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EX-31.1 - KIWA BIO-TECH PRODUCTS GROUP CORPv217958_ex31-1.htm
EX-31.2 - KIWA BIO-TECH PRODUCTS GROUP CORPv217958_ex31-2.htm
EX-32.1 - KIWA BIO-TECH PRODUCTS GROUP CORPv217958_ex32-1.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, 2010

¨
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:
     
Securities registered pursuant to
Section 12(g) of the Act:
(Title of Each Class)
None
     
Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.¨Yes xNo

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 xNo
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.xYes¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ¨ Yes  ¨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 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.x

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). oYes xNo

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, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $440,000.

The number of shares of registrant’s common stock outstanding as of April 10, 2011 was 400,000,000.
 
 
 

 
 
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2010
INDEX

 
TABLE OF CONTENTS
 
PART I
 
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
1
ITEM 1. BUSINESS
 
1
ITEM 1A. RISK FACTORS
 
10
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
23
ITEM 2. PROPERTIES
 
23
ITEM 3. LEGAL PROCEEDINGS
 
24
ITEM 4. (REMOVED AND RESERVED)
 
25
PART II
 
26
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
26
ITEM 6. SELECTED FINANCIAL DATA
 
26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
38
ITEM 9A. CONTROLS AND PROCEDURES
 
39
ITEM 9B. OTHER INFORMATION
 
40
PART III
 
41
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
41
ITEM 11. EXECUTIVE COMPENSATION
 
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
48
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
48
PART IV
 
50
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
50
SIGNATURES
  
51

 
 

 
 
Part I
 
Special Note Regarding Forward-Looking Statements
 
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 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.
 
 
We develop, manufacture, distribute and market innovative, cost-effective and environmentally safe bio-technological products for agriculture.  Our main products are bio-fertilizers.  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.
 
 
1

 
 
Bio-fertilizers
 
We have developed a number of bio-fertilizers and are continuing to develop new products in this area.  In 2002, Kiwa BVI chartered Kiwa Shandong, a wholly-owned subsidiary organized under the laws of the 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 bio-fertilizer products to the agricultural market in China.  Since then, we have been devoted to expanding our market share.
 
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, these products 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 develop, manufacture and market biologically enhanced feed for livestock.  Pursuant to the joint venture agreement between the Company and Challenge Feed, we formed Kiwa Tianjin, a company organized and operating under the laws of the PRC, and the Company invested $480,000 in cash in return for an 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 leased 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 of Wuqing District ruled that the local court would not examine the lawsuit against Challenge Feed since Challenge Feed entered into bankruptcy proceedings and that all related matters would be solved during Challenge Feed’s bankruptcy proceedings.
 
On August 29, 2010, Kiwa Tianjin filed objections with the local court of Wuqing District and Challenge Feed’s bankruptcy administrator.  According to Challenge Feed’s bankruptcy administrator, the filed objections have been received but have not been examined.
 
 As a result of Challenge Feed’s actions, Kiwa Tianjin was unable to operate as it no longer had the necessary machinery, equipment and inventory.  As a result, as of December 31, 2010, the Company 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”), pursuant to which JKB agreed to transfer to the Company’s PRC subsidiary, its AF-01 anti-viral aerosol technology for veterinary medicine applications, including the exclusive production and other related rights to produce an anti-viral aerosol veterinary drug.  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.  Pursuant to the payment schedule in the Technology Transfer Agreement, the transfer of the technology will be effective upon the full payment of the first installment of the purchase price in the amount of RMB 3,000,000.  As of December 31, 2010, the Company had paid one-third of the first installment or RMB 1,000,000.  The Company intends to use this technology to develop a commercialized aerosol for application in fowl houses and other animal holding facilities to prevent and cure viral-borne diseases.
 
 
2

 
 
In addition, pursuant to the Technology Transfer Agreement, JKB agreed to supply us on an exclusive basis the raw material for the 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 under the contract.
 
The Technology Transfer Agreement provides that in the event the Company fails to develop the AF-01 product or fails to sell veterinary medicine product within two years, JKB has the right to take back the development rights to such product in which case any products developed will belong to JKB.  The Technology Transfer Agreement expired on May 6, 2008.  However, the Company is negotiating with JKB a renewal of the Technology Transfer Agreement.  There can be no assurance that we can renew the Technology Transfer Agreement or successfully acquire the AF-01 anti-viral aerosol technology.
 
If we are successful in renewing the Technology Transfer Agreement, before marketing any products developed from this technology, we will need to: (1) successfully complete safety evaluations, pre-clinical studies, pharmacological and toxicological tests, clinical trial reports, stability test reports, environmental impact reports, residue depletion tests 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 with the goal of establishing a joint venture or other strategic relationship to develop and manufacture this product.
 
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;
 
 
3

 
 
l
Invest in mature technologies that will not require substantial research and development to commercialize;
 
l
Utilize proprietary technology to supply ag-biotech inputs to the market at lower cost than our competitors;
 
l
Construct or acquire new production facilities, and improve existing facilities to improve our manufacturing capability in China;
 
l
Build and strengthen our “KIWA” brand which will increase our ability 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
 
l
Enhance our 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 and industrial organizations (such as “China Green Food Association”) to strengthen existing sales networks in rural areas, thereby reaching end-users in a more cost-effective manner; cut off selling expenses incurred 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
Chinese agricultural products producers that provide high value-added agricultural products (such as fruits, vegetables, meat, eggs that meet the requirements of green food/organic food) ;
 
 
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.
 
 
4

 
 
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-fertilizers
 
We have developed six bio-fertilizer products with bacillus spp and/or photosynthetic bacteria as core ingredients.  Bacillus spp is a 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 enhance the photosynthetic capacity of green plants by increasing the utilization of sunlight, which helps keep the photosynthetic process at a vigorous level, enhances the capacity of plants to transform inorganic materials to organic products, and boosts overall plant health and productivity.
 
Our bacillus bacteria based fertilizers are protected by patents.  In 2004, we acquired patent no. ZL 93101635.5 entitled “Highly Effective Composite Bacteria for Enhancing Yield and the Related Methodology for Manufacturing” from China Agricultural University (“CAU”) for the aggregate purchase of $480,411, consisting of $60,411 in cash and 1,000,000 shares of our common stock, valued at $0.42 per share (aggregate value of $420,000).  Our photosynthetic bacteria based fertilizers are also protected by trade secret laws.
 
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.
 
 
5

 
 
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 between CAU and Kiwa Shandong dated November 14, 2006, Kiwa Shandong agreed to contribute RMB 1 million (approximately $151,515) 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.  The Company has spent $182,970 and $192,103 for its research and development activities during the years ended December 31, 2010 and 2009, respectively.  The costs incurred by Company’s research and development activities are not borne directly by customers.
 
During fiscal 2010, Kiwa-CAU R&D Center concentrated on the following activities:
 
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.
 
During fiscal 2010, Kiwa-CAU R&D Center had successfully isolated thirty-three strains of endophytic bacillus from plants. A number of strains had been observed to have the capability of boosting crop yield and 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 fertilizers, 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 2008:
 
 
6

 
 
Data item
 
2008
   
2007
   
2006
   
2005
   
2004
   
2003
   
2002
   
2001
   
2000
   
1999
   
1990
   
1980
   
1970
 
Corn
    165,910       152,300       145,482       139,365       130,287       115,830       121,310       114,094       106,001       128,084       96,821       62,600       33,030  
Cotton
    7,492       7,624       6,746       5,714       6,324       4,860       4,916       5,324       4,417       3,829       4,508       2,707       2,277  
Early rice
    N/A       31,515       31,868       31,873       32,217       29,484       30,288       34,002       37,623       40,973       51,649       49,140       37,410  
Late rice
    N/A       33,513       34,669       34,614       32,959       31,903       35,244       41,754       41,423       48,120       50,438       36,710       26,320  
Middle rice
    N/A       121,005       116,034       114,104       113,914       99,268       109,007       101,382       108,861       109,394       89,661       44,410       39,320  
Wheat
    112,460       109,298       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
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.  On January 1, 2006, the agricultural tax was abolished.  Since 2004, the Central People’s Government of the PRC has continuously issued “Number One Document” regarding rural areas of China.  The latest “Number One Document” issued on January 31, 2010, contains a wide-range policies promoting the development of sustainable agriculture methods, for example, improving the income level of hundreds of millions of farmers, strengthening supervision of farm inputs and actively developing green-food and organic food production.
 
Bio-fertilizer Market
 
To increase overall crop yield, farmers in China use vast amounts of chemical fertilizers.  According to the U.S. Department of Agriculture, the use of chemical fertilizers in China skyrocketed from 10,863,000 tons in 1979 to 52,390,000 tons in 2008, underpinning a compound annual growth rate of 5.58%.  However, notwithstanding the continuous growth of total fertilizer consumption, the way that Chinese farmers apply fertilizer is beginning to change.  From 1979 to 2008, the percentage of nitrogenous fertilizer application to total amount of fertilizer consumption decreased gradually from 76% to 43.9%.  Meanwhile, the percentage of phosphate fertilizer and potash fertilizer increased steadily.  More importantly, whereas in 1976, 100% of China’s fertilizer consumption was chemical fertilizer (including nitrogenous fertilizer, phosphate fertilizer and potash fertilizer); in 2008, the rate decreased to 69%. Other fertilizers, including bio-fertilizer have begun to be accepted by Chinese farmers. (Source: ERS-United States Department of Agriculture)
 
The excessive use of chemical fertilizers in China is also reflected by the China-to-U.S. rate of chemical fertilizer application.  According to data from the U.S. Department of Agriculture, in 2005 Chinese farmers applied 2.05 times the nitrogen fertilizer and 1.8 times the phosphate fertilizer compared to their U.S. counterparts.
 
Use of chemical fertilizer in China is now higher than it has ever been.  This increase in use of chemical fertilizers 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.
 
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.
 
 
7

 
 
Competition
 
Bio-fertilizer
 
The Company believes that there are about 400 producers of microbial fertilizers 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 twenty years and customers are more accustomed to using their established products as compared to our products.
 
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.
 
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.
 
In fiscal 2010 we purchased all of our raw materials from a single supplier, Beijing Shuang Long A Mu Si Technologies Co., Ltd. Since the market for our raw material is not tight and will not be in the foreseeable future, we do not expect to have any difficulties obtaining our required supply of raw materials.
 
Customers
 
We had a total of 15 customers as of December 31, 2010.  A single customer accounted for 79.9% of our net sales for the year ended December 31, 2010.  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 in this product line.
 
 
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Seasonality
 
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.  Generally, we expect the second and third quarters to 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 or continue.
 
Employees
 
We currently employ 25 full-time employees in China, including seven management staff, and one employee in the United States.  We also have 28 seasonal employees in China.
 
Available Information
 
The Company files or furnishes Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, registration statements and other items with the Securities and Exchange Commission (SEC). The Company provides access free of charge to all of these SEC filings, as soon as reasonably practicable after filing or furnishing, on its Internet site located at http://www.kiwabiotech.com/tuoziy.htm?eid=12. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC.
 
The public may read and copy any materials and files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
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).  The amount of costs incurred in connection with compliance with environmental laws during fiscal 2010 and 2009 were immaterial.
 
Environmental Matters
 
Our two manufacturing facilities, Kiwa Shandong and Kiwa Tianjin, have passed environmental impact assessments by local environmental authorities.  Photosynthesis bacteria, bacillus ssp, and actinomycetes are environmentally friendly and are not known to cause any environmental problems.
 
 
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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.
 
(2) Inventories.  Kiwa Tianjin had a long standing agreement to lease Challenge Feed’s factory facilities and warehouse for the storage of its inventory.  Challenge Feed disposed of Kiwa Tianjin’s inventories including raw materials, packaging and finished goods stored in the factory to repay Challenge Feed’s debt without the permission of Kiwa Tianjin.
 
Kiwa Tianjin is seeking damages against Challenge Feed in the amount of approximately RMB 2.2 million in total.
 
The local court of Wuqing District has informed the Company that it will not examine the lawsuit against Challenge Feed since Challenge Feed has entered into bankruptcy proceedings.  Related matters will be solved during Challenge Feed’s bankruptcy proceedings.
 
On August 29, 2010, Kiwa Tianjin filed objections to the local court of Wuqing District and Challenge Feed’s bankruptcy administrator.  According to Challenge Feed’s bankruptcy administrator, the filed objections have been received but have not been examined.
 
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, 2010
 
As of December 31, 2010, the Company had an accumulated deficit of $18,670,713, of which, $2,275,783 and $3,714,529 were incurred during the years ended December 31, 2010 and 2009, respectively.
 
 
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As of December 31, 2010, we had cash and cash equivalents of $32,816 and total current assets of $106,022; at the same time, we had current liabilities of $8,768,262, denoting a current ratio (current assets divided by current liabilities) of 0.01 and a quick ratio (cash divided by current liabilities) of 0.004.  At the end of fiscal 2010, we also had long-term liabilities of $1,736,452.
 
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, 2010, 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. On January 31, 2011, the 2% Notes were due and the Company failed to make repayment for outstanding balances.  Thus the 2% 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 Years Ended December 31, 2010 and 2009
 
During the years ended December 31, 2010 and 2009, our sales revenue from continuing operations was $88,056 and $38,292, respectively.  The Company’s gross profit was $33,255 and $6,091, respectively, denoting a gross profit margin of 37.8% and 15.9%, respectively.  During fiscal years 2010 and 2009, our loss from continuing operations was $2,275,783 and $3,388,109, respectively.  Net losses attributable to Kiwa stockholders for both periods were $2,275,783 and $3,714,529, respectively.
 
Overview of the Company’s Cash flow Status for the Years Ended December 31, 2010 and 2009
 
During fiscal years ended December 31, 2010 and 2009, our operating activities for continuing operations used net cash of $983,280 and $566,233, respectively.  We also invested $424 and $7,320 in purchasing property and equipment during both periods.  Although our financing activities for continuing operations provided net cash of $1,070,998 and $918,217 in the fiscal years of 2010 and 2009, respectively, we had cash of only $32,816 and $28,765 on December 31, 2010 and 2009, respectively.
 
The Company’s Ability of Raising New Financing
 
Continuous losses and a low share price have significantly impacted the Company’s ability to raise additional financing.  As of December 31, 2010, the closing price of our common stock reported by on the OTC Bulletin Board was $0.004 and the market value of the Company was $1,600,000.  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 obtain the Purchaser’s consent to take certain actions including paying dividends, repurchasing stock, incurring debt, guaranteeing obligations, merging or restructuring the Company, or selling significant assets.  As a result of these restrictions, our ability to raise new financing is severely limited.
 
Kiwa Shandong’s Ability to Continue as a Going Concern is in Doubt
 
Kiwa Shandong is our wholly-owned subsidiary engaged in researching, developing, producing and marketing bio-fertilizer.  However, since its inception in 2002, Kiwa Shandong has not generated material revenues.  Moreover, Kiwa Shandong has never been profitable.  As of December 31, 2010, Kiwa Shandong has an accumulated deficit of $3,580,373.
 
 
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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 pay tenure tax on a quarterly basis at the rate of approximately $1,660 per acre.  However, beginning in January, 2007, the China central government adopted a series of policies to strengthen land management, including doubling the 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 result, local authorities may reduce the acreage of the land grant.  The Company is in negotiation with Zoucheng Municipal Government to renew the agreement.  However, there is no assurance that the Company will successfully renew the agreement with Zoucheng Municipal Government.  In the future, the Company may consider moving the primary location of Kiwa Shandong’s operation to other locations in China.
 
As of December 31, 2010, we tested the recoverability of our long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa Shandong’s long-lived assets were impaired.  Management is also assessing the usage of our long-lived assets in Kiwa Shandong; it is possible that we would dispose of 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 reduce the acreage of land we use in Kiwa Shandong to lower tax expenditures or move the principal location of operations to other locations in China.
 
Kiwa Tianjin’s Operations have been 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 of Wuqing District has informed the Company the lawsuit against Challenge Feed will not be examined since Challenge Feed has entered into bankruptcy proceedings.  Related matters will be solved during Challenge Feed’s bankruptcy proceedings.
 
On August 29, 2010, Kiwa Tianjin filed objections to the local court of Wuqing District and Challenge Feed’s bankruptcy administrator.  According to Challenge Feed’s bankruptcy administrator, objections filed have been received but have not been examined.
 
As a result, Kiwa Tianjin could no longer use its assets including machinery and inventory in normal course of operation.  As of December 31, 2010, the Company has classified its bio-enhanced feed business through Kiwa Tianjin as discontinued operations.
 
 
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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 new markets and conducting 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 eight 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 we 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 2010, one customer accounted for approximately 79.9% of our net sales in bio-fertilizer product line.  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 in this 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.

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;
 
 
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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, 2010 to December 31, 2010, the market close price for our common stock as quoted on the OTC Bulletin Board has ranged from a low of $0.001 to a high of $0.0045 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.
 
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.
 
 
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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.
 
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.
 
 
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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.
 
During fiscal 2010, our sales revenue was very limited, and 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 8 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.
 
 
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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.
 
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 doubling 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 plans to reduce the acreage that we lease and return part of the land to the local authority to lower 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 slow  down.  The financial meltdown has significantly slowed down the growth of the world economy.  There can be no assurance that Chinese economy and our growth and profitability will not be affected.
 
 
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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.
 
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.
 
 
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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 the above mentioned 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.
 
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.
 
 
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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 planned 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.
 
We have no 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 on 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.
 
As required by Section 404 of the U.S. Sarbanes-Oxley Act, our management has concluded that our internal controls over our financial reporting are ineffective as of December 31, 2010.  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.
 
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.
 
 
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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.
 
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.
 
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 1,313,837,238 shares of our common stock based on the average price of three lowest prices within 20 trading days before December 31, 2010.  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 a proposed amendment to our certificate of incorporation, we cannot repay the 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 2010 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, 2010, 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, 2010, amount of authorized shares does not meet the requirements as set forth by the security purchase agreement in connection with the 6% Notes.
 
 
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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, 2010, 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.
 
During fiscal 2010, the lowest trading price of our common stocks was $0.001.  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 1B.  Unresolved Staff Comments
 
None.
 
Item 2.
Properties
 
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 ($72,478) 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, 2010, we had invested approximately $1.91 million in plant and equipment for the project.  The Company is in negotiation with Zoucheng Municipal Government to renew the agreement.  However, there is no assurance that the Company will successfully renew the agreement with Zoucheng Municipal Government.  In the future, the Company may consider moving the primary location of Kiwa Shandong’s operation to other locations in China.
 
 
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From January 1, 2007, China central government adopted a series of policies to strengthen land management, including doubling the 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 that the building coverage be not 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 a portion of the land granted to us.
 
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 of bio-fertilizer production facilities was not fully completed due to shortage of capital.
 
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’ 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, 2010, the lease agreement has expired.
 
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.
 
Kiwa Tianjin is seeking damages against Challenge Feed in the amount of approximately RMB 2.2 million in total.
 
The local court of Wuqing District has informed the Company that it will not examine the lawsuit against Challenge Feed since Challenge Feed has entered into bankruptcy proceedings.  Related matters will be solved during Challenge Feed’s bankruptcy proceedings.
 
On August 29, 2010, Kiwa Tianjin filed objections to the local court of Wuqing District and Challenge Feed’s bankruptcy administrator.  According to Challenge Feed’s bankruptcy administrator, the filed objections have been received but have not  been examined.
 
 
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Item 4.
(Removed and Reserved.)
 
 
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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.  During fiscal 2010, the market price for our common stock has ranged from $0.001 to $0.0045.
 
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 2010
 
High
   
Low
 
First Quarter
  $ 0.004     $ 0.002  
Second Quarter
  $ 0.0023     $ 0.001  
Third Quarter
  $ 0.0041     $ 0.0011  
Fourth Quarter
  $ 0.0045     $ 0.0025  

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  

Holders
 
As of March 20, 2011, 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.
 
Item 6.
Selected Financial Data
 
Not required.
 
 
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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, 2010 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, 2010 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, our 80% subsidiary.  At the end of 2009, Kiwa Tianjin discontinued its business operations, because it lost possession of its primary assets including machinery and inventory, necessary to its business operations due to an unsettled dispute.  This dispute is currently pending in court. As a result, the Company has classified the bio-enhanced feed business as discontinued operations.
 
We generated $88,056 and $38,292 in revenue from continuing operations in fiscal years 2010 and 2009, respectively, reflecting an increase of 130.0%.  We incurred a net loss of $2,275,783 and $3,388,109 from continuing operations and a net loss of nil and $392,512 from discontinued operations during fiscal 2010 and 2009, respectively.
 
Due to our limited revenues 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 generated $1,070,998 and $918,217 during fiscal 2010 and 2009, 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.
 
Going Concern
 
Overview of the Company’s Financial Condition as of December 31, 2010
 
As of December 31, 2010, the Company had an accumulated deficit of $18,670,713, of which, $2,275,783 and $3,714,529 were incurred during the years ended December 31, 2010 and 2009, respectively.
 
As of December 31, 2010, we had cash and cash equivalents of $32,816 and total current assets of $106,022; at the same time, we had current liabilities of $8,768,262, denoting a current ratio of 0.01 and a quick ratio of 0.004.  At the end of fiscal 2010, we also had long-term liabilities of $1,736,452.
 
 
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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, 2010, the outstanding principal of the 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. On January 31, 2011, the 2% Notes were due and the Company failed to make repayment for outstanding balances.  Thus the 2% 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 Years Ended December 31, 2010 and 2009
 
During the years ended December 31, 2010 and 2009, our sales revenue from continuing operations was $88,056 and $38,292, respectively.  The Company’s gross profit was $33,255 and $6,091, respectively, denoting a gross profit margin of 37.8% and 15.9%, respectively.  During fiscal years 2010 and 2009, our loss from continuing operations was $2,275,783 and $3,388,109, respectively.  Net losses attributable to Kiwa stockholders for both periods were $2,275,783 and $3,714,529, respectively.
 
Overview of the Company’s Cash flow Status for the Years Ended December 31, 2010 and 2009
 
During fiscal year ended December 31, 2010 and 2009, our operating activities for continuing operations used net cash of $983,280 and $566,233, respectively.  We also invested $424 and $7,320 in purchasing property and equipment during both periods.  Although our financing activities for continuing operations provided net cash of $1,070,998 and $918,217 in the fiscal year of 2010 and 2009, we had cash of only $32,816 and $28,765 on December 31, 2010 and 2009, respectively.
 
The Company’s Ability of Raising New Financing
 
Continuous losses and a low share price have significantly impacted the Company’s ability to raise additional financing.  As of December 31, 2010, the closing price of our common stock reported by on the OTC Bulletin Board was $0.004 and the market value of the Company was $1,600,000.  In addition, 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 obtain the Purchaser’s consent to take certain actions including paying dividends, repurchasing stock, incurring debt, guaranteeing obligations, merging or restructuring the Company, or selling significant assets.  As a result of these restrictions, our ability to raise new financing is severely limited.
 
Kiwa Shandong’s Ability to Continue as a Going Concern is in Doubt
 
Kiwa Shandong is our wholly-owned subsidiary engaged in researching, developing, producing and marketing bio-fertilizer.  However, since its inception in 2002, Kiwa Shandong has not generated material revenues.  Moreover, Kiwa Shandong has never been profitable.  As of December 31, 2010, Kiwa Shandong has an accumulated deficit of $3,580,373.
 
 
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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 pay tenure tax on a quarterly basis at the rate of approximately $1,660 per acre.  However, beginning in January, 2007, the China central government adopted a series of policies to strengthen land management, including doubling the 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 result, local authorities may reduce the acreage of the land grant.  The Company is in negotiation with Zoucheng Municipal Government to renew the agreement.  However, there is no assurance that the Company will successfully renew the agreement with Zoucheng Municipal Government.  In the future, the Company may consider moving the primary location of Kiwa Shandong’s operations to other locations in China.
 
As of December 31, 2010, we  tested  the recoverability of our long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa Shandong’s long-lived assets were impaired.  Management is also assessing the usage of our long-lived assets in Kiwa Shandong; it is possible that we would dispose of 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 reduce the acreage of land we use in Kiwa Shandong to lower tax expenditures or move the principal location of operations to other locations in China.
 
Kiwa Tianjin’s Operations have been 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 of Wuqing District has informed the Company the lawsuit against Challenge Feed will not be examined since Challenge Feed has entered into bankruptcy proceedings.  Related matters will be solved during Challenge Feed’s bankruptcy proceedings.
 
On August 29, 2010, Kiwa Tianjin filed objections to the local court of Wuqing District and Challenge Feed’s bankruptcy administrator.  According to Challenge Feed’s bankruptcy administrator, objections filed have been received but have not been examined.
 
As a result, Kiwa Tianjin could no longer use its assets including machinery and inventory in normal course of operation.  As of December 31, 2010, the Company has classified its bio-enhanced feed business through Kiwa Tianjin as discontinued operations.
 
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 new markets and conducting 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.
 
 
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Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with our financial statements for the latest eight 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, 2010 was US$1.00 = RMB6.6227.
 
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.
 
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, 2010 and 2009, and the audited statements of operations, equity movement and cash flows for the fiscal years ended December 31, 2010 and 2009, and the related notes thereto, for further discussion of our accounting policies.
 
 
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Accounts Receivable
 
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 a 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 of 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, 2010, the net value of property and equipment and intangible assets was $25,922 and nil, respectively, which represented approximately 19.6% 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 $219,118 and $804,780 as loss from impairment of long-lived assets during the years ended December 31, 2010 and 2009, respectively.
 
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 adopted ASC Topic 718 “Share Based Payment” to recognize options granted to employees as derivative instruments in our consolidated financial statements.
 
We calculate the fair value of the warrants and options using the Black-Scholes Model.
 
 
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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 15 customers during fiscal 2010 and a single customer who accounted for 89.5% of our net sales for the year ended December 31, 2010.  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.
 
In fiscal 2010 we had a single supplier.  In 2009, two suppliers accounted for 85.7% and 6.4% of net purchases for fiscal 2009, respectively.  Historically our existing suppliers have met our needs.  The Company does not believe that the loss of its sole supplier would impact the Company’s ability to produce its products because the raw materials used in our bio-fertilizer products are widely available from a variety of alternative sources.
 
Results of Operations
 
Net Sales
 
Net sales were $88,056 and $38,292 for the years ended December 31, 2010 and 2009, representing a $49,764 or 130.0% increase.  The increase was primarily as a result of a one-time sales transaction of $78,787 during the first quarter of 2010.
 
Cost of Sales
 
Cost of sales was $54,801 and $32,201 for the years ended December 31, 2010 and 2009, respectively.  The increase of $22,600 or 70.2% in cost of sales was primarily due to an increase in net sales.
 
 
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Gross Profit
 
Gross profit was $33,255 and $6,091, representing a profit margin of 37.8% and 15.9% for the years ended December 31, 2010 and 2009, respectively.  This increase of $27,164 in gross profit was due to (1) increased amount of revenue realized and (2) higher gross profit margin of the products sold.  The Company is focusing on enhancing profitability of its bio-fertilizer product sector by developing and selling higher profit margin products.
 
Consulting and Professional Fees
 
Consulting and professional fees incurred in principal operations were $180,871 and $271,042 for the years ended December 31, 2010 and 2009, respectively, representing a decrease of $90,171 or 33.3%.  During fiscal 2009, the Company issued amendments to its quarterly reports for the three months ended March 31, 2009 and June 30, 2009, which resulted in higher professional fees.
 
Officers’ Compensation
 
Officers’ compensation was $151,435 and $230,214 for the years ended December 31, 2010 and 2009, denoting a $78,779 or 34.2% decrease.  During fiscal 2009, $71,364 was charged to officer’s compensation as a result of amortizing the fair value of stock options issued to officers on December 13, 2006.  (See Item 11 in Part III.)
 
General and Administrative
 
General and administrative expenses were $1,263,069 and $1,164,733 for the years ended December 31, 2010 and 2009, an increase of $98,336 or 8.4%.  General and administrative expenses include salaries, travel and entertainment, rent, office expense, telephone expense and insurance costs.  The increase mainly resulted from the expansion of our operating activities, which led to an increase in rent, salaries, travel expenses and office expenses.  We also charged $491,038 and $442,527 of liquidated damages in connection with the 6% Notes to general and administrative expenses during the years ended December 31, 2010 and 2009, respectively  (see Note 8 to the Consolidated Financial Statements).
 
Selling Expenses
 
During 2010 and 2009, selling expenses were $3,626 and $75,994, respectively.  The $72,368 or 95.2% decrease was mainly attributable to our adjustment of marketing and sales policies in our fertilizer business.  The Company had to reduce its selling expenses as a result of the Company’s severe cash constraints during 2010.
 
Research and Development
 
Research and development expenses decreased by $9,133 or 4.8% to $182,970, for the year ended December 31, 2010, as compared to $192,103 for the year ended December 31, 2009.  The research and development expense mainly consists 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).
 
 
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Depreciation and Amortization
 
Depreciation and amortization, excluding depreciation included in cost of production and depreciation of research equipment, decreased $118,087 or 81.3% to $27,228, for the year ended December 31, 2010, as compared to $145,315 for the same period of 2009.  Most of our property, plant and equipment in Kiwa Shandong were impaired and charged to expenses at the end of 2009.  As a result, depreciation and amortization decreased significantly during 2010 compared to 2009.
 
Loss From Disposal of Obsolete Inventory
 
During the years ended December 31, 2010 and 2009, the Company incurred losses resulting from the disposal of obsolete inventory in the amounts of $42,721 and $55,183, respectively.  Due to the unique nature of bio-fertilizer products, some of our raw materials have a shorter shelf life than chemical substances.  The Company continues to adjust its product mix.  As a result, some of its raw material inventories have become obsolete and cannot be used.  We have decided to dispose of these raw materials as obsolete inventory.
 
Loss From Impairment of Long-lived Assets
 
At the end of fiscal years 2010 and 2009, we tested the recoverability of long-lived assets.  Based on our evaluation, the Company charged $219,118 and $804,780 to loss from impairment of long-lived assets in fiscal 2010 and 2009, respectively.
 
Net Interest Expenses
 
Net interest expense was $242,606 in 2010 and $532,626 in 2009, representing a $290,020 or 54.5% decrease.  The significant decrease in interest expense was due to amortization of the fair value of warrants issued in connection with the 6% Notes of $348,932 in 2009.  The fair value of warrants was fully amortized in 2009.   The 6% Notes have been  in default since June 2009 and a default interest rate of 15% per annum has been charged on the 6% Notes.
 
Other Income
 
Other income during the years ended December 31, 2010 and 2009 was $4,606 and $77,790.  This income was generated by our bio-fertilizer business.
 
Loss from Discontinued Operations
 
During the years ended December 31, 2010 and 2009, the Company incurred a net loss of nil and $392,512 from discontinued operations.  During both periods, discontinued operations refer to the bio-enhanced feed business.
 
Net Loss Attributable to Kiwa Stockholders
 
Net loss attributable to Kiwa stockholders for fiscal 2010 and 2009 was $2,275,783 and $3,714,529, representing $1,438,746 or 38.7% decrease.  This decrease resulted from the net effect of the following factors: (1) increase in gross profit of $27,164 or 446.0%; (2) decrease in operating expenses of $270,202 or 13.0%; (3) decrease in loss from disposal of obsolete inventory from $55,183 in 2009 to $42,721 in 2010; (4) decrease in loss from impairment of long-lived assets from $804,780 in 2009 to $219,118 in 2010; (5) decrease in interest expenses of $290,020 or 54.5%; (5) other income of $4,606 in 2010 and $77,790 in 2009; (6) loss from discontinued operations decreased from $392,512 in 2009 to nil in 2010; and (7) nil and $66,092 in net loss attributable to non-controlling interest in subsidiary in 2010 and 2009, respectively.
 
 
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Comprehensive Loss
 
Comprehensive loss decreased by $1,278,213 or 34.4% to $2,440,353 for the year ended December 31, 2010, as compared to $3,718,566 for the comparable period of 2009.  The decrease in comprehensive loss in the current year as compared to fiscal 2009 is due to a decrease of $1,438,746 in net loss attributable to Kiwa stockholders offset by an increase of $160,533 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 2010, we raised $1,338,637 in total from related parties and repaid $259,902 to related parties.  To some extent, these advances improved our short-term liquidity, however as of December 31, 2010, our current liabilities exceeded current assets by $8,662,240, reflecting a current ratio of 0.01:1, whereas current liabilities exceeded current assets by $6,383,120, reflecting a current ratio 0.03:1, as of December 31, 2009.  The sharp downturn in our short-term liquidity was mainly due to continuous losses, which resulted in a decrease of $63,960 of current assets and an increase in current liabilities of $2,215,160 as of December 31, 2010 when compared to December 31, 2009.  During the year ended December 31, 2010, we issued nil shares resulting from the conversion of principal of the 6% Notes into our common stock as compared to 260,285,794 shares issued resulting from conversion of $104,151 of principal during 2009.  Since the Company does not have sufficient financial capability to repay the 6% Notes and has issued all of its 400,000,000 authorized shares, the Company cannot issue additional shares to repay the 6% Notes, unless the Company can obtain stockholder approval to amend its certificate of incorporation to increase the authorized shares of common stock (see Note 8 to the Consolidated Financial Statements).
 
As of December 31, 2010 and 2009, we had cash of $32,816 and $28,765, respectively.  The change is outlined as follows.
 
During 2010, our operating activities from continuing operations utilized cash of $983,280, as compared with $566,233 used by operations in 2009.  Such cash was mainly used for maintaining operations of a public company and working capital for our bio-fertilizer business.
 
During 2010 and 2009, our investing activities utilized $424 and $7,320 in acquiring property and equipment.
 
During the year ended December 31, 2010, we generated cash inflow of $1,070,998 from financing activities, consisting of proceeds from related parties of $1,338,637, which was offset in part by repayment of $259,902 to related parties and long-term borrowings of $7,737.  During the year ended December 31, 2009, we generated cash inflow of $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.
 
Operating activities of discontinued operations used $326,433 in the year ended December 31, 2009 and nil during the comparable period of 2010.
 
As of December 31, 2010, we had an accumulated deficit of $18,670,713, which was made up in part of a net loss attributable to Kiwa stockholders of $2,275,783 during 2010 and $3,714,529 during 2009.  We do not anticipate generating sufficient positive operating cash inflow to fund our planned operations.
 
 
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In 2011, we plan to 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 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.
 
Given the fact that:
 
(1)
Extremely low share price.  The price of the Company’s our common stocks ranged from $0.001 to $0.0045 per share during fiscal 2010;
 
(2)
Continuous losses.  As of December 31, 2010, the Company had an accumulated deficit of $18,670,713, which was made up in part of net losses attributable to Kiwa stockholders of  $2,275,783 and $3,714,529  during the years ended December 31, 2010 and 2009, respectively;
 
(3)
Deteriorating financial situation.  As of December 31, 2010 and 2009, the Company had total assets of $131,944 and $425,465, respectively, and total liabilities of $10,504,714 and $8,357,882, respectively.
 
(4)
Outstanding 6% and 2% Notes.  As of December 31, 2010, the amount of outstanding 6% and 2% Notes were $1,518,171, and $112,917, respectively.  The 6% Notes and the 2% Notes have been in default since June 2009 and January 2011, respectively.  The Company had also accrued $1,086,315 as a penalty in connection with the 6% Notes and 2% Notes.
 
Our ability of raising funds through new finance from outside sources is extremely limited.  Our Chief Executive Officer, Mr. Wei Li and other related parties have signed a statement promising to provide financial aids to the Company to meet its daily cash demand for the next twelve months.
 
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.
 
Contractual Obligations
 
(1)
Operating lease commitments
 
The Company leased an office in Beijing on July 15, 2007.  The initial lease agreement expired on January 14, 2010 and was renewed.  The renewed lease agreement will expire on January 14, 2012.  The monthly rental payment for the office is RMB80,324 (approximately $12,129).  Rent expense under the operating leases for the years ended December 31, 2010 and 2009 was $159,574 and $153,759, respectively.
 
Our commitments for minimum lease payments under the operating lease for the next five years and thereafter as of December 31, 2010 are as follows:
 
 
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Fiscal Year
 
Amount
 
2011
  $ 133,414  
2012
    6,064  
2013
    -  
2014
    -  
2015
    -  
Thereafter
    -  
Total
  $ 139,478  
 
(2)
Technology acquisition
 
On May 8, 2006 we 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 us. Pursuant to the agreement we will pay JKB a transfer fee of RMB10 million (approximately $1.52 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.
 
As of December 31, 2010, we had paid one-third of the first installment, or RMB1,000,000 (or $151,515)to JKB.
 
We are 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. The Technology Transfer Agreement expired on May 6, 2008
 
(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 $151,515) each year to fund research at the R&D Center.  The term of this agreement is ten years starting from July 1, 2006.  Prof. Qi Wang, who became one of our directors in July 2007, has acted 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, we have committed to investing approximately $18 million to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province. As of December 31, 2010, we had invested approximately $1.91 million for the project.
 
Off-Balance Sheet Arrangements
 
At December 31, 2010, 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.
 
 
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Recent Accounting Pronouncements
 
See Note 2 to the Consolidated Financial Statements under Item 8, Part II.
 
Item 8.
Financial Statements and Supplementary Data
 
The full text of our audited consolidated financial statements as of December 31, 2010 and 2009 begins on page F-1 of this annual report.
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Effective as of July 19, 2010 the Company dismissed AGCA Inc. (“AGCA”), the Company’s independent registered public accounting firm.  The decision to change accountants was approved by the Company’s Board of Directors.
 
The Company has engaged Crowe Horwath (HK) CPA Limited to assume the role of its new independent registered public accounting firm.  The decision to engage Crowe Horwath (HK) CPA Limited was approved by the Board of Directors on July 19, 2010.  The Company signed the engagement letter on July 19, 2010.
 
The audit reports of AGCA on the financial statements of the Company as of and for the year ended December 31, 2009 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
 
During the Company’s recent fiscal year ended December 31, 2009 and through July 19, 2010, the Company did not consult with Crowe 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 Crowe did not provide either 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)(iv) 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.
 
In connection with the audits of the Company’s financial statements for the fiscal year ended December 31, 2009 and through the date of this Current Report, there were: (i) no disagreements between the Company and AGCA on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of AGCA would have caused AGCA to make reference to the subject matter of the disagreement in their reports on the Company’s financial statements for such years, and (ii) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
 
The Company has provided AGCA a copy of the disclosures in Form 8-K, which was filed with the Securities and Exchange Commission on July 20, 2010 and has requested that AGCA furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not AGCA agrees with the Company’s statements in this Item 4.01(a).  A copy of the letter dated July 19, 2010, furnished by AGCA in response to that request is filed as Exhibit 16.1 to Form 8-K, which was filed with the Securities and Exchange Commission on July 20, 2010.
 
 
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Item 9A.
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, 2010, 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, 2010.  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, 2010.
 
The specific material weakness identified by the Company’s management as of December 31, 2010 is described as follows:
 
 
The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of accounting principles generally 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 determined that the number and nature of these significant deficiencies, when aggregated, constituted a material weakness.
 
 
39

 
 
 
 
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 2010.  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.
 
 
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
 
Despite 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.
 
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, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.
Other Information
 
None.
 
 
40

 
 

 
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
 
Director Since
Wei Li
 
50
 
Chief Executive Officer, Chief Financial Officer (from January 4, 2009 to February 17, 2009) and Chairman of the Board of Directors
 
2004
Steven Ning Ma
 
54
 
Chief Financial Officer and Chief Operating Officer (from February 18, 2009)
   
Lianjun Luo
 
41
 
Director
 
2004
Xucheng Hu
 
48
 
Director
 
2008
Qi Wang
 
44
 
Director and Vice President - Technical
 
2007
Yvonne Wang
 
32
 
Corporate Secretary
   
Dianyuan Song
 
51
 
Vice President - Marketing
   

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.  Mr. Li has a wealth of experience in running businesses in China, with broad management expertise and a knowledge and understanding of business issues in China, and is able to provide the Board of Directors with his insights and experience in running businesses in China.
 
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.
 
 
41

 
 

 
Lianjun Luo became our Chief Financial Officer on March 12, 2004, and one of our directors on March 27, 2004 and served in that capacity until the expiration of his employment agreement as the Company’s CFO on December 31, 2008.  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. Mr. Luo’s expertise in the field of accounting and law enables him to provide the Company’s Board of Directors with insight and information related to the Company’s financial, accounting and SEC reporting issues.
 
Xucheng Hu has been serving as one of our directors since December 30, 2008.  Since August 2003, he has been the Executive Director of New Capital International Investment Limited, a listed company on the Hong Kong Stock Exchange.  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 proposals, and supervising sino-foreign investments in Beijing.  Mr. Hu graduated with a bachelor degree in economics from Beijing Economics College in 1983. Mr. Xu’s experience working with public companies in China enables him to provide the Board with an understanding of the operation of other boards of directors.
 
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 has also acted as Director of Kiwa-CAU R&D Center since July 2006. Prof. Wang served as a Professor and Advisor for Ph.D. students in the Department of Plant Pathology, China Agricultural University (“CAU”) 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. Prof. Wang’s unique expertise in the field of agriculture offers significant knowledge and experience to the Board of Directors when making critical operational decisions.
 
Yvonne Wang became our Secretary in September 2005. Prior to that, she served as an executive assistant and a manager of the Company’s U.S. 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 California Realtor, and a certified Notary Public.
 
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.
 
Family Relationships
 
There are no family relationships among our directors or executive officers.
 
Involvement in Certain Legal Proceedings
 
 None of our directors or executive officers has, during the past ten years: 
 
 
42

 
   

 
(a) 
Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
 
(b) 
Been convicted in a criminal proceeding or subject to a pending criminal proceeding;
 
(c) 
Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and
 
(d) 
Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
 
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.  To the best of the Company’s knowledge, based solely upon a review of the copies of such reports, during 2010, all of the required filings were made on a timely basis.
 
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 four members: Wei Li, Lianjun Luo, Xucheng Hu 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.
 
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.
 
 
43

 
   
 
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 2010, the Board of Directors had four meetings in total.  All members of the Board of Directors attended all four meetings.  The Company requires all members of the Board of Directors are required to attend the annual meetings of securities holders.  On December 15, 2010, all members of the Board of Directors attended the annual meetings of securities holders for 2010.
 
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 the 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 2010 or 2009 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
($)
 
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
 
2010
    72,000  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    72,000  
Wei Li, CEO
 
2009
    72,000  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    72,000  
Steven Ning Ma, CFO
 
2010
    74,400  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    74,400  
Steven Ning Ma, CFO
 
2009
    74,400  
Nil
 
Nil
 
Nil
 
Nil
 
Nil
 
Nil
    74,400  

 
44

 

 
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 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.
 
Stock Incentive Plan and Option Grants
 
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 Grants
 
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.
 
No options were granted under the Plan during 2010.
 
 
45

 
   
 
Outstanding Equity Awards at 2010 Fiscal Year-End
 
The following table sets forth the status of all outstanding equity awards of the Company as of December 31, 2010.
 
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

(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 2010 and 2009.  We did not adjust or amend the exercise price of any stock options previously awarded to any named executive officers during 2010 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
 
 
Director Compensation for 2010
 
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 2010 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, 2010 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 March 10, 2011.  None of the shares listed below are issuable pursuant to stock options or warrants of the Company.
 
 
46

 
  

 
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
 
Steven Ning Ma
    -       -  
Common Stock
 
Qi Wang
    -       -  
                     
Common Stock
 
All officers and directors as a group
    13,064,794       3.3 %

(1)
Consists of 12,356,672 shares of common stock (3.1% of all shares outstanding) 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.  Mr. Li has pledged all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes (See Note 8 to Consolidated Financial Statements).
 
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, 2010 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.
 
 
47

 

 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
 
For description of transactions with related parties, see Note 6 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:
 
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. Yunlong Zhang was one of the directors of the Company.  On July 26, 2010, the Board of Directors of the Company accepted the resignation of Yunlong Zhang as a director of the Company, effective immediately.  Mr. Zhang’s resignation was due to personal reasons and not because of any disagreement with the Company on any matter relating to the Company's operations, policies or practices.
 
Prof. Qi Wang is the Director of Kiwa-CAU R&D centre and also Vice President of the Company.
 
Item 14.
Principal Accountant Fees and Services
 
Fees Paid to Independent Public Accountants for 2010 and 2009.
 
Audit Fees
 
Crowe Horwath (HK) CPA Limited (“Crowe Horwath”) audited our financial statements for year-end 2010, and reviewed our quarterly report on Form 10-Q for the three months ended September 30, 2010 and June 30, 2010.  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 board of directors approved the engagement of Crowe Horwath 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 2010 paid and payable to Crowe Horwath were approximately $88,000.  The amounts include: (1) fees for professional services rendered by Crowe Horwath in connection with the audit of our consolidated financial statements for the 2010 fiscal year; (2) reviews of our quarterly reports on the Form 10-Q for the second and third quarters of 2010 fiscal year and (3) fees for professional services rendered by AGCA in connection with the review of quarterly report on the Form 10-Q for the first quarter of 2010.
 
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.
 
 
48

 
 

  
The aggregate audit fees for 2010 and 2009 paid to AGCA, Inc. were approximately $12,000 and $130,000, respectively. The 2010 amount includes fees for the review of our quarterly report on the Form 10-Q for the first quarter of 2010 and the 2009 amounts include fees for professional services rendered 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.
 
Audit-Related Fees
 
Audit-related fees for 2010 and 2009 were nil.
 
Tax Fees
 
Tax service fees billed by a tax consultant for 2010 and 2009 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 Crowe Horwath for 2010 for other services rendered to the Company.
 
During 2010, AGCA, Inc. has charged the Company $8,500 for reissuance of audit report for fiscal year ended December 31, 2009, which has been included in this annual report.
 
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 2010.  All of the services provided and fees charged by our independent registered accounting firms in 2010 were approved by the board of directors.
 
 
49

 
 

 
Part IV
 
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
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.
   

 
50

 
 
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: April 15, 2011
 
 
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)
 
April 15, 2011
Wei Li 
       
         
/s/ Steven Ning Ma
 
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
April 15, 2011
Steven Ning Ma
       
         
/s/ Xucheng Hu
 
Director
 
April 15, 2011
Xucheng Hu
       
         
/s/ Lianjun Luo
 
Director
 
April 15, 2011
Lianjun Luo
       
         
 /s/ Qi Wang
 
Director
 
April 15, 2011
Qi Wang
       
 
 
51

 

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 Statements of Stockholders’ Deficiency
F-5
Consolidated Statements of Cash Flows
F-6
Notes to Consolidated Financial Statements
F-7

 
52

 


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 sheet of Kiwa Bio-Tech Products Group Corporation  (“Company”) and subsidiaries as of December 31, 2010 and the related consolidated statements of income and comprehensive loss, stockholders’ deficiency and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an 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 the Company’s 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provides 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 the Company and subsidiaries as of December 31, 2010 and the consolidated results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
These 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 operating and liquidity concerns as it has suffered recurring losses from operations and incurred an accumulated deficit of $18,670,713 as of December 31, 2010. This condition raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

/s/ Crowe Horwath (HK) CPA Limited
Hong Kong, China
April 15, 2011
 
 
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.

These 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 operating and liquidity concerns, has incurred an accumulated deficit of $16,394,930 as of December 31, 2009. This condition raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

/s/ AGCA, Inc.

Arcadia, California
March 29, 2010
 
 
F-2

 
 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
(Audited)
 
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 32,816     $ 28,765  
Accounts receivable
    -       2,441  
Inventories
    -       6,717  
Deposits and other receivables
    72,808       131,674  
Current assets of discontinued operation
    398       385  
Total current assets
    106,022       169,982  
Property, plant and equipment - net
    25,922       255,483  
Total assets
  $ 131,944     $ 425,465  
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
               
Current liabilities
               
Accounts payable
  $ 319,299     $ 279,248  
Advances from customers
    13,514       13,107  
Construction costs payable
    268,060       290,429  
Due to related parties - trade
    422,788       351,484  
Due to related parties - non-trade
    2,898,242       1,819,507  
Convertible notes payable
    1,631,088       1,518,171  
Salary payable
    707,712       493,153  
Taxes payable
    166,255       85,937  
Penalty payable
    1,086,315       595,277  
Interest payable
    520,813       290,827  
Current portion of long-term liabilities
    -       4,253  
Other payable
    625,386       706,194  
Current liabilities of discontinued operation
    108,790       105,515  
Total current liabilities
    8,768,262       6,553,102  
Long-term liabilities, less current portion
               
Unsecured loans payable
    1,736,452       1,684,192  
Bank notes payable
    -       7,671  
Long-term convertible notes payable
    -       112,917  
Total long-term liabilities
    1,736,452       1,804,780  
Total liabilities
    10,504,714       8,357,882  
                 
Stockholders’ deficiency
               
Common stock - $0.001 par value Authorized 400,000,000 shares. Issued and outstanding 400,000,000 at December 31, 2010 and 2009
    400,000       400,000  
Preferred stock - $0.001 par value Authorized 20,000,000 shares, none issued
    -       -  
Additional paid-in capital
    8,093,337       8,093,337  
Deficit accumulated
    (18,670,713 )     (16,394,930 )
Accumulated other comprehensive deficiency
    (195,394 )     (30,824 )
Total Kiwa stockholders’ deficiency
    (10,372,770 )     (7,932,417 )
Total liabilities and stockholders' deficiency
  $ 131,944     $ 425,465  

SEE ACCOMPANYING NOTES
 
 
F-3

 
 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
(Audited)
 
   
Year Ended December 31,
 
   
2010
   
2009
 
Net sales
  $ 88,056     $ 38,292  
Cost of sales
    54,801       32,201  
Gross profit
    33,255       6,091  
                 
Operating expenses
               
Consulting and professional fees
    180,871       271,042  
Officers’ compensation
    151,435       230,214  
General and administrative
    1,263,069       1,164,733  
Selling expenses
    3,626       75,994  
Research and development
    182,970       192,103  
Depreciation and amortization
    27,228       145,315  
Total operating expenses
    1,809,199       2,079,401  
Operating loss
    (1,775,944 )     (2,073,310 )
                 
Loss from disposal of obsolete inventory
    (42,721 )     (55,183 )
Loss from impairment of long-lived assets
    (219,118 )     (804,780 )
Interest expense
    (242,606 )     (532,626 )
Other income
    4,606       77,790  
Loss from continuing operations
    (2,275,783 )     (3,388,109 )
                 
Loss from discontinued operation
    -       (392,512 )
                 
Net loss before income tax
    (2,275,783 )     (3,780,621 )
Income tax
    -       -  
Net loss after income tax
    (2,275,783 )     (3,780,621 )
Net loss attributable to non-controlling interest
    -       66,092  
Net loss attributable to Kiwa stockholders
    (2,275,783 )     (3,714,529 )
                 
Other comprehensive loss
               
Translation adjustment
    (164,570 )     (4,037 )
Total comprehensive loss
  $ (2,440,353 )   $ (3,718,566 )
                 
Net loss per common share - basic and diluted -continuing operations
  $ (0.006 )   $ (0.010 )
Net loss per common share - basic and diluted - discontinued operations
  $ -     $ (0.001 )
Weighted average number of common shares outstanding-basic and diluted
    400,000,000       351,197,778  

SEE ACCOMPANYING NOTES
 
 
F-4

 
 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(Audited)
 
               
Kiwa Stockholders
             
   
Common Stock
   
Additional
Paid-in
   
Stock-based
Compensation
   
Accumulated
   
Other
Comprehensive
   
Non-controlling
       
   
Shares
   
Amount
   
Capital
   
Reserve
   
Deficits
   
Deficiency
   
Interest
   
Total
 
Balance, January 1, 2009
    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 fair 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 )
Net loss attributable to Kiwa shareholders for the twelve months ended December 31, 2010
    -       -       -       -       (2,275,783 )     -       -       (2,275,783 )
Foreign currency translation difference
    -       -       -       -       -       (164,570 )     -       (164,570 )
Balance, December 31, 2010
    400,000,000     $ 400,000     $ 8,093,337     $ -     $ (18,670,713 )   $ (195,394 )   $ -     $ (10,372,770 )

SEE ACCOMPANYING NOTES
 
 
F-5

 
 

 
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Audited)
 
   
Year Ended December 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (2,275,783 )   $ (3,714,529 )
Net loss from discontinued operations, net of income taxes
    -       326,421  
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    27,228       201,984  
Impairment loss on long-lived assets
    219,118       908,926  
Amortization of detachable warrants, options and stocks as  compensation
    -       538,808  
Provision for doubtful debt and inventory impairment
    2,442       (1,544 )
Provision for penalty payable
    491,038       442,527  
(Gain)/Loss on disposal of inventory
    42,721       -  
Interest payable on convertible notes
    229,984       163,331.00  
Non-controlling interest
    -       (66,092 )
Changes in operating assets and liabilities:
               
Accounts receivable
    -       544,601  
Inventories
    (35,934 )     290,076  
Prepaid expenses
    -       20,450  
Deposits and other receivables
    61,146       (57,976 )
Accounts payable
    (4,290 )     (612,195 )
Salary payable
    208,344       247,646  
Taxes payable
    75,971       69,714  
Advances from customers
    -       (146,182 )
Due to related parties-trade
    59,089       147,908  
Other payable
    (84,354 )     129,893  
Net cash used in operating activities
    (983,280 )     (566,233 )
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (424 )     (7,320 )
Net cash used in investing activities
    (424 )     (7,320 )
                 
Cash flows from financing activities:
               
Proceeds from related parties
    1,338,637       1,009,844  
Repayment to related parties
    (259,902 )     (87,407 )
Repayment of long-term borrowings
    (7,737 )     (4,220 )
Net cash provided by financing activities
    1,070,998       918,217  
Effect of exchange rate change
    (83,243 )     (8,075 )
                 
Cash flows from discontinued operations
               
Net cash used in discontinued operating activities
    -       (326,433 )
Cash and cash equivalents:
               
Net increase
    4,051       10,156  
Balance at beginning of year
    28,765       18,609