE, WE MAY NOT BE ABLE TO SECURE ADDITIONAL
FINANCING TO OPERATE OUR BUSINESS.
We require substantial working capital to fund our business. Because we
currently do not have sufficient revenues to support our business activities,
and if operating losses continue, we may be required to raise additional capital
to fund our operations and finance our research and development activities.
Funding, whether from a public or private offering of debt or equity, a bank
loan or a collaborative agreement, may not be available when needed or on
favorable terms. Any equity financing could result in dilution to the existing
stockholders. Debt financing will result in interest expense, and if convertible
into equity, could also dilute then-existing stockholders. We may also be
subject to various restrictive covenants which could significantly limit our
operating and financial flexibility and may limit our ability to respond to
changes in our business or competitive environment. If we are unable to obtain
necessary financing in the amounts and on terms deemed acceptable, we may have
to limit, delay, scale back or
4
eliminate our research and development activities or future operations. Any of
the foregoing may adversely affect our business.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO EFFECTIVELY RECEIVE
AND USE OUR REVENUE.
Because almost all of our future revenues may be in the form of
Renminbi, China's currency which is denominated RMB, any future restrictions on
currency exchanges may limit our ability to use revenue generated in Renminbi to
fund our business activities outside China or to make dividend or other payments
in U.S. Dollars. Although the Chinese government introduced regulations in 1996
to allow greater convertibility of the Renminbi, for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign invested enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents. In addition, conversion of
Renminbi for capital account items, including direct investment and loans, is
subject to governmental approval in China, and companies are required to open
and maintain separate foreign exchange accounts for capital account items. We
cannot be certain that the Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the Renminbi, especially with
respect to foreign exchange transactions.
CHANGES IN CHINA'S POLITICAL, SOCIAL, ECONOMIC OR LEGAL SYSTEMS COULD MATERIALLY
HARM OUR BUSINESS.
All of our manufacturing and production is conducted in China.
Consequently, an investment in our common stock may be adversely affected by the
political, social and economic environment in China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be significantly altered
from time to time. Our business and prospects are dependent upon agreements and
regulatory approval with various entities controlled by Chinese governmental
instrumentalities. Our operations and prospects would be materially and
adversely affected by the failure of such governmental entities to grant
necessary approvals or honor existing contracts, and, if breached, it might be
difficult to enforce these contracts in China. In addition, the legal system of
China relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances.
A SLOW-DOWN IN THE CHINESE ECONOMY MAY ADVERSELY EFFECT OUR GROWTH AND
PROFITABILITY.
The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any recessionary conditions will not have
a negative effect on our business. Several years ago, the Chinese economy
experienced deflation, which may reoccur in the foreseeable future. In addition,
if an outbreak of SARS recurs, it may cause a decrease in the level of economic
activity and may adversely affect economic growth in China, Asia and elsewhere
in the world. The performance of the Chinese economy overall affects our
profitability as expenditures for agricultural technological products may
decrease due to slowing domestic demand.
OUR ABILITY TO GENERATE REVENUES COULD SUFFER IF THE CHINESE AG-BIOTECHNOLOGY
MARKET DOES NOT DEVELOP AS ANTICIPATED.
The agriculture-biotechnology market in China, the primary market in
which we do business, is in the early stage of development. It is expected that
though the market opportunity looks promising, it will take time to develop.
Successful development of the ag-biotechnology market in China depends on the
following:
o continuation of governmental and consumer trends favoring the use of
products and technologies designed to create sustainable agriculture;
o educating the Chinese agricultural community and consumers about the
uses of ag-biotechnology products; and
5
o certain institutional developments such as governmental agricultural
subsidies designed to promote the use of environmentally friendly
ag-biotechnological products.
There are no assurances that these trends will continue, governmental
subsidies will be offered, or that the Chinese agricultural community and
consumers will be successfully educated about the uses of ag-biotechnology
products. The conduct of business in the ag-biotechnology market involves high
risks. There can be no assurances that the ag-biotechnology market in China will
develop sufficiently to facilitate our profitable operation. Existing
competitors and new entrants in the ag-biotechnology market are expected to
create fierce competition in the future as the market evolves. Competitors and
new entrants may introduce new products into the market that may detrimentally
affect sales of our existing products, and consequently our revenues.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
MAY BE EXPOSED TO INFRINGEMENT CLAIMS FROM THIRD PARTIES.
Our success will depend in part on our ability to obtain patent
protection for our technology, to preserve our trade secrets and to operate
without infringing on the proprietary rights of third parties. We have filed
several patents with the Chinese government and plan to file several patents
with the U.S. Patent &Trademark Office. We may file other patent applications as
we deem appropriate. There can be no assurance that the patents applied for will
be reviewed in a timely manner, that any additional patents will issue or that
any patents issued will afford meaningful protection against competitors with
similar technology or that any patents issued will not be challenged by third
parties. There also can be no assurance that others will not independently
develop similar technologies, duplicate our technologies or design around our
technologies whether or not patented. There also can be no assurance that we
will have sufficient resources to maintain a patent infringement lawsuit should
anyone be found or believed to be infringing our patents. There also can be no
assurance that the technology ultimately used by us will be covered in any
additional patent issued from our pending patent application or other patent
applications which we may file. We do not believe that our technology infringes
on the patent rights of third parties. However, there can be no assurance that
certain aspects of our technology will not be challenged by the holders of other
patents or that we will not be required to license or otherwise acquire from
third parties the right to use additional technology. The failure to overcome
such challenges or obtain such licenses or rights on acceptable terms could have
a material adverse affect on us, our business, results of operations and
financial condition.
The processes and know-how of importance to our technology are
dependent upon the skills, knowledge and experience of our technical personnel,
consultants and advisors and such skills, knowledge and experience are not
patentable. To help protect our rights, we require employees, significant
consultants and advisors with access to confidential information to enter into
confidentiality and proprietary rights agreements. There can be no assurance,
however, that these agreements will provide adequate protection for our trade
secrets, know-how or proprietary information in the event of any unauthorized
use or disclosure. There can be no assurance that we will be able to obtain a
license for any technology that we may require to conduct our business or that,
if obtainable, such technology can be licensed at a reasonable cost. The cost of
obtaining and enforcing patent protection and of protecting proprietary
technology may involve a substantial commitment of our resources. Any such
commitment may divert resources from other areas of our operations. We may be
required to license or sublicense certain technology or patents in order to
commence operations. There can be no assurance that we will be able to obtain
any necessary licenses or to do so on satisfactory terms. In addition, we could
incur substantial costs in defending ourselves against suits brought by other
parties for infringement of intellectual property rights.
WE MAY BECOME INVOLVED IN INTELLECTUAL PROPERTY LITIGATION, THE DEFENSE OF WHICH
COULD ADVERSELY IMPACT OUR BUSINESS OPERATIONS.
We may, from time to time, become involved in litigation regarding
patent and other intellectual property rights. From time to time, we may receive
notices from third parties of potential infringement and claims of potential
infringement. Defending these claims could be costly and time consuming and
would divert the attention of management and key personnel from other business
issues. The complexity of the technology involved and the uncertainty of
intellectual property litigation increase these risks. Claims of intellectual
property infringement also might require us to enter into costly royalty or
license agreements. However, we may be unable to obtain royalty or license
agreements on terms acceptable to us, or at all. In addition, third parties may
attempt to appropriate the
6
confidential information and proprietary technologies and processes used in our
business, which we may be unable to prevent and which would harm the businesses
and our prospects.
WE FACE TECHNICAL RISKS ASSOCIATED WITH COMMERCIALIZING OUR TECHNOLOGY WHICH
COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS RESULTS AND OPERATIONS.
A key to our future success is the ability to produce our Ph-BC series
of products at lower costs than our competitors. Although we are currently
utilizing our proprietary technology to produce such products at lower costs,
our method for producing such products on a commercial basis has only recently
begun. Further, although results from recent independent tests and our early
production results have been encouraging, the ability of our technology to
commercially produce such products at consistent levels is still being
evaluated. There can be no assurance that we will continue to produce such
products at lower costs than our competitors, nor that our technology will be
able to commercially produce such products at consistent levels.
RISKS RELATED TO OUR COMMON STOCK
IF AN ACTIVE TRADING MARKET FOR OUR SECURITIES DOES NOT REMAIN IN EXISTENCE, THE
MARKET PRICE OF OUR SECURITIES MAY DECLINE AND STOCKHOLDERS' LIQUIDITY MAY BE
REDUCED.
Although our common stock trades on the OTC Bulletin Board, a regular
trading market for the securities may not be sustained in the future. The OTC
Bulletin Board is an inter-dealer, Over-The-Counter market that provides
significantly less liquidity than the NASD's automated quotation system. Quotes
for stocks included on the OTC Bulletin Board are not listed in the financial
sections of newspapers as are those for the NASDAQ Stock Market. Therefore,
prices for securities traded solely on the OTC Bulletin Board may be difficult
to obtain and holders of common stock may be unable to resell their securities
at or near their original offering price or at any price. Market prices for our
common stock will be influenced by a number of factors, including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by competitors of new
products or services or significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the ag-biotechnology industry
generally; and
o general economic and other conditions.
WE ARE CONTROLLED BY TWO EXISTING STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM
OTHER STOCKHOLDERS' INTERESTS.
Our principal stockholders are All Star Technology Inc. and InvestLink
(China) Limited. Wei Li, our Chief Executive Officer and Chairman, is a
principal shareholder of All Star Technology Inc. Da-chang Ju, one of our
directors, is a principal stockholder of InvestLink (China) Limited. All Star
Technology Inc., together with InvestLink (China) Limited, currently
beneficially own approximately 58.3% of the outstanding shares of our common
stock. Accordingly, All Star Technology Inc., together with InvestLink (China)
Limited, currently have the ability to determine the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including election of directors, mergers, consolidations and the sale of all or
substantially all of our assets. Our principal stockholders will also have the
power to prevent or cause a change in control. The interests of these
stockholders may differ from other stockholders' interests. In addition, this
concentration of ownership may delay, prevent, or deter a change in control and
could deprive other stockholders of an opportunity to receive a premium for
their common stock as part of a sale of our business.
7
THE POTENTIAL DESIGNATION OF OUR COMMON STOCK AS "PENNY STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.
Our common stock could be considered to be a "penny stock" if it meets
one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under
Section 15(g) of the Securities Exchange Act of 1934, as amended. These include
but are not limited to the following: (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a "recognized" national exchange;
(iii) it is NOT quoted on the NASDAQ Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company with net tangible
assets less than $2.0 million, if in business more than a continuous three
years, or with average revenues of less than $6.0 million for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in it
on an unsolicited basis.
BROKER-DEALER REQUIREMENTS IMPOSED BY THE DESIGNATION OF OUR COMMON STOCK AS
"PENNY STOCK" MAY AFFECT THE TRADING MARKET FOR OUR COMMON STOCK.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and
Rule 15g-2 promulgated thereunder by the Securities and Exchange Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account.
Potential investors in our common stock are urged to obtain and read
such disclosure carefully before purchasing any shares that are deemed to be
"penny stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of the Registrant's
common stock to resell their shares to third parties or to otherwise dispose of
them in the market or otherwise.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. We intend to retain any earnings to finance the growth
of our business. We cannot assure you that we will ever pay cash dividends.
Whether we pay any cash dividends in the future will depend on the financial
condition, results of operations and other factors that the Board of Directors
will consider.
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY NEGATIVELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all.
EXISTING STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT.
The sale of shares pursuant to the Standby Equity Distribution
Agreement will have a dilutive impact on our stockholders. Our net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price, the more shares of common
stock we will have to issue
8
in order to receive the maximum cash advance allowed under the Standby Equity
Distribution Agreement. If our stock price is lower, then our existing
stockholders would experience greater dilution.
CORNELL CAPITAL PARTNERS, LP WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE
OF OUR COMMON STOCK UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT.
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 1% discount to the lowest volume weighted average
price for the five days immediately following the notice date of an advance. In
addition, Cornell Capital Partners, LP will retain 4% from each advance. These
discounted sales could cause the price of our common stock to decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE.
The selling stockholders intend to sell in the public market 45,277,605
shares of common stock being registered in this offering. That means that up to
45,277,605 shares may be sold pursuant to this registration statement. Such
sales may cause our stock price to decline. Our officers and directors and those
stockholders who are significant stockholders as defined by the Securities and
Exchange Commission will continue to be subject to the provisions of various
insider trading and Rule 144 regulations.
THE SALE OF OUR STOCK UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT COULD
ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE
DECLINE OF OUR STOCK PRICE.
In many circumstances the provision of financing based on the
distribution of equity for companies that are traded on the OTC Bulletin Board
has the potential to cause a significant downward pressure on the price of
common stock. This is especially the case if the shares being placed into the
market exceed the market's ability to take up the increased stock or if we have
not performed in such a manner to show that the equity funds raised will be used
to grow our business. Such an event could place further downward pressure on the
price of our common stock. Under the terms of the Standby Equity Distribution
Agreement, we may request numerous cash advances. Even if we use the cash
advances to grow our revenues and profits or invest in assets that are
materially beneficial to us, the opportunity exists for short sellers and others
to contribute to the future decline of our stock price. If there are significant
short sales of stock, the price decline that would result from this activity
will cause the share price to decline more so which in turn may cause long
holders of the stock to sell their shares thereby contributing to sales of stock
in the market. If there is an imbalance on the sell side of the market for the
stock the price will decline.
It is not possible to predict if the circumstances exist under which
short sales could materialize or to what level our stock price could decline. In
some companies that have been subjected to short sales the stock price has
dropped to near zero.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED.
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the Standby Equity
Distribution Agreement. No assurances can be given that such financing will be
available in sufficient amounts or at all when needed, in part, because we are
limited to a maximum cash advance of $500,000 during any seven trading day
period. In addition, if the actual average price at which we sell shares of
common stock under the Standby Equity Distribution Agreement falls, we may need
to register additional shares to fully utilize the funds available under the
Standby Equity Distribution Agreement.
WE MAY NOT BE ABLE TO OBTAIN A CASH ADVANCE UNDER THE STANDBY EQUITY
DISTRIBUTION AGREEMENT IF, SUBSEQUENT TO THE ADVANCE, CORNELL CAPITAL PARTNERS,
LP WOULD HOLD IN EXCESS OF 9.9% OF OUR COMMON STOCK.
We will be unable to obtain a cash advance under the Standby Equity
Distribution Agreement where the number of shares of common stock issuable under
an advance would cause Cornell Capital Partners, LP to own in excess of 9.9% of
our then-outstanding common stock. A possibility exists that Cornell Capital
Partners, LP may own approximately 9.9% of our outstanding common stock at a
time when we would otherwise plan to make an
9
advance under the Standby Equity Distribution Agreement. In that event, if we
are unable to obtain additional external funding or generate revenue from the
sale of our products, we could be forced to curtail or cease our operations.
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis" and "Description of Business," as well as in this prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this prospectus
will in fact occur.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, LP under the Standby Equity Distribution Agreement.
The purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 99% of the market price which is defined as the
lowest volume weighted average price of our common stock on the OTC Bulletin
Board for the five days immediately following the notice date. As an additional
fee we will pay Cornell Capital Partners, LP 4% of each cash advance we receive.
Pursuant to the Standby Equity Distribution Agreement, we cannot
receive a cash advance for more than $500,000 in any period of seven trading
days or more than $1,500,000 in the aggregate in any thirty-day calendar period.
We may issue 40,704,038 shares of common stock under this registration statement
in connection with the Standby Equity Distribution Agreement. Pursuant to the
Standby Equity Distribution Agreement, we should receive up to $10,000,000 in
net proceeds. Based on the assumed offering price of $0.25 per share, we would
have to issue to Cornell Capital Partners, LP 40,000,000 shares in order to
receive the entire $10,000,000 available to us under the Standby Equity
Distribution Agreement.
For illustrative purposes only, we have set forth below our intended
use of proceeds for the range of net proceeds indicated below to be received
under the Standby Equity Distribution Agreement. The table assumes estimated
offering expenses of 0.5%, plus a 4% retention payable to Cornell Capital
Partners, LP under the Standby Equity Distribution Agreement. The figures below
are estimates only, and may be changed due to various factors, including the
timing of the receipt of the proceeds.
10
GROSS PROCEEDS......................... $5,000,000 $7,500,000 10,000,000
NET PROCEEDS........................... $4,775,000 $7,162,500 $9,550,000
(AFTER OFFERING EXPENSES AND 4% FEE)
USE OF PROCEEDS AMOUNT AMOUNT AMOUNT
Manufacturing Facility Construction.... $2,500,000 $3,000,000 $3,500,000
General Working Capital................ $600,000 $800,000 $1,000,000
General Administrative and Operation
Expenses............................ $575,000 $762,500 $950,000
Repayment of Short-term Loan........... $100,000 $100,000 $100,000
Future Acquisitions.................... $1,000,000 $2,500,000 $4,000,000
TOTAL.................................. $4,775,000 $7,162,500 $9,550,000
DILUTION
Sales of the shares of our common stock will not result in any change
to the net tangible book value per share before and after the distribution of
shares by the selling stockholders. There will be no change in the net tangible
book value per share attributable to cash payments made by purchasers of the
shares being offered by the selling stockholders. Prospective investors in the
shares held by the selling stockholders should be aware, however, that the price
of shares being offered by the selling stockholders may not bear any rational
relationship to our net tangible book value per share.
SELLING STOCKHOLDERS
The following table sets forth: (1) the name of each of the
stockholders for whom we are registering shares under this registration
statement; (2) the number of shares of our common stock beneficially owned by
each such stockholder prior to this offering (including all shares of common
stock issuable pursuant to the Standby Equity Distribution Agreement or upon the
exercise of a warrant as described below, whether or not exercisable within 60
days of the date hereof); (3) the number of shares of our common stock offered
by such stockholder pursuant to this prospectus; and (4) the number of shares,
and (if one percent or more) the percentage of the total of the outstanding
shares, of our common stock to be beneficially owned by each such stockholder
after this offering, assuming that all of the shares of our common stock
beneficially owned by each such stockholder and offered pursuant to this
prospectus are sold and that each such stockholder acquires no additional shares
of our common stock prior to the completion of this offering. Such data is based
upon information provided by each selling stockholder.
11
PERCENTAGE
SHARES SHARES OF SHARES
BENEFICIALLY SHARES TO BE BENEFICIALLY BENEFICIALLY
OWNED BEFORE SOLD IN THE OWNED AFTER OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERING OFFERING OFFERING (1)
- ------------------- -------- -------- -------- ------------
Cornell Capital Partners, LP (2) 704,038 40,704,038 0 --
Tze Ming Hsu 2,000,000 2,000,000 0 --
Westpark Capital, Inc. (3) 1,747,000 1,747,000 0 --
Shu-chen Wang 280,000 280,000 0 --
Wen-Jen Lee 205,000 205,000 0 --
Wai Sun Chan 200,000 200,000 0 --
Zheng Wang 115,000 115,000 0 --
Newbridge Securities
Corporation 26,567 26,567 0 --
- ----------
<FN>
(1) Applicable percentage of ownership is based on 38,460,853 shares of common
stock outstanding as of the date of this prospectus.
(2) Yorkville Advisors, LLC, Cornell Capital Partners, LP's general partner,
exercises voting and investment authority over the shares held by Cornell
Capital Partners, LP.
(3) WestPark Holdings, LLC exercises voting and investment authority over the
shares held by Westpark Capital, Inc. Richard Rappaport controls WestPark
Holdings, LLC.
- ----------
</FN>
The following information contains a description of each selling
stockholder's relationship to us and how each selling stockholder acquired the
shares to be sold in this offering. None of the selling stockholders have held a
position or office, or had any other material relationship, with us, except as
follows:
STANDBY EQUITY DISTRIBUTION AGREEMENT. On July 6, 2004, we entered into
a Standby Equity Distribution Agreement with Cornell Capital Partners, LP. Under
the Standby Equity Distribution Agreement, we may issue and sell to Cornell
Capital Partners, LP common stock for a total purchase price of up to
$10,000,000. The purchase price for the shares is equal to 99% of the market
price, which is defined as the lowest volume weighted average price of the
common stock during the five trading days following the notice date. The amount
of each advance is subject to an aggregate maximum advance amount of $500,000,
with no advance occurring within seven trading days of a prior advance. Cornell
Capital Partners, LP received a one-time commitment fee of 704,038 shares of our
common stock. Cornell Capital Partners, LP is entitled to retain a fee of 4% of
each cash advance we receive.
On July 6, 2004, we entered into the Placement Agent Agreement with
Newbridge Securities Corporation in connection with the Standby Equity
Distribution Agreement. Pursuant to the Placement Agent Agreement, we paid
Newbridge Securities Corporation a one-time placement agent fee of 26,567
restricted shares of common stock equal to approximately $10,000 based on the
volume weighted average price of our common stock as quoted by Bloomberg, LP on
the date of the Placement Agent Agreement.
ISSUANCE OF WARRANT. On March 11, 2004, we issued a Common Stock
Warrant to Westpark Capital to purchase 1,747,000 shares of our common stock at
an exercise price per share of $0.20. The Common Stock Warrant was issued for
financial advisory services rendered to us in connection with our reverse merger
transaction which was completed in March 2004. The Common Stock Warrant has a
term of six years and was fully vested upon issuance. We granted Westpark
Capital "piggy-back" registration rights with respect to the shares of common
stock issuable upon exercise of the warrants.
ISSUANCE OF CONVERTIBLE NOTES. On January 25, 2004, we entered into a
convertible loan agreement with Kao Ming Investment Company, a foreign company
in Taiwan for $500,000, with an interest rate of 12%, payable at maturity and a
maturity date of September 25, 2004. As part of the loan terms, the lender had
the right to convert the loan into shares of our common stock at $0.25 per share
at any time prior to the maturity date, subject to our consummation of a reverse
merger transaction which was accomplished in March 2004. The lender
12
exercised its conversion right on June 8, 2004 and a total of 2,000,000 shares
of our common stock were issued to Tze Ming Hsu per the lender's instruction.
On March 12, 2004, we entered into a convertible loan agreement with
JZU HSIANG Trading Co. Ltd., a foreign company in Taiwan for $200,000, with an
interest rate of 12%, payable at maturity and a maturity date of three months
after funding. The loan was funded on April 7, 2004. As part of the loan terms,
the lender had the right to convert the loan into shares of our common stock at
$0.25 per share at any time prior to the maturity date, subject to our
consummation of a reverse merger transaction which was accomplished in March
2004. The lender exercised its conversion right on June 8, 2004, and a total of
800,000 shares of our common stock were issued to the following individuals in
the following amounts per the lender's instruction:
STOCKHOLDER AMOUNT
----------- ------
Sue-Chen Wang 280,000
Wen-Jen Lee 205,000
Wai Sun Chan 200,000
Zheng Wang 115,000
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act, and Regulation D promulgated under the Securities Act. In each
instance, the purchaser had access to sufficient information regarding our
company so as to make an informed investment decision. More specifically, we had
a reasonable basis to believe that each purchaser was an "accredited investor"
as defined in Regulation D of the Securities Act and otherwise had the requisite
sophistication to make an investment in our securities.
EQUITY LINE OF CREDIT
SUMMARY
On July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners, LP shares of common stock for a total purchase price of up to
$10,000,000. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners, LP will pay us 99% of the
lowest volume weighted average price of our common stock on the Over-the-Counter
Bulletin Board or other principal market on which our common stock is traded for
the five days immediately following the notice date. The number of shares
purchased by Cornell Capital Partners, LP for each cash advance is determined by
dividing the amount of each advance by the purchase price for the shares of
common stock. Cornell Capital Partners, LP will retain 4% of each cash advance
we receive under the Standby Equity Distribution Agreement. Cornell Capital
Partners, LP is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. In addition, we
engaged Newbridge Securities Corporation, a registered broker-dealer, as our
placement agent in connection with the Standby Equity Distribution Agreement.
For its services, Newbridge Securities Corporation received 26,567 shares of our
common stock, valued at approximately $10,000 based on the volume weighted
average price of our Common Stock as quoted by Bloomberg, LP on the date of the
Placement Agent Agreement. The sale of the shares under the Standby Equity
Distribution Agreement is conditioned upon us registering the shares of common
stock with the Securities and Exchange Commission and obtaining all necessary
permits or qualifying for exemptions under applicable state laws. The costs
associated with this registration will be borne by us. There are no other
significant closing conditions to cash advances under the Standby Equity
Distribution Agreement.
13
EQUITY LINE OF CREDIT EXPLAINED
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically sell shares of common stock to Cornell Capital
Partners, LP to raise capital to fund our working capital needs. The periodic
sale of shares is known as an advance. We may request an advance no more than
every seven trading days. A closing will be held the first trading day after the
pricing period at which time we will deliver shares of common stock and Cornell
Capital Partners, LP will pay the advance amount. There are no closing
conditions imposed on us for any of the advances other than that we have filed
our periodic and other reports with the Securities and Exchange Commission, have
delivered the stock for an advance, the trading of our common stock has not been
suspended and that we have not undergone a fundamental change (as defined in the
agreement). We may request cash advances under the Standby Equity Distribution
Agreement once the underlying shares are registered with the Securities and
Exchange Commission. Thereafter, we may continue to request cash advances until
Cornell Capital Partners, LP has advanced us a total amount of $10,000,000 or 24
months after the effective date of the this registration statement, whichever
occurs first.
The amount of each advance is subject to a maximum amount of $500,000,
and we may not submit a request for an advance within seven trading days of a
prior advance. The amount available under the Standby Equity Distribution
Agreement is not dependent on the price or volume of our common stock. Our
ability to request advances is conditioned upon us registering the shares of
common stock with the Securities and Exchange Commission. In addition, we may
not request cash advances if the shares to be issued in connection with such
advances would result in Cornell Capital Partners, LP owning more than 9.9% of
our outstanding common stock. We would be permitted to make draws on the Standby
Equity Distribution Agreement only so long as Cornell Capital Partners, LP's
beneficial ownership of our common stock remains lower than 9.9% and, therefore,
a possibility exists that Cornell Capital Partners, LP may own more than 9.9% of
our outstanding common stock at a time when we would otherwise plan to make an
advance under the Standby Equity Distribution Agreement.
We do not have any agreements with Cornell Capital Partners, LP
regarding the distribution of such stock, although Cornell Capital Partners, LP
has indicated that it intends to promptly sell any stock received under the
Standby Equity Distribution Agreement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Based on the assumed
offering price of $0.25 per share, we would have to issue to Cornell Capital
Partners, LP 40,000,000 shares in order to receive the entire $10,000,000
available to us under the Standby Equity Distribution Agreement. Pursuant to the
Standby Equity Distribution Agreement, we could receive up to approximately
$9,600,000 in net proceeds.
There is an inverse relationship between our stock price and the number
of shares to be issued under the Standby Equity Distribution Agreement. That is,
as our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement,
assuming the receipt of aggregate proceeds of $10,000,000, at a recent price of
$0.25 per share and 75%, 50% and 25% discounts to the recent price.
PURCHASE PRICE $0.25 $0.1875 $0.125 $0.0625
NO. OF SHARES 40,000,000 53,333,333 80,000,000 160,000,000
Proceeds received under the Standby Equity Distribution Agreement will
be used in the manner set forth in the "Use of Proceeds" section of this
prospectus. We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to receive. Cornell Capital
14
Partners, LP has the ability to permanently terminate its obligation to purchase
shares of our common stock under the Standby Equity Distribution Agreement if
there shall occur any stop order or suspension of the effectiveness of this
registration statement for an aggregate of 50 trading days other than due to
acts by Cornell Capital Partners, LP or if we fail materially to comply with
certain terms of the Standby Equity Distribution Agreement (subject to a 30-day
cure period).
All fees and expenses under the Standby Equity Distribution Agreement
will be borne by us. In connection with the Standby Equity Distribution
Agreement, Cornell Capital Partners, LP received a one-time commitment fee in
the form of 704,038 shares of common stock. In addition, we issued 26,567 shares
of common stock to Newbridge Securities Corporation, an unaffiliated registered
broker-dealer, as compensation for its services as a placement agent.
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or on any other market in which the price of our shares
of common stock are quoted or (ii) in transactions otherwise than in the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved).
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Cornell Capital Partners, LP is an "underwriter" within the meaning of
the Securities Act in connection with the sale of common stock under the Standby
Equity Distribution Agreement. Under the Standby Equity Distribution Agreement,
we may issue and sell common stock to Cornell Capital Partners, LP for a total
purchase price of up to $10,000,000. Cornell Capital Partners, LP will pay us
99% of the lowest volume weighted average price of our common stock on the OTC
Bulletin Board or other principal trading market on which our common stock is
traded for the five days immediately following our request for an advance. In
addition, Cornell Capital Partners, LP will retain 4% of the proceeds received
by us under the Standby Equity Distribution Agreement, and received a one-time
commitment fee in the form of 704,038 shares of common stock. The 4% retention
and the 704,038 shares of common stock are underwriting discounts. In addition,
we engaged Newbridge Securities Corporation, an unaffiliated registered
broker-dealer, to act as our placement agent in connection with the Standby
Equity Distribution Agreement. We issued 26,567 shares of common stock to
Newbridge Securities Corporation as compensation for its services as a placement
agent.
Cornell Capital Partners, LP was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners, LP is a domestic hedge fund in
the business of investing in and financing public companies. Cornell Capital
Partners, LP does not intend to make a market in our stock or to otherwise
engage in stabilizing or other transactions intended to help support the stock
price. Prospective investors should take these factors into consideration before
purchasing our common stock.
Other than Cornell Capital Partners, LP, the selling stockholders and
any broker-dealers or agents that are involved in selling the shares may also be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker?dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts
15
under the Securities Act. The selling stockholders have informed us that they do
not have any agreement or understanding, directly or indirectly, with any person
to distribute the common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and we have complied with them.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public other than commissions, fees
and discounts of underwriters, brokers, dealers and agents. If any of these
other expenses exists, we expect the selling stockholders to pay these expenses.
We have agreed to indemnify Cornell Capital Partners, LP and its controlling
persons against certain liabilities, including liabilities under the Securities
Act. We will not receive any proceeds from the sale of any of the shares of
common stock by the selling stockholders. We will, however, receive proceeds
from the sale of common stock under the Standby Equity Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. Accordingly, the selling stockholders are not
permitted to cover short sales by purchasing shares while the distribution is
taking place. The selling stockholders are advised that if a particular offer of
common stock is to be made on terms constituting a material change from the
information set forth above with respect to the Plan of Distribution, then, to
the extent required, a post-effective amendment to the accompanying registration
statement must be filed with the Securities and Exchange Commission.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following presents information as of July 30, 2004, regarding our
executive officers and directors.
NAME POSITION
---- --------
Wei Li Chief Executive Officer and Chairman of the Board
Lian-jun Luo Chief Financial Officer and Director
James Nian Zhan Secretary and Director
Da-Chang Ju Director
Yun-long Zhang Director
WEI LI, age 42, became our Chief Executive Officer and Chairman of the
Board on March 12, 2004. Mr. Li was the acting Chief Executive Officer of Kiwa
Bio-Tech Products Group Ltd. since January 1, 2004 prior to the reverse merger.
Mr. Li founded Kiwa Bio-Tech Products Group Ltd. to capitalize on the fast
growth of the ag-biotechnology industry in China. Prior to founding Kiwa
Bio-Tech Products Group Ltd., Mr. Li founded China Star Investment Group, an
entity which provides integrated financing services and/or venture investments
to growth businesses in China. In 1989, Mr. Li founded Xinhua International
Market Development Ltd., a company which engaged in investing in China's high
tech, pharmaceutical, medical device, media, entertainment and real estate
industries. Mr. Li is a successful entrepreneur with 15 years of experience in
founding companies and investing in China's growth industries. Mr. Li holds a
B.S. in finance from Hunan Finance and Economics University.
LIAN-JUN LUO, age 33, became our Chief Financial Officer on March 12,
2004, and one of our directors on March 27, 2004. Mr. Luo served as the Chief
Executive Officer of Kiwa Bio-Tech Products Group Ltd. from
16
October 2002 to December 2003. From January 2002 to October 2002, Mr. Luo served
as the Chief Financial Officer of China Star Investment & Management Company.
Mr. Luo's professional experience started as a staff accountant with an
accounting firm with responsibilities in audit, project evaluation, financial
analysis and negotiation of several merger and acquisition deals. Mr. Luo
obtained his law degree from China University of Politics and Law in 1993. Mr.
Luo is a certified public accountant and lawyer in China.
JAMES NIAN ZHAN, age 39, became our Secretary on March 12, 2004, and
one of our directors on March 27, 2004. Mr. Zhan has 15 years of business
experience in the areas of financial management, investment banking, operations
and information systems, both in the United States and China, including
experience with United States public companies. Mr. Zhan most recently worked
with Cornerstone Propane L.P. (NYSE: CNO/OTC: CNPP), the 6th largest propane
distributor in the United States. Prior to working with Cornerstone Propane
L.P., Mr. Zhan spent a few years with RSM Equico, a leading United States
Investment Banking firm in mergers and acquisitions for middle-market companies,
where he focused on advising corporate clients on valuation, corporate
restructuring and mergers & acquisitions. Mr. Zhan holds an MBA degree from the
Olin School of Business at Washington University in St. Louis.
DA-CHANG JU, age 63, became one of our directors on March 12, 2004. In
2003, Mr. Ju became a member of Kiwa Bio-Tech Products Group Ltd.'s Board of
Directors. From 1999 to 2000, Mr. Ju served on the Board of Directors of China
Star Investment Group. Mr. Ju served as General Manager for Xinshen Company from
1987 to 1999. Mr. Ju holds a B.S. in mathematics from a major university in
Beijing, China.
YUN-LONG ZHANG, age 41, became one of our directors on March 27, 2004.
Mr. Zhang is currently the General Manager of China Star Investment Group. In
2004, he was appointed a director to Kiwa Bio-Tech Products Group Ltd.'s Board
of Directors. From 1994 to 2000, Mr. Zhang served as the head of the Investment
Department at China National Economic and Systems Reform Research and Services
Center. Mr. Zhang holds a degree in statistics.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have an audit committee. Our Board of Directors performs some
of the same functions of an audit committee, including recommending a firm of
independent certified public accountants to audit our annual financial
statements, reviewing the independent auditors independence, our financial
statements and their audit report, and reviewing management's administration of
the system of internal accounting controls. We do not currently have a written
audit committee charter or similar document.
The Board of Directors has determined that none of its members qualify
as an audit committee financial expert as defined in Item 401 of Regulation S-B.
We are a development stage company and have only recently become a
publicly-traded company. We have not been able to identify a suitable candidate
for our Board of Directors that would qualify as an audit committee financial
expert.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of July 30, 2004, certain information
known to us with respect to the beneficial ownership of our common stock by (i)
each of our directors and executive officers, (ii) each person who is known by
us to own of record or beneficially more than 5% of the outstanding common
stock, and (iii) all of our directors and executive officers as a group. Unless
otherwise indicated, each of the stockholders can be reached at our principal
executive offices located at 17700 Castleton Street, Suite 589, City of
Industry, California 91748.
17
SHARES BENEFICIALLY OWNED (1)
BENEFICIAL OWNER NUMBER PERCENT (%)
---------------- ---------- -----------
(i) Directors and Executive Officers
Wei Li (2)
Chairman of the Board and CEO............... 12,356,672 32.1
Da-chang Ju (3)
Director.................................... 10,062,088 26.2
Lian-jun Luo
Chief Financial Officer and Director........ 308,916 *
James Nian Zhan
Secretary and Director...................... 308,916 *
Yun-long Zhang
Director.................................... 308,916 *
(ii) 5% Holders
All Star Technology Inc. (2)................ 12,356,672 32.1
InvestLink (China) Limited (3).............. 10,062,088 26.2
De-jun Zou.................................. 3,089,168 8.0
Times Crossword Investment, Ltd............. 3,089,168 8.0
Tze Ming Hsu
9th Floor, #101 Fu-Shin N.
Taipei, Taiwan, R.O.C....................... 2,000,000 5.2
(iii) Management as a Group
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (FIVE
PERSONS)................................. 23,345,508 60.7
- ----------
* Less than 1%.
(1) Gives effect to the shares of Common Stock issuable upon the exercise of all
options exercisable within 60 days of July 30, 2004 and other rights
beneficially owned by the indicated stockholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting and investment power with respect to
shares. Unless otherwise indicated, the persons named in the table have sole
voting and sole investment control with respect to all shares beneficially
owned. Percentage ownership is calculated based on 38,460,853 shares of the
Common Stock outstanding as of July 30, 2004. All information is as of July 30,
2004 and is based upon information furnished by the persons listed, contained in
filings made by them with the Securities and Exchange Commission or otherwise
available to us.
(2) Consists of shares held by All Star Technology Inc., a British Virgin
Islands international business company. Wei Li is a principal stockholder of All
Star Technology Inc. and may be deemed to beneficially own such shares, but
disclaims beneficial ownership in such shares held by All Star Technology Inc.
except to the extent of his pecuniary interest therein.
(3) Consists of 6,178,336 shares of common stock held directly by InvestLink
(China) Limited and 3,883,752 shares of common stock held by InvestLink (China)
Limited as custodian for Gui-sheng Chen. Da-chang Ju is a principal stockholder
of InvestLink (China) Limited and may be deemed to beneficially own such shares,
but disclaims beneficial ownership in such shares held by InvestLink (China)
Limited except to the extent of his pecuniary interest therein.
18
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.001 per share and 20,000,000 shares of preferred stock, of
which 38,460,853 shares of common stock and no shares of preferred stock were
issued and outstanding as of July 30, 2004. Set forth below is a description of
certain provisions relating to our capital stock. For additional information
regarding our stock please refer to our Certificate of Incorporation and Bylaws.
Common Stock. Each share of common stock entitles the holder thereof to
one vote on each matter that may come before a meeting of the stockholders.
There is no right to cumulative voting thus, the holders of fifty percent or
more of the shares outstanding can, if they choose to do so, elect all of the
directors. In the event of a voluntary or involuntary liquidation, all
stockholders are entitled to a pro rata distribution after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the common stock. The holders of the common stock have no
preemptive rights with respect to future offerings of shares of common stock.
Holders of common stock are entitled to dividends if, as and when declared by
the Board out of the funds legally available therefor. It is our present
intention to retain earnings, if any, for use in our business. The payment of
dividends on the common stock are, therefore, unlikely in the foreseeable
future.
Preferred Stock. Our preferred stock may be issued from time to time in
one or more series. Our Certificate of Incorporation authorizes our Board of
Directors to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of preferred stock and the
number of shares constituting any such series and the designation thereof, and
to increase or decrease the number of shares of any series prior or subsequent
to the issue of shares of that series, but not below the number of shares of
such series then outstanding.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The financial statements for Kiwa Bio-Tech Products Group Ltd. for the
year ended December 31, 2003 and the year ended December 31, 2002, included in
this prospectus, and incorporated by reference in this registration statement,
have been audited by Grobstein, Horwath & Company LLP, independent auditors, as
stated in their report appearing with the financial statements and incorporated
by reference in this registration statement. These financial statements are
included in reliance upon the report of Grobstein, Horwath & Company LLP, given
upon their authority as experts in accounting and auditing.
Stubbs Alderton and Markiles, LLP will pass on the validity of the
shares of common stock offered hereby.
The transfer agent for our common stock is Fidelity Transfer Company.
Its address is 1800 South West Temple, Suite 301, Salt Lake City, Utah 84115,
and its telephone number is (801) 484-7222.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation includes an indemnification provision
under which we have agreed to indemnify our directors and officers from and
against certain claims arising from or related to future acts or omissions as
our directors or officers. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
DESCRIPTION OF BUSINESS
We are a development stage company that develops, manufactures,
distributes and markets innovative, cost-effective and environmentally safe
bio-technological products for agriculture, natural resources and environmental
conservation. Our products are designed to enhance the quality of human life by
increasing the
19
value, quality and productivity of crops and decreasing the negative
environmental impact of chemicals and other wastes.
We were originally incorporated in the State of Utah on June 14, 1933,
under the name Tintic Gold Mining Company to perform mining operations in Utah.
On March 12, 2004, pursuant to an Agreement and Plan of Merger dated as of March
11, 2004, by and among Tintic Gold Mining Company, TTGM Acquisition Corporation,
a Utah corporation and wholly-owned subsidiary of Tintic Gold Mining Company,
and Kiwa Bio-Tech Products Group Ltd., a British Virgin Islands international
business company, TTGM Acquisition Corporation merged with and into Kiwa
Bio-Tech Products Group Ltd. Each share of Kiwa Bio-Tech Products Group Ltd.
common stock was converted into 1.5445839 shares of Tintic Gold Mining Company
Common Stock, with Kiwa Bio-Tech Products Group Ltd. surviving as Tintic Gold
Mining Company's wholly-owned subsidiary. The merger resulted in a change of
control of Tintic Gold Mining Company, with former Kiwa Bio-Tech Products Group
Ltd. stockholders owning approximately 89% of Tintic Gold Mining Company on a
fully diluted basis. Subsequent to the merger, Tintic Gold Mining Company
changed its name to Kiwa Bio-Tech Products Group Corporation. On July 22, 2004,
we completed our reincorporation in the State of Delaware.
In 2002, Kiwa Bio-Tech Products Group Ltd. chartered Kiwa Bio-Tech
Products (Shandong) Co. Ltd., a wholly-owned subsidiary organized under the laws
of China, as its offshore manufacturing base to capitalize on low cost, high
quality manufacturing advantages available in China. In October 2003, Kiwa
Bio-Tech Products Group Ltd. completed Phase I construction of its
state-of-the-art manufacturing facility. In November 2003, Kiwa Bio-Tech
Products Group Ltd. began shipping its first commercial product, a
bio-fertilizer, to the agricultural market in China. We are currently working on
existing product improvement and new product development while we continue our
three-phase facility build-up.
BUSINESS AND OPERATIONS
Our goal is to build a platform to commercialize bio-technological
research and development results for applications in agriculture and
environmental protection. In this respect, we are working on developing
cooperative research relationships with several universities in China and the
U.S. We are also acquiring technologies to reduce research and development costs
and shorten commercialization cycles. We have filed patent applications in China
for technologies related to applications of photosynthesis bacteria, biologic
catalyst, and synergetic enzyme, and are preparing to file patent applications
in the U.S. These technologies have applications in the agricultural, natural
resources and environmental conservation and drug manufacturing sectors. We also
plan to acquire similar technologies both in China and the U.S.
Our first commercial product, based on the photosynthesis bacteria
technology, is a bio-fertilizer called Photosynthesis Biological Catalyst. Field
tests conducted by Chinese government and research institutions over the past
three years have confirmed that this product stimulates plant growth and
increases crop yields, including vegetables, fruits and other economic plants,
by 10% to 25%. We plan to market another three to four products in the
agriculture market in the next six to twelve months. These products are humus
related products that can help increase soil fertility and play a vital role in
plant nutrition. In addition, we plan to market a water-cleansing product based
on the photosynthesis bacteria technology in the natural resources conservation
market. We have other products in development, which include a plant regulator,
an animal feed additive and an air-cleansing additive. We plan to actively
pursue strategic alliances with bio-technology companies in the U.S. to maximize
use of our strong marketing network in China's vast agricultural market.
STRATEGIES
With the world's largest population to feed, China's demand for
agricultural products is immense. Problems with pollution and soil contamination
have increased pressure on the Chinese government to conserve land and enhance
environmental protection. China thus faces an urgent need to improve unit land
yield and reduce pollution. We plan to address this need through the development
of our ag-biotechnology products which increase agricultural productivity in
environmentally friendly ways. To capture this opportunity, our core strategies
are as follows:
20
o Build a commercialization platform for world-class biotechnological
research and development results for applications in agriculture,
natural resources conservation and environmental protection;
o Establish strategic alliances for research and development, sales and
distribution and customer acquisition with complimentary entities in
the biological-agriculture and natural resources conservation industry;
o Complete our manufacturing facility in Shandong Province, one of the
largest agricultural provinces in China;
o Offer flexible investment structure that does not take high risks in
the research and development process, thus being able to manage
commercialization risks and capture value; and
o Enhance overall management systems, operational structure and corporate
governance.
Our sales strategy involves utilizing both a direct sales force and
distribution networks. Our distribution efforts are expected to include the
following:
o Leveraging government support and existing rural area distribution
networks to more effectively reach end-users;
o Cooperating with special fertilizer distributors who also help farmers
resell their products;
o Focusing on large-to-medium size wholesalers of farm fertilizers at
provincial and municipal levels;
o Establishing a three-level distribution network consisting of a company
centralized sales office, provincial and city/county level agents; and
o Leveraging existing sales channel network of affiliates' products to
save costs of building the network from scratch.
We plan to target major agricultural companies and growers as customers
that can realize significant financial benefits from using our products
including:
o High value crop (such as fruits and vegetables) growers in China that
supply to major cities;
o Agricultural producers in China who export to Japanese, Korean and
other regional markets; and
o "Green" or organic growers of produce throughout the world.
Our sales efforts in the year 2004 are focused on the following
geographic markets in China:
o Shandong Province - where our manufacturing facility is based and its
products are tested. This province is a significant agricultural market
and close to the Japanese and Korean markets;
o Jiangsu and Zhejiang Provinces - two large provinces that are close to
Shanghai. Currently, we have entered into an exclusive distribution
arrangement with one of the largest fertilizer and related product
distributors in Jiangsu Province which is distributing our series of
products to the local farmers;
o Hebei Province - a vegetable supplier base for the neighboring capital
city of Beijing. We are partnering with government affiliated entities
in Hebei Province to facilitate faster market penetration; and
o Xinjiang Autonomous Region - which is one of the largest agricultural
provinces in China and the largest base for growing cotton and tomatoes
in China.
Given the global trend of customers favoring environmentally safe
organically grown food and growers' need for higher crop yields and better
quality, we also foresee strong market needs in the U.S. and other international
markets including East and Southeast Asia. We are currently targeting the
California and Florida markets in the
21
U.S., where farmers grow more "green" or organic high value crops such as fruits
and vegetables. We are also in discussions with fertilizer manufacturers and
distributors in Taiwan to distribute our products in the Taiwanese market and
other Southeast Asian markets.
MARKET OVERVIEW
Modern agricultural practices largely rely on heavy use of chemical
fertilizers and pesticides which cause tremendous harm to the environment and
soils. Such practices have been under increasing scrutiny across the world,
leading to consumer demand for agricultural practices that are more
environmentally friendly. China has only 7% of the world's agricultural land but
needs to feed over 1.3 billion people, or approximately 20% of the world's
population. To increase the overall crop yield, farmers in China use vast
amounts of chemical fertilizers. According to the China Statistics Bureau and
the Food & Agriculture Organization of the United Nations, the use of chemical
fertilizers in China increased 90.7% in the past decade and is now 1.6 times the
world average. Long-term excessive use of chemical fertilizers in China has led
to severe soil contamination and pollution. If the situation continues
unchanged, the largest population in the world could potentially face severe
food and water shortages and an increasingly polluted living environment.
One solution to the environmental problem is bio-fertilizer, an
environmental friendly fertilizer. China's current consumption of bio-fertilizer
consists of only 3% of the total fertilizer consumption which is significantly
lower than the consumption rate in the U.S. of 18%. The Chinese agricultural
industry has started to recognize the importance of bio-fertilizers to
sustainable long-term agriculture in China. Our first commercialized product,
Photosynthesis Biological Catalyst, capitalizes on this market trend and we hope
to become one of the leaders in developing green technologies for productive,
more sustainable agriculture in China.
COMPETITION
Due to the unique products that we offer, there is little direct
competition in the Chinese marketplace. With respect to existing products that
are similar to Photosynthesis Biological Catalyst and their manufacturers,
management believes that we have product differentiation and cost advantages
(cost to customer) which will enable us to outperform our competitors, in terms
of profitability, for the following reasons, among others:
o High effectiveness in increasing crop yield and quality while being
environmentally friendly;
o Lower price point and higher return on investment to end users;
o Powder-based form making transportation and storage easier; and
o Complimentary to existing use of chemical fertilizer which will help to
minimize switching costs for end users.
We have conducted detailed research and analysis of the competitive
landscape in the marketplace. From a broader view, there are about 10 companies,
in different stages and of varied sizes of operations, which have or are
producing similar photosynthesis related, microbial bio-fertilizer products in
China, according to the categorization records from the Agriculture Fertilizer
License Authority in China. The products of these companies are all in liquid
form. Below is a summary of these 10 companies:
COMPANY NAME CURRENT STATUS
- ----------------------------------- ------------------------------------------
Shanxi Kelin Environment Protection The products are still in the experimental
Center, Shanxi Province stage.
- ----------------------------------- ------------------------------------------
Xinjin Microbial Products Factory Only sells in part of Sichuan Province
of Sichuan Agriculture University, with a relatively low sales volume.
Sichuan Province
22
- ----------------------------------- ------------------------------------------
Shenyang Fengyuan Bio-tech Products A wholly-owned Japanese company.
Co., Ltd., Liaoning Province
3 years in production of photosynthesis-
based fertilizer product.
Annual production of 2,000 tons (liquid).
- ----------------------------------- ------------------------------------------
Shanghai Pudong Yiyijou Bio- In business since 1999.
engineering Co., Ltd., Shanghai
Covers more than 10 provincial markets.
- ----------------------------------- ------------------------------------------
Chongyi Bio-technology Development A county-level plant.
Center, She County, Hebei Province
Small production scale.
Products are sold in Linxi County in
Shandong Province nearby.
- ----------------------------------- ------------------------------------------
Bierfu Bio-engineering Co., Ltd., Products mostly sold in Jinan and
Weihai, Shandong Province Shouguang areas in Shandong Province.
Sales branches in Hebei, Nanjing & Fujian.
Annual sales of 100 tons.
- ----------------------------------- ------------------------------------------
North Design Institute, Protection Has no commercial production.
Sub-Institute
Owns the related intellectual property
rights.
- ----------------------------------- ------------------------------------------
Wuhan Shiruifu Bio-Technology Co., Its target market is in Hubei Province.
Ltd., Wuhan, Hubei Province
Annual production of 3,000 tons (liquid).
- ----------------------------------- ------------------------------------------
Harbin Tianye Bio-Technology Co., For details, refer to the following
Ltd., Harbin, Heilongjiang Province section.
- ----------------------------------- ------------------------------------------
Beijing Feishite Bio-engineering Expected to establish two photosynthesis
Co., Ltd., Beijing bacteria fertilizer production bases in
Beijing with annual production of 5,000
tons (liquid).
FACILITIES AND EQUIPMENT
We are in the process of constructing a manufacturing facility on 15.7
acres of land in Shandong Province, China. The right of land use has been
approved by the local government for up to 10 years without land use costs. In
the event our Chinese subsidiary becomes profitable, it will have the option to
acquire the land use rights for a period of up to 50 years. Phase I of a
three-phase construction plan has been completed. We expect the facility to be
fully operational in 2005.
Our principal executive offices are located at 17700 Castleton Street,
Suite 589, City of Industry, California 91748.
SOURCES OF RAW MATERIALS
The major raw materials for photosynthetic bacteria production are
photosynthetic bacteria, sodium acetate, glucose, diammonium phosphate, and
dipotassium hydrogen phosphate. Other chemicals are also used in the growth
media. These materials are either cultured by our technicians or purchased from
local markets.
23
DEPENDENCE ON CUSTOMERS
We currently have 17 customers. One customer accounted for 100% of our
net sales for the first quarter of fiscal year 2004 and for approximately 62% of
our estimated sales for the second quarter of fiscal year 2004. We hope to
expand our customer base to reduce our reliance on any single customer.
REGULATORY
Our production needs to follow bio-fertilizer and photosynthetic
bacteria standard production and testing procedures issued by the Chinese
Ministry of Agriculture. We comply with the applicable standard production and
testing procedures.
ENVIRONMENTAL MATTERS
The bacteria used in our products are naturally occurring in many water
bodies and have been extensively tested for environmental safety. They have been
recognized as group beneficiary bacteria that can digest small inorganic and
organic molecules for water cleaning and other water treatment purpose. They are
environmental friendly and are not known to cause any environmental problems.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We intend to develop, manufacture, distribute and market innovative,
cost-effective and environmentally safe bio-technological products for the
agricultural, natural resources and environmental protection markets located
primarily in the People's Republic of China. We intend to improve existing
products and to develop new products. Our activities to date have included
conducting research and development, acquiring and developing intellectual
property, raising capital, developing of a manufacturing facility and
identifying strategic acquisitions. Our first product, a photosynthesis
biological catalyst, was introduced in the People's Republic of China's
agricultural market in November 2003. We are a development stage entity.
In March 2004, we entered into a merger with Kiwa Bio-Tech Products
Group Ltd., a privately-held British Virgin Islands corporation, through a newly
formed wholly-owned subsidiary, with Kiwa Bio-Tech Products Group Ltd. surviving
as our wholly-owned subsidiary. For accounting purposes this transaction was
treated as an acquisition of the public company and a recapitalization of Kiwa
Bio-Tech Products Group Ltd. and its wholly owned subsidiary, KIWA Bio-Tech
Products (Shandong) Co., Ltd. For accounting purposes, Kiwa Bio-Tech Products
Group Ltd. is considered the acquirer in this transaction. The statements of
operations and cash flows subsequent to the merger will be those of Kiwa
Bio-Tech Products Group Ltd.
MAJOR CUSTOMERS AND SUPPLIERS
We currently have 17 customers. One customer accounted for 100% of our
net sales for the first quarter of fiscal year 2004. We did not have any sales
for the three months ended March 31, 2003.
Three suppliers accounted for 21%, 21%, and 10%, respectively, of our
net purchases for the three months ended March 31, 2004. We did not have any
purchases for the three months ended March 31, 2003.
GOING CONCERN
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $1,650,247 and $1,355,239 during
24
the three months ended March 31, 2004 and the year ended December 31, 2003,
respectively, and our current liabilities exceeded its current assets by
$965,294 and $585,313 and it had a stockholders' deficiency of $621,990 and
$211,123 at March 31, 2004 and December 31, 2003, respectively. In addition, we
are still in the development stage and will require additional capital to fund
our business plan, and are continuing to develop our manufacturing facility and
have not generated significant revenues from our planned principal operations.
These factors create substantial doubt about our ability to continue as a going
concern.
As of March 31, 2004, we had obtained non-interest bearing loans from
the local People's Republic of China government of approximately $1,200,000. The
repayment of approximately $1,060,000 will start as our Chinese subsidiary
becomes profitable and will be paid off within three years. The balance of the
loans has been paid off as of June 30, 2004.
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the People's Republic of China
Patent Bureau on July 12, 1996. The purchase consideration is approximately
$720,612, of which $30,204 was paid at signing of the agreement and an
additional $30,204 will be paid within five days of the completion of the
issuance of a notice regarding the patent right holder alternate registration by
the People's Republic of China Patent Bureau. In addition, we agreed to issue
1,000,000 shares of common stock at an agreed-upon value of $0.63 per share, the
fair market value on April 12, 2004 (aggregate value $630,000) within two months
of the completion of the issuance of a notice regarding the patent right holder
alternate registration by the People's Republic of China Patent Bureau.
As of July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP for the sale and issuance of up to
$10,000,000 of our common stock. We plan to use these funds to finance our
operations.
During the year ending December 31, 2004, we intend to raise additional
capital through the issuance of debt or equity securities to fund the
development of its planned business operations, although there can be no
assurances that we will be successful in this regard. To the extent that we are
unable to successfully raise the capital necessary to fund our future cash
requirements on a timely basis and under acceptable terms and conditions, we
will not have sufficient cash resources to maintain operations, and may have to
curtail operations and consider a formal or informal restructuring or
reorganization.
CRITICAL ACCOUNTING POLICIES
We prepared our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our
customers and intend to establish an allowance for doubtful accounts when
amounts are not considered fully collectable. We believe that the accounts
receivable balance at March 31, 2004 is fully collectible.
INVENTORIES. Inventories are stated at the lower of cost or net
realizable value. Cost is determined on the weighted average method. Inventories
include raw materials, work-in-progress, finished goods and low-value
consumables. Net realizable value is the estimated selling price in the ordinary
course of business, less estimated costs to complete and dispose.
25
REVENUE RECOGNITION. We recognize revenue in accordance with Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." Sales represent the invoiced value of goods, net of
value added tax, supplied to customers, and are recognized upon delivery of
goods and passage of title.
IMPAIRMENT OF ASSETS. Our long-lived assets consist of property and
equipment. At March 31, 2004, the net value of property and equipment was
$1,467,190, which represented approximately 67% of our total assets. At December
31, 2003, the net value of property and equipment was $1,477,148, which
represented approximately 69% of our total assets.
We periodically evaluate our investment in long-lived assets, including
property and equipment, for recoverability whenever events or changes in
circumstances indicate the net carrying amount may not be recoverable. Our
judgments regarding potential impairment are based on legal factors, market
conditions and operational performance indicators, among others. In assessing
the impairment of property and equipment, we make assumptions regarding the
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or the related assumptions change in the
future, we may be required to record impairment charges for these assets.
INCOME TAXES. We record a valuation allowance to reduce our deferred
tax assets arising from net operating loss carryforwards to the amount that is
more likely than not to be realized. In the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of our
recorded amount, an adjustment to the deferred tax assets would be credited to
operations in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
to operations in the period such determination was made.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003:
NET SALES. Net sales were $53,458 for the three months ended March 31,
2004. We did not have any sales for the three months ended March 31, 2003. The
increase in net sales is the result of our first product being introduced to the
market in November 2003.
COST OF SALES. Cost of sales was $31,011 for the three months ended
March 31, 2004, including depreciation and amortization of $9,572.
GROSS PROFIT. Gross profit was $22,447 or 42% of net sales for the
three months ended March 31, 2004.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were
$29,887 for the three months ended March 31, 2004. We did not have any
consulting and professional fees for the three months ended March 31, 2003. The
increase in consulting and professional fees in 2004 is primarily attributable
to activities relating to fundraising.
DIRECTORS' COMPENSATION. Directors' compensation was $8,699 for the
three months ended March 31, 2004, as compared to $3,624 for the three months
ended March 31, 2003.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$74,545 for the three months ended March 31, 2004, as compared to $43,717 for
the three months ended March 31, 2003, an increase of $30,828 or 71%, primarily
as a result of increased personnel-related costs in the People's Republic of
China reflecting an increased level of business activity and increased costs
associated with being a public company. General and administrative expenses
include salaries, travel and entertainment, rent, office expense, telephone
expense and insurance costs.
26
RESEARCH AND DEVELOPMENT. Research and development expense increased
$2,820, or 29%, to $12,540 for the three months ended March 31, 2004, as
compared to $9,720 for the three months ended March 31, 2003. This increase is
the result of preparation for new product testing and development.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $7,238, or
381%, to $9,138 for the three months ended March 31, 2004, as compared to $1,900
for the three months ended March 31, 2003. This increase is the result of the
completion of the first phase of construction of our manufacturing facility in
late 2003.
REVERSE MERGER COSTS. Reverse merger costs relating to our March 2004
reverse merger were $1,397,981 for the three months ended March 31, 2004,
including non-cash costs relating to the issuance of stock options and warrants
of $1,114,380. We did not have any reverse merger costs for the three months
ended March 31, 2003.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $14,592, or
4,692%, to $14,903 for the three months ended March 31, 2004, as compared to
interest income of $311 for the three months ended March 31, 2003. This increase
is due to increased borrowing during the three months ended March 31, 2004.
AMORTIZATION OF BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTE
PAYABLE. On January 25, 2004, we entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures on
September 25, 2004. As part of the loan terms, the lender has the right to
convert the loan into shares of our common stock at $0.25 per share at any time
prior to the maturity date, subject to our completion of a reverse merger
transaction in the United States, which was accomplished in March 2004. The fair
value of this beneficial conversion feature was determined to be $500,000,
consisting of the aggregate fair value of the difference between the $0.25
conversion price and the fair market value of our common stock of $0.60 per
share, and is being charged to operations as interest expense from January 25,
2004 through September 25, 2004, which resulted in a charge to operations of
$125,000 for the three months ended March 31, 2004.
NET LOSS. Net loss increased $1,591,597 to $1,650,247 for the three
months ended March 31, 2004, as compared to $58,650 for the three months ended
March 31, 2003. The increased net loss in the current period is primarily the
result of charges related to the reverse merger, consulting and professional
fees, and convertible notes.
Twelve Months ended December 31, 2003 and 2002:
NET SALES. Net sales were $40,031 for the twelve months ended December
31, 2003. We did not have any sales for the twelve months ended December 31,
2002. The increase in net sales is the result of our first product being
introduced to the market in November 2003.
COST OF SALES. Cost of sales was $30,294 for the twelve months ended
December 31,2003, including depreciation and amortization of $16,578.
GROSS PROFIT. Gross profit was $9,737 or 24.3% of net sales for the
twelve months ended December 31, 2003.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were
$545,787 and $21,816 for the twelve months ended December 31, 2003 and 2002,
respectively. The increase in consulting and professional fees in 2003 is
primarily attributable to activities relating to implementing a strategy to
become a publicly traded company through reverse merger.
DIRECTORS' COMPENSATION. Directors' compensation was $347,110 for the
twelve months ended December 31, 2003, as compared to $906 for the same period
of 2002. In 2002 directors worked almost free for the company. In 2003 we issued
stock to compensate director's compensation due to increasing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$327,501 for the twelve months ended December 31, 2003, as compared to $41,435
for the same period of 2002, an increase of 286,066 or 690.4%, primarily as a
result of a short operation history in 2002 and increased personnel-related
costs in the People's
27
Republic of China reflecting an increased level of business activity and
increased costs associated with being a public company. General and
administrative expenses include salaries, travel and entertainment, rent, office
expense, telephone expense and insurance costs.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$57,269, or 928.94%, to $6,165 for the twelve months ended December 31, 2003, as
compared to $6,165 for the twelve months ended December 31, 2002. This increase
is due to the incorporation in June 2002 and minimum research and development
activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $18,280, or
almost sixty times, to $18,585 for the twelve months ended December 31, 2003, as
compared to $305 for the same period of 2002. This increase is the result of a
short operational history in 2002.
REVERSE MERGER COSTS. Reverse merger costs relating to a proposed
reverse merger were $50,336 for the twelve months ended December 31, 2003 due to
implementing a strategy to become a publicly-traded company through reverse
merger. We did not have any reverse merger costs for the twelve months ended
December 31, 2002.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $11,966, or
4,656%, to $12,223 for the twelve months ended December 31, 2003, as compared to
interest income of $257 for the same period of 2002. This increase is due to
increased borrowing in 2003.
NET LOSS. Net loss increased $1,284,355 to $1,355,239 for the twelve
months ended December 31, 2003, as compared to $70,844 for the same period of
2002. The increased net loss in 2003 is primarily the result of the increase in
consulting and professional fees as well as director's compensation.
LIQUIDITY AND CAPITAL RESOURCES
We have relied on the proceeds from the sale of our equity securities
and loans from both unrelated and related parties to provide the resources
necessary to fund the development of our business plan and operations. During
the three months ended March 31, 2004, we raised $500,000 in the form of a
convertible note payable.
We are in the development stage and will require additional capital to
fund our business plan, and are continuing to develop our manufacturing facility
and have not generated significant revenues from our planned principal
operations. We do not anticipate enough positive internal operating cash flow
until such time as we generate substantial revenues, which may take the next few
years to fully realize. In the event we cannot obtain the necessary capital to
pursue our strategic plan, we may have to cease or significantly curtail our
operations.
Over the next twelve months, we believe that existing capital and
anticipated funds from operations will not be sufficient to sustain operations
and planned expansion. However, our near term cash requirements are anticipated
to be offset through the receipt of funds through the Standby Equity
Distribution Agreement with Cornell Capital Partners, LP and through other
private placement offerings and loans obtained through private sources. Once
this registration statement becomes effective we anticipate being able to use
the cash advances from Cornell Capital Partners, LP to finance our operations.
If, however, these cash advances are unavailable, we will be required to seek
additional capital in the future to fund growth and expansion through additional
equity or debt financing or credit facilities. No assurance can be made that
such financing would be available, and such financing, if available, could have
a negative impact on our financial condition.
At March 31, 2004 and December 31, 2003, we had cash of $10,910 and
$48,730, respectively. At March 31, 2004 and December 31, 2003, our net working
capital deficiency was $965,294 and $585,313, respectively, reflecting current
ratios of .42:1 and .53:1, respectively, at such dates. During April 2004, we
borrowed $200,000 pursuant to a three-month convertible note payable.
During the three months ended March 31, 2004, our operations utilized
cash of $559,463, as compared to $53,040 for the three months ended March 31,
2003, as a result of an increased level of business activity and the
28
costs associated with operating a public company. For the years ended December
31, 2003 and 2002, our operations utilized cash of $186,503 and $37,337,
respectively.
During the three months ended March 31, 2004, we utilized $8,752 in
investing activities, as compared to $388,848 for the three months ended March
31, 2003, for the purchase of property and equipment. For the years ended
December 31, 2003 and 2002, we utilized $1,448,668 and $63,948, respectively, in
investing activities for the purchase of property and equipment.
During the three months ended March 31, 2004, we generated $530,395
from financing activities, consisting of the proceeds from a convertible note
payable of $500,000, a decrease in restricted cash of $100,000 and an increase
in long-term borrowings of $21,021, offset in part by the repayment of
short-term loans of $90,626.
During the three months ended March 31, 2003, we generated $300,328
from financing activities through an increase in long-term borrowings.
For the years ended December 31, 2003 and 2002, we generated $1,161,844
and $623,342, respectively, from financing activities, consisting of the
proceeds from the sale of common stock of $465,000, the proceeds from
convertible notes payable of $100,000, the proceeds from short-term borrowings
of $283,930 and the proceeds from long-term borrowings of $1,236,256, offset by
an increase in restricted cash of $300,000.
The short-term loans are secured by restricted cash in the form of a
bank certificate of deposit denominated in U.S. Dollars.
Long-term borrowings consist primarily of unsecured, non-interest
bearing notes payable to the local People's Republic of China government that do
not mature until three years after our People's Republic of China operations
reach defined levels of profitability.
INFLATION AND CURRENCY MATTERS:
In the most recent decade, the Chinese economy has experienced periods
of rapid economic growth as well as relatively high rates of inflation, which in
turn has resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Our
success depends in substantial part on the continued growth and development of
the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. We conduct virtually all of
our business in China and, accordingly, the sale of our products is settled
primarily in Renminbi. As a result, devaluation or currency fluctuation of the
Renminbi against the U.S. Dollar would adversely affect our financial
performance when measured in U.S. Dollars. Although prior to 1994 the Renminbi
experienced significant devaluation against the U.S. Dollar, the Renminbi has
remained fairly stable since then. In addition, the Renminbi is not freely
convertible into foreign currencies, and the ability to convert the Renminbi is
subject to the availability of foreign currencies. Effective December 1, 1998,
all foreign exchange transactions involving the Renminbi must take place through
authorized banks or financial institutions in China at the prevailing exchange
rates quoted by the People's Bank of China.
As China has recently been admitted as a member of the World Trade
Organization, the central government of China is expected to adopt a more
rigorous approach to partially deregulate currency conversion restrictions,
which may in turn increase the exchange rate fluctuation of the Renminbi. Should
there be any major change in the central government's currency policies, we do
not believe that such an action would have a detrimental effect on our
operations, since we conduct virtually all of our business in China, and the
sale of our products is settled in Renminbi.
Although prior to 1994 the Renminbi experienced significant devaluation
against the U.S. Dollar, the Renminbi has remained fairly stable since then. The
exchange rate was approximately $1.00 to RMB 8.30 at March 31, 2004 and December
31, 2003.
29
COMMITMENTS AND CONTINGENCIES
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing," which was originally granted by the People's Republic of China
Patent Bureau on July 12, 1996. The purchase consideration is approximately
$720,612, of which $30,204 was paid at signing of the agreement and an
additional $30,204 will be paid within five days after the completion of the
issuance of a notice regarding the patent right holder alternate registration by
the People's Republic of China Patent Bureau. In addition, we agreed to issue
1,000,000 shares of common stock at an agreed-upon value of $0.63 per share, the
fair market value on April 12, 2004 (aggregate value $630,000) within two months
of the completion of the issuance of a notice regarding the patent right holder
alternate registration by the People's Republic of China Patent Bureau.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2004, we did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on our financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances) because that financial instrument embodies
an obligation of the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS No.
150 is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance date
of SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The adoption of SFAS No. 150 did not
have a significant effect on our financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. We implemented
the disclosure provisions of FIN 45 in our December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on our consolidated financial statement
presentation or disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets
30
forth certain disclosures regarding interests in VIEs that are deemed
significant, even if consolidation is not required. We are not currently
participating in, or invested in any VIEs, as defined in FIN 46R. The
implementation of the provisions of FIN 46R in 2003 did not have a significant
effect on our consolidated financial statement presentation or disclosures.
DESCRIPTION OF PROPERTY
We are in the process of constructing a manufacturing facility on 15.7
acres of land in Shandong Province, China. The right of land use has been
approved by the local government for up to 10 years without land use costs. In
the event our Chinese subsidiary becomes profitable, it will have the option to
acquire the land use rights for a period of up to 50 years. The first phase of a
three-phase construction plan has been completed. We expect the facility to be
fully operational in 2005.
We lease our principal executive offices located at 17700 Castleton
Street, Suite 589, City of Industry, California 91748. The lease has a term of 2
years and expires on June 11, 2005.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
China Star Investment Group is a company which is 10% owned by one of
our major stockholders. The balance due to China Star at December 31, 2002 of
$26,902 was primarily related to pre-operating costs that China Star paid on our
behalf before it was incorporated in the People's Republic of China. The balance
due from China Star at December 31, 2003 of $30,574 resulted from unsecured,
non-interest bearing cash advances which are due on demand.
In October 2003, we obtained a $100,000 loan from China Star. The loan
was scheduled to mature on October 20, 2004, and bears interest at 12% per
annum, payable at maturity. As part of the loan terms, China Star had the right
to convert the loan into shares of our common stock at $0.25 per share at any
time prior to the maturity date, subject to our completing a reverse merger
transaction in the United States, which was accomplished in March 2004. China
Star waived this conversion right in March, 2004.
During the three months ended March 31, 2004, the $30,574 due from
China Star was offset against the $100,000 loan payable to China Star, resulting
in a liability to China Star of $69,426 at March 31, 2004.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since January 31, 2002, we have been eligible to participate in the OTC
Bulletin Board, an electronic quotation medium for securities traded outside of
the Nasdaq Stock Market, and prices for our common stock are published on the
Over-the-Counter Bulletin under the trading symbol "KWBT." The market for shares
of our common stock is extremely limited and no assurance can be given that the
present limited market for our common stock will continue or will be maintained.
The potential sale of our common stock pursuant to Rule 144 of the Commission by
officers and directors may have a substantial adverse impact on any such public
market. As of July 30, 2004 the closing price was $0.19.
The following table sets forth the quarterly high and low trade prices
for our common stock since we have been eligible to participate in the OTC
Bulletin Board as reported by the National Quotations Bureau. The quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission, and
may not necessarily represent actual transactions. These prices also take into
account the 4-for-1 stock split that occurred during the first quarter of 2004,
and the 1-for-10 reverse stock split that occurred during the first quarter of
2003.
31
YEAR 2002 HIGH TRADE LOW TRADE
Quarter Ended March 31, 2002 $0.25 $0.12
Quarter Ended June 30, 2002 $0.25 $0.12
Quarter Ended September 30, 2002 $0.25 $0.12
Quarter Ended December 31, 2002 $0.25 $0.12
YEAR 2003 HIGH TRADE LOW TRADE
Quarter Ended March 31, 2003 $0.22 $0.05
Quarter Ended June 30, 2003 $0.12 $0.12
Quarter Ended September 30, 2003 $0.12 $0.12
Quarter Ended December 31, 2003 $0.12 $0.12
YEAR 2004 HIGH TRADE LOW TRADE
Quarter Ended March 31, 2004 $0.12 $0.12
Quarter Ended June 30, 2004 $0.80 $0.31
HOLDERS OF COMMON STOCK
As of July 30, 2004, we had approximately 376 stockholders of record of
our common stock and 38,460,853 shares of our common stock were issued and
outstanding.
DIVIDENDS
We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. We intend to retain any earnings to finance the growth
of the business. We cannot assure you that we will ever pay cash dividends.
Whether we pay any cash dividends in the future will depend on the financial
condition, results of operations and other factors that the Board of Directors
will consider.
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2003, we did not have any securities to be issued
under any equity compensation plans.
AUTHORIZED AND UNISSUED STOCK
The authorized but unissued shares of our capital stock are available
for future issuance without our stockholders' approval. These additional shares
may be utilized for a variety of corporate purposes including but not limited to
future public or direct offerings to raise additional capital, corporate
acquisitions and employee incentive
32
plans. In the event of an unsolicited tender offer or takeover proposal, the
increased number of shares could give us greater opportunity to issue shares to
persons who are friendly to management. The shares might also be available to
make acquisitions or enter into other transactions that might frustrate
potential offerors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer,
information concerning all compensation paid for services to us in all
capacities for each of the three years ended December 31 indicated below. No
other executive officer received total annual salary and bonus in excess of
$100,000 for each of the three years ended December 31 indicated below.
LONG TERM COMPENSATION
ANNUAL COMPENSATION
FISCAL YEAR RESTRICTED ALL
NAME ENDED STOCK AWARDS OTHER
PRINCIPAL POSITION DECEMBER 31, SALARY BONUS ($) COMPENSATION
- ------------------ ------------ ------ ----- --- ------------
George Christopulos (1) 2003 0 0 8,139 (2) 0
President, Chief 2002 0 0 7,875 (3) 0
Executive Officer & 2001 0 0 6,900 (4) 0
Chief Financial Officer
<FN>
(1) Mr. Christopulos resigned as of March 12, 2004.
(2) 81,391 shares of restricted stock valued at $0.10 per share were issued to
Mr. Christopulos as compensation for services rendered to us during the
fiscal year ended December 31, 2003.
(3) 45,000 shares of restricted stock valued at $0.175 per share were issued to
Mr. Christopulos as compensation for services rendered to us during the
fiscal year ended December 31, 2002.
(4) 23,000 shares of restricted stock valued at $0.30 per share (as adjusted
for the one share for ten shares reverse stock split approved by the Board
on January 17, 2003) were issued to Mr. Christopulos as compensation for
services rendered to us during the fiscal year ended December 31, 2001.
</FN>
COMPENSATION OF DIRECTORS
At present, non-employee directors do not receive any cash compensation
or award of options, warrants, or stock appreciation rights (SARs) for their
service on the Board. The Board may in the future establish a policy for
compensation of non-employee directors, which may include cash payments, option
or stock grants and/or reimbursement of expenses.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
At present, there are no employment contracts between any named
executive officers and us. There are no compensatory plans or arrangements with
respect to a named executive officer that would result in payments or
installments in excess of $100,000 upon the resignation, retirement or other
termination of such executive officer's employment with us or from a
change-in-control.
2004 STOCK INCENTIVE PLAN
On May 10, 2004, our Board of Directors determined that it was in our
best interest to provide equity incentives to certain of our directors, officers
and employees and or consultants. Pursuant to that end, our Board of Directors
adopted and approved, subject to shareholder approval, our 2004 Stock Incentive
Plan. The 2004 Stock Incentive Plan reserves 1,047,907 shares of our common
stock for issuance to qualifying participants of options and
33
stock purchase rights. This key aspect of our compensation program is designed
to attract, retain, and motivate the highly qualified individuals required for
our long-term success. Approval of the Plan required the affirmative vote of the
majority of the outstanding shares of our common stock on the record date. As of
June 3, 2004, holders of a majority of our common stock had approved the 2004
Stock Incentive Plan.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission in
Washington, DC, a registration statement on Form SB-2 under the Securities Act
with respect to the shares we are offering. This prospectus does not contain all
of the information set forth in the registration statement, as permitted by the
rules and regulations of the Securities and Exchange Commission. Reference is
hereby made to this registration statement and exhibits hereto for further
information with respect to Kiwa Bio-Tech Products Group Corporation and the
shares to which this prospectus relates. Copies of the registration statement
and other information filed by Kiwa with the Securities and Exchange Commission
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission in Washington, DC at 450 Fifth Street, NW,
Washington, DC 20549. In addition, the Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy statements and
other information regarding registrants such as Kiwa which filed electronically
with the Securities and Exchange Commission at the following Internet address:
(http:www.sec.gov).
34
FINANCIAL STATEMENTS
TABLE OF CONTENTS
FINANCIAL STATEMENTS AS OF MARCH 31, 2004 (UNAUDITED).........................36
CONDENSED CONSOLIDATED BALANCE SHEETS FOR THE
QUARTER ENDED MARCH 31, 2004 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 2003.........................................36
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2004
AND 2003, AND JUNE 5, 2002 (INCEPTION) TO MARCH
31, 2004 (CUMULATIVE)................................................38
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY (DEFICIENCY) - JUNE 5, 2002 (INCEPTION)
TO MARCH 31, 2004 (CUMULATIVE).......................................39
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2004
AND 2003, AND JUNE 5, 2002 (INCEPTION) TO MARCH
31, 2004 (CUMULATIVE)................................................42
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) - THREE MONTHS ENDED
MARCH 31, 2004 AND 2003, AND JUNE 5, 2002
(INCEPTION) TO MARCH 31, 2004 (CUMULATIVE)...........................44
FINANCIAL STATEMENTS OF KIWA BIO-TECH PRODUCTS GROUP LTD......................51
REPORT OF GROBSTEIN, HORWATH & COMPANY LLP,
INDEPENDENT AUDITORS.................................................51
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
2003 AND 2002........................................................52
CONSOLIDATED STATEMENTS OF OPERATIONS AND
DEFICIT ACCUMULATED DURING THE DEVELOPMENT
STAGE FOR THE YEAR ENDED DECEMBER 31, 2003,
PERIOD ENDED DECEMBER 31, 2002, AND FROM JUNE 5,
2002 (INCEPTION) THROUGH DECEMBER 31, 2003...........................53
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT) FOR THE YEAR ENDED DECEMBER 31 AND THE
PERIOD ENDED DECEMBER 31, 2002.......................................54
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEAR ENDED DECEMBER 31, 2003, PERIOD ENDED
DECEMBER 31, 2002, AND FROM JUNE 5, 2002
(INCEPTION) THROUGH DECEMBER 31, 2003 AND 2002.......................55
NOTES TO FINANCIAL STATEMENTS........................................56
35
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash .................................. $ 10,910 $ 48,730
Restricted cash ....................... 200,000 300,000
Accounts receivable ................... 60,408 45,235
Inventories ........................... 144,757 135,201
Due from related party ................ -- 30,574
Other current assets .................. 283,224 109,811
----------- -----------
Total current assets ....................... 699,299 669,551
----------- -----------
Property, plant and equipment:
Buildings ............................. 1,045,549 1,045,599
Machinery and equipment ............... 314,297 312,784
Automobiles ........................... 97,480 97,485
Construction in process ............... 52,403 45,108
Office equipment ...................... 11,639 11,640
----------- -----------
1,521,368 1,512,616
Less accumulated depreciation ......... (54,178) (35,468)
----------- -----------
1,467,190 1,477,148
----------- -----------
Total assets ............................... $ 2,166,489 $ 2,146,699
=========== ===========
See accompanying notes to condensed consolidated financial statements.
36
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets (continued)
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable and accrued
expenses .............................. $ 768,473 $ 737,636
Short-term loans .......................... 193,304 283,930
Due to related party ...................... 69,426 --
Convertible notes payable -
Related party ......................... -- 100,000
Unrelated party ....................... 500,000 --
Current portion of long-term
liabilities ........................... 133,390 133,298
----------- -----------
Total current liabilities ................. 1,664,593 1,254,864
----------- -----------
Long-term liabilities, less current portion:
Unsecured notes payable ............... 1,087,337 1,063,226
Bank notes payable .................... 36,549 39,732
----------- -----------
1,123,886 1,102,958
----------- -----------
Stockholders' deficiency:
Common stock, $0.001 par value -
Authorized - 50,000,000 shares
Issued and Outstanding - 34,930,248
shares and 30,891,676 shares at
March 31, 2004 and December 31, 2003,
respectively .............................. 34,930 30,892
Additional paid-in capital ..................... 2,794,450 1,184,108
Deficit accumulated during the
development stage ......................... (3,076,370) (1,426,123)
Deferred interest expense ...................... (375,000) --
----------- -----------
Total stockholders' deficiency ................. (621,990) (211,123)
----------- -----------
Total liabilities and
stockholders' deficiency .................. $ 2,166,489 $ 2,146,699
=========== ===========
See accompanying notes to condensed consolidated financial statements.
37
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 5, 2002
March 31, (Inception) to
---------------------------- March 31, 2004
2004 2003 (Cumulative)
------------ ------------ ------------
Net sales ..................... $ 53,458 $ -- $ 93,489
Cost of sales ................. 31,011 -- 61,305
------------ ------------ ------------
Gross profit .................. 22,447 -- 32,184
------------ ------------ ------------
Operating expenses:
Consulting and professional
Fees .................... 29,887 -- 597,490
Directors' compensation ..... 8,699 3,624 356,715
General and administrative .. 74,545 43,717 443,482
Research and development .... 12,540 9,720 82,139
Depreciation and amortization 9,138 1,900 28,028
Reverse merger costs ........ 1,397,981 -- 1,448,317
------------ ------------ ------------
Total costs and expenses .... 1,532,790 58,961 2,956,171
------------ ------------ ------------
(1,510,343) (58,961) (2,923,987)
------------ ------------ ------------
Interest income (expense), net (14,904) 311 (27,383)
Amortization of beneficial
conversion feature of
convertible note payable .... (125,000) -- (125,000)
------------ ------------ ------------
Net loss ...................... $ (1,650,247) $ (58,650) $ (3,076,370)
============ ============ ============
Net loss per common share -
basic and diluted ........... $ (0.05) $ --
============ ============
Weighted average number
of common shares
outstanding -
basic and diluted ........... 31,564,771 12,356,670
============ ============
See accompanying notes to condensed consolidated financial statements.
38
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------ Paid-In Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- ----------- ----------- ----------- ---------- -----------
Issuance of
common stock .... 12,356,670 $ 12,357 $ 452,643 $ -- $ -- $ 465,000
Net loss for the
period from
June 5, 2002
(Inception) to
December 31, 2002 -- -- -- (70,884) -- (70,884)
---------- ----------- ----------- ----------- ---------- -----------
Balance,
December 31, 2002 12,356,670 12,357 452,643 (70,884) -- 394,116
Shares issued
to consultants
for services .... 10,503,170 10,503 414,497 -- -- 425,000
Shares issued to
directors as
directors'
compensation .... 8,031,836 8,032 316,968 -- -- 325,000
Net loss for the
year ended
December 31, 2003 -- -- -- (1,355,239) -- (1,355,239)
---------- ----------- ----------- ----------- ---------- -----------
Balance,
December 31, 2003 30,891,676 30,892 1,184,108 (1,426,123) -- (211,123)
See accompanying notes to condensed consolidated financial statements.
39
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited) (continued)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------ Paid-In Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- ----------- ----------- ----------- ---------- -----------
Shares retained
by public
shareholders
in March 2004
reverse merger
transaction ... 4,038,572 $ 4,038 $ (4,038) $ -- $ -- $ --
Issuance of
warrants in
conjunction
with March
2004 reverse
merger
transaction ... -- -- 943,380 -- -- 943,380
Issuance of
stock options
to consultant
in conjunction
with March 2004
reverse merger
transaction ... -- -- 171,000 -- -- 171,000
Beneficial
conversion
feature of
convertible
notes payable . -- -- 500,000 -- (500,000) --
See accompanying notes to condensed consolidated financial statements.
40
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited) (continued)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------ Paid-In Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- ----------- ----------- ----------- ---------- -----------
Amortization
of beneficial
conversion
feature of
convertible
note payable -- $ -- $ -- $ -- $ 125,000 $ 125,000
Net loss for the
three months
ended March 31,
2004 -- -- -- (1,650,247) -- (1,650,247)
---------- ----------- ----------- ----------- ---------- -----------
Balance,
March 31, 2004 34,930,248 $ 34,930 $ 2,794,450 $(3,076,370) $ (375,000) $ (621,990)
=== ==== ========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
41
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 5, 2002
March 31, (Inception) to
-------------------------- March 31, 2004
2004 2003 (Cumulative)
----------- ----------- -----------
Cash flows from operating
activities:
Net loss .......................... $(1,650,247) $ (58,650) $(3,076,370)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Issuance of common stock for
to consultants for services .. -- -- 425,000
Issuance of common stock for
directors' compensation ...... -- -- 325,000
Issuance of securities for
reverse merger costs ......... 1,114,380 -- 1,114,380
Depreciation and amortization .. 18,710 1,915 54,178
Amortization of beneficial
conversion feature of
convertible note payable ..... 125,000 -- 125,000
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable ...... (15,173) -- (60,408)
Inventories .............. (9,556) (9,198) (144,757)
Other current assets ..... (173,413) (20,802) (283,224)
Deposits ................. -- 25,794 --
Due from related party ... -- -- (57,476)
Increase (decrease) in:
Accounts payable and
accrued liabilities .... 30,836 (2,227) 768,472
Due to related party ..... -- 10,128 26,902
----------- ----------- -----------
Net cash used in operating
Activities ..................... (559,463) (53,040) (783,303)
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of property and
Equipment .................. (8,752) (388,848) (1,521,368)
----------- ----------- -----------
Net cash used in investing
Activities ..................... (8,752) (388,848) (1,521,368)
----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements.
42
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended June 5, 2002
March 31, (Inception) to
-------------------------- March 31, 2004
2004 2003 (Cumulative)
----------- ----------- -----------
Cash flows from financing
activities:
(Increase) decrease in
restricted cash .............. $ 100,000 $ -- $ (200,000)
Proceeds from short-term
Loans ........................ 283,930
Repayment of short-term
Loans ........................ (90,626) -- (90,626)
Proceeds from convertible
notes payable ................ 500,000 -- 600,000
Increase in long-term
borrowings, net .............. 21,021 300,328 1,257,277
Proceeds from sale of
common stock ................. -- -- 465,000
----------- ----------- -----------
Net cash provided by
financing activities ........... 530,395 300,328 2,315,581
----------- ----------- -----------
Cash:
Net increase (decrease) ........ (37,820) (141,560) 10,910
At beginning of period ......... 48,730 522,057 --
----------- ----------- -----------
At end of period ............... $ 10,910 $ 380,497 $ 10,910
=========== =========== ===========
Supplemental Disclosures of
Cash Flow Information:
Cash paid for interest ............ $ 3,593 $ -- $ 12,114
=========== =========== ===========
Cash paid for taxes ............... $ -- $ -- $ --
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
43
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2004 and 2003,
and June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
1. Organization and Basis of Presentation
Organization - On March 12, 2004, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated as of March 11, 2004, by and among Tintic Gold
Mining Company, a Utah corporation ("Tintic" or "Kiwa"), TTGM Acquisition
Corporation, a Utah corporation and wholly-owned subsidiary of Tintic ("Merger
Sub"), and Kiwa Bio-Tech Products Group Ltd., a privately-held corporation
organized in the British Virgin Islands ("Kiwa Bio-Tech"), Merger Sub merged
with and into Kiwa Bio-Tech with Kiwa Bio-Tech surviving as a wholly-owned
subsidiary of Tintic (the "Merger"). In exchange for 100% of the issued and
outstanding shares of Kiwa Bio-Tech, the Kiwa Bio-Tech stockholders were issued
30,891,676 shares of Tintic's common stock (after giving effect to a 4-to-1
stock split effective as of March 29, 2004). The stockholders of Tintic retained
their 4,038,572 shares of common stock which were issued and outstanding prior
to the consummation of the Merger Agreement. Tintic also assumed 1,852,501 stock
options issuable by Kiwa Bio-Tech at March 12, 2004. On March 17, 2004, Tintic
changed its name to Kiwa Bio-tech Products Group Corporation.
At the closing of the Merger Agreement, Tintic transferred all of its pre-merger
assets, consisting primarily of its interest in certain mining claims situated
in the State of Utah, subject to all of its pre-merger liabilities, to a
newly-formed, wholly-owned subsidiary, Tintic Gold Mining Company, a Nevada
corporation ("Tintic Nevada"). The shares of Tintic Nevada were transferred to
an escrow agent to be held in escrow for the benefit of the pre-merger
stockholders of Tintic until such time as the distribution of such shares has
been registered under the Securities Act of 1933 and any applicable state
securities laws.
The Merger resulted in a change of control of Tintic, with the former
stockholders of Kiwa Bio-Tech acquiring approximately 88.4% of Tintic's common
stock immediately following the closing of the Merger. Accordingly, this
transaction was accounted for as a recapitalization of Kiwa Bio-Tech, pursuant
to which the accounting basis of Kiwa Bio-Tech continued unchanged subsequent to
the transaction date. Accordingly, the pre-transaction financial statements of
Kiwa Bio-Tech are now the historical financial statements of the Company. The
stockholders' equity (deficiency) section of the balance sheet has been
retroactively restated for all periods presented to reflect the post-transaction
equity received by the Kiwa Bio-Tech stockholders as a result of the
recapitalization.
Kiwa Bio-Tech was incorporated on June 5, 2002 in the British Virgin Islands as
a holding company. On October 11, 2002, Kiwa Bio-Tech established a wholly-owned
subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. ("Kiwa-SD") in Zoucheng
City, Shandong Province, People's Republic of China (the "PRC").
Unless the context indicates otherwise, Kiwa and its wholly-owned subsidiaries,
Kiwa Bio-Tech and Kiwa SD, are referred to herein collectively as the "Company,"
"we" or "our."
Business - The Company intends to develop, manufacture, distribute and market
innovative, cost-effective and environmentally safe bio-technological products
for the agricultural, natural resources and environmental protection, primarily
in the PRC. The Company intends to improve existing products and to develop new
products. Activities to date have included conducting research and development,
acquiring and developing intellectual property, raising capital, development of
a manufacturing facility and identification of strategic acquisitions. The
Company's first product, a photosynthesis biological catalyst, was introduced in
the PRC agricultural market in November 2003. The Company is a development stage
entity.
As the Company's principal operations are conducted in the PRC, the Company is
subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. These risks include, among
others, risks associated with the political, economic and legal environments and
foreign currency exchange limitations encountered in the PRC. The Company's
results of operations may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, among other things.
In addition, all of the Company's transactions undertaken in the PRC are
denominated in Renminbi ("RMB"), which must be converted into other currencies
before remittance out of the PRC may be considered. Both the conversion
44
of RMB into foreign currencies and the remittance of foreign currencies abroad
require the approval of the PRC government.
Basis of Presentation - The condensed consolidated financial statements include
the operations of Kiwa Bio-tech Products Group Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The interim condensed consolidated financial statements are unaudited, but in
the opinion of management of the Company, contain all adjustments, which include
normal recurring adjustments, necessary to present fairly the financial position
at March 31, 2004, the results of operations for the three months ended March
31, 2004 and 2003, and the cash flows for the three months ended March 31, 2004
and 2003. The consolidated balance sheet as of December 31, 2003 is derived from
the Company's audited financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Certain information
and footnote disclosures normally included in financial statements that have
been presented in accordance with generally accepted accounting principles in
the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission with respect to
interim financial statements, although management of the Company believes that
the disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Current Report on Form 8-K dated March 12, 2004, as amended, as filed
with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2004.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Going Concern - The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities presented in
the consolidated financial statements do not purport to represent the realizable
or settlement values. The Company incurred a net loss of $1,650,247 and
$1,355,239 during the three months ended March 31, 2004 and the year ended
December 31, 2003, respectively, and the Company's current liabilities exceeded
its current assets by $965,294 and $585,313 and it had a stockholders'
deficiency of $621,990 and $211,123 at March 31, 2004 and December 31, 2003,
respectively. In addition, the Company is still in the development stage and
will require additional capital to fund its business plan, and is continuing to
develop its manufacturing facility and has not generated significant revenues
from its planned principal operations. These factors create substantial doubt
about the Company's ability to continue as a going concern.
The Company's independent certified public accountants, in their independent
auditors' report on the consolidated financial statements as of and for the year
ended December 31, 2003, have expressed substantial doubt about the Company's
ability to continue as a going concern.
As of March 31, 2004, the Company had obtained non-interest bearing loans from
the local PRC government of approximately $1,200,000 on favorable repayment
terms. During the year ending December 31, 2004, the Company intends to raise
additional capital through the issuance of debt or equity securities to fund the
development of its planned business operations, although there can be no
assurances that the Company will be successful in this regard.
45
There can be no assurances that the Company will be able to obtain sufficient
funds to allow it to continue its operations during the remainder of 2004.
To the extent that the Company is unable to successfully raise the capital
necessary to fund its future cash requirements on a timely basis and under
acceptable terms and conditions, the Company will not have sufficient cash
resources to maintain operations, and may have to curtail operations and
consider a formal or informal restructuring or reorganization.
Foreign Currency Translation - The functional currency of the Company is the
Renminbi ("RMB"). Transactions denominated in foreign currencies are translated
into RMB at the unified exchange rates quoted by the People's Bank of China,
prevailing at the transaction dates. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable unified
exchange rates prevailing at the balance sheet date.
Translations of amounts from RMB into United States Dollars ("US$") were at
approximately US $1.00 = RMB 8.28 for all periods presented. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
that rate or at any other rate. Due to the stability of the RMB during the
periods covered by the consolidated financial statements, no material exchange
differences exist.
Net Loss Per Common Share - Basic loss per common share is calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per common share reflects the potential dilution
that would occur if dilutive securities (stock options, warrants and convertible
debt) were exercised. These potentially dilutive securities were not included in
the calculation of loss per share for the periods presented because the Company
incurred a loss during such periods and thus their effect would have been
anti-dilutive. Accordingly, basic and diluted loss per common share is the same
for all periods presented. As of March 31, 2004, potentially dilutive securities
aggregated 4,047,000 shares of common stock, respectively. The loss per common
share calculation for the three months ended March 31, 2003 reflects the
retroactive restatement of the stockholders' equity (deficiency) section of the
balance sheet to reflect the March 2004 recapitalization of Kiwa Bio-Tech.
The Company effected a 4-for-1 forward split of its outstanding shares of common
stock effective March 29, 2004, in conjunction with the reverse merger
transaction with Kiwa Bio-Tech described above. Unless otherwise indicated, all
share and per share amounts presented herein have been adjusted to reflect the
forward stock split.
Comprehensive Income (Loss) - The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general purpose financial statements. SFAS No. 130 defines
comprehensive income (loss) to include all changes in equity except those
resulting from investments by owners and distributions to owners, including
adjustments to minimum pension liabilities, accumulated foreign currency
translation, and unrealized gains or losses on marketable securities.
The Company's only component of comprehensive income (loss) is foreign currency
translation income (loss). Comprehensive income (loss) was not material for all
periods presented.
Stock-Based Compensation - The Company periodically issues shares of common
stock for services rendered or for financing costs. Such shares are valued based
on the market price on the transaction date.
The Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock-based compensation plans.
46
The provisions of SFAS No. 123 allow companies to either record an expense in
the financial statements to reflect the estimated fair value of stock options or
warrants to employees, or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", but to disclose on an annual basis the pro forma effect on
net income (loss) and net income (loss) per common share had the fair value of
the stock options and warrants been recorded in the financial statements. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies to disclose in
interim financial statements the pro forma effect on net income (loss) and net
income (loss) per common share of the estimated fair market value of stock
options or warrants issued to employees. The Company has elected to continue to
account for stock-based compensation plans utilizing the intrinsic value method.
Accordingly, compensation cost for stock options and warrants is measured as the
excess, if any, of the fair market price of the Company's common stock at the
date of grant above the amount an employee must pay to acquire the common stock.
In accordance with SFAS No. 123, the cost of stock options and warrants issued
to non-employees is measured at the grant date based on the fair value of the
award. The fair value of the stock-based award is determined using the
Black-Scholes option-pricing model. The resulting amount is charged to expense
on the straight-line basis over the period in which the Company expects to
receive benefit, which is generally the vesting period.
The Company did not issue any stock options to its officers or management during
the three months ended March 31, 2004.
2. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on the Company's financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on the Company's consolidated financial statement
presentation or disclosures.
47
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even if
consolidation is not required. The Company is not currently participating in, or
invested in any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Company's
consolidated financial statement presentation or disclosures.
3. Inventories
Inventories consisted of the following at March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
-------- --------
Raw materials ...................... $ 35,310 $ 23,497
Work in progress ................... 24,386 111,390
Finished goods ..................... 85,061 314
-------- --------
$144,757 $135,201
======== ========
4. Short-Term Loans
As of March 31, 2004 and December 31, 2003, short-term loans consisted of bank
loans that mature on various dates through June 2004, with interest rates
ranging from 5.04% to 6.9% per annum. The short-term loans are secured by
restricted cash in the form of a bank certificate of deposit denominated in
United States dollars.
5. Convertible Note Payable
On January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures on
September 25, 2004. As part of the loan terms, the lender has the right to
convert the loan into shares of the Company's common stock at $0.25 per share at
any time prior to the maturity date, subject to the Company completing a reverse
merger transaction in the United States, which was accomplished in March 2004.
The lender is an unrelated party located outside the United States.
The fair value of this beneficial conversion feature was determined to be
$500,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and has been presented as deferred interest expense in the
balance sheet at March 31, 2004 and is being charged to operations as interest
expense from January 25, 2004 through September 25, 2004, which resulted in a
charge to operations of $125,000 for the three months ended March 31, 2004.
48
6. Related Party Transactions with China Star Investment Group
China Star Investment Group is a company which is 10% owned by a major
stockholder of the Company. The balance due to China Star at December 31, 2002
of $26,902 was primarily related to pre-operating costs that China Star paid on
behalf of the Company before it was incorporated in the PRC. The balance due
from China Star at December 31, 2003 of $30,574 resulted from unsecured,
non-interest bearing cash advances which are due on demand.
In October 2003, the Company obtained a $100,000 loan from China Star. The loan
was scheduled to mature on October 20, 2004, and bears interest at 12% per
annum, payable at maturity. As part of the loan terms, China Star had the right
to convert the loan into shares of the Company's common stock at $0.25 per share
at any time prior to the maturity date, subject to the Company completing a
reverse merger transaction in the United States, which was accomplished in March
2004. China Star has waived this conversion right.
During the three months ended March 31, 2004, the $30,574 due from China Star
was offset against the $100,000 loan payable to China Star, resulting in a
liability to China Star of $69,426 at March 31, 2004.
7. Equity-Based Transactions
From June 5, 2002 (Inception) to March 31, 2004 (Cumulative), the Company has
engaged in the following equity-based transactions:
The Company was initially capitalized on June 5, 2002 through the sale of
12,356,670 shares of common stock for $465,000.
On December 31, 2003, the Company issued 18,535,006 shares of common stock in
exchange for consulting services provided by various consultants and directors
of the Company.
In conjunction with the March 2004 reverse merger transaction (see Note 1), the
Company entered into the following equity-based transactions:
a. In exchange for 100% of the issued and outstanding shares of Kiwa
Bio-Tech, the Kiwa Bio-Tech stockholders were issued 30,891,676 shares
of Tintic's common stock.
b. The stockholders of Tintic retained their 4,038,572 shares of
common stock which were issued and outstanding prior to the
consummation of the Merger Agreement.
c. Tintic assumed 1,852,501 stock options issuable by Kiwa Bio-Tech at
March 12, 2004.
d. Effective March 11, 2004, the Company issued a warrant to its
financial advisor to purchase 1,747,000 shares of common stock
exercisable at $0.20 per share six years. The fair value of this
warrant was determined to be approximately $0.54 per share pursuant to
the Black-Scholes option-pricing model. The aggregate fair value of
such warrant of $943,380 was charged to operations as reverse merger
costs during the three months ended March 31, 2004.
e. Effective March 30, 2004, the Company issued a stock option to a
consultant to purchase 300,000 shares of common stock exercisable at
$0.20 per share for ten years. The fair value of this option was
determined to be approximately $0.57 per share pursuant to the
Black-Scholes option pricing model. The aggregate fair value of such
option of $171,000 was charged to operations as reverse merger costs
during the three months ended March 31, 2004.
49
8. Major Customers and Suppliers
One customer accounted for 100% of the Company's net sales for the three months
ended March 31, 2004. The Company did not have any sales for the three months
ended March 31, 2003.
Three suppliers accounted for 21%, 21%, and 10% of the Company's net purchases
for the three months ended March 31, 2004. The Company did not have any
purchases for the three months ended March 31, 2003.
9. Subsequent Events
On March 12, 2004, the Company entered into a convertible loan agreement for
$200,000, with interest at 12%, payable at maturity. The loan matures three
months after funding. As part of the loan terms, the lender has the right to
convert the loan into shares of the Company's common stock at $0.25 per share at
any time prior to the maturity date, subject to the Company completing a reverse
merger transaction in the United States, which was accomplished in March 2004.
The lender is an unrelated party located outside the United States. The loan was
not funded until April 7, 2004.
The fair value of this beneficial conversion feature was determined to be
$200,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and will be charged to operations as interest expense during
the three months ending June 30, 2004.
On April 6, 2004, the Company entered into a subscription agreement to issue
6,000,000 shares of common stock at $0.40 per share for gross proceeds of
$2,400,000. The investor is an unrelated party located outside the United
States. The transaction was scheduled to close on April 30, 2004. The Company
has granted the investor a 60 day extension to close the transaction.
On April 12, 2004, the Company entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration is approximately $720,612, of which $60,408
was paid at signing of the agreement and an additional $30,204 will be paid
within five days of the completion of the issuance of a notice regarding the
patent right holder alternate registration by the PRC Patent Bureau. In
addition, the Company will issue 1,000,000 shares of common stock at an
agreed-upon value of $0.63 per share, the fair market value on April 12, 2004
(aggregate value $630,000) within two months of the completion of the issuance
of a notice regarding the patent right holder alternate registration by the PRC
Patent Bureau.
50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Kiwa Bio-Tech Products Group Ltd.
We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech
Products Group Ltd. and subsidiary, a development stage company, as of December
31, 2003 and 2002, and the related consolidated statements of operations and
deficit accumulated during the development stage, stockholders' equity
(deficit), and cash flows for the year ended December 31, 2003, period ended
December 31, 2002, and from June 5, 2002 (inception) through December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kiwa Bio-Tech
Products Group Ltd. and subsidiary as of December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 2003, period ended December 31, 2002 and from June 5, 2002
(inception) through December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has been in the development stage
since its inception, has suffered recurring losses from operations, has a
working capital deficit and a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Grobstein, Horwath & Company, LLP
Sherman Oaks, California
March 19, 2004, except for Notes 13 and 16
which are as of April 30, 2004
51
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND DECEMBER 31, 2002
2003 2002
----------- -----------
Assets
Current Assets
Cash and cash equivalents ................. $ 48,730 $ 522,057
Restricted cash ........................... 300,000 --
Accounts receivable ....................... 45,235 --
Inventories ............................... 135,201 6,295
Due from related party .................... 30,574 --
Other current assets ...................... 109,811 6,433
----------- -----------
Total Current Assets ........................... 669,551 534,785
----------- -----------
Property, Plant and Equipment - net ............ 1,477,148 63,643
Deposits ....................................... -- 25,794
----------- -----------
Total Assets ................................... $ 2,146,699 $ 624,222
=========== ===========
Liabilities and Stockholders' (Deficit)
Equity
Current Liabilities
Short-term loans .......................... $ 283,930 $ --
Due to related party ...................... -- 26,902
Convertible note payable to
related party .......................... 100,000 --
Accounts payable and accrued
liabilities ............................ 737,636 44,862
Current portion of long-term
liabilities ............................ 133,298 6,996
----------- -----------
Total Current Liabilities ...................... 1,254,864 78,760
----------- -----------
Long-Term Liabilities, less current
portion ................................... 1,102,958 151,346
Stockholders' (Deficit) Equity
Common stock - par value $0.01 per
share, 5,000,000 shares authorized,
5,000,000 shares and 2,000,000
shares issued and outstanding at
December 31, 2003 and 2002,
respectively ........................... 50,000 20,000
Additional paid-in capital ................ 1,165,000 445,000
Deficit accumulated during the
development stage ...................... (1,426,123) (70,884)
----------- -----------
Total Stockholders' (Deficit) Equity ........... (211,123) 394,116
----------- -----------
Total Liabilities and Stockholders'
(Deficit) Equity .......................... $ 2,146,699 $ 624,222
=========== ===========
52
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
CUMULATIVE
RESULTS OF
OPERATIONS
FROM JUNE 5,
2002
(INCEPTION)
YEAR ENDED PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003
----------- ----------- -----------
Net Sales ......................... $ 40,031 $ -- $ 40,031
Cost of Sales ..................... 30,294 -- 30,294
----------- ----------- -----------
Gross Profit ...................... 9,737 -- 9,737
----------- ----------- -----------
Operating Expenses:
Consulting and professional fees 545,787 21,816 567,603
Directors' compensation ........ 347,110 906 348,016
Salaries ....................... 97,534 12,393 109,927
Other .......................... 87,733 3,537 91,270
Travel and entertainment ....... 68,182 11,540 79,722
Research and development ....... 63,434 6,165 69,599
Reverse merger costs ........... 50,336 -- 50,336
Rent ........................... 27,570 1,800 29,370
Office and telephone expense ... 27,477 9,227 36,704
Insurance ...................... 19,005 2,938 21,943
Depreciation ................... 18,585 305 18,890
----------- ----------- -----------
1,352,753 70,627 1,423,380
----------- ----------- -----------
Loss Before Interest Expense and
Provision for Income Taxes ..... (1,343,016) (70,627) (1,413,643)
Interest Expense .................. 12,223 257 12,480
----------- ----------- -----------
Loss Before Provision for Income
Taxes .......................... (1,355,239) (70,884) (1,426,123)
Provision for Income Taxes ........ -- -- --
----------- ----------- -----------
Net Loss .......................... (1,355,239) (70,884) (1,426,123)
Beginning Deficit Accumulated
During the Development Stage ... (70,884) -- --
----------- ----------- -----------
Ending Deficit Accumulated During
the Development Stage .......... $(1,426,123) $ (70,884) $(1,426,123)
=========== =========== ===========
53
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FROM JUNE 5, 2002 (INCEPTION) TO DECEMBER 31, 2003
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE STOCKHOLDERS'
------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIT)
----------- ----------- ----------- ----------- -----------
Balance at inception (June 5, 2002) -- $ -- $ -- $ -- $ --
Issuance of common stock .......... 2,000,000 20,000 445,000 -- 465,000
Net loss for the period from
June 5, 2002 (Inception) to
December 31, 2002 ............... -- -- -- (70,884) (70,884)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 ........ 2,000,000 20,000 445,000 (70,884) 394,116
Shares issued to consultants for
services ........................ 1,700,000 17,000 408,000 -- 425,000
Shares issued to directors as
directors' compensation ......... 1,300,000 13,000 312,000 -- 325,000
Net loss for the year ended
December 31, 2003 ............... -- -- -- (1,355,239) (1,355,239)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 ........ 5,000,000 $ 50,000 $ 1,165,000 $(1,426,123) $ (211,123)
=========== =========== =========== =========== ===========
54
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
CUMULATIVE
RESULTS OF
OPERATIONS FROM
JUNE 5, 2002
(INCEPTION)
YEAR ENDED PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss ............................... $(1,355,239) $ (70,884) $(1,426,123)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of common stock for services .. 425,000 -- 425,000
Issuance of common stock for directors'
compensation ....................... 325,000 -- 325,000
Depreciation and amortization .......... 35,163 305 35,468
Sources and (uses) of cash from changes
in operating assets and liabilities:
Accounts receivable .................... (45,235) -- (45,235)
Inventories ............................ (128,906) (6,295) (135,201)
Other current assets ................... (103,378) (6,433) (109,811)
Deposits ............................... 25,794 (25,794) --
Accounts payable and accrued liabilities 692,774 44,862 737,636
Due (from) to related party ............ (57,476) 26,902 (30,574)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .. (186,503) (37,337) (223,840)
----------- ----------- -----------
INVESTING ACTIVITIES
Expenditures for property and
equipment ....................... (1,448,668) (63,948) (1,512,616)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .. (1,448,668) (63,948) (1,512,616)
----------- ----------- -----------
FINANCING ACTIVITIES
Increase in restricted cash ........ (300,000) -- (300,000)
Proceeds from sale of common stock . -- 465,000 465,000
Proceeds from short-term loans ..... 283,930 -- 283,930
Proceeds from convertible note due
to a related party .............. 100,000 -- 100,000
Proceeds from long-term borrowings . 1,077,914 158,342 1,236,256
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES ......................... 1,161,844 623,342 1,785,186
----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS ................... (473,327) 522,057 48,730
BEGINNING CASH AND CASH EQUIVALENTS .... 522,057 -- --
----------- ----------- -----------
ENDING CASH AND CASH EQUIVALENTS ....... $ 48,730 $ 522,057 $ 48,730
=========== =========== ===========
55
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
KIWA Bio-Tech Products Group Ltd. ("KIWA") was incorporated on June 5,
2002 in the British Virgin Islands ("BVI"). KIWA has been a development stage
enterprise since its inception as defined under Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises". KIWA has established a wholly owned subsidiary, KIWA Bio-Tech
Products (Shandong) Co., Ltd. ("KIWA-SD" or the "Subsidiary") in Zoucheng City,
Shandong Province, People's Republic of China ("PRC") on October 11, 2002.
Through its Subsidiary, KIWA intends to develop, manufacture,
distribute and market innovative, cost-effective, and environmentally safe
bio-technological products for the agriculture, natural resources and
environmental protection markets, primarily in the PRC. Activities to date have
included conducting research and development, acquiring and developing
intellectual property, raising capital, and identifying strategic acquisitions.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of KIWA and its wholly owned subsidiary (collectively "the Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Sales represent
the invoiced value of goods, net of value added tax ("VAT"), supplied to
customers, and are recognized upon delivery of goods and passage of title.
All of the Company's sales made in the PRC are subject to the Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Company on purchases
("input VAT").
USE OF ESTIMATES
The preparation of the consolidated financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
COUNTRY RISK
As the Company's principal operations are conducted in the PRC, the
Company is subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These risks
include, among others, risks associated with the political, economic and legal
environments and foreign currency exchange limitations encountered in the PRC.
The Company's results of operations may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, among other things.
In addition, all of the Company's transactions undertaken in the PRC
are denominated in Renminbi ("RMB") which must be converted into other
currencies before remittance out of the PRC may be considered. Both the
conversion of RMB into foreign currencies and the remittance of foreign
currencies abroad require the approval of the PRC government.
56
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Highly liquid investments with maturity of three months or less at the
time of acquisition are considered to be cash equivalents.
CREDIT RISK
The Company performs ongoing credit evaluations of its customers and
intends to establish an allowance for doubtful accounts when amounts are not
considered fully collectable. Management of the Company believes the accounts
receivable balance as of December 31, 2003 will be fully collected.
INVENTORIES
Inventories, which include raw materials, work-in-progress, finished
goods and low-value consumables, are stated at the lower of cost, determined on
the weighted average method, or net realizable value. Net realizable value is
the estimated selling price in the ordinary course of business, less estimated
costs to complete and dispose.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Major renewals and improvements are capitalized while minor
replacements, maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets after taking into account the estimated residual
value. The estimated useful lives are as follows:
Buildings 30-35 years
Machinery and equipment 3-10 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company tests its investment in long-lived assets, including
property and equipment, for recoverability whenever events or changes in
circumstances indicate the net carrying amount may not be recoverable.
CONSTRUCTION IN PROGRESS
Construction in progress ("CIP") includes all costs incurred during the
preparation period before commencement of construction and until the asset is
ready for its intended use. CIP is transferred to fixed assets when the asset is
substantially ready for its intended use. The imputation of interest or
capitalization of interest during the construction period is not considered
applicable to the Company because the Company obtained construction financing on
an interest free basis from the local PRC government. In addition, repayment of
a substantial portion of the loans are to be determined based on achieving
specified levels of future profitability. Therefore, the loans do not have a
determinable repayment date.
ADVERTISING
The Company charges all advertising costs to expense as incurred.
Advertising expense for the year ended December 31, 2003 was $4,788. The Company
did not incur any advertising expense for the period from June 5, 2002
(Inception) to December 31, 2002.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
57
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING LEASES
Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
INCOME TAXES
Income taxes are computed using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements'
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in the years in which these temporary differences are expected to reverse.
Valuation allowances are provided against deferred tax assets that are not
expected to be realized. There were no material deferred tax assets or
liabilities as of December 31, 2003 and 2002.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Renminbi ("RMB").
Transactions denominated in foreign currencies are translated into RMB at the
unified exchange rates quoted by the People's Bank of China, prevailing at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable unified exchange rates
prevailing at the balance sheet date.
Translations of amounts from RMB into United States ("US$") were at US
$1.00 = RMB 8.3 for the year ended December 31, 2003 and for the period from
June 5, 2002 (Inception) to December 31, 2002. No representation is made that
the RMB amounts could have been, or could be, converted into US$ at that rate or
at any other rate. Due to the stability of the RMB during the periods covered by
the consolidated financial statements, no material exchange differences exist.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN45"). FIN45 elaborates on the existing disclosure for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair market value of obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of FIN 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company has implemented the disclosure
provisions of FIN45 in its December 31, 2002 and December 31, 2003 financial
statements, without significant impact.
In January 2003, (as revised in December 2003) The FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", an
interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated
Financial Statements". Interpretation No. 46, as revised, addresses
consolidation by business enterprises of variable interest entities, which have
one or both or the following characteristics: (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated support from other parties, which is provided through
other financial interests that will absorb some or all of the expected losses of
the entity; (ii) the equity investors lack one or more of the following
essential characteristics of a controlling financial interest: the direct or
indirect ability to make decisions about the entities activities through voting
rights or similar rights; or the obligation to absorb the expected losses of the
entity if they occur, which makes it possible for the entity to finance its
activities; the right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing the expected
losses.
58
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interpretation No. 46, as revised, also requires expanded disclosures
by the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
The consolidation requirements of FIN 46 are required to be implemented
for any variable interest entity created on or after January 31, 2003. In
addition, FIN 46 requires disclosure of information regarding guarantees or
exposures to loss relating to any variable interest entity existing prior to
January 31, 2003 in financial statements issued after January 31, 2003. The
implementation of the provisions of Interpretation No. 46, as revised, is not
expected to have a significant effect on the Company's consolidated financial
statement presentation or disclosure.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, could be accounted for as equity. SFAS No. 150 requires that
those instruments be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involve instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under SFAS No. 150 are obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or which vary inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of a non-public entity, as to which the
effective date is for fiscal periods beginning after December 15, 2003.
The adoption of SFAS No. 150 is not expected to have a material impact
on the Company's consolidated financial statements.
NOTE 2 - DEVELOPMENT ACTIVITIES
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a going concern.
However, the Company incurred a net loss of $1,355,239 during the year ended
December 31, 2003, the Company's current liabilities exceeded its current assets
by $585,313 at December 31, 2003, and it had a stockholders' deficit of
$211,123. In addition, the Company continues to develop its manufacturing
facility, and has not generated significant revenues from its planned principal
operations. Those factors create an uncertainty about the Company's ability to
continue as a going concern.
As of December 31, 2003, the Company has obtained non-interest bearing
loans from the local PRC government of approximately $1,183,000 on favorable
repayment terms. In March 2004, the Company initiated a reverse merger
transaction with a publicly held shell company in the United States. During the
next 12 months, if the Company cannot generate sufficient working capital from
product sales to operate its business, the Company will sell debt or equity
securities (See Note 16). As the Company is still in the development stage,
there are no assurances that the Company will obtain funds sufficient to
continue its operations during the next 12 months.
59
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories consisted of the following at December 31:
2003 2002
-------- --------
Raw materials ................ $ 23,497 $ 2,295
Work in progress ............. 111,390 4,000
Finished goods ............... 314 --
-------- --------
$135,201 $ 6,295
======== ========
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31:
2003 2002
-------- --------
Advances ..................... $ 66,002 $ --
Deposits ..................... 31,644 6,433
VAT receivable ............... 7,127 --
Prepaid expenses ............. 5,038 --
-------- --------
$109,811 $ 6,433
======== ========
Advances consisted of petty cash and travel advances to our employees
for business purposes, and the prepayment for expenses associated with the
reverse merger transaction in the United States (See Note 16).
Deposits consisted of various deposits for raw materials, utilities,
telecommunications and insurance.
VAT receivable consisted of the balance of input VAT that is greater
than output VAT as of December 31, 2003.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
31:
2003 2002
----------- -----------
Buildings ...................... $ 1,045,599 $ --
Machinery and equipment ........ 312,784 3,850
Autos .......................... 97,485 56,247
Construction in progress ....... 45,108 2,500
Office equipment ............... 11,640 1,351
----------- -----------
1,512,616 63,948
Less: accumulated depreciation . (35,468) (305)
----------- -----------
$ 1,477,148 $ 63,643
=========== ===========
Depreciation expense for the year ended December 31, 2003 and for the
period from June 5, 2002 (Inception) to December 31, 2002 was $35,163 and $305,
respectively.
NOTE 6 - LAND USE RIGHTS
Private ownership of land is not allowed in the PRC. Rather, entities
acquire the right to use the land for a designated term. In accordance with an
agreement signed by the local government in Zoucheng City, Shandong
60
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Province, PRC, and KIWA-SD, the land underlying the Company's manufacturing
facility was assigned to KIWA-SD for up to a 10-year period free of land use
costs. In the event KIWA-SD becomes profitable, it will have the option to
acquire the land use rights for a period up to 50 years. In accordance with the
agreement, the consideration to acquire the land use rights will not exceed RMB
8.0 million (approximately $966,569 at the exchange rate of RMB 8.3 = $1.00).
Such land use rights cannot be mortgaged or resold without full payment of the
above consideration. As of December 31, 2003, KIWA-SD has not exercised its
option to acquire any land use rights.
NOTE 7 - SHORT-TERM LOANS
As of December 31, 2003, the short-term loans consisted of RMB bank
loans secured by a US Dollar deposit of $300,000, maturing on various dates
through June 2004, with interest rates ranging from 5.04% to 6.9%, per annum.
NOTE 8 - CONVERTIBLE NOTE PAYABLE TO RELATED PARTY
The Company obtained an unsecured loan of $100,000 from China Star
Investment Group ("China Star"), a company which is 10% owned by a major
stockholder of the Company. China Star has the right to convert the note into
shares of the Company's common stock based on an agreed-upon conversion price of
$0.25 per share at any time after the Company completes the reverse merger
transaction in the United States (See Note 16) and prior to the repayment date.
The note matures on October 20, 2004 and bears interest at 12% per annum,
payable on the maturity date of the note or the date China Star exercises its
conversion right. In March 2004, China Star waived its rights to convert the
loan into shares of the Company's common stock.
NOTE 9 - ADVANCES TO AND FROM RELATED PARTY
The Company has participated in additional transactions with China
Star. The balance due from China Star at December 31, 2003 of $30,574 results
from unsecured, non-interest bearing cash advances which are due on demand. The
balance due to China Star at December 31, 2002 of $26,902 was mainly related to
pre-operating expenses that China Star paid on behalf of the Company before it
was incorporated in the PRC.
NOTE 10 - LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at December 31:
2003 2002
---------- ----------
Unsecured note payable to the local PRC
government, non-interest bearing,
becoming due within three years from
KIWA-SD's first profitable year on a
formula basis, interest has not been
imputed due to the undeterminable
repayment date ................................. $1,063,226 $ 120,814
Unsecured note payable to the local PRC
government, non-interest bearing, 50%
of the loan balance becomes due in
October 2004. Thereafter, the remaining
balance is due on demand, interest has
not been imputed due to the
undeterminable repayment date .................. 120,821 --
Note payable to a bank, payable in monthly
installments of $735 secured by an
automobile, bearing an interest rate
of 5.32% per annum, and maturing in
October 2007 ................................... 30,536 37,528
Note payable to a bank, payable in monthly
installments of $425, secured by an
automobile, bearing an interest rate
of 5.02% per annum, and maturing in
March 2008 ..................................... 21,673 --
---------- ----------
$1,236,256 $ 158,342
========== ==========
61
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of notes payable as of December 31, 2003, are as follows:
Years Ending December 31,
2004 ................................... $ 133,298
2005 ................................... 12,879
2006 ................................... 13,303
2007 ................................... 12,276
2008 ................................... 1,274
Thereafter ............................. 1,063,226
----------
$1,236,256
NOTE 11 - LEASE COMMITMENTS
The Company leases an office facility under an operating lease expiring
in May 2004 with an aggregate monthly lease payment of approximately $2,880.
Rent expense under the operating lease for the year ended December 31, 2003 was
$27,570. At December 31, 2003, the Company's future minimum lease payments
required under the operating lease is $12,551 for the year ending December 31,
2004.
NOTE 12 - TAXATION
In accordance with the relevant tax laws in the PRC, KIWA-SD would
normally be subject to a corporate income tax rate of 30% on its taxable income.
However, in accordance with the relevant tax laws in the PRC, KIWA-SD is exempt
from corporate income taxes for its first two profit making years and is
entitled to a 50% tax reduction for the succeeding three years. KIWA-SD has not
provided for any corporate income taxes since it has no taxable income for the
year ended 2003 and the period from June 5, 2002 (inception) to December 31,
2002.
In accordance with the relevant tax laws in the BVI, KIWA, as an
International Business Company, is exempt from income taxes.
NOTE 13 - COMMON STOCK ISSUED FOR SERVICES
On December 31, 2003, the Company issued the following common stock in
exchange for consulting services provided by our various consultants and
directors as follows:
AMOUNTS
NUMBER OF -----------------------
SHARES ISSUED TO SHARES CONSULTANTS DIRECTORS
- ---------------- ---------- ---------- ----------
InvestLink (China) Limited (formerly
known as Peace Land Venture Ltd.)
for services in corporate and
product development ................... 1,000,000 $ 250,000 $ --
Guisheng Chen, Director, for
services in controlling product
formulas and guiding technology
development ........................... 750,000 -- 187,500
Dejun Zou, Director, for services
in fundraising with the People's
Republic of China government
agents ................................ 500,000 -- 125,000
Times Crossword Investment Ltd., for
services in fundraising ............... 500,000 125,000 --
62
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lianjun Luo, Director, for services
in accounting and finance
management ............................ 50,000 -- 12,500
Bin Qu, for services in research and
development ........................... 50,000 12,500 --
Nian James Zhan, for services in
strategic business development ........ 50,000 12,500 --
Yunlong Zhang, for services in
marketing and distribution channel
development ........................... 50,000 12,500 --
Yuhong Pang, for services in product
and technology development ............ 50,000 12,500 --
---------- ---------- ----------
3,000,000 $ 425,000 $ 325,000
========== ========== ==========
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company has accounted for the
consulting services performed based on the fair market value of the Company's
common stock at the date of their issuance. Management has estimated the fair
market value of the Company's common stock as of December 31, 2003 to be $0.25
per share. Management's estimate is based upon the conversion price option of
the convertible loan agreement entered into in January 2004 with a non-US
investor (See Note 16). For the year ended December 31, 2003, the Company
charged to expense a total of $425,000 associated with these consulting
agreements.
On December 31, 2003, the Company's Board of Directors approved a
director's compensation arrangement for certain directors who performed services
on behalf of the Company during 2003. The Company issued 1,300,000 shares of
common stock to the directors for such services. The value of such services has
been determined as set forth in the preceding paragraph. Directors' compensation
expense for the year ended December 31, 2003 was to $325,000.
NOTE 14 - MAJOR CUSTOMERS AND SUPPLIERS
Two customers accounted for 66% and 34% of the Company's net sales for
the year ended December 31, 2003.
Four suppliers accounted for 23%, 16%, 15% and 13%, respectively, of
the Company's net purchases for the year ended December 31, 2003.
NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year ended December 31, 2003 and the period from
June 5, 2002 (inception) to December 31, 2002 was as follows:
2003 2002
------ ------
Interest ....................... $8,181 $ 340
Income taxes ................... -- --
The Company issued common stock for consulting services and directors'
compensation of $425,000 and $325,000, respectively, during the year ended
December 31, 2003.
63
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
CONVERTIBLE LOAN AGREEMENTS
In January and March 2004, KIWA entered into two convertible loan
agreements with two individual non-US investors in the amount of US $500,000 and
$200,000, respectively, each loan bearing an interest rate of 12% per annum. The
principal and interest payments on the January 2004 loan are due in September
2004, and the principal and interest payments due on the March 2004 loan are due
in June 2004. Prior to the respective maturity dates, both lenders were offered
an option to convert the loan amounts into common stock at a conversion price of
US $0.25 per share.
REVERSE MERGER TRANSACTION
In March 2004, Kiwa Bio-Tech Products Group Corporation ("KBPGC")
(formerly Tintic Gold Mining Company ("TTGM")) issued 7,722,919 shares of common
stock to the shareholders of KIWA in exchange for all the outstanding shares of
KIWA. In connection with the transaction, TTGM changed its name to Kiwa Bio-Tech
Products Group Corporation. For accounting purposes this transaction was treated
as an acquisition of KBPGC and a recapitalization of KIWA and its wholly owned
subsidiary, KIWA-SD. KIWA is considered the accounting acquirer, and KBPGC the
legal acquirer.
SUBSCRIPTION AGREEMENT
On April 6, 2004, KBPGC signed a subscription agreement with a non-US
investor to issue 6,000,000 shares of the Company's restricted common stock, at
price per share of $0.40, for gross proceeds of $2,400,000. The transaction was
expected to close on April 30, 2004. On April 28, 2004, the investor requested
an extension of time of 30 to 60 days to close the transaction. The Company is
considering the request and may grant an extension as the investor requested.
64
- -------------------------------------- -------------------------------------
YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO GIVE YOU
INFORMATION DIFFERENT THAN THAT
CONTAINED IN THIS PROSPECTUS. THE
SELLING STOCKHOLDERS ARE OFFERING TO
SELL SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE,
REGARDLESS OF THE TIME YOU RECEIVE 45,277,605 SHARES
THIS PROSPECTUS.
COMMON STOCK
----------------
TABLE OF CONTENTS KIWA BIO-TECH PRODUCTS
PAGE GROUP CORPORATION
Prospectus Summary...................1
Risk Factors.........................3
Use of Proceeds.....................10
Dilution............................11
Selling Stockholders................11
Equity Line of Credit...............13
Plan of Distribution................15
Directors, Executive Officers,
Promoters and Control ________________
Persons..........................16
Security Ownership of Certain
Beneficial Owners and PROSPECTUS
Management.......................17
Description of Securities...........19 ________________
Interest of Named Experts and
Counsel..........................19
Disclosure of Commission
Position of Indemnification
for Securities Act Liability.....19
Description of Business.............19
Management's Discussion and
Analysis or Plan of
Operation........................24
Description of Property.............31
Certain Relationships and
Related Transactions.............31
Market for Common Equity and AUGUST 2, 2004
Related Stockholder Matters......31
Executive Compensation..............33
How to Get More Information.........34
Financial Statements................35
Indemnification of Directors and
Officers.........................66
Other Expenses of Issuance and
Distribution.....................66
Recent Sales of Unregistered
Securities.......................66
Exhibits............................67
Undertakings........................68
- -------------------------------------- -------------------------------------
65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bylaws authorize us to indemnify, and our Certificate of
Incorporation include an indemnification provision under which we have agreed to
indemnify, to the fullest extent permitted by the Delaware General Corporation
Law, our directors and officers from and against certain claims arising from or
related to future acts or omissions as one of our directors or officers. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. We will pay all of the expenses in connection with this
offering.
Registration Fee - Securities and
Exchange Commission ...................... $ 1,434.17
Accounting Fees and Expenses ................ 8,000.00
Legal Fees and Expenses ..................... 20,000.00
Miscellaneous 2,000.00
-------------
TOTAL ....................................... $ 31,434.17
=============
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following securities in the past three years without
registering them under the Securities Act:
On June 8, 2004, Kao Ming Investment Company converted a $500,000
convertible note into 2,000,000 shares of our common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued to Tze Ming Hsu. Kao
Ming Investment Company is an unrelated party located outside the United States.
On June 8, 2004, JZU HSIANG Trading Co. Ltd converted a $200,000
convertible note into 800,000 shares of our common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued to Sue-Chen Wang,
Wen-Jen Lee, Wai Sun Chan and Zheng Wang. JZU HSIANG Trading Co. Ltd is an
unrelated party located outside the United States.
On May 24, 2004, in connection with our engagement of Cinapsys, Inc.
for investor relations services, we agreed to issue a one-time stock payment of
75,000 shares or our common stock at an agreed upon value of $0.45 per share,
the closing price on May 24, 2004, for an aggregate value of $33,750. We have
agreed with Cinapsys, Inc. to issue the stock at the end of the engagement.
On April 12, 2004, the Company entered into an agreement with China
Agricultural University to acquire patent no. ZL 93101635.5 entitled "Highly
Effective Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration is approximately $720,612, of which $30,204
was paid at signing of the agreement and an additional $30,204 will be paid
within five days of the completion of the issuance of a notice regarding the
patent
66
right holder alternation registration by the PRC Patent Bureau. In addition, the
Company agreed to issue 1,000,000 shares of common stock at an agreed-upon value
of $0.63 per share, the fair market value on April 12, 2004 (aggregate value
$630,000) within two months of the completion of the issuance of a notice
regarding the patent right holder alternate registration by the PRC Patent
Bureau. The application for the patent right holder alternation registration is
still in process.
On March 30, 2004, the Company issued a stock option to a consultant to
purchase 300,000 shares of common stock exercisable at $0.20 per share for ten
years. The fair value of this option was determined to be approximately $0.57
per share pursuant to the Black-Scholes option pricing model.
Effective March 11, 2004, the Company issued a warrant to its financial
advisor to purchase 1,747,000 shares of common stock exercisable at $0.20 per
share for a term of six years. The fair value of this warrant was determined to
be approximately $0.54 per share pursuant to the Black-Scholes option-pricing
model.
Pursuant to that certain Agreement and Plan of Merger, dated March 11,
2004, in exchange for 100% of the issued and outstanding shares of Kiwa Bio-Tech
Products Group Limited, the Kiwa Bio-Tech Products Group Limited shareholders
were issued 30,891,676 shares of Tintic's common stock.
Stock issuances. In December 2003, the Company issued 228,304 shares of
common stock for services rendered valued at approximately $5,708 or $.025 per
share.
In February 2003, the Company issued 2,146,444 shares of common stock
to members of the board of directors, the Company's legal counsel and
stockholders for services rendered valued at approximately $53,661, or $.025 per
share.
In December 2002, the Company issued 536,612 shares of common stock for
services rendered valued at approximately $23,477 or $.04375 per share.
In December 2001, the Company issued 200,024 shares of common stock for
services rendered valued at approximately $15,000 or $.075 per share.
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act, and Regulation D promulgated under the Securities Act. In each
instance, the purchaser had access to sufficient information regarding our
company so as to make an informed investment decision. More specifically, we had
a reasonable basis to believe that each purchaser was an "accredited investor"
as defined in Regulation D of the Securities Act and otherwise had the requisite
sophistication to make an investment in our securities.
Item 27. EXHIBITS
The following exhibits are included as part of this Form SB-2.
3.1 Certificate of Incorporation, effective as of July 21, 2004.
3.2 Bylaws, effective as of July 22, 2004.
5.1 Opinion and Consent of Stubbs Alderton & Markiles, LLP.
10.1 Standby Equity Distribution Agreement, dated July 6, 2004, between
Cornell Capital Partners, LP and Kiwa Bio-Tech Products Group
Corporation.
10.2 Placement Agent Agreement, dated July 6, 2004, between Newbridge
Securities Corporation and Kiwa Bio-Tech Products Group Corporation.
67
10.3 Registration Rights Agreement, dated July 6, 2004, between Cornell
Capital Partners, LP and Kiwa Bio-Tech Products Group Corporation.
10.4 Warrant Purchase Agreement, dated March 11, 2004, issued to Westpark
Capital, Inc. (incorporated herein by reference to our Quarterly Report
on Form 10-QSB filed May 20, 2004).
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stubbs Alderton & Markiles, LLP (see Exhibit 5.1).
Item 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and notwithstanding the forgoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form
of prospects filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time as the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the City of
Industry, State of California, on August 2, 2004.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
/S/ WEI LI
--------------------------------
Wei Li
Chief Executive Officer
/S/ LIAN-JUN LUO
--------------------------------
Lian-jun Luo
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE DATE TITLE
/S/ WEI LI. August 2, 2004 Chief Executive Officer and Chairman
- -------------------- of the Board
Wei Li
/S/ LIAN-JUN LUO August 2, 2004 Chief Financial Officer and Director
- --------------------
Lian-jun Luo
/S/ JAMES NIAN ZHAN August 2, 2004 Secretary and Director
- --------------------
James Nian Zhan
/S/ DA-CHANG JU August 2, 2004 Director
- --------------------
Da-chang Ju
/S/ YUN-LONG ZHANG August 2, 2004 Director
- --------------------
Yun-long Zhang
69
EXHIBITS INDEX
The following exhibits are included as part of this Form SB-2.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Certificate of Incorporation, effective as of July 21, 2004.
3.2 Bylaws, effective as of July 22, 2004.
5.1 Opinion and Consent of Stubbs Alderton & Markiles, LLP.
10.1 Standby Equity Distribution Agreement, dated July 6, 2004,
between Cornell Capital Partners, LP and Kiwa Bio-Tech
Products Group Corporation.
10.2 Placement Agent Agreement, dated July 6, 2004, between
Newbridge Securities Corporation and Kiwa Bio-Tech Products
Group Corporation.
10.3 Registration Rights Agreement, dated July 6, 2004, between
Cornell Capital Partners, LP and Kiwa Bio-Tech Products Group
Corporation.
10.4 Warrant Purchase Agreement, dated March 11, 2004, issued to
Westpark Capital, Inc. (incorporated herein by reference to
our Quarterly Report on Form 10-QSB filed May 20, 2004).
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stubbs Alderton & Markiles, LLP (see Exhibit 5.1).
70