UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended March 31, 2010.
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
transition period from _____ to_____.
Commission
File Number: 001-32477
TIENS
BIOTECH GROUP (USA), INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
75-2926439
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
No. 6,
Yuanquan Rd.
Wuqing
New Tech Industrial Park
Tianjin, China
301700
(Address
of principal executive offices) (Zip Code)
+86-22-8213-7914
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the 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
¨
(Do not check if a smaller reporting company)
|
Smaller Reporting Company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
x
There
were 71,333,586 shares of the registrant’s common stock outstanding on May 14,
2010.
TIENS
BIOTECH GROUP (USA), INC.
INDEX
TO FORM 10-Q
|
|
PAGE
|
PART
I - FINANCIAL INFORMATION
|
|
3
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
3
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
2009
|
|
3
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Three Months
Ended March 31, 2010 and 2009 (Unaudited)
|
|
4
|
|
|
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2010 and
2009 (Unaudited)
|
|
5
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
|
6
|
|
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
|
21
|
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
29
|
|
|
|
ITEM
4T. CONTROLS AND PROCEDURES
|
|
29
|
|
|
|
PART
II - OTHER INFORMATION
|
|
29
|
|
|
|
ITEM
6. EXHIBITS
|
|
29
|
PART I -
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL
STATEMENTS
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
MARCH 31, 2010 (UNAUDITED) AND DECEMBER 31, 2009
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
9,873,298
|
|
|
$
|
1,848,328
|
|
Accounts
receivable, trade - related parties, net of
|
|
|
|
|
|
|
|
|
allowance
for doubtful accounts of $1,621,619 and $1,419,178
|
|
|
|
|
|
|
|
|
as
of March 31, 2010 and December 31, 2009, respectively
|
|
|
10,245,625
|
|
|
|
15,379,312
|
|
Inventories
|
|
|
5,024,331
|
|
|
|
5,328,052
|
|
Other
receivables
|
|
|
902,216
|
|
|
|
995,657
|
|
Other
receivables - related parties
|
|
|
39,458,619
|
|
|
|
44,561,626
|
|
Employee
advances
|
|
|
101,755
|
|
|
|
115,673
|
|
Prepaid
expenses
|
|
|
594,263
|
|
|
|
658,193
|
|
Prepaid
taxes
|
|
|
171,715
|
|
|
|
407,534
|
|
Total
current assets
|
|
|
66,371,822
|
|
|
|
69,294,375
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
9,811,115
|
|
|
|
10,124,483
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
133,225,733
|
|
|
|
125,572,621
|
|
Construction
deposits
|
|
|
3,763,996
|
|
|
|
1,405,997
|
|
Intangible
assets, net
|
|
|
12,789,812
|
|
|
|
12,864,295
|
|
Other
assets
|
|
|
13,400,435
|
|
|
|
11,847,937
|
|
Total
other assets
|
|
|
163,179,976
|
|
|
|
151,690,850
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
239,362,913
|
|
|
$
|
231,109,708
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,211,661
|
|
|
$
|
5,012,157
|
|
Advances
from customers - related parties
|
|
|
8,461,804
|
|
|
|
4,426,751
|
|
Wages
and benefits payable
|
|
|
1,068,256
|
|
|
|
1,484,852
|
|
Income
taxes payable
|
|
|
314,266
|
|
|
|
-
|
|
Contractor
deposits
|
|
|
183,420
|
|
|
|
183,395
|
|
Contractor
payables
|
|
|
18,834,263
|
|
|
|
18,513,216
|
|
Other
payables
|
|
|
1,168,820
|
|
|
|
1,151,551
|
|
Other
payables - related parties
|
|
|
4,405,557
|
|
|
|
3,326,110
|
|
Total
current liabilities
|
|
|
38,648,047
|
|
|
|
34,098,032
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
|
11,238,037
|
|
|
|
11,236,501
|
|
Total
non current liabilities
|
|
|
11,238,037
|
|
|
|
11,236,501
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
49,886,084
|
|
|
|
45,334,533
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
|
|
|
Shareholders'
equity of the Company:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 250,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
71,333,586
issued and outstanding, respectively
|
|
|
71,334
|
|
|
|
71,334
|
|
Paid-in-capital
|
|
|
18,118,007
|
|
|
|
18,042,189
|
|
Statutory
reserves
|
|
|
13,217,217
|
|
|
|
13,217,217
|
|
Retained
earnings
|
|
|
129,631,801
|
|
|
|
126,370,263
|
|
Accumulated
other comprehensive income
|
|
|
18,277,093
|
|
|
|
18,262,123
|
|
Total
shareholders' equity of the Company
|
|
|
179,315,452
|
|
|
|
175,963,126
|
|
Noncontrolling
interest
|
|
|
10,161,377
|
|
|
|
9,812,049
|
|
Total
equity
|
|
|
189,476,829
|
|
|
|
185,775,175
|
|
Total
liabilities and equity
|
|
$
|
239,362,913
|
|
|
$
|
231,109,708
|
|
The
accompanying notes are an integral part of this statement.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 and 2009 (UNAUDITED)
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
11,403,363
|
|
|
$
|
18,237,545
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
3,440,881
|
|
|
|
5,735,059
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
7,962,482
|
|
|
|
12,502,486
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
3,497,547
|
|
|
|
3,130,936
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
4,464,935
|
|
|
|
9,371,550
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
-
|
|
|
|
(52,616
|
)
|
Interest
income
|
|
|
1,872
|
|
|
|
85,768
|
|
Other
expense
|
|
|
(253,710
|
)
|
|
|
(45,288
|
)
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
(251,838
|
)
|
|
|
(12,136
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
4,213,097
|
|
|
|
9,359,414
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
609,502
|
|
|
|
359,615
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
3,603,595
|
|
|
|
8,999,799
|
|
|
|
|
|
|
|
|
|
|
LESS:
Net income attributable to the noncontrolling interest
|
|
|
(342,057
|
)
|
|
|
(406,974
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME ATTRIBUTABLE TO THE COMPANY
|
|
|
3,261,538
|
|
|
|
8,592,825
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
14,970
|
|
|
|
200,003
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO THE COMPANY
|
|
|
3,276,508
|
|
|
|
8,792,828
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
|
|
|
343,398
|
|
|
|
419,595
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
3,619,906
|
|
|
$
|
9,212,423
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.05
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
The
accompanying notes are an integral part of this statement.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,603,595
|
|
|
$
|
8,999,799
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
202,247
|
|
|
|
(184,568
|
)
|
Depreciation
|
|
|
417,469
|
|
|
|
544,811
|
|
Amortization
|
|
|
83,557
|
|
|
|
97,143
|
|
Interest
expense
|
|
|
-
|
|
|
|
1,372
|
|
Gain
on sale of assets
|
|
|
(15,082
|
)
|
|
|
(11,652
|
)
|
Rental
expense borne by a related party
|
|
|
81,749
|
|
|
|
81,626
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade - related parties
|
|
|
4,933,543
|
|
|
|
(1,493,130
|
)
|
Other
receivables
|
|
|
93,577
|
|
|
|
(17,415
|
)
|
Other
receivables - related parties
|
|
|
(1,200,159
|
)
|
|
|
(2,567,169
|
)
|
Inventories
|
|
|
304,560
|
|
|
|
1,398,175
|
|
Employee
advances
|
|
|
13,935
|
|
|
|
(76,407
|
)
|
Prepaid
expense
|
|
|
64,017
|
|
|
|
(589,907
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(819,926
|
)
|
|
|
(567,056
|
)
|
Advances
from customers - related parties
|
|
|
4,034,448
|
|
|
|
1,364,661
|
|
Wages
and benefits payable
|
|
|
(416,798
|
)
|
|
|
(393,303
|
)
|
Other
taxes payable
|
|
|
550,140
|
|
|
|
(270,424
|
)
|
Other
payables
|
|
|
19,487
|
|
|
|
(565,726
|
)
|
Other
payables - related parties
|
|
|
1,079,414
|
|
|
|
106,916
|
|
Net
cash provided by operating activities
|
|
|
13,029,773
|
|
|
|
5,857,746
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investment
in Life Resources
|
|
|
3,000,000
|
|
|
|
-
|
|
Proceeds
from disposal of a subsidiary
|
|
|
700,000
|
|
|
|
-
|
|
Construction
deposits
|
|
|
(562,642
|
)
|
|
|
(1,163,628
|
)
|
Contractor
deposits
|
|
|
-
|
|
|
|
48,930
|
|
Addition
to construction in progress
|
|
|
(9,112,590
|
)
|
|
|
(4,483,010
|
)
|
Equipment
deposits
|
|
|
(1,558,192
|
)
|
|
|
-
|
|
Proceeds
from sales of properties
|
|
|
2,621,021
|
|
|
|
17,031
|
|
Purchase
of equipment and automobiles
|
|
|
(88,505
|
)
|
|
|
(1,035,910
|
)
|
Net
cash used in investing activities
|
|
|
(5,000,908
|
)
|
|
|
(6,616,587
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(3,895
|
)
|
|
|
55,752
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
8,024,970
|
|
|
|
(703,089
|
)
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
1,848,328
|
|
|
|
44,854,511
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
9,873,298
|
|
|
$
|
44,151,422
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
266,273
|
|
Income
taxes
|
|
$
|
213,625
|
|
|
$
|
3,877,420
|
|
The
accompanying notes are an integral part of this statement.
Note
1 - Background
Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.
The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO and President. The Company owns 100% of
Tianshi International Holdings Group Limited ("Tianshi Holdings"). Tianshi
Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd.
("Biological") and 100% of Tianjin Tiens Life Resources Co., Ltd. (“Life
Resources”).
Nature of
o
perations
The
Company through its subsidiaries is primarily engaged in the manufacturing of
nutritional supplement products, including wellness products and dietary
supplement products. In the People’s Republic of China (“PRC”), the Company
sells its products to Tianjin Tianshi Biological Engineering Co. Ltd. (“Tianshi
Engineering”), a Chinese company. Tianshi Engineering, in turn, sells the
products to customers through its branches and affiliated companies and at chain
stores which are owned by individual distributors. Tianshi Engineering is 100%
owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”). Tianshi
Group is 90% owned by Jinyuan Li, the Company’s Chairman, President and CEO, and
10% owned by Baolan Li, Jinyuan Li’s daughter. Outside the PRC, the Company
sells its products to overseas affiliated companies located in 54 countries who
in turn re-package them and sell to independent direct sales
distributors.
Note
2 – Summary of significant accounting policies
Basis of
presentation
The
financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). These Consolidated Financial Statements for interim
periods are unaudited. In the opinion of management, the consolidated financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation
.
The results reported in
these Consolidated Financial Statements are not necessarily indicative of the
results that may be reported for the entire year. The accompanying consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and do not
include all information and footnotes necessary for a complete presentation
of financial statements in conformity with U.S. GAAP. These Consolidated
Financial Statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009, filed with the
Securities and Exchange Commission on April 2, 2010.
The reporting
entity
The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
Subsidiary
|
|
Jurisdiction
of
Formation
|
|
%
Ownership
|
Tianshi Holdings
|
|
British
Virgin Islands
|
|
100.0
%
|
Biological
|
|
P.R.C.
|
|
80.0
%
|
Life
Resources
|
|
P.R.C.
|
|
100.0
%
|
Principle
s of
consolidation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances are eliminated in consolidation.
Use of
estimates
In
preparing financial statements in conformity with U.S. GAAP, the Company makes
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and sales and expenses
during the reported periods. Significant estimates include useful life of
long lived asset, provision for bad debt and allowance for sales
return. Management bases its estimates on historical experience and
on various other assumptions that they believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those
estimates.
Foreign currency
translation
The
reporting currency of the Company is the US dollar. Biological and Life
Resources’ financial records are maintained and the statutory financial
statements are stated in its local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are translated at
the unified exchange rate as quoted by the People's Bank of China at the end of
each reporting period. Translation adjustments resulting from this process are
included in other comprehensive income in the statement of income and other
comprehensive income.
Translation
adjustments amounted to $14,970 and $200,003 for the three months ended
March 31, 2010 and 2009, respectively. Asset and liability accounts at March 31,
2010 were translated at RMB6.84 to $1.00 USD compared to RMB6.85 at March
31, 2009. Equity accounts are stated at their historical rate. The average
translation rates applied to income statement accounts for the three months
ended March 31, 2010 and 2009 were 6.84 RMB and 6.85 RMB, respectively. Cash
flows are also translated at average translation rates for the period.
Therefore, amounts reported on the statements of cash flows will not necessarily
agree with changes in the corresponding balances on the balance
sheets.
Fair value of financial
instruments
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants at the
measurement date. Fair value hierarchy prioritizes the inputs used in measuring
fair value into three broad levels as follows:
•
Level one — Quoted market prices in active markets for
identical assets or liabilities;
•
Level two — Inputs other than level one inputs that are either directly or
indirectly observable; and
•
Level three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions that a
market participant would use.
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company's financial instruments consist primarily of
cash, trade accounts receivable, trade payables, advances, and other
receivables. The carrying amounts of the Company's financial instruments
generally approximate their fair values at March 31, 2010 and December 31,
2009.
Cash
Cash
includes cash on hand and demand deposits in accounts maintained with banks of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on its cash in bank accounts.
Accounts
receivable
The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties’ ability to collect their
receivables and a general allowance for doubtful debt of 0.5% of the remaining
accounts receivable-related parties. Management reviews its accounts receivable
on a regular basis to determine if the provision for doubtful debts is adequate,
paying particular attention to the age of receivables outstanding. At March 31,
2010 and December 31, 2009, there were no receivables due from Tianshi
Engineering outstanding more than 90 days. At March 31, 2010 and December 31,
2009, receivables due from overseas related companies outstanding more than 180
days totaled $6,139,508 and $5,089,510, respectively. The Company did not
charge-off any receivables for the periods reported. The following table
represents the changes in the allowance for doubtful accounts:
|
|
Provision for
Doubtful
Accounts
|
|
Three
month period ended March 31, 2010
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,419,178
|
|
Increase
of provision for Doubtful Accounts
|
|
|
202,441
|
|
Balance
at End of Period
|
|
$
|
1,621,619
|
|
|
|
|
|
|
Three
month period ended March 31, 2009
|
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,108,789
|
|
Decrease
of provision for Doubtful Accounts
|
|
|
(183,224
|
)
|
Balance
at End of Period
|
|
$
|
925,565
|
|
Inventories
Inventories
are stated at the lower of cost or market using the moving average basis. The
Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence.
Employee
advances
Employee
advances represent cash advances to various employees of the Company. In the
PRC, a majority of business transactions are completed in cash. These cash
advances represent monies advanced to certain employees to pay for various
expenses and purchases related to the Company's daily operations.
Prepaid
expenses
Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
Company reviews its advances to suppliers annually to determine whether
provisions should be made. The amount included in prepaid expenses is net of any
provisions. Provisions for prepaid expenses are as follows:
|
|
Provision for Doubtful
Accounts
|
|
Three
month period ended March 31, 2010
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,018,474
|
|
Increase
of provision for Doubtful Accounts
|
|
|
139
|
|
Balance
at End of Period
|
|
$
|
1,018,613
|
|
|
|
|
|
|
Three
month period ended March 31, 2009
|
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
952,071
|
|
Increase
of provision for Doubtful Accounts
|
|
|
1,175
|
|
Balance
at End of Period
|
|
$
|
953,246
|
|
Property, plant and
equipment, net
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of the assets are as
follows:
|
Estimated
Useful
Life
|
Buildings
and improvements
|
20
years
|
Machinery
and equipment
|
10
years
|
Computer,
office equipment and furniture
|
5
years
|
Automobiles
|
5
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts, and any gain or loss is included in the
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expenses as incurred. Major
additions and betterments to buildings and equipment are
capitalized.
Construction in
progress
Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets are
completed and are ready for their intended use.
Construction
deposits
Construction
deposits represent advances paid by the Company to contractors for construction
in progress.
In
tangible
assets
Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. However, the
government grants "land use rights" for a specified period of time. The Company
amortizes its land use rights according to the actual useful life of 50 years.
Other intangible assets include patents and trademarks and are amortized over
their estimated useful lives ranging from five to ten years.
Other
assets
Other
assets consist of deposits made to purchase equipment and a long-term
prepaid expense. The Company will transfer the deposits made to purchase
equipment from other assets to property, plant and equipment upon taking
ownership. The Company amortizes its long-term prepaid expense according to the
service period.
Impairment of long-lived
assets
Long-lived
assets, including intangible assets, of the Company are reviewed annually as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
Deferred
income
Deferred
income consists of government grants. On August 2, 2005 and November 20, 2006,
the Company received two government grants related to the purchase of land use
rights in the amount of RMB 35,803,461 (or US $5,237,330). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or US $6,000,707) for the zoning changes to
one parcel of land on which the land use rights were changed from “industrial”
to “educational”. On September 12, 2008, the Company received RMB 41,022,061 (or
US $6,000,707) from a government grant. The grants are treated as deferred
income and will be amortized over the life of the buildings on the
land.
Noncontrolling
interest
Noncontrolling
interest represents the outside shareholder’s 20% ownership of Biological and 4%
ownership of Tiens Yihai Co. Ltd. (“Tiens Yihai”) . Effective as of November 15,
2009, the Company transferred its interest in Tiens Yihai to Tianshi
International Investment Group Co., Ltd. (“Tianshi Investment”),
a company 100% owned by Jinyuan Li.
Revenue
recognition
The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products is recognized at
delivery point. Revenue from finished products is recognized only when the
related party Chinese distributors recognized sales of the Company's products to
unaffiliated third parties. Revenues in both cases are net of value
added taxes.
For
overseas sales, the Company sells mostly finished products. The Company
recognizes revenue from international sales (non-Chinese) to affiliated parties,
net of taxes, as goods are shipped and clear review by the customs department of
the Chinese government.
The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. Revenue is recorded net of an allowance for estimated returns. Such
reserves are based upon management's evaluation of historical experience and
estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns of
products during the past three years, and management does not anticipate
allowing any returns in 2010 related to previous revenues, no allowance for
estimated returns has been recorded as of March 31, 2010 and December 31,
2009.
Advertising
c
osts
The
Company sells its products to related parties, and these related parties are
primarily responsible for marketing. The Company did not incur any advertising
costs for the three months ended March 31, 2010 and 2009.
Shipping and
h
andling
Shipping
and handling costs totaled $209,005 and $140,702 for the three months ended
March 31, 2010 and 2009, respectively. The Company sells products on FOB
condition, however, it usually prepays shipping and handling expenses to
transportation companies on behalf of customers and collects these shipping and
handling expenses when it receives payments from customers. The payments
received from customers are included in revenue and the related shipping and
handling costs are included in selling, general and administrative
expenses.
Research and
d
evelopm
ent
Research
and development expenses include salaries, supplies, and overhead such as
depreciation, utilities and other costs. These costs are expensed as incurred.
The Company expensed research and development costs of $298,133 and $379,460 for
the three months ended March 31, 2010 and 2009, respectively. These costs are
included in selling, general and administrative expenses in the accompanying
statements.
Income
taxes
The
Company accounts for income taxes under the liability method. Deferred
income taxes are recognized for the estimated tax consequences in future years,
as differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized when, in management’s
opinion, it is more likely than not that some portion of the deferred tax assets
will not be realized. The provision for income taxes represents current taxes
payable net of the change during the period in deferred tax assets and
liabilities.
The
Company has not been subjected to income tax examinations by taxing authorities
for the three months ended March 31, 2010 and the year ended December 31, 2009.
The Company is subject to tax examination in the PRC for all years, as tax
returns remain open to examination until notified by the taxing authorities, and
the Company has not received any notifications to date. The company records
interest and penalties as other expense on the consolidated income and other
comprehensive income statements. During the three months ended March
31, 2010 and the year ended December 31, 2009, the Company did not recognize any
amount in interest and penalties.
Earnings per
share
Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing net
income (loss) attributable to common stockholders by the weighted average number
of common shares outstanding for the period. There are no differences between
Basic and Diluted EPS for the three months ended March 31, 2010 and
2009.
Recently issued accounting
pronouncements
In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and 2 fair value measurements and
describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010,
except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The guidance adopted on January 1,
2010 did not have an effect on the Company’s consolidated financial statements.
Adoption of the remaining guidance is not expected to have a material impact on
the Company’s consolidated financial statements.
Note
3 – Supplemental disclosure of cash flow information
On
February 10, 2010, Tianshi Holdings, Fuhong Development Co., Ltd. (“Fuhong
Development”), and Tianshi Investment entered into an agreement, pursuant to
which liabilities in the form of a loan receivable due to Fuhong Development
from the Company in the amount of $3,000,000 were offset against assets in the
form of a loan receivable due to the Company from Tianshi
Investment. Each of Fuhong Development and Tianshi Investment is 100%
owned by Jinyuan Li.
The right
to offset existed because:
|
1.
|
Tianshi
Investment had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Fuhong
Development;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
The
Company, Fuhong Development and Tianshi Investment agreed to offset the
two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
Note
4 – Inventories
Inventories
consisted of the following at March 31, 2010 and December 31, 2009:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,411,012
|
|
|
$
|
1,937,306
|
|
Packaging
material
|
|
|
679,890
|
|
|
|
729,517
|
|
Miscellaneous
supplies
|
|
|
1,011,723
|
|
|
|
848,720
|
|
Work
in process
|
|
|
273,441
|
|
|
|
476,529
|
|
Finished
goods
|
|
|
1,648,265
|
|
|
|
1,335,980
|
|
Total
|
|
$
|
5,024,331
|
|
|
$
|
5,328,052
|
|
The
Company has not written off any obsolete goods for the three months ended March
31, 2010 and 2009.
Note
5 – Prepaid expenses
Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses, net of the allowance as disclosed in Note 2,
at March 31, 2010 and December 31, 2009 are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Advance
to suppliers
|
|
$
|
592,263
|
|
|
$
|
655,443
|
|
Short-term
prepaid expenses
|
|
|
2,000
|
|
|
|
2,750
|
|
Total
|
|
$
|
594,263
|
|
|
$
|
658,193
|
|
Note
6 – Property, plant and equipment, net
Property,
plant and equipment consist of the following at March 31, 2010 and December 31,
2009:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Buildings
and improvements
|
|
$
|
1,559,147
|
|
|
$
|
1,558,934
|
|
Office
equipment
|
|
|
355,408
|
|
|
|
348,284
|
|
Computer
equipment and software
|
|
|
2,408,127
|
|
|
|
2,405,467
|
|
Machinery
and equipment
|
|
|
14,309,135
|
|
|
|
14,211,726
|
|
Automobiles
|
|
|
4,449,974
|
|
|
|
4,470,909
|
|
Total
|
|
|
23,081,791
|
|
|
|
22,995,320
|
|
Less:
accumulated depreciation
|
|
|
(13,270,676
|
)
|
|
|
(12,870,837
|
)
|
Property,
plant and equipment, net
|
|
$
|
9,811,115
|
|
|
$
|
10,124,483
|
|
Depreciation
expense for the three months ended March 31, 2010 and 2009 amounted to
$
417,469
and $544,811, respectively.
Note
7 - Intangible assets
Intangible
assets consist of the following at March 31, 2010 and December 31,
2009:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Land
use rights
|
|
$
|
13,533,305
|
|
|
$
|
13,531,454
|
|
Other
intangible assets
|
|
|
344,321
|
|
|
|
344,274
|
|
Less
accumulated amortization
|
|
|
(1,087,814
|
)
|
|
|
(1,011,433
|
)
|
Intangible
assets, net
|
|
$
|
12,789,812
|
|
|
$
|
12,864,295
|
|
Amortization
expense for the three months ended March 31, 2010 and 2009 amounted to
$76,243 and $97,143, respectively.
The
estimated amortization expense for the next five years is as
follows:
Estimated amortization expense for
|
|
|
|
the
year
ending
December
31,
|
|
Amount
|
|
2010
|
|
$
|
304,927
|
|
2011
|
|
$
|
298,416
|
|
2012
|
|
$
|
298,416
|
|
2013
|
|
$
|
287,322
|
|
2014
|
|
$
|
286,689
|
|
2015
and thereafter
|
|
$
|
11,388,525
|
|
Note
8 – Related party transactions and balances
The
Company mainly conducts related party transactions with Tianshi Group, Tianshi
Engineering, Tianshi Investment, Fuhong Development, Tianjin Tianshi
Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”) and overseas related
companies of Tianshi Group. Tianshi Group is owned 90% by Jinyuan Li and 10% by
his daughter, Baolan Li. Tianshi Engineering is owned 51% by Tianshi Group and
49% by Baolan Li. Tianshi Pharmaceuticals is wholly owned by Tianshi Group.
Tianshi Investment and Fuhong Development are each 100% owned by Jinyuan
Li. Jinyuan Li owns or controls the overseas related companies of Tianshi
Group.
The
Company’s related party transactions are required to be reviewed and approved or
ratified by the Board of Directors. No director that is a related person in a
related party transaction may participate in any discussion, approval or
ratification of the related party transaction except to provide information
concerning it. The following tables are provided to facilitate an understanding
of the transactions and outstanding balances between those related
parties.
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenue-related
parties
|
|
$
|
11,403,363
|
|
|
$
|
18,237,545
|
|
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Accounts
receivable, trade – related parties,
net
of allowance for doubtful accounts of
$1,621,619
and $1,419,178 as of March 31,
2010
and December 31, 2009, respectively
|
|
$
|
10,245,625
|
|
|
$
|
15,379,312
|
|
Other
receivables – related parties
|
|
$
|
39,458,619
|
|
|
$
|
44,561,626
|
|
Advances
from customers – related parties
|
|
$
|
8,461,804
|
|
|
$
|
4,426,751
|
|
Other
payables – related parties
|
|
$
|
4,405,557
|
|
|
$
|
3,326,110
|
|
Revenue -
related
parties
The
details of revenue-related parties are as follows:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Engineering
|
|
$
|
6,783,273
|
|
|
$
|
2,742,620
|
|
Overseas
Related Companies
|
|
|
4,620,090
|
|
|
|
15,494,925
|
|
Total
|
|
$
|
11,403,363
|
|
|
$
|
18,237,545
|
|
The
Company markets its products through various domestic and international business
entities that are related to the Company through common ownership.
In China,
the Company sells products to Tianshi Engineering, a related party through
common ownership. Tianshi Engineering, in turn, markets and sells the products
to customers through its branches and affiliated companies and at chain stores
owned by individual distributors. Tianshi Engineering is solely responsible for
all marketing and payments of sales commissions to independent
distributors.
Internationally,
the Company sells its products directly to overseas affiliates. These overseas
related companies re-package
the Company’s products
and then sell to overseas independent distributors or end users of the products.
Due to the common ownership, there are no formal sales or administrative
agreements among Biological and those overseas related companies. The business
operations among these related entities are regulated through internal
ordinances.
Accounts receivable, trade -
related parties
The
details of accounts receivable, trade - related parties are as
follows:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Tianshi
Engineering
|
|
$
|
-
|
|
|
$
|
5,035,320
|
|
Overseas
Related Companies
|
|
|
11,867,244
|
|
|
|
11,763,170
|
|
Allowance
for Doubtful Accounts
|
|
|
(1,621,619
|
)
|
|
|
(1,419,178
|
)
|
Total
|
|
$
|
10,245,625
|
|
|
$
|
15,379,312
|
|
Other receivables - related
parties
Other
receivables - related parties are generated by the Company making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following table
summarizes the other receivables - related parties balances:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Investment
|
|
$
|
33,300,000
|
|
|
$
|
37,000,000
|
|
Tianshi
Engineering
|
|
|
5,841,491
|
|
|
|
5,688,926
|
|
Tianshi
Group
|
|
|
-
|
|
|
|
1,613,168
|
|
Sego
Property Service (Tianjin) Co., Ltd.
|
|
|
114,085
|
|
|
|
77,612
|
|
Tiens
SmartFlow Logistics (International) Group Ltd.
|
|
|
57,104
|
|
|
|
74,651
|
|
Tianjin
Tianshi Life Science Co., Ltd.
|
|
|
94,429
|
|
|
|
55,878
|
|
Tianshi
Yinshi Hotel
|
|
|
36,570
|
|
|
|
36,566
|
|
Tianshi
Indonesia Logistic & Trade Co., Ltd.
|
|
|
9,872
|
|
|
|
9,873
|
|
Sego
Hotel Management Co., Ltd.
|
|
|
2,731
|
|
|
|
2,730
|
|
Others
|
|
|
2,337
|
|
|
|
2,222
|
|
Total
|
|
$
|
39,458,619
|
|
|
$
|
44,561,626
|
|
Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China. On April 21, 2009, the
Company entered into a loan agreement with Tianshi Engineering. Pursuant to that
agreement, effective as of April 1, 2009, $2,562,017 of other
receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. During the
first quarter of 2010, the company did not convert any accounts
receivables-related parties to other receivables-related parties.
The
Company and Tianshi Group use common meters at the Company’s headquarters for
electricity and water, and also used the same employee insurance account. When
making payments to these outside parties, the Company usually pays the fees
first and then is reimbursed by Tianshi Group. These pro-rated amounts relating
to Tianshi Group are categorized as other receivables - related
parties.
On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,797,984). As
of March 31, 2010, the amount was paid in full by Tianshi Group.
On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million. As of March 31, 2010, $3,700,000 of the purchase price was
paid.
Advances from
cus
tomers -
related parties
These
advances represent prepayments made to the Company to insure that related party
customers could obtain enough of the Company’s products to meet their market
demands. As of March 31, 2010 and December 31, 2009, advances from related party
customers amounted to $8.5 million and $4.4 million, respectively.
Other
payables - related parties
The
details of other payable-related parties are as follows:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Fuhong
Development Co. Ltd.
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Tianshi
Group
|
|
|
1,035,972
|
|
|
|
-
|
|
Tianshi
Germany Co., Ltd.
|
|
|
101,396
|
|
|
|
107,326
|
|
Tianjin
Tianshi Global International Trade Co., Ltd.
|
|
|
93,619
|
|
|
|
93,606
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
|
84,359
|
|
Tianshi
Engineering
|
|
|
90,197
|
|
|
|
40,805
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
14
|
|
|
|
14
|
|
Total
|
|
$
|
4,405,557
|
|
|
$
|
3,326,110
|
|
These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.
On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009 on December
31, 2008. On June 30, 2009, the loan was paid in full by the
Company.
On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
to fund its capital contribution to Life Resources. On February 10, 2010, the
loan was paid in full by cancelling the same amount Tianshi Investment owed
to the Company. On March 3, 2010, Tianshi Holdings borrowed another $3,000,000
from Fuhong Development to fund its capital contribution to Life
Resources.
Other Transactions with
Tianshi Engineering
On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that enable Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment to manufacture products which
Tianshi Engineering owns, or jointly owns, with Biological. Each of
the four agreements was effective as of January 1, 2008 and expired on
December 31, 2009. On December 31, 2007, Biological entered into two
supplemental agreements, which added fourteen pieces of personal care products
production equipment to, and removed two health products production workshops
from, two of the lease agreements Biological entered into on October 31,
2007.
On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group (as further described under note 7), pursuant to which Biological
transferred to Tianshi Group four buildings which were covered by the above
mentioned lease agreements. Accordingly, the two lease agreements which covered
production workshops expired at the end of 2008.
On
November 20, 2009, the lease agreement for health products
production equipment and the lease agreement for personal care product
production equipment were renewed by Biological and Tianshi Engineering for
2010.
Rent
revenue accrued from these leases amounted to $51,854 and $54,856 for the three
months ended March 31, 2010 and 2009, respectively.
Other Transactions with
Tianshi Group
On
January 1, 2009, Biological entered an office and facilities lease agreement
with Tianshi Group. Under the terms of the agreement, Biological’s annual rent
is equal to 1% of its gross revenues. In addition, Biological is obligated to
pay insurance, maintenance and other expenses related to the premises. This
agreement expired on December 31, 2009, and was renewed by Biological and
Tianshi Group, effective as of January 1, 2010, for 2010. On January 1, 2010,
Life Resources entered an office and facilities lease agreement with Tianshi
Group on the same terms as Biological’s lease agreement with Tianshi Group. Rent
expense totaled $159,226 and $160,988 for the three months ended March 31, 2010
and 2009, respectively.
On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the three months ended March
31, 2010 and 2009, Biological and Life Resources recorded $81,749 and
$81,638 of the rent expense, which is not paid to Tianshi Group, but recorded as
paid in capital based upon market price.
Transactions with
Tian
yuan
Capital
On
September 10, 2004, Tianshi Holdings entered a loan agreement with Tianyuan
Capital to borrow $10.65 million to fund Tianshi Holdings' contribution due to
Tiens Yihai. Jinyuan Li owns 100% of Tianyuan Capital.
The
principal of the loan is being paid in consecutive semi-annual installments of
$1,065,000 on the last day of June and December, commencing June 2006. Interest
of $186,543 was paid for the year ended December 31, 2009, and the loan was
pre-paid in full on December 31, 2009.
Transactions
with
Tianshi
Pharmaceuticals
On
December 15, 2009, the Company entered into a one-year lease agreement with
Tianshi Pharmaceuticals. Under the terms of the lease agreement, the Company
leased equipment for the fee of RMB 25,383 (or US $3,713) per month.
In addition, the Company is obligated to pay insurance, maintenance and other
expenses related on the equipments. This agreement is effective from
January 1, 2010 and expires on December 31, 2010. The company had paid $11,139
of the rent expense for the first quarter of 2010.
Note
9 – Additional product sales information
The
Company has a single operating segment. All of the Company's revenues were
generated from related parties. Summarized enterprise-wide financial information
concerning the Company’s revenues based on product groups is shown in the
following table:
Revenue
by Product Group:
|
Three months ended March 31,
|
|
|
2010
|
|
|
2009
|
|
Wellness
products
|
$
|
10,165,740
|
|
|
$
|
17,163,712
|
|
Dietary
supplement products
|
|
1,237,623
|
|
|
|
1,073,833
|
|
Total
|
$
|
11,403,363
|
|
|
$
|
18,237,545
|
|
Note
10 - Income taxes
The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is domiciled. The
Company's subsidiary, Tianshi Holdings, was incorporated in the British Virgin
Islands and is not liable for income taxes.
The
Company's subsidiaries, Biological and Life Resources, were incorporated in
the PRC. According to US GAAP, the following are the income tax credits granted
by the Chinese government, which are significant components of income taxes
associated with continuing operations required to be disclosed.
Beginning
January 1, 2008, Enterprise Income Tax (“EIT”) laws became effective.
According to the EIT, the standard tax rate is 25% and high-tech companies could
be subject to a special reduced tax rate of 15%. The qualification of a
high-tech company is to be reviewed annually. In the fiscal year 2008 and 2009,
Biological was qualified as a high-tech company . However, Biological was
required by the local tax authority to prepay income tax at a tax rate of 25%
every year, although the prepaid income tax could be refunded in the next
year. On December 17, 2009, the prepaid income tax $1,562,168 for 2008 was
fully refunded.
According
to the EIT, Life Resources could be fully exempt from PRC income taxes for two
years starting from January 1, 2008, followed by a 12.5% reduced tax rate for
the next three years. However, before the tax exemption qualification of Life
Resources was approved by the tax authority, Life Resources was required by
local tax authority to prepay income tax at a tax rate of 25%. On October 10,
2008, the approval was issued and the prepaid income tax $685,475 in Life
Resources was refunded in 2009.
Provisions
for income taxes were all current income tax expenses and for the three months
ended March 31, 2010 and 2009 were $609,502 and $359,615,
respectively.
The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Biological
|
|
|
Life
Resources
|
|
|
Biological
|
|
|
Life
Resources
|
|
U.S.
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign
income not recognized in USA
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
China
income taxes
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
Effect
of reduced tax rate
|
|
|
(10.0
|
)
|
|
|
(12.5
|
)
|
|
|
(10.0
|
)
|
|
|
(25.0
|
)
|
Total
provision for income taxes
|
|
|
15.0
|
%
|
|
|
12.5
|
%
|
|
|
15.0
|
%
|
|
|
0.0
|
%
|
The
estimated tax savings due to the reduced tax rate for the three months ended
March 31, 2010 and 2009 amounted to $508,897 and $1,324,958, respectively.
The net effect on earnings per share if the income tax had been applied would
decrease earnings per share for the three months ended March 31, 2010 and 2009
by $0.01and $0.02, respectively.
Note
11
–
Retirement plan
Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Company employees are entitled to a
retirement pension amount calculated based upon their salary at their date of
retirement and their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension liability to the
retired staff.
The
Company is required to make contributions to the state retirement plan at 20% of
the employees' monthly salary. Employees are required to contribute 8% of their
salary to the plan. Total pension expense incurred by the Company amounted to
$261,632 and $220,913 for the three months ended March 31, 2010 and 2009,
respectively.
The
Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of his or her salary to the plan. The
Company matches the contributions in an amount equal to two times the
contribution of each participant. The Company made contributions to the
unemployment insurance plan of $25,308 and $22,421 for the three months ended
March 31, 2010 and 2009, respectively. All contributions are paid to a PRC
insurance company, which in turn, is responsible for the unemployment liability.
Pursuant to the Company’s medical insurance plan for its employees, the Company
is required to pay an amount equal to 10% of its employees' salary to a PRC
insurance company, which amounted to $131,667 and $113,430 for the
three months ended March 31, 2010 and 2009, respectively.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In this
Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United
States Dollars and references to “renminbi” or “RMB” are to the People’s
Republic of China Renminbi. References to “we”, “us”, “our”, the “Company” or
“Tiens” include Tiens Biotech Group (USA), Inc. and its subsidiaries, except
where the context requires otherwise.
FORWARD-LOOKING
STATEMENTS
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; (d) whether we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-Q with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date.
Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.
OVERVIEW
Tiens
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations are
conducted from our headquarters in Tianjin, People’s Republic of China (“China”
or the “PRC”) through our 80% owned subsidiary, Tianjin Tianshi Biological
Development Co. Ltd. (“Biological”) and our wholly-owned subsidiary, Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). We sell our products to
affiliated companies in China and internationally.Tiens is a Delaware
corporation. We own 100% of Tianshi International Holdings Group Ltd., a British
Virgin Islands company (“Tianshi Holdings”). Tianshi Holdings owns 80% of
Biological and 100% of Life Resources.
Tianjin
Tianshi Biological Engineering Co. Ltd. (“Tianshi Engineering”), a Chinese
company and the entity to which we sell all of our products for consumption in
China, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned
by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”). Tianshi Group is 90% owned
by Jinyuan Li, our Chairman, President and CEO, and 10% owned by Baolan Li,
Jinyuan Li’s daughter.
Life
Resources is currently constructing research and development, manufacturing and
logistic facilities, as well as administrative offices in Tianjin, China
totaling approximately 420,000 square meters. We intend to move our headquarters
to these new facilities once they are completed.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2009
|
|
Three months ended March 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Change
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
11,403,363
|
|
|
$
|
18,237,545
|
|
|
|
-37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
3,440,881
|
|
|
|
5,735,059
|
|
|
|
-40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
7,962,482
|
|
|
|
12,502,486
|
|
|
|
-36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
3,497,547
|
|
|
|
3,130,936
|
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
4,464,935
|
|
|
|
9,371,550
|
|
|
|
-52.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Interest
expense)
|
|
|
-
|
|
|
|
(52,616
|
)
|
|
|
-100.0
|
%
|
Interest
income
|
|
|
1,872
|
|
|
|
85,768
|
|
|
|
-97.8
|
%
|
Other
(expense) income
|
|
|
(253,710
|
)
|
|
|
(45,288
|
)
|
|
|
460.2
|
%
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
(251,838
|
)
|
|
|
(12,136
|
)
|
|
|
1975.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
4,213,097
|
|
|
|
9,359,414
|
|
|
|
-55.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
609,502
|
|
|
|
359,615
|
|
|
|
69.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
3,603,595
|
|
|
|
8,999,799
|
|
|
|
-60.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
Net income attributable to the noncontrolling interest
|
|
|
342,057
|
|
|
|
406,974
|
|
|
|
-16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
|
|
$
|
3,261,538
|
|
|
$
|
8,592,825
|
|
|
|
-62.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.05
|
|
|
$
|
0.12
|
|
|
|
|
|
Revenue
. For the
first quarter of 2010, revenue was $11.4 million, a decrease of 37.5% compared
to $18.2 million for the same period in 2009.
Revenue
in China was $6.8 million for the first quarter of 2010, an increase
of 147.3% compared to $2.7 million for the same period in 2009. Revenue in
China for the first quarter of 2009 was lower than any other quarter
in 2009. We believe that Tianshi Engineering’s announcement of plans to
increase the price of its products during the third quarter of 2008 caused
consumers to stock up on certain products in late 2008, thereby decreasing
customer demand in the first quarter of 2009. Our 2010 first quarter sales in
China was, however, comparable to the 2009 average quarterly sales in China of
$6.8 million.
For the
first quarter of 2010, international revenue was $4.6 million, a decrease of
70.2% compared to $15.5 million for the same period in 2009. Management
believes that uneven bulk ordering magnified the decrease significantly since
2009 international quarterly average revenue was only $8.7 million, as some
international distributors purchase products only once or twice during each
year. The decrease in international revenue is also due to our declined sales to
Indonesia and Vietnam. In the first two quarters of 2009 customers in Indonesia
and Vietnam stocked up on our products significantly, which depressed subsequent
sales in the later half of 2009 and continued through the first quarter of
2010. Another factor that contributed to the sales decline in these
regions is the recent adjustment by our international distributors of
the direct selling rules for customers in these regions, which is expected to
boost sales performance over the long-run but negatively affect sales in the
short-run. Additionally, during 2008, China’s Administration of Quality
Supervision, Inspection and Quarantine (“AQSIQ”) carried out a national campaign
against unsafe food and substandard products, which brought on a general
slow-down and backlog of export clearances for Chinese food products. Upon
the lifting of the regulations, overseas affiliated companies began to purchase
more products, thereby increasing sales in the first quarter of
2009.
Cost of Sales
. Cost
of sales for the first quarter of 2010 decreased to $3.4 million, a
decrease of 40.0% compared to $5.7 million for the same period in 2009. This
decrease was mainly due to the decrease in sales for the period. However,
the decrease in cost of sales was at a higher rate than the decrease in
revenues. This is mainly attributable to the increased sales percentage of
certain products, such as Cordyceps Capsules, which have a higher
profit margin.
Gross Profit
. Gross
profit for the first quarter of 2010 was $8.0 million, a decrease of 36.3%
compared to $12.5 million for the same period in 2009. This decrease reflects
the decrease in sales. The gross profit margin for the first quarter of 2010 was
69.8%, compared to 68.6% for the same period in 2009.
Selling, general and
administrative expenses
. Selling, general and administrative expenses
were $3.5 million for the first quarter of 2010, an increase of 11.7%
compared to $3.1 million for the same period in 2009. The increase was
primarily due to increases in bad debts. The selling and administrative expenses
as a percentage of sales was 30.7% for the first quarter of 2010, compared to
17.2% for the same period in 2009. This is primarily due to fixed costs which do
not change as a result of the decrease in sales.
Other income (expense),
net.
Other expense was $0.3 million for the first quarter of 2010,
compared to $0.01 million of expense for the same period in 2009. The difference
was mainly due to increase in loss based on currency translation differences
between the two periods.
Provision for income
taxes
. Provision for income taxes was $0.6 million for the first
quarter of 2010 compared to $0.4 million for the same period in 2009. The main
reason was that Life Resources began applying the reduced income tax rate of
12.5% from January 1, 2010, while it was exempt from income tax in the
first quarter of 2009.
Net income
. As a
result of the foregoing factors, net income for the first quarter of 2010 was
$3.6 million, a decrease of 60.0% compared to $9.0 million for the same period
in 2009.
Financial
Condition, Liquidity and Capital Resources
We have
historically met our working capital and capital expenditure requirements,
including funding for expansion of operations, through net cash flow provided by
operating activities. Our principal source of liquidity is our operating cash
flow.
Net cash
provided by operating activities was $13.0 million for the three months
ended March 31, 2010, compared to net cash provided by operating activities of
$5.9 million for the same period of 2009. This increase was primarily due to the
collection of accounts receivable from Tianshi Engineering.
As of
March 31, 2010, we had positive working capital of $27.7 million. Cash was $9.9
million as of March 31, 2010, compared to $1.8 million as of December 31,
2009.
Net cash
used in investing activities decreased by $1.6 million for the three months
ended March 31, 2010 compared to the same period of 2009. During the first
three months of 2010, we paid $9.1 million to contractors for construction in
progress, compared to $4.5 million for the same period in 2009. In addition, we
used $1.6 million in connection with purchasing large machinery and equipment
for the first quarter of 2010.
Going
forward, our primary requirements for cash consist of:
·
construction
by Life Resources of new research and development, manufacturing and logistic
facilities, and administrative offices;
·
the
continued production of existing products and general overhead and personnel
related expenses to support these activities;
·
the
development costs of new products; and
·
expansion
of production scale to meet the demands of our markets.
We
believe that the cash flow would be sufficient for the next nine to twelve
months. Thereafter, financing may be needed to fund research and
development efforts and operations, but management is unable at this
time to determine what level of financing would be needed or desirable
then.
Critical
Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.
Revenue
recognition
.
We sell
both semi-finished products and finished products to Tianshi Engineering
domestically. Revenue from the sale of semi-finished products is recognized
at FOB delivery point, when the semi-finished products are sold to Tianshi
Engineering. Revenue from the sale of finished products is recognized only when
the related party Chinese distributor recognizes sales of our products to
unaffiliated third parties. Revenues in both cases are net of value added
taxes.
For
overseas sales, we sell mostly finished products. We recognize revenue from
international sales (outside of China) to affiliated parties, net of value added
taxes, as goods are shipped and clear review by the customs department of the
Chinese government.
We are
generally not contractually obligated to accept returns. However, on a case by
case negotiated basis, we permit customers to return products. Revenue is
recorded net of an allowance for estimated returns. Such reserves are based upon
management’s evaluation of historical experience and estimated costs. The amount
of the reserves ultimately required could differ materially in the near term
from amounts included in the accompanying consolidated financial
statements. As we did not receive any returns of products during the past
three years, and management does not anticipate allowing any returns in 2010
related to previous revenues, no allowance for estimated returns has been
recorded as of March 31, 2010.
Bad
debts
.
Our trade
accounts receivables are mainly due from related companies. We have made full
provision for accounts receivable-related parties aging over one year and a
general allowance for doubtful debts of 0.5% of the remaining accounts
receivable-related parties. Management reviews its accounts receivable on a
regular basis to determine if the bad debt allowance is adequate at each
year-end, paying particular attention to the age of
receivables outstanding.
Inventories
.
Inventories
are stated at the lower of cost or market, using the moving average basis. We
review our inventory annually for possible obsolete goods or to determine if any
reserves are necessary for potential obsolescence.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and 2 fair value measurements and
describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010,
except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The guidance adopted on January 1,
2010 did not have an effect on our consolidated financial statements.
Adoption of the remaining guidance is not expected to have a material impact
on our consolidated financial statements.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We market
most our products through various domestic and international business entities
that are related to us through common ownership. As a result, most of our
consolidated sales are to related parties.
In China,
we sell our products to Tianshi Engineering, an affiliated company. Tianshi
Engineering, in turn, markets and sells the products to customers through
its branches and affiliated companies and at chain stores owned by individual
distributors.
We have a
sales contract with Tianshi Engineering which requires Tianshi Engineering to
purchase all of our products to be sold in China. We sell our finished products
to Tianshi Engineering at a price equal to 25% of the Chinese market price for
the products. This 25% figure was negotiated between the parties in 2003, before
we acquired Tianshi Holdings, and we believe that it is a reasonable sales price
for us to receive. The price of semi-finished goods sold to Tianshi Engineering
was originally set at the beginning of 2006 to provide us with a 75% gross
profit margin. However, based on fluctuations in the cost of raw materials and
quantities produced, the gross profit margin percentage varied during the year.
This 75% figure was negotiated between the parties, and we believe that it is
reasonable. The goal of this new pricing policy was to try to maintain our gross
margins on semi-finished goods at a similar level to historical gross margins
for finished goods. All of Tianshi Engineering’s Chinese affiliated companies
are owned in whole or in part by Jinyuan Li’s immediate family
members.
Internationally,
we sell our products directly to overseas affiliates located in 54
countries, who in turn re-package the products to meet the needs of the local
markets and sell to independent distributors or end users of our
products. Our CEO, Jinyuan Li, owns or controls these overseas related
companies. Due to the common ownership, there are no formal sales or
administrative agreements among us and those overseas related parties. The
business operations among these related entities are regulated through internal
policies.
Our
related party transactions are required to be reviewed and approved or ratified
by a majority of our non-interested Board of Directors. The following tables are
provided to facilitate your understanding of the transactions and outstanding
balances between those related parties and our company.
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Accounts
receivable, trade – related parties, net of allowance for doubtful
accounts of $1,621,619 and $1,419,178 as of March 31, 2010 and December
31, 2009, respectively
|
|
$
|
10,245,625
|
|
|
$
|
15,379,312
|
|
Other
receivables – related parties
|
|
$
|
39,458,619
|
|
|
$
|
44,561,626
|
|
Advances
from customers – related parties
|
|
$
|
8,461,804
|
|
|
$
|
4,426,751
|
|
Other
payables – related parties
|
|
$
|
4,405,557
|
|
|
$
|
3,326,110
|
|
Revenue
- Related Parties
The
details of revenue-related parties are as follows:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Engineering
|
|
$
|
6,783,273
|
|
|
$
|
2,742,620
|
|
Overseas
Related Companies
|
|
|
4,620,090
|
|
|
|
15,494,925
|
|
Total
|
|
$
|
11,403,363
|
|
|
$
|
18,237,545
|
|
Accounts
Receivable, Trade - Related Parties
The
details of accounts receivable, trade – related parties are as
follows:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Tianshi
Engineering
|
|
$
|
-
|
|
|
$
|
5,035,320
|
|
Overseas
Related Companies
|
|
|
11,867,244
|
|
|
|
11,763,170
|
|
Allowance
for Doubtful Accounts
|
|
|
(1,621,619
|
)
|
|
|
(1,419,178
|
)
|
Total
|
|
$
|
10,245,625
|
|
|
$
|
15,379,312
|
|
Other
Receivables - Related Parties
Other
receivables - related parties are generated by our making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The details of other
receivables-related parties are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Investment
|
|
$
|
33,300,000
|
|
|
$
|
37,000,000
|
|
Tianshi
Engineering
|
|
|
5,841,491
|
|
|
|
5,688,926
|
|
Tianshi
Group
|
|
|
-
|
|
|
|
1,613,168
|
|
Sego
Property Service (Tianjin) Co., Ltd.
|
|
|
114,085
|
|
|
|
77,612
|
|
Tiens
SmartFlow Logistics (International) Group Ltd.
|
|
|
57,104
|
|
|
|
74,651
|
|
Tianjin
Tianshi Life Science Co., Ltd.
|
|
|
94,429
|
|
|
|
55,878
|
|
Tianshi
Yinshi Hotel
|
|
|
36,570
|
|
|
|
36,566
|
|
Tianshi
Indonesia Logistic & Trade Co., Ltd.
|
|
|
9,872
|
|
|
|
9,873
|
|
Sego
Hotel Management Co., Ltd.
|
|
|
2,731
|
|
|
|
2,730
|
|
Others
|
|
|
2,337
|
|
|
|
2,222
|
|
Total
|
|
$
|
39,458,619
|
|
|
$
|
44,561,626
|
|
Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, to support Tianshi Engineering’s marketing efforts in anticipation of
receiving a direct selling license in China, we agreed to allow Tianshi
Engineering to defer payment. The credit terms provide an interest-free credit
term of three months. Any amounts exceeding this term are transferred from
accounts receivable - related parties to other receivable - related
parties. Beginning January 1, 2007, the other receivables - related
parties became interest bearing once a loan contract is adopted. The
interest rate is the interest rate, on the date the loan commences, that is
stipulated by the People’s Bank of China for a loan of the same
level.
On April
21, 2009, our company entered into a loan agreement with Tianshi Engineering.
Pursuant to that agreement, effective as of April 1, 2009, $2,562,017 of
other receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. During the
first quarter of 2010, we did not convert any accounts receivables-related
parties to other receivables-related parties.
Our
company and Tianshi Group use common meters at our headquarters for electricity
and water, and also used the same employee insurance account. When making
payments to these outside parties, we usually pay the fees first and then is
reimbursed by Tianshi Group. These pro-rated amounts relating to Tianshi Group
are categorized as other receivables - related parties.
On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,797,984). As
of March 31, 2010, the amount was paid in full by Tianshi Group.
On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million. Tiens Yihai holds land use rights for 50 acres of land located in
Shanghai, China. Tiens Yihai was originally established to build a new research
and development facility, but our company suspended the proposed development in
March 2007. Tianshi Holdings held 96% of the equity interest in Tiens
Yihai. Tianjin Tianshi Pharmaceuticals Co., Ltd. owned the remaining
4% of Tiens Yihai’s share capital. The first payment of $3,700,000 was
settled during the first quarter of 2010 and another payment of $3,000,000 was
settled on April 9, 2010. The remaining $30,300,000 is payable by November 14,
2010.
Advances
from Customers - Related Parties
Advances
from related party customers were $8.5 million and $4.4 million as of March 31,
2010 and December 31, 2009, respectively. These advances represented
prepayments made to us to insure that customers could obtain enough of our
products to meet their market demands.
Other
Payables - Related Parties
These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties. The details of other payable-related parties are
as follows:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Fuhong
Development Co. Ltd.
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Tianshi
Group
|
|
|
1,035,972
|
|
|
|
-
|
|
Tianshi
Germany Co., Ltd.
|
|
|
101,396
|
|
|
|
107,326
|
|
Tianjin
Tianshi Global International Trade Co., Ltd.
|
|
|
93,619
|
|
|
|
93,606
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
|
84,359
|
|
Tianshi
Engineering
|
|
|
90,197
|
|
|
|
40,805
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
14
|
|
|
|
14
|
|
Total
|
|
$
|
4,405,557
|
|
|
$
|
3,326,110
|
|
On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009, on December
31, 2008. On June 30, 2009, we paid the loan in full.
On June
5, 2009, Biological, Tianshi Holdings, Tianshi Investment and Tianshi Group
entered into an agreement pursuant to which Biological agreed to pay $3.9
million to Tianshi Group on behalf of Tianshi Investment, Tianshi Investment
agreed to cancel a $3.9 million loan owed by Tianshi Holdings, and Tianshi
Holdings agreed to cancel a $3.9 million dividend owed by
Biological.
On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
to fund its capital contribution to Life Resources. On February 10, 2010, the
loan was paid in full by cancelling the same amount Tianshi Investment owed to
the Company. On March 3, 2010, Tianshi Holdings borrowed another $3,000,000 from
Fuhong Development to fund its capital contribution to Life
Resources.
Other
Transactions with Tianshi Engineering
On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that enable Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns, with
Biological. Each of the four agreements was effective as of
January 1, 2008 and expired on December 31, 2009. On December 31, 2007,
Biological entered into two supplemental agreements, which added fourteen pieces
of personal care products production equipment to, and removed two health
products production workshops from, two of the lease agreements Biological
entered into on October 31, 2007.
On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group (as further described under the caption “—Other Receivables – Related
Party” above), pursuant to which Biological transferred to Tianshi Group four
buildings which were covered by the above mentioned lease agreements.
Accordingly, the two lease agreements which covered production workshops expired
at the end of fiscal 2008.
On
November 20, 2009, the lease agreement for health products
production equipment and the lease agreement for personal care product
production equipment were renewed by Biological and Tianshi Engineering for
2010. Following is a summary of the monthly rent payable to Biological
under the two leases Biological entered into on November 20, 2009:
Lease Agreement
|
|
Monthly rent
|
|
|
|
|
|
Lease
Agreement for Health Products Production Equipment
|
|
$
|
11,255
|
|
Lease
Agreement for Personal Care Product Production Equipment
|
|
$
|
6,029
|
|
Rent
revenue accrued from these leases amounted to $51,854 and $54,856 for the three
months ended March 31, 2010 and 2009, respectively.
Other
Transactions with Tianshi Group
On
January 1, 2009, Biological entered an office and facilities lease
agreement with Tianshi Group. Under the terms of the agreement, Biological’s
annual rent is equal to 1% of its gross revenues. In addition, Biological is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expired on December 31, 2009, and was renewed by
Biological and Tianshi Group, effective as of January 1, 2010, for 2010. On
January 1, 2010, Life Resources entered an office and facilities lease agreement
with Tianshi Group on the same terms as Biological’s lease agreement with
Tianshi Group. Rent expense totaled $159,226 and $160,988 for the three
months ended March 31, 2010 and 2009, respectively.
On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement (as further described under the caption “—Other Receivables –
Related Party” above). The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the three months ended March
31, 2010 and 2009, Biological and Life Resources recorded $81,749 and
$81,638 of the rent expense, which is not paid to Tianshi Group, but recorded as
paid in capital based upon market price.
Transactions
with Tianyuan Capital
On
September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan
Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan
Capital agreed to lend $10.65 million in the aggregate to Tianshi Holdings, at
an interest rate of 5% per year, with interest payable on June 30 and December
31, commencing December 31, 2004. Pursuant to this agreement, Tianshi Holdings
must repay the loan in ten consecutive semi-annual installments of $1,065,000
commencing June 30, 2006 and ending June 30, 2011. Tianshi Holdings used the
loan proceeds to fund its capital contribution to Tiens Yihai. Mr. Jinyuan Li
owns 100% of Tianyuan Capital. The loan was pre-paid in full by us on December
31, 2009.
Transactions
with Tianshi Pharmaceuticals
On
December 15, 2009, we entered into a one-year lease agreement with Tianshi
Pharmaceuticals. Under the terms of the lease agreement, we leased equipment for
the fee of RMB 25,383 (or US $3,713) per month. In addition, we are obligated to
pay insurance, maintenance and other expenses related on the
equipments. This agreement is effective from January 1, 2010 and expired on
December 31, 2010. We paid $11,139 of the rent expense for the first quarter of
2010.
MANAGEMENT
ASSUMPTIONS
Management
anticipates, based on internal forecasts and assumptions relating to our current
operations, that existing cash and funds generated from operations will be
sufficient to meet working capital needs for at least the next 12 months. In the
event that plans change, our assumptions change or prove inaccurate or if other
capital resources and projected cash flow otherwise prove to be insufficient to
fund operations (due to unanticipated expense, technical difficulties, or
otherwise), we could be required to seek additional financing. There can be no
assurance that we will be able to obtain additional financing on terms
acceptable to us, or at all.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
no off-balance sheet arrangements.
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 4
T
.
CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness, as of the end of the
period covered by this report, of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation,
our principal executive officer and principal financial officer concluded that,
as of such date, the Company’s disclosure controls and procedures were
effective.
Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in our Exchange Act reports is recorded, processed, summarized,
and reported, within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There has
been no change in our internal control over financial reporting during the first
quarter of 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II -
OTHER INFORMATION
ITEM 6.
EXHIBITS
The
exhibits listed on the Exhibit Index are provided as part of this
report.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
May 17, 2010
|
|
|
|
|
/s/ Ji
nyuan
Li
|
|
|
|
Jinyuan
Li
|
|
Chief
Executive Officer and President
|
|
(Principal
Executive Officer)
|
|
|
Date:
May 17, 2010
|
|
|
|
|
/s/
Manbo
He
|
|
|
|
Manbo
He
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
EXHIBIT
INDEX
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Agreement,
dated January 1, 2010 by and between Tianjin Tianshi Biological
Development Co., Ltd. and Tianjin Tianshi Group Co.
Ltd.
|
|
|
|
10.2
|
|
Agreement,
dated January 1, 2010 by and between Tianjin Tiens Life Resources Co.,
Ltd. and Tianjin Tianshi Group Co. Ltd.
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|