UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
¨
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011.
¨
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. 17, Xinyuan 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 13, 2011.
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, 2011 (Unaudited) and December 31, 2010 (Audited)
|
3
|
|
|
Consolidated Statements of Income and Other Comprehensive Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
|
4
|
|
|
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
|
5
|
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
6
|
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
20
|
|
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
27
|
|
|
ITEM 4. CONTROLS AND PROCEDURES
|
27
|
|
|
PART II - OTHER INFORMATION
|
27
|
|
|
ITEM 6. EXHIBITS
|
27
|
PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010 (AUDITED)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
9,691,411
|
|
|
$
|
10,155,522
|
|
Accounts receivable, trade-related parties, net of allowance for doubtful accounts of $4,152,284 and $3,869,617 as of March 31, 2011 and December 31, 2010, respectively
|
|
|
11,279,779
|
|
|
|
10,012,861
|
|
Inventories
|
|
|
6,801,856
|
|
|
|
5,703,349
|
|
Other receivables
|
|
|
942,959
|
|
|
|
1,045,952
|
|
Other receivables-related parties
|
|
|
17,327,387
|
|
|
|
17,376,522
|
|
Employee advances
|
|
|
127,314
|
|
|
|
170,842
|
|
Prepaid expenses, net
|
|
|
356,817
|
|
|
|
415,208
|
|
Prepaid taxes
|
|
|
3,689,268
|
|
|
|
3,646,140
|
|
Total current assets
|
|
|
50,216,791
|
|
|
|
48,526,396
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
72,098,917
|
|
|
|
72,037,542
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
130,736,007
|
|
|
|
128,715,283
|
|
Construction deposits
|
|
|
20,177,749
|
|
|
|
12,490,855
|
|
Intangible assets, net
|
|
|
12,991,801
|
|
|
|
12,987,000
|
|
Other assets
|
|
|
10,302,761
|
|
|
|
10,721,040
|
|
Total other assets
|
|
|
174,208,318
|
|
|
|
164,914,178
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
296,524,026
|
|
|
$
|
285,478,116
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
14,719,467
|
|
|
$
|
14,120,791
|
|
Advances from customers-related parties
|
|
|
7,546,016
|
|
|
|
8,688,877
|
|
Wages and benefits payable
|
|
|
1,584,986
|
|
|
|
1,613,782
|
|
Short-term debt
|
|
|
7,610,000
|
|
|
|
3,024,800
|
|
Income taxes payable
|
|
|
717,129
|
|
|
|
490,782
|
|
Contractor deposits
|
|
|
195,485
|
|
|
|
209,376
|
|
Contractor payables
|
|
|
26,888,982
|
|
|
|
28,134,711
|
|
Other payables
|
|
|
1,109,025
|
|
|
|
1,113,416
|
|
Other payables-related parties
|
|
|
5,337,033
|
|
|
|
1,417,516
|
|
Total current liabilities
|
|
|
65,708,123
|
|
|
|
58,814,051
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
18,568,400
|
|
|
|
18,451,280
|
|
Deferred income
|
|
|
11,400,523
|
|
|
|
11,473,853
|
|
Total non current liabilities
|
|
|
29,968,923
|
|
|
|
29,925,133
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
95,677,046
|
|
|
|
88,739,184
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
18,428,796
|
|
|
|
18,349,908
|
|
Statutory reserves
|
|
|
16,465,144
|
|
|
|
16,465,144
|
|
Retained earnings
|
|
|
130,711,559
|
|
|
|
127,957,951
|
|
Accumulated other comprehensive income
|
|
|
24,405,648
|
|
|
|
23,393,626
|
|
Total shareholders' equity of the Company
|
|
|
190,082,481
|
|
|
|
186,237,963
|
|
Noncontrolling interest
|
|
|
10,764,499
|
|
|
|
10,500,969
|
|
Total equity
|
|
|
200,846,980
|
|
|
|
196,738,932
|
|
Total liabilities and equity
|
|
$
|
296,524,026
|
|
|
$
|
285,478,116
|
|
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, 2011 AND 2010 (UNAUDITED)
|
|
Three months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
REVENUE-RELATED PARTIES
|
|
$
|
13,050,225
|
|
|
$
|
11,403,363
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES-RELATED PARTIES
|
|
|
4,136,399
|
|
|
|
3,440,881
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
8,913,826
|
|
|
|
7,962,482
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,870,886
|
|
|
|
3,497,547
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
4,042,940
|
|
|
|
4,464,935
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(131,636
|
)
|
|
|
-
|
|
Interest income
|
|
|
7,992
|
|
|
|
1,872
|
|
Other expense
|
|
|
(529,185
|
)
|
|
|
(253,710
|
)
|
OTHER EXPENSE, NET
|
|
|
(652,829
|
)
|
|
|
(251,838
|
)
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
3,390,111
|
|
|
|
4,213,097
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
446,299
|
|
|
|
609,502
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
2,943,812
|
|
|
|
3,603,595
|
|
|
|
|
|
|
|
|
|
|
LESS: Net income attributable to the noncontrolling interest
|
|
|
(190,204
|
)
|
|
|
(342,057
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO THE COMPANY
|
|
|
2,753,608
|
|
|
|
3,261,538
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1,012,022
|
|
|
|
14,970
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY
|
|
|
3,765,630
|
|
|
|
3,276,508
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
|
|
|
257,361
|
|
|
|
343,398
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
4,022,991
|
|
|
$
|
3,619,906
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE,
BASIC AND DILUTED
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
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, 2011 AND 2010 (UNAUDITED)
|
|
Three months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
2,943,812
|
|
|
$
|
3,603,595
|
|
Adjustments to reconcile net income to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Deferred income
|
|
|
(145,776
|
)
|
|
|
-
|
|
Provision for doubtful accounts
|
|
|
257,427
|
|
|
|
202,247
|
|
Depreciation
|
|
|
1,117,611
|
|
|
|
417,469
|
|
Amortization
|
|
|
85,020
|
|
|
|
83,557
|
|
loss on assets written off
|
|
|
655,611
|
|
|
|
-
|
|
Gain on sale of assets
|
|
|
-
|
|
|
|
(15,082
|
)
|
Rental expense borne by a related party
|
|
|
84,834
|
|
|
|
81,749
|
|
(Increase) decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, trade-related parties
|
|
|
(1,457,625
|
)
|
|
|
4,933,543
|
|
Other receivables
|
|
|
109,344
|
|
|
|
93,577
|
|
Other receivables-related parties
|
|
|
141,586
|
|
|
|
(1,200,159
|
)
|
Inventories
|
|
|
(1,050,293
|
)
|
|
|
304,560
|
|
Employee advances
|
|
|
44,495
|
|
|
|
13,935
|
|
Prepaid expense
|
|
|
60,774
|
|
|
|
64,017
|
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
500,706
|
|
|
|
(819,926
|
)
|
Advances from customers-related parties
|
|
|
(1,194,866
|
)
|
|
|
4,034,448
|
|
Wages and benefits payable
|
|
|
(38,897
|
)
|
|
|
(416,798
|
)
|
Other taxes payable
|
|
|
202,713
|
|
|
|
550,140
|
|
Other payables
|
|
|
(11,159
|
)
|
|
|
19,487
|
|
Other payables-related parties
|
|
|
3,900,777
|
|
|
|
1,079,414
|
|
Net cash provided by operating activities
|
|
|
6,206,094
|
|
|
|
13,029,773
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investment in Life Resources
|
|
|
-
|
|
|
|
3,000,000
|
|
Proceeds from disposal of a subsidiary
|
|
|
-
|
|
|
|
700,000
|
|
Construction deposits
|
|
|
(7,783,013
|
)
|
|
|
(562,642
|
)
|
Contractor deposits
|
|
|
(15,180
|
)
|
|
|
-
|
|
Addition to construction in progress
|
|
|
(2,729,380
|
)
|
|
|
(9,112,590
|
)
|
Equipment deposits
|
|
|
(427,179
|
)
|
|
|
(1,558,192
|
)
|
Proceeds from sales of properties
|
|
|
-
|
|
|
|
2,621,021
|
|
Purchase of equipment and automobiles
|
|
|
(163,060
|
)
|
|
|
(88,505
|
)
|
Net cash used in investing activities
|
|
|
(11,117,812
|
)
|
|
|
(5,000,908
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceed from short term debt
|
|
|
4,554,000
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
4,554,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(106,393
|
)
|
|
|
(3,895
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(464,111
|
)
|
|
|
8,024,970
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
10,155,522
|
|
|
|
1,848,328
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
9,691,411
|
|
|
$
|
9,873,298
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
342,018
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
223,653
|
|
|
$
|
213,625
|
|
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, Acting CFO 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 operations
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
,
Acting CFO
and CEO, and 10% owned by Baolan Li, Jinyuan Li’s daughter, a director of the Company. Outside the PRC, the Company sells its products to overseas affiliated companies located in 45 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, 2010, filed with the Securities and Exchange Commission on March 31, 2011.
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
|
%
|
Principles 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 OANDA.com 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 $1,012,022 and $14,970 for the three months ended March 31, 2011 and 2010, respectively. Asset and liability accounts at March 31, 2011 were translated at RMB6.57 to US$1.00 compared to RMB6.84 at March 31, 2010. Equity accounts are stated at their historical rates. The average translation rates applied to income statement accounts for the three months ended March 31, 2011 and 2010 were 6.59 RMB and 6.84 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, other receivables and debt instruments. The carrying amounts of the Company's financial instruments generally approximate their fair values at March 31, 2011 and December 31, 2010.
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 ages of receivables outstanding. At March 31, 2011 and December 31, 2010, there were no receivables due from Tianshi Engineering outstanding more than 90 days. At March 31, 2011 and December 31, 2010, receivables due from overseas related companies outstanding more than 180 days totaled $7,547,494 and $6,985,556, 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:
|
|
Balance at
|
|
|
Increase of provision
|
|
|
Balance at
|
|
|
|
Beginning of Period
|
|
|
for Doubtful Accounts
|
|
|
End of Period
|
|
Three month period ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
Reserves and allowances
deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
$
|
3,869,617
|
|
|
$
|
282,667
|
|
|
$
|
4,152,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowances
deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
$
|
1,419,178
|
|
|
$
|
202,441
|
|
|
$
|
1,621,619
|
|
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:
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Increase of provision
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
for Doubtful Accounts
|
|
|
of Period
|
|
Three month period ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
Reserves and provisions
deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
Provision for prepaid expenses:
|
|
$
|
1,056,551
|
|
|
$
|
6,706
|
|
|
$
|
1,063,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and provisions
deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for prepaid expenses:
|
|
$
|
1,018,474
|
|
|
$
|
139
|
|
|
$
|
1,018,613
|
|
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.
Intangible 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 RMB35,803,461 (or US$5,449,287). On August 28, 2008, Life Resources paid RMB41,022,061 (or US$6,243,558) 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 RMB41,022,061 (or US$6,243,558) from a government grant. The grants are treated as deferred income and amortized over the life of the buildings on the land from October 2010.
Noncontrolling interest
Noncontrolling interest represents the outside shareholder’s 20% ownership of Biological and is presented as a reduction of net income to arrive at net income attributable to the Company and as a component of equity.
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 2011 related to previous revenues, no allowance for estimated returns has been recorded as of March 31, 2011 and December 31, 2010.
Advertising costs
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, 2011 and 2010.
Shipping and handling
Shipping and handling costs totaled $224,653 and $209,005 for the three months ended March 31, 2011 and 2010, 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 development
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 $259,147 and $298,133 for the three months ended March 31, 2011 and 2010, 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.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational or other errors made by the taxpayer or the withholding agent. The statute of limitations extends to five years under special circumstances. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. Accordingly, the income tax returns of the Company’s PRC operating subsidiaries for the years ended December 31, 2008 through 2010 are open to examination by the PRC state and local tax authorities. 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, 2011 and 2010, 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, 2011 and 2010.
Note 3 – Inventories
Inventories consisted of the following at March 31, 2011 and December 31, 2010:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,812,201
|
|
|
$
|
1,392,141
|
|
Packaging material
|
|
|
613,024
|
|
|
|
479,651
|
|
Miscellaneous supplies
|
|
|
1,702,383
|
|
|
|
1,860,462
|
|
Work in process
|
|
|
632,593
|
|
|
|
640,664
|
|
Finished goods
|
|
|
2,041,655
|
|
|
|
1,330,431
|
|
Total
|
|
$
|
6,801,856
|
|
|
$
|
5,703,349
|
|
The Company has not written off any obsolete goods for the three months ended March 31, 2011 and 2010.
Note 4 – 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, 2011 and December 31, 2010 are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Advance to suppliers
|
|
$
|
354,817
|
|
|
$
|
412,458
|
|
Short-term prepaid expenses
|
|
|
2,000
|
|
|
|
2,750
|
|
Total
|
|
$
|
356,817
|
|
|
$
|
415,208
|
|
Note 5 – Prepaid taxes
Prepaid taxes primarily represents prepaid value added tax, which will be deducted from the value added tax payables in future. The detail of prepaid taxes is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Prepaid value added taxes
|
|
$
|
3,876,716
|
|
|
$
|
3,822,250
|
|
Taxes payable (except income taxes payable)
|
|
|
(187,448
|
)
|
|
|
(176,110
|
)
|
Total
|
|
$
|
3,689,268
|
|
|
$
|
3,646,140
|
|
Note 6 – Property, plant and equipment, net
Property, plant and equipment consist of the following at March 31, 2011 and December 31, 2010:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Buildings and improvements
|
|
$
|
64,310,041
|
|
|
$
|
63,687,629
|
|
Office equipment
|
|
|
599,314
|
|
|
|
487,179
|
|
Computer equipment and software
|
|
|
3,196,567
|
|
|
|
2,855,978
|
|
Machinery and equipment
|
|
|
15,497,881
|
|
|
|
15,325,589
|
|
Automobiles
|
|
|
5,029,852
|
|
|
|
4,998,126
|
|
Total
|
|
|
88,633,655
|
|
|
|
87,354,501
|
|
Less: accumulated depreciation
|
|
|
(16,534,738
|
)
|
|
|
(15,316,959
|
)
|
Property, plant and equipment, net
|
|
$
|
72,098,917
|
|
|
$
|
72,037,542
|
|
Depreciation expense for the three months ended March 31, 2011 and 2010 amounted to
$
1,117,611 and $417,469, respectively. Interest expense related to the construction of buildings or new additions to the Company's plant facilities of $210,382 and $0 for the three months ended March 31, 2011 and 2010 has been capitalized.
Note 7 - Intangible assets
Intangible assets consist of the following at March 31, 2011 and December 31, 2010:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Land use rights
|
|
$
|
14,081,002
|
|
|
$
|
13,992,186
|
|
Other intangible assets
|
|
|
358,255
|
|
|
|
355,996
|
|
Less accumulated amortization
|
|
|
(1,447,456
|
)
|
|
|
(1,361,182
|
)
|
Intangible assets, net
|
|
$
|
12,991,801
|
|
|
$
|
12,987,000
|
|
Amortization expense for the three months ended March 31, 2011 and 2010 amounted to $85,020 and $83,557, respectively.
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense for
|
|
|
|
the year ending December 31,
|
|
Amount
|
|
2011
|
|
$
|
308,577
|
|
2012
|
|
$
|
308,577
|
|
2013
|
|
$
|
297,105
|
|
2014
|
|
$
|
296,450
|
|
2015
|
|
$
|
294,747
|
|
2016 and thereafter
|
|
$
|
11,481,544
|
|
Note 8 -Short-term debt
On October 20, 2010, Life Resources entered into an agreement with Construction Bank of China to obtain the loan of RMB20,000,000 (US$3,024,800) for purchasing raw materials and other auxiliary materials at the term of one year. The weighted-average interest rate of the short-term debt is the one-year benchmark lending rate (The interest rate is 5.56% from October 20, 2010 to December 25, 2010, 5.81% from December 26, 2010 to February 9, 2011, and 6.06% from February 9, 2011 to March 31, 2011). Under the agreement, Life Resources is required to take the following obligations:
1. Submit quarterly financial statement within fifteen days after each quarter;
2. Submit any information that significantly affect the repayment ability of the Company;
3. The condition of using the fund should be fulfilled the environmental law;
4. No utilization of bank loans in other than prescribed;and
5. To inform the bank for any related party transaction with an amount over 10% of net asset.
On February 14, 2011, under the following loan agreement (see note 9) Life Resources obtained RMB30,000,000 (US$4,554,000) from Agricultural Bank of China (Agricultural Bank), which is recorded as short-term debt, to fund Life Resources’ construction in progress and is due by October 8, 2011. The interest rate is 6.06% from February 14, 2011 to March 31, 2011.
Note 9 -Long-term debt
On October 9, 2010, Life Resources entered into a loan agreement with Agricultural Bank, pursuant to which Agricultural Bank loaned RMB200,000,000 (or US$30,248,000) with the benchmark lending interest rate of The People’s Bank of China to fund Life Resources’ construction in progress under the guarantee of Tiens Group. Life Resources is permitted the full amount before October 8, 2011, and repay it before October 8, 2013. Under the agreement, Life Resources is required to take the following obligations:
1. The usage of the loan is in accordance with the laws and regulations or contracts;
2. Agree and actively cooperate with the lender and their agents on monitoring, inspecting of the construction of the project, financial activities, usage of loan and other related matters;
3. Submit information timely to the lender as the lender requested regarding the projects, usage of the loan, finance and other; and
4. Submit any information that significantly affect the repayment ability of the Company.
As of March 31, 2011, Life Resources has drawn RMB122,000,000 (or US$18,451,280) of the loan, which was recorded as long-term debt, and RMB30,000,000 which is recorded as short-term debt (see note 8). The interest rate of the long-term loan was equal to the three-year benchmark lending interest rate of The People’s Bank of China which was adjusted twice, from 5.85% to 6.10% since January 1, 2011. The detail information of the obtained amount is as follows:
Obtained date
|
|
October 11, 2010
|
|
|
November 12, 2010
|
|
|
December 10, 2010
|
|
Amount
|
|
$
|
9,893,000
|
|
|
$
|
6,088,000
|
|
|
$
|
2,587,400
|
|
The amounts to be paid are as follows:
Date
|
|
October 8, 2011
|
|
|
October 8, 2012
|
|
|
October 8, 2013
|
|
Amount
|
|
$
|
4,566,000
|
|
|
$
|
9,132,000
|
|
|
$
|
16,742,000
|
|
Note 10 – 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 majority of our non-interested 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,
|
|
|
|
2011
|
|
|
2010
|
|
Revenue-related parties
|
|
$
|
13,050,225
|
|
|
$
|
11,403,363
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
Accounts receivable, trade–related parties, net of allowance for doubtful accounts of $4,152,284 and $3,869,617 as of March 31, 2011 and December 31, 2010, respectively
|
|
$
|
11,279,779
|
|
|
$
|
10,012,861
|
|
Other receivables–related parties
|
|
$
|
17,327,387
|
|
|
$
|
17,376,522
|
|
Advances from customers–related parties
|
|
$
|
7,546,016
|
|
|
$
|
8,688,877
|
|
Other payables–related parties
|
|
$
|
5,337,033
|
|
|
$
|
1,417,516
|
|
Revenue-related parties
The details of revenue-related parties are as follows:
|
|
Three months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Tianshi Engineering
|
|
$
|
8,218,691
|
|
|
$
|
6,783,273
|
|
Overseas Related Companies
|
|
|
4,831,534
|
|
|
|
4,620,090
|
|
Total
|
|
$
|
13,050,225
|
|
|
$
|
11,403,363
|
|
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, 2011
|
|
|
December 31, 2010
|
|
Tianshi Engineering
|
|
$
|
984,290
|
|
|
$
|
1,803,688
|
|
Overseas Related Companies
|
|
|
14,447,773
|
|
|
|
12,078,790
|
|
Allowance for Doubtful Accounts
|
|
|
(4,152,284
|
)
|
|
|
(3,869,617
|
)
|
Total
|
|
$
|
11,279,779
|
|
|
$
|
10,012,861
|
|
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,
|
|
|
|
2011
|
|
|
2010
|
|
Tiens Life Science Co., Ltd.
|
|
$
|
11,598,376
|
|
|
$
|
11,525,219
|
|
Tianshi Group
|
|
|
3,002,895
|
|
|
|
-
|
|
Tianshi Engineering
|
|
|
2,470,399
|
|
|
|
5,603,197
|
|
All-Legend Property Service (Tianjin) Co., Ltd.
|
|
|
161,461
|
|
|
|
155,798
|
|
All-Legend Hotel Co., Ltd.
|
|
|
38,627
|
|
|
|
37,856
|
|
Tianshi Yinshi Hotel
|
|
|
38,050
|
|
|
|
37,810
|
|
Tianshi Indonesia Logistic & Trade Co., Ltd.
|
|
|
9,865
|
|
|
|
9,902
|
|
Tianshi Taijisheng Health Management Co., Ltd.
|
|
|
5,735
|
|
|
|
5,459
|
|
Shengshi Real Estate Development
|
|
|
1,201
|
|
|
|
1,072
|
|
Others
|
|
|
778
|
|
|
|
209
|
|
Total
|
|
$
|
17,327,387
|
|
|
$
|
17,376,522
|
|
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. Other receivables-related parties become interest bearing at the interest rate for the same level of loan stipulated by the People’s Bank of China. During the first quarter of 2011, 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 use 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.
A portion of the construction in progress at an amount of RMB83,263,708 (US$12,672,736), which is recorded and paid for by Life Resources is built on the land controlled by Tianshi Life Science. In addition, a portion of the construction in progress at an amount of RMB5,245,839 (US$798,417), which is recorded and paid for by Tianshi Life Science is built on the land controlled by Life Resources. Tianshi Life Science and Life Resources intend to reimburse each other for the cost of the above construction in progress. The agreement is currently being drafted. The balance of RMB78,017,869 (US$11,874,320) has been reclassified as other receivable-related party as of March 31, 2011 and December 31, 2010, accordingly.
During the first quarter of 2011, the Company provided Tianshi Group with $3,500,600 to fund its operating activities. As of March 31, 2011, the amounts had been reclassified as other receivable-related party, accordingly.
Advances from customers-related parties
These advances represent prepayments made to the Company to insure that related companies could obtain enough of the Company’s products to meet their market demands. As of March 31, 2011 and December 31, 2010, advances from related party customers amounted to $7,546,016 and $8,688,877, respectively.
Other payables-related parties
The details of other payable-related parties are as follows:
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
Tiens Group
|
|
$
|
3,535,048
|
|
|
$
|
639,529
|
|
Tianshi Engineering
|
|
|
1,448,472
|
|
|
|
431,400
|
|
Tianshi Germany Co., Ltd.
|
|
|
105,654
|
|
|
|
99,759
|
|
Tianjin Tianshi Global International Trade
Co., Ltd.
|
|
|
97,408
|
|
|
|
96,794
|
|
Tianyuan Capital Development Co., Ltd.
|
|
|
84,359
|
|
|
|
84,359
|
|
Beijing All-Legend Travel Co., Ltd.
|
|
|
66,077
|
|
|
|
65,660
|
|
Tianshi Administrative Committee of
Industrial Park
|
|
|
15
|
|
|
|
15
|
|
Total
|
|
$
|
5,337,033
|
|
|
$
|
1,417,516
|
|
These amounts arose primarily from previous cash advances from related parties such as management fees due to related parties and various operational transactions incurred with related parties.
During the first quarter of 2011, the Company received $7,815,470 and $3,500,600 as working capital from Tianshi Group and Tianshi Engineering, respectively. As of March 31, 2011, $4,566,000 had been repaid to Tianshi Group.
Other Transactions with Tianshi Engineering
On November 20, 2009, Biological entered into two lease agreements with Tianshi Engineering that enable Tianshi Engineering to share the use of certain of Biological’s production equipment to manufacture products which Tianshi Engineering owns, or jointly owns, with Biological. Each of the two agreements was effective as of January 1, 2010 and expired on December 31, 2010. On December 3, 2010, 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 2011. Rent revenue accrued from these leases amounted to $53,590 and $51,854 for the three months ended March 31, 2011 and 2010, respectively.
Other Transactions with Tianshi Group
On January 1, 2010, Biological and Life Resources each entered an office and facilities lease agreement with Tianshi Group. Under the terms of the agreements, Biological and Life Resources’ annual rents are equal to 1% of their gross revenues. The two agreements expired on December 31, 2010 and renewed on January 1, 2011, for 2011. Under the new lease agreements, Biological and Life Resources have rights to use ORACLE and KM systems, and receive technical support from Tianshi Group’s IT department. The rent is the same as the agreements for 2010. Rent expense totaled $150,031 and $159,226 for the three months ended March 31, 2011 and 2010, 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 Property 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, 2011 and 2010, Biological and Life Resources recorded $84,834 and $81,749 of the rent expense, which is not paid to Tianshi Group, but recorded as paid in capital based upon market price.
Transactions with Tianshi Pharmaceuticals
On December 15, 2009, the Company entered into a one-year lease agreement with Tianshi Pharmaceutical. Under the terms of the lease agreement, the Company leased equipment for the fee of RMB25,383 (or US$3,853) per month. In addition, the Company is obligated to pay insurance, maintenance and other expenses related to the equipment. Upon expiration on December 31, 2010, the lease agreement was extended for an additional one year period. Rent expense totaled $11,559 and $11,139 for the three months ended March 31, 2011 and 2010, respectively.
Note 11– 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,
|
|
|
|
2011
|
|
|
2010
|
|
Wellness products
|
|
$
|
12,087,841
|
|
|
$
|
10,165,740
|
|
Dietary supplement products
|
|
|
962,384
|
|
|
|
1,237,623
|
|
Total
|
|
$
|
13,050,225
|
|
|
$
|
11,403,363
|
|
Note 12 - 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, are Sino-Foreign Joint Ventures 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, the new Enterprise Income Tax (“EIT”) law replaced the laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently applicable to both DES and FIEs. According to the new EIT, 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. Biological currently qualifies as a high-tech company. However, as there is no detailed regulation regarding the implementation of the new EIT, for the year of 2009 and 2010, Biological was required by the local tax authority to prepay income tax at a tax rate of 25%. In June, 2010, the prepaid income tax $582,480 for the year of 2009 was fully refunded.
According to the new EIT law, Life Resources could still 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.
Provisions for income taxes were all current income tax expenses and for the three months ended March 31, 2011 and 2010 were $446,299 and $609,502, respectively.
The following table reconciles the U.S. statutory rates to the Company's effective tax rate:
|
|
Three months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Biological
|
|
|
Life Resources
|
|
|
Biological
|
|
|
Life Resources
|
|
U.S. Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized in
|
|
|
(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
|
)
|
|
|
(12.5
|
)
|
Total provision for income taxes
|
|
|
15.0
|
%
|
|
|
12.5
|
%
|
|
|
15.0
|
%
|
|
|
12.5
|
%
|
The estimated tax savings due to the reduced tax rate for the three months ended March 31, 2011 and 2010 amounted to $373,404 and $508,897, 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, 2011 and 2010 by $0.005 and $0.01, respectively.
Note 13 – 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 salary at retirement and 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 salaries. Employees are required to contribute 8% of their salaries to the plan. Total pension expense incurred by the Company amounted to $294,757 and $261,632 for the three months ended March 31, 2011 and 2010, 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 $28,871 and $25,308 for the three months ended March 31, 2011 and 2010, 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' salaries to a PRC insurance company, which amounted to $147,124 and $131,667 for the three months ended March 31, 2011 and 2010, respectively.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q, references to “dollars” and “$” 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, Acting CFO and CEO, and 10% owned by Baolan Li, Jinyuan Li’s daughter and a member of our Board of Directors.
Life Resources is currently constructing research and development, manufacturing and logistic facilities, and administrative offices in Tianjin, China totaling approximately 420,000 square meters. We moved our administrative offices to the newly constructed Industrial Park on October 16, 2010. We expect to complete the move of all our other facilities, including our corporate headquarters at the end of 2011.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2010
|
|
Three months ended March 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Change
|
|
REVENUE-RELATED PARTIES
|
|
$
|
13,050,225
|
|
|
$
|
11,403,363
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
4,136,399
|
|
|
|
3,440,881
|
|
|
|
20.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
8,913,826
|
|
|
|
7,962,482
|
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,870,886
|
|
|
|
3,497,547
|
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
4,042,940
|
|
|
|
4,464,935
|
|
|
|
-9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(131,636
|
)
|
|
|
-
|
|
|
|
|
|
Interest income
|
|
|
7,992
|
|
|
|
1,872
|
|
|
|
326.9
|
%
|
Other expense
|
|
|
(529,185
|
)
|
|
|
(253,710
|
)
|
|
|
108.6
|
%
|
OTHER EXPENSE, NET
|
|
|
(652,829
|
)
|
|
|
(251,838
|
)
|
|
|
159.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
3,390,111
|
|
|
|
4,213,097
|
|
|
|
-19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
446,299
|
|
|
|
609,502
|
|
|
|
-26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
2,943,812
|
|
|
|
3,603,595
|
|
|
|
-18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS: Net income attributable to the noncontrolling interest
|
|
|
190,204
|
|
|
|
342,057
|
|
|
|
-44.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
|
|
$
|
2,753,608
|
|
|
$
|
3,261,538
|
|
|
|
-15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE, BASIC AND DILUTED
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
|
|
|
Revenue
. For the first quarter of 2011, revenue was $13.1 million, an increase of 14.4% compared to $11.4 million for the same period in 2010.
The increase in revenue for the first quarter of 2011 was mainly due to the increase in domestic sales. For the first quarter of 2011, domestic revenue was $8.2 million, an increase of 21.2% compared to $6.8 million for the same period of 2010. The reasons for the increase in domestic revenue include, but are not limited to the following: (1) The distributors stocked additional products at the lower prices as Engineering increasing the prices of some products from March, 2011. (2) Engineering was granted a direct selling license by the Ministry of Commerce of the People's Republic of China in the first quarter of 2011, which help to boost the sale of the distributors, and we expect it will enhance our sales in the long term.
For the first quarter of 2011, international revenue was $4.8 million, an increase of 4.6% compared to $4.6 million for the same period in 2010. The increase was mainly reflected in the increase of sales to South Africa.
Cost of Sales
. Cost of sales for the first quarter of 2011 increased to $4.1 million, an increase of 20.2% compared to $3.4 million for the same period in 2010. This increase was mainly due to the increase in sales for the period. However, the increase in cost of sales was at a higher rate than the increase in revenues. This is mainly attributable to the decreased sales percentage of certain products, such as Cordyceps Capsules, which have a higher profit margin.
Gross Profit
. Gross profit for the first quarter of 2011 was $8.9 million, an increase of 11.9% compared to $8.0 million for the same period in 2010. This increase reflects the increase in sales. The gross profit margin for the first quarter of 2011 was 68.3%, compared to 69.8% for the same period in 2010.
Selling, general and administrative expenses
. Selling, general and administrative expenses were $4.9 million for the first quarter of 2011, an increase of 39.3% compared to $3.5 million for the same period in 2010. The increase was primarily due to increases in depreciation. From the fourth quarter of 2010, Life Resources started to transfer its construction in progress to fixed assets, which increased the depreciation for the first quarter of 2011. The selling and administrative expenses as a percentage of sales was 37.3 % for the first quarter of 2011, compared to 30.7% for the same period in 2010.
Other income (expense), net.
Other expense was $0.7 million for the first quarter of 2011, compared to $0.3 million of expense for the same period in 2010. The increase is primarily attributed to the transfer in March 2011 of a part of the plant, in the industrial park in which the Company’s facilities are located, into a parking lot, that was valued at $0.6 million and recorded as other expense . Additionally, amortization of deferred income in the amount of $0.15 million for the first quarter of 2011 also contributed to the increase.
Provision for income taxes
. Provision for income taxes was $0.4 million for the first quarter of 2011 compared to $0.6 million for the same period in 2010.
Net income
. Net income for the first quarter of 2011 was $2.9 million, a decrease of 18.3% compared to $3.6 million for the same period in 2010. The decrease was mainly due to the increase of $1.4 million in selling, general and administrative expenses.
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. From the fourth quarter of 2010, due to the large amount of cash required for construction in progress and materials purchases by Life Resources, we obtained bank loans.
On February 14, 2011, under the loan agreement (see note 9) Life Resources obtained RMB30,000,000 (USD$4,554,000) from Agricultural Bank which is recorded as short-term debt, to fund Life Resources’ construction in progress and should be repaid before October 8, 2011. The interest rate is 6.06% from February 14, 2011 to March 31, 2011.
Net cash provided by operating activities was $6.2 million for the three months ended March 31, 2011, compared to net cash provided by operating activities of $13.0 million for the same period of 2010. This decrease was primarily due to the Company not only collected all account receivable from Tianshi Engineering, but also received large amount of advance from it, during the first quarter of 2010.
As of March 31, 2011, we had negative working capital of $15.5 million. Cash was $9.7 million as of March 31, 2011, compared to $10.2 million as of December 31, 2010.
Net cash used in investing activities increased by $6.1 million for the three months ended March 31, 2011 compared to the same period of 2010. During the first three months of 2011, we paid $7.8 million to contractors as construction deposits, compared to $0.6 million for the same period in 2010. In addition, we used $2.7 million in construction in progress for the first quarter of 2011.
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.
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 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 2011 related to previous revenues, no allowance for estimated returns has been recorded as of March 31, 2011.
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.
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 45 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, 2011
|
|
|
December 31, 2010
|
|
Accounts receivable, trade–related parties, net of allowance for doubtful accounts of $4,152,284 and $3,869,617 as of March 31, 2011 and December 31, 2010, respectively
|
|
$
|
11,279,779
|
|
|
$
|
10,012,861
|
|
Other receivables–related parties
|
|
$
|
17,327,387
|
|
|
$
|
17,376,522
|
|
Advances from customers–related parties
|
|
$
|
7,546,016
|
|
|
$
|
8,688,877
|
|
Other payables–related parties
|
|
$
|
5,337,033
|
|
|
$
|
1,417,516
|
|
Revenue-Related Parties
The details of revenue-related parties are as follows:
|
|
Three months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Tianshi Engineering
|
|
$
|
8,218,691
|
|
|
$
|
6,783,273
|
|
Overseas Related Companies
|
|
|
4,831,534
|
|
|
|
4,620,090
|
|
Total
|
|
$
|
13,050,225
|
|
|
$
|
11,403,363
|
|
Accounts Receivable, Trade-Related Parties
The details of accounts receivable, trade–related parties are as follows:
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
Tianshi Engineering
|
|
$
|
984,290
|
|
|
$
|
1,803,688
|
|
Overseas Related Companies
|
|
|
14,447,773
|
|
|
|
12,078,790
|
|
Allowance for Doubtful Accounts
|
|
|
(4,152,284
|
)
|
|
|
(3,869,617
|
)
|
Total
|
|
$
|
11,279,779
|
|
|
$
|
10,012,861
|
|
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,
|
|
|
|
2011
|
|
|
2010
|
|
Tiens Life Science Co., Ltd.
|
|
$
|
11,598,376
|
|
|
$
|
11,525,219
|
|
Tianshi Group
|
|
|
3,002,895
|
|
|
|
-
|
|
Tianshi Engineering
|
|
|
2,470,399
|
|
|
|
5,603,197
|
|
All-Legend Property Service (Tianjin) Co., Ltd.
|
|
|
161,461
|
|
|
|
155,798
|
|
All-Legend Hotel Co., Ltd.
|
|
|
38,627
|
|
|
|
37,856
|
|
Tianshi Yinshi Hotel
|
|
|
38,050
|
|
|
|
37,810
|
|
Tianshi Indonesia Logistic & Trade Co., Ltd.
|
|
|
9,865
|
|
|
|
9,902
|
|
Tianshi Taijisheng Health Management Co., Ltd.
|
|
|
5,735
|
|
|
|
5,459
|
|
Shengshi Real Estate Development
|
|
|
1,201
|
|
|
|
1,072
|
|
Others
|
|
|
778
|
|
|
|
209
|
|
Total
|
|
$
|
17,327,387
|
|
|
$
|
17,376,522
|
|
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. Other receivables-related parties become interest bearing at 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. During the first quarter of 2011, 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 use the same employee insurance account. When making payments to these outside parties, we usually pay the fees first and then are reimbursed by Tianshi Group. These pro-rated amounts relating to Tianshi Group are categorized as other receivables-related parties.
A portion of the construction in progress at an amount of RMB83,263,708 (US$12,672,736), which is recorded and paid for by Life Resources is built on the land controlled by Tianshi Life Science. In addition, a portion of the construction in progress at an amount of RMB5,245,839 (US$798,417), which is recorded and paid for by Tianshi Life Science is built on the land controlled by Life Resources. Tianshi Life Science and Life Resources intend to reimburse each other for the cost of the above construction in progress. The agreement is currently being drafted. The balance of RMB78,017,869 (US$11,874,320) has been reclassified as other receivable-related party as of March 31, 2011 and December 31, 2010, accordingly.
During the first quarter of 2011, the Company provided Tianshi Group with $3,500,600 to fund its operating activities. As of March 31, 2011, the amounts had been reclassified as other receivable-related party, accordingly.
Advances from Customers-Related Parties
Advances from related party customers were $7,546,016 and $8,688,877 as of March 31, 2011 and December 31, 2010, 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, 2011
|
|
|
December 31, 2010
|
|
Tiens Group
|
|
$
|
3,535,048
|
|
|
$
|
639,529
|
|
Tianshi Engineering
|
|
|
1,448,472
|
|
|
|
431,400
|
|
Tianshi Germany Co., Ltd.
|
|
|
105,654
|
|
|
|
99,759
|
|
Tianjin Tianshi Global International Trade
Co., Ltd.
|
|
|
97,408
|
|
|
|
96,794
|
|
Tianyuan Capital Development Co., Ltd.
|
|
|
84,359
|
|
|
|
84,359
|
|
Beijing All-Legend Travel Co., Ltd.
|
|
|
66,077
|
|
|
|
65,660
|
|
Tianshi Administrative Committee of
Industrial Park
|
|
|
15
|
|
|
|
15
|
|
Total
|
|
$
|
5,337,033
|
|
|
$
|
1,417,516
|
|
These amounts arose primarily from previous cash advances from related parties such as management fees due to related parties and various operational transactions incurred with related parties.
During the first quarter of 2011, the Company received $7,815,470 and $3,500,600 as working capital from Tianshi Group and Tianshi Engineering respectively. As of March 31, 2011, $4,566,000 had been repaid to Tianshi Group.
Other Transactions with Tianshi Engineering
On November 20, 2009, Biological entered into two lease agreements with Tianshi Engineering that enable Tianshi Engineering to share the use of certain of Biological’s production equipment to manufacture products which Tianshi Engineering owns, or jointly owns, with Biological. Each of the two agreements was effective as of January 1, 2010 and expired on December 31, 2010. On December 3, 2010, 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 2011. Following is a summary of the monthly rent payable to Biological under the two leases Biological entered into on December 3, 2010.
Lease Agreement
|
|
Monthly rent
|
|
|
|
|
|
Lease Agreement for Health Products Production Equipment
|
|
$
|
11,680
|
|
Lease Agreement for Personal Care Product Production Equipment
|
|
$
|
6,183
|
|
Rent revenue accrued from these leases amounted to $53,590 and $51,854 for the three months ended March 31, 2011 and 2010, respectively.
Other Transactions with Tianshi Group
On January 1, 2010, Biological and Life Resources each entered an office and facilities lease agreement with Tianshi Group. Under the terms of the agreements, Biological and Life Resources’ annual rents are equal to 1% of their gross revenues. The two agreements expired on December 31, 2010 and renewed on January 1, 2011, for 2011. Under the new lease agreements, Biological and Life Resources have rights to use ORACLE and KM systems, and receive technical support from Tianshi Group’s IT department. The rent is the same as the agreements for 2010. Rent expense totaled $150,031 and $159,226 for the three months ended March 31, 2011 and 2010, 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 Property 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, 2011 and 2010, Biological and Life Resources recorded $84,834 and $81,749 of the rent expense, which is not paid to Tianshi Group, but recorded as paid in capital based upon market price.
Transactions with Tianshi Pharmaceuticals
On December 15, 2009, we entered into a one-year lease agreement with Tianshi Pharmaceutical. Under the terms of the lease agreement, we leased equipment for the fee of RMB25,383 (or US$3,853) per month. In addition, we are obligated to pay insurance, maintenance and other expenses related to the equipment. Upon expiration on December 31, 2010, the lease agreement was extended for an additional one year period. Rent expense totaled $11,559 and $11,139 for the three months ended March 31, 2011 and 2010, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4.
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 2011 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 16, 2011
|
|
|
|
|
/s/ Jinyuan Li
|
|
|
|
Jinyuan Li
|
|
Chief Executive Officer, Acting Chief Financial Officer and President
|
|
(Principal Executive Officer, Principal Financial and Accounting Officer)
|
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Agreement, dated January 1, 2011 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
|
|
|
|
10.2
|
|
Agreement, dated January 1, 2011 by and between Tianjin Tiens Life Resources Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
|
|
|
|
31.1
|
|
Certification of the Principal Executive Officer and the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|