Edgar Filing: KIWA BIO-TECH PRODUCTS GROUP CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ______ to ______

Commission file number: 000-33167

KIWA BIO-TECH PRODUCTS GROUP CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes 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, 2008 was approximately $8,878,825.

The number of shares of registrant’s common stock outstanding as of May 15, 2009 was 400,000,000.

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the period ended December 31, 2008, which was filed on May 18, 2009 (the ‘‘Form 10-K’’) to amend:

(1).

Item 11, “Executive compensation,” replacing it in its entirety with Item 11, “Executive Compensation;”

(2).

Item 15, “Exhibits and Financial Statement Schedules” to add certain employment agreements between the Company and our executives, and

(3).

“Report of Independent Registered Public Accounting Firm,” in which our independent auditor’s signature was inadversely omitted.

The effect of such amendments is as follows:

(1).

This amendment corrects the mistake in Item 11 of Form 10-K in which Mr. Lianjun Luo’s “Non-equity Incentive Plan” was reported as “Bonus” in the Summary Compensation Table. Relevant statement has also been updated. The “Outstanding Equity Awards at Fiscal Year-End” table and “Option Exercise and Stock Vested” table had also been updated. After revision, only the result of our Chief Executive Officer and Chief Financial Officer had been included.

(2).

This amendment also updates Item 15 of Form 10-K “Exhibits and Financial Statement Schedules” to include employment agreements between the Company and Mr. Wei Li, Mr. Lianjun Luo and Mr. Steven Ning Ma, respectively.

(3).

This amendment also includes “Report of Independent Registered Public Accounting Firm,” which was signed by Mao & Company CPAs, Inc.

We have filed the following exhibits with this amendment:

Exhibit 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934;

Exhibit 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; and

Exhibit 32.1 Certification of Principal 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.

Except for the above-mentioned items, our Form 10-K has not been amended.

Item 11.

Executive compensation

We currently have no Compensation Committee. The Board of Directors is currently performing the duties and responsibilities of Compensation Committee. In addition, we have no formal compensation policy. We decide on our executives’ compensation based on average compensation levels of similar companies in U.S. or China, depending on consideration of many factors such as where the executive works. Our Chief Executive Officer’s compensation is approved by the Board of Directors. Other named executive officers’ compensation are proposed by our Chief Executive Officer and approved by the Board of Directors.

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

The Company had no officers or directors whose total annual salary and bonus during either 2008 or 2007 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 stipulated in their respective employment agreements; and (3) the granting of incentive stock options subject to approval by our Board of Directors.

Summary Compensation Table

Name and

Principal position

Year

Salary

($)

Bonus

($)

Stock

Awards

($)

Option

Awards

($)(1)

Non-Equity

Incentive Plan

Compensation

($)

Nonqualified

Deferred

Compensation

Earnings ($)

All Other

Compensation

($)

Total

($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Wei Li, CEO

2008

75,000

Nil

75,000

Wei Li, CEO

2007

75,000

Nil

75,000

Lianjun Luo, CFO

2008

48,000

Nil

48,000

Lianjun Luo, CFO

2007

48,000

Nil

12,000

Nil

60,000

(1)

Options granted on December 12, 2006. For material terms of the grant, see additional information below under subheading entitled “2004 Stock Incentive Plan” under this Item 10 of the Form 10-K. The fair value of these options at the date of grant was estimated using a Black-Scholes option pricing model.

Employment Contracts and Termination of Employment and Change of Control Arrangements

On February 2, 2009, we entered into an employment agreement with our Chief Executive Officer and Chief Financial Officer, Wei Li, for a three-year term, commencing on January 1, 2009. Pursuant to this agreement, Mr. Li receives a salary at the rate of $96,000 per annum, of which $72,000 will be paid in equal monthly installments of $6,000 during the period of employment, prorated for any partial employment period, and $24,000 is paid as an annual performance bonus in three months after each employment year. Mr. Li may receive such annual increases in salary as may be determined by our Board of Directors at our annual meeting. Mr. Li is also entitled to an annual grant of stock options under our employee stock option plan as determined by the Board of Directors. Mr. Li is entitled to three-month’s severance if his employment is terminated without cause.

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

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

There are no compensatory plans or arrangements with respect to a named executive officer that would result in payments or installments in excess of $100,000 upon the resignation, retirement or other termination of such executive officer's employment with us or from a change-in-control.

Stock Incentive Plan and Option Grant

2004 Stock Incentive Plan

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

The Plan is a key aspect of our compensation program, designed to attract, retain, and motivate the highly qualified individuals required for our long-term success.

Stock Option Grant

On December 12, 2006, our Board of Directors granted 2,000,000 options under the Plan, of which 823,700 shares were granted to the current executive officers and directors. The exercise price was $0.175, equal to the closing price of our common stock on December 12, 2006. Pursuant to the approval of Board of Directors, after each of the first and second anniversaries of the grant date, 33% percent of the options will become exercisable. After the third anniversary of the grant date, 34% of the options will become exercisable.

During 2008, a total number of 222,500 unexercised stock options were returned to the Plan pool following the separation of certain company employees. These stock options are available for future grant.

On December 12, 2008, 471,800 outstanding stock options were vested, among which 179,200 stock options in total are held by our current executive officers.

No options were granted under the Plan during 2008.

Outstanding Equity Awards at 2008 Fiscal Year-End

The following table sets forth the status of all outstanding equity awards of the Company as of December 31, 2008.

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

or Units

Stock

That

Have

Not

Vested

(#)

Value

Units

Stock

That

Have

Not

Vested

($)

Equity

Incentive

Plan

Awards:

Number

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

120,648

62,152

182,800

0.175

12/04/16

Nil

Lianjun Luo

87,252

44,948

132,200

0.175

12/04/16

Nil

Total

207,900

107,100

315,000

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 2007 and 2008. We did not adjust or amend the exercise price of any stock options previously awarded to any named executive officers during 2007 and 2008.

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

Lianjun Luo

Nil

Total

Nil

Director Compensation for 2008

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 2008 for services performed as directors.

Item 15. Exhibits and Financial Statement Schedules

Exhibit No.	Description	Incorporated by Reference in Document	Exhibit No. in Incorporated Document
3.1	Certificate of Incorporation, effective as of July 21, 2004	Form 8-K filed on July 23, 2004	3.1
3.2	Bylaws, effective as of July 22, 2004	Form 8-K filed on July 23, 2004	3.2
3.3	Certificate of Amendment to Certificate of Incorporation, effective as of January 9, 2009	Filed herewith	3.3
10.1	Advance Agreement by and between Wei Li and the Company dated January 10, 2008	Form 8-K filed on January 11, 2008	10.01
10.2	Stock Purchase Agreement between Kiwa Bio-Tech Products Group Corporation and Yuxin Zhou dated February 19, 2008	Form 8-K filed on February 22, 2008	10.01
10.3	Consulting Agreement between the Company and Robert Schechter dated January 10, 2008	Form 10-Q filed on August 11, 2008	10.1
10.4	Contract for Joint Venture between the Company and Hebei Huaxing Pharmaceuticals Co., Ltd. dated May 22, 2008	Form 8-K filed on May 27, 2008	10.1
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
14.1	Code of Ethics	Filed herewith.
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.

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: September 25, 2009

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.

	Chief Executive Officer and
	Chairman of the Board of Directors (Principal
/s/ Wei Li	Executive Officer)	September 25, 2009
Wei Li

/s/ Steven Ning Ma	Chief Financial Officer (Principal Financial and Accounting Officer)	September 25, 2009
Steven Ning Ma

/s/ Xucheng Hu	Director	September 25, 2009
Xucheng Hu

/s/ Yunlong Zhang	Director	September 25, 2009
Yunlong Zhang

/s/ Lianjun Luo	Director	September 25, 2009
Lianjun Luo

/s/ Qi Wang	Director	September 25, 2009
Qi Wang

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Kiwa Bio-Tech Products Group Corporation:

We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products Group Corporation and its subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive income, stockholders’ equity (deficiency), and cash flows for each of the years in the two-year period ended December 31, 2008. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has debts maturing in 2009 but a working capital deficit and a net capital deficiency as of December 31, 2008 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Mao & Company CPAs, Inc.

New York, New York

March 6, 2009 – except for the subsequent event as disclosed in note 21 and going concern disclosure in note 1, for which the date is May 14, 2009.

KIWA BIO-TECH PRODUCTS GROUP CORPORATION

CONSOLIDATED BALANCE SHEETS

Item	December 31,
	2008			2007
ASSETS
Current assets
Cash and cash equivalents	$	18,986		$	61,073
Accounts receivable, net of allowance for doubtful
accounts of $352,896 and $277,140, respectively		490,060			470,298
Inventories		351,786			818,329
Prepaid expenses		20,440			70,460
Prepayment for fertilizer trade		2,955,550			-
Other current assets		73,432			67,372
Total current assets		3,910,254			1,487,532
Property, Plant and Equipment
Buildings		1,241,972			1,162,060
Machinery and equipment		705,680			660,273
Automobiles		81,390			76,154
Office equipment		108,759			93,231
Computer software		21,166			9,877
Property, plant and equipment - total		2,158,967			2,001,595
Less: accumulated depreciation		(600,596	)		(433,690	)
Less: impairment on long-lived assets		(542,285	)		-
Property, plant and equipment - net		1,016,086			1,567,905
Construction in progress		71,887			67,262
Intangible asset - net		151,231			296,245
Deferred financing costs		47,793			129,793
Deposit to purchase proprietary technology		126,443			126,443
Total assets	$	5,323,694		$	3,675,180
LIABILITIES AND SHAREHOLDERS’ EQUITY
(DEFICIENCY)
Current liabilities
Accounts payable	$	1,935,698		$	1,635,490
Advances from customers		159,200			169,553
Construction costs payable		297,472			316,902
Due to related parties - trade		3,190,872			177,970
Due to related parties - non-trade		897,070			551,654
Convertible notes payable, net of $348,932 discount		1,273,391			-
Penalty payable		152,750			-
Current portion of long-term liabilities		3,857			2,889
Total current liabilities		7,910,310			2,854,458
Long-term liabilities, less current portion
Unsecured loans payable		1,682,615			1,574,350
Bank notes payable		11,881			17,988
Long-term convertible notes payable		112,917			2,058,625
Less: discount relating to long-term
convertible notes payable		-			(856,308	)
Long-term convertible notes payable - net		112,917			1,202,317
Total long-term liabilities		1,807,413			2,794,655

Minority interest in a subsidiary		66,057			110,838

Shareholders’ equity (deficiency)
Common stock - $0.001 par value Authorized 200,000,000 shares. Issued and outstanding 139,399,206 and 81,519,676 shares at December 31, 2008 and December 31, 2007		139,399			81,520
Preferred stock - $0.001 par value Authorized 20,000,000 shares, none issued		-			-
Additional paid-in capital		10,269,855			9,217,876
Stock-based compensation reserve		(135,843	)		(307,053	)
Deficit accumulated		(14,706,710	)		(11,074,522	)
Accumulated other comprehensive income		(26,787	)		(2,592	)
Total shareholders’ equity (deficiency)		(4,460,086	)		(2,084,771	)
Total liabilities and stockholders’ equity	$	5,323,694		$	3,675,180

SEE ACCOMPANYING NOTES

KIWA BIO-TECH PRODUCTS GROUP CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Item	Fiscal Year Ended December 31,
	2008			2007
Net sales	$	9,175,737		$	9,129,779
Cost of sales		8,958,219			8,603,795
Gross profit		217,518			525,984

Operating expenses
Consulting and professional fees		359,831			794,324
Officers’ compensation		240,993			285,941
General and administrative		1,126,167			901,545
Selling expenses		189,163			363,131
Research and development		192,977			177,773
Depreciation and amortization		123,147			129,298
Allowance for doubtful accounts		82,815			588
Total operating expenses		2,315,093			2,652,600
Operating loss		(2,097,575	)		(2,126,616	)

Loss from disposal of obsolete inventory		(192,798	)		-
Loss from impairment of long-lived assets		(639,492	)		-
Interest expense		(753,956	)		(766,411	)
Loss before minority interest in a subsidiary’s deficit		(3,683,821	)		(2,893,027	)
Minority interest in a subsidiary’s deficit (profit)		51,633			(332	)
Loss from continuing operations		(3,632,188	)		(2,893,359	)

Loss on discontinued operations:
Discountinued urea entrepot trade -
Commission paid to a related party		-			(414,509	)

Net loss	$	(3,632,188	)	$	(3,307,868	)

Other comprehensive loss
Translation adjustment		(24,195	)		(61,111	)
Comprehensive loss	$	(3,656,383	)	$	(3,368,979	)

Net (loss) from continuing operations per common share - basic and diluted	$	(0.039	)	$	(0.038	)
Net loss on discontinued operations per common share - basic and diluted	$	-		$	(0.005	)
Weighted average number of common shares outstanding-basic and diluted		93,624,204			75,543,446

SEE ACCOMPANYING NOTES

KIWA BIO-TECH PRODUCTS GROUP CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

	Common Stock				Additional Paid-in			Stock-based Compensation			Accumulated			Other Comprehensive			Total Stockholders’
	Shares		Amount		Capital			Reserve			Deficits			Income			Deficiency
Balance, January 1, 2007		70,149,556		70,150		8,311,975			(523,468	)		(7,766,654	)		1,166			93,169
Issuance of common stock for exercise of warrants at January 5, 2007		1,000,000		1,000		(1,000	)		-			-			-			-
Issuance of common stock for cashless exercise of warrants on April 11, 2007		610,278		610		(610	)		-			-			-			-
Issuance of common stock for cashless exercise of warrants on April 20, 2007		97,844		98		(98	)		-			-			-			-
Issuance of common stock for conversion of principal and interest of 6% Notes during 12 months ended December 31, 2007		5,821,998		5,822		353,405			-			-			-			359,227
Issuance of 700,000 shares of common stock to a consultant on April 18, 2007		700,000		700		125,300			-			-			-			126,000
Issuance of 140,000 shares of common stock to an investor relations consultant on October 24, 2007		140,000		140		20,860			-			-			-			21,000
Issuance of 3,000,000 shares to two Chinese citizens designated by a related party on October 30, 2007		3,000,000		3,000		222,300			-			-			-			225,300
Issuance of 250,000 shares of warrants to a consultant		-		-		44,414			-			-			-			44,414
Amortizaton of fair value of warrants issued to a financing consultant during fiscal year ended December 31, 2007		-		-		-			77,181			-			-			77,181
Amortization of fair value of employee stock option cancelled		-		-		-			55,792			-			-			55,792
Amortization of fair value of employee stock options granted in 2006		-		-		-			83,442			-			-			83,442
Fair value of warrants issued to a related party in June		-		-		15,172			-			-			-			15,172
Fair value of warrants issued to a related party in September		-		-		60,742			-			-			-			60,742
Fair value of warrants issued to a related party in December		-		-		65,416			-		_				-			65,416
Net loss for fiscal ended December 31, 2007		-		-		-			-			(3,307,868	)		-			(3,307,868	)
Other comprehensive income fiscal year ended December 31, 2007		-		-		-			-			-			(3,758	)		(3,758	)
Balance, December 31, 2007		81,519,676		81,520		9,217,876			(307,053	)		(11,074,522	)		(2,592	)		(2,084,771	)
Issuance of 140,000 shares of common stock to an Investor Relations consultant on February 27, 2008		140,000		140		19,460			-			-			-			19,600
Issuance of 5,000,000 shares of common stock to an investor for the consideration of $650,000 on March 14, 2008		5,000,000		5,000		645,000			-			-			-			650,000
Issuance of common stock for conversion of principal and interest of 6% Notes during fiscal year ended December 31, 2008		52,739,530		52,739		387,519			-			-			-			440,258
Amortizaton of fair value of warrants issued to a financing consultant during fiscal year ended December 31, 2008		-		-		-			77,181			-			-			77,181
Amortization of fari value of employee stock options granted in 2006		-		-		-			94,029			-			-			94,029
Net loss for the fiscal year ended December 31, 2008		-		-		-			-			(3,632,188	)		-			(3,632,188	)
Other comprehensive income for the fiscal year ended December 31, 2008		-		-		-			-			-			(24,195	)		(24,195	)
Balance, December 31, 2008		139,399,206		139,399		10,269,855			(135,843	)		(14,706,710	)		(26,787	)		(4,460,086	)

SEE ACCOMPANYING NOTES

KIWA BIO-TECH PRODUCTS GROUP CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Item	Fiscal Year Ended December 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(3,632,188	)	$	(3,307,868	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		317,379			291,309
Impairment loss on long-lived assets		639,492			-
Amortization of detachable warrants, options and stocks as compensation		844,069			1,132,902
Provision for doubtful debt and inventory impairment		275,613			588
Provision for panalty payable		152,750			-
(Gain)/Loss on disposal of fixed assets		-			2,033
Minority interest in a subsidiary		(51,633	)		332
Changes in operating assets and liabilities:
Accounts receivable		(102,577	)		458,560
Inventories		273,745			(276,989	)
Prepaid expenses		(7,669	)		21,612
Prepayment to supplier - fertilizer trade		(2,955,550	)		-
Other current assets		(6,060	)		(10,361	)
Accounts payable		420,938			955,565
Advances from customers		(10,353	)		-
Due to related parties-trade		57,352			208,668
Advances from related party - fertilizer trade		2,955,550			-
Net cash provided by (used in) operating activities		(829,142	)		(523,649	)
Cash flows from investing activities:
Purchase of property and equipment		(48,111	)		(206,446	)
Net cash used in investing activities		(48,111	)		(206,446	)
Cash flows from financing activities:
Proceeds from issuance of common stock		650,000			-
Proceeds from related parties		802,574			720,172
Repayment to related parties		(545,353	)		(388,196	)
Repayment of long-term borrowings		(5,606	)		(23,385	)
Net cash provided by financing activities		901,615			308,591
Effect of exchange rate changes on cash and cash equivalents		(66,449	)		(15,526	)
Cash and cash equivalents:
Net increase (decrease)		(42,087	)		(437,030	)
Balance at beginning of period		61,073			498,103
Balance at end of period	$	18,986		$	61,073

Supplemental Disclosures of Cash flow Information:
Cash paid for interest	$	1,715		$	247
Cash paid for income taxes	$	-		$	-

Non-cash investing and financing activities:
Issuance of detachable warrants in conjunction with loans		-			141,330
Issuance of detachable warrants as compensation to consultants		-			44,414
Issuance of common stock for conversion of long-term
convertible notes payable and interest		440,258			359,227
Issuance of stock as compensation to consultants		19,600			147,000
Issuance of stock to repay related-party		-			225,300
Issuance of stock for cashless exercise of Warrants		-			1,708
Conversion of accrued interests into principal		112,917			-

SEE ACCOMPANYING NOTES

Notes to Consolidated Financial Statements

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.

1.	Background and Basis of Presentation

Organization - We are the result of a share exchange transaction accomplished on March 12, 2004 between Tintic Gold Mining Company, a Utah corporation, and Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”). The exchange transaction 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 became Tintic’s wholly-owned subsidiary. Subsequent to the share exchange, Tintic changed its name to Kiwa Bio-Tech Products Group Corporation. On July 21, 2004, we completed our reincorporation in the State of Delaware.

Business - Our business plan is to develop, manufacture, distribute and market innovative, cost-effective and environmentally safe bio-technological products for agriculture markets located primarily in China. We have acquired technologies to produce and market bio-fertilizer and bio-enhanced feed products, and also are developing a veterinary drug based on AF-01 anti-viral aerosol technology.

Basis of Presentation - The consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, Kiwa BVI and Kiwa Bio-Tech Products (Shandong) Co., Ltd. (“Kiwa Shandong”), and also its majority-owned subsidiary, Tianjin Kiwa Feed Co., Ltd. (“Kiwa Tianjin”). These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States. All significant intercompany balances and transactions have been eliminated in consolidation.

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

Country Risk - As the Company’s principal operations are conducted in China, the Company is subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These risks include, among others, risks associated with the political, economic and legal environments and foreign currency exchange limitations encountered in China. The Company’s results of operations may be adversely affected by changes in the political and social conditions in China, and by changes in governmental policies with respect to laws and regulations, among other things.

In addition, all of the Company’s transactions undertaken in China are denominated in Renminbi (“RMB”), which must be converted into other currencies before remittance out of China may be made. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require the approval of the Chinese government. In recent years, the Chinese government has gradually loosed its control over foreign exchange, especially on current foreign exchange accounts, for instance, canceling of advanced examination and approval for the opening of current foreign exchange accounts and enhancing of quota of current foreign exchange accounts.

Credit Risk - The Company performs ongoing credit evaluations of its customers and intends to establish an allowance for doubtful accounts when amounts are not considered fully collectable. According to the Company’s credit policy, the Company generally provides 100% bad debt provision for the amounts outstanding over 365 days after the deduction of the amount subsequently settled after the balance sheet date, which management believes is consistent with industry practice in the China region.

As of December 31, 2008, there was $359,955 in accounts receivable aged over 365 days old, we have provided $352,896 bad debt provision based on all accounts receivable over one year as of December 31, 2008.

Going Concern - The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not purport to represent the realizable or settlement values, should the company not be able to continue in existence.

Overview of the Company’s Financial Condition as of December 31, 2008

As of December 31, 2008, the Company had accumulated deficit of $14,706,710, among which, $3,632,188 and $3,307,868 were incurred during twelve months ended December 31, 2008 and 2007, respectively.

As of December 31, 2008, we had cash and cash equivalents of $18,986 and total current assets of $3,910,254; at the same time, we had current liabilities of $7,910,310, denoting current ratio of 0.49 and quick ratio of 0.45. At the end of fiscal 2008, we also had long-term liabilities of $1,807,413.

On June 29, 2006, the Company entered into a securities purchase agreement with six institutional investors for the issuance and sale of (1) 6% secured convertible notes, due three years from the date of issuance, in the aggregate principal amount of $2,450,000, convertible into shares of the Company’s common stock, and (2) warrants to purchase 12,250,000 shares of the Company’s common stock. As of December 31, 2008, the outstanding principal of 6% Notes was $1,622,323. The maturity date of the 6% Notes is June 29, 2009.

To the extent that we are unable to successfully raise the capital necessary to fund our future cash requirements on a timely basis and under acceptable terms and conditions, we will not have sufficient cash resources to maintain operations and repay our liabilities, and may have to curtail or cease operations and consider a formal or informal restructuring or reorganization.

Overview of the Company’s Operating Results for the Twelve Months Ended December 31, 2008 and 2007

During twelve months ended December 31, 2008 and 2007, our sales revenue was $9,175,737 and $9,129,779, respectively. However, the Company gross profit was $217,518 and $525,984, denoting a gross profit margin of 2.4% and 5.8%. During fiscal year of 2008 and 2007, our operating loss was $2,097,575 and $2,126,616. Net loss for both periods was $3,632,188 and $3,307,868, respectively.

Overview of the Company’s Cash flow Status for the Twelve Months Ended December 31, 2008 and 2007

During fiscal year ended December 31, 2008 and 2007, our operating activities used net cash of $829,142 and $523,649, respectively. We also invested $48,111 and $206,446 in purchasing property and equipment during both periods. Although our financing activities provided net cash of $901,615 and $308,591 in the fiscal year of 2008 and 2007, we had cash of only $18,986 and $61,073 on December 31, 2008 and 2007, respectively.

The Company’s Ability of Raising New Finance

Continuous losses and low share price has deteriorate the Company’s ability of raising new finance. As of December 31, 2008, the closing price of our common stock reported by on the OTC Bulletin Board was $0.0019. The market value of the Company was $264,858, which makes it very hard to arrange new financing on equity financing basis. The Company’s obligations under the 6% Notes and the Warrants are secured by a first priority security interest in the Company’s intellectual property pursuant to an Intellectual Property Security Agreement with the Purchasers, and by a first priority security interest in all of the Company’s other assets pursuant to a Security Agreement with the Purchasers. In addition, the Company’s Chief Executive Officer has pledged all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes and the Warrants. As a result, the Company does not have assets to security the obligations of new debt.

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

Kiwa Shandong’s Ability to Continue as a Going Concern is in Doubt

Kiwa Shandong is our wholly-owned subsidiary of engaging in researching, developing, producing and marketing bio-fertilizer. However, since its inception in 2002, Kiwa Shandong has not generated material revenue. Moreover, Kiwa Shandong has never been profitable. As of December 31, 2008, Kiwa Shandong has accumulated deficit of $2,180,030.

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

During the first half of 2009, Kiwa Shandong plan to raise working capital from related parties to meet Kiwa Shandong’s daily requirements of cash, including repayment to raw material and service suppliers and other costs of daily operations. We are also actively looking for new financing from outside investors, for instance, financial institutions.

Kiwa Shandong is also further strengthening its effort of expanding the market. It is planned to expand the market within Shandong Province so as to reduce selling expenses. We also plan to sell our bio-fertilizer products directly to end-users so as to reduce costs to end-users. We also plan to lower down prices of our bio-fertilizer products to enhance competitiveness in the market.

On December 31, 2008, we launched a complete test on the recoverability of our long-lived assets in Kiwa Shandong. Based on our analysis, Kiwa Shandong’s long-lived assets were impaired. Management is assessing the usage of our long-lived assets in Kiwa Shandong; it is possible that we would dispose some of our long-lived assets when necessary.

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

Kiwa Tianjin’s Ability to Continue as a Going Concern is in Doubt

Kiwa Tianjin is our majority-owned subsidiary engaging in the developing, manufacturing and marketing of biologically enhanced feed for live stock. Since its inception in 2006, the gross profit margin of Kiwa Tianjin has been declining. During fiscal year ended December 31, 2008, Kiwa Tianjin’s gross profit margin was less than 3%, underpinning its limited profitability. As of December 31, 2008, Kiwa Tianjin had accumulated deficit of $303,507.

As of December 31, 2008, Kiwa Tianjin has cash of only $377. 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 Tianjin.

During the first half of 2009, Kiwa Tianjin plan to raise working capital from related parties to meet Kiwa Tianjin’s daily requirements of cash, including repayment to raw material and service suppliers and other costs of daily operations. We are also actively looking for new financing from outside investors, for instance, financial institutions.

Kiwa Tianjin is also adjusting its product mix to reduce the amount of production of those low-gross profit margin products. Specifically, Tianjin will gradually reduce the amount of product of fowl feed, which typically has a gross profit margin of less than 3%. We also plan to increase the amount of production of fish feeds, which has a larger-than-average gross profit margin. In the short term, total amount of revenue of Kiwa Tianjin may drop down, resulting from these adjustments; however it is expected that the profitability of our bio-enhanced feed business will be improved.

2009 Financing Plan From the fourth quarter of 2008, we are putting in place very strict control over expenses. We plan to raise new financing from related parties to satisfy the Company’s daily demand of cash resources and maintain its operation. At the same time, we are actively looking for new financing from outside investors. We expect to raise at least $2,000,000 in the first half of 2009, which could allow us to repay outstanding balance of 6% Notes at its maturity date of June 29, 2009. If we could successfully settle 6% Notes, our capital structure would be improved. We would be better positioned in raising new finance. We are also adjusting product mix to reduce the amount of production of those low-gross profit margin products.

In Conclusion

The Company’s ability to continue as a going concern is in doubt. We expect to continue to have operating losses for the foreseeable future as we are still in the process of exploring market, further research and product tests. We will require additional capital to implement our business plan and continue operating. To the extent that we are unable to successfully raise the capital necessary to fund our future cash requirements on a timely basis and under acceptable terms and conditions, we will not have sufficient cash resources to maintain operations, and may have to curtail or cease operations and consider a formal or informal restructuring or reorganization.

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with our financial statements for the latest six 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.

Foreign Currency Translation - The functional currency of the Company is China RMB, which is the primary medium of exchange where Kiwa Shandong and Kiwa Tianjin operate. The Company reports its financial results in United States dollars (“U.S. dollars” or “US$”).

Translations of amounts from RMB into U.S. dollars were at approximately US$1.00 = RMB8.28 for all periods prior to July 21, 2005. Due to the stability of the RMB during the periods covered by the consolidated financial statements prior to July 21, 2005, no material exchange differences exist during the aforesaid period. On July 21, 2005, the People’s Bank of China announced it would appreciate the RMB, increasing the RMB-US$ exchange rate from approximately US$ 1.00 = RMB 8.28 to approximately US$1.00 = RMB8.00. The Company translates it’s China subsidiaries’ assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date (on December 31, 2008, the prevailing exchange rate of the U.S. dollar against the RMB was US$1.00 = RMB6.8346), and the statement of operations is translated at the average rates over each quarterly reporting period. Equity items are translated at historical exchange rates. Adjustments resulting from the translation from RMB into U.S. dollars are recorded in shareholders’ equity as part of accumulated comprehensive income (loss). Gains or losses resulting from transactions in currencies other than RMB are reflected in the results of operations as incurred.

Revenue Recognition - The Company recognizes sales of its products in accordance with Securities and Exchange Commission (“SEC”) 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 (“VAT”), if any, and are recognized upon delivery of goods and passage of title.

Pursuant to China’s value-added tax (“VAT”) rules and regulations, Kiwa Shandong as an ordinary VAT taxpayer is subject to a tax rate of 13% (“output VAT”). Such output VAT is payable after offsetting VAT paid by Kiwa Shandong on purchases (“input VAT”).

The VAT rate applied for Kiwa Tianjin, as a small-scale VAT taxpayer, is 6%. However as a livestock feed producer, it is exempted from VAT. Such VAT exemption shall be approved by the local tax authority each year. On January 27, 2007, the local tax authority approved the exemption from VAT for Kiwa Tianjin’s revenues for fiscal year 2007.

Pursuant to EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”, the company must recognize revenue based on the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) if the company carries out a transaction which has the following indicators: (1) the supplier (not the company) is the primary obligor in the arrangement; (2) the amount the company earns is fixed; and (3) the supplier (and not the company) has credit risk. We evaluate the relevant facts and circumstances of our urea entrepot trade, and recognize net amount as revenue for Urea entrepot business. During the fiscal year December 31, 2006, we recognized $800,000 revenue from urea entrepot trade; no revenues were earned during fiscal 2007. urea entrepot trade operation was discontinued and has been classified as a discontinued operation.

Advertising - The Company charges all advertising costs to expense as incurred.

Research and development - Research and development costs are charged to expense as incurred.

Operating Leases - Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to expense on the straight-line basis over the period of the relevant lease contracts.

Net Loss Per Common Share - Basic loss per common share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share reflects the potential dilution that would occur if dilutive securities (stock options, warrants, convertible debt, stock subscription and other stock commitments issuable) were exercised. These potentially dilutive securities were not included in the calculation of loss per share for the periods presented because the Company incurred a loss during such periods and thus their effect would have been anti-dilutive. Accordingly, basic and diluted loss per common share is the same for all periods presented. As of December 31, 2008, potentially dilutive securities aggregated 4,666,414,111 shares of common stock.

Comprehensive (Loss) Income - The Company has adopted the SFAS No. 130, “Reporting Comprehensive Income,” which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general-purpose financial statements. The Company has chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.

Income Taxes - The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for 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.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is “morelikely-than-not” to be sustained based solely on its technical merits as of the reporting date. The morelikely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more-likelythan-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. We evaluated our tax positions and believe there is no material uncertainty on our income tax issues for fiscal 2008.

Cash and Cash Equivalents - Highly liquid investments with a maturity of three months or less at the time of acquisition are considered to be cash equivalents.

Inventories - Inventories are stated at the lower of cost, determined on a weighted average basis, 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.

Property, Plant and Equipment - Property, plant and equipment are stated at cost. Major expenditures for betterments and renewals are capitalized while ordinary repairs and maintenance costs are expensed as incurred. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets after taking into account the estimated residual value. The estimated useful lives of property, plant and equipment are as follows:

Buildings		20-35 years
Machinery and equipment		4-12 years
Automobiles		8 years
Office equipments		5 years
Computer software		3 years

Construction in progress represents factory and office buildings under construction. The Company capitalizes interest during the construction phase of qualifying assets in accordance with SFAS No. 34, “Capitalization of Interest Cost.” No interest was capitalized during twelve months ended December 31, 2008 and 2007.

Depreciation costs were charged into costs of production or periodic expenses in accordance with the utilization of relating property, plant and equipment. However, due to the abnormally low production capacity in Kiwa Shandong in 2008 and 2007, we pro rata charged part of the depreciation of production facilities into production cost in accordance with the proportion of actual capacity to normal capacity, and the rest into operating expenses.

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 $639,492 as loss from impairment of long-lived assets. No such costs were charged during fiscal 2007.

Derivative Instruments - The Company accounts for financial instruments under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires that all derivative financial instruments be recognized in the consolidated financial statements and maintained at fair value regardless of the purpose or intent for holding them. Changes in fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows.

Financial Instruments and Fair Value - SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, requires that the Company disclose estimated fair values of financial instruments.

The carrying amounts for cash and cash equivalents, accounts receivable, other receivables, deposits and prepayments, short-term borrowings, accounts payable, other payables and accruals approximate their fair values because of the short maturity period of those instruments.

Stock Issued for Compensation and Financing - Effective January 1, 2006, the Company adopted SFAS No. 123(R) (revised 2004), “Share Based Payment,” which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line attribution method under SFAS No. 123(R).

Related Parties - Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

Reclassification from Prior Year Financial Statements - Certain prior year comparative figures have been reclassified to conform to the current year presentation.

2.	Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS 141R replaces SFAS No. 141, Business Combinations ("FAS 141"). SFAS 141R retains the fundamental requirements in FAS 141 that the purchase method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. SFAS 141R expands the definition of transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141R also increases the disclosure requirements for business combinations in the financial statements. SFAS 141R is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company was required to adopt SFAS 141R on January 1, 2009. There was no business combination consummated during 2008 and the Company does not expect the adoption of SFAS No. 141R to have a material effect on the Company's financial position and results of operations.

In December 2007, the FASB ratified the consensus reached on Emerging Issues Task Force Issue No. 07-1, "Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property" ("EITF 07-1"). EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Therefore, the Company was required to adopt EITF07-1 on January 1, 2009. We are currently evaluating the potential impact of this standard on our financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS No. 161 gives financial statement users better information about the reporting entity’s hedges by providing for qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those years. The Company does not expect the adoption of SFAS No. 161 to have a material effect on the Company’s financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 removes the requirement under SFAS No. 142, Goodwill and Other Intangible Assets to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions, and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. FSP 142-3 also requires entities to disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The Company was required to adopt FSP 142-3 on January 1, 2009. The adoption of FSP 142-3 did not have an impact on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS No. 162 directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to remove the GAAP hierarchy from the auditing standards. SFAS No. 162 is not expected to have an impact on the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60.” SFAS No. 163 is primarily geared towards financial guarantee insurance contracts by insurance enterprises. It is not expected to have any material effect on the reporting of the Company’s results of operations.

In November 2008, the Emerging Issues Task Force ("EITF") issued Issue No. 08-7, Accounting for Defensive Intangible Assets ("EITF 08-7"). EITF 08-7 applies to all acquired intangible assets in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining access to the asset (a defensive asset), assets that the acquirer will never actually use, as well as assets that will be used by the acquirer during a transition period when the intention of the acquirer is to discontinue the use of those assets. EITF 08-7 is effective as of January 1, 2009. The Company does not expect the adoption of EITF 08-7 to have a material impact on its financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

3.	Accounts Receivable

As of December 31, 2008, the balance of $490,060 was net of bad debt provision of $352,896. During fiscal year 2008, accounts receivable totaled $296,199 of Kiwa Shandong was determined to be uncollectible and therefore written off from book, after being approved by General Manager of Kiwa Shandong and CEO of the Company.

$303,258 of the bad debt provision in 2008 was related to bio-fertilizer business and the rest ($56,697) was related to bio-enhanced feed business.

Item	December 31, 2008			December 31, 2007
Accounts receivables - gross	$	842,956		$	747,438
Allowance for doubtful accounts		(352,896	)		(277,140	)
Accounts receivables - net	$	490,060		$	470,298

As of December 31, 2007, bad debt provision of $277,140 was relates to our bio-fertilizer business.

4.	Inventories

Inventories consisted of the following as of December 31, 2008 and December 31, 2007:

Item	December 31, 2008		December 31, 2007
Raw materials	$	283,770	$	686,290
Finished goods		68,016		132,039
Total	$	351,786	$	818,329

During fiscal year ended December 31, 2008, we wrote off $192,798 and disposed of obsolete inventory which exceeded the guarantee period. The General Manager of Kiwa Shandong and CEO of the Company had approved the disposal. There was no inventory exceeding their quality guarantee period as of December 31, 2007.

5.	Prepayment for fertilizer trade

On November 25, 2008, Kiwa Shandong and Oriental Chemical Industrial Corp., Ltd. (the “Oriental Chemical”) entered into “Chemical Fertilizer Sales Agreement,” (the “Chemical Fertilizer Purchase Agreement”) pursuant to which Oriental Chemical will sell to Kiwa Shandong 6,700 tons of chemical fertilizer products at the tentative price of RMB3,000 per ton. Under this agreement, Kiwa Shandong prepaid $2,955,550 to Oriental Chemical. As of December 31, 2008, Kiwa Shandong did not purchase any chemical fertilizer under the Chemical Fertilizer Purchase Agreement. Please also refer to Note 13 “Related Party Transaction – Kangtai – Fertilizer trade” section below.

6.	Prepaid expenses

Prepaid expenses consisted of the following as of December 31, 2008 and December 31, 2007:

Item	December 31, 2008		December 31, 2007
Prepaid stock-based compensation to consultants	$	-	$	46,865
Others		20,440		23,595
Total	$	20,440	$	70,460

(i) Prepaid stock-based compensation to investor relation consultant

Pursuant to a consulting agreement with an investor relation consultant, on April 18, 2007 we issued to the consultant 700,000 shares of common stock and warrants to purchase 250,000 shares of the Company’s common stock with an exercise price equal to $0.25. The fair value of the stock and warrants were amortized over the period that services were rendered (The year ended March 31, 2008).

On December 18, 2008, we entered into an engagement letter with our new attorney. Pursuant to which, we paid $1,500 in cash as service fees for one month. Kiwa Tianjin and Kiwa Shandong also prepaid minor fees and expenses to suppliers and service providers.

7.	Property, Plant and Equipment

The total gross amount of property, plant and equipment was $2,158,967 and $2,001,595 as of December 31, 2008 and 2007, respectively. The increase of $157,372 or 7.9% is mainly due to purchase of property and equipment for upgrading the Kiwa Shandong facility.

Depreciation expense was $166,906 and $147,651 for the twelve months ended December 31, 2008 and 2007, respectively.

Impairment on long-lived assets was $542,285 and nil as of December 31, 2008 and 2007, respectively.

All of our property, plant and equipment have been used as collateral to secure the 6% Notes (See Note 15 below).

8.	Intangible Assets

The Company’s intangible asset as of December 31, 2008 consisted of a patent as follows:

Amortization Year		Gross carrying value				Accumulated amount of amortization				Impairment on Intangible Assets				Net Value at December 31, 2008
8.5		$	480,411			$	232,238			$	96,942			$	151,231

The following table presents future expected amortization expense related to the patent:

Future expected amortization	Amount
2009		37,036
2010		37,036
2011		37,036
2012		37,036
2013	$	3,086

This patent has been used as collateral to secure the 6% Notes (See Note 15 below).

9.	Deferred Financing Costs

The financing costs relating to 6% Notes (See Note 15 below) were $47,793 and 129,793 as of December 31, 2008 and 2007, respectively. These costs consist of financing commission paid to an investment bank, legal service fees, insurance premium and other related costs. The costs are being amortized over the three-year term of the 6% Notes, starting at various dates of each tranche of 6% Notes in 2006.

10.	Deposit to Purchase the Proprietary Technology

The balance of $126,443 as of December 31, 2008 and 2007 is partial payment of the first installment of the transfer fee for the Anti-viral Aerosol technology pursuant to a Technology Transfer Agreement dated May 8, 2006 (See Note 20 below).

11.	Accounts Payable

Accounts payable consisted of the following at December 31, 2008 and December 31, 2007:

Item	December 31, 2008		December 31, 2007
Consulting and professional payables	$	436,560	$	436,381
Payables to material suppliers		607,146		425,306
Interest payable		190,431		192,275
Salary payable		318,864		212,219
Insurance payable		103,394		95,247
Office rental payable		86,528		80,960
Credit card balance		80,591		84,042
Others		112,184		109,060
Total	$	1,935,698	$	1,635,490

12.	Construction Costs Payable

Construction costs payable represents remaining amounts to be paid for the first phase of construction of our bio-fertilizer facility in Shandong.

13.	Related Party Transactions

Amounts due to related parties consisted of the following as of December 31, 2008 and December 31, 2007:

Item	Nature	Notes		31 December 2008			31 December 2007
Mr. Wei Li ("Mr. Li")	Non-trade		(1)	$	837,347		$	377,218
Discount of loans due to Mr. Li with detachable warrants	Non-trade				-			(88,195	)
Kangtai International Logistics (Beijing) Co., Ltd. ("Kangtai")	Non-trade		(2)		(57,277	)		205,631
Ms. Yvonne Wang ("Ms. Wang")	Non-trade		(3)		117,000			57,000
Subtotal				$	897,070		$	551,654

Kiwa-CAU R&D Center	Trade		(4)		234,103			164,280
Tianjin Challenge Feed Co., Ltd.	Trade		(5)
("Challenge Feed")					1,219			13,690
Kantai International Logistics (Beijing) Co., Ltd.			(6)		2,955,550			-
Subtotal				$	3,190,872		$	177,970
Total				$	4,087,942		$	729,624

(i) Mr. Li

Mr. Li is the Chairman of the Board, Chief Executive Officer and Chief Financial Officer of the Company.

Advances and Loans

As of December 31, 2007, the remaining balance due to Mr. Li was $377,218. During the twelve months ended December 31, 2008, Mr. Li advanced $669,846 to the Company and was repaid $209,717. As of December 31, 2008, the balance due to Mr. Li was $837,347. Mr. Li has agreed that the Company may repay the balance when its cash flow circumstance allows.

Motor Vehicle Lease

In December 2004, we entered into an agreement with Mr. Li, pursuant to which Mr. Li leases to the Company a motor vehicle. The monthly rental payment is $2,200. We have extended this lease agreement with Mr. Li to the end of fiscal 2009.

Guarantees for the Company

Mr. Li has pledged without any compensation from the Company all of his common stock of the Company as collateral security for the Company’s obligations under the 6% Notes. (See Note 15 below).

(2) Kangtai

Non-trade

Kangtai International Logistics (Beijing) Co., Ltd., formerly named China Star Investment Management Co., Ltd., is a private company, 28% owned by Mr. Li. Mr. Li is the Chairman of Kantai.

On December 31, 2007, the amount due to Kangtai was $205,631. During the twelve months ended December 31, 2008, Kangtai advanced $72,728 and was repaid $335,636. The balance due from Kangtai on December 31, 2008 was $57,277.

Fertilizer trade

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

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

(3) Ms. Wang

Ms. Wang is the Secretary of the Company.

On December 31, 2007, the amount due to Ms. Wang was $57,000. During the twelve months ended December 31, 2008, Ms. Wang advanced $60,000 to the Company. As of December 31, 2008, the amount due to Ms. Wang was $117,000. Ms. Wang has agreed that the Company may repay the balance when its cash flow circumstance allows.

(4) Kiwa-CAU R&D Center

In November 2006 Kiwa and China Agricultural University (the “CAU”) agreed to jointly set up a new research and development center, named Kiwa-CAU R&D Center. The term of the agreement was ten years commencing from July 1, 2006.

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

·	Three new technological achievements get patented;
·	Two technological achievements pass the provincial level or ministerial level scientific and technological achievements qualification;

·	Develop two new products which can be commercialized..

During fiscal 2008, Kiwa-CAU R&D Center had concentrated on the following filed of works:

1.	Isolation and culture of microorganisms;
2.	Screening of growth-promoting bacteria;

3.	Screening of bio-control bacteria;
4.	Screening of environmental microbiology;

5.	Studies on fermentation technology and related production process;
6.	Analysis of soil and fertilizer nutrients and fertilization program development;

7.	Field demonstration test of Kiwa fertilizer products;
8.	Application of approval and certification of Kiwa fertilizer products;

9.	Application of patents; and
10.	Technical training and services.

During fiscal 2008, Kiwa-CAU R&D Center had successfully isolated forty-one strains of endophytic bacillus from plants. In 2008, Ministry of Agriculture of the PRC had granted Organic Product Certification to two of our products. A number of strains had been observed to have the capability of boosting crop yield, dispelling chemical pesticide residual from soil. These strains could be used for not only developing new biological preparation but also environmental protection preparation. We are applying for three patents.

Management has assessed Kiwa-CAU R&D center’s performance for the fiscal year ended December 31, 2008; it is believed that Kiwa-CAU R&D center has achieved its goals.

On December 31, 2007, the amount due to Kiwa-CAU R&D Center was $164,280. During the twelve months ended December 31, 2008, we paid approximately $87,800 to Kiwa-CAU R&D Center. As of December 31, 2008, the outstanding balance due to Kiwa-CAU R&D Center was $234,103.

(5) Challenge Feed

Challenge Feed owns 20% of Kiwa Tianjin’s equity, and Mr. Wenbin Li, one of Challenge Feed’s shareholders, is also in charge of daily operations of Kiwa Tianjin.

The Company has entered into an agreement with Challenge Feed to lease the following 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 of approximately 2,500 square meters; (3) a concentrated feed production line for fowl and livestock; and (4) two workshops with floor area of approximately 1,200 square meters. The total monthly rent is RMB50,000 (approximately $7,300). During the twelve months ended December 31, 2008, all scheduled rent payments were paid.

The Company also paid $3,015 taxes on behalf of Challenge feed. As of December 31, 2008, the outstanding balance due to Challenge Feed was $1,219, which was unpaid rental from operating lease.

14.	Unsecured Loans Payable

The balance of unsecured loans payable was $1,682,615 and $1,574,350 as of December 31, 2008 and December 31, 2007, respectively. The difference of $108,265 was due to the different exchange rates prevailing at the two dates. Unsecured loans payable consisted of the following at December 31, 2008 and December 31, 2007:

Item	December 31, 2008		December 31, 2007

Unsecured loan payable to Zoucheng Municipal Government, non-interest bearing, becoming due within three years from Kiwa Shandong’s first profitable year on a formula basis, interest has not been imputed due to the undeterminable repayment date	$	1,316,829	$	1,232,100

Unsecured loan payable to Zoucheng Science & Technology Bureau, non-interest bearing, it is due in Kiwa Shandong’s first profitable year, interest has not been imputed due to the undeterminable repayment date		365,786		342,250

Total	$	1,682,615	$	1,574,350

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

According to our project agreement, Zoucheng Municipal Government granted the Company use of at least 15.7 acres in Shandong Province, China at no cost for 10 years to construct a manufacturing facility. Under the agreement, the Company has the option to pay a fee of RMB480,000 ($70,400) per acre for the land use right after the 10-year period. The Company may not transfer or pledge the temporary land use right. The Company also committed to invest approximately $18 million to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province. As of December 31, 2008, the Company invested approximately $1.91 million for the property, plant and equipment of the project.

15.	Long-Term Convertible Notes Payable

On June 29, 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with six institutional investors (collectively, the “Purchasers”) for the issuance and sale of (1) 6% secured convertible notes, due three years from the date of issuance, in the aggregate principal amount of $2,450,000 (the “6% Notes”), convertible into shares of the Company’s common stock, and (2) warrants (the “Warrants”) to purchase 12,250,000 shares of the Company’s common stock.

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

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

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

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

To enable reservation of a sufficient amount of authorized shares that may be issued pursuant to conversion of the 6% Notes and exercise of the Warrants, the Purchase Agreement required the Company to amend its Certificate of Incorporation to increase the number of authorized shares of common stock. At our annual meeting held on December30, 2008, a proposal to amend our Certificate of Incorporation to increase the number of authorized shares of common stock, from 200,000,000 shares to 400,000,000 shares was approved by the required vote of our stockholders. The Company incurs a financial penalty in cash or shares at the option of the Company (equal to 2% of the outstanding amount of the Notes per months plus accrued and unpaid interest on the Notes, prorated for partial months) if it breaches this or other affirmative covenants in the Purchase Agreement, including a covenant to maintain a sufficient number of authorized shares under its Certificate of Incorporation to cover at least 110% of the stock issuable upon full conversion of the Notes and the Warrants.

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

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

During fiscal year ended December 31, 2008, the Purchasers converted principal amount of $436,302 and interest amount of $116,873 into 59,254,970 shares of common stocks.

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

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

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

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

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

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

Pursuant to security purchase agreement dated June 29, 2006, the Company shall, at the end of each month that the 6% Notes and 2% Notes or Warrants are outstanding, have authorized and reserved for the purpose of issuance, a number of shares of Common Stock that is not less than one hundred ten percent of the number of shares of Common Stock actually issuable upon full conversion of the 6% Notes and 2% Notes and exercise of the Warrants based on the average Conversion Price of the Notes and the average Exercise Price of the Warrants during such calendar month (“Reserved Amount”). Our month-end calculation shows that the amount of authorized shares did not meet the above-mentioned requirements as of December 31, 2008. Therefore, we accrued liquidated damages amount, which equals to 2% of the outstanding amount of the 6% Notes and 2% Notes per month plus accrued and unpaid interest on the Notes.

16.	Equity-Based Transactions

As of December 31, 2008 and December 31, 2007, the Company had 139,399,206 and 81,519,676 shares of common stock outstanding, respectively. From January 1, 2008 to December 31, 2008, the Company has engaged in the following equity-based transactions:

On February 27, 2008, we issued 140,000 shares of common stock as partial compensation to an investor relation consultant for consulting services.

On March 14, 2008, the Company issued 5,000,000 shares of common stock to an investor for consideration of $650,000 cash pursuant to a stock purchase agreement dated February 19, 2008.

During the twelve months ended December 31, 2008, the Company issued 52,739,530 shares of common stock for conversions of principal and interest under our 6% Notes.

17.	Stock-based Compensation

(a) Summary Description of 2004 Stock Incentive Plan, as amended

The 2004 Stock Incentive Plan originally reserved 3,047,907 shares of our common stock for the issuance of options and other stock awards after the amendment approved by the 2006 annual shareholder meeting. Under the Plan, not more than 500,000 options or other stock awards may be granted to any participant in any fiscal year. Currently, the Stock Plan is administered by the Board. Employees, consultants and directors who are selected by the Board are eligible to receive options or stock purchase rights under the Plan subject to limitations set forth therein; provided, however, that only employees are eligible to be granted options intended to qualify as “incentive stock options” under the Internal Revenue Code of 1986, as amended (the “Code”). The exercise price of stock option awards may not be less than the fair market value on the date of grant, while nonstatutory stock options must have an exercise price of at least 85% of the fair market value on the date of grant. The exercise price of stock purchase rights may not be less than 85% of the fair market value of the shares of stock on either the date of grant or the date of purchase of the stock purchase right.

(b) Option Grant

On December 12, 2006, we granted 2,000,000 shares of stock option under our 2004 Stock Incentive Plan as amended. During fiscal 2007, 362,100 stock options were returned to the Company when the holders separated from the Company without exercising the options. During fiscal 2008, 222,500 stock options were returned to the company for the same reason. Consequently, as of December 31, 2008, 1,415,400 options were issued and outstanding.

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

The Company has adopted SFAS 123R effective as of January 1 2006. The fair value of the options granted at the grant date was determined to be $320,154 (approximately $0.16 per share), calculated pursuant to the Black-Scholes option pricing model. The calculated fair value is recognized as expense over the applicable vesting periods, using the straight-line attribution method. Unamortized fair value of stock options granted to those who separated from the Company has been charged to expense, while the options returned to the Company. We charged $94,029 and $139,233 as compensation expense in 2008 and 2007, respectively.

As of December 31, 2008, 934,164 shares of our issued and outstanding options vested and none were exercised. The closing price of our common stock on December 31, 2008 was $0.0019 (lower than the exercise price), thus the year-end intrinsic value of options granted was nil.

18.	Segment Reporting

We had three principal business segments, bio-fertilizer, livestock feed and urea entrepot trade for fiscal 2006. Commencing from July 2007 when we terminated all agreements related to urea entrepot trade, we treated urea entrepot trade as discontinued and have been operating in the rest two segments during 2008, we made arrangements to engage in fertilizer trade business. Management believes that the following table highlights relevant information to the chief operation decision makers for measuring business performances and financing needs and preparing the corporate budget and other items. As most of the Company’s customers are located in China, no geographical segment information is presented.

Item	Bio-fertilizer			Livestock Feed			Urea Entrepot Trade(1)			Chemical Fertilizer Trade (2)			Corporate (3)			Total
Fiscal Year Ended December 31, 2008
Net sales	$	226,869		$	8,948,868		$	-		$	-		$	-		$	9,175,737
Gross profit		60,035			157,483			-			-			-			217,518
Operating expenses		360,320			415,608			-			2,323			1,536,842			2,315,093
Operating profit (loss)		(300,285	)		(258,125	)		-			(2,323	)		(1,536,842	)		(2,097,575	)
Loss from disposal of obsolete inventory		(192,798	)		-			-			-			-			(192,798	)
Loss from impairment of long-lived assets		(639,492	)		-			-			-			-			(639,492	)
Interest income (expense)		(438	)		(39	)		-			-			(753,479	)		(753,956	)
Minority interest in subsidiary		-			51,633			-			-			-			51,633
Net income (loss)	$	(1,133,013	)	$	(206,531	)	$	-		$	(2,323	)	$	(2,290,321	)	$	(3,632,188	)

Total assets as of December 31, 2008		1,223,645			846,175			-			2,955,550			298,324			5,323,694

Fiscal Year Ended December 31, 2007
Net sales	$	241,357		$	8,888,422			-		$	-		$	-		$	9,129,779
Gross profit		101,784			424,200			-			-			-			525,984
Operating expenses		403,984			442,833			-			-			1,805,783			2,652,600
Operating profit (loss)		(302,200	)		(18,633	)		-			-			(1,805,783	)		(2,126,616	)
Interest income (expense)		(3,739	)		89			-			-			(762,761	)		(766,411	)
Minority interest in subsidiary		-			(332	)		-			-			-			(332	)
(Loss) from discontinued operations		-			-			414,509			-						414,509
Net income (loss)	$	(305,939	)	$	(18,876	)	$	(414,509	)		-		$	(2,568,544	)	$	(3,307,868	)

Total assets as of December 31, 2007	$	2,178,912		$	1,080,602		$	-		$	-		$	415,666		$	3,675,180

(1) In July 2007, the Company has entered three termination agreements with each party of the Urea entrepot trade for the termination of contracts between Kiwa BVI and Shengkui Technologies, Hua Yang Roneo Corporation and UPB International Sourcing Limited. Pursuant to these termination agreements, the Company will have neither rights nor obligations under previous contracts in connection with the urea entrepot trade except for a commission due to UPB. Based on these facts, we recognized relevant expenses in the second quarter of 2007.

(2) On June 23rd, 2008, Kiwa Bio-Tech Products (Shangdong) Co., Ltd. (Kiwa Shandong) received approval documents from the Ministry of Commerce of the People’s Republic of China, ratifying Kiwa Shandong to wholesale other companies’ fertilizer products, including chemical fertilizers, complex fertilizers and compound fertilizers.

(3) Beijing Representative Office of Kiwa Shandong fulfills part of corporate managerial function. Most of its expenses relating to this function were categorized into corporate segment.

19.	Income Tax

There is no provision (benefit) for income taxes for the years ended December 31, 2008 and 2007 since the Company and its subsidiaries have incurred operating losses and have established a valuation allowance equal to the total deferred tax asset.

The loss generated in the U.S., British Virgin Islands and China (Kiwa Shandong and Kiwa Tianjin) before income taxes in 2008 and 2007, respectively, was as follows:

	Years Ended December 31,
	2008			2007
Income (Loss) in U.S. before income taxes	$	(1,228,183	)	$	(1,693,745	)
Income (Loss) in British Virgin Islands before income taxes		(120,000	)		(612,592	)
Income (Loss) in Kiwa Shandong before income taxes		(2,093,534	)		(982,656	)
Income (Loss) in Kiwa Tianjin before income taxes		(190,471	)		(18,875	)
Total	$	(3,632,188	)	$	(3,307,868	)

The tax effect of temporary differences and operating loss carryforwards is as follows as of December 31, 2008 and 2007:

	Year Ended December 31,
	2008			2007
Deferred tax assets
Net operating loss carryforwards	$	1,183,364		$	904,035
Allowance for doubtful accounts receivable		59,037			41,571
Value difference of intangible assets		27,987			19,173
Impairment of inventories		28,920			-
Impairment of long-lived asset		73,239			-
Accrued expenses		40,286			141,867
		1,412,833			1,106,646
Deferred tax liabilities					0
Prepaid expenses		(375	)		(3,539	)
Deferred financing cost		(7,169	)		(19,469	)
		(7,544	)		(23,008	)

Valuation allowance		(1,405,289	)		(1,083,638	)
Net deferred tax assets	$	-		$	-

In accordance with the current tax laws in China, Kiwa Shandong and Kiwa Tianjin would normally be subject to a corporate income tax rate of 33% on its taxable income. However, in accordance with the relevant income laws in China, Kiwa Shandong and Kiwa Tianjin are exempt from corporate income taxes for their first two profitable years and are entitled to a 50% tax reduction for the succeeding three years. After the Enterprise Income Tax Law of the PRC promulgated on March 16, 2007 took effect as of January 1, 2008, fiscal year 2008 shall be regarded as the first profitable year for determining eligibility of these benefits even if Kiwa Shandong or Kiwa Tianjin have not been profitable in 2008. Kiwa Shandong and Kiwa Tianjin have not provided for any corporate income taxes since they had no taxable income for the years ended December 31, 2006 and 2005. The difference between the effective income tax rate and the expected statutory rate for Kiwa Shandong and Kiwa Tianjin was as follows:

	Year Ended December 31, 2008			Year Ended December 31, 2007
Statutory rate		25.0	%		33.0	%
Income tax holiday		(25.0	)%		(33.0	)%
Effective income tax rate		-			-

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

Our net operating loss of the Company could be carried forward and taken against any taxable income for a period of not more than twenty years from the year of the initial loss pursuant to Section 172 of the Internal Revenue Code of 1986, as amended. The net operating loss of Kiwa Shandong and Kiwa Tianjin could be carried forward for a period of not more than five years from the year of the initial loss pursuant to relevant P.R.C. tax laws and regulations.

20.	Commitments and Contingencies

The Company has the following material contractual obligations:

Operating lease commitments

The Company has leased an office in Beijing from July 15, 2007. The operating lease agreement will expire at January 14, 2009. The Company has renewed this lease agreement for the period from January 15, 2009 to January 14, 2010. The monthly rental payment for the new office is RMB 80,323.74 ($11,753). Rent expense under the operating leases for the fiscal year ended December 31, 2008 and 2007 was $132,000 and $92,570, respectively.

The Company has entered into an agreement with Challenge Feed, its joint venture partner in Kiwa Tianjin, to lease several facilities for three years commencing on August 1, 2006. The total monthly rental is RMB 50,000 ($7,316). Pursuant to the lease agreement, rent expense for the fiscal year ended December 31, 2008 was $87,789 and 2007 was $82,140 (See Note 13 above).

Lease commitments under the foregoing lease agreements are as follows:

Fiscal Year	Amount
2009	$	180,495
Total	$	180,495

Technology acquisition

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

During twelve months ended December 31, 2008, no payment was made to JKB. The Company is still pursuing to acquire AF-01 technology and develop veterinary drug product based on this technology. There were no changes to the terms of the Technology Transfer Agreement.

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 $137,000) each year to fund research at the R&D Center. The term of this Agreement is ten years starting from July 1, 2006. Qi Wang, one of our director commencing in July 2007 acts as Director of Kiwa-CAU R&D Center since July 2006.

Investment in manufacturing and research facilities in Zoucheng, Shandong Province in China

According to the Project Agreement with Zoucheng Municipal Government in 2002, the Company committed to invest approximately $18 million to $24 million for developing the manufacturing and research facilities in Zoucheng, Shandong Province. As of December 31, 2008, the Company had invested approximately $1.91 million for the project.

Investment commitment under the joint venture agreement entered into in May

In May 2008, the Company entered into a joint venture agreement with Hebei Huaxing Pharmaceuticals Co., Ltd. (“Huaxing”), which committed us to invest $1,534,000 in cash for 70% of the equity of a new joint venture (“Kiwa Hebei”). Under the joint venture agreement, the Company is required to complete its capital contribution within one year after the date Kiwa Hebei receives its business license from Chinese government authorities, with the first installment payment of 25% of the investment due at the end of the first month after the license is received and an installment of another 25% due at the end of second month. The agreement will take effect at the date of approval of local bureau of commerce. However, due to sharp change in macro economic climate, both parties proposed to local bureau of commerce in Hebei to suspend the approval of the joint venture agreement. The joint venture agreement was not taken effective. Both parties will not be committed to any responsibilities or making any capital contributions under the joint venture agreement.

21.	Subsequent Event

From January 1, 2009 to May 14, 2009, purchasers of 6% Notes (See Note 15 above) had converted principal amount of $104,151 into 260,285,794 shares of our common stocks, resulting in a quick expansion of the Company’s issued and outstanding shares. As of May 14, 2009, the amount of issued and outstanding shares of common stocks totaled 400,000,000.