KIWA BIO-TECH PRODUCTS GROUP CORPORATION This Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 contains "forward-looking" statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, including statements that include the words "believes," "expects," "anticipates," or similar expressions. These forward-looking statements include, among others, statements concerning our expectations regarding our working capital requirements, financing requirements, business, growth prospects, competition and results of operations, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements contained herein. Overview
The Company took its present corporate form inMarch 2004 when shareholders ofKiwa Bio-Tech Products Group Ltd. ("Kiwa BVI"), a company originally organized under the laws of theBritish Virgin Islands onJune 5, 2002 andTintic Gold Mining Company ("Tintic"), a corporation originally incorporated in the state ofUtah onJune 14, 1933 to perform mining operations inUtah , entered into a share exchange transaction. The share exchange transaction left the shareholders of Kiwa BVI owning a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic. For accounting purposes this transaction was treated as an acquisition of Tintic by Kiwa BVI in the form of a reverse triangular merger and a recapitalization of Kiwa BVI and its wholly owned subsidiary,Kiwa Bio-Tech Products (Shandong) Co., Ltd. ("Kiwa Shandong"). OnJuly 21, 2004 , we completed our reincorporation in theState of Delaware . OnMarch 8, 2017 , we completed our reincorporation in theState of Nevada . The Company develops, manufactures, distributes and markets innovative, cost-effective and environmentally safe bio-technological products for agricultural use. Our products are designed to enhance the quality of human life by increasing the value, quality and productivity of crops and decreasing the negative environmental impact of chemicals and other wastes. The Company currently mainly operates its business throughKiwa Bio-Tech (Yangling) Co., Ltd. ("Kiwa Yangling"), which incorporated inMarch 2018 ,Kiwa Bio-Tech Products (Hebei) Co., Ltd. ("Kiwa Hebei"), which was incorporated inChina inDecember 2016 , andThe Institute of Kiwa-Yangling Ecological Agriculture andEnvironment Research Co. , Ltd. ("Kiwa Institute "), which incorporated inMarch 2018 . OnOctober 21, 2019 , the Company transferred all of its right, title and interest inKiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa Asia),Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. ("Kiwa Beijing"),Kiwa Bio-Tech Products (Shenzhen) Co., Ltd. ("Kiwa Shenzhen"), andKiwa Bio-Tech Products (Shenzhen) Co., Ltd. Xian Branch , ("Kiwa Xian"), to theHong Kong Sano Group Co., Ltd. for a consideration ofHKD 17,000,000 equivalent of US$2,169,862 . Kiwa Asia, KiwaShenzhen , Kiwa Beijing, andKiwa Xian has transferred all of their bio-technological products business toKiwa Yangling , the Company conduct the same business of bio-technological products before and after the disposal of these entities.. These disposed subsidiaries did not operate or generate any revenue in 2019. This restructuring did not constitute a strategic shift that will have a major effect on the Company's operations and financial results. Therefore, the results of operations for Kiwa Asia, Kiwa Shenzhen, Kiwa Beijing, andKiwa Xian were not reported as discontinued operations under the guidance of Accounting Standards Codification ("ASC") 205. The disposal transactions resulted in loss of approximately$3.5 million . 10
Principal Factors Affecting Our Financial Performance
We believe that the following factors could affect our financial performance:
? Change in the Chinese Government Policy on agricultural industry. The Chinese
Government is continuously to promote green environment and implement quality
standards and environmentally sensitive policies in the Agricultural industry.
Below is a list of government policies issued by the Chinese Government to
promote green environment and these policies are either directly or indirectly
to encourage the end users of the bio-fertilizer to use more organic related
products. Unfavorable changes to these policies could affect demand of our
products that we produce and could materially and adversely affect the results
of operations. Although we have generally benefited from these policies by
using our bio-fertilizer to enhances the capacity of plants to transform
inorganic materials to organic products, to boost overall plant health and
productivity and not to deteriorate landfall soil.
? In
tax-exempt value-added taxes on all organically fertilizer related products
effectively from
? In
fasten the agricultural modernization process.
? In
further deterioration of landfall soil action plan.
? In
promote agricultural structural reform on accelerating the cultivation in the
agricultural development.
? In
2017-02 to carry out replacement of chemical bio-fertilizers by organically
bio-fertilizers action plan on vegetables, fruits and teas planting.
? In
to implementing five major action plans on agriculture green development with
an action plan for replacing chemical bio-fertilizers with organically
bio-fertilizers on vegetables, fruits and teas planting under action plan No.
2-2.
? In
meeting, the Minister of the Agriculture and Rural Affairs has pronoun that
the Chinese government will continue to promote green environment, to ensure
food safety and food qualify for the people in the PRC, and to provide more
education and training cause to the farmer in the Agriculture industry. Follow
up with the second meeting, in
process of setting up some government grants to these companies or
individuals, including but not limited, organic fertilizer production
companies, organic fertilizer raw materials (livestock and poultry excrement)
storage and transportation companies, users of organic fertilizer, and users
of organic fertilizer production machinery.
? Innovation Efforts. We strive to produce the most technically and
scientifically advanced products for our customers and maintained close
relationships with institutes in the PRC.
11
? In March 2018 , Kiwa Bio-Tech has established a Research Institute of
various Universities including the
University,
KETS technology in the next thirty years. In comparison to our existing
technology, Ecology Technological Sustainability ("KETS") technology is
comprised of microorganisms with a larger scale of micro-flora. The
micro-flora could significantly increase the beneficial microorganism in the
soil that enhances the yield of the plant crops and prevents soil ecological
problems. The newly upgraded technology will be applied to the main crop
planting areas and presently-polluted arable areas for soil restoration.
On
obtain land use rights to construct a new manufacturing facility to help meet
the growing demand in
agreed to offer Kiwa Bio-Tech approximately US$432,975 (RMB 3,000,000 ) in
incentives and provide tax preferences for the first three years of
production.
The manufacturing facility will specialize in developing and producing Kiwa
bio-fertilizers. The total facility construction area is approximately 8.77
acres, and will include fermentation and production terminals, agricultural
produce sorting facilities and storage, a research and development institute
and corresponding ancillary facilities. The construction of the manufacturing
facility is expected to be completed in 2020 and have a production capacity of
60,000 tons of Kiwa Bio-Tech's core microbes. The annual production value is
expected to be over US$65 million (approximately RMB462 million ).
? Experienced Management. Management's technical knowledge and business
relationships give us the ability to secure more sales orders with our
customers. If there were to be any significant turnover in our seniormanagement, it could deplete the institutional knowledge held by our existing
senior management team.
? Large Scale Customer Relationship. We have contracts with major customers that
are distributors of our products. Our sales efforts focus on these
distributors which place large recurring orders. For the year ended December
31, 2019, three customers accounted for 46%, 31%, and 23% of the Company's
total sales. Should we lose any large-scale customer in the future and are
unable to obtain additional customers, our revenues will suffer.
? Competition. Our competition includes a number of publicly traded companies in
the PRC and privately-held PRC-based companies that produce and sell products
similar to ours. We compete primarily on the basis of quality, technological
innovation and price. Some of our competitors have achieved greater market
penetration but with less sophisticated technological innovation than our
products as there were in the transition period from being the chemical
bio-fertilizer producers to the organically bio-fertilizer producers. We
believe that we have a better competitive advantage over them as we are the
pioneer within our markets. Some of our competitors competed within our
markets have lesser financial and other resources than us as they have
established their companies a few years behind us. If we are unable to compete
successfully in our markets, our relative market share and profits could be
reduced.
12
Results of Operations for the Years ended
The following table summarizes the results of our operations for the years endedDecember 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods. Years Ended Amount Percentage December 31, Increase Increase Statement of Operations Data: 2019 2018
(Decrease) (Decrease)
Revenues$ 40,089,457 $ 30,650,402 $ 9,439,055 31 % Cost of goods sold (30,757,460 ) (22,391,952 ) (8,365,508 ) 37 % Gross profit 9,331,997 8,258,450 1,073,547 13 % Operating expenses Provision for deferred cost of goods sold 2,411,006 - 2,411,006 100 % Research and development expense - 122,774
(122,774 ) (100 )% Selling expenses 199,664 617,387 (417,723 ) (68 )% General and administrative expenses 4,379,851 4,928,943 (549,092 ) (11 )% Loss on sale of subsidiaries 3,527,254 - 3,527,254 100 % Total operating expenses 10,517,775 5,669,104 4,848,671 86 % Operating income/(expense) (1,185,778 ) 2,589,346 (3,775,124 ) (146 )% Other income/(expense), net Change in fair value of derivative liabilities 101,765 241,312 (139,547 ) (58 )% Interest expense (3,943,751 ) (634,874 ) (3,308,877 ) 521 % Other income/(expense) 37,253 (1,185 ) 38,438 (3,244 )% Exchange gain 15,296 55,444 (40,148 ) (72 )% Total other expense (3,789,437 ) (339,303 ) (3,450,134 ) 1,017 % Income (loss) from continuing operations before income taxes (4,975,215 ) 2,250,043 (7,225,258 ) (321 )% Provision for income taxes Current (2,091,736 ) (1,906,222 ) (185,514 ) 10 % Deferred 431,655 - 431,655 100 % Income taxes (1,660,081 ) (1,906,222 ) 246,141 (13 )% Net Income (loss)$ (6,635,296 ) $ 343,821 $ (6,979,117 ) (2,030 )% Revenue Revenue increased by approximately$9.4 million or 31%, to approximately$40.1 million in the year endedDecember 31, 2019 from approximately$30.7 million in the year endedDecember 31, 2018 . More sales are achieved for most of our four product lines in quantities are due to the good quality of our products and more reputation gained in different regions of the PRC, such asHainan Province ,Guangdong Province andShaanxi Province upon establishment of our sales channel in different regions. We currently realized revenue in four major product categories of Biological Organic Fertilizer, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer. Our revenues from our major product category are summarized as follows: 13 For the year ended For the year ended December 31, 2019 December 31, 2018 Change Change (%) Biological Organic Fertilizer Sold and shipped in USD $ 16,026,941 $ 15,311,862$ 715,079 5 % Quantity sold in tons 92,229 84,139 8,090 10 % Average selling price $ 173.77 $ 181.98$ (8.21 ) (5 )% Compound Microbial Fertilizer Sold and shipped in USD $ 20,770,479 $ 13,499,578$ 7,270,901 54 % Quantity sold in tons 65,196 40,585 24,611 61 % Average selling price $ 318.59 $ 332.62$ (14.03 ) (4 )% Bio-Water Soluble Fertilizer Sold and shipped in USD $ 3,292,037 $ 1,825,752$ 1,466,285 80 % Quantity sold in tons 5,050 2,733 2,317 85 % Average selling price $ 651.89 $ 668.04$ (16.15 ) (2 )% Microbial Inoculum Fertilizer Sold and shipped in USD $ - $ 13,210$ (13,210 ) (100 )% Quantity sold in tons - 18 (18 ) (100 )% Average selling price $ - $ 733.89$ (733.89 ) (100 )% Total Sold and shipped in USD $ 40,089,457 $ 30,650,402$ 9,439,055 31 % Quantity sold in tons 162,475 127,475 35,000 27 % Average selling price $ 246.74 $ 240.44$ 6.30 3 % Average selling prices of Biological Organic Fertilizers, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer decreased by$8.21 or 5%,$14.03 or 4% and$16.15 or 2%, respectively in the year endedDecember 31, 2019 as compared with the same period of 2018. This decrease is mainly due to the fluctuation of exchange rate as Chinese Yuan depreciated againstU.S. dollars by approximately 4% for the year 2019 compares to the year 2018. Because the Chinese Government is continuously to promote green environment and implement quality standards and environmentally sensitive policies in the Agricultural industry, we expect our revenues from our innovated and highly effective products, Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer will continue to grow in a higher rate than that from Biological Organic Fertilizer. Our Compound Microbial Fertilizer, Bio-Water Soluble Fertilizer, and Microbial Inoculum Fertilizer generally have a higher effectiveness on the productivity of crops that are suitable for promoting green environment. In addition, our marketing team is expanding to the Western areas ofChina andHainan province and we expect our revenues will continue to grow in 2020. Meanwhile, we expect to continue to gain more market shares in our existing sales channel bases in the Northern and the Southern areas ofChina due to the good quality of the products and better reputation in the industry. 14 Cost of Revenue Our cost of revenues from our major product categories are summarized as follows: For the year ended For the year ended December 31, 2019 December 31, 2018 Change Change (%)
Biological Organic Fertilizer Cost of sold and shipped in USD $ 11,233,403 $ 10,470,687$ 762,716 7 % Quantity sold and shipped in tons 92,229 84,139 8,090 10 % Average unit cost $ 121.80 $ 124.45$ (2.65 ) (2 )% Compound Microbial Fertilizer Cost of sold and shipped in USD $ 17,264,806 $ 10,644,951$ 6,619,855 62 % Quantity sold and shipped in tons 65,196 40,585 24,611 61 % Average unit cost $ 264.81 $ 262.29$ 2.52 1 % Bio-Water Soluble Fertilizer Cost of sold and shipped in USD $ 2,259,251 $ 1,264,068$ 995,183 79 % Quantity sold and shipped in tons 5,050 2,733 2,317 85 % Average unit cost $ 447.38 $ 462.52$ (15.14 ) (3 )% Microbial Inoculum Fertilizer Cost of sold and shipped in USD $ - $ 12,246$ (12,246 ) (100 )% Quantity sold and shipped in tons - 18 (18 ) (100 )% Average unit cost $ - $ 680.33$ (680.33 ) (100 )% Total Cost of sold and shipped in USD $ 30,757,460 $ 22,391,952$ 8,365,508 37 % Quantity sold and shipped in tons 162,475 127,475 35,000 27 % Average unit cost $ 189.31 $ 175.66$ 13.65 8 % Cost of revenue from Biological Organic Fertilizer, Compound Microbial Fertilizer and Bio-Water Soluble Fertilizer increased by approximately$0.8 million ,$6.6 million and$1.0 million or 7%, 62% and 79% to approximately$11.2 million ,$17.3 million and$2.3 million in the year endedDecember 31, 2019 from approximately$10.5 million ,$10.6 million and$1.3 million in the year endedDecember 31, 2018 . The increase is mainly due to the total quantity of products sold increased due to the good quality of our products and more reputation gained in the agricultural industry, which offset by the fluctuation of exchange rate as Chinese Yuan depreciated againstU.S. dollars by approximately 4.4% during the year endedDecember 31, 2019 compared to the year ended December
31, 2018. Average unit cost of Biological Organic Fertilizers decreased by$2.65 or 2% in the year endedDecember 31, 2019 as compared with the same period of 2018. The decrease is mainly due to the fluctuation of exchange rate changes as Chinese Yuan depreciated againstU.S. dollars by approximately 4.4% and offset by a slightly increase in overall purchase price of the raw material. Average unit cost of Compound Microbial Fertilizer increased by$2.52 or 1% is mainly due to increase in overall purchase price of raw material. Average unit cost of Bio-Water Soluble Fertilizer decreased by$15.14 or 3% is mainly due to the RMB depreciation against USD of approximately 4.4% along with a 2.6% decrease due to we outsourced manufacturing to a third party vendor in the year endedDecember 31, 2019 compares to the year endedDecember 31, 2018 . We did not sell any Microbial Inoculum Fertilizer during the year endedDecember 31, 2019 . The company is adjusting the formula of Microbial Inoculum Fertilizer and plans to re-make the packaging and launch it in the market in August, 2020. 15 Gross Profit Our gross profit from our major product categories are summarized as follows: For the year ended For the year ended December 31, 2019 December 31, 2018 Change Change (%) Biological Organic Fertilizer Gross Profit $ 4,793,538 $ 4,841,175$ (47,637 ) (1 )% Gross Profit Percentage 30 % 32 % (2 )% (6 )% Compound Microbial Fertilizer Gross Profit $ 3,505,673 $ 2,854,627$ 651,046 23 % Gross Profit Percentage 17 % 21 % (4 )% (19 )% Bio-Water Soluble Fertilizer Gross Profit $ 1,032,786 $ 561,684$ 471,102 84 % Gross Profit Percentage 31 % 31 % - % - % Microbial Inoculum Fertilizer Gross Profit $ - $ 964$ (964 ) (100 )% Gross Profit Percentage - % 7 % (7 )% (100 )% Total Gross Profit 9,331,997 8,258,450 1,073,547 13 % Gross Profit Percentage 23 % 27 % (4 )% (15 )% Gross profit percentage for Biological Organic Fertilizer decreased from 32% for the year endedDecember 31, 2018 to 30% for the year endedDecember 31, 2019 mainly due to the decrease in average unit cost less than the decrease in average selling price of our products as discussed above. Gross profit percentage for Compound Microbial decreased from 21% for the year endedDecember 31, 2018 to 17% for the year endedDecember 31, 2019 mainly due to the increase in average unit cost was less than the decrease in average selling price of our products as discussed above.
Gross profit percentage for Bio-Water Soluble Fertilizer remains unchanged as
31% for year ended
Gross profit percentage for Microbial Inoculum Fertilizer was 7% for the year
ended
Provision for Deferred Cost of Goods Sold
Provision on deferred cost of goods sold was$2.4 million for the year endedDecember 31, 2019 , increased by approximately$2.4 million or 100% from nil for the year endedDecember 31, 2018 . The increase in provision on deferred cost of goods sold is made based on historical collection experience on related accounts receivable and realizability of deferred revenue. Because part of the shipments to several clients, for which revenue have already been deferred, have been assessed to be uncollectible,$2.4 million of provision for deferred cost of goods sold were made during the year endedDecember 31, 2019 .
Research and Development Expenses
Research and development expenses was$0 for the year endedDecember 31, 2019 , decreased by approximately$123,000 or 100% from approximately$123,000 (RMB 801,630 ) for the year endedDecember 31, 2018 . OnNovember 20, 2015 , the Company signed a strategic cooperation agreement (the "Agreement") withChina Academy of Agricultural Science ("CAAS")'sInstitute of Agricultural Resources & Regional Planning ("IARRP") andInstitute of Agricultural Economy & Development ("IAED"). Pursuant to the Agreement, the Company will form a strategic partnership with the two institutes and establish an "International Cooperation Platform for Internet and Safe Agricultural Products". To fund the cooperation platform's R&D activities, the Company will provideRMB 1 million (approximately$148,000 ) per year to the Spatial Agriculture Planning Method & Applications Innovation Team that belongs to the Institutes. The term of the Agreement is for three years beginningNovember 20, 2015 and has expired onNovember 19, 2018 . We did not have such expenses during the year endedDecember 31, 2019 . 16 Selling Expenses Selling expenses include salaries of sales personnel, sales commission, travel and entertainment as well as freight out expenses. Selling expenses for the years endedDecember 31, 2019 and 2018 were approximately$200,000 and$617,000 , respectively. The decrease in selling expenses is because we were in the position of integrating and closing our offices from different locations and consolidated our bio-technological products business toKiwa Yangling . The decrease in selling expenses is mainly due to a decrease of approximately$273,000 of sales personnel salary, a decrease of office, insurance, travel, entertainment expenses and other selling expenses of approximately$118,000 , and a decrease of freight out and shipping expenses as our customers required to pay for its own shipping costs in 2019 of approximately$50,000 , offset by an increase of approximately$23,000 advertising expenses.
General and Administrative Expenses
G&A expenses include professional fees, depreciation and amortization,
insurance, salaries, employee benefits, travel, auto expense, meal and
entertainment, rent, office expense and telephone expense and other
miscellaneous G&A expenses. General and administrative ("G&A") expenses
decreased by approximately $0.5 million or 11% from approximately $4.9 million
in the year ended December 31, 2018 to approximately $4.4 million in the same
period in 2019. The decrease in G&A expenses is because we were in the position
of integrating and closing our offices from different location and consolidated
our bio-technological products business to Kiwa Yangling . The decrease in G&A
expenses is mainly due to a decrease of approximately $783,000 salaries expense
and employee benefits, a decrease of approximately $258,000 rent expense and
related utilities and management fees, and a decrease of approximately $154,000
consulting and professional fees. This decrease is offset by an increase of
approximately $410,000 of meals and entertainment, travel, office expense, and
other G&A expenses, and an increase of approximately $235,000 bad debt expenses
according to the company policy of allowance for doubtful accounts.
Loss on Sales of Subsidiaries
We were in the position of integrating and closing our offices from different
locations and consolidated our bio-technological products business to Kiwa
Yangling as we deemed restructuring our offices into our headquarters is the
best course for the Company. On October 21, 2019 , we transferred all of our
right, title and interest in Kiwa Bio-Tech Asia Holdings (Shenzhen) Ltd. (Kiwa
Asia ), Kiwa Baiao Bio-Tech (Beijing) Co., Ltd. ("Kiwa Beijing"), Kiwa Bio-Tech
Products (Shenzhen) Co., Ltd. ("Kiwa Shenzhen"), and Kiwa Bio-Tech Products
(Shenzhen) Co., Ltd. Xian Branch Company , ("Kiwa Xian"), to the Hong Kong Sano
Group Co., Ltd. for the HKD 17,000,000 equivalent of US $2,169,862 , which
resulted in a loss of $3,527,254 .
Interest Expense
Net interest expense was $3,943,751 and $634,874 for the years ended December
31, 2019 and 2018, respectively, representing an increase of $3,308,877 or 521%.
Interest expense included accrued interest on convertible note and other note
payable, and the amortization of the convertible note discount, and the issuance
cost of the convertible note for the year ended December 31, 2019 and 2018. The
increase in interest expenses is mainly attributed to the six 12% convertible
notes issued during the year ended December 31, 2019 where we did not have these
in the year ended December 31, 2018 .
Provision for income taxes
Provision for income taxes was $1,660,081 and $1,906,222 for the years ended
December 31, 2019 and 2018, respectively, representing a decrease of $246,141 or
13%. Our profitable PRC subsidiaries incurred more of taxable income in 2019 as
compared to the same period in 2018 offset by the deferred income tax benefits
resulted from the temporary difference of accrued expenses between book basis
and tax basis.
Net Income
During the fiscal year 2019, net loss was $6,635,296 , compared with a net income
of $343,821 or the same period of 2018, representing a decrease of $6,979,117 or
2,030%. Such change was the result of the combination of the changes as
discussed above.
17
Critical Accounting Policies and Estimates
We prepared our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. In addition, you should refer to our accompanying consolidated balance sheets as ofDecember 31, 2019 , and the consolidated statements of operations and comprehensive income, and cash flows for the year endedDecember 31, 2019 , and the related notes thereto, for further discussion of our accounting policies. Revenue Recognition
OnJanuary 1, 2018 , the Company adopted Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective method for contracts that were not completed as ofJanuary 1, 2018 . We did not result in an adjustment to the retained earnings upon adoption of this new guidance as the Company's revenue was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance obligations. The core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company's revenue streams are recognized at a point in time. The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition. The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.
The Company continues to derive its revenues from sales contracts with its customers with revenues being recognized upon delivery of products. Persuasive evidence of an arrangement is demonstrated via sales contract and invoice; and the sales price to the customer is fixed upon acceptance of the sales contract and there is no separate sales rebate, discount, or volume incentive. The Company recognizes revenue when title and ownership of the goods are transferred upon shipment to the customer by the Company to consider control of goods are transferred to its customer and collectability of payment is reasonably assured. The Company's revenues are recognized at a point in time after all performance obligations are satisfied. 18 The Company's customers are mainly agricultural cooperative company and distributors who then resell the Company's products to individual farmers. Because the crop growing cycle usually takes approximately 3 to 9 months in the agricultural industry for some of these Co-ops and distributors, will take approximately similar time frame of 3 to 9 months for farmers to harvest crops and to realize profits to repay the resellers. As a result, for the sales contracts with these customers, the collectability of payment is highly dependent on the successful harvest of corps and the customers' ability to collect money from farmers. The Company deemed the collectability of payment may not be reasonably assured until after the Company get paid. Collectability is a necessary condition for the contract to be accounted for to meet the criteria of the first step "identifying the contract with the customer" under the new revenue guidance in ASC 606. As a result, the sales contracts with these customers are not considered a contract under ASC 606, thus the shipments under these contracts are not recognized as revenue until all criteria for "identifying the contract with the customer" and revenue recognition are met using the five-step model.
Deferred Revenue and Deferred Cost of Goods Sold
Deferred revenue and deferred cost of goods sold result from transactions where the Company has shipped product for which all revenue recognition criteria under the five-step model have not yet been met. Though these contracts are not considered a contract under ASC 606, they are legally enforceable, and the Company has an unconditional and immediate right to payment after the Company has shipped products, therefore, the Company recognizes a receivable and a corresponding deferred revenue upon shipment. Deferred cost of goods sold related to deferred product revenues includes direct inventory costs. Once all revenue recognition criteria under the five-step model have been met, the deferred revenues and associated cost of goods sold are recognized. The Company's provision for deferred cost of goods sold is made based on historical collection experience on such related accounts receivable and realizability
of deferred revenue.
Accounts receivable and allowance for doubtful accounts
Accounts receivable represent customer accounts receivables. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience, the economic environment trends in the microbial fertilizer industry, and a review of the current status of trade accounts receivable. Management reviews its accounts receivable each reporting period to determine if the allowance for doubtful accounts is adequate. Such allowances, if any, would be recorded in the period the impairment is identified. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change. Uncollectible accounts receivables are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted.
Impairment of Long-Lived Assets
The Company's long-lived assets consist of property and equipment. The Company evaluates its investment in long-lived assets for recoverability whenever events or changes in circumstances indicate the net carrying amount may not be recoverable. It is possible that these assets could become impaired as a result of legal factors, market conditions, operational performance indicators, technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Income Taxes The Company accounts for income taxes under the provisions of FASB ASC Topic 740, "Income Tax," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation when it is more likely than not that the assets will not be recovered. 19 ASC Topic 740-10, "Accounting for Uncertainty in Income Taxes," defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs is to meet our working capital requirements, operating expenses and capital expenditure obligations.
Our business is capital intensive as we need to make advance payment to our suppliers to secure timely delivery and current market price of raw materials. Debt financing in the form of notes payable and loans from related parties have been utilized to finance our working capital requirements. As ofDecember 31, 2019 , our working capital was approximately$8.6 million , however, we had only cash of approximately$8,000 , with remaining current assets mainly composed of advance to suppliers, notes receivable, other receivables, and prepaid expenses. In addition, we sold Convertible Promissory Notes ("Notes") in the aggregate principal amount of$1,901,250 for the year ended 2019.
We may have to consider supplementing our available sources of funds for operations through the following sources:
? We will continuously seek additional equity financing to support our working
capital;
? other available sources of financing from PRC banks and other financial
institutions; and
? financial support and credit guarantee commitments from our major shareholder.
Based on the above considerations, our management is of the opinion that it does
not have sufficient funds to meet our working capital requirements and debt
obligations as they become due one year from the date of this report. Therefore,
our consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. If the Company
can't raise enough funds, it might be unable to fund our future cash requirement
on a timely basis and under acceptable terms and conditions and may not have
sufficient liquidity to maintain operations and repay our liabilities for the
next twelve months. As a result, we may be unable to implement our current plans
for expansion, repay our debt obligations or respond to competitive pressures,
any of which would have a material adverse effect on our business, prospects,
financial condition and results of operations.
The following table set forth summary of our cash flows for the periods
indicated:
Years Ended December 31,
2019 2018
Net cash provided by (used in) operating activities
(2,070,522 ) (52,992 )
Net cash provided by financing activities 1,482,086 510,707
Effect of exchange rate changes on cash 405,475
115,568
Net increase (decrease) in cash 106 (1,075,680 ) Cash, beginning of year 7,859 1,083,539 Cash, end of year$ 7,965 $ 7,859 20 Operating Activities Net cash provided by operating activities was approximately$0.2 million for the year endedDecember 31, 2019 , compared to cash used in operating activities of approximately$1.6 million for the same period in 2018. Net cash provided by operating activities for the year endedDecember 31, 2019 was primarily attributable to 1) a decrease of approximately$3.4 million accounts receivable, 2) approximately$3.5 million loss on selling those subsidiaries, 3) approximately$2.7 million provision for deferred cost of goods sold and bad debt expenses, 4) approximately$2.1 million accrued interest, penalties and financing costs of convertible note, 5) an increase of approximately$2.1 million in tax payables, 6) a decrease of approximately$1.6 million of inventories 7) approximately$1.9 million stock compensation for services, 8) a decrease of approximately$1.2 million of prepaid expenses, 9) an increase of approximately$0.3 million in other payables and accruals, 10) an increase of approximately$0.5 million in salary payable, and 11) an increase of approximately$0.5 million in advance from customers. This increase in cash was offset by 1) a net loss of approximately$6.6 million , 2) an increase in approximately$7.2 note receivables as promissory notes was received, 3) an increase of approximately$3.4 million deferred revenue, 4) a decrease of approximately$1.5 million accounts payables, and 5) an increase of approximately$0.4 million deferred tax assets, and 6) an increase approximately$0.3 million advance to suppliers. Investing Activities
Net cash used in investing activities was approximately$2.1 million in the year endedDecember 31, 2019 , which was mainly attributable to loan to third parties as they were our important strategy partners. Net cash used in investing activities was approximately$53,000 for the year endedDecember 31, 2018 .
Financing Activities Net cash provided by financing activities was approximately$1.5 million for the year endedDecember 31, 2019 and net cash provided by financing activities was approximately$0.6 million for the year endedDecember 31, 2018 . The cash inflow for the year endedDecember 31, 2019 was mainly due to an approximately$1.6 million proceed from six new issued convertible notes, and an approximately 0.2 million proceeds from sale of common stocks; offset by an approximately$0.3 million net payment to related parties.
Trends and Uncertainties in Regulation and Government Policy in
Foreign Exchange Policy Changes
China is considering allowing its currency to be freely exchangeable for other major currencies. This change will result in greater liquidity for revenues generated in Renminbi ("RMB"). We would benefit by having easier access to and greater flexibility with capital generated in and held in the form of RMB. The majority of our assets are located inChina and most of our earnings are currently generated inChina and are therefore denominated in RMB. Changes in the RMB-U.S. Dollar exchange rate will impact our reported results of operations and financial condition. In the event that RMB appreciates over the next year as compared to theU.S. Dollar, our earnings will benefit from the appreciation of the RMB. However, if we have to useU.S. Dollars to invest in our Chinese operations, we will suffer from the depreciation ofU.S. Dollars against the RMB. On the other hand, if the value of the RMB were to depreciate compared to theU.S. Dollar, then our reported earnings and financial condition would be adversely affected when converted toU.S. Dollars. From the end of 2018 throughDecember 31, 2019 , the value of the RMB depreciated by approximately 1.6% against theU.S. Dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against theU.S. Dollar in the future. It is difficult to predict how market forces or PRC orU.S. government policy may impact the exchange rate between the RMB and theU.S. Dollar in the future. The exchange rate ofU.S. Dollar against RMB onDecember 31, 2019 wasUS$1.00 =RMB 6.9860 . 21 Risk Credit Risk
Credit risk is one of the most significant risks for our business.
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness. Accounts receivable are typically unsecured and derived from revenue (or deferred revenue) earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. We manage credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, we normally require certain prepayment from the customers prior to begin production or delivery products. We identify credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management. In measuring the credit risk of our sales to our customers, we mainly reflect the "probability of default" by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development. Liquidity Risk We are also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions or related parties to obtain short-term funding to meet the liquidity shortage. Inflation Risk We are also exposed to inflation risk Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.
Coronavirus (COVID-19) Pandemic Risk
InDecember 2019 , an outbreak of a novel strain of coronavirus (COVID-19) originated inWuhan, China , and has since spread to a number of other countries, includingthe United States . OnMarch 11, 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. In addition, as of this time, several states inthe United States have declared states of emergency, and several countries around the world, includingthe United States , have taken steps to restrict travel. Our operations are principally located inChina , which has taken action to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations, or to our suppliers' or customers' supply chains and business operations, could include disruptions from the closure of supplier and manufacturer facilities, interruptions in the supply of raw materials and components, personnel absences, or restrictions on the shipment of our or our suppliers' or customers' products, any of which could have adverse ripple effects on our manufacturing output and delivery schedule. If a critical number of our employees become too ill to work, or we are not able to access a sufficient quantity of our inventory for shipment due to enforced office closures, our production ability could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse business consequences due to COVID-19, or any other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we or our suppliers and customers operate. Any of these uncertainties could have a material adverse effect on our business, financial condition or results of operations. 22 Commitments and Contingencies
See Note 22 to the Consolidated Financial Statements under Item 8 in Part II.
Off-Balance Sheet Arrangements
AtDecember 31, 2019 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements under Item 8, Part II.
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