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EX-32.1 - KIWA BIO-TECH PRODUCTS GROUP CORPv179093_ex32-1.htm
EX-31.2 - KIWA BIO-TECH PRODUCTS GROUP CORPv179093_ex31-2.htm
EX-31.1 - KIWA BIO-TECH PRODUCTS GROUP CORPv179093_ex31-1.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______

Commission file number: 000-33167

KIWA BIO-TECH PRODUCTS GROUP CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
77-0632186
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
310 N. Indian Hill Blvd., #702 Claremont, California 91711
 
 
(Address of principal executive
offices)
 
 
(626) 715-5855
 
 
(Registrant’s telephone number,
including area code)
 
Securities registered pursuant to
Section 12(b) of the Act:
 
Name of each exchange on which
registered
None
 
OTC Bulletin Board
 
Securities registered pursuant to
Section 12(g) of the Act:
(Title of Each Class)
 
 
Common Stock, $0.001 par value
 

Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

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

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing bid quotation for the registrant’s common stock, as reported on the OTC Bulletin Board quotation service, as of June 30, 2009 was approximately $560,000.
 
The number of shares of registrant’s common stock outstanding as of March 29, 2010 was 400,000,000.
 

 
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009
INDEX

 
TABLE OF CONTENTS
 
PART I
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
1
ITEM 1. BUSINESS
1
ITEM 1A. RISK FACTORS
13
ITEM 2. PROPERTY
27
ITEM 3. LEGAL PROCEEDINGS
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
28
PART II
30
ITEM 5. MARKET OF REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER PURCHASES OF EQUITY SECURITY
30
ITEM 6. SELECTED FINANCIAL DATE
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31
ITEM 8. FINANCIAL STATEMENTS
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
41
ITEM 9A(T). CONTROLS AND PROCEDURES
42
ITEM 9B. OTHER INFORMATION
44
PART III
44
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
44
ITEM 11. EXECUTIVE COMPENSATION
47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
51
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
52
PART IV
53
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
53
SIGNATURES
55

 
 

 
 

 
Part I
 
 
On one or more occasions, we may make forward-looking statements in this Annual Report on Form 10-K regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events.  Words or phrases such as “anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,” “will continue” or similar expressions identify forward-looking statements.  These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described elsewhere in this report and our other Securities and Exchange Commission filings.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

References herein to “we,” “us,” “our” or “the Company” refer to Kiwa Bio-Tech Products Group Corporation and its wholly-owned and majority-owned subsidiaries unless the context specifically states or implies otherwise.
 
Item 1.
Business
 
The Company
 
We are the result of a share exchange transaction completed in March 2004 between the shareholders of Tintic Gold Mining Company (“Tintic”), a corporation originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah, and the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company originally organized under the laws of the British Virgin Islands on June 5, 2002.  The share exchange resulted in a change of control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on a fully diluted basis and Kiwa BVI surviving as a wholly-owned subsidiary of Tintic.  Subsequent to the share exchange transaction, Tintic changed its name to Kiwa Bio-Tech Products Group Corporation.  On July 21, 2004, we completed our reincorporation in the State of Delaware.

We have established two subsidiaries in China: (1) Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”) in 2002 and (2) Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin”) in July 2006.  The following chart summarizes our organizational and ownership structure.
 
1

 

 
We develop, manufacture, distribute and market innovative, cost-effective and environmentally safe bio-technological products for agriculture.  Our main product groups are bio-fertilizer, biologically enhanced livestock feed, and animal drugs and disinfectants.  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.
 
Bio-fertilizer
 
We have developed a number of bio-fertilizer and other products for plants and are developing more.  In 2002, Kiwa BVI chartered Kiwa Shandong, a wholly-owned subsidiary organized under the laws of PRC, as its offshore fertilizer manufacturing base to capitalize on low cost, high quality manufacturing advantages available in China.  In October 2003, Kiwa Shandong completed the first phase of construction of its manufacturing facility in Shandong Province, China.  In November 2003, Kiwa Shandong began shipping its first bio-fertilizer product to the agricultural market in China.  Since then, we have been devoting ourselves to expand our market share and further upgrade our facility.

In June 2008, Kiwa Shandong received approval from the Ministry of Commerce of the PRC to sell fertilizer products of other manufacturers on a wholesale basis, including chemical fertilizers, complex fertilizers and compound fertilizers.  Based on applicable tax laws in China, Kiwa Shandong’s new business items will be exempt from value-added tax.
 
Bio-enhanced Feed
 
On July 11, 2006, we entered into a joint venture with Tianjin Challenge Feed Co., Ltd. (“Challenge Feed”) to engage in the developing, manufacturing and marketing of biologically enhanced feed for livestock.  The joint venture is through Kiwa Tianjin, our 80% subsidiary formed under the laws of PRC.  Pursuant to the joint venture agreement between the Company and Challenge Feed, we invested $480,000 in cash for our 80% equity share of Kiwa Tianjin and Challenge Feed invested machinery and equipment used in one of Kiwa Tianjin’s two bio-enhanced feed production lines with an agreed value of $120,000 for the remaining 20% equity.  We also lease another production line from Challenge Feed.

On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.  In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin.  The local court is currently reviewing the complaint and related documents filed with it.  As a result, Kiwa Tianjin could no longer use its assets including machinery and inventory in normal course of operation.  As of December 31, 2009, the Company has classified its bio-enhanced feed business through Kiwa Tianjin as discontinued operations.
 
AF-01 Anti-viral Aerosol
 
On May 8, 2006 we entered into a Technology Transfer Agreement with Jinan Kelongboao Bio-Tech Co., Ltd. (“JKB”), which will become fully effective when we have finished paying the first installment of consideration of RMB 3,000,000 according to the payment schedule in the contract.  As of December 31, 2009, the Company has paid RMB 1,000,000 for the first installment of consideration of the contract.  Pursuant to the agreement, JKB agreed to transfer its AF-01 anti-viral aerosol technology for veterinary medicine applications to the Company.  The AF-01 anti-viral aerosol technology is a broad-spectrum antiviral agent with potent inhibitory and/or viricidal effects on a variety of RNA viruses found in animals and fowls such as bird flu.  We acquired the exclusive production right and other related rights to produce an anti-viral aerosol veterinary drug.  Our hope is to develop a commercialized product in the form of a spray for applying in fowl houses and other animal holding facilities to prevent and cure virus-caused diseases.
 
2



 
In addition, pursuant to the Technology Transfer Agreement, JKB will exclusively supply to us the raw material medicine for AF-01 anti-viral aerosol, which must have an index of 200,000 zymolysis units per milliliter.  There is no alternative supplier if JKB fails to perform its supply obligations in the contract.

We are now in the process of applying for statutory licenses for the AF-01 technology.  Before marketing this product, we will need to: (1) successfully complete a safety evaluation, pre-clinical study, pharmacological and toxicological test, clinical trial report, stability test report, environmental impact report, residue depletion test and other obligatory experiments by statutory authorities; (2) pass an evaluation by the veterinary drug evaluation institution established by Administrative Department for Veterinary Medicine of State Council (the “Administrative Department”) and pass a sample quality retrial by a test institution established by the Administrative Department after the application is accepted; (3) acquire a Registration Certificate of New Veterinary Drug from the Administrative Department compliant with its drug qualification standards; (4) acquire a company or factory with GMP qualification and submit the application for Approval Number of Veterinary Drug Products in the name of the acquired company to the Administrative Department; and (5) pass an evaluation of manufacturing requirements by the Administrative Department and procure a Veterinary Drug Manufacturing License.  There can be no assurance that we can acquire such prerequisite approvals and licenses, or how much time it will take.

Such procedures are subject to Regulations on Administration of Veterinary Drugs promulgated by Decree No. 404 of the State Council of China on April 9, 2004, Measures for Registering of Veterinary Drugs and Measures for Administration of Approval Number of Veterinary Drug Products promulgated by Decrees No. 44 and No. 45 respectively of the PRC Ministry of Agriculture on November 24, 2004, and other applicable rules and regulations of China.

The Company is currently looking for GMP-qualified veterinary drug manufacturers to set up a new joint venture.
 
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. Serious diseases such as H5N1 avian flu are spreading around the world and have threatened animal husbandry.  More critically, such diseases have threatened the health and safety of humans through possible bird to human and human to human transmission.  China thus faces an urgent need to improve unit land yield, prevent and treat such diseases, and reduce pollution.  We plan to address this need through the development of our ag-biotech inputs which may resolve many of these problems in environmentally friendly ways.  To exploit this opportunity, our core strategies are as follows:

General Operational Strategy
l
Build a platform for world-class biotechnological research and development results to be commercialized into products for applications in agriculture;
l
Invest in mature technologies that will not require large amounts of research expense to develop into commercial products;
l
Utilize proprietary technology to supply ag-biotech inputs to the market at lower cost than our competitors;
l
Constructing or acquiring new production facilities, improving established facilities; to improve our manufacturing capability in China;
l
Building and strengthening our “KIWA” brand so as to become one of the leading companies in China’s “biological, safe and environment-friendly” agricultural inputs industry;
l
Establish strategic alliances for research and development, sales and distribution and customer acquisition with complimentary entities in the biological-agriculture industry; and
 
3

 

 
l
Enhance overall management systems, operational structure and corporate governance.

Sales Strategy
l
Our sales strategy involves utilizing both a direct sales force and distribution networks. Our distribution efforts are expected to include the following:
 
o
Choosing green food/organic food planting bases or other demonstrative agricultural products producers, carrying out regional field tests, fanning out from a point to an area, cultivating market network;
 
o
Leveraging government, industrial organizations (such as “China Green Food Association”) to strengthen existing sales network in rural areas, thereby reach end-users in a more cost-effective manner; cut off selling expenses occurred during middle tiers of supply chain to boost end-user’s value;
 
o
Cooperating with special agricultural production materials distributors who also help farmers resell their products; focusing on large-to-medium size wholesalers of agricultural production materials at provincial and municipal levels;
 
o
Establishing a three-level distribution network consisting of a company-centralized sales office, prefectural representative offices and direct distributors in villages and towns; and
 
o
Leveraging existing sales channels and network of affiliates’ products to save costs of building the network from scratch.

Strategy Regarding Customers
l
Our targeted customers include major agricultural companies and growers that can realize significant financial benefits from using our products including:
 
o
Provide high value-added agricultural products (such as fruits, vegetables, meat, eggs that meet the requirements of green food/organic food) to Chinese agricultural products producers;
 
o
Agricultural products producers located in China who are exporting to Japan, Korea, Europe, US and other regional markets of the world;
 
o
Chinese agricultural products producers who have generated internal needs of ag-biotech inputs to solve the problems of soil-caused diseases, anti-biotic drug tolerance, leftover and others; and
 
o
“Green” or organic growers throughout the world.

Given the global trend of customers favoring environmentally safe green food and organically grown food, producers’ needs for higher yields and better quality and increasing pressure of treating and preventing such diseases as H5N1 avian flu, we also foresee strong market needs in other international markets including East Asia and Southeast Asia.  We plan to explore these markets when the time is right.
 
Intellectual Property and Product Lines
 
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 and institutions in China.  When our liquidity position improves, we also intend to continue to acquire technologies to reduce research and development costs and shorten commercialization cycles.
 
Bio-fertilizer
 
We have developed six series of bio-fertilizer products with bacillus spp and/or photosynthetic bacteria as core ingredients.  Bacillus spp is one species of bacteria that interacts with plants and promotes biological processes.  It is highly effective for promoting plant growth, enhancing yield, improving quality and elevating resistances.  Photosynthetic bacteria are a group of green and purple bacteria.  Bacterial photosynthesis differs from green plant photosynthesis in that bacterial photosynthesis occurs in an anaerobic environment and does not produce oxygen.  Photosynthetic bacteria can help enhance the photosynthetic capacity of green plants by increasing the utilization of sunlight.  This helps keep the photosynthetic process at a vigorous level, enhance the capacity of plants to transform inorganic materials to organic products.  It greatly boosts overall plant health and the productivity of agricultural products.
 
4



 
Our bacillus bacteria based fertilizers are protected by patents.  On April 12, 2004, we entered into an agreement with China Agricultural University (“CAU”) to acquire from the university Chinese patent no. ZL 93101635.5 entitled “Highly Effective Composite Bacteria for Enhancing Yield and the Related Methodology for Manufacturing.”  The aggregate purchase consideration under the agreement was $480,411, of which $60,411 was paid in cash in 2004.  For the balance of the consideration, we issued 1,000,000 shares of our common stock to CAU in September 2004, valued at $0.42 per share (aggregate value of $420,000) based on the market value on July 20, 2004, the date when the transfer of the patent was approved.  Our photosynthetic bacteria based fertilizers are protected by trade secret.

The patent acquired from CAU covers six different species of bacillus which have been tested as bio-fertilizers to enhance yield and plant health.  The production methods of the six species are also patented.  The patent will expire on February 9, 2013.  There are no limitations under this agreement on our exclusive use of the patent.  Pursuant to our agreement with CAU, the university agreed to provide research and technology support services at no additional cost to us in the event we decide to use the patent to produce commercial products.  These research and technology support services include: (1) furnishing faculty or graduate-level researchers to help bacteria culturing, sampling, testing, trial production and production formula adjustment; (2) providing production technology and procedures to turn the products into powder form while keeping live required bacteria in the products; (3) establishing quality standards and quality control systems; (4) providing testing and research support for us to obtain necessary sale permits from the Chinese government; and (5) cooperation in developing derivative products.

We have obtained five fertilizer registration certificates from the Chinese government - four covering our bacillus bacteria fertilizer and one covering our photosynthetic bacteria fertilizer.  Some of our products contain ingredients of both photosynthesis and bacillus bacteria.  The five registration certificates are: (1) Microorganism Microbial Inoculum Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture; (2) Photosynthetic Bacteria Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture; (3) Amino Acid Foliar Fomular Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture; (4) Organic Fertilizer Registration Certificate issued by Agriculture Department of Shandong Province; and (5) Organic Matter-Decomposing Inoculants Registration Certificate issued by the PRC Ministry of Agriculture on February 16, 2008.  Protected by these five fertilizer registration certificates and five trademarks under the names of “KANGTAN” (Chinese translation name for Kiwa), “ZHIGUANGYOU,” “PUGUANGFU,” “JINWA” and “KANGGUAN,” we have developed six series of bio-fertilizer products with bacillus spp and/or photosynthetic bacteria as core ingredients.

We also obtained two fertilizer product licenses from the Vietnamese government in November 2006, one is used for leaf fertilizer and the other for organic fertilizer.
 
Bio-enhanced Feed
 
We have developed our own special concentrated and supportive feeds prescriptions, mainly for fowl, fish and pigs.  We add distilled materials from animal blood, bacillus spp or other ingredients to standard livestock feed to improve quality and function.  Our feed products can enhance digestion and inhibit disease in animals, in some circumstances functioning as a substitute for antibiotic additives.  Currently we have different feed prescriptions for fowl, fish and swine at different growth stages.
 
5



 
The Company has engaged in bio-enhanced feed business through its majority-owned subsidiary, Kiwa Tianjin.  On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed.  In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin, such assets include (1) machinery and equipment and (2) inventories.

As a result, Kiwa Tianjin could no longer use its assets including machinery and inventory in normal course of operation.  As of December 31, 2009, the Company has classified its bio-enhanced feed business through Kiwa Tianjin as discontinued operations.
 
AF-01 Anti-viral Aerosol
 
AF-01 anti-viral aerosol is a broad-spectrum antiviral agent with potent inhibitory and/or viricidal effects on a variety of RNA viruses found in fowl and other animals, initially discovered and developed by the Institute of Medicinal Biotechnology, Chinese Academy of Medical Sciences (“IMB”).  Pursuant to a related technical appraisal report certified by the PRC Ministry of Health, the current owners of technology rights are IMB and its medium test center, Jinan Kelongboao Bio-Tech Co., Ltd. (“JKB”).  IMB designated JKB as its custodian to apply and dispose all rights of the AF-01 technology on IMB’s behalf.  Pursuant to a technical appraisal report certified by the PRC Ministry of Health, no adverse effects have been found of this agent, and it is not irritating or erosive to the skin, mucous membrane or the eyes of the recipient animal after swallowing or inhalation.

On May 8, 2006, we entered into a Technology Transfer Agreement with JKB.  Pursuant to the agreement, JKB agreed to transfer to us its AF-01 anti-viral aerosol technology for veterinary medicine applications.  The AF-01 technology, which can be used to prevent and cure virus-caused diseases by aerosol spray, is recognized by a technological achievement appraisal certificate issued by relevant administration of the Chinese government.  Under the agreement JKB will facilitate transferring of the technology by providing consulting services to us and to cooperate with us in the development of an animal drug product for the market.

We plan to develop a commercialized product in the form of spray for applying in hen houses and other animal holding facilities to prevent and cure virus-caused diseases.  Before marketing this product, we must acquire statutory licenses in accordance with the rules and regulations of the PRC government. See subsection entitled “The Company” under Business in Part I.
 
Kiwa-CAU Research and Development Center
 
In July 2006, we established a new research center with CAU through our subsidiary, Kiwa Shandong, which goes under the name, Kiwa-CAU Bio-Tech Research & Development Center (the “Kiwa-CAU R&D Center”).  Pursuant to an agreement reached between CAU and Kiwa Shandong on November 14, 2006, Kiwa Shandong agreed to contribute RMB 1 million (approximately $146,300) each year to fund research at Kiwa-CAU R&D Center.  Under the above agreement, the Kiwa-CAU R&D Center is responsible for fulfilling the overall research-and-development functions of Kiwa Shandong, including: (1) development of new technologies and new products (which will be shared by Kiwa and CAU); (2) subsequent perfection of existing product-related technologies; and (3) training quality-control personnel and technicians and technical support for marketing activities.

During fiscal 2009, Kiwa-CAU R&D Center had concentrated on the following filed of works:
1.
Screening of growth-promoting bacteria;
2.
Screening of bio-control bacteria;
3.
Screening of environmental microbiology;
4.
Studies on fermentation technology and related production process;
5.
Analysis of soil and fertilizer nutrients and fertilization program development;
6.
Organic Fertilizer Application Techniques; and
7.
Technical training and services.

6

 

 
During fiscal 2009, Kiwa-CAU R&D Center had successfully isolated forty-one strains of endophytic bacillus from plants. A number of strains had been observed to have the capability of boosting crop yield, dispelling chemical pesticide residual from soil.  These strains could be used for not only developing new biological preparation but also environmental protection preparation.
 
Market Overview
 
Modern agricultural practices largely rely on heavy use of chemical fertilizers, pesticides and veterinary drugs that can cause tremendous harm to the environment, soils and human health.  Such practices have been under increasing public scrutiny across the world, leading to increased consumer demand for agricultural practices that are more environmentally friendly.  China has only 9.26% of the world’s arable land but needs to feed over 1.3 billion people, or approximately 22.9% of the world’s population.  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 to develop environmentally friendly fertilizer, veterinary drugs and animal feed.

China’s agricultural production has steadily increased for more than 20 years due to agricultural policy reform, improved agricultural technology and recent government support programs, including price supports, export incentives, direct payment and tax incentives.  The following table shows the increase in output of major agriculture products between 1970 and 2006:
Data item
 
2006
   
2005
   
2004
   
2003
   
2002
   
2001
   
2000
   
1999
   
1990
   
1980
   
1970
 
Corn
    145,482       139,365       130,287       115,830       121,310       114,094       106,001       128,084       96,821       62,600       33,030  
Cotton
    6,746       5,714       6,324       4,860       4,916       5,324       4,417       3,829       4,508       2,707       2,277  
Early rice
    31,868       31,873       32,217       29,484       30,288       34,002       37,623       40,973       51,649       49,140       37,410  
Late rice
    34,669       34,614       32,959       31,903       35,244       41,754       41,423       48,120       50,438       36,710       26,320  
Middle rice
    116,034       114,104       113,914       99,268       109,007       101,382       108,861       109,394       89,661       44,410       39,320  
Wheat
    104,467       97,445       91,952       86,488       90,290       93,874       99,637       113,879       98,220       55,210       29,185  
 
(All in thousand tons)
 
Source: ERS-United States Department of Agriculture
 
According to Organic Products Market in China 2006, a publication issued by USDA in June 2006, China has the potential to become a world power in the organic foods industry. Home to one-fifth of the world’s population, a growing number of its Chinese consumers are making more health-conscious purchases. The country continues to attempt to increase organic export production as well as boost domestic demand. With the growth of the international market for organic products, some products in China are now being grown to international organic standards for export with the help of third-party global certification groups. Other products continue to target the domestic market with certification by local or provincial bodies. In 2003, the total turnover for the “Green Foods” market reached approximately $11.9 billion with $8.7 billion wholesale for the domestic market. An initiative by the government to promote pure foods led to development of an organic food market that continues to show growth potential. Organic farms in China are beginning to resemble Western counterparts in farming practices, certification and retail promotion.

In response to the increasingly severe deterioration in food safety, environment pollution, rural area stability and other challenges, the Chinese government attaches high importance to the problems of farmers, rural areas and agriculture. From January 1, 2006, the agricultural tax had been abolished. From 2004, the Central People’s Government of the PRC continuously issued “Number One Document” regarding rural areas of China. The latest “Number One Document” issued on January 30, 2008, contains wider-range of policies promoting sustainable development of agriculture, for example, promoting income level of billions of farmers, strengthening supervision of farm inputs and actively developing green-food and organic food. In April 2007, the State Council of the PRC promulgated the “‘Eleven-Five’ National Program on Boosting Food and Drug Safety”, calling for strengthening agricultural input quality and safety control; setting up demonstrational bases for agricultural products and food based on “recycling economy” model; speeding up building bases for Uncontaminated Food/Agricultural Products), GAP (Good Agricultural Practices), Green Food and Organic Food. In July 2007, the State Council of the PRC promulgated “Special Rules of the State Council on Strengthening the Supervision and Management of the Safety of Food and Other Products” requiring compliance of laws, administrative regulations and national compulsory standards for producers when using agricultural input; producers and dealers of export products must guarantee the compliance of importing country’s relevant standards or contractual standards; any violators will face severe punishment. These policies are in favor of our Company in the following three ways:
 
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l
The trend in government policy development is propitious to expedite more agricultural products’ producers to accept ag-biotech input in a quicker fashion;
l
Preferential policies in rural areas increase farmers’ income level, therefore they can afford to buy more of our products, thus increase our sales volume.
l
Resulting from certain changes in new policies’ procedures, we expect to receive stronger support from relevant industrial associations and government departments when promoting our products.
 
Bio-fertilizer Market
 
To increase the overall crop yield, farmers in China use vast amounts of chemical fertilizers. According to U.S. Department of Agriculture, the use of fertilizer in China rocketed from 10,863,000 tons in 1979 to 47,662,000 tons in 2005, underpinning a compound annual growth rate of 5.85%.  Together with the continuous growth of total fertilizer consumption, the way that Chinese farmers apply fertilizer is also changing.  From 1979 to 2005, the percentage of Nitrogenous fertilizer application to total amount of fertilizer consumption decreased gradually from 76% to 47%. In the meanwhile, the percentage of Phosphate fertilizer and Potash fertilizer increased steadily. Most importantly, in 1976, 100% of China’s fertilizer consumption was chemical fertilizer (including Nitrogenous fertilizer, Phosphate fertilizer and Potash fertilizer); while in 2005, the rate decreased to 73%. Other fertilizer, including bio-fertilizer has been gradually accepted by Chinese farmers. (Source: ERS-United States Department of Agriculture)

The excessive use of chemical fertilizer in China is also reflected by the China-to-U.S. rate of chemical fertilizer application.  According to data quoted from U.S. Department of Agriculture, Chinese farmers applied 2.05 times the nitrogen fertilizer and 1.8 times the phosphate fertilizer compared to their U.S. counterparts in 2005.

Use of chemical fertilizer in China is now higher than it has ever been.  This increase in use of chemical fertilizer has led to a series of severe problems including degradation of the soil structure, natural biodiversity and ecological system stability.  Promoting the use of bio-fertilizer together with chemical fertilizer is one of the solutions to solve these problems.

In the U.S. and European countries, the amount of bio-fertilizer consumption in the agricultural production accounts for over 20% of the total amount of fertilizer consumption. The output increased at the speed of 10% to 20% each year. According to the statistics, total amount of bio-fertilizer production was 1.5 million tons, total sales volume about RMB4 billion Yuan in 2001, which accounts for about 1% of total commercial fertilizer consumption. Analysis indicates that bio-fertilizer will possess about 10% of market share in 2010, which is forecasted to be about 14 million tons of market demands. Therefore, the market potential of bio-fertilizer is immense.

Our serial commercialized products, with bacillus and/or Photosynthesis Biological Catalyst as core ingredients, capitalize on this market trend and we hope to become one of the leaders in developing green technologies for productive, more sustainable agriculture in China.

Our main markets have so far been in China, mostly in Shandong (sown area 10,736,100 hectares, accounted for 6.9% of China; value of crop output RMB203,400 million Yuan, 10.4% of China in 2005), Jiangsu (sown area 7,641,200 hectares, accounted for 4.9% of China; value of crop output RMB129,110 million Yuan, 6.6% of China in 2005), Zhejiang (sown area 2,837,900 hectares, accounted for 1.8% of China; value of crop output RMB65,480 million Yuan, 3.3% of China in 2005), Hebei Provinces (sown area 8,785,500 hectares, accounted for 5.7% of China; value of crop output RMB125,800 million Yuan, 6.4% of China in 2005), Xinjiang Uygur Autonomous Region (sown area 3,731,200 hectares, accounted for 2.4%; value of crop output RMB59,580 million Yuan, 3.0% of China in 2005), and Northeast area of China all these are the primary large agricultural provinces in China. (Source: ERS-United States Department of Agriculture)

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Anti-viral Veterinary Drug Market
 
Virus-caused diseases remain the most deadly category of animal disease in clinic.  They are not only spreading quickly but also claiming a high fatality rate.  The unique nature of virus reproduction makes it difficult to find a cure for it in the laboratory.  Virus-caused diseases account for a large proportion of all animal infectious diseases; the death rate is 36.8%, the second highest among all causes, second only to bacteria.  However, in China only a very small proportion of veterinary drugs are anti-viral.  The income breakdown of the Chinese veterinary drug industry is as follows: antimicrobial agent 37%, medication additive 21%, biological products 14%, insecticide-agent 14%, health-care products 6%, environmental hygiene products 4%, and others 4%.

Virus can be divided into two categories, one group is DNA virus and other group is RNA virus.  Our planned anti-viral aerosol product is based on AF-01 technology.  It will be in the form of spray and be capable of preventing/curing various RNA virus-caused diseases in various breading farms.  Bird-flu is caused by typical RNA virus, it is the first virus caused animal disease that AF-01 will target.

In recent years, it was reported that human being could be infected by H5N1 and sometimes it could be fatal.  According to the World Health Organization (the “WHO”) to date, human cases have been reported in six countries, most of which are in Asia: Cambodia, China, Indonesia, Thailand, Turkey, and Vietnam.  The first patients in the current outbreak, which were reported from Vietnam, developed symptoms in December 2003 but were not confirmed as H5N1 infection until January 11, 2004.  Thailand reported its first cases on January 23, 2004.  The first case in Cambodia was reported on February 2, 2005.  The next country to report cases was Indonesia, which confirmed its first infection on July 21, 2005.  China’s first two cases were reported on November 16, 2005.  Confirmation of the first cases in Turkey came on January 5, 2006, followed by the first reported case in Iraq on January 30, 2006.  All human cases have coincided with outbreaks of highly pathogenic H5N1 avian influenza in poultry.  To date, Vietnam has been the most severely affected country, with more than 90 cases.

The use of appropriate antiseptics is an effective prevention method against avian influenza. As indicated by our Technical Appraisal Report (No. GuoWeiKeChengJianZi (2004) A0101) certified by the Ministry of Health of China, our planned product with bio-active glycopeptides produced by actinomycetes as the functioning element has been demonstrated to be an effective antiseptic to prevent the spread of H5N1. Furthermore, we believe this product has competitive differential compared with other existing chemical disinfectors. If we are able to complete approval procedures to develop our intended anti-viral aerosol agent product, we believe that it will have the potential to attract a significant share of the Chinese market upon launching and benefit from large government orders.
 
Competition
 
We have two different product lines: (1) bio-fertilizer and (2) veterinary disinfectants and drugs.  The market condition and competition confronting us are different and vary with respect to each of the three product lines.
 
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Bio-fertilizer
 
According to statistics, so far there are about 400 microbial fertilizer producers in China, most of which are small-scale, workshop producing enterprises with backward equipment and production processes and poor quality.  Some of the producers over-exaggerate product effectiveness, employ improper artifice and even produce fake and shoddy products, all of which has caused losses to farmers and lowered the reputation of bio-fertilizer.

Due to the unique products that we offer and the very early stage of the bio-fertilizer market in China, we believe there is limited direct competition for our products in the Chinese marketplace.  We believe that we have product differentiation and cost advantages (cost to customer) that will enable us to be more profitable than our competitors, in terms of profitability, for the following reasons, among others:
l
Highly effective in boosting crop yield and quality while being environmentally friendly;
l
Lower price point and higher return on investment to end users; and
l
Complimentary to existing use of chemical fertilizer which will help minimize switching costs for end users.

In addition, we face competition from large chemical fertilizer manufacturers in China.  These chemical fertilizer manufacturers have provided chemical fertilizers to farmers in China for more than ten years and customers are more accustomed to using their established products as compared to our products.
 
AF-01 Anti-viral Aerosol
 
Our planed AF-01 anti-viral aerosol belongs to the scope of bio-veterinary drugs.  According to the Ministry of Agriculture of PRC, approximately 1,700 veterinary drug manufacturers were awarded GMP qualifications as of December 31, 2007.  Few of these manufacturers have annual net sales of over RMB100 million; some generate more than RMB50 million each year; while most of these companies have annual net sales about RMB10 million.  In the meantime, some of the manufacturers remain small scale workshop-production level.

AF-01 anti-viral aerosol is very much different from other ordinary veterinary drugs.  First of all, it is fundamentally a biological product; and secondly it is an anti-viral biological product.  The combination of these two features has equipped AF-01 with distinct product differentiation and competitive advantage.  The income structure of Chinese veterinary drug industry is as follows: antimicrobial agent 37%, medication additive 21%, biological product 14%, insecticide-agent 14%, health-care product 6%, environmental hygiene product 4%, and others 4%. From the perspective of income structure, it can be seen that anti-viral veterinary drug holds a very small proportion and that of biological product is as low as 14% (most of them are vaccines); therefore our planned product will face limited competition once the commercialized product has been developed.

One of the most severe diseases that AF-01 anti-viral aerosol is against is avian flu.  According to the Ministry of Agriculture of PRC, there are nine Chinese companies that are developing/distributing anti-avian flu vaccine, which can be regarded as substitutes of our product. However, as one of the two ways to prevent/cure avian flu, anti-viral aerosol is different from vaccine in first these is no residues; and second there will not be any drug failure in case virus variation. Thus we believe once our commercialized product has been successfully developed, it will have a greater market potential and social value than vaccines.

Other potential competitors of our veterinary drugs product line also include some veterinary disinfector manufacturers.
 
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Raw Materials and Suppliers
 
The key raw materials used in manufacturing of our products are available from a wide variety of supply sources. Historically, we have not experienced any difficulties in procuring adequate quantities of raw materials for use in our bio-fertilizer and biologically enhanced livestock feed production. We do not have long-term agreements with our suppliers due to the availability of other numerous suppliers that have the ability to supply our required raw materials to us on fairly short notice. We typically place purchase orders when we need raw material supplies.
 
Bio-fertilizer
 
The major raw materials for our bio-fertilizer production can be divided into two categories: (1) growth media such as sodium acetate, glucose and turf for culturing bacillus spp. and (2) photosynthetic and bacillus bacteria, which are the core ingredients for our finished products. Some other main ingredients include urea, aminophenol, humus, diammonium phosphate, and dipotassium hydrogen phosphate. Prior to the completion of our bacillus manufacturing facility upgrade in Shandong, we had purchased semi-manufactured bacillus goods.

Our top two suppliers accounted for 85.7% and 6.4% of our net purchases for the fiscal year ended December 31, 2009, respectively. No other single supplier accounted for more than 10%.
 
Customers
 
Bio-fertilizer
 
With respect to bio-fertilizer, we have a total of 34 customers as of December 31, 2009, of which two customers accounted for 15.9% and 7.4% of our net sales for the fiscal year ended December 31, 2009, respectively. No other single customer accounted for more than 7% of our revenues in this product line.
 
Seasonality
 
Bio-fertilizer
 
Our operating results have been and are expected to continue to be subject to seasonal trends. This trend is dependent on numerous factors, including the markets in which we are operating in, growing seasons, climate, economic conditions and numerous other factors beyond our control. Generally, we expect the second and third quarters will be stronger than the first and fourth quarters, primarily because the second and third quarters correspond with the growing seasons in our primary markets in China. It is during those growing seasons when application of our products by our customers would be most beneficial and we therefore expect greater demand for our products during those periods. There can be no assurance that these operating patterns will occur.
 
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Bio-enhanced Feed
 
Our operating results for livestock feed products are also expected to continue to be subject to seasonal factors.  The main seasonal factors that would influence our livestock feed product line operating results include farming seasons, climate, traditional holidays, animal diseases as well as other factors that the management cannot control.  Generally speaking, our operating results in this product line in the second and third quarters are expected be better than those from the first and fourth quarters since fishponds in the first and fourth quarters are frozen and pisciculturists stop fishing by then.  Consequently they do not purchase our fish feed products during the first and fourth quarters of each year.  Our livestock feed factory does not produce fish feed during most of the first and fourth quarters.  There is no guarantee for those operating result circles will repeat themselves and management would adjust our plan in accordance with changes occurred.
 
AF-01 Anti-viral Aerosol
 
We have not identified any patterns from our AF-01 anti-viral aerosol product business, as it is still in the development stage.
 
Employees
 
We currently employ 30 full-time employees in China and 1 in the United States.  We also have 43 seasonal employees in China.  We have full-time workers of 20 and management staff of 10.
 
Regulatory Concerns
 
Our production must comply with bio-fertilizer, livestock feed production and testing procedure standards promulgated by the PRC Ministry of Agriculture or local administrative authorities.  We have complied with the applicable PRC government standard production and testing procedures.  As for AF-01 anti-viral aerosol, we are now in the process of applying for statutory licenses for the AF-01 technology in accordance with relevant regulations (See subsection entitled “The Company— AF-01 Anti-viral Aerosol” in this Item 1).
 
Environmental Matters
 
Our two manufacturing facilities, Kiwa Shandong and Kiwa Tianjin, have passed environmental impact assessment by local environmental authorities.  Photosynthesis bacteria, bacillus ssp, and actinomycetes are environmentally friendly and are not known to cause any environmental problems.
 
Legal Proceedings
 
On December 22, 2009, Tianjin Kiwa filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.

In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin, such assets include:

(1) Machinery and equipment.  Challenge Feed entered into a settlement agreement with one of its creditors, in accordance with which Challenge Feed agreed to transfer title of the machinery and equipment, which had been assigned to Kiwa Tianjin in 2006 in connection with the establishment of Kiwa Tianjin as a joint venture between the Company and Challenge Feed, to repay Challenge Feed’s debt.  Challenge Feed did not obtain Kiwa Tianjin’s consent nor inform Kiwa Tianjin of such transfer.
 
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(2) Inventories.  Kiwa Tianjin had a long standing agreement to lease Challenge Feed’s factory facilities and warehouse for storage of its inventory.  Challenge Feed has disposed Kiwa Tianjin’s inventories including raw materials, packages and finished goods stored in the factory to repay Challenge Feed’s debt without any permission from Kiwa Tianjin.

Kiwa Tianjin is seeking damages against Challenge Feed in the amount of approximately RMB 2.2 million in total.  The local court is currently reviewing the complaint and related documents filed with it.
 
Item 1A.
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.  The following risk factors and other information included in this annual report should be carefully considered.  The risks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.  If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.
 
(1) Risks Related to Our Business
 
We have not yet generated any profits and if we do not become profitable or obtain additional funding to implement our business plan our ability to continue as a going concern is in doubt.
 
Overview of the Company’s Financial Condition as of December 31, 2009
As of December 31, 2009, the Company had accumulated deficit of $16,394,930, among which, $3,714,529 and $3,632,188 were incurred during twelve months ended December 31, 2009 and 2008, respectively.

As of December 31, 2009, we had cash and cash equivalents of $28,765 and total current assets of $169,982; at the same time, we had current liabilities of $6,553,102, denoting current ratio of 0.03 and quick ratio of 0.005.  At the end of fiscal 2009, we also had long-term liabilities of $1,804,780.

On June 29, 2006, the Company entered into a securities purchase agreement with six institutional investors (the “Purchasers”) for the issuance and sale of (1) 6% secured convertible notes, due three years from the date of issuance, in the aggregate principal amount of $2,450,000, convertible into shares of the Company’s common stock (the “6% Notes”), and (2) warrants to purchase 12,250,000 shares of the Company’s common stock (the “Warrants”).  As of December 31, 2009, the outstanding principal of 6% Notes was $1,518,171.  On June 29, 2009, the 6% Notes were due.  The Company has informed the Purchasers of its inability to repay the outstanding balance on the due date.  Therefore, the 6% Notes are in default.

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 repay our liabilities, and may have to curtail or cease operations and consider a formal or informal restructuring or reorganization.

Overview of the Company’s Operating Results for the Twelve Months Ended December 31, 2009 and 2008
During twelve months ended December 31, 2009 and 2008, our sales revenue from continuing operations was $38,292 and $226,869, respectively.  The Company gross profit was $6,091 and $60,035, denoting a gross profit margin of 15.9% and 26.5%, respectively.  During fiscal year of 2009 and 2008, our loss from continuing operations was $3,388,109 and $3,425,657, respectively.  Net loss attributable to Kiwa Shareholders for both periods was $3,714,529 and $3,632,188, respectively.
 
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Overview of the Company’s Cash flow Status for the Twelve Months Ended December 31, 2009 and 2008
During fiscal year ended December 31, 2009 and 2008, our operating activities for continuing operations used net cash of $566,232 and $622,611, respectively.  We also invested $7,320 and $48,111 in purchasing property and equipment during both periods.  Although our financing activities for continuing operations provided net cash of $918,217 and $901,615 in the fiscal year of 2009 and 2008, we had cash of only $28,765 and $18,609 on December 31, 2009 and 2008, respectively.

The Company’s Ability of Raising New Finance
Continuous losses and low share price has deteriorate the Company’s ability of raising new finance.  As of December 31, 2009, the closing price of our common stock reported by on the OTC Bulletin Board was $0.003.  The market value of the Company was $1,200,000, which makes it very hard to arrange new financing on equity financing basis.  The Company’s obligations under the 6% Notes and the Warrants are secured by a first priority security interest in the Company’s intellectual property pursuant to an Intellectual Property Security Agreement with the Purchasers, and by a first priority security interest in all of the Company’s other assets pursuant to a Security Agreement with the Purchasers.  In addition, the Company’s Chief Executive Officer has pledged all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes and the Warrants.  As a result, the Company does not have assets to secure the obligations of new debt.

The 6% Notes require the Company to procure the Purchaser’s consent to take certain actions including paying dividends, repurchasing stock, incur debt, guaranty obligations, merge or restructuring the Company, or selling significant assets.  Our ability of raising new finance is limited.

Kiwa Shandong’s Ability to Continue as a Going Concern is in Doubt
Kiwa Shandong is our wholly-owned subsidiary of engaging in researching, developing, producing and marketing bio-fertilizer.  However, since its inception in 2002, Kiwa Shandong has not generated material revenue.  Moreover, Kiwa Shandong has never been profitable.  As of December 31, 2009, Kiwa Shandong has accumulated deficit of $3,263,469.

In June 2002, we entered into an agreement with Zoucheng Municipal Government granting us the use of at least 15.7 acres in Shandong Province, China at no cost for 10 years to construct a manufacturing facility.  Pursuant to relevant China laws and regulations, we had paid tenure tax on quarterly basis at the rate of approximately $1,660 per acre.  However, from January 1, 2007, China central government adopted a series of policies to strengthen land management, including doubled tenure tax to $3,320 per acre.  In February 2008, the Ministry of Land and Resources of China issued “Controlling Indexes of Construction Land Use for Industrial Projects,” which requires the building coverage should not be less than 30%.  Up to now, the current situation in Kiwa Shandong does not meet this requirement.  There is no assurance that local authority would not reduce the acreage of land granted to us to use at no cost.

On December 31, 2009, we launched a complete test on the recoverability of our long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa Shandong’s long-lived assets were impaired.  Management is assessing the usage of our long-lived assets in Kiwa Shandong; it is possible that we would dispose some of our long-lived assets in the future.

Given the tight cash flow status of the Company, we may have to curtail or cease operations and consider a formal or informal restructuring or reorganization in Kiwa Shandong.  For example, we may consider reduce the acreage of land we use in Kiwa Shandong to lower tax expenditure.
 
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Kiwa Tianjin’s Operation is Discontinued

On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.  In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin, such assets include:

(1) Machinery and equipment.  Challenge Feed entered into a settlement agreement with one of its creditors, in accordance with which Challenge Feed agreed to transfer title of the machinery and equipment, which had been assigned to Kiwa Tianjin in 2006 in connection with the establishment of Kiwa Tianjin as a joint venture between the Company and Challenge Feed, to repay Challenge Feed’s debt.  Challenge Feed did not obtain Kiwa Tianjin’s consent nor inform Kiwa Tianjin of such transfer.

(2) Inventories.  Kiwa Tianjin had a long standing agreement to lease Challenge Feed’s factory facilities and warehouse for storage of its inventory.  Challenge Feed has disposed of  Kiwa Tianjin’s inventories including raw materials, packages and finished goods stored in the factory to repay Challenge Feed’s debt without any permission from Kiwa Tianjin.

The local court is currently reviewing the complaint and related documents filed with it.

As a result, Kiwa Tianjin could no longer use its assets including machinery and inventory in normal course of operation.  As of December 31, 2009, the Company has classified its bio-enhanced feed business through Kiwa Tianjin as discontinued operations.

In Conclusion
The Company’s ability to continue as a going concern is in doubt.  We expect to continue to have operating losses for the foreseeable future as we are still in the process of exploring market, further research and product tests.  We will require additional capital to implement our business plan and continue operating.  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 or cease operations and consider a formal or informal restructuring or reorganization.

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with our financial statements for the latest seven fiscal years, 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.
 
We depend on a few customers for a significant portion of our revenue and are still in the initial stage of market development.
 
We do not have long-term contracts with any of our customers.  Generally we sign an annual distribution agreement with each customer and purchases in most cases occur on an order-by-order basis.  Relationships exist as long as there is a perceived benefit to both parties.  A decision by a major customer, whether motivated by competitive considerations, financial difficulties and economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition.

During fiscal 2009, three customers accounted for 59.2% of our net sales in bio-fertilizer product line.  During fiscal 2009, three customers accounted for 29.0% of our net sales in bio-enhanced feed product line.  The customer concentration in this production line has been increasing.  The loss of any of our significant customers would result in a material reduction in our sales and results of operations.
 
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We are still in the initial stage of market development and need more time to construct a robust customer base.  There can be no assurances that we will be able to retain these customers.  Our inability to generate new customers and retain old customers could negatively impact our business and our ability to continue as a going concern.
 
Our business is subject to seasonal fluctuations.
 
Our operating results have been and are expected to continue to be subject to seasonal trends.  This trend is dependent on numerous factors, including the markets in which we operate, growing seasons, climate, economic conditions and numerous other factors beyond our control.
 
Our operating results may fluctuate significantly, which may result in volatility or have an adverse effect on the market price of our common stock.
 
We have experienced, and expect to continue to experience, substantial variation in our net sales and operating results from quarter to quarter.  Our business is subject to seasonal fluctuations due to growing seasons in different markets.  We believe the factors that influence this variability of quarterly results include:
l
the timing and size of orders from major customers;
l
budgeting and purchasing cycles of customers;
l
the timing of enhancements to products or new products introduced by us or our competitors;
l
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;
l
fluctuations in general economic conditions;
l
the status of operating cash flow; and
l
natural disasters and contagious animal diseases.

We may also choose to reduce prices or to increase spending in response to competition or to pursue new market opportunities.  Due to fluctuations in our revenue and operating expenses, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance.  It is possible that in some future quarter or quarters our operating results will be below the expectations of securities analysts or investors.  In that case, our stock price could fluctuate significantly or decline.

From January 1, 2009 to December 31, 2009, the market close price for our common stock as quoted on the OTC Bulletin Board has ranged from a low of $0.0003 to a high of $0.008 per share.  High volatility in the market price of our common stock may result in lower prices for our common stock, making it more difficult for us to obtain equity financing on terms and conditions which are favorable to us, if at all.  We expect to continue to incur losses in the future as we develop and market our initial products.  As a result, we will be dependent on additional debt or equity financing to fund our operations.  If such financing is not available on terms which are acceptable to us, we may have to delay development of new products and/or reduce sales and marketing efforts for our existing products.  Such actions may have an adverse effect on our results of operations.  In addition, uncertainties with respect to our ability to raise additional capital would make operational planning more difficult for management.
 
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Revocation of our right to use patents or other intellectual property rights could adversely impact the growth of our business.
 
We acquired a patent in April 2004 from CAU, entitled “Highly Effective Composite Bacteria for Enhancing Yield and the Related Methodology for Manufacturing,” issued by the China Intellectual Property Bureau.  On May 8, 2006, we entered into a technology transfer agreement with JKB with respect to the technology transfer and related technical service for the AF-01 anti-viral aerosol, which will become fully effective when we have finished paying the first installment of consideration according to the payment schedule in the contract.  So far we have not yet fully paid the first installment.  If our rights under this patent and technology transfer agreement are challenged or if we default on our obligations under applicable Chinese regulatory requirements, our right to use these forms of intellectual property could be revoked and we would no longer be permitted to use them in our research, development, manufacturing and sales activities.  Such a revocation or default could have an adverse impact on the growth of our business by reducing the introduction of new products, and consequently, sales.
 
Our success depends in part on our successful development and sale of products currently in the research and development stage.
 
Some 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 stages 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 win market acceptance.  For example, before marketing of the planned veterinary drug based on AF-01 technology, there are several tests, trial, evaluation, government approval and other procedures that are required.  Our failure to successfully develop and sell new products may delay or eliminate future acquisition plans and would most likely slow our development.  Our plans to introduce additional proprietary products may not be realized as expected, if at all.

As above mentioned, the China bio-fertilizer market is still in a very early stage and is very fragmented with many potential customers, but with no single producer or small group of producers dominating the market.  To some extent, however, we also face competition from large chemical fertilizer manufacturers in China.  These chemical fertilizer manufacturers have provided chemical fertilizers to farmers in China for over twenty years and customers are more accustomed to using their established products as compared with new products.  The livestock feed industry is fully developed in China.  We are new entrants to the livestock feed industry, and our production capacity is small relative to that of the whole industry.

We plan to develop a commercialized product using AF-01 anti-viral aerosol technology.  We are now in the process of applying for prerequisite statutory licenses.  There can be no assurance that we can acquire such prerequisite approvals and licenses, or how much time it will take.

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.
 
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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.
 
The products we hope to develop based on AF-01 technology will depend on an exclusive supply relationship for raw materials.
 
Pursuant to our Technology Transfer Agreement with JKB, they will have the exclusive right to supply us the raw material medicine for AF-01 anti-viral aerosol.  Although the exclusive supply relationship may help to prevent new entrants from producing similar products, our ability to produce our products in a timely manner will depend on JKB fulfilling its supply obligation for the raw material.  If we desired to produce raw material medicine by ourselves, we would have to acquire additional technology and negotiate with JKB and IMB. There can be no assurance that we can acquire the required technology with an acceptable price.  Consequently without JKB’s cooperation and performance of its obligations, we may not be able to execute our business plan on this project, even if we successfully acquire all prerequisite certificates for producing and marketing this veterinary drug product.
 
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, key product development personnel and key scientific personnel.  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.  We maintain employment agreements with all members of management or key personnel.  Pursuant to our joint agreement with CAU, it must make available at least six R&D staff to join the Kiwa-CAU R&D Center, at least three of whom must have professor or doctorate degrees, and at least two who must have master degrees.  There can be no assurance that we will be able to retain these personnel, and it may be time-consuming and costly to recruit qualified replacement personnel.
 
We currently do not have sufficient revenues to support our business activities, expect operating losses continue, and will require additional financing which we may not be able to secure.
 
We require substantial working capital to fund our business.  In the short term, we still need to continue building out our bio-fertilizer manufacturing facility, adjust our product formula to improve product stability and optimize our product offerings, expand our sales and marketing efforts in China, expand our distribution base in China, maintain operation of Kiwa-CAU R&D Center, introduce new veterinary drug products and acquire a small or medium sized biotechnology company or a factory with GMP qualification for this new product.  In the long term, we plan to become a commercialization platform for world-class biotechnological research and development results for applications in agriculture, natural resources conservation and environment protection, launch our products in the Southeast Asia, United States and other markets, continue our introduction of new products, create formal strategic alliances with selected United States companies to co-develop and/or co-market products in the United States and China, and form an international biotechnology research center in China for the research and development of agricultural, environmental and medical applications.
 
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During fiscal year of 2009, our sales revenue decreased significantly as compared to that of 2008, at the same time we are continuing to experience losses.  We currently do not have sufficient revenues to support our business activities and we expect operating losses to continue.  We will require 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.  Further, any significant equity or debt financing will require us to give priority to holders of the 6% secured convertible notes (“6% Notes”) under the terms of a securities purchase agreement dated June 29, 2006, which may raise the difficulty level of completing a financing. (For more details regarding the 6% Notes see Note 12 to consolidated financial statements under Item 8, Part II.) If we are unable to obtain necessary financing in the amounts and on terms deemed acceptable, we will have to limit, delay, scale back or eliminate our research and development activities or future operations.  Any of the foregoing may adversely affect our business and cause us to discontinue as a going concern.
 
The risks associated with raising capital through collaborations and licensing agreements could adversely affect our business.
 
We will be required to raise additional capital to fund our operations and finance our research and development activities through collaborative and/or licensing agreements.  Under these agreements, we may be subject to various restrictive covenants which could significantly limit our operating and financial flexibility and may limit our ability to respond to changes in our business or competitive environment.  If we are unable to obtain necessary financing in the amounts and on terms deemed acceptable, we may have to limit, delay, scale back or eliminate our research and development activities or future operations.  Any of the foregoing may adversely affect our business.
 
Restrictions on currency exchange may limit our ability to effectively receive and use our revenue.
 
Since most of our future revenues may be in the form of China Renminbi, any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund our business activities outside China or to make dividend or other payments in U.S. Dollars.  Although the Chinese government introduced regulations since 1996 to allow greater convertibility of 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 Renminbi, especially with respect to foreign exchange transactions.

We may also be subject to foreign exchange risk and foreign ownership restrictions.  The Chinese government is loosening its control on foreign exchange transactions, and has steadily appreciated Renminbi relative to the U.S. dollar since July 2005.  However, there can be no assurance that this policy will continue.  More liberal foreign exchange policies will reduce our foreign exchange risk by increasing the liquidity of revenues generated in Renminbi.  Fluctuations in the exchange rate of Renminbi against the U.S. Dollar could adversely affect our results of operations by affecting our reported earnings for any given period.  In addition, foreign ownership restrictions could also impact our ability to expand our business through investment and acquisition opportunities.  If we are unable to pursue such strategic opportunities due to foreign ownership regulations, the growth of our business could be limited.
 
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Changes in China’s political, social, economic or legal systems could materially harm our business.
 
All of our manufacturing and production as well as the majority of our sales occur 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 activities 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.  Historically, our operations in China have received relatively favorable treatment from these instrumentalities as a result of the Chinese government’s policies of encouraging economic development and innovation, especially in underdeveloped regions.  However, our operations and prospects would be materially and adversely affected by a change in China’s economic policies, which could make it more difficult for us to obtain necessary approvals from governmental authorities and to obtain economic incentives from governmental authorities.  In addition, if the Chinese government elects not to honor certain contracts as a result of political change, it might be difficult to enforce these contracts against such governmental entities 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.

For example, in June 2002, we entered into an agreement with Zoucheng Municipal Government granting us the use of at least 15.7 acres in Shandong Province, China at no cost for 10 years to construct a manufacturing facility.  Pursuant to relevant China laws and regulations, we had paid tenure tax on quarterly basis at the rate of approximately $1,660 per acre.  However, from January 1, 2007, China central government adopted a series of policies to strengthen land management, including doubled tenure tax to $3,320 per acre.  In February 2008, the Ministry of Land and Resources of China issued “Controlling Indexes of Construction Land Use for Industrial Projects,” which requires the building coverage should not be less than 30%.  Up to now, the current situation in Kiwa Shandong does not meet this requirement.  The Company is also considering reduce the acreage that we leased and return part of the land to local authority to lower down taxes.
 
A slow-down in the Chinese economy may adversely affect 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.  To the extent that there is a slow-down in the Chinese economy, the agricultural industry may be adversely affected.  Consequently, the growth and profitability of our bio-fertilizer business and bio-enhanced feed business may drop down.  The financial tsunami has significantly slow down the growth of world economy.  There can be no assurance that Chinese economy and our growth and profitability will not be affected.
 
Any recurrence of SARS, avian influenza or another widespread public health problem, could adversely affect our business and results of operations.
 
A renewed outbreak of SARS, avian influenza, highly pathogenic blue-ear disease or another widespread public health problem in China, where most of our revenue is derived, could have a negative effect on our operations.  Our operations may be impacted by a number of health-related factors, including the following: (1) quarantines or closures of some of our offices and factories which would severely disrupt our operations, (2) the sickness or death of our key officers and employees, (3) a general slowdown in the Chinese economy, especially rapid decrease of stockbreeding
 
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Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations.
 
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 stages of development.  While we believe the market opportunity looks promising, we expect that the market will take several years to develop.  While it is difficult to project exactly how long it will take to develop the ag-biotechnology industry in China, we anticipate that it will take at least ten years to reach a level of development that is similar to the current state of the industry in the United States.  Successful development of the ag-biotechnology market in China depends on the following: (1) continuation of governmental and consumer trends favoring the use of products and technologies designed to create sustainable agriculture; (2) educating the Chinese agricultural community and consumers about the uses of ag-biotechnology products; and (3) 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.  While we believe that we will benefit from our first-mover advantage in a growing market, 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 intend to fund operations through sales, debt and equity financings until such time as the ag-biotechnology market in China is sufficiently developed to support our profitable operation.
 
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 several trademarks registered in China, which will be protected by the trademark laws in China for ten years and are renewable at the expiration of the initial ten-year term.  In addition, we acquired a China patent in 2004 from CAU entitled “Highly Effective Composite Bacteria for Enhancing Yield and the Related Methodology for Manufacturing,” issued by the China Intellectual Property Bureau, which has a remaining term of five years, and entered into a Technology Transfer Agreement with JKB on the technology transfer and related technical service for the AF-01 technology.

We may also file patents with the PRC Intellectual Property Bureau and/or the U.S. Patent and Trademark Office as we deem appropriate, or buy other patents such as above said anti-viral aerosol technologies.  There can be no assurance that the patents applied for will be reviewed in a timely manner, that any additional patents will be issued 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 applications that 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 our results of operations and financial condition.
 
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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 proprietary 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 and there are no assurances that we will have the resources to do so.
 
We may become involved in intellectual property litigation, the defense of which could adversely impact our business operations.
 
Currently we have one patent in China (Patent Number ZL93 101635.5 and International patent classification Number A01N 63/00), which covers six different species of bacillus which have been tested as bio-fertilizers to enhance yield and plant health as well as the production methods of the six species.  The patent will expire on February 19, 2013.  Pursuant to our Technology Transfer Agreement with JKB, we will acquire the AF-01 anti-viral aerosol technology when we have fully paid the first installment of the purchase price and other conditions to the contract have been fulfilled, such as issuance by the PRC Ministry of Agriculture of a new medicine certificate in respect of the technology.

While we have not received any allegations, complaints or threats of litigation relating to any intellectual property rights, we may, from time to time, become involved in litigation regarding patent and other intellectual property rights.  From time to time, we may receive notices from third parties of potential infringement and claims of potential infringement.  Defending these claims could be costly and time consuming and would divert the attention of management and key personnel from other business issues.  The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks.  Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements.  However, we may be unable to obtain royalty or license agreements on terms acceptable to us, or at all. In addition, third parties may attempt to appropriate the confidential information and proprietary technologies and processes used in our business, which we may be unable to prevent and which would harm the businesses and our prospects.
 
We face technical risks associated with commercializing our technology which could have a material adverse impact on our business results and operations.
 
A key to our future success is the ability to produce our planed animal flu disinfector, livestock feed and bacillus 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 be able 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.
 
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We have limited business insurance coverage.
 
We do not have any business liability insurance coverage for our operations. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
 
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.
 
 As a public company, we are subject to report our internal control structure and procedures for financial reporting in our annual reports on Form 10-K, as a requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S. Securities and Exchange Commission (the “SEC”).  The report must contain an assessment by management about the effectiveness of our internal controls over financial reporting.

Our management has concluded that our internal controls over our financial reporting are ineffective, as required by Section 404 of the U.S. Sarbanes-Oxley Act, for the fiscal year ending December 31, 2009.  Any failure to implement and maintain improvements in the controls over our financial reporting, or difficulties encountered in the implementation of any improvements in our controls, could cause us to fail to meet our reporting obligations.  Any failure to improve our internal controls to address these identified weaknesses could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.
 
(2) Risk 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.
 
Our common stock is quoted on the OTC Bulletin Board; however, trading volume is very limited.  We cannot guarantee that trading volumes to sustain a regular trading market will ever develop.  The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ’s automated quotation system.  Market prices for our common stock will be influenced by a number of factors, including but not limited to: (1) the issuance of new equity securities; (2) changes in interest rates; (3) competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; (4) variations in quarterly operating results; (5) change in financial estimates by securities analysts; (6) the depth and liquidity of the market for our common stock; (7) investor perceptions of our company and the ag-biotechnology industry generally; and (8) general economic and other conditions.
 
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The designation of our common stock as “penny stock” could impact the trading market for our common stock due to broker-dealer requirements imposed by the designation of our common stock as “penny stock.”
 
Our common stock is a “penny stock” as defined in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Securities Exchange Act of 1934, as amended, as it meets the following definitions: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange, or even if so, has a price less than $5.00 per share; and (iii) 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 as a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.

Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the Securities and Exchange Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.

Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”  Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives.  Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
 
Provisions in our charter and the corporate law of our state of incorporation could deter or prevent an acquisition or change of control.
 
Provisions of our certificate of incorporation may deter or prevent a change in control of management.  Specifically, our certificate of incorporation allows our Board of Directors to issue 20,000,000 shares of preferred stock, in one or more series and with such rights and preferences including voting rights, without further stockholder approval.  In the event that the Board of Directors designates additional series of preferred stock with rights and preferences, including super-majority voting rights, and issues such preferred stock, the preferred stock could make our acquisition by means of a tender offer, a proxy contest or otherwise, more difficult, and could also make the removal of incumbent officers and directors more difficult.  As a result, these provisions may have an anti-takeover effect.  The preferred stock authorized in our certificate of incorporation may inhibit changes of control.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law.  That section provides, with some exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or affiliate, or associate of the person, who is an “interested stockholder” for a period of three years from the date that the person became an interested stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the Board of Directors of the corporation before the person becomes an interested stockholder; (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested stockholder, excluding shares owned by persons who are both officers and directors of the corporation, and shares held by some employee stock ownership plans; or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation’s Board of Directors and by the holders of at least 66 2/3% of the corporation’s outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder.  An “interested stockholder” is defined as any person that is (a) the owner of 15% or more of the outstanding voting stock of the corporation or (b) an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether the person is an interested stockholder.
 
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These provisions could also limit the price that future investors might be willing to pay in the future for our common stock.  This could have the effect of delaying, deferring or preventing a change in control of our Company and/or a change in the members our Board of Directors.  The issuance of preferred stock could also effectively limit or dilute the voting power of our stockholders.  Accordingly, such provisions of our certificate of incorporation, as amended, may discourage or prevent an acquisition or disposition of our business that could otherwise be in the best interest of our stockholders.
 
Investors should not rely on an investment in our common stock for dividend income as 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.  Therefore, investors should not rely on an investment in our common stock if they require dividend income.  The only income in the foreseeable future such investors will receive from an investment in our common stock will come from increases in the market price of our common stock.  There can be no assurances that the market price of our common stock will increase or continue to increase, and such increases will most likely be uncertain and unpredictable.  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.
 
It may be difficult for investors to enforce a service of process or enforce liabilities against us.
 
We are incorporated in the State of Delaware, and our principal executive offices are located in the State of California.  However, substantially all our fixed assets and operations are located in the PRC.  In addition, some of our directors and officers are Chinese citizens and residents.  As a result, it may be more difficult for investors or other third parties to attach our assets in enforcement of a judgment against us or to enforce liabilities and obligations against us in certain circumstances.  It may also be difficult to enforce service of process against directors and officers in China.
 
Entering into equity or debt financings could result in dilution to existing stockholders.
 
We will be required to raise additional capital to fund our operations and finance our research and development activities through a public or private offering of debt or equity securities.  Any equity financing could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock.  Debt financings will result in interest expense and likely subject us to negative covenants that would limit our operational flexibility, and if convertible into equity, could also dilute then-existing stockholders.
 
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For example, we issued $2,450,000 of convertible notes (6% Notes) in 2006, of which $931,829 of principal have been converted into 318,398,409 shares and the balance of $1,518,171 may be converted into an estimated 1,167,823,796 shares of our common stock based on the average price of three lowest prices within 20 trading days before December 31, 2009.  We also have outstanding 6% Note Warrants to purchase 12,250,000 shares of common stock.  The conversion ratio of the 6% Notes is based on the market price of our stock at any given point in time.  Consequently, the number of shares of common stock issuable upon conversion of the outstanding 6% Notes and certain of our other outstanding convertible notes will increase if the market price of our stock declines.  Such debt financings may cause immediate and substantial dilution to our existing stockholders.
 
The shares of common stock allocated for conversion of the 6% Notes are not adequate and we are required to amend our certificate of incorporation to increase our authorized shares of common stock.  We may incur substantial costs in connection therewith.  Since the annual meeting of stockholders did not approve an proposed amendment to our certificate of incorporation, we cannot repay 6% Notes by issuing shares of common stocks.
 
Pursuant to the securities purchase agreement in connection with the 6% Notes, we must reserve for purposes of issuance a number of shares of common stock that is no less than 110% of the number of shares of common stock issuable upon full conversion of the 6% Notes based on the average conversion price of the 6% Notes and full exercise of the 6% Note Warrants based on the average exercise price of the 6% Note Warrants.  Based on our current market price and the potential decrease in our market price as a result of the issuance of shares upon conversion of the 6% Notes, we have made a good faith estimate as to the amount of shares of common stock that we are required to allocate for conversion of the 6% Notes.  The annual meeting of stockholders of the Company for 2009 did not approve a proposed amendment of certificate of incorporation increasing the authorized shares from 400,000,000 to 800,000,000.  Given the fact that as of December 31, 2009, the Company had issued 400,000,000 shares of common stock, the Company could not repay outstanding 6% Notes by further issuing shares of common stock.  As of December 31, 2009, amount of authorized shares does not meet the requirements as set forth by the security purchase agreement in connection with the 6% Notes.

In the future, we may have to further amend our certificate of incorporation to increase the number of authorized common stock, which could incur substantial costs.
 
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 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.  As of December 31, 2009, we had 400,000,000 shares of common stock outstanding, most of which we estimate have been held more than two years and are freely tradable under Rule 144.  In the Form SB-2 declared effective on October 30, 2006, we registered up to 27,685,365 shares of common stock for resale, which may be sold without restriction under securities laws.  In November of 2007, the SEC adopted significant amendments to Rule 144, pursuant to which holding period of non-affiliates before resale of restricted shares of a reporting company has been shortened to six months.  The sale of these shares may adversely affect the market price of our common stock.
 
The sale of our stock under the Securities Purchase 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/convertible notes for companies that are quoted on the OTC Bulletin Board has the potential to cause a significant downward pressure on the price of common stock.  Since the registration statement for this offering is effective, the number of freely tradable shares will significantly increase, thus there is a possibility that the balance of sell side pressure would overwhelmingly exceed that of the buying side.  As a consequence, the price of shares will drop considerably.  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.
 
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During fiscal 2009, the lowest trading price of our common stocks was $0.0003.  There is no assurance that the share price will not further drop down.

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 significantly and quickly.  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.
 
Item 2.
Property
 
In June 2002, Kiwa Shandong entered into an agreement with Zoucheng Municipal Government granting us the use of at least 15.7 acres in Shandong Province, China at no cost for 10 years to construct a manufacturing facility.  Under the agreement, we have the option to pay a fee of approximately RMB 480,000 ($70,297) per acre for the land use right at the expiration of the 10-year period.  We may not transfer or pledge the temporary land use right.  In the same agreement, we have also committed to invest approximately $18 million to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province.  As of December 31, 2009, we had invested approximately $1.91 million in plant and equipment for the project.

From January 1, 2007, China central government adopted a series of policies to strengthen land management, including doubled tenure tax to $3,320 per acre.  In February 2008, the Ministry of Land and Resources of China issued “Controlling Indexes of Construction Land Use for Industrial Projects,” which requires the building coverage should not be less than 30%.  Up to now, the current situation in Kiwa Shandong does not meet this requirement. As a company operating ag-biotech business, the building coverage may differ from that of typical manufacturers in other industries.  However, there is no assurance that local authorities would not take back part of the land.

The core ingredient of our bio-fertilizer products is bacillus spp.  Photosynthetic bacteria are one of the ingredients used in some of our products.  However, the upgrade was not fully completed due to shortage of capital.  The Company plans to finish upgrading bacillus spp manufacturing facilities in 2010 if the required financing could be successfully raised.

With the formation of Kiwa Tianjin in July 2006, Challenge Feed, the minority shareholder, invested machinery and equipment used in one of its two bio-enhanced feed production lines at an agreed value of $120,000.  The Company has also entered into a lease agreement with Challenge Feed to lease another concentrated feed product line for three years.    Under the lease agreement, we also lease Challenge Feeds’s other facilities for three years commencing on August 1, 2006: (1) an office building with floor area of approximately 800 square meters; (2) storehouses with floor area approximately 2,500 square meters; and (3) two workshops with floor area of approximately 1,200 square meters.  The total monthly rental is RMB 50,000 ($7,300).  As of December 31, 2009, the lease agreement has expired.

On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.

 
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In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin, such assets include:

(1) Machinery and equipment.  Challenge Feed entered into a settlement agreement with one of its creditors, in accordance with which Challenge Feed agreed to transfer title of the machinery and equipment, which had been assigned to Kiwa Tianjin in 2006 in connection with the establishment of Kiwa Tianjin as a joint venture between the Company and Challenge Feed, to repay Challenge Feed’s debt.  Challenge Feed did not obtain Kiwa Tianjin’s consent nor inform Kiwa Tianjin of such transfer.

(2) Inventories.  Kiwa Tianjin had a long standing agreement to lease Challenge Feed’s factory facilities and warehouse for storage of its inventory.  Challenge Feed has disposed Kiwa Tianjin’s inventories including raw materials, packages and finished goods stored in the factory to repay Challenge Feed’s debt without any permission from Kiwa Tianjin.

The local court is currently reviewing the complaint and related documents filed with it.
 
Item 3.
Legal Proceedings
 
On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed, the Company’s 20% joint venture partner in Kiwa Tianjin, in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.

In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin, such assets include:

(1) Machinery and equipment.  Challenge Feed entered into a settlement agreement with one of its creditors, in accordance with which Challenge Feed agreed to transfer title of the machinery and equipment, which had been assigned to Kiwa Tianjin in 2006 in connection with the establishment of Kiwa Tianjin as a joint venture between the Company and Challenge Feed, to repay Challenge Feed’s debt.  Challenge Feed did not obtain Kiwa Tianjin’s consent nor inform Kiwa Tianjin of such transfer.

(2) Inventories.  Kiwa Tianjin had a long standing agreement to lease Challenge Feed’s factory facilities and warehouse for storage of its inventory.  Challenge Feed has disposed Kiwa Tianjin’s inventories including raw materials, packages and finished goods stored in the factory to repay Challenge Feed’s debt without any permission from Kiwa Tianjin.

The local court is currently reviewing the complaint and related documents filed with it.
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
The Company hosted annual stockholders’ meeting of 2009 on December 28, 2009.

Only stockholders of record at the close of business on August 24, 2009 were entitled to vote at the meeting.  As of August 24, 2009, number of shares of common stock issued and outstanding and entitled to vote was 400,000,000.  On December 28, 2009, 215,483,661 shares of common stock, representing 53.9% of total number of shares entitled to vote, voted at the meeting in person or through proxies.
 
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At our annual meeting held on December 28, 2009, five nominees for director have been elected to serve a one-year term on the Board of Directors set to expire at the 2010 annual meeting of stockholders and until their respective successors are elected and qualified.  Directors elected are Mr. Wei Li, Mr. Lianjun Luo, Mr. Xucheng Hu, Mr. Yunlong Zhang and Prof. Qi Wang.

The following table summarizes voting results of electing members of Board of Directors.
   
FOR
   
WITHHOLD
   
FOR %
 
Wei Li
    214,736,363       747,298       99.7 %
Xucheng Hu
    214,728,072       755,589       99.6 %
Lianjun Luo
    214,696,168       787,493       99.6 %
Yunlong Zhang
    214,686,420       797,241       99.6 %
Qi Wang
    214,696,168       787,493       99.6 %
 
The annual meeting also ratified the appointment of AGCA, Inc. as the Company’s independent auditor for fiscal 2009.

   
FOR
   
WITHHOLD
   
ABSTAINED
 
TOTAL
    194,520,839       2,439,092       18,523,730  

The annual meeting of stockholders did not approve of changing our certificate of incorporation by increasing the number of authorized common stocks from 400,000,000 to 800,000,000.

 
 
FOR
   
WITHHOLD
   
ABSTAINED
 
TOTAL
    91,956,551       74,514,400       49,012,710  

 
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Part II
 
Item 5.
Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities
 
Market Information
 
The Company’s common stock has been quoted on the OTC Bulletin Board of the NASD under the symbol “KWBT.OB” since March 30, 2004, and was quoted under the symbol “TTGM.OB” prior to the merger in March 2004.  The merger transaction is described in “The Company” under Item 1- Business.  During fiscal 2009, the market price for our common stock has ranged from $0.0003 to $0.008.

The following table sets forth the high and low bid quotations per share of our common stock as reported on the OTC Bulletin Board for the periods indicated.  The high and low bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
Fiscal Year 2009
 
High
   
Low
 
First Quarter
  $ 0.008     $ 0.0005  
Second Quarter
  $ 0.0062     $ 0.0003  
Third Quarter
  $ 0.0055     $ 0.0011  
Fourth Quarter
  $ 0.0075     $ 0.0021  
                 
Fiscal Year 2008
 
High
   
Low
 
First Quarter
  $ 0.21     $ 0.10  
Second Quarter
  $ 0.115     $ 0.058  
Third Quarter
  $ 0.11     $ 0.0125  
Fourth Quarter
  $ 0.048     $ 0.0009  
 
Holders
 
As of March 20, 2010, there were approximately 428 shareholders of record of our common shares.
 
Dividend Policy
 
We have not paid any dividends on our common shares since our inception and do not anticipate that dividends will be paid at any time in the immediate future.
 
Equity Compensation Plan Information
 
The information required by Item 5 regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this report.
 
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Item 6.
Selected Financial Data
 
Not required.
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
This Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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 ended December 31, 2009 involve known and unknown risks, uncertainties and other factors (described in “Business-Risk Factors” under Item 1) that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements contained herein.
 
Overview
 
The Company took its present corporate form in March 2004 when the shareholders of Tintic Gold Mining Company, a Utah public corporation (“Tintic”), entered into a share exchange transaction with the shareholders of Kiwa BVI, a privately-held British Virgin Islands corporation that left the shareholders of Kiwa BVI owning a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic, See “Business - The Company” under Item 1.  For accounting purposes this transaction was treated as an acquisition of Tintic Gold Mining Company by Kiwa BVI in the form of a reverse triangular merger and a recapitalization of Kiwa BVI and its wholly owned subsidiary, Kiwa Shandong.  On July 21, 2004, we completed our reincorporation in the State of Delaware.

We have established two subsidiaries in China: (1) Kiwa Shandong in 2002, a wholly-owned subsidiary, and (2) Kiwa Tianjin in July 2006, of which we hold 80% equity.  At the end of 2009, Kiwa Tianjin could no longer use its assets including machinery and inventory in normal course of operation.  The Company has classified the bio-enhanced feed business as discontinued operations.  Our company chart is presented and our businesses, including bio-fertilizer, fertilizer trade and AF-01 anti-viral aerosol, are described in detail in “Business - The Company” under Item I.

We generated approximately $38,292 and $226,869 in revenue from continuing operations in fiscal years 2009 and 2008, respectively, reflecting a decrease of 83.1%.  We incurred a net loss of $3,388,109 and $3,425,657 from continuing operations and net loss of $$392,512 and $258,164 from discontinued operations during fisacal 2009 and 2008, respectively.

Due to our limited revenues from sales and continuous losses, 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.  Our financing activities of continuing operations generated $918,217 and $901,615 net cash inflow in total during the twelve months ended December 31, 2009 and 2008, respectively.  These funds are insufficient to execute our business plan as currently contemplated, which may result in the risks described in “Risk Factors” under Item 1-Business.
 
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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.

Overview of the Company’s Financial Condition as of December 31, 2009
As of December 31, 2009, the Company had accumulated deficit of $16,394,930, among which, $3,714,529 and $3,632,188 were incurred during twelve months ended December 31, 2009 and 2008, respectively.

As of December 31, 2009, we had cash and cash equivalents of $28,765 and total current assets of $169,982; at the same time, we had current liabilities of $6,553,102, denoting current ratio of 0.03 and quick ratio of 0.005.  At the end of fiscal 2009, we also had long-term liabilities of $1,804,780.

On June 29, 2006, the Company entered into a securities purchase agreement with six institutional investors for the issuance and sale of (1) 6% secured convertible notes, due three years from the date of issuance, in the aggregate principal amount of $2,450,000, convertible into shares of the Company’s common stock, and (2) warrants to purchase 12,250,000 shares of the Company’s common stock.  As of December 31, 2009, the outstanding principal of 6% Notes was $1,518,171.  On June 29, 2009, the 6% Notes were due.  The Company has informed the Purchasers of its inability to repay the outstanding balance on the due date.  Therefore, the 6% Notes are in default.

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 repay our liabilities, and may have to curtail or cease operations and consider a formal or informal restructuring or reorganization.

Overview of the Company’s Operating Results for the Twelve Months Ended December 31, 2009 and 2008
During twelve months ended December 31, 2009 and 2008, our sales revenue was $38,292 and $226,869, respectively.  The Company gross profit was $6,091 and $60,035, denoting a gross profit margin of 15.9% and 26.5%, respectively.  During fiscal years of 2009 and 2008, our operating loss was $2,073,310 and $1,839,450.  Net loss attributable to Kiwa shareholders for both periods was $3,714,529 and $3,632,188, respectively.

Overview of the Company’s Cash flow Status for the Twelve Months Ended December 31, 2009 and 2008
During fiscal year ended December 31, 2009 and 2008, our operating activities of continuing operations used net cash of $566,232 and $622,611, respectively.  We also invested $7,320 and $48,111 in purchasing property and equipment during both periods.  Our financing activities of continuing operations provided net cash of $918,217 and $901,615 in the fiscal year of 2009 and 2008.   Our operating activities of discontinued operations used net cash of $326,433 and 212,136 for fiscal 2009 and 2008, respectively.  Our investing activities of discontinued activities generated nil and $5,863 during the same period.  We had cash of only $28,765 and $18,609 on December 31, 2009 and 2008, respectively.

The Company’s Ability of Raising New Finance
Continuous losses and low share price has deteriorate the Company’s ability of raising new finance.  As of December 31, 2009, the closing price of our common stock reported by on the OTC Bulletin Board was $0.003.  The market value of the Company was $1,200,000, which makes it very hard to arrange new financing on equity financing basis.  The Company’s obligations under the 6% Notes and the Warrants are secured by a first priority security interest in the Company’s intellectual property pursuant to an Intellectual Property Security Agreement with the Purchasers, and by a first priority security interest in all of the Company’s other assets pursuant to a Security Agreement with the Purchasers.  In addition, the Company’s Chief Executive Officer has pledged all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes and the Warrants.  As a result, the Company does not have assets to secure the obligations of new debt.
 
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The 6% Notes require the Company to procure the Purchaser’s consent to take certain actions including to pay dividends, repurchasing stock, incur debt, guaranty obligations, merge or restructuring the Company, or selling significant assets.  Our ability of raising new finance is limited.

Kiwa Shandong’s Ability to Continue as a Going Concern is in Doubt
Kiwa Shandong is our wholly-owned subsidiary of engaging in researching, developing, producing and marketing bio-fertilizer.  However, since its inception in 2002, Kiwa Shandong has not generated material revenue.  Moreover, Kiwa Shandong has never been profitable.  As of December 31, 2009, Kiwa Shandong has accumulated deficit of $3,263,469.

In June 2002, we entered into an agreement with Zoucheng Municipal Government granting us the use of at least 15.7 acres in Shandong Province, China at no cost for 10 years to construct a manufacturing facility.  Pursuant to relevant China laws and regulations, we had paid tenure tax on quarterly basis at the rate of approximately $1,660 per acre.  However, from January 1, 2007, China central government adopted a series of policies to strengthen land management, including doubled tenure tax to $3,320 per acre.  In February 2008, the Ministry of Land and Resources of China issued “Controlling Indexes of Construction Land Use for Industrial Projects,” which requires the building coverage should not be less than 30%.  Up to now, the current situation in Kiwa Shandong does not meet this requirement.  There is no assurance that local authority would not reduce the acreage of land granted to us to use at no cost.

On December 31, 2009, we launched a complete test on the recoverability of our long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa Shandong’s long-lived assets were impaired.  Management is assessing the usage of our long-lived assets in Kiwa Shandong; it is possible that we would dispose some of our long-lived assets in the future.

Given the tight cash flow status of the Company, we may have to curtail or cease operations and consider a formal or informal restructuring or reorganization in Kiwa Shandong.  For example, we may consider reduce the acreage of land we use in Kiwa Shandong to lower tax expenditure.

Kiwa Tianjin’s Bio-enhanced Feed Business has been Classified as Discontinued Operations

On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.  In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin, such assets include:

(1) Machinery and equipment.  Challenge Feed entered into a settlement agreement with one of its creditors, in accordance with which Challenge Feed agreed to transfer title of the machinery and equipment, which had been assigned to Kiwa Tianjin in 2006 in connection with the establishment of Kiwa Tianjin as a joint venture between the Company and Challenge Feed, to repay Challenge Feed’s debt.  Challenge Feed did not obtain Kiwa Tianjin’s consent nor inform Kiwa Tianjin of such transfer.

(2) Inventories.  Kiwa Tianjin had a long standing agreement to lease Challenge Feed’s factory facilities and warehouse for storage of its inventory.  Challenge Feed has disposed Kiwa Tianjin’s inventories including raw materials, packages and finished goods stored in the factory to repay Challenge Feed’s debt without any permission from Kiwa Tianjin.

Kiwa Tianjin is seeking damages against Challenge Feed in the amount of approximately RMB 2.2 million in total.  The local court is currently reviewing the complaint and related documents filed with it.
 
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Taking into consideration of the fact that Kiwa Tianjin will not be able to operate normally with its own machinery and equipment in the factory leased from Challenge Feed, the Company has classified the bio-enhanced feed business as discontinued operations.

In Conclusion
The Company’s ability to continue as a going concern is in doubt.  We expect to continue to have operating losses for the foreseeable future as we are still in the process of exploring market, further research and product tests.  We will require additional capital to implement our business plan and continue operating.  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 or cease operations and consider a formal or informal restructuring or reorganization.

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

On July 21, 2005, the People’s Bank of China announced it would appreciate the RMB, increasing the RMB-U.S. Dollar exchange rate from approximately US$1.00 = RMB8.28 to approximately US$1.00 = RMB8.11.  So far the trend of such appreciation continues; the exchange rate of U.S. Dollar against RMB on December 31, 2009 was US$1.00 = RMB6.8282.
 
Critical Accounting Policies and Estimates
 
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 current circumstances.  Actual results may differ from these estimates as a result of different assumptions or conditions.
 
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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 audited balance sheets as of December 31, 2009 and 2008, and the audited statements of operations, equity movement and cash flows for the fiscal years ended December 31, 2009 and 2008, and the related notes thereto, for further discussion of our accounting policies.
 
Accounts Receivables
 
The Company performs ongoing credit evaluations of its customers and establishes an allowance for doubtful accounts when amounts are not considered fully collectable.  According to the Company’s credit policy, the Company generally provides 100% bad debt provision for the amounts outstanding over 365 days after the deduction of the amount subsequently settled after the balance sheet date, which management believes is consistent with industry practice in the China region.

Terms of our sales vary from cash on delivery to a credit term up to three to twelve months.  Ordinarily, we require our customers to pay between 20% and 60% of the purchase price of an order placed, depending on the results of our credit investigations, prior to shipment.  The remaining balance is due within twelve months, unless other terms are approved by management.  As stated in the “Business - Risk Factors” under Item 1, the agriculture-biotechnology market in China is in the early stages of development and we are still in the process of exploring the new market.  We may also distribute our bio-products to special wholesalers with favorable payment terms with a focus on the future.  We maintain a policy that all sales are final and we do not allow returns.  However, in the event of defective products, we may allow customers to exchange the defective products for new products within the quality guarantee period.  In the event of any exchange, the customers pay all transportation expenses.
 
Inventories
 
Inventories are stated at the lower of cost, determined on the weighted average method, and net realizable value.  Work in progress and finished goods are composed of direct material, direct labor and a portion of manufacturing overhead.  Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and dispose.
 
Impairment of Long-Lived Assets
 
Our long-lived assets consist of property, equipment and intangible assets.  As of December 31, 2009, the net value of property and equipment and intangible assets was $255,483 and nil, respectively, which represented approximately 58.0% and 0% of our total assets, respectively.

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.

Based on our analysis, we charged $804,780 and $639,492 as loss from impairment of long-lived assets during twelve months ended December 31, 2009 and 2008, respectively.
 
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Fair value of warrants and options
 
We have adopted ASC Topic 815, “Accounting for Derivative Instruments and Hedging Activities” to recognize warrants relating to loans and warrants issued to consultants as compensation as derivative instruments in our consolidated financial statements.

We also adopt ASC Topic 718 “Share Based Payment” to recognize options granted to employees as derivative instruments in our consolidated financial statements.

We calculate fair value of the warrants and options with Black-Schole Model.
 
Revenue Recognition
 
We recognize revenue for our products in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” 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.
 
Income Taxes
 
The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes” (codified to FASB ASC Topic 740, “Income Taxes”), 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.
 
Major Customers and Suppliers
 
Bio-fertilizer products
 
We had a total of 34 customers as of December 31, 2009, of which two customers accounted for 15.9%and 7.4% of our net sales for the fiscal year ended December 31, 2009, respectively. No other single customer accounted for more than 7% of our revenues. For the fiscal year ended December 31, 2008, we had three significant customers accounting for 40.6%, 10.9% and 7.8% of our net sales, respectively, and no other single customer accounted for more than 7% of our revenues.

Three suppliers accounted for 16.3%, 11.6% and 11.4% of our net sales of our net purchase for the fiscal year ended December 31, 2008. Comparably, two suppliers accounted for 85.7% and 6.4% of net purchases for fiscal 2009, respectively. Historically our existing suppliers have met our needs. In addition, the raw materials used in our bio-fertilizer products are widely available from a variety of alternative sources.

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Results of Operations
 
Net Sales
 
Net sales from continuing operations were $38,292 and $226,869 for the twelve months ended December 31, 2009, representing a $188,577 or 83.1% decrease. The tremendous decrease was mainly due to loss of customers who are extremely price-sensitive and are reluctant to settle payment at the place of order.
 
Cost of Sales
 
Cost of sales from continuing operations was $32,201 and $166,834 for the twelve months ended December 31, 2009 and 2008, respectively. The decrease of $134,633 or 80.7% in cost of sales was primarily due to decrease of net sales from continuing operations.
 
Gross Profit
 
Gross profit from our continuing operations was $6,091 and $60,035, representing a profit margin of 15.9% and 26.5% for the twelve months ended December 31, 2009 and 2008, respectively.

This decrease of $53,944 in gross profit is mainly due to drop down of gross profit in both bio-fertilizer and bio-enhanced feed business.

Gross profit margin of bio-fertilizer business reduced gradually in 2009. This was due to the fact that we sold higher percentage (in terms of quantity of products sold) low-end products in 2009 than did 2008, which has undermined our profitability of this segment.
 
Consulting and Professional Fees
 
Consulting and professional fees of continuing operations occurred in principal operations were $271,042 and $358,142 for the twelve months ended December 31, 2009 and 2008, respectively, representing a decrease of $87,100 or 24.3%. Fair value of warrants issued to a financial advisor, who introduced 6% Notes purchasers to the Company, had been charged to consulting and professional fees in three years time from June 2006. As the 6% Notes fell due by the end of June 2009, our consulting and professional fees decreased.
 
Officers’ Compensation
 
Officers’ compensation was $230,214 and $240,993 for the twelve months ended December 31, 2009 and 2008, denoting $10,779 or 4.5% decrease.
 
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General and Administrative
 
General and administrative expenses of continuing operations were $1,164,733 and $914,539 for the twelve months ended December 31, 2009 and 2008, an increase of $250,194 or 27.4%.  General and administrative expenses include salaries, travel and entertainment, rent, office expense, telephone expense and insurance costs. The increase is mainly resulted from the expansion of our operating activities, which led to the increased amount of rental, salaries, travel expenses and office expenses.  We also charged $442,527 and $152,750 of liquidated damages in connection with 6% Notes into general and administrative expenses during twelve months ended December 31, 2009 and 2008, respectively.  (See Note 12 of Notes to Consolidated Financial Statements)
 
Selling Expenses
 
During 2009, selling expenses of continuing operations were $75,994, a $31,426 or 70.5% increase from $44,568 of the selling expenses from continuing operations in 2008.  This increase was mainly attributable to our adjustment of marketing and sales policies in our fertilizer business.
 
Research and Development
 
Research and development expenses decreased by $874 or 0.5% to $192,103, for the twelve months ended December 31, 2009, as compared to $192,977 for the twelve months ended December 31, 2008.  The research and development expense mainly consist of the expenses of maintaining Kiwa-CAU R&D Centre, which began operation in July 2006. (See “Business-Intellectual Property and Product Lines- Kiwa-CAU R&D Center” under Item 1 in Part I).
 
Depreciation and Amortization
 
Depreciation and amortization of continuing operations, excluding depreciation included in cost of production and deprecation of research equipment, increased $23,143 or 18.9% to $145,315, for the twelve months ended December 31, 2009, as compared to $122,172 for the same period of 2008.    For fiscal years 2009 and 2008, part of the depreciation of manufacturing facilities was booked as operating expense, which would normally be booked as production costs when production capacity reaches an adequate level.
 
Loss From Disposal of Obsolete Inventory
 
During twelve months ended December 31, 2009 and 2008, the Company incurred $55,183 and $192,798 loss resulting from disposal of obsolete inventory of continuing operations.  Due to unique nature of bio-fertilizer products, some raw materials of bio-fertilizer products have a shorter term of validity than chemical substance.  Since the Company kept on adjusting its product mix, some raw materials purchased years ago cannot be used to in production of current products and had been stored for a period of time that is longer than its period of validity.  We decided to dispose these raw materials as obsolete inventory.
 
Loss From Impairment of Long-lived Assets
 
At the end of fiscal years 2009 and 2008, we launched a complete test of the recoverability of long-lived assets.  Based on evaluations, the Company charged $804,780 and $639,492 into losses of fiscal 2009 and 2008, respectively.
 
Net Interest Expenses
 
Net interest expense was $532,626 in 2009 and $753,917 in 2008, representing a $221,291 or 29.4% decrease.  The interest expenses for both periods are consisted of amortization of fair value of warrants in connection with 6% Notes, and (2) interest charges on our loans.
 
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Other Income
 
Other income during twelve months ended December 31, 2009 was $77,790 and was nil during comparable period of 2008.  This income was generated by our bio-fertilizer business.

Loss from Discontinued Operations

During twelve months ended December 31, 2009 and 2008, the Company has incurred net loss of $392,512 and $258,164 from discontinued operations.  During both periods, discontinued operations refer to bio-enhanced feed business.
 
Net Loss Attributable to Kiwa Shareholders
 
Net loss attributable to Kiwa shareholders for fiscal 2009 and 2008 was $3,714,529 and $3,632,188, representing $82,341 or 2.3% increase.  This increase resulted from the following factors: (1) decrease in gross profit of $53,944 or 89.9%; (2) increase in operating expenses of $179,916 or 9.5%; (3) decrease in loss from disposal of obsolete inventory from $192,798 in 2008 to $55,183 in 2009; (4) increase in loss from impairment of long-lived assets from $639,492 in fiscal 2008 to $804,780 in 2009; (5) decrease in interest expenses of $221,291 or 29.4%; (5) other income of $77,790 in 2009 and nil in 2008; (6) loss from discontinued operations increased from $258,164 in 2008 to $392,512 in 209  and (7) $66,092 and $51,633 in net loss attributable to non-controlling interest in subsidiary in 2009 and 2008, respectively.
 
Comprehensive Loss
 
Comprehensive loss increased by $62,183 or 1.7% to $3,718,566 for the twelve months ended December 31, 2009, as compared to $3,656,383 for the comparable period of 2008.  The increase in comprehensive loss in the current year as compared to fiscal 2008 is due to an increase of $82,341 in net loss attributable to Kiwa shareholders and a decrease of $20,158 in other comprehensive loss.
 
Liquidity and Capital Resources
 
Since inception of our ag-biotech business in 2002, we have relied on the proceeds from the sale of our equity securities and loans from both unrelated and related parties to provide the resources necessary to fund our operations and the execution of our business plan.  During fiscal 2009, we raised $1,009,844 in total from our related parties through several advance and repaid $87,407 to related parties.  To some extent, these fundraisings improved our short-term liquidity, however as of December 31, 2009, our current liabilities exceeded current assets by $6,383,120, reflecting a current ratio of 0.03:1, compared to current liabilities exceeded current assets by $4,000,056, reflecting a current ratio 0.49:1, as of December 31, 2008.  The sharp downturn of our short-term liquidity was mainly due to current assets hold by Kiwa Tianjin was disposed by Challenge Feed without the Company’s permission, therefore, inventory and other current assets hold by Kiwa Tianjin was charged into losses.  During twelve months ended December 31, 2009, we issued 260,285,794 shares resulting from the conversion of $104,151 principal of 6% Notes into our common stock.  During comparable period of 2008, 52,739,530 shares of common stock had been issued for the conversion of $436,302 principal and $116,873 interest by 6% Notes Purchasers.  Since the Company does not have sufficient financial capability to repay or buy-back 6% Notes by means of cash and has issued 400,000,000 shares of common stocks, it is expected that we could not issue mores shares to repay principal and interest of 6% Notes.  The Company may have to further amend its certificate of incorporation increasing authorized number of common shares.  (See Note12 of Notes to Consolidated Financial Statements).
 
39

 

 
As of December 31, 2009 and 2008, we had cash of $28,765 and $18,609, respectively.  The change is outlined as follows.

During 2009, our operating activities from continuing operations utilized cash of $566,233, as compared with $622,611 used by operations in 2008.  Such cash was mainly used for working capital for our bio-fertilizer and bio-enhanced feed businesses, purchase of inventory, a market development fee for bio-fertilizer, and repayment of accounts payable to venders and service providers.

During 2009, our investing activities utilized $7,320 in acquiring property and equipment.  Comparatively, in 2008 we spent $48,111 for the purchase of equipment to finish the first stage to upgrade our facility in Kiwa Shandong.

During the twelve months ended December 31, 2009, we generated $918,217 from financing activities, consisting of proceeds from related parties of $1,009,844, which was offset in part by repayment of $87,407 to related parties and long-term borrowings of $4,220.  During the fiscal year ended December 31, 2008, we generated $901,615 from financing activities, consisting of proceeds from issuance of common stocks of $650,000 and from related parties of $802,574, which was offset in part by repayment of $545,353 to related parties and long-term borrowings of $5,606.

Operating activities of discontinued operations used $326,433 in the twelve months ended December 31, 2009 and $212,136 during the comparable period of 2008.

Investing activities of discontinued operations has generated nil and $5,863 in fiscal 2009 and 2008, respectively.

As of December 31, 2009, we had an accumulated deficit of $16,394,930, which was made up in part of a net loss attributable to Kiwa shareholders of $3,714,529 (including non-cash expenses of $1,721,577) and $3,632,188 (including non-cash expenses of $1,532,958) during 2009 and 2008, respectively.  Our operating activities incurred net loss $3,388,109 and $3,425,657 during twelve months ended December 31, 2009 and 2008.  Our discontinued operations has incurred $392,512 and $258,164 in fiscal 2009 and 2008, respectively.  We do not anticipate generating sufficient positive operating cash inflow to fund our planned operations.

In 2010, we plan to keep on upgrading of Kiwa Shandong’s fermentation facilities, which will allow us to fully utilize the patent we acquired from CAU and further reduce production costs.  In the meantime, we will focus on expanding our bio-fertilizer sales.  We will concentrate on (1) adjusting our product mix to increase the proportion of high-margin products, (2) improving our current equipment, and (3) setting up new production lines.  With respect to the AF-01 technology, our hope is to (1) close the acquisition of a GMP-qualified veterinary factory, (2) close a first round of investment, and (3) procure approval of a number of veterinary drug products for the AF-01 technology.

Currently we have insufficient cash resources to accomplish our objectives.  We will need to seek additional sources of funding to sustain our operations.  In the next year, we intend to raise additional capital through the issuance of debt or equity securities to fund the development of our planned business operations, although there can be no assurance that we will be successful in obtaining this financing.

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.
 
40

 

 
Off-Balance Sheet Arrangements
 
At December 31, 2009, 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.
 
Item 8.
Financial Statements
 
The Consolidated Financial Statements of Kiwa Bio-Tech Products Group Corporation and its subsidiaries including the notes thereto, together with the reports thereon of AGCA, Inc. for fiscal year ended December 31, 2009 and Consolidated Financial Statements of Kiwa Bio-Tech Products Group Corporation and its subsidiaries including the notes thereto, together with the reports from thereon of Mao & Company, CPAs, Inc. (“Mao & Company”) are presented beginning on page F-1.
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Effective as of June 2, 2009, the Company dismissed Mao & Company, the Company's independent registered public accounting firm.  The decision to change accountants was approved by the Company's Board of Directors.  Mao & Company reported on the Company's consolidated financial statements for the years ended December 31, 2008 and 2007.  For these periods and up to June 2, 2009, there were no disagreements with Mao & Company on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Mao & Company, would have caused it to make reference thereto in its report on the financial statements for such years.  During such years, there were no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

The reports of Mao & Company on the financial statements of the Company for the fiscal years ended December 31, 2008 and 2007 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

The Company has engaged AGCA, Inc. (“AGCA”) to assume the role of its new principal independent accountants. The decision to engage AGCA was approved by the Board of Directors on June 2, 2009.  The Company signed the AGCA engagement letter on June 2, 2009 after AGCA completed its internal procedures related to new attest client acceptance.  During the fiscal years ended December 31, 2008 and 2007 and through June 2, 2009, the Company did not consult with AGCA on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and AGCA did not provide either in a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(v) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304 (a)(1)(V) of Regulation S-K.
 
41

 

 
At the annual meeting of shareholders on December 28, 2009, the proposal of the appointment of AGCA, Inc. as the Company’s independent auditors for the fiscal year ended December 31, 2009 was approved by the required votes of our shareholders.  Mao & Company had audited our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Through March 29, 2010, there was not any disagreement with our current certifying accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedures.
 
Item 9A(T).    Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual Report.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our CEO and CFO, to allow timely decisions regarding required disclosures.  Based on their evaluation, our CEO and CFO have concluded that, as of December 31, 2009, our disclosure controls and procedures were ineffective.
 
Management Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published consolidated financial statements. Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.

Our management has conducted, with the participation of our CEO and CFO, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2009. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, management identified deficiencies that were determined to be a material weakness.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because of the material weakness described below, management concluded that our internal control over financial reporting was ineffective as of December 31, 2009.
 
42

 

 
The specific material weakness identified by the Company’s management as of December 31, 2009 is described as follows:
 
• The Company is lacking qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the Company’s internal audit function are yet to be developed.
 
• We currently do not have an audit committee.
 
Remediation Initiative
 
 •           We are committed to establishing the internal audit functions but due to limited qualified resources in the region, we were not able to hire sufficient internal audit resources before the end of 2009. However, internally we established a central management center to recruit more senior qualified people in order to improve our internal control procedures. Externally, we are looking forward to engage an accounting firm to assist the Company in improving the Company’s internal control system based on COSO Framework. During fiscal 2009, the Company engaged a consulting firm to provide training services regarding U.S. GAAP, financial statement and SOX compliance to management staff. In the future, we also will increase our efforts to hire the qualified resources.
 
•           We intend to establish an audit committee of the board of directors as soon as practicable.  We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls.
 
Conclusion
 
The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of generally accepted accounting principles accepted in the United States of America commensurate with the Company’s financial reporting requirements, which resulted in a number of internal control deficiencies that were identified as being significant.  The Company’s management believes that the number and nature of these significant deficiencies, when aggregated, was determined to be a material weakness.

Despite of the material weakness and deficiencies reported above, the Company’s management believes that its consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this Annual Report.
 
43

 

 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the fiscal year ended December 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.    Other Information
 
None.
 
Part III
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
Directors and Executive Officers
 
Set forth below are the names of our directors and executive officers, their ages, their offices with us, if any, their principal occupations or employment for the past five years.  The directors listed below will serve until the Company’s next annual meeting of the stockholders:

Name
 
Age
 
Position
Wei Li
 
49
 
Chief Executive Officer, Chief Financial Officer (from January 4, 2009 to February 17, 2009) and Chairman of the Board of Directors
Steven Ning Ma
 
53
 
Chief Financial Officer and Chief Operating Officer (from February 18, 2009)
Lianjun Luo
 
40
 
Chief Financial Officer (to December 31, 2008), Director
Xucheng Hu
 
47
 
Director (since December 30, 2008)
Dachang Ju
 
69
 
Director (to December 30, 2008)
Yunlong Zhang
 
46
 
Director (General Manager of Kiwa Shandong until February 2009)
Qi Wang
 
43
 
Director and Vice President - Technical
Yvonne Wang
 
31
 
Corporate Secretary
Dianyuan Song
 
50
 
Vice President - Marketing
Xin Ma
 
33
 
Vice President (since January 4, 2009) Associate Chief Financial Officer (from January 2006 to January 3, 2009)

Wei Li became our Chief Executive Officer and Chairman of the Board of Directors on March 12, 2004.  Mr. Li was appointed as Chief Financial Officer on January 4, 2009 by the Board of Directors.  From January 1, 2004 to the time of the Tintic/Kiwa merger, Mr. Li was the acting Chief Executive Officer of Kiwa Bio-Tech Products Group Ltd.  Mr. Li founded Kiwa Bio-Tech Products Group Ltd. to capitalize on the growth of the ag-biotechnology industry in China.  Prior to founding Kiwa Bio-Tech Products Group Ltd., Mr. Li founded China Star, an entity which provides integrated financial services and/or venture investments to growth businesses in China.  Mr. Li served as President of China Star from June 1993 to January 2004. In 1989, Mr. Li founded Xinhua International Market Development Co. Ltd., a company which engaged in investing in China’s high tech, pharmaceutical, medical device, media, entertainment and real estate industries. Mr. Li holds a B.S. in Finance from Hunan Finance and Economics University.

Steven Ning Ma became our Chief Financial Officer and Chief Operating Officer on February 18, 2009.  Prior to joining the Company, Mr. Ma served as Managing Director of SAS Conserve de Provence from 2006 to 2008.  Prior to that, Mr. Ma was the Senior Managing Partner of HJV (Hejun) Consulting (Ltd.) from 2004 to 2005.  Mr. Ma received his Master degree in Economics/Finance from the Graduate School of Chinese Academy of Sciences.  He is also a Ph.D. Candidate in Financial Economics from Wageningen University, Netherlands.
 
44

 


Lianjun Luo became our Chief Financial Officer on March 12, 2004, and one of our directors on March 27, 2004.  On December 31, 2008, the employment agreement between the Company and Mr. Lianjun Luo expired, Mr. Luo does not serve as Chief Financial Officer since then.  Mr. Luo served as the Chief Executive Officer of Kiwa Bio-Tech Products Group Ltd. from October 2002 to December 2003.  From January 2002 to October 2002, Mr. Luo served as the Chief Financial Officer of China Star.  From August 2000 to December 2001, Mr. Luo served as manager of Security Department and Assistant to President at Jilin Hengfa Group Ltd., a Chinese drug manufacturing company, responsible for the company’s preparation for an aborted IPO and for merger and acquisition activities.  From May 1998 to July 2000, Mr. Luo worked as manager of Investment Department and Associate General Manager for Hongli Enterprise Ltd., a Chinese investment company on merger and acquisition transactions.  Mr. Luo obtained his law degree from China University of Political Science and Law in 1993. Mr. Luo is a certified public accountant and lawyer in China.

Xucheng Hu became one of our directors since December 30, 2008.  He has been the Executive Director of New Capital International Investment Limited, a listed company on the Hong Kong Stock Exchange, since August 2003.  Prior to that engagement, Mr. Hu acted as Executive Director of China Property Development (Holdings) Limited and Asia Director of ING Real Estate.  Over the past 10 years, he has been working with the Beijing International Trade Association and the Beijing International Trade Research Institute, during which period his responsibilities included performing financial and economic research and providing professional advice on the Beijing municipal government’s cross-provincial investments and foreign investments, participating in the decision-making process for granting export rights to Beijing government-owned enterprises, evaluating investment proposal, and supervising sino-foreign investments in Beijing.  Mr. Hu graduated with a bachelor degree in economics from Beijing Economics College in 1983.

Dachang Ju became one of our directors on March 12, 2004.  From 1987 to 1999 when he retired, Mr. Ju worked as General Manager of XinShen Company, an investment firm in China.  He was responsible for the company's daily operations and investment decision making.  He served as a board member of Kiwa Bio-Tech Products Group Ltd. since 2003 and a board member of China Star from 1999 to 2000.  Mr. Ju holds a B.S. in mathematics from Capital Normal University in Beijing, China.

Yunlong Zhang became one of our directors on March 27, 2004. From May 2000 to 2007, Mr. Zhang had been the General Manager of China Star, responsible for the group’s daily operations. 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, an economic reform think tank for the central government. Mr. Zhang holds a degree in statistics.

Qi Wang became our Vice President - Technical on July 19, 2005 and was elected one of our directors of the Company on July 18, 2007. Prof. Wang also acts as Director of Kiwa-CAU R&D Center since July 2006. Prof. Wang served as a Professor and Advisor for Ph.D. students in Department of Plant Pathology, China Agricultural University since January 2005. Prior to that, he served as an assistant professor and lecturer of CAU since June 1997. He obtained his master degree and Ph.D. in agricultural science from CAU in July 1994 and July 1997, respectively. Prof. Wang received his bachelor’s degree of science from Inner Mongolia Agricultural University in July 1989. He is a committee member of various scientific institutes in China, including the National Research and Application Center for Increasing-Yield Bacteria, Chinese Society of Plant Pathology, Chinese Association of Animal Science and Veterinary Medicine.

Yvonne Wang became our Secretary in September 2005. Prior to that, she served as an executive assistant and a manager of the Company’s US office between April 2003 and September 2005. She obtained her B.S. degree of Business Administration in July 2001 from University of Phoenix. She is also a Realtor and committees in California, and a certified Notary Public from California’s Secretary of State.
 
45

 


Dianyuan Song became our Vice President-Marketing in February 2008, prior to that Mr. Song served as Marketing and Sales Director of Kiwa since he joined Kiwa in October 2007. Mr. Song served as a member of senior management of HuaKen Group of China, which is a large enterprise group specializing in marketing and distributing of fertilizer in China. Mr. Song holds a Bachelor’s degree from Agriculture University of Shenyang.

Xin Ma became our Vice President on January 4, 2009, prior to that Mr. Ma was our Associate Chief Financial Officer in January 2006.  Prior to that Mr. Ma served as financial controller of LangChao Group.  He obtained his MSc. Degrees of Management and of Finance in 2005 and 2006 respectively from the University of Leicester.
 
Family Relationships
 
There are no family relationships among our directors or executive officers.
 
Section 16(a) Beneficial Ownership Compliance
 
Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and certain persons holding more than 10 percent of a registered class of our common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock.  Officers, directors and certain other shareholders are required by the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file.  During fiscal 2009, there are a number of filings were not made on a timely basis.
l
The Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2008 was filed with the SEC on May 18, 2009.
l
The Company’s Quarterly Report on Form 10-Q for three months ended March 31, 2009 was filed with the SEC on June 15, 2009.
 
Code of Ethics
 
We have adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to all employees, consultants and members of the Board of Directors, including the Chief Executive Officer, Chief Financial Officer and Secretary.  This Code embodies our commitment to conduct business in accordance with the highest ethical standards and applicable laws, rules and regulations.  We will provide any person a copy of the Code, without charge, upon written request to the Company’s Secretary.  Requests should be addressed in writing to Ms. Yvonne Wang; 310 N. Indian Hill Blvd., #702 Claremont, California 91711.
 
Director Nominees Recommended by Stockholders
 
We have not implemented any changes to the procedures by which stockholders may recommend nominees to our board of directors since we last disclosed those procedures in our most recent proxy statement.
 
Board Composition; Audit Committee and Financial Expert
 
Our Board of Directors is currently composed of five members: Wei Li, Lianjun Luo, Xucheng Hu, Yunlong Zhang and Qi Wang.  All board actions require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
 
46

 

 
We currently do not have an audit committee.  We intend, however, to establish an audit committee of the board of directors as soon as practicable.  We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls.  Currently such functions are performed by our Board of Directors.

The Board has determined that at least one person on the Board, Lianjun Luo, qualifies as a “financial expert” as defined by SEC rules implementing Section 407 of the Sarbanes-Oxley Act.  Mr. Luo does not meet the definition of an “independent” director set forth in Rule 4200(a)(15) of the Market Place Rules of the Nasdaq Stock Market, which is the independence standard that we have chosen to report under.
 
Board meetings and committees; annual meeting attendance.
 
During fiscal year 2009, the Board of Directors had six meetings in total.  All members of the Board of Directors attended all six meetings.  The Company requires all members of the Board of Directors are required to attend the annual meetings of securities holders.  On December 30, 2009, all members of the Board of Directors attended the annual meetings of securities holders for 2009.
 
Item 11.
Executive Compensation
 
We currently have no Compensation Committee.  The Board of Directors is currently performing the duties and responsibilities of Compensation Committee.  In addition, we have no formal compensation policy.  We decide on our executives’ compensation based on average compensation levels of similar companies in U.S. or China, depending on consideration of many factors such as where the executive works.  Our Chief Executive Officer’s compensation is approved by the Board of Directors.  Other named executive officers’ compensation are proposed by our Chief Executive Officer and approved by the Board of Directors.

Our Stock Incentive Plan is administered by the Board of Directors.  Any amendment to our Stock Incentive Plan requires majority approval of the stockholders of the Company.

The Company had no officers or directors whose total compensation during either 2009 or 2008 exceeded $100,000.

Currently, the main forms of compensation provided to each of our executive officers are: (1) annual salary; (2) non-equity Incentive Plan; and (3) the granting of incentive stock options subject to approval by our Board of Directors.
 
Summary Compensation Table
 
Summary Compensation Table
 
Name and principal
position
 
Year
 
Salary
($)
 
Bonus
($)
 
Stock
Awards
($)
 
Option
Awards
($)(1)
 
Non-Equity
Incentive Plan
Compensation
($)
 
Nonqualified
Deferred
Compensation
Earnings ($)
 
All Other
Compensation
($)
 
Total
($)
 
(a)
 
(b)
 
(c)
 
(d)
 
(e)
 
(f)
 
(g)
 
(h)
 
(i)
 
(j)
 
Wei Li, CEO
 
2009
 
  72,000  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    72,000  
Wei Li, CEO
 
2008
 
  72,000  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    72,000  
                                           
Steven Ning Ma, CFO
 
2009
    74,400  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    74,400  
Lianjun Luo, CFO
 
2008
    48,000  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    48,000  
 
47

 

 
(1)
Options granted on December 12, 2006.  For material terms of the grant, see additional information below under subheading entitled “2004 Stock Incentive Plan” under this Item 10.  The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model.
 
Employment Contracts and Termination of Employment and Change of Control Arrangements
 
On February 2, 2009, we entered into an employment agreement with our Chief Executive Officer and Chief Financial Officer, Wei Li, for a three-year term, commencing on January 1, 2009.  Pursuant to this agreement, Mr. Li receives a salary at the rate of $96,000 per annum, of which $72,000 will be paid in equal monthly installments of $6,000 during the period of employment, prorated for any partial employment period, and $24,000 is paid as an annual performance bonus in three months after each employment year.  Mr. Li may receive such annual increases in salary as may be determined by our Board of Directors at our annual meeting.  Mr. Li is also entitled to an annual grant of stock options under our employee stock option plan as determined by the Board of Directors.  Mr. Li is entitled to three-month’s severance if his employment is terminated without cause.

On July 31, 2006, we entered into an employment agreement with our Chief Financial Officer, Lianjun Luo, for a three-year term, commencing on January 1, 2006.  Pursuant to this 2006 agreement, we paid pay Mr. Luo an annual salary at the rate per annum of RMB480,000 (approximately $65,700), of which RMB384,000 was paid in equal monthly installments of RMB32,000 during the period of employment, prorated for any partial employment period, and RMB96,000 was paid as an annual performance bonus in three months after each employment year for the successful completion of all goals and objectives of that year.  Mr. Luo was entitled to an annual grant of stock options under our employee stock option plan as determined by the Board of Directors.  Mr. Luo was entitled to three month’s severance if his employment is terminated without cause.  The employment agreement between the Company and Mr. Lianjun Luo expired on December 31, 2008.  Both parties agreed not to renew the contract.

On February 18, 2009, the Company and Mr. Steven Ning Ma entered into an employment agreement with the Company. Pursuant to the employment agreement, Mr. Ma is entitled to annual salary of RMB636,000 (approximately US$93,000), among which RMB42,400 (approximately US$6,200) payable monthly and RMB127,200 (approximately $18,600) in one lump sum, as a performance bonus, three months following the anniversary of his employment provided that Mr. Ma meets all goals and objectives set by the Company.  Mr. Ma’s employment may be terminated at any time for cause or with thirty days’ written notice without cause.  The employment agreement is automatically terminated upon death or permanent disability.  Upon termination without cause, Mr. Ma is entitled to severance payment equal to three months’ salary including all non-cash benefits, if the termination is due to death or permanent disability; Mr. Ma is entitled to six months’ salary.  The employment agreement also contains confidentiality provisions and provisions against competition with the Company and solicitation of customers for 12 months following termination of employment.

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.
 
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Stock Incentive Plan and Option Grant
 
2004 Stock Incentive Plan
 
On May 10, 2004, our Board of Directors approved equity incentive awards to certain of our directors, officers and employees and/or consultants and adopted, subject to stockholder approval, our 2004 Stock Incentive Plan (the “Plan”).  Our stockholders approved the Plan on June 3, 2004, and an amendment to the Plan on September 12. 2006.  There are 3,047,907 shares reserved for issuance of options and other stock awards under the Plan.  The number of shares that may be granted to any participant in a fiscal year is 500,000.  Options issued under the Plan will expire not more than ten years from the date of grant.

The Plan is a key aspect of our compensation program, designed to attract, retain, and motivate the highly qualified individuals required for our long-term success.
 
Stock Option Grant
 
On December 12, 2006, our Board of Directors granted 2,000,000 options under the Plan, of which 823,700 shares were granted to the current executive officers and directors.  The exercise price was $0.175, equal to the closing price of our common stock on December 12, 2006.  Pursuant to the approval of Board of Directors, after each of the first and second anniversaries of the grant date, 33% percent of the options will become exercisable.  After the third anniversary of the grant date, 34% of the options will become exercisable.

During 2009, a total number of 182,800 unexercised stock options were returned to the Plan pool following the separation of certain company employees.  These stock options are available for future grant.

On December 12, 2009, 1,232,600outstanding stock options were vested, among which 691,500 stock options in total are held by our current executive officers.

No options were granted under the Plan during 2009.
 
Outstanding Equity Awards at 2009 Fiscal Year-End
 
The following table sets forth the status of all outstanding equity awards of the Company as of December 31, 2009.
 
Outstanding Equity Awards at Fiscal Year-End
 Option Awards
 
Stock Awards
Name
 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
 
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
 
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
 
Option
Exercise
Price ($)
 
Option
Expiration
Date
 
Number
of
Shares
or Units
of
Stock
That
Have
Not
Vested
(#)
 
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
 
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
 
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#) 
(a)
 
(b)
 
(c)
 
(d)
 
(e)
 
(f)
 
(g)
 
(h)
 
(i)
 
(j)
Wei Li
  182,800  
Nil
  182,800   0.175  
12/04/16
 
Nil
 
Nil
 
Nil
 
Nil
Steven Ning Ma
 
Nil
 
Nil
 
Nil
 
Nil
  N/A  
Nil
 
Nil
 
Nil
 
Nil
Lianjun Luo
  132,200  
Nil
  132,200   0.175  
12/04/16
 
Nil
 
Nil
 
Nil
 
Nil
 
49

 

 
(1)
See information contained in subheading entitled “Stock Option Grant” under heading “2004 Stock Incentive Plan.”
 
Option Exercises and Stock Vested
 
No stock options were exercised by any officers or directors during 2008 and 2009.  We did not adjust or amend the exercise price of any stock options previously awarded to any named executive officers during 2008 and 2009.
 
Option Exercises and Stock Vested
 
 
Option Awards
 
Stock Awards
Name
 
Number of Shares
Acquired on
Exercise (#)
 
Value Realized on
Exercise ($)
 
Number of Shares
Acquired on
Vesting (#)
 
Value Realized on
Vesting ($)
(a)
 
(b)
 
(c)
 
(d)
 
(e)
Wei Li
 
Nil
 
Nil
 
Nil
 
Nil
Steven Ning Ma
 
Nil
 
Nil
 
Nil
 
Nil
Lianjun Luo
  
Nil
  
Nil
  
Nil
  
Nil
 
Director Compensation for 2009
 
We currently have no policy in effect for providing compensation to our directors for their services on our Board of Directors, and did not compensate our directors in 2009 for services performed as directors.
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table sets forth as of December 31, 2009 certain information with respect to the beneficial ownership of our common stock by (i) each of our executive officers, (ii) each person who is known by us to beneficially own more than 5% of our outstanding common stock, and (iii) all of our directors and executive officers as a group.  Percentage ownership is calculated based on 400,000,000 shares of our common stock outstanding as of December 31, 2009.  None of the shares listed below are issuable pursuant to stock options or warrants of the Company.
 
Title of class
    
Name and Address of Beneficial Ownership
   
Amount and Nature of
Beneficial Owner
   
Percentage of class
 
                     
Common Stock
 
 
Wei Li(1)
      13,064,794       3.3 %
Common Stock
 
 
Dachang Ju(2)
      10,062,088       2.5 %
Common Stock
 
 
Lianjun Luo
      1,305,562    
Ü
 
Common Stock
 
 
Qi Wang
      -       -  
Common Stock
 
 
Yunlong Zhang
      308,916    
Ü
 
Common Stock
 
 
All Star Technology Inc.
      12,356,672       3.1 %
Common Stock
 
 
InvestLink (China) Limited
      10,062,288       2.5 %
Common Stock
 
 
All officers and directors as a group (5 persons)
      24,741,360       6.2 %

Ü
Less than 1%
(1).
Consists of shares held by All Star Technology Inc., a British Virgin Islands international business company.  Wei Li exercises voting and investment control over the shares held by All Star Technology Inc.  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.
 
50

 

 
(2).
Consists of 7,812,088 shares of common stock held directly by InvestLink (China) Limited (“Investlink”) and 2,250,000 shares of common stock held by InvestLink as custodian for Guisheng Chen.  InvestLink has the sole power to vote or direct the vote and dispose or direct the disposition of 10,062,088 shares but disclaims beneficial ownership of such shares except to the extent of its pecuniary interest therein.  Dachang Ju exercises voting and investment control over the shares held by InvestLink.  Dachang Ju is a principal stockholder of InvestLink and may be deemed to beneficially own such shares, but disclaims beneficial ownership in such shares held by InvestLink except to the extent of his pecuniary interest therein.

Under the terms of the 6% Notes and 6% Note Warrants, the notes and warrants are exercisable by any holder only to the extent that the number of shares of common stock issuable pursuant to such securities, together with the number of shares of common stock owned by such holder and its affiliates (but not including shares of common stock underlying unconverted shares of callable secured convertible notes or unexercised portions of the warrants) would not exceed 4.99% of the then outstanding common stock as determined in accordance with Section 13(d) of the Exchange Act.  Therefore, the table above does not include beneficial ownership information of the following holders of the 6% Notes and 6% Note Warrants of the Company: AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, New Millennium Capital Partners II, LLC, Double U Master Fund LP, and Nite Capital LP.
 
Equity Compensation Plan Information
 
The following table sets forth certain information as of December 31, 2009 about our equity compensation plans under which our equity securities are authorized for issuance.
 
Equity Compensation Plan Information
Plan category
 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
   
Weighted-average exercise
price of outstanding options,
warrants and rights
   
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders
    1,232,600     $ 0.175       767,400  
Equity compensation plans not approved by security holders
    -       -    
 
 
Total
    1,232,600       -       767,400  
 
Change in Control
 
None.
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
 
For description of transactions with related parties, see Note 13 to Consolidated Financial Statements under Item 8 in Part II.

Under the independence standard set forth in Rule 4200(a) (15) of the Market Place Rules of the Nasdaq Stock Market, which is the independence standard that we have chosen to report under, none of the members of the Board of Directors are independent.

The relationships between our directors and the Company are as follows:
 
51

 


Mr. Wei Li is a principal stockholder of All Star Technology Inc, which holds 12,356,672 shares of our common stock.  Mr. Li may be deemed to beneficially own such shares and exercises voting and investment control over such shares. Mr. Li is also Chief Executive Officer of the Company.

Mr. Dachang Ju is a principal stockholder of InvestLink (China) Limited, which holds directly 7,812,088 shares of our common stock and 2,250,000 shares of common stock as custodian, Mr. Ju may be deemed to beneficially own such shares. Mr. Ju exercises voting and investment control over such shares.

Mr. Lianjun Luo was Chief Financial Officer of the Company for the fiscal year of 2008.  On December 31, 2008, the employment agreement between the Company and Mr. Lianjun Luo expired.  Both parties agreed not to renew this agreement.

Prof. Qi Wang is the Director of Kiwa-CAU R&D centre and also Vice President of the Company.

Mr. Yunlong Zhang is Vice President of the Company.
 
Item 14.
Principal Accounting Fees and Services
 
Fees Paid to Independent Public Accountants for 2009 and 2008.
 
Audit Fees
 
AGCA, Inc. audited our financial statements for year-end 2009, and reviewed our quarterly financial statements for 2009.  Since we do not have a formal audit committee, our entire Board of Directors serves as our audit committee.  We have not adopted pre-approval policies and procedures with respect to the Company’s accountants, but our shareholders’ meeting and board of directors approved the engagement of AGCA, Inc. before engagement.  All of the services described below were approved by our board of directors prior to performance.  The board of directors has determined that the payments made to its independent accountant for these services are compatible with maintaining such auditor's independence.

The aggregate audit fees for 2009 were approximately $130,000.  The amounts include fees for professional services rendered by AGCA, Inc. in connection with the audit of our consolidated financial statements for the 2009 fiscal year and reviews of our quarterly reports on the Form 10-Q for the first, second and third quarters of 2009 fiscal year.

Mao & Company, CPAs, Inc. audited our financial statements for year-end 2008, and reviewed our quarterly financial statements for 2008.  Since we do not have a formal audit committee, our entire Board of Directors serves as our audit committee.  We have not adopted pre-approval policies and procedures with respect to the Company’s accountants, but our shareholders’ meeting and board of directors approved the engagement of Mao & Company, CPAs, Inc. before engagement.  All of the services described below were approved by our board of directors prior to performance.  The board of directors has determined that the payments made to its independent accountant for these services are compatible with maintaining such auditor's independence.

The aggregate audit fees for 2008 were approximately $74,612.  The amounts include fees for professional services rendered by Mao & Company, CPAs, Inc. in connection with the audit of our consolidated financial statements for the 2008 fiscal year and reviews of our quarterly reports on the Form 10-Q for the first, second and third quarters of 2008 fiscal year.

52

 

 
Audit-Related Fees
 
Audit-related fees for 2009 and 2008 were nil.
 
Tax Fees
 
Tax service fees billed to a tax consultant for 2009 and 2008 were $4,500 in each year..
 
All Other Fees
 
During 2009, AGCA, Inc. has charged the Company $1,500 for IDD call, company search, issuance of review reports, copying, photocopying, courier, etc.  There were no additional aggregate fees billed by Mao & Company, CPAs, Inc. for 2008 for other services rendered to the Company.
 
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
Since we did not have a formal audit committee, our board of directors served as our audit committee.  We have not adopted pre-approval policies and procedures with respect to our accountants in 2009.  All of the services provided and fees charged by our independent registered accounting firms in 2009 were approved by the board of directors.
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
Exhibit
No.
 
Description
 
Incorporated by
Reference in
Document
 
Exhibit No. in
Incorporated
Document
3.1
 
Certificate of Incorporation, effective as of July 21, 2004
 
Form 8-K filed on July 23, 2004
 
3.1
3.2
 
Bylaws, effective as of July 22, 2004
 
Form 8-K filed on July 23, 2004
 
3.2
3.3
 
Certificate of Amendment to Certificate of Incorporation, effective as of January 9, 2009
 
Filed herewith
 
3.3
10.1
 
Advance Agreement by and between Wei Li and the Company dated January 10, 2008
 
Form 8-K filed on January 11, 2008
 
10.01
10.2
 
Stock Purchase Agreement between Kiwa Bio-Tech Products Group Corporation and Yuxin Zhou dated February 19, 2008
 
Form 8-K filed on February 22, 2008
 
10.01
10.3
 
Consulting Agreement between the Company and Robert Schechter dated January 10, 2008
 
Form 10-Q filed on August 11, 2008
 
10.1
10.4
 
Contract for Joint Venture between the Company and Hebei Huaxing Pharmaceuticals Co., Ltd. dated May 22, 2008
 
Form 8-K filed on May 27, 2008
 
10.1
 
53

 

 
10.5
 
Term Sheet for Redemption Convertible Notes dated September 25, 2008 between the Company and AJW Offshore Ltd., AJW Qualified Partners LLC, AJW Partners LLC, and New Millennium Capital Partners II LLC
 
Form 10-Q filed on November 12, 2008
 
10.3
10.6
 
Term Sheet for Redemption Convertible Notes dated September 25, 2008 between the Company and FirsTrust Group, Inc. dated October 7, 2008
 
Form 10-Q filed on November 12, 2008
 
10.4
10.7
 
2004 Stock Incentive Plan, amended in 2006
 
Form Pre 14A filed on July 28, 2006
 
Appendix A
10.8
 
Employment Agreement dated July 31, 2006, between the Company and Lianjun Luo
 
Form 8-K filed on August 7, 2006
 
10.02
10.9
 
Employment Agreement dated February 2, 2009 by and between the Company and Wei Li.
 
Form 8-K filed on February 2, 2009
 
10.1
10.10
 
Employment Agreement dated February 18, 2009 by and between the Company and Steven Ning Ma.
 
Form 8-K filed on February 19, 2009
 
10.1
10.11
 
Letter from Mao & Company, CPAs, Inc. dated June 7, 2009 to the Securities and Exchange Commission
 
Form 8-K filed on June 8, 2009
 
16.1
14
 
Code of Ethics
 
Form 10-K filed on May 18, 2009
 
14.1
21
 
List of Subsidiaries
 
Form 10-KSB filed on April 2, 2007
 
21
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
 
Filed herewith.
   
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
 
Filed herewith.
   
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith.
   
 
54


Kiwa Bio-Tech Products Group Corporation

 
Signatures
 
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: March 29, 2010
 
 
KIWA BIO-TECH PRODUCTS GROUP
CORPORATION.
     
 
By:
/s/ Wei Li
   
Wei Li
   
Chief Executive Officer
   
 (Principal Executive Officer)
     
 
By:
/s/ Steven Ning Ma
   
Steven Ning Ma
   
Chief Financial Officer
   
 (Principal Financial and Accounting Officer)
 
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the registrant and in the capacities and on the dates indicated.
 
/s/ Wei Li
 
Chief Executive Officer and
Chairman of the Board of Directors (Principal
Executive Officer)
 
March 29, 2010
Wei Li 
       
         
/s/ Steven Ning Ma
 
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
March 29, 2010
Steven Ning Ma
       
         
/s/ Xucheng Hu
 
Director
 
March 29, 2010
Xucheng Hu
       
         
/s/ Yunlong Zhang
 
Director
 
March 29, 2010
Yunlong Zhang
       
         
/s/ Lianjun Luo
 
Director
 
March 29, 2010
Lianjun Luo
       
         
 /s/ Qi Wang
 
Director
 
March 29, 2010
Qi Wang
       

 
55

 
 
Kiwa Bio-Tech Products Group Corporation

Index to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firms
F-1
   
Consolidated Balance Sheets
F-3
   
Consolidated Statements of Operations and Comprehensive Income
F-4
   
Consolidated Statement of Stockholders’ Equity
F-5
   
Consolidated Statements of Cash Flows
F-6
   
Notes to Consolidated Financial Statements
F-7
 

 

 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Kiwa Bio-Tech Products Group Corporation:

We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products Group Corporation and its subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of operations and comprehensive income, stockholders’ equity (deficiency), and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 the Company as of December 31, 2008, and the consolidated result of its operations and its cash flows for the year then ended 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 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has debts maturing in 2009 but a working capital deficit and a net capital deficiency as of December 31, 2008 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 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Mao & Company CPAs, Inc.
New York, New York
March 6, 2009 – except for discontinued operation disclosure in note 18 and the related reclassification presentation in the financial statements, for which the date is March 27, 2010.

 
F-1

 

 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Kiwa Bio-Tech Products Group Corporation:

We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products Group Corporation and subsidiaries (the “Company”) as of December 31, 2009 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended. 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.  The consolidated financial statements of Kiwa Bio-Tech Products Group Corporation and subsidiaries for the year ended December 31, 2008 were audited by other auditors whose report dated March 6, 2009 (except for discontinued operation disclosure in note 18 and the related reclassification presentation in the financial statements, for which the date is March 27, 2010.) expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also 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 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 consolidated financial position of Kiwa Bio-Tech Products Group Corporation and subsidiaries as of December 31, 2009, the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ AGCA, Inc.

Arcadia, California
March 29, 2010

F-2

 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
(AUDITED)

   
December 31,
 
   
2009
   
2008
 
ASSETS
           
Current assets
           
    Cash and cash equivalents
  $ 28,765     $ 18,609  
    Accounts receivable, net
    2,441       83,836  
    Inventories
    6,717       55,447  
    Prepaid expenses
    -       6,889  
    Prepayment for fertilizer trade
    -       2,955,550  
    Other current assets
    131,674       62,290  
    Current assets of discontinued operation
    385       727,633  
Total current assets
    169,982       3,910,254  
Property, Plant and Equipment
               
    Buildings
    1,243,137       1,241,972  
    Machinery and equipment
    565,745       565,218  
    Automobiles
    81,467       81,390  
    Office equipment
    99,159       99,071  
    Computer software
    21,186       21,166  
Property, plant and equipment - total
    2,010,694       2,008,817  
    Less: accumulated depreciation
    (688,617 )     (568,988 )
    Less: impairment on long-lived assets
    (1,066,594 )     (542,285 )
Property, plant and equipment - net
    255,483       897,544  
Construction in progress
    -       71,887  
Intangible asset - net
    -       151,231  
Deferred financing costs
    -       47,793  
Deposit to purchase proprietary technology
    -       126,443  
Property, plant and equipment of discontinued operation
    -       118,542  
Total assets
  $ 425,465     $ 5,323,694  
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
               
Current liabilities
               
    Accounts payable
  $ 279,248     $ 382,714  
    Advances from customers
    13,107       146,241  
    Construction costs payable
    290,429       297,472  
    Due to related parties - trade
    351,484       3,189,653  
    Due to related parties - non-trade
    1,819,507       897,070  
    Convertible notes payable, net
    1,518,171       1,273,391  
    Salary payable
    493,153       301,892  
    Taxes payable
    85,937       16,179  
    Penalty payable
    595,277       152,750  
    Current portion of long-term liabilities
    4,253       3,857  
    Other payable
    997,021       690,194  
    Current liabilities of discontinued operation
    105,515       558,897  
Total current liabilities
    6,553,102       7,910,310  
Long-term liabilities, less current portion
               
    Unsecured loans payable
    1,684,192       1,682,615  
    Bank notes payable
    7,671       11,881  
    Long-term convertible notes payable - net
    112,917       112,917  
Total long-term liabilities
    1,804,780       1,807,413  
                 
Shareholders’ deficiency
               
    Common stock - $0.001 par value
        Authorized 400,000,000 shares. Issued and
        outstanding 400,000,000 and 139,399,206 shares at
        December 31, 2009 and 2008
    400,000       139,399  
    Preferred stock - $0.001 par value
        Authorized 20,000,000 shares, none issued
    -       -  
    Additional paid-in capital
    8,093,337       10,269,855  
    Stock-based compensation reserve
    -       (135,843 )
    Deficit accumulated
    (16,394,930 )     (14,706,710 )
    Accumulated other comprehensive income (deficiency)
    (30,824 )     (26,787 )
Total Kiwa shareholders’ deficiency
    (7,932,417 )     (4,460,086 )
Non-controlling interest
    -       66,057  
Total deficiency
    (7,932,417 )     (4,394,029 )
Total liabilities and shareholders' deficiency
  $ 425,465     $ 5,323,694  
 
SEE ACCOMPANYING NOTES

F-3

 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(AUDITED)

   
Year Ended December 31,
 
   
2009
   
2008
 
Net sales
  $ 38,292     $ 226,869  
    Cost of sales
    32,201       166,834  
Gross profit
    6,091       60,035  
                 
Operating expenses
               
    Consulting and professional fees
    271,042       358,142  
    Officers’ compensation
    230,214       240,993  
    General and administrative
    1,164,733       914,539  
    Selling expenses
    75,994       44,568  
    Research and development
    192,103       192,977  
    Depreciation and amortization
    145,315       122,172  
    Allowance for doubtful accounts
    -       26,094  
Total operating expenses
    2,079,401       1,899,485  
Operating loss
    (2,073,310 )     (1,839,450 )
                 
Loss from disposal of obsolete inventory
    (55,183 )     (192,798 )
Loss from impairment of long-lived assets
    (804,780 )     (639,492 )
Interest expense
    (532,626 )     (753,917 )
Other income
    77,790       -  
Loss from continuing operations
    (3,388,109 )     (3,425,657 )
                 
Loss from discontinued operation
    (392,512 )     (258,164 )
                 
Net loss
    (3,780,621 )     (3,683,821 )
Net loss attributable to non-controlling interest
    66,092       51,633  
Net loss attributable to Kiwa shareholders
    (3,714,529 )     (3,632,188 )
                 
Other comprehensive loss
               
    Translation adjustment
    (4,037 )     (24,195 )
Comprehensive loss
  $ (3,718,566 )   $ (3,656,383 )
                 
Net (loss) per common share - basic and diluted -contiuing operations
  $ (0.010 )   $ (0.037 )
Net (loss) per common share - basic and diluted -discontiued operations
    (0.001 )     (0.003 )
Weighted average number of common
    shares outstanding-basic and diluted
    351,197,778       93,624,204  
 
SEE ACCOMPANYING NOTES

 
F-4

 


 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(AUDITED)

 
Kiwa Shareholders
             
 
Common Stock
   
Additional
Paid-in
Capital
   
Stock-based
Compensation
Reserve
   
Accumulated
Deficits
   
Other
 Comprehensive
 Deficiency
   
Non-controlling
interest
   
Total
 
Shares
   
Amount
 
Balance, December 31, 2007
  81,519,676       81,520       9,217,876       (307,053 )     (11,074,522 )     (2,592 )     110,838       (1,973,933 )
Issuance of 140,000 shares of common stock to an Investor Relations consultant on February 27, 2008
  140,000       140       19,460       -       -       -       -       19,600  
Issuance of 5,000,000 shares of common stock to an investor for the consideration of $650,000 on March 14, 2008
  5,000,000       5,000       645,000       -       -       -       -       650,000  
Issuance of common stock for conversion of principal and interest of 6% Notes during fiscal year ended December 31, 2008
  52,739,530       52,739       387,519       -       -       -       -       440,258  
Amortizaton of fair value of warrants issued to a financing consultant during fiscal year ended December 31, 2008
  -       -       -       77,181       -       -       -       77,181  
Amortization of fari value of employee stock options granted in 2006
  -       -       -       94,029       -       -       -       94,029  
Net loss for the fiscal year ended December 31, 2008
  -       -       -       -       (3,632,188 )             -       (3,632,188 )
Foreign currency translation difference
  -       -       -       -       -       (24,195 )     (45,113 )     (69,308 )
Net loss attributible to non-controlling interest
  -       -       -       -       -       -       332       332  
Balance, December 31, 2008 (as previously reported)
  139,399,206     $ 139,399     $ 10,269,855     $ (135,843 )   $ (14,706,710 )   $ (26,787 )   $ 66,057     $ (4,394,029 )
Cumulative effective of reclassification of warrants under ASC Topic 815
  -       -       (2,026,309 )     -       2,026,309       -       -       -  
Balance, January 1, 2009, as adjusted
  139,399,206     $ 139,399     $ 8,243,546     $ (135,843 )   $ (12,680,401 )   $ (26,787 )   $ 66,057     $ (4,394,029 )
Issuance of 75,000 shares of common stock to a legal service provider as compensation on January 8, 2009
  75,000       75       5,925       -       -       -       -       6,000  
Issuance of 140,000 shares of common stock to an Investor Relations consultant on February 18, 2009
  140,000       140       -       -       -       -       -       140  
Issuance of 100,000 shares of common stock to an Investor Relations consultant on February 23, 2009
  100,000       100       -       -       -       -       -       100  
Issuance of common stock for conversion of principal of 6% Notes during twelve months ended December 31, 2009
  260,285,794       260,286       (156,134 )     -       -       -       -       104,152  
Amortizaton of fair value of warrants issued to a financing consultant during twelve months ended December 31, 2009
  -       -       -       46,380       -       -       -       46,380  
Amortization of fari value of employee stock options granted in 2006
  -       -       -       89,463       -       -       -       89,463  
Net loss attributable to Kiwa shareholders for the twelve months ended December 31, 2009
  -       -       -       -       (3,714,529 )     -       -       (3,714,529 )
Foreign currency translation difference
  -       -       -       -       -       (4,037 )     35       (4,002 )
Net loss attributable to non-controlling interest
  -       -       -       -       -       -       (66,092 )     (66,092 )
Balance, December 31, 2009
  400,000,000     $ 400,000     $ 8,093,337       -     $ (16,394,930 )   $ (30,824 )     -     $ (7,932,417 )
 
SEE ACCOMPANYING NOTES

F-5

 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AUDITED)

   
Year Ended December 31,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net loss attributable to Kiwa shareholders
  $ (3,714,529 )   $ (3,632,188 )
Net loss from discontinued operations, net of income taxes
    326,421       206,531  
Adjustments to reconcile net loss to net cash used in
  operating activities:
               
    Depreciation and amortization
    201,984       317,379  
    Impairment loss on long-lived assets
    908,926       639,492  
    Amortization of detachable warrants, options and stocks as
       compensation
    538,808       844,069  
    Provision for doubtful debt and inventory impairment
    (1,544 )     275,613  
    Provision for penalty payable
    442,527       152,750  
    Non-controlling interest
    (66,092 )     (51,633 )
    Changes in operating assets and liabilities:
               
        Accounts receivable
    544,601       (102,577 )
        Inventories
    290,076       273,745  
        Prepaid expenses
    20,450       (7,669 )
        Prepayment to supplier - fertilizer trade
    -       (2,955,550 )
        Other current assets
    (57,976 )     (6,060 )
        Accounts payable
    (612,195 )     420,938  
        Salary payable
    247,646       -  
        Taxes payable
    69,714       -  
        Advances from customers
    (146,182 )     (10,353 )
        Due to related parties-trade
    147,908       57,352  
        Other payable
    293,224       -  
        Advances from related party - fertilizer trade
    -       2,955,550  
Net cash used in operating activities
    (566,233 )     (622,611 )
                 
Cash flows from investing activities:
               
    Purchase of property and equipment
    (7,320 )     (48,111 )
Net cash used in investing activities
    (7,320 )     (48,111 )
                 
Cash flows from financing activities:
               
    Proceeds from issuance of common stock
    -       650,000  
    Proceeds from related parties
    1,009,844       802,574  
    Repayment to related parties
    (87,407 )     (545,353 )
    Repayment of long-term borrowings
    (4,220 )     (5,606 )
Net cash provided by financing activities
    918,217       901,615  
Effect of exchange rate changes on cash and cash equivalents
    (8,075 )     (66,088 )
                 
Cash flows from discontinued operations
               
Net cash (used in) discontinued operating activities
    (326,433 )     (212,136 )
Net cash provided by discontinued investing activites
    -       5,863  
Net cash (used in) discontinued financing activites
    -       -  
                 
Cash and cash equivalents:
               
   Net increase (decrease)
    10,156       (41,468 )
   Balance at beginning of year
    18,609       60,077  
Balance at end of year
  $ 28,765     $ 18,609  
                 
Supplemental Disclosures of Cash flow Information:
               
Cash paid for interest
  $ 1,360     $ 1,008  
Cash paid for income taxes
  $ -     $ -  
                 
Non-cash operating, investing and financing activities:
               
    Issuance of common stock for conversion of
         convertible notes payable and  interest
    104,152       440,258  
    Issuance of stock as compensation to consultants
    6,000       19,600  
    Conversion of accrued interests into principal
    -       112,917  
    Setoff of prepayment for fertilizer trade against due to
    related parties (see Note 10(2))
    2,957,107       -  
 
SEE ACCOMPANYING NOTES
 
 
F-6

 
 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
Notes to Consolidated Financial Statements
 
1.
Description of Business and Organization
 
Organization – The Kiwa Bio-Tech Products Group Corporation (“the Company”) is the result of a share exchange transaction accomplished on March 12, 2004 between the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company originally organized under the laws of the British Virgin Islands on June 5, 2002 and Tintic Gold Mining Company (“Tintic”), a corporation originally incorporated in the state of Utah on June 14, 1933 to perform mining operations in Utah.  The share exchange resulted in a change of control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on a fully diluted basis and Kiwa BVI surviving as a wholly-owned subsidiary of Tintic.  Subsequent to the share exchange transaction, Tintic changed its name to Kiwa Bio-Tech Products Group Corporation.  On July 21, 2004, the Company completed its reincorporation in the State of Delaware.

The Company has established two subsidiaries in China: (1) Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”) in 2002 and (2) Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin”) in July 2006.  The following chart summarizes the Company’s organizational and ownership structure.


Business – The Company’s business plan is to develop, manufacture, distribute and market innovative, cost-effective and environmentally safe bio-technological products for agriculture markets located primarily in China.  The Company has acquired technologies to produce and market bio-fertilizer and also is developing a veterinary drug based on AF-01 anti-viral aerosol technology.

Going Concern and Management Plan - 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.

As of December 31, 2009, the Company had cash of $28,765, current ratio of 0.03 and quick ratio of 0.005.  The Company had an accumulated deficit of $16,394,930 and incurred net loss attributable to Kiwa shareholders of $3,714,529 and $3,632,188 during the years ended December 31, 2009 and 2008, respectively.  This trend is expected to continue.  These factors cast substantial doubt about the Company’s ability to continue as a going concern.

F-7

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
In addition, during the year ended December 31, 2009, Challenge Feed, the 20% minority shareholder of Kiwa Tianjin, without the Company’s prior permission, transferred titles to machinery and equipment as well as inventories of Kiwa Tianjin to its own creditors to settle its own debts.  On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.  In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin. Whilst the lawsuit is in process, Kiwa Tianjin has been unable to carry on the normal business and has classified bio-enhanced feed business through Kiwa Tianjin as discontinued operations.

Management is in the course of sourcing additional capital and considering ways to restructure or adjust the Company’s operations and product mix so as to increase profit margins in the future.  However, there is no guarantee that these actions will be successful.

These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
2.
Summaries of Significant Accounting Policies
 
Principle of Consolidation - These consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Kiwa BVI and Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”), and also its majority-owned subsidiary, Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin”).  All significant inter-company balances or transactions are eliminated on consolidation.

Basis of Preparation - The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”).

Use of Estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Significant accounting estimates include bad debt provision, impairment of inventory and long-lived assets, depreciation and amortization and fair value of warrants and options.

Country Risk - As the Company’s principal operations are conducted in China, the Company is subject to special considerations and significant risks not typically associated with companies operating 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 China.  The Company’s results of operations may be adversely affected by changes in the political and social conditions in China, 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 China are denominated in China Renminbi (“RMB”), which must be converted into other currencies before remittance out of China may be made.  Both the conversion of RMB into foreign currencies and the remittance of foreign currencies out of China require the approval from the Chinese government.  In recent years, the Chinese government has gradually loosened its control over foreign exchange, especially with respect to current foreign exchange accounts, for instance, by removing the requirement for advance examination and approval to open a current foreign exchange account and by increasing the quota for foreign exchange accounts.

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.  According to the Company’s credit policy, the Company generally provides 100% bad debt provision for the amounts outstanding over 365 days after the deduction of the amount subsequently settled after the balance sheet date, which management believes is consistent with industry practice in China region.

F-8

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

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

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

   
As of December 31,
 
   
2009
   
2008
 
Balance sheet items, except for equity accounts
    6.8282       6.8346  

   
Twelve months ended December 31,
 
   
2009
   
2008
 
Items in the statements of income
    6.8310       6.9480  
 
Advertising Costs - The Company charges all advertising costs to expense as incurred.  The total amounts of advertising costs charged to selling, general and administrative expense were $44,988 and $9,517 for the years ended December 31, 2009 and 2008, respectively.

Research and Development Costs - Research and development costs are charged to expense as incurred.  During the years ended December 31, 2009 and 2008, research and development costs were $192,103 and $192,977, respectively.

Shipping and Handling Costs - Substantially all costs of shipping and handling of products to customers are included in selling, general and administrative expense.  Shipping and handling costs for the years ended December 31, 2009 and 2008 were $5,999 and $12,758, respectively.

Net Loss Per Common Share - Basic loss per common share is calculated by dividing net loss attributable to Kiwa shareholders by the weighted-average number of shares of common stock outstanding during the period.  Diluted loss per common share includes dilutive effect of dilutive securities (stock options, warrants, convertible debt, stock subscription and other stock commitments issuable).  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 the effect would have been anti-dilutive.  Accordingly, basic and diluted loss per common share is the same for all periods presented.  As of December 31, 2009, potentially dilutive securities aggregated 1,467,435,018 shares of common stock.

Reclassification from Prior Period Financial Statements - The balance sheet as of December 31, 2008 and the statements of operations and cash flow have been reclassified to reflect the discontinued operations (see Note 18) and to conform to the current year presentation.

F-9

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
Fair value measurements
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying values of cash and cash equivalents, trade receivables and payables, and short-term debts approximate their fair values due to their short maturities.

There were no assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009.

Recent accounting pronouncement adopted
In June 2009, the FASB established the FASB Accounting Standards CodificationTM (ASC) as the single source of authoritative U.S generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC superseded all previously existing non-SEC accounting and reporting standards, and any prior sources of U.S. GAAP not included in the ASC or grandfathered are not authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). The ASC did no change current U.S. GAAP but changes the approach by referencing authoritative literature by topic (each a “Topic”) rather than by type of standard. The ASC has been effective for the Company effective July 1, 2009. Adoption of the ASC did not have a material impact on the Company’s Consolidated Financial Statements, but references in the Company’s Notes to Consolidated Financial Statements to former FASB positions, statements, interpretations, opinions, bulletins or other pronouncements are now presented as references to the corresponding Topic in the ASC.

Effective January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired subsequent to the adoption date.  The adoption of these revised provisions had no impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”), which amends and expands previously existing guidance on derivative instruments to require tabular disclosure of the fair value of derivative instruments and their gains and losses., This ASC also requires disclosure regarding the credit-risk related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. The adoption of this ASC did not have a material impact on the Company’s Consolidated Financial Statements.

F-10

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
During 2008, the Company adopted FASB ASC 820-10 (formerly FSP FAS 157-2, "Effective Date of FASB Statement 157"), which deferred the provisions of previously issued fair value guidance for nonfinancial assets and liabilities to the first fiscal period beginning after November 15, 2008. Deferred nonfinancial assets and liabilities include items such as goodwill and other nonamortizable intangibles. Effective January 1, 2009, the Company adopted the fair value guidance for nonfinancial assets and liabilities. The adoption of FASB ASC 820-10 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51"), which amends previously issued guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity. Among other requirements, this Statement requires that the consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement.  The adoption of the provisions in this ASC did not have a material impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, "Business Combinations"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree and the goodwill acquired.  In addition, the provisions in this ASC require that any additional reversal of deferred tax asset valuation allowance established in connection with our fresh start reporting on January 7, 1998 be recorded as a component of income tax expense rather than as a reduction to the goodwill established in connection with the fresh start reporting. The Company will apply ASC 805-10 to any business combinations subsequent to adoption.

Effective January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies"), which amends ASC 805-10 to require that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of ASC Topic 450, Contingences, to determine whether the contingency should be recognized at the acquisition date or after such date. FSP The adoption of ASC 805-20 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FASB Staff Position (“FSP”) No. FAS 107-1 and Accounting Principles Board 28-1, "Interim Disclosures about Fair Value of Financial Instruments"), which amends previous guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The adoption of FASB ASC 825-10-65 did not have a material impact on the Company’s Consolidated Financial Statements.

F-11

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
Effective July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments"). Under  ASC 320-10-65, an other-than-temporary impairment must be recognized if the Company has the intent to sell the debt security or the Company is more likely than not will be required to sell the debt security before its anticipated recovery. In addition, ASC 320-10-65 requires impairments related to credit loss, which is the difference between the present value of the cash flows expected to be collected and the amortized cost basis for each security, to be recognized in earnings while impairments related to all other factors to be recognized in other comprehensive income. The adoption of ASC 320-10-65 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly"), which provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased when compared with normal market activity for the asset or liability as well as guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have a material impact on the Company’s Consolidated Financial Statements.

New accounting pronouncement to be adopted
In December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits (formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”), which expands the disclosure requirements about plan assets for defined benefit pension plans and postretirement plans. The Company is required to adopt these disclosure requirements in the fourth quarter of 2009. It is expected the adoption of these disclosure requirements will have no material effect on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (not yet reflected in FASB ASC). SFAS No. 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” along with the exception from applying FIN 46(R), “Consolidation of Variable Interest Entities.” The standard is effective for the first annual reporting period that begins after November 15, 2009 (i.e. the Company’s fiscal year beginning January 1, 2010), for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. It is expected the adoption of this Statement will have no material effect on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” (not yet reflected in FASB ASC). The standard amends FIN No. 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard. SFAS No. 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN No. 46(R). This Statement will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009  (i.e. the Company’s fiscal year beginning January 1, 2010), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. As such, the Company will adopt this Statement for interim and annual periods ending after January 1, 2010.  It is expected the adoption of this Statement will have no material effect on the Company’s Consolidated Financial Statements.

F-12

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
In August, 2009, the FASB issued ASC Update No. 2009-05 (“Update 2009-05”) to provide guidance on measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS 157, "Fair Value Measurements").  The Company is required to adopt Update 2009-05 in the fourth quarter of 2009.  It is expected the adoption of this Update will have no material effect on the Company’s Consolidated Financial Statements.

In October 2009, the FASB concurrently issued the following ASC Updates:
 
·            ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue No. 09-3). This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.
 
·            ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1).  This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction.  This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.

These Accounting Standards Updates should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  Alternatively, an entity can elect to adopt these standards on a retrospective basis, but both these standards must be adopted in the same period using the same transition method.  The Company expects to apply this standard on a prospective basis for revenue arrangements entered into or materially modified beginning January 1, 2011.  The Company is currently evaluating the potential impact these standards may have on its financial position and results of operations.

In January 2010, the FASB issued the following ASC Updates:
 
·            ASU No. 2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application.
 
·            ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10).
 
·            ASU No. 2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  This Update amends Subtopic 820-10 that require new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends Subtopic 820-10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.
 
The Company expects that the adoption of the above Updates issued in January 2010 will not have any significant impact on its financial position and results of operations.

F-13

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
3.
Accounts Receivable
 
The following table sets forth gross amount, bad-debt allowance and net amount of accounts receivable as of December 31, 2009 and 2008, repectively.

Item
 
December 31, 2009
   
December 31, 2008
 
Accounts receivables - gross
  $ 2,441     $ 380,035  
Write-off for doubtful accounts
    -       (296,199 )
Accounts receivables - net
  $ 2,441     $ 83,836  
 
4.
Prepayment for fertilizer trade
 
On November 25, 2008, Kiwa Shandong and Oriental Chemical Industrial Corp., Ltd. (the “Oriental Chemical”) entered into “Chemical Fertilizer Sales Agreement,” (the “Chemical Fertilizer Purchase Agreement”) pursuant to which Oriental Chemical will sell to Kiwa Shandong 6,700 tons of chemical fertilizer products at the tentative price of RMB3,000 per ton.  Under this agreement, Kiwa Shandong prepaid $2,955,550 to Oriental Chemical.  As of December 20, 2009, Kiwa Shandong did not purchase any chemical fertilizer under the Chemical Fertilizer Purchase Agreement. Please also refer to Note 10 “Related Party Transaction – Kangtai – Fertilizer trade” section below.

On December 12, 2008, Kiwa Shandong and Kangtai entered into “Chemical Fertilizer Sales Agreement,” (the “Chemical Fertilizer Sales Agreement”) pursuant to which, Kiwa Shandong will sell to Kangtai 6,700 tons of chemical fertilizer products at the tentative price of RMB 3,130 per ton.  Under this agreement, Kangtai prepaid to Kiwa Shandong $2,957,973.  As of December 20, 2009, Kiwa Shandong did not sell any chemical fertilizer to Kangtai under the Chemical Fertilizer Sales Agreement.

On December 20, 2009, Kiwa Shandong, Oriental Chemical and Kangtai had entered into “Chemical Fertilizer Sales Termination Agreement,” (the “Chemical Fertilizer Termination Agreement”) pursuant to which Oriental Chemical and Kiwa Shandong confirmed that Chemical Fertilizer Purchase Agreement has been terminated.  Kiwa Shandong and Kangtai also confirmed that Chemical Fertilizer Sales Agreement was also terminated.  After the Chemical Fertilizer Termination Agreement took effect, Kiwa Shandong will no longer have any responsibilities nor interests under Chemical Fertilizer Purchase Agreement and Chemical Fertilizer Sales Agreement.
 
5.
Property, Plant and Equipment
 
The total gross amount of property, plant and equipment was $2,010,694 and $2,008,817 as of December 31, 2009 and 2008, respectively.

The building is on a piece of land the use right of which was granted to Kiwa Bio-Tech Products (Shandong) Co., Ltd. ("Kiwa Shandong) by local government free for 10 years. Then for another 20 years on a fee calculated according to Kiwa Shandong's net profit. Since Kiwa Shandong did not generate any net profit, no fee is payable.

Depreciation expense was $119,096 and $153,019 for the years ended December 31, 2009 and 2008, respectively.

F-14

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
Impairment on long-lived assets was $523,801 and $542,285 for the years ended December 31, 2009 and 2008, respectively.
 
All of our property, plant and equipment have been held as collaterals to secure the 6% Notes (See Note 12 below).
 
6.
Intangible Assets
 
The Company’s intangible asset as of December 31, 2009 consisted of a patent as follows:

Amortization Year
   
Gross carrying
value
   
Accumulated
amount of
amortization
   
Impairment on
Intangible
Assets
   
Net Value at
December 31,
2009
 
  8.5     $ 592,901     $ 413,004     $ 179,897     $ nil  

This patent is held as collateral to secure the 6% Notes (See Note 12 below).
 
7.
Deferred Financing Costs
 
The financing costs relating to 6% Notes (See Note 15 below) were nil and $47,793 as of December 31, 2009 and 2008, respectively.  These costs consist of financing commission paid to an investment bank, legal service fees, insurance premium and other related costs. The costs are being amortized over the three-year term of the 6% Notes, starting at various dates of each tranche of 6% Notes in 2006.
 
8.
Deposit to Purchase the Proprietary Technology
 
The balance of $126,443 as of December 31, 2008 is partial payment of the first installment of the transfer fee for the Anti-viral Aerosol technology pursuant to a Technology Transfer Agreement dated May 8, 2006 (See Note 17 below).  Since the Company did not make full payment for the first installment of consideration, the deposit to purchase proprietary technology had been charged to expenses.
 
9.
Construction Costs Payable
 
Construction costs payable represents remaining amounts to be paid for the first phase of construction of bio-fertilizer facility in Shandong.  The balance of construction costs payment on December 31, 2009 and 2008 was $290,429 and $297,472, respectively.
 
10.
Related Party Transactions
 
Amounts due to related parties consisted of the following as of December 31, 2009 and December 31, 2008:

F-15

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
   
Nature
 
Notes
 
December 31, 2009
   
December 31, 2008
 
Item
                   
Mr. Wei Li ("Mr. Li")
 
Non-trade
 
(1)
  $ 1,693,036     $ 837,347  
Kangtai International Logistics (Beijing) Co., Ltd. ("Kangtai")
 
Non-trade
 
(2)
    (45,029 )     (57,277 )
Ms. Yvonne Wang ("Ms. Wang")
 
Non-trade
 
(3)
    171,500       117,000  
Subtotal
          $ 1,819,507     $ 897,070  
                         
Kiwa-CAU R&D Center
 
Trade
 
(4)
    351,484       234,103  
Kangtai International Logistics (Beijing) Co., Ltd.
     
(2)
    -       2,955,550  
Subtotal           $ 383,513     $ 3,190,872  
Total           $ 2,203,020     $ 4,087,942  
 
(1) Mr. Li
 
Mr. Li is the Chairman of the Board, Chief Executive Officer and Chief Financial Officer of the Company.
 
Advances and Loans
 
As of December 31, 2008, the balance due to Mr. Li was $837,347.  During the year ended December 31, 2009, Mr. Li advanced $943,096 to the Company and was repaid $87,407.  As of December 31, 2009, the balance due to Mr. Li was $1,693,036.  Mr. Li has agreed that the Company may repay the balance when its cash flow circumstance allows.
 
Motor Vehicle Lease
 
In December 2004, the Company entered into an agreement with Mr. Li, pursuant to which Mr. Li leases to the Company a motor vehicle.  The monthly rental payment is $2,200.  The Company has extended this lease agreement with Mr. Li to the end of fiscal year 2010.
 
Guarantees for the Company
 
Mr. Li has pledged without any compensation from the Company all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes  (See Note 12 below).
 
(2) Kangtai
 
Non-trade
Kangtai International Logistics (Beijing) Co., Ltd., formerly named China Star Investment Management Co., Ltd., is a private company, 28% owned by Mr. Li. Mr. Li is the Chairman of Kantai.

The balance due from Kangtai on December 31, 2008 was $57,277.  During twelve months ended December 31, 2009, Kangtai has repaid $12,248 to the Company.  As of December 31, 2009, the balance due from Kangtai was $45,029.

 
F-16

 

Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)


Fertilizer trade
On December 12, 2008, Kiwa Shandong and Kangtai entered into “Chemical Fertilizer Sales Agreement,” (the “Chemical Fertilizer Sales Agreement”) pursuant to which, Kiwa Shandong will sell to Kangtai 6,700 tons of chemical fertilizer products at the tentative price of RMB3,130 per ton.  Under this agreement, Kangtai prepaid to Kiwa Shandong $2,955,550.  As of December 31, 2008, Kiwa Shandong did not sell any chemical fertilizer to Kangtai under the Chemical Fertilizer Sales Agreement.

On November 25, 2008, Kiwa Shandong and Oriental Chemical Industrial Corp., Ltd. (the “Oriental Chemical”) entered into “Chemical Fertilizer Sales Agreement,” (the “Chemical Fertilizer Purchase Agreement”) pursuant to which Oriental Chemical will sell to Kiwa Shandong 6,700 tons of chemical fertilizer products at the tentative price of RMB3,000 per ton.  Under this agreement, Kiwa Shandong prepaid to Oriental Chemical $2,955,550.  As of December 31, 2008, Kiwa Shandong did not purchase any chemical fertilizer under the Chemical Fertilizer Purchase Agreement.

On December 20, 2009, Kiwa Shandong, Oriental Chemical and Kangtai had entered into “Chemical Fertilizer Sales Termination Agreement,” (the “Chemical Fertilizer Termination Agreement”) pursuant to which Oriental Chemical and Kiwa Shandong confirmed that Chemical Fertilizer Purchase Agreement has been terminated.  Kiwa Shandong and Kangtai also confirmed that Chemical Fertilizer Sales Agreement was also terminated.  After the Chemical Fertilizer Termination Agreement took effect, Kiwa Shandong will no longer have any responsibilities nor interests under Chemical Fertilizer Purchase Agreement and Chemical Fertilizer Sales Agreement.  Kiwa Shandong, Oriental Chemical and Kangtai had confirmed that prepayment by Kangtai to Kiwa Shandong under the Chemical Fertilizer Sales Agreement and the prepayment by Kiwa Shandong to Oriental Chemical under the Chemical Fertilizer Purchase Agreement has been set off.
 
(3) Ms. Wang
 
Ms. Wang is the Secretary of the Company.

As of December 31, 2008, the amount due to Ms. Wang was $117,000.  During the year ended December 31, 2009, Ms. Wang has advanced $54,500 to the Company.  As of December 31, 2009, balance due to Ms. Wang was $171,500.  Ms. Wang has agreed that the Company may repay the balance when its cash flow circumstance allows.
 
(4) Kiwa-CAU R&D Center
 
In November 2006 Kiwa and China Agricultural University (the “CAU”) agreed to jointly set up a new research and development center, named Kiwa-CAU R&D Center.  The term of the agreement was ten years commencing from July 1, 2006.

Pursuant to the agreement, Kiwa agree to invest RMB 1 million (approximately $146,300) each year to fund research at Kiwa-CAU R&D Center.  Prof. Qi Wang, director of the Company, is also the director of Kiwa-CAU R&D Center.  The agreement also stipulated that the Kiwa-CAU R&D Center shall complete the following tasks each year:

l
Three new technological achievements get patented;
l
Two technological achievements pass the provincial level or ministerial level scientific and technological achievements qualification;
l
Develop two new products which can be commercialized..

During the fiscal year 2009, Kiwa-CAU R&D Center had concentrated on the following filed of works:
1. 
Screening of growth-promoting bacteria;
 
F-17

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
2. 
Screening of bio-control bacteria;
3. 
Screening of environmental microbiology;
4. 
Studies on fermentation technology and related production process;
5. 
Analysis of soil and fertilizer nutrients and fertilization program development;
6. 
Organic Fertilizer Application Techniques; and
7. 
Technical training and services.

During fiscal 2009, Kiwa-CAU R&D Center had successfully isolated forty-one strains of endophytic bacillus from plants. A number of strains had been observed to have the capability of boosting crop yield, dispelling chemical pesticide residual from soil.  These strains could be used for not only developing new biological preparation but also environmental protection preparation.

Management has assessed Kiwa-CAU R&D center’s performance for the fiscal year ended December 31, 2009; it is believed that Kiwa-CAU R&D center has achieved its goals.

As of December 31, 2008, the outstanding balance due to Kiwa-CAU R&D Center was $234,103.  During the year ended December 31, 2009, the Company paid $29,290 to Kiwa-CAU R&D Center.  As of December 31, 2009, the outstanding balance due to Kiwa-CAU R&D Center was $351,484.
 
11.
Unsecured Loans Payable
 
The balance of unsecured loans payable was $1,684,192 and $1,682,615 as of December 31, 2009 and December 31, 2008, respectively.  The movements from the balances at December 31, 2008 to December 31, 2009 arose from the effect of changes in the exchange rates prevailing at the balance sheet dates.  Unsecured loans payable consisted of the following at December 31, 2009 and December 31, 2008:

Item
 
December 31, 2009
   
December 31, 2008
 
                 
Unsecured loan payable to Zoucheng Municipal Government, non-interest bearing, becoming due within three years from Kiwa Shandong’s first profitable year on a formula basis, interest has not been imputed due to the undeterminable repayment date
  $ 1,318,063     $ 1,316,829  
                 
Unsecured loan payable to Zoucheng Science & Technology Bureau, non-interest bearing, it is due in Kiwa Shandong’s first profitable year, interest has not been imputed due to the undeterminable repayment date
    366,129       365,786  
Total
  $ 1,684,192     $ 1,682,615  

The Company qualifies for non-interest bearing loans under a Chinese government sponsored program to encourage economic development in certain industries and locations in China.  To qualify for the favorable loan terms, a company must meet the following criteria: (1) be a technology company with innovative technology or product (as determined by the Science Bureau of the central Chinese government); (2) operate in specific industries that the Chinese government has determined are important to encourage development, such as agriculture, environmental, education, and others; and (3) be located in an undeveloped area such as Zoucheng, Shandong Province, where the manufacturing facility of the Company is located.

F-18

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
According to the Company’s project agreement, Zoucheng Municipal Government granted the Company use of at least 15.7 acres in Shandong Province, China at no cost for 10 years to construct a manufacturing facility.  Under the agreement, the Company has the option to pay a fee of RMB480,000 ($70,297) per acre for the land use right after the 10-year period.  The Company may not transfer or pledge the temporary land use right.  The Company also committed to invest approximately $18 million to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province.  As of December 31, 2009, the Company invested approximately $1.91 million for the property, plant and equipment of the project.
 
12.
Long-Term Convertible Notes Payable
 
On June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional investors (collectively, the “Purchasers”) for the issuance and sale of (1) 6% secured convertible notes, due three years from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Notes”), convertible into shares of the Company’s common stock, and (2) warrants (the “Warrants”) to purchase 12,250,000 shares of the Company’s common stock.

In conjunction with the sale and issuance of the 6% Notes, the Company entered into a Registration Rights Agreement, amended in October 2006, the requirements of which the Company met by filing its registration statement on Form SB-2 on August 11, 2006 and subsequently amended on October 20, 2006 and June 29, 2007.

Closings for the sale of the 6% Notes occurred on June 29, August 15 and October 31, 2006 for $857,500, $735,000 and $857,500 principal amount, respectively.  The Company received $2,450,000 in aggregate from the three sales of the 6% Notes.

The conversion price of the 6% Notes is based on a 40% discount to the average of the trading price of the Company’s common stock on the OTC Bulletin Board over a 20-day trading period.  The conversion price is also adjusted for certain subsequent issuances of equity securities of the Company at prices below the conversion price then in effect.  The 6% Notes contain a volume limitation that prohibits the holder from converting further 6% Notes if doing so would cause the holder and its affiliates to hold more than 4.99% of the Company’s outstanding common stock.  In addition, each holder of 6% Notes agrees that they may not convert more than their pro-rata share (based on original principal amount) of the greater of $120,000 principal amount of 6% Notes per calendar month or the average daily dollar volume calculated during the 10 business days prior to a conversion, per conversion.  This conversion limit has since been eliminated pursuant to an agreement by the Company and the Purchasers (see discussion below).

The exercise price of the Warrants is $0.45 per share, subject to anti-dilution adjustments pursuant to a broad-based weighted average formula for subsequent issues of equity securities by the Company below the trading price of the shares.  The Purchase Agreement requires the Company to maintain a reserve of authorized common stock equal to 110% of the number of shares issuable upon full conversion of the 6% Notes and exercise of the Warrants.  The Purchase Agreement imposes financial penalties in cash (equal to 2% of the number of shares that the Purchaser is entitled to multiplied by the market price for each day) if the authorized number of shares of common stock is insufficient to satisfy the reserve requirements. The 6% Notes and the Warrants also impose financial penalties on the Company if it fails to timely deliver common stock upon conversion of the 6% Notes and exercise of the Warrants, respectively.

To enable reservation of a sufficient amount of authorized shares that may be issued pursuant to conversion of the 6% Notes and exercise of the Warrants, the Purchase Agreement required the Company to amend its Certificate of Incorporation to increase the number of authorized shares of common stock.  At the annual meeting for 2006, which was held on September 12, 2006, a proposal to amend our Certificate of Incorporation to increase the number of authorized shares of common stock, from 100,000,000 shares to 200,000,000 shares was approved by the required vote of our stockholders.  At the annual meeting held for 2008 on December 30, 2008 we further amended our Certificate of Incorporation by increasing the number of authorized shares of common stock from 200,000,000 to 400,000,000.  At our annual meeting for 2009, which was hold on December 28, 2009, the proposal of further amend the Certificate of Incorporation to increase the number of authorized shares from 400,000,000 to 800,000,000 was not approved by stockholders.

F-19

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
The Company incurs a financial penalty in cash or shares at the option of the Company (equal to 2% of the outstanding amount of the Notes per months plus accrued and unpaid interest on the Notes, prorated for partial months) if it breaches this or other affirmative covenants in the Purchase Agreement, including a covenant to maintain a sufficient number of authorized shares under its Certificate of Incorporation to cover at least 110% of the stock issuable upon full conversion of the Notes and the Warrants.  Pursuant to the relevant provisions for liquidated damages in the Purchase Agreement, as of December 31, 2009, the Company has accrued a total amount of $595,277 penalty, which was included in general and administrative expenses. .

The 6% Notes require the Company to procure the Purchaser’s consent to take certain actions including to pay dividends, repurchase stock, incur debt, guaranty obligations, merge or restructure the Company, or sell significant assets.

The Company’s obligations under the 6% Notes and the Warrants are secured by a first priority security interest in the Company’s intellectual property pursuant to an Intellectual Property Security Agreement with the Purchasers, and by a first priority security interest in all of the Company’s other assets pursuant to a Security Agreement with the Purchasers.  In addition, the Company’s Chief Executive Officer has pledged all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes and the Warrants.  The Purchasers are accredited investors as defined under the Securities Act and the 6% Notes and the Warrants and the underlying common stock upon conversion and exercise will be issued without registration under the Securities Act in reliance on the exemption provided by Rule 506 under Regulation D under the Securities Act.

The fair value of the Warrants underlying the three sales of the 6% Notes (amounting to 4,287,500 shares, 3,675,000 shares and 4,287,500 shares respectively) at the time of their issuance was determined to be $545,477, $416,976 and $505,503 calculated pursuant to the Black-Scholes option pricing model.  The fair value was recorded as a reduction to 6% Notes payable and was charged to operations as interest expense in accordance with effective interest method within the period of the 6% Notes.

The Purchasers of the 6% Notes and Warrants were introduced to the Company by an investment bank pursuant to an engagement letter agreement with the Company.  Pursuant to the engagement letter, the investment bank received a cash fee equal to 8% of the aggregate proceeds raised in the financing and to warrants in the quantity equal to 8% of the securities issued in the financing.  The Company recorded the cash fee and other direct costs incurred for the issuance of the convertible loan in aggregate of $30,000 as deferred debt issuance costs.  Debt issuance costs were amortized on the straight-line method over the term of the 6% Notes, with the amounts amortized being recognized as interest expense.  As of June 30, 2009 the debt issuance costs were fully amortized.

The warrants issued to the investment bank in connection with each tranche of 6% Notes (amounting to 343,000 shares, 294,000 shares and 343,000 shares) are exercisable for three years and have an exercise price equal to $0.2598.  The fair value of these warrants at the time of their issuance was determined to be $94,005, $60,324 and $77,214 calculated pursuant to the Black-Scholes option pricing mode.  As of June 29, 2009, warrants issued to the investment bank had expired.

On January 31, 2008, the Company entered into three Callable Secured Convertible Notes Agreements (“2% Notes”) with four of the Company’s 6% Notes purchasers converting their unpaid interest of $112,917 in total, into principal with an interest rate of 2% per annum, which will be due on January 31, 2011.  Other terms of the 2% Notes are similar to the 6% Notes. No principal of the 2% Notes has been converted so far.  As of December 31, 2009, the outstanding principal balance on the 2% Notes was $112,917.

F-20

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
On September 25 and October 7, 2008, the Company entered into an agreement with the Purchasers to redeem all of the 6% Notes and 2% Notes.  Under the redemption agreement, the Purchasers agreed to waive their participation right with respect to any new financing that closes before October 31, 2008, and suspend conversions of principal and interest under the 6% Notes and 2% Notes from September 25 to October 31, 2008.  The Company agreed to redeem the notes for a specified price if a new financing was completed before October 31, 2008.  Under the redemption agreement, if the Company failed to redeem the notes by October 31, 2008, the 6% Notes and 2% Notes would be automatically amended to remove limitations on the Purchasers’ right to convert under the 6% Notes and 2% Notes no more than (1) $120,000 per calendar month; and (2) the average daily dollar volume calculated during the ten (10) business days prior to a conversion, per conversion.

On October 27, 2008, the Company had informed the Purchasers that the Company would not be able to redeem the 6% Notes and the 2% Notes due to failure to close an anticipated new financing.  Therefore, the amendment to 6% Notes and 2% Notes took effective and the Purchasers resumed conversion.

During twelve months ended December 31, 2009, the Purchasers converted $104,152 principal and nil interest into 260,285,794 shares of common stocks.  As of December 31, 2009, face amount of convertible notes outstanding was $1,518,171.

On June 3, 2009, the Company has received Notice of Default from four of 6% Notes purchasers for reason of the Company’s failure to timely file registration or effect registration.  However, the Company believes that such Notes Purchasers’ claim is not valid and has not made any provision for liquidated damages in this regard.

On June 29, 2009, the 6% Notes were due.  The Company has informed the Purchasers of its inability to repay the outstanding balance on the due date.  Therefore, the 6% Notes are in default.
 
13.
Equity-Based Transactions
 
During the year ended December 31, 2009, the Company effected the following equity-based transactions:
 
a)
Expenses paid by issuance of common stocks:
i. Issuance of 75,000 shares as partial settlement of legal fees on January 8, 2009.
Shares of the Company during the year were rarely traded at around par value and accordingly, the agreed price of $0.08 is adopted as the fair value of this transaction.

ii. Issuance of 240,000 shares as partial settlement of investor relationship consulting fees on February 18 and 23, 2009 in accordance of an agreement dated July 1, 2008.
Shares of the Company during the year were rarely traded at around par value and accordingly, the par value is adopted as the fair value of these transactions.

Fair values of the above transactions were accounted for as expenses during the year.

 
b)
Convertible notes of $104,152 were converted, under difference periods of fewer than 10% of total issued capital each occasion, into 260,285,794 common stocks.

After the above transactions, the Company’s issued and outstanding common stocks increased to 400,000,000 shares as of December 31, 2009.
 
F-21

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
14.
Stock-based Compensation
 
On December 12, 2006, the Company granted options for 2,000,000 shares of its common stock under its 2004 Stock Incentive Plan.  During fiscal 2007 and 2008, 362,100 and 222,500 stock options were returned to the Company when the holders separated from the Company without exercising the options.  As of December 31, 2009, 1,232,600 options were outstanding.  As of December 31, 2009, none of the stock options were exercised.

The exercise price of all of our outstanding options was $0.175 per share, equal to the closing price of our common stock on December 12, 2006.  On each of the first and second anniversaries of the grant date, 33% percent of the options will become exercisable.  On the third anniversary of the grant date, 34% of the options will become exercisable.

The Company has adopted ASC Topic 718 effective as of January 1, 2006.  The fair value of the options granted at the grant date was determined to be $320,154 (approximately $0.16 per share), calculated pursuant to the Black-Scholes option pricing model.  The calculated fair value is recognized as expense over the applicable vesting periods, using the straight-line attribution method.  Unamortized fair value of stock options granted to those who separated from the Company has been charged to expense, while the options returned to the Company.  During the twelve months ended December 31, 2009 and 2008, $89,463 and $94,028 was charged to expense, respectively.
 
15.
Segment Reporting
 
Our principal business is bio-fertilizer for fiscal 2008.  We used to engage in livestock feed business and chemical fertilizer trade business.  At the end of fiscal year 2009, we made arrangements to terminate all agreements related to chemical fertilizer trade.  At the end of fiscal 2009, we classified livestock feed business as discontinued operation.  Management believes that the following table highlights relevant information to the chief operation decision makers for measuring business performances and financing needs and preparing the corporate budget and other items.  As most of the Company’s customers are located in China, no geographical segment information is presented.
 
F-22

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
Item
 
Bio-fertilizer
   
Livestock Feed
(Discontined)
   
Chemical Fertilizer
Trade (1)
   
Corporate (2)
   
Total
 
Fiscal Year Ended December 31, 2009
                             
Net sales
  $ 38,292     $ -     $ -     $ -     $ 38,292  
Gross profit
    6,091       -       -       -       6,091  
Operating expenses
    424,735       -       -       1,654,666       2,079,401  
Operating loss
    (418,644 )     -       -       (1,654,666 )     (2,073,310 )
Loss from disposal of obsolete inventory
    (55,183 )     -       -       -       (55,183 )
Loss from impairment of long-lived assets
    (678,337 )     -       -       (126,443 )     (804,780 )
Interest income (expense)
    (246 )     -       -       (532,380 )     (532,626 )
Other income
    5,856       -       -       71,934       77,790  
Non-controlling interest
    -       -       -       -       -  
Net loss attributable to Kiwa shareholders
  $ (1,146,554 )   $ -     $ -     $ (2,241,555 )   $ (3,388,109 )
                                         
Total assets as of December 31, 2009
  $ 252,638     $ 385     $ -     $ 172,442     $ 425,465  
                                         
Fiscal Year Ended December 31, 2008
                                       
Net sales
  $ 226,869     $ -     $ -     $ -     $ 226,869  
Gross profit
    60,035       -       -       -       60,035  
Operating expenses
    360,320       -       2,323       1,536,842       1,899,485  
Operating loss
    (300,285 )     -       (2,323 )     (1,536,842 )     (1,839,450 )
Loss from disposal of obsolete inventory
    (192,798 )     -       -       -       (192,798 )
Loss from impairment of long-term assets
    (639,492 )     -       -       -       (639,492 )
Interest income (expense)
    (438 )     -       -       (753,479 )     (753,917 )
Non-controlling interest
    -       -       -       -       -  
Net loss attributable to Kiwa shareholders
  $ (1,133,013 )   $ -     $ (2,323 )   $ (2,290,321 )   $ (3,425,657 )
                                         
Total assets as of December 31, 2008
  $ 1,223,645     $ 846,175     $ 2,955,550     $ 298,324     $ 5,323,694  

(1)                On June 23rd, 2008, Kiwa Bio-Tech Products (Shangdong) Co., Ltd. (Kiwa Shandong) received approval from the Ministry of Commerce of the People's Republic of China, ratifying authority for Kiwa Shandong to sell fertilizer products, including chemical fertilizers, complex fertilizers and compound fertilizers to other companies.
(2)                Beijing Representative Office of Kiwa Shandong fulfills part of corporate managerial function. Most of its expenses relating to this function were categorized into corporate segment.
 
16.
Income Tax
 
There is no provision (benefit) for income taxes for the years ended December 31, 2009 and 2008 since the Company and its subsidiaries have incurred operating losses and have established a valuation allowance equal to the total deferred tax asset.

The loss generated in the U.S., British Virgin Islands and China (Kiwa Shandong and Kiwa Tianjin) before income taxes in 2009 and 2008, respectively, was as follows:

   
Years Ended December 31,
 
   
2009
   
2008
 
Income (Loss) in U.S. before income taxes
  $ (1,483,597 )   $ (1,228,183 )
Income (Loss) in British Virgin Islands before income taxes
    (120,000 )     (120,000 )
Income (Loss) in Kiwa Shandong before income taxes
    (1,784,512 )     (2,093,534 )
Income (Loss) in Kiwa Tianjin before income taxes
    (326,420 )     (190,471 )
Total
  $ (3,714,529 )   $ (3,632,188 )
 
F-23

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
The tax effect of temporary differences and operating loss carryforwards is as follows as of December 31, 2009 and 2008:
 
   
Year Ended December 31,
 
   
2009
   
2008
 
Deferred tax assets
           
    Net operating loss carryforwards
  $ 1,311,782     $ 1,130,492  
    Allowance for doubtful accounts receivable
 
  0        50,529  
    Value difference of intangible assets
    0       27,987  
    Impairment of inventories
    8,277       28,920  
    Impairment of long-lived asset
    101,751       73,239  
    Accrued expenses
    137,285       40,286  
      1,559,095       1,351,453  
Deferred tax liabilities
               
    Prepaid expenses
    0       (375 )
    Deferred financing cost
    0       (7,169 )
      0       (7,544 )
                 
Valuation allowance
    (1,559,095 )     (1,343,909 )
                 
Net deferred tax assets
  $ -     $ -  

In accordance with the current tax laws in China, Kiwa Shandong and Kiwa Tianjin would normally be subject to a corporate income tax rate of 25% on its taxable income. However, in accordance with the relevant income laws in China, Kiwa Shandong and Kiwa Tianjin are exempt from corporate income taxes for their first two profitable years and are entitled to a 50% tax reduction for the succeeding three years.  After the Enterprise Income Tax Law of the PRC promulgated on March 16, 2007 took effect as of January 1, 2008, fiscal year 2009 shall be regarded as the second profitable year for determining eligibility of these benefits even if Kiwa Shandong or Kiwa Tianjin have not been profitable in 2009. Kiwa Shandong and Kiwa Tianjin have not provided for any corporate income taxes since they had no taxable income for the years ended December 31, 2009 and 2008. The difference between the effective income tax rate and the expected statutory rate for Kiwa Shandong and Kiwa Tianjin was as follows:

   
Year Ended December 31, 2009
   
Year Ended December 31, 2008
 
Statutory rate
    25.0 %     25.0 %
Income tax holiday
    (25.0 )%     (25.0 )%
Effective income tax rate
    -       -  

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

Net operating loss of the Company could be carried forward and taken against any taxable income for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the Internal Revenue Code of 1986, as amended. The net operating loss of Kiwa Shandong and Kiwa Tianjin could be carried forward for a period of not more than five years from the year of the initial loss pursuant to relevant P.R.C. tax laws and regulations.
 
17.
Commitments and Contingencies
 
The Company has the following material contractual obligations:
 
(1)           Operating lease commitments
 
The Company leased an office in Beijing on July 15, 2007.  The operating lease agreement will expire at January 14, 2010.  The monthly rental payment for the office is RMB 96,074 (approximately $14,068).  Rent expense under the operating leases for the twelve months ended December 31, 2009 and 2008 was $153,759 and $132,000, respectively.

F-24

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
Lease commitments under the foregoing lease agreements are as follows:

Fiscal Year
 
Amount
 
2010
  $ 6,027  
2011
    -  
2012
    -  
2013
    -  
2014
    -  
Thereafter
    -  
Total
  $ 6,027  
 
(2)           Technology acquisition
 
On May 8, 2006 the Company entered into a Technology Transfer Agreement with Jinan Kelongboao Bio-Tech Co. Ltd. (“JKB”). Pursuant to the agreement, JKB agreed to transfer its AF-01 Anti-viral Aerosol technology for veterinary medicines to the Company. Pursuant to the agreement the Company will pay JKB a transfer fee of RMB10 million (approximately $1.369 million), of which RMB 6 million will be paid in cash and RMB 4 million will be paid in stock. The cash portion will be paid in installments, the first installment RMB 3 million was set for May 23, 2006 initially, of which RMB 1 million has been paid and both parties have agreed to extend the remaining RMB 2 million to the date when the application for new veterinary drug certificate is accepted.  Three other installments of RMB 1 million are due upon the achievement of certain milestones, the last milestone being the issuance by the PRC Ministry of Agriculture of a new medicine certificate in respect of the technology.  The RMB 4 million stock payment will be due 90 days after the AF-01 technology is approved by the appropriate PRC department for use as a livestock disinfector for preventing bird flu. The agreement will become effective when the first installment has been fully paid.

During the year ended December 31, 2009, no payment was made to JKB.  The Company is still pursuing to acquire AF-01 technology and develop veterinary drug product based on this technology.  There were no changes to the terms of the Technology Transfer Agreement.
 
(3)           Operation of Kiwa-CAU R&D Center
 
Pursuant to the agreement on joint incorporation of the research and development center between CAU and Kiwa Shandong dated November 14, 2006, Kiwa Shandong agrees to invest RMB1 million (approximately $146,451) each year to fund research at the R&D Center.  The term of this Agreement is ten years starting from July 1, 2006.  Qi Wang, one of our director commencing in July 2007 acts as Director of Kiwa-CAU R&D Center since July 2006.
 
(4)           Investment in manufacturing and research facilities in Zoucheng, Shandong Province in China
 
According to the Project Agreement with Zoucheng Municipal Government in 2002, the Company has committed to investing approximately $18 million to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province. As of December 31, 2009, the Company had invested approximately $1.91 million for the project.
 
F-25

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
(5)           PRC employee costs
 
According to the prevailing laws and regulations of the PRC, the Company’s subsidiaries in the PRC are required to cover its employees with medical, retirement and unemployment insurance programs.  Management believes that due to the transient nature of its employees, they do not need to provide all employees with such social insurances, and have not paid the social insurances for all employees.

In the event that any current or former employee files a complaint with the PRC government, the Company's subsidiaries may be subject to making up the social insurances as well as administrative fines.  As the Company believes that these fines would not be material, no provision has been made in this regard.
 
18.
Discontinued Operation
 
In accordance with the provisions of ASC topic 360 (formerly SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the disposal of our bio-enhanced feed business segment is presented as assets and liabilities of a discontinued operation in the accompanying consolidated financial statements.

The consolidated balance sheets at December 31, 2009 and 2008 were updated to reflect the assets and liabilities of the bio-enhanced feed business segment as a discontinued operation. The following table summarizes the assets and liabilities of the discontinued operation, excluding intercompany balances eliminated in consolidation, at December 31, 2009 and 2008, respectively:

   
December 31,
 
   
2009
   
2008
 
Assets
           
Cash and cash equivalents
  $ 385     $ 377  
Accounts receivable - net
    -       406,224  
Inventories - net
    -       296,339  
Prepaid expenses
    -       13,551  
Other current assets
    -       11,142  
Property, plant and equipment - net
    -       118,542  
Total assets
  $ 385     $ 846,175  
                 
Liabilities
               
Accounts payable
    -     $ 514,238  
Advances from customers
    -       12,959  
Due to related-parties-trade
    32,029       1,219  
Salary payable
    73,486       16,972  
Other payable
    -       13,509  
Total liabilities
  $ 105,515     $ 558,897  
 
The income statement for the year ended December 31, 2008 was adjusted to reflect the bio-enhanced feed business segment as a discontinued operation. The following results of operations of bio-enhanced feed business are presented as a loss from a discontinued operation in the consolidated statements of operations:
 
F-26

 
Kiwa Bio-Tech Products Group Corporation
Notes to Consolidated Financial Statements
(Audited)

 
   
Fiscal year ended December 31,
 
   
2009
   
2008
 
Net sales
  $ 3,615,860     $ 8,948,868  
Gross profit
    55,636       157,483  
Operating expenses
    115,758       415,608  
Operating loss
    (60,122 )     (258,125 )
Interest expense
    -       (39 )
Impairment on long-lived assets
    (104,146 )     -  
Loss from discontinued operation
    (228,244 )     -  
Non-controlling interest
    66,092       51,633  
Net loss from discontinued operations
  $ (326,420 )   $ (206,531 )

During the year ended December 31, 2009, Challenge Feed, the 20% minority shareholder of Kiwa Tianjin, without our prior permission, transferred titles to machinery and equipment as well as inventories of Kiwa Tianjin to its own creditors to settle its own debts. On December 22, 2009, Kiwa Tianjin filed a lawsuit against Challenge Feed in the local court of Wuqing District, Tianjin, where Kiwa Tianjin is domiciled.  In the lawsuit, Kiwa Tianjin asserted that Challenge Feed unlawfully disposed of the assets held by Kiwa Tianjin.  The local court is currently reviewing the complaint and related documents filed with it.  Assets disposed by Challenge Feed includes inventory amounting to $221,848 and fixed assets at the amount of $104,190.   As a result, Kiwa Tianjin could no longer use its assets including machinery and inventory in its normal course of operation.  As of December 31, 2009, the Company has classified its bio-enhanced feed business through Kiwa Tianjin as discontinued operations.
 
 
F-27