U.S.
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 June 30, 2008.
o
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: 1-32477
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)
Registrant’s
Telephone Number, including area code: +86-22-8213-7915
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.
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. (Check one):
o
Large
Accelerated Filer
o
|
Accelerated
Filer
o
|
Non-Accelerated Filer
x
(Do not check if a smaller reporting company)
|
Smaller Reporting Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
There
were 71,333,586 shares of the Company’s common stock outstanding on August 13,
2008.
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 June 30, 2008 (Unaudited) and December 31,
2007
|
|
3
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the three
and six
months ended June 30, 2008 and 2007 (Unaudited)
|
|
4
|
|
|
|
Consolidated
Statements of Shareholders’ Equity (Unaudited)
|
|
5
|
|
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2008 and
2007
(Unaudited)
|
|
6
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
|
7
|
|
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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|
37
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|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
48
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|
|
|
ITEM
4. CONTROLS AND PROCEDURES
|
|
48
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|
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|
PART
II - OTHER INFORMATION
|
|
49
|
|
|
|
ITEM
1A. RISK FACTORS
|
|
49
|
|
|
|
ITEM
6. EXHIBITS
|
|
50
|
PART
I -
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
CONSOLIDATED
BALANCE SHEETS
AS
OF
JUNE 30, 2008 AND DECEMBER 31, 2007
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
As Adjusted (Note 3)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
47,741,333
|
|
$
|
54,081,848
|
|
Accounts
receivable, trade - related parties, net of allowance for doubtful
accounts of $109,415 and $71,700 as of June 30, 2008 and December
31,
2007, respectively
|
|
|
23,176,490
|
|
|
14,268,229
|
|
Accounts
receivable, trade - third parties
|
|
|
-
|
|
|
104,398
|
|
Inventories
|
|
|
6,222,266
|
|
|
5,949,963
|
|
Other
receivables
|
|
|
609,326
|
|
|
1,068,343
|
|
Other
receivables - related parties
|
|
|
11,844,719
|
|
|
13,887,138
|
|
Employee
advances
|
|
|
260,974
|
|
|
65,901
|
|
Prepaid
expenses
|
|
|
285,677
|
|
|
623,638
|
|
Prepaid
income taxes
|
|
|
734,772
|
|
|
-
|
|
Total
current assets
|
|
|
90,875,557
|
|
|
90,049,458
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
16,053,138
|
|
|
16,071,900
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
55,279,413
|
|
|
39,792,774
|
|
Construction
deposits
|
|
|
1,615,659
|
|
|
1,089,216
|
|
Intangible
assets, net
|
|
|
9,711,580
|
|
|
9,246,879
|
|
Other
assets
|
|
|
5,274,200
|
|
|
5,301,847
|
|
Total
other assets
|
|
|
71,880,852
|
|
|
55,430,716
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
178,809,547
|
|
$
|
161,552,074
|
|
LIABILITIES
AND SHARE HOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,592,022
|
|
$
|
4,070,906
|
|
Advances
from customers - related parties
|
|
|
2,493,135
|
|
|
1,700,838
|
|
Wages
and benefits payable
|
|
|
892,276
|
|
|
1,250,685
|
|
Other
taxes payable
|
|
|
451,829
|
|
|
536,819
|
|
Income
taxes payable
|
|
|
2,803,788
|
|
|
665,726
|
|
Contractor
deposits
|
|
|
738,208
|
|
|
595,128
|
|
Contractor
payables
|
|
|
9,350,693
|
|
|
7,820,285
|
|
Other
payables
|
|
|
1,137,420
|
|
|
1,133,539
|
|
Other
payables - related parties
|
|
|
7,437,449
|
|
|
7,938,205
|
|
Dividend
payable to minority interest
|
|
|
-
|
|
|
4,902,629
|
|
Current
portion of long term debt, related party
|
|
|
2,130,000
|
|
|
2,130,000
|
|
Total
current liabilities
|
|
|
33,026,820
|
|
|
32,744,760
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Long
term debt, net of current portion, related party
|
|
|
3,202,742
|
|
|
4,267,742
|
|
Other
payables-non current
|
|
|
572,767
|
|
|
538,130
|
|
Deferred
income
|
|
|
5,210,120
|
|
|
4,895,049
|
|
Total
non current liabilities
|
|
|
8,985,629
|
|
|
9,700,921
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
42,012,449
|
|
|
42,445,681
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
8,484,637
|
|
|
6,144,063
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
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
|
|
|
8,842,009
|
|
|
8,842,009
|
|
Statutory
reserves
|
|
|
9,420,783
|
|
|
9,420,783
|
|
Retained
earnings
|
|
|
86,918,663
|
|
|
78,668,160
|
|
Accumulated
other comprehensive income
|
|
|
23,059,672
|
|
|
15,960,044
|
|
Total
shareholders' equity
|
|
|
128,312,461
|
|
|
112,962,330
|
|
Total
liabilities and shareholders' equity
|
|
$
|
178,809,547
|
|
$
|
161,552,074
|
|
The
acompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
|
|
2007
|
|
|
|
2007
|
|
|
|
2008
|
|
As Adjusted (Note 3)
|
|
2008
|
|
As Adjusted (Note 3)
|
|
REVENUE - RELATED
PARTIES
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
6,203,705
|
|
|
4,454,594
|
|
|
10,243,765
|
|
|
8,890,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
13,450,742
|
|
|
9,865,888
|
|
|
22,231,503
|
|
|
21,667,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
5,088,597
|
|
|
3,388,675
|
|
|
8,335,796
|
|
|
6,653,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
8,362,145
|
|
|
6,477,213
|
|
|
13,895,707
|
|
|
15,013,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Interest
expense)
|
|
|
(80,078
|
)
|
|
(106,351
|
)
|
|
(132,662
|
)
|
|
(211,573
|
)
|
Interest
income
|
|
|
268,517
|
|
|
587,270
|
|
|
505,849
|
|
|
1,217,183
|
|
Other
(expense) income, net
|
|
|
(1,246,287
|
)
|
|
(42,984
|
)
|
|
(986,864
|
)
|
|
(117,463
|
)
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
(1,057,848
|
)
|
|
437,935
|
|
|
(613,677
|
)
|
|
888,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
|
|
|
7,304,297
|
|
|
6,915,148
|
|
|
13,282,030
|
|
|
15,901,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
1,664,054
|
|
|
555,395
|
|
|
3,144,448
|
|
|
1,266,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE MINORITY INTEREST
|
|
|
5,640,243
|
|
|
6,359,753
|
|
|
10,137,582
|
|
|
14,635,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
998,642
|
|
|
1,369,361
|
|
|
1,887,079
|
|
|
3,122,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
4,641,601
|
|
|
4,990,392
|
|
|
8,250,503
|
|
|
11,512,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
2,675,768
|
|
|
2,383,905
|
|
|
7,099,628
|
|
|
3,773,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
7,317,369
|
|
$
|
7,374,297
|
|
$
|
15,350,131
|
|
$
|
15,285,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.07
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
The
acompanying notes are an integral part of these consolidated financial
statements.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
Number
|
|
Common
|
|
Paid-in
|
|
Additional
|
|
Statutory
|
|
Retained
|
|
comprehensive
|
|
|
|
|
|
of shares
|
|
stock
|
|
capital
|
|
paid-in-capital
|
|
reserves
|
|
earnings
|
|
income (loss)
|
|
Totals
|
|
BALANCE, December 31, 2006
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
-
|
|
$
|
9,420,783
|
|
$
|
95,371,137
|
|
$
|
5,714,988
|
|
|
119,420,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,621,218
|
|
|
|
|
|
11,621,218
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,337,343
|
|
|
3,337,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2007, unaudited
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
-
|
|
$
|
9,420,783
|
|
$
|
106,992,355
|
|
$
|
9,052,331
|
|
$
|
134,378,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,972,423
|
|
|
|
|
|
6,972,423
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,928,015
|
|
|
4,928,015
|
|
Additional
paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
|
69,105
|
|
|
|
|
|
|
|
|
|
|
|
69,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007, as previously reported
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
69,105
|
|
$
|
9,420,783
|
|
$
|
113,964,778
|
|
$
|
13,980,346
|
|
$
|
146,348,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add
adjustment for the acquisition of Life Resource
|
|
|
|
|
|
|
|
|
|
|
|
(69,105
|
)
|
|
|
|
|
(35,296,618
|
)
|
|
1,979,698
|
|
|
(33,386,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007, as adjusted (Note 3)
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
-
|
|
$
|
9,420,783
|
|
$
|
78,668,160
|
|
$
|
15,960,044
|
|
$
|
112,962,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,250,503
|
|
|
|
|
|
8,250,503
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,099,628
|
|
|
7,099,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2008, unaudited
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
-
|
|
$
|
9,420,783
|
|
$
|
86,918,663
|
|
$
|
23,059,672
|
|
$
|
128,312,461
|
|
The
acompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)
|
|
Six months ended June 30
|
|
|
|
|
|
2007
|
|
|
|
2008
|
|
As Adjusted (Note 3)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,250,503
|
|
$
|
11,512,659
|
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
37,715
|
|
|
547
|
|
Minority
interest
|
|
|
1,887,079
|
|
|
3,122,579
|
|
Depreciation
|
|
|
1,373,096
|
|
|
1,426,271
|
|
Amortization
|
|
|
140,911
|
|
|
117,830
|
|
Interest
income
|
|
|
(92,523
|
)
|
|
(935,932
|
)
|
(Gain)
on sale of assets
|
|
|
(8,554
|
)
|
|
-
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
Accounts
receivable, trade - related parties
|
|
|
(15,693,689
|
)
|
|
(4,062,388
|
)
|
Accounts
receivable, trade - third parties
|
|
|
22,722
|
|
|
-
|
|
Other
receivables
|
|
|
498,556
|
|
|
2,239,427
|
|
Other
receivables - related parties
|
|
|
(526,327
|
)
|
|
(4,120,698
|
)
|
Inventories
|
|
|
190,894
|
|
|
1,628,894
|
|
Employee
advances
|
|
|
(185,415
|
)
|
|
(49,889
|
)
|
Prepaid
expense
|
|
|
365,778
|
|
|
406,509
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,223,358
|
|
|
(648,583
|
)
|
Advances
from customers - related parties
|
|
|
663,444
|
|
|
(67,035
|
)
|
Wages
and benefits payable
|
|
|
(422,254
|
)
|
|
(289,033
|
)
|
Other
taxes payable
|
|
|
1,205,680
|
|
|
(40,345
|
)
|
Other
payables
|
|
|
(67,118
|
)
|
|
(83,390
|
)
|
Other
payables - related parties
|
|
|
16,388
|
|
|
(299,389
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(1,119,756
|
)
|
|
9,858,034
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayment
from (loans to) related parties
|
|
|
2,133,222
|
|
|
(4,689,017
|
)
|
Collections
from loans to local government
|
|
|
450,197
|
|
|
-
|
|
Acquisition
of intangible assets
|
|
|
-
|
|
|
(129,527
|
)
|
Construction
deposits
|
|
|
(2,206,145
|
)
|
|
-
|
|
Contractor
deposits
|
|
|
101,801
|
|
|
412,802
|
|
Addition
to construction in progress
|
|
|
(9,722,463
|
)
|
|
(12,961,091
|
)
|
Proceeds
from sale of equipment
|
|
|
61,152
|
|
|
-
|
|
Purchase
of equipment and automobiles
|
|
|
(360,192
|
)
|
|
(1,158,813
|
)
|
Net
cash used in investing activies
|
|
|
(9,542,428
|
)
|
|
(18,525,646
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Loan
from (repayment to) related parties
|
|
|
7,400,000
|
|
|
(843,115
|
)
|
Payments
on long term debt, related party
|
|
|
(1,065,000
|
)
|
|
-
|
|
Proceeds
from share subscription in subsidiary
|
|
|
-
|
|
|
18,000,130
|
|
Proceeds
from joint venture investor in Dongfeng
|
|
|
2,828
|
|
|
-
|
|
Payments
to minority interest shareholder
|
|
|
(5,070,091
|
)
|
|
(6,676,102
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
1,267,737
|
|
|
10,480,913
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
3,053,932
|
|
|
1,272,215
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(6,340,515
|
)
|
|
3,085,516
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
54,081,848
|
|
|
55,214,540
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
47,741,333
|
|
$
|
58,300,056
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
(net of amount capitalized)
|
|
$
|
132,662
|
|
$
|
-
|
|
Income
taxes
|
|
$
|
1,822,619
|
|
$
|
1,370,002
|
|
The
acompanying notes are an integral part of these consolidated financial
statements.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2.8% by officers
and
92.29% 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"),
99.4% of
Tiens Yihai
Co.,
Ltd.
("Tiens Yihai")
and 100%
of
Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). Biological owns 99% of
Dongfeng Tianshi Biological Development Co., Ltd. (“Dongfeng Biological”).
On
September 9, 2003, the Company received all of the issued and outstanding
common
stock of Tianshi Holdings in exchange for the issuance by the Company of
68,495,000 shares of its common stock to the original stockholders of Tianshi
Holdings, representing 95% of the issued and outstanding common stock of
the
Company at such time, after giving effect to the issuance.
On
June
18, 2003, Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong
International Development Co., Ltd.
("Tianshi Hong Kong")
,
which
was 100% owned by the Company's current Chairman, Chief Executive Officer
and
President, Jinyuan Li. Tianjin Tianshi Biological Engineering Co., Ltd.
(“Tianshi Engineering”)
owned
the remaining 20% of Biological.
Tianshi
Engineering is 49% owned by Baolan Li, the daughter of Jinyuan Li and 51%
by
Tianjin
Tianshi Group Co., Ltd. ("Tianshi Group")
.
In June
2003, Tianshi Engineering transferred its 20% interest in Biological for
no
consideration to Tianjin Tianshi Pharmaceuticals Co., Ltd. (”Tianshi
Pharmaceutical
s”)
and
Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong for no
consideration. On February 25, 2008, Tianshi Pharmaceuticals transferred
its 20%
interest in Biological to Tianshi Engineering.
On
April
20, 2004, Tianshi Holdings entered a joint venture contract (the "Joint Venture
Project") with Tianshi Pharmaceuticals to establish Tiens Yihai. Tiens Yihai
is
located in Shanghai, the People’s Republic of China (“PRC”), and was established
to build a new research facility which would also produce the Company’s
nutrition supplement, home care, and personal care products. Tianshi Holdings
contributed 99.4% of the registered capital and Tianshi Pharmaceuticals
contributed the remaining 0.6%.
On
December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement
with
Tianshi International Investment Group Co., Ltd. (“Tianshi Investment”). Jinyuan
Li owns 100% of Tianshi Investment. Pursuant to the Sale and Purchase Agreement,
Tianshi Holdings agreed to buy all of the registered share capital of Life
Resources for $64.2 million. The closing of the transaction was subject to
government approval of transfer of all of the share capital of Life Resources
to
Tianshi Holdings. On March 13, 2008, the Chinese government approved the
transfer and the Company became the 100% shareholder of Life
Resources.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Life
Resources was incorporated on April 29, 2005 as a Foreign Investment Enterprise
(“FIE”) in Wuqing, Tianjin, PRC, with a registered share capital of $30,000,000.
The Company is currently constructing research and development and manufacturing
and logistic facilities, as well as administrative offices. Construction
on the
project began in July 2006. On March 13, 2008, the Chinese government approved
the increase of registered capital of Life Resources from $30,000,000 to
$50,000,000.
On
May
22, 2008, Biological entered a joint venture contract with Mr. Fulin Zhu
to
establish Dongfeng Biological. Dongfeng Biological is incorporated in Jilin
Province, PRC, and was established to manufacture and export the Company’s
products overseas. Biological invested RMB 1,980,000 (or US $288,130) in
Dongfeng Biological and owns 99% of Dongfeng Biological, and Mr. Fulin Zhu
owns
the remaining 1%. As of June 30, 2008, Dongfeng Biological had not conducted
any
operations.
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. The Company discontinued its personal care products
during
2007. In the PRC, the Company sells its products to Tianshi Engineering.
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. Outside the PRC, the Company sells its products to overseas
affiliated companies located in 52 countries who in turn sell them 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 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 generally accepted accounting
principles in the United States. These Consolidated Financial Statements
should
be read in conjunction with the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, filed with the Securities and Exchange
Commission on March 31, 2008.
The
reporting entity
The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Subsidiary
|
|
Jurisdiction
of Formation
|
|
|
% Ownership
|
|
Tianshi
Holdings
|
|
|
|
British Virgin Islands
|
|
|
100.0
%
|
|
Biological
|
|
|
|
P.R.C.
|
|
|
80.0%
|
|
Tiens
Yihai
|
|
|
|
P.R.C.
|
|
|
99.4%
|
|
Life
Resources
|
|
|
|
P.R.C.
|
|
|
100.0%
|
|
Dongfeng
Biological
|
|
|
|
P.R.C.
|
|
|
79.20%
|
|
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.
As
Tianshi Holdings and Life Resources were under common control before the
combination was consummated, the combination of Life Resources was treated
for
accounting purposes as a pooling of interests. The balance sheet of the Company
at December 31, 2007 and comparative interim financial statements for the
corresponding periods of the preceding fiscal year were adjusted as if Life
Resources had been combined with the Company before January 1,
2007.
Use
of estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported
in
the consolidated financial statements and accompanying notes. Management
believes that the estimates utilized in preparing its financial statements
are
reasonable and prudent. Actual results could differ from these estimates.
Foreign
currency translation
The
reporting currency of the Company is the US dollar. Biological, Tiens Yihai,
Life Resources and Dongfeng Biological's 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 $7,099,628 and $3,773,257 for the six months ended
June
30,
2008
and
2007, respectively, and $2,675,768 and $2,383,905 for the three months ended
June
30,
2008
and
2007, respectively. Asset and liability accounts at
June
30,
2008
were
translated at 6.87 RMB to $1.00 USD as compared to 7.31 RMB at December 31,
2007. Equity accounts were stated at their historical rate. The average
translation rates applied to income statement accounts for the six months
ended
June
30,
2008
and 2007
were 7.07 RMB and 7.71 RMB, respectively. Cash flows are also translated
at
average translation rates for the period. Therefore, amounts reported on
the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fair
value of financial instruments
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
June
30,
2008
and
December 31, 2007, except for long-term debt, which has a fixed interest
rate.
The fair value of the long-term debt is estimated based on the borrowing
rates
currently available to the Company for bank loans with similar terms and
average
maturities. The carrying value and fair value of long-term debt is as
follows:
|
|
June
30, 2008
|
|
December
31, 2007
|
|
|
|
Balance sheet
amount
|
|
Fair value
|
|
Balance
sheet
amount
|
|
Fair value
|
|
Long-term
debt - related party
|
|
$
|
(5,332,742
|
)
|
$
|
(5,367,618
|
)
|
$
|
(6,397,742
|
)
|
$
|
(6,443,795
|
)
|
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 a general allowance for doubtful debt of 0.5% of the year end
balance of accounts receivable-related parties. Management reviews its accounts
receivable on a regular basis to determine if the bad debt allowance is
adequate, paying particular attention to the age of receivables outstanding.
At
June
30,
2008
and
December 31, 2007, receivables outstanding more than 180 days totaled $1,829,524
and $2,937,718, respectively. The Company believes that the 0.5% general
allowance for doubtful accounts is adequate. The following table represents
the
changes in the allowance for doubtful accounts:
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Balance at
Beginning of
Period
|
|
Provision for
Doubtful
Accounts
|
|
Recovery
|
|
Balance at
End of Period
|
|
Period
ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
and allowances
deducted
from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
$
|
71,700
|
|
$
|
109,415
|
|
$
|
71,700
|
|
$
|
109,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
and allowances
deducted
from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
$
|
86,776
|
|
$
|
71,700
|
|
$
|
86,776
|
|
$
|
71,700
|
|
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 for determining whether
provisions should be provided. The amount included in prepaid expense is
net of
any provisions. Provisions for prepaid expenses amounted to $928,183 and
$872,053 at June 30, 2008 and December 31, 2007, respectively.
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
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 betterment
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 the
constructions 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 life ranging from five to ten years.
Other
assets
Other
assets mainly consist of a deposit and a related loan made to a local government
agency for the acquisition of land use rights in Shanghai. Originally, the
deposit related to the proposed acquisition of land use rights for 263 acres
of
land by Tiens Yihai. However, on November 10, 2006, Tiens International and
the
local government entered a supplemental agreement pursuant to which the parties
agreed to the acquisition of land use rights by Tiens Yihai of a reduced
80
acres parcel of land. As of June 30, 2008, land use rights for only 50 of
the 80
acres had been received.
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.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Deferred
income
Deferred
income consists of two government grants. On August 2, 2005 and November
20,
2006, the Company received two government grants related to land use rights
at
an amount of RMB 35,803,461 (or US $4,895,049). The grants are treated as
deferred income and will be amortized over the life of the buildings on the
land.
Minority
interest
Minority
interest represents the outside shareholder’s 20% ownership of Biological, 20.8%
ownership of Dongfeng Biological and 0.6% ownership of Tiens Yihai. The net
income shown in Consolidated Statements of Cash Flows and Consolidated
Statements of Income and Other Comprehensive Income is net of minority
interest.
Revenue
recognition
The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products is recognized
at
FOB Tianjin shipping point. Revenue from finished products is recognized
only
when the related party Chinese distributors recognize sales of the Company's
products to unaffiliated third parties. Revenues in both cases are net of
taxes.
For
overseas sales, the Company only sells finished products. The Company recognizes
revenue from international sales (non-Chinese) to both affiliated and
unaffiliated third 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. In accordance with SFAS No. 48, "Revenue Recognition when the Right
of
Return Exists", 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, no allowance for estimated returns
has
been recorded as of June 30, 2008 and December 31, 2007.
Advertising
Costs
The
Company sells all of its products to related parties and these related parties
are primarily responsible for marketing. Advertising costs of the Company
for
the six months ended June 30, 2008 and 2007 amounted to $213,468 and $548,
respectively, and for the three months ended June 30, 2008 and 2007 amounted
to
$86,828 and $548, respectively, and were expensed as incurred.
Shipping
and Handling
Shipping
and handling costs totaled $222,637 and $168,355 for the six months ended
June
30, 2008 and 2007, respectively, and $171,922 and $941 for the three months
ended June 30, 2008 and 2007, 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 were included in revenue and the related shipping
and
handling costs were included in selling, general and administrative
expenses.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
in
accordance with SFAS No. 2, "Accounting for Research and Development Costs."
The
Company expensed research and development costs of $613,662 and $351,613
for the
six months ended
June
30,
2008
and
2007, respectively, and $
383,052
and $
204,082
for the three months ended June 30, 2008 and 2007, respectively. These costs
are
included in selling, general and administrative expenses in the accompanying
statements.
Income
taxes
The
Company has adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN No.48”). FIN No.48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes.” FIN No.48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return.
According
to FIN No.48, the evaluation of a tax position is a two-step process. The
first
step is recognition: the enterprise determines whether it is more likely
than
not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation process, based on the technical merits
of
the position. The second step is measurement: a tax position that meets the
more-likely than not recognition threshold is measured to determine the amount
of benefit to recognize in the financial statement. The tax position is measured
at the largest amount of benefit that is greater than 50 percent likely of
being
realized upon ultimate settlement.
The
Company has not been subjected to income tax examinations by taxing authorities
for the six months ended June 30, 2008 and the year ended December 31, 2007.
During the six months ended June 30, 2008 and the year ended December 31,
2007,
the Company did not recognize any amount in interest and penalties. The Company
did not accrue any amount for the payment of interest and penalties at June
30,
2008 and December 31, 2007, respectively.
Earnings
per share
The
Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 requires
the presentation of earnings per share (“EPS”) as Basic EPS and Diluted EPS.
Basic 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 each of the three months and six months ended June 30, 2008
and
2007.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other
comprehensive income
Other
comprehensive income represents foreign currency translation adjustments
for the
period. The amounts shown in the Consolidated Statements of Income and Other
Comprehensive Income and Consolidated Statements of Shareholders’ Equity are net
of minority interests.
Recently
issued accounting pronouncements
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value
that
are
not
currently required to be measured at fair value. The objective of SFAS 159
is to
provide opportunities to mitigate volatility in reported earnings caused
by
measuring
related assets and liabilities differently, without having to apply hedge
accounting provisions. SFAS 159 also establishes presentation and
disclosure
requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
SFAS
159
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combination" (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements
the
identifiable assets, the liabilities and any non-controlling interest in
the
acquiree, and the goodwill acquired in business combination or a gain from
a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness,
and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS
141R
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements- An amendment of ARB No. 51" (“SFAS 160”).
SFAS 160 provides a guide on how to report a non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve
the
relevance, comparability, and transparency of the financial information that
a
reporting entity provides in its consolidated financial statements.
SFAS
160
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires an enhanced disclosure
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. The objective of SFAS 161 is to provide
adequate information about how derivative and hedging activities affect an
entity’s financial position, financial performance, and cash flows. SFAS 161
will be effective in the first quarter of fiscal 2009. The Company is evaluating
the impact that this statement will have on its consolidated financial
statements.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be
used
in the preparation of financial statements of nongovernmental entities that
are
presented in conformity with U.S. GAAP. SFAS 162 shall be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
(“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company is
evaluating the impact that this statement will have on its consolidated
financial statements.
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS 163”). SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deteriorations have occurred in
an
insured financial obligation. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The adoption of
SFAS
163 will not have a material impact on the Company’s consolidated financial
statements.
Note
3 – Change in reporting entity
On
December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement
with
Tianshi Investment. Pursuant to the Sale and Purchase Agreement, Tianshi
Holdings agreed to buy all of the registered share capital of Life Resources
for
$64.2 million. The closing of the transaction was subject to government approval
of transfer of all of the share capital of Life Resources to Tianshi Holdings.
On March 13, 2008, the Chinese government approved the transfer. As Tianshi
Holdings and Life Resources were under common control by Jinyuan Li before
the
combination, the combination was treated for accounting purposes as a pooling
of
interests. The balance sheet of the Company at December 31, 2007 and comparative
interim financial statements for the corresponding periods of the preceding
fiscal year were adjusted as if Life Resources had been combined before January
1, 2007. The following are unaudited statements of income and other
comprehensive income of Life Resources for each of the three months and six
months ended June 30, 2008 and 2007. Since most of the sales in Life Resources
were to the Company, the amounts in the statements of income of Life Resource
are not the same as amounts shown as the “Effect of Change” presented in the
following comparative interim financial statements.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
5,630,685
|
|
$
|
-
|
|
$
|
5,630,685
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
1,304,868
|
|
|
-
|
|
|
1,304,868
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
4,325,817
|
|
|
-
|
|
|
4,325,817
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
666,697
|
|
|
59,948
|
|
|
738,761
|
|
|
102,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
3,659,120
|
|
|
(59,948
|
)
|
|
3,587,056
|
|
|
(102,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
39,740
|
|
|
6,537
|
|
|
50,558
|
|
|
9,230
|
|
Other
(expense), net
|
|
|
(50,541
|
)
|
|
(15,596
|
)
|
|
(71,773
|
)
|
|
(15,690
|
)
|
OTHER
(EXPENSE), NET
|
|
|
(10,801
|
)
|
|
(9,059
|
)
|
|
(21,215
|
)
|
|
(6,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY
INTEREST
|
|
|
3,648,319
|
|
|
(69,007
|
)
|
|
3,565,841
|
|
|
(108,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
3,648,319
|
|
|
(69,007
|
)
|
|
3,565,841
|
|
|
(108,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
3,071,526
|
|
|
321,623
|
|
|
4,752,467
|
|
|
435,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
6,719,845
|
|
$
|
252,616
|
|
$
|
8,318,308
|
|
$
|
327,355
|
|
The
following financial statement line items for each of the three months and
six
months ended June 30, 2008 and 2007 were affected by the combination of
Life
Resources:
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Income
statement
(
Unaudited)
|
|
For three months ended
June 30,
2008
|
|
For three months ended
June 30,
2007
|
|
|
|
As computed,
without Life
Resources
|
|
As reported,
combined with
Life Resources
|
|
Effect of
Change
|
|
As reported,
without Life
Resources
|
|
As adjusted,
combined with
Life Resources
|
|
Effect of
Change
|
|
REVENUE
- RELATED PARTIES
|
|
|
17,852,755
|
|
|
19,654,447
|
|
|
1,801,692
|
|
|
14,320,482
|
|
|
14,320,482
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
5,762,288
|
|
|
6,203,705
|
|
|
441,417
|
|
|
4,454,594
|
|
|
4,454,594
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
12,090,467
|
|
|
13,450,742
|
|
|
1,360,275
|
|
|
9,865,888
|
|
|
9,865,888
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,449,986
|
|
|
5,088,597
|
|
|
638,611
|
|
|
3,328,727
|
|
|
3,388,675
|
|
|
59,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
7,640,481
|
|
|
8,362,145
|
|
|
721,664
|
|
|
6,537,161
|
|
|
6,477,213
|
|
|
(59,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
(1,047,047
|
)
|
|
(1,057,848
|
)
|
|
(10,801
|
)
|
|
446,994
|
|
|
437,935
|
|
|
(9,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
|
|
|
6,593,434
|
|
|
7,304,297
|
|
|
710,863
|
|
|
6,984,155
|
|
|
6,915,148
|
|
|
(69,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
1,664,054
|
|
|
1,664,054
|
|
|
-
|
|
|
555,395
|
|
|
555,395
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE MINORITY INTEREST
|
|
|
4,929,380
|
|
|
5,640,243
|
|
|
710,863
|
|
|
6,428,760
|
|
|
6,359,753
|
|
|
(69,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
998,642
|
|
|
998,642
|
|
|
-
|
|
|
1,369,361
|
|
|
1,369,361
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
3,930,738
|
|
|
4,641,601
|
|
|
710,863
|
|
|
5,059,399
|
|
|
4,990,392
|
|
|
(69,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
1,583,660
|
|
|
2,675,768
|
|
|
1,092,108
|
|
|
2,062,282
|
|
|
2,383,905
|
|
|
321,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
5,514,398
|
|
|
7,317,369
|
|
|
1,802,971
|
|
|
7,121,681
|
|
|
7,374,297
|
|
|
252,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
|
0.06
|
|
|
0.07
|
|
|
0.01
|
|
|
0.07
|
|
|
0.07
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
For six months ended
June 30,
2008
|
|
For six months ended
June 30,
2007
|
|
|
|
As computed,
without Life
Resources
|
|
As reported,
combined with
Life Resources
|
|
Effect of
Change
|
|
As reported,
without Life
Resources
|
|
As adjusted,
combined with
Life Resources
|
|
Effect of
Change
|
|
REVENUE
- RELATED PARTIES
|
|
|
30,673,576
|
|
|
32,475,268
|
|
|
1,801,692
|
|
|
30,557,271
|
|
|
30,557,271
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
9,802,348
|
|
|
10,243,765
|
|
|
441,417
|
|
|
8,890,193
|
|
|
8,890,193
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
20,871,228
|
|
|
22,231,503
|
|
|
1,360,275
|
|
|
21,667,078
|
|
|
21,667,078
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
7,625,121
|
|
|
8,335,796
|
|
|
710,675
|
|
|
6,551,483
|
|
|
6,653,582
|
|
|
102,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
13,246,107
|
|
|
13,895,707
|
|
|
649,600
|
|
|
15,115,595
|
|
|
15,013,496
|
|
|
(102,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
(592,462
|
)
|
|
(613,677
|
)
|
|
(21,215
|
)
|
|
894,607
|
|
|
888,147
|
|
|
(6,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
|
|
|
12,653,645
|
|
|
13,282,030
|
|
|
628,385
|
|
|
16,010,202
|
|
|
15,901,643
|
|
|
(108,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
3,144,448
|
|
|
3,144,448
|
|
|
-
|
|
|
1,266,405
|
|
|
1,266,405
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE MINORITY INTEREST
|
|
|
9,509,197
|
|
|
10,137,582
|
|
|
628,385
|
|
|
14,743,797
|
|
|
14,635,238
|
|
|
(108,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
1,887,079
|
|
|
1,887,079
|
|
|
-
|
|
|
3,122,579
|
|
|
3,122,579
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
7,622,118
|
|
|
8,250,503
|
|
|
628,385
|
|
|
11,621,218
|
|
|
11,512,659
|
|
|
(108,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
4,326,579
|
|
|
7,099,628
|
|
|
2,773,049
|
|
|
3,337,343
|
|
|
3,773,257
|
|
|
435,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
11,948,697
|
|
|
15,350,131
|
|
|
3,401,434
|
|
|
14,958,561
|
|
|
15,285,916
|
|
|
327,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
|
0.11
|
|
|
0.12
|
|
|
0.01
|
|
|
0.16
|
|
|
0.16
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Balance
sheet (Unaudited)
June
30,
2008
|
|
June
30, 2008
|
|
|
|
As computed,
without Life
Resources
|
|
As reported,
combined with
Life Resources
|
|
Effect of Change
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
|
40,862,267
|
|
|
47,741,333
|
|
|
6,879,066
|
|
Accounts
receivable, trade - related parties, net
|
|
|
24,226,745
|
|
|
23,176,490
|
|
|
(1,050,255
|
)
|
Inventories
|
|
|
6,841,510
|
|
|
6,222,266
|
|
|
(619,244
|
)
|
Other
receivables
|
|
|
380,902
|
|
|
609,326
|
|
|
228,424
|
|
Other
receivables - related parties
|
|
|
12,188,461
|
|
|
11,844,719
|
|
|
(343,742
|
)
|
Employee
advances
|
|
|
259,034
|
|
|
260,974
|
|
|
1,940
|
|
Prepaid
expenses
|
|
|
285,677
|
|
|
285,677
|
|
|
-
|
|
Prepaid
income taxes
|
|
|
-
|
|
|
734,772
|
|
|
734,772
|
|
Total
current assets
|
|
|
85,044,596
|
|
|
90,875,557
|
|
|
5,830,961
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
15,674,368
|
|
|
16,053,138
|
|
|
378,770
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
2,630,150
|
|
|
55,279,413
|
|
|
52,649,263
|
|
Construction
deposits
|
|
|
-
|
|
|
1,615,659
|
|
|
1,615,659
|
|
Intangible
assets, net
|
|
|
2,731,157
|
|
|
9,711,580
|
|
|
6,980,423
|
|
Other
assets
|
|
|
5,274,200
|
|
|
5,274,200
|
|
|
-
|
|
Acquisition
deposit
|
|
|
84,247,182
|
|
|
-
|
|
|
(84,247,182
|
)
|
Total
other assets
|
|
|
94,882,689
|
|
|
71,880,852
|
|
|
(23,001,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
195,601,653
|
|
|
178,809,547
|
|
|
(16,792,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
4,399,779
|
|
|
5,592,022
|
|
|
1,192,243
|
|
Accounts
payable-related parties
|
|
|
4,810,304
|
|
|
-
|
|
|
(4,810,304
|
)
|
Advances
from customers - related parties
|
|
|
2,493,135
|
|
|
2,493,135
|
|
|
-
|
|
Wages
and benefits payable
|
|
|
865,817
|
|
|
892,276
|
|
|
26,459
|
|
Other
taxes payable
|
|
|
(33,107
|
)
|
|
451,829
|
|
|
484,936
|
|
Income
taxes payable
|
|
|
2,064,916
|
|
|
2,803,788
|
|
|
738,872
|
|
Contractor
deposits
|
|
|
-
|
|
|
738,208
|
|
|
738,208
|
|
Contractor
payables
|
|
|
-
|
|
|
9,350,693
|
|
|
9,350,693
|
|
Other
payables
|
|
|
1,137,420
|
|
|
1,137,420
|
|
|
-
|
|
Other
payables - related parties
|
|
|
7,188,212
|
|
|
7,437,449
|
|
|
249,237
|
|
Dividend
payable to minority interest
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Current
portion of long term debt, related party
|
|
|
2,130,000
|
|
|
2,130,000
|
|
|
-
|
|
Total
current liabilities
|
|
|
25,056,476
|
|
|
33,026,820
|
|
|
7,970,344
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current portion, related party
|
|
|
3,202,742
|
|
|
3,202,742
|
|
|
-
|
|
Other
payables-non current
|
|
|
572,767
|
|
|
572,767
|
|
|
-
|
|
Deferred
income
|
|
|
-
|
|
|
5,210,120
|
|
|
5,210,120
|
|
Total
non current liabilities
|
|
|
3,775,509
|
|
|
8,985,629
|
|
|
5,210,120
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
28,831,985
|
|
|
42,012,449
|
|
|
13,180,464
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
8,482,178
|
|
|
8,484,637
|
|
|
2,459
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
71,334
|
|
|
71,334
|
|
|
-
|
|
Paid-in-capital
|
|
|
8,842,009
|
|
|
8,842,009
|
|
|
-
|
|
Additional
paid-in-capital
|
|
|
69,105
|
|
|
-
|
|
|
(69,105
|
)
|
Statutory
reserves
|
|
|
9,420,783
|
|
|
9,420,783
|
|
|
-
|
|
Retained
earnings
|
|
|
121,577,334
|
|
|
86,918,663
|
|
|
(34,658,671
|
)
|
Accumulated
other comprehensive income
|
|
|
18,306,925
|
|
|
23,059,672
|
|
|
4,752,747
|
|
Total
shareholders' equity
|
|
|
158,287,490
|
|
|
128,312,461
|
|
|
(29,975,029
|
)
|
Total
liabilities and shareholders' equity
|
|
|
195,601,653
|
|
|
178,809,547
|
|
|
(16,792,106
|
)
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December
31, 2007
|
|
December
31, 2007
|
|
|
|
As reported,
without Life
Resources
|
|
As adjusted,
combined with Life
Resources
|
|
Effect of Change
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
|
48,678,945
|
|
|
54,081,848
|
|
|
5,402,903
|
|
Accounts
receivable, trade - related parties, net
|
|
|
14,268,229
|
|
|
14,268,229
|
|
|
-
|
|
Accounts
receivable, trade - third parties
|
|
|
104,398
|
|
|
104,398
|
|
|
-
|
|
Inventories
|
|
|
5,949,963
|
|
|
5,949,963
|
|
|
-
|
|
Other
receivables
|
|
|
892,489
|
|
|
1,068,343
|
|
|
175,854
|
|
Other
receivables - related parties
|
|
|
13,070,907
|
|
|
13,887,138
|
|
|
816,231
|
|
Employee
advances
|
|
|
64,336
|
|
|
65,901
|
|
|
1,565
|
|
Prepaid
expenses
|
|
|
623,638
|
|
|
623,638
|
|
|
-
|
|
Total
current assets
|
|
|
83,652,905
|
|
|
90,049,458
|
|
|
6,396,553
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
16,034,812
|
|
|
16,071,900
|
|
|
37,088
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
2,287,807
|
|
|
39,792,774
|
|
|
37,504,967
|
|
Construction
deposits
|
|
|
-
|
|
|
1,089,216
|
|
|
1,089,216
|
|
Intangible
assets, net
|
|
|
2,603,084
|
|
|
9,246,879
|
|
|
6,643,795
|
|
Long-term
prepaid expenses
|
|
|
5,301,847
|
|
|
5,301,847
|
|
|
-
|
|
Acquisition
deposit
|
|
|
71,747,182
|
|
|
-
|
|
|
(71,747,182
|
)
|
Total
other assets
|
|
|
81,939,920
|
|
|
55,430,716
|
|
|
(26,509,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
181,627,637
|
|
|
161,552,074
|
|
|
(20,075,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
4,070,906
|
|
|
4,070,906
|
|
|
-
|
|
Advances
from customers - related parties
|
|
|
1,700,838
|
|
|
1,700,838
|
|
|
-
|
|
Wages
and benefits payable
|
|
|
1,250,685
|
|
|
1,250,685
|
|
|
-
|
|
Other
taxes payable
|
|
|
536,819
|
|
|
536,819
|
|
|
-
|
|
Income
taxes payable
|
|
|
665,726
|
|
|
665,726
|
|
|
-
|
|
Contractor
deposits
|
|
|
-
|
|
|
595,128
|
|
|
595,128
|
|
Contractor
payable
|
|
|
-
|
|
|
7,820,285
|
|
|
7,820,285
|
|
Other
payables
|
|
|
1,133,539
|
|
|
1,133,539
|
|
|
-
|
|
Other
payables - related parties
|
|
|
7,938,205
|
|
|
7,938,205
|
|
|
-
|
|
Dividend
payable to minority interest
|
|
|
4,902,629
|
|
|
4,902,629
|
|
|
-
|
|
Current
portion of long term debt, related party
|
|
|
2,130,000
|
|
|
2,130,000
|
|
|
-
|
|
Total
current liabilities
|
|
|
24,329,347
|
|
|
32,744,760
|
|
|
8,415,413
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current portion, related party
|
|
|
4,267,742
|
|
|
4,267,742
|
|
|
-
|
|
Other
payables-non current
|
|
|
538,130
|
|
|
538,130
|
|
|
-
|
|
Deferred
income
|
|
|
-
|
|
|
4,895,049
|
|
|
4,895,049
|
|
Total
non current liabilities
|
|
|
4,805,872
|
|
|
9,700,921
|
|
|
4,895,049
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
29,135,219
|
|
|
42,445,681
|
|
|
13,310,462
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
6,144,063
|
|
|
6,144,063
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
71,334
|
|
|
71,334
|
|
|
-
|
|
Paid-in-capital
|
|
|
8,842,009
|
|
|
8,842,009
|
|
|
-
|
|
Additional
paid-in-capital
|
|
|
69,105
|
|
|
-
|
|
|
(69,105
|
)
|
Statutory
reserves
|
|
|
9,420,783
|
|
|
9,420,783
|
|
|
-
|
|
Retained
earnings
|
|
|
113,964,778
|
|
|
78,668,160
|
|
|
(35,296,618
|
)
|
Accumulated
other comprehensive income
|
|
|
13,980,346
|
|
|
15,960,044
|
|
|
1,979,698
|
|
Total
shareholders' equity
|
|
|
146,348,355
|
|
|
112,962,330
|
|
|
(33,386,025
|
)
|
Total
liabilities and shareholders' equity
|
|
|
181,627,637
|
|
|
161,552,074
|
|
|
(20,075,563
|
)
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Statements
of cash flows (Unaudited)
Six
months ended June 30, 2008
|
|
For six months ended
June 30,
2008
|
|
|
|
As computed,
without Life
Resources
|
|
As reported,
combined with
Life Resources
|
|
Effect of Change
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
|
7,622,118
|
|
|
8,250,503
|
|
|
628,385
|
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
(6,824,299
|
)
|
|
(9,370,259
|
)
|
|
(2,545,960
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
797,819
|
|
|
(1,119,756
|
)
|
|
(1,917,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Payment
of deposit on acquisition of Life Resource
|
|
|
(12,500,000
|
)
|
|
-
|
|
|
12,500,000
|
|
Repayment
from related parties
|
|
|
-
|
|
|
2,133,222
|
|
|
2,133,222
|
|
Collections
from loans to local government
|
|
|
450,197
|
|
|
450,197
|
|
|
-
|
|
Construction
deposits
|
|
|
-
|
|
|
(2,206,145
|
)
|
|
(2,206,145
|
)
|
Contractor
deposits
|
|
|
-
|
|
|
101,801
|
|
|
101,801
|
|
Addition
to construction in progress
|
|
|
(136,765
|
)
|
|
(9,722,463
|
)
|
|
(9,585,698
|
)
|
Proceeds
from sale of equipment
|
|
|
47,712
|
|
|
61,152
|
|
|
13,440
|
|
Purchase
of equipment and automobiles
|
|
|
(358,915
|
)
|
|
(360,192
|
)
|
|
(1,277
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(12,497,771
|
)
|
|
(9,542,428
|
)
|
|
2,955,343
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Loan
from related parties
|
|
|
7,400,000
|
|
|
7,400,000
|
|
|
-
|
|
Payments
on long term debt, related party
|
|
|
(1,065,000
|
)
|
|
(1,065,000
|
)
|
|
-
|
|
Proceeds
from issuing stock of minority investor in Dongfeng
Biological
|
|
|
2,828
|
|
|
2,828
|
|
|
-
|
|
Payments
to minority interest shareholder
|
|
|
(5,070,091
|
)
|
|
(5,070,091
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,267,737
|
|
|
1,267,737
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
2,615,537
|
|
|
3,053,932
|
|
|
438,395
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(7,816,678
|
)
|
|
(6,340,515
|
)
|
|
1,476,163
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
48,678,945
|
|
|
54,081,848
|
|
|
5,402,903
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
|
40,862,267
|
|
|
47,741,333
|
|
|
6,879,066
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six
months ended June 30, 2007
|
|
For
six months ended
June
30, 2007
|
|
|
|
As reported,
without Life
Resources
|
|
As adjusted,
combined with
Life Resources
|
|
Effect of Change
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
|
11,621,218
|
|
|
11,512,659
|
|
|
(108,559
|
)
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
(4,063,645
|
)
|
|
(1,654,625
|
)
|
|
2,409,020
|
|
Net
cash provided by operating activities
|
|
|
7,557,573
|
|
|
9,858,034
|
|
|
2,300,461
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Loan
to related parties
|
|
|
-
|
|
|
(4,689,017
|
)
|
|
(4,689,017
|
)
|
Acquisition
of intangible assets
|
|
|
(129,527
|
)
|
|
(129,527
|
)
|
|
-
|
|
Contractor
deposits
|
|
|
-
|
|
|
412,802
|
|
|
412,802
|
|
Addition
to construction in progress
|
|
|
-
|
|
|
(12,961,091
|
)
|
|
(12,961,091
|
)
|
Purchase
of equipment and automobiles
|
|
|
(3,103,320
|
)
|
|
(1,158,813
|
)
|
|
1,944,507
|
|
Net
cash used in investing activities
|
|
|
(3,232,847
|
)
|
|
(18,525,646
|
)
|
|
(15,292,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Repayment
of loan to related parties
|
|
|
-
|
|
|
(843,115
|
)
|
|
(843,115
|
)
|
Increase
in registered share capital
|
|
|
-
|
|
|
18,000,130
|
|
|
18,000,130
|
|
Payments
to minority interest shareholder
|
|
|
(6,676,102
|
)
|
|
(6,676,102
|
)
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(6,676,102
|
)
|
|
10,480,913
|
|
|
17,157,015
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
1,229,691
|
|
|
1,272,215
|
|
|
42,524
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(1,121,685
|
)
|
|
3,085,516
|
|
|
4,207,201
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
54,270,065
|
|
|
55,214,540
|
|
|
944,475
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
|
53,148,380
|
|
|
58,300,056
|
|
|
5,151,676
|
|
Note
4 – Supplemental disclosure of cash flow information
Income
taxes paid for the six months ended June 30, 2008 and 2007 amounted to
$1,822,619 and $1,370,002, respectively.
Interest
paid for the six months ended June 30, 2008 and 2007 amounted to $132,662
and
$0, respectively.
On
December 21, 2007 the Company, Tianshi Investment and Life Resources entered
a
Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
to Life
Resources without interest. The Company agreed to pay back the $7.5 million
to
Tianshi Investment within five days of the date of the government approval
of
the transfer of the shares of Life Resources to Tianshi Holdings. On March
13,
2008, the Chinese government approved the transfer and the Company repaid
$7.5
million to Tianshi Investment on March 18, 2008 by netting off part of the
accounts receivable due from Tianshi Engineering.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
right
to offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding amount of a loan to repay
to
Tianshi Investment;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
The
Company, Tianshi Investment and Tianshi Engineering agreed to offset
the
two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
On
April
9, 2008, liabilities in the form of accounts receivable due to Biological
from
Tianshi Engineering in the amount of $900,000 were offset against a cash
payment
of $900,000 from Tianshi Investment to Tianshi Holdings. Tianshi Holdings
used
such monies to increase the capital contribution of Life Resources.
The
right
to offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company received a determinable amount in cash from Tianshi
Investment;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
The
Company, Tianshi Investment and Tianshi Engineering agreed to offset
the
two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
Note
5 – Inventories
Inventories
consist of the following at June 30, 2008 and December 31, 2007:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,317,470
|
|
$
|
1,842,760
|
|
Packing
materials
|
|
|
888,955
|
|
|
810,319
|
|
Miscellaneous
supplies
|
|
|
286,537
|
|
|
217,370
|
|
Work
in process
|
|
|
439,865
|
|
|
571,173
|
|
Processing
materials
|
|
|
0
|
|
|
137,188
|
|
Finished
goods
|
|
|
2,289,439
|
|
|
2,371,153
|
|
Total
|
|
$
|
6,222,266
|
|
$
|
5,949,963
|
|
The
Company has written off obsolete goods in the amount of
$99,415
and $0 for the six months ended June 30, 2008 and 2007, respectively.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
6 – Prepaid expenses
Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses.
The
details of prepaid expenses at June 30, 2008 and December 31, 2007 are
as
follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Advance
to suppliers
|
|
$
|
217,217
|
|
$
|
622,275
|
|
Short-term
prepaid expenses
|
|
|
68,460
|
|
|
1,363
|
|
Total
|
|
$
|
285,677
|
|
$
|
623,638
|
|
Note
7 – Property, plant and equipment, net
Property,
plant and equipment consist of the following at June 30, 2008 and December
31,
2007:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Buildings
and improvements
|
|
$
|
7,404,962
|
|
$
|
6,923,475
|
|
Office
equipment
|
|
|
440,724
|
|
|
405,277
|
|
Computer
equipment and software
|
|
|
2,930,789
|
|
|
2,678,312
|
|
Machinery
and equipment
|
|
|
12,323,180
|
|
|
11,333,473
|
|
Automobiles
|
|
|
5,528,147
|
|
|
5,188,650
|
|
Total
|
|
|
28,627,802
|
|
|
26,529,187
|
|
Less:
accumulated depreciation
|
|
|
(12,574,664
|
)
|
|
(10,457,287
|
)
|
Property,
plant and equipment, net
|
|
$
|
16,053,138
|
|
$
|
16,071,900
|
|
Depreciation
expense for the six months ended June 30, 2008 and 2007 amounted to $1,373,096
and $1,426,271, respectively.
Note
8 - Intangible assets
Intangible
assets consist of the following at June 30, 2008 and December 31,
2007:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Land
use rights
|
|
$
|
10,007,906
|
|
$
|
9,402,699
|
|
Other
intangible assets
|
|
|
350,041
|
|
|
328,873
|
|
Less
accumulated amortization
|
|
|
(646,367
|
)
|
|
(484,693
|
)
|
Intangible
assets, net
|
|
$
|
9,711,580
|
|
$
|
9,246,879
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amortization
expense for the six months ended June 30, 2008 and 2007 amounted to $140,911
and
$117,830 respectively. The estimated amortization expense for the next
five
years is as follows:
Estimated amortization expense for
|
|
|
|
the year ending December 31,
|
|
Amount
|
|
2008
|
|
$
|
225,238
|
|
2009
|
|
$
|
224,854
|
|
2010
|
|
$
|
224,471
|
|
2011
|
|
$
|
217,992
|
|
2012
|
|
$
|
217,992
|
|
Note
9 – Related party transactions and balances
The
Company mainly conducted related party transactions with Tianshi Group,
Tianshi
Engineering, Tianshi Investment 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
Investment is 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 understanding
of
the transactions and outstanding balances between those related parties.
|
|
Six months ended June 30,
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenue-related
parties
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Accounts
receivable, trade – related parties, net of allowance for doubtful
accounts of $109,415
and
$71,700 as of June 30, 2008 and December 31, 2007,
respectively
|
|
$
|
23,176,490
|
|
$
|
14,268,229
|
|
Other
receivables – related parties
|
|
$
|
11,844,719
|
|
$
|
13,887,138
|
|
Advances
from customers – related parties
|
|
$
|
2,493,135
|
|
$
|
1,700,838
|
|
Other
payables – related parties
|
|
$
|
7,437,449
|
|
$
|
7,938,205
|
|
Current
portion of long-term debt - related party
|
|
$
|
2,130,000
|
|
$
|
2,130,000
|
|
Long
term debt – related party
|
|
$
|
3,202,742
|
|
$
|
4,267,742
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue
-related parties
The
details of revenue-related parties are as follows:
|
|
Six months ended June 30,
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Tianshi
Engineering
|
|
$
|
14,615,711
|
|
$
|
12,347,614
|
|
$
|
8,509,932
|
|
$
|
5,137,313
|
|
Overseas
Related Companies
|
|
|
17,859,557
|
|
|
18,209,657
|
|
|
11,144,515
|
|
|
9,183,169
|
|
Total
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
The
Company markets all of its products through various domestic and international
business entities that are related to the Company through common ownership.
As a
result, almost all of the Company’s total consolidated sales were to related
parties.
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 which are 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 market and sell the Company’s products 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:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Tianshi
Engineering
|
|
$
|
4,945,115
|
|
$
|
2,062,333
|
|
Overseas
Related Companies
|
|
|
18,340,790
|
|
|
12,277,596
|
|
Allowance
for Doubtful Accounts
|
|
|
(109,415
|
)
|
|
(71,700
|
)
|
Total
|
|
$
|
23,176,490
|
|
$
|
14,268,229
|
|
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:
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
December 31,
|
|
|
|
|
|
2007
As Adjusted
|
|
Tianshi
Engineering
|
|
$
|
10,973,059
|
|
$
|
9,460,811
|
|
Tianshi
Group
|
|
|
838,605
|
|
|
2,347,489
|
|
Tianjin
Xingda Travel Co., Ltd
|
|
|
15,718
|
|
|
1,939
|
|
Beijin
Xingda Travel Co., Ltd
|
|
|
7,925
|
|
|
5,959
|
|
Tianshi
Pharmaceuticals
|
|
|
3,207
|
|
|
5,065
|
|
Shanghai
Tianshi Jinquan Investment Co.
|
|
|
3,083
|
|
|
874
|
|
Shengshi
Real Estate Development
|
|
|
2,047
|
|
|
2,238
|
|
Shanghai
Gujia
|
|
|
1,075
|
|
|
-
|
|
Xiongshi
Construction
|
|
|
-
|
|
|
2,062,763
|
|
Total
|
|
$
|
11,844,719
|
|
$
|
13,887,138
|
|
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 to the Company.
The
credit terms provide an interest-free credit term of three months.
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.
The
Company and Tianshi Group used 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.
In
addition, during 2006 the Company was owed other receivables-related parties
in
the amount of RMB 7,560,000 ($1,033,603) from Tianjin Juchao Commercial
and
Trading Co., Ltd (“Juchao”), a related party owned by Jinyuan Li. On March 31,
2006, Juchao declared termination of its operations, and all of its rights
and
liabilities were transferred to Tianshi Group. This amount was also included
in
other receivables – related parties as of December 31, 2007.
Advances
from customers - related parties
These
advances represent prepayments made to the Company to insure that overseas
related companies could obtain enough of the Company’s products to meet their
market demands. As of June 30, 2008 and December 31, 2007, advances from
related
party customers amounted to $2.5 million and $1.7 million,
respectively.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other
payables - related parties
The
details of other payable-related parties are as follows:
|
|
June 30, 2008
|
|
December 31, 2007
As Adjusted
|
|
Tianshi
Investment
|
|
$
|
6,708,852
|
|
$
|
7,490,136
|
|
Tianshi
Group
|
|
|
526,181
|
|
|
-
|
|
Tianshi
Germany Co., Ltd
|
|
|
118,043
|
|
|
109,233
|
|
Tianyuan
Capital Development Co. Ltd. ("Tianyuan Capital")
|
|
|
84,359
|
|
|
84,359
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
14
|
|
|
13
|
|
Tianshi
Pharmaceuticals
|
|
|
-
|
|
|
9,308
|
|
Tianshi
Shanghai Co., Ltd
|
|
|
-
|
|
|
176
|
|
Tianshi
Engineering
|
|
|
-
|
|
|
244,980
|
|
Total
|
|
$
|
7,437,449
|
|
$
|
7,938,205
|
|
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
December 21, 2007, Tianshi Holdings and Tianshi Investment entered a Capital
Contribution Agreement, pursuant to which Tianshi Investment agreed to
fund a
capital increase of Life Resources in the amount of $7.5 million. Tianshi
Holdings agreed to pay back the $7.5 million to Tianshi Investment within
five
days of the date of the government approval of the transfer of the shares
of
Life Resources to Tianshi Holdings. The approval was received on March
13, 2008
and the $7.5 million was paid back on March 18, 2008, by canceling $7.5
million
of accounts receivable owed to the Company by Tianshi Engineering
(see
Note 4).
On
January 21, 2008, Life Resources and Tianshi Investment entered a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan
to Life
Resources for $6.5 million without interest. The loan was due on June 30,
2008.
On June 30, 2008, the parties extended the loan to December 31,
2008.
Long
term debt - related party
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 is a director of Tiens Yihai and a director of
Tianyuan
Capital. Jinyuan Li owns 100% of Tianyuan Capital.
The
principal of the loan will be paid in ten consecutive semi-annual installments
of $1,065,000 on the last day of June and December, commencing June 2006
and
ending June 31, 2011. The interest on
the loan
is calculated at an annual interest rate of 5% based on the remaining balance
of
the principal. The interest accrued in each period is paid along with the
installment payment on the principal. Five installment payments had been
made by
June 30, 2008.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
loan
balance at
June 30,
2008 and December 31, 2007 consisted of the following:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Note
payable to Tianyuan Capital
|
|
|
|
|
|
Development
Corp. Ltd., related party
|
|
$
|
5,332,742
|
|
$
|
6,397,742
|
|
Less
current portion of long term debt
|
|
|
(2,130,000
|
)
|
|
(2,130,000
|
)
|
Total
|
|
$
|
3,202,742
|
|
$
|
4,267,742
|
|
Total
principal payments for the next four years on all long-term debt are as
follows:
Year Ending
|
|
|
|
December 31,
|
|
Amount
|
|
2008
(6 months remaining)
|
|
$
|
1,065,000
|
|
2009
|
|
$
|
2,130,000
|
|
2010
|
|
$
|
2,130,000
|
|
2011
|
|
$
|
7,742
|
|
Other
Transactions with Tianshi Engineering
On
December 31, 2005, Biological entered four lease agreements with Tianshi
Engineering which enabled 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 for one
year
beginning January 1, 2006. These four lease agreements were renewed in
December
2006 for the 2007 fiscal year and October 2007 for the 2008 fiscal year.
Rent
revenue accrued from these leases amounted to $160,929 and $187,275 for
the six
months ended June 30, 2008 and 2007, respectively, and $81,620 and $94,143
for
the three months ended June 30, 2008 and 2007, respectively.
Other
Transactions with Tianshi Group
On
June
30, 2002, the Company entered an office and facilities lease agreement
with
Tianshi Group. Under the terms of the five year agreement, the Company’s annual
rent is equal to 1% of gross revenues. In addition, the Company is obligated
to
pay insurance, maintenance and other expenses related to the premises.
This
agreement expired on December 31, 2007.
The
Company entered a new one-year lease agreement with Tianshi Group, effective
January 1, 2008 covering the same facilities and having identical rent
terms.
For the six months ended June 30, 2008 and 2007, the Company paid this
rent at
an amount of $399,632 and $319,832, respectively, and $211,241 and $153,500 for
the three months ended June 30, 2008 and 2007, respectively.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other
Transactions with Tianshi Investments
On
December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement
with
Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the
Sale and
Purchase Agreement, Tianshi Holdings agreed to buy all of the registered
share
capital of Life Resources from Tianshi Investment for RMB474,674,415
($64,247,182). The closing of the transaction was subject to government
approval
of the transfer of Life Resources to Tianshi Holdings. On March 13, 2008,
the
government approved the transfer.
Pursuant
to the Sale and Purchase Agreement, Tianshi Holdings advanced a deposit
of
$64,247,182 to Tianshi Investment on December 20, 2007. This acquisition
deposit
was settled as follows:
•
$28,592,743
was paid by canceling a loan in the principal amount of RMB200,000,000
to
Tianshi Engineering owned by Biological together with interest
accrued;
•
$16,557,914
was paid by canceling of other receivable owned by Tianshi Engineering
to
Biological; and
•
$19,096,525
was paid in cash.
On
January 14, 2008, Tianshi Holdings and Tianshi Investment entered a loan
agreement pursuant to which Tianshi Holdings loaned Tianshi Investment
$4.1
million without interest. The loan was required to be used by Tianshi Investment
to increase the registered share capital of Life Resources. The loan was
due on
June 30, 2008, provided however, that if the government approved the transfer
of
the shares of Life Resources to Tianshi Holdings prior to that date, the
loan
would be cancelled, as Life Resources would then be a wholly-owned subsidiary
of
Tianshi Holdings. The approval was received on March 13, 2008, and therefore,
the loan was cancelled on the same date.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
10 – Minority interest and distribution
The
roll
forward of the Minority Interest balance in the balance sheet is shown
below:
|
|
|
|
|
|
|
|
Dongfeng
|
|
|
|
|
|
|
|
|
|
|
|
Biological
|
|
|
|
Biological
|
|
|
|
Tiens
Yihai
|
|
|
|
|
|
|
|
Minority
|
|
Dongfeng
|
|
Minority
|
|
|
|
Minority
|
|
Total
|
|
|
|
Biological
|
|
Owners
|
|
Biological
|
|
Owners
|
|
Tiens
Yihai
|
|
Owners
|
|
Minority
|
|
|
|
USD
|
|
(20%)
|
|
USD
|
|
(20.8%)
|
|
USD
|
|
(0.60%)
|
|
Interest
|
|
December
31, 2006
|
|
$
|
58,499,962
|
|
$
|
11,699,992
|
|
$
|
-
|
|
$
|
-
|
|
$
|
30,555,046
|
|
$
|
183,331
|
|
$
|
11,883,323
|
|
Net
income (loss)
|
|
|
24,840,180
|
|
|
4,968,036
|
|
|
-
|
|
|
-
|
|
|
(273,217
|
)
|
|
(1,639
|
)
|
|
4,966,397
|
|
Other
comprehensive Income
|
|
|
2,947,667
|
|
|
589,533
|
|
|
-
|
|
|
-
|
|
|
2,019,326
|
|
|
12,116
|
|
|
601,649
|
|
Additional
paid-in-capital
|
|
|
86,381
|
|
|
17,276
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,276
|
|
Dividend
distribution
|
|
|
(56,622,912
|
)
|
|
(11,324,582
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,324,582
|
)
|
December
31, 2007
|
|
$
|
29,751,278
|
|
$
|
5,950,255
|
|
$
|
-
|
|
$
|
-
|
|
$
|
32,301,156
|
|
$
|
193,808
|
|
$
|
6,144,063
|
|
Net
income (loss)
|
|
|
9,433,346
|
|
|
1,886,669
|
|
|
-
|
|
|
-
|
|
|
68,254
|
|
|
410
|
|
|
1,887,079
|
|
Other
comprehensive Income
|
|
|
2,187,030
|
|
|
437,406
|
|
|
3,500
|
|
|
728
|
|
|
2,081,065
|
|
|
12,486
|
|
|
450,620
|
|
Less:
cost of investment in Dongfeng Biological
|
|
|
(284,665
|
)
|
|
(56,933
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(56,933
|
)
|
Share
capital
|
|
|
-
|
|
|
-
|
|
|
287,540
|
|
|
59,808
|
|
|
-
|
|
|
-
|
|
|
59,808
|
|
June
30, 2008
|
|
$
|
41,086,989
|
|
$
|
8,217,397
|
|
$
|
291,040
|
|
$
|
60,536
|
|
$
|
34,450,474
|
|
$
|
206,704
|
|
$
|
8,484,637
|
|
Dividends
declared by Biological are split pro rata between the shareholders according
to
their ownership interest. The payment of the dividends to the shareholders
may
occur at different times, resulting in distributions which do not appear
to be
reflective of the minority ownership percentages. The table below shows the
outstanding dividends payable of Biological, as well as the allocation of
dividends between Tianshi Holdings and the minority shareholder.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Tianshi
|
|
Minority
|
|
|
|
Date
|
|
Holdings
|
|
Shareholder
|
|
Totals
|
|
|
|
|
|
|
|
|
|
Dividends
outstanding, December 31, 2006 Balance
|
|
$
|
45,978,854
|
|
$
|
238,311
|
|
$
|
46,217,165
|
|
Dividends
declared
|
|
|
45,298,330
|
|
|
11,324,582
|
|
|
56,622,912
|
|
Dividends
paid
|
|
|
(86,747,565
|
)
|
|
(6,676,102
|
)
|
|
(93,423,667
|
)
|
Accumulated
Other Comprehensive Income (loss)
|
|
|
3,900,013
|
|
|
15,838
|
|
|
3,915,851
|
|
Dividends
outstanding, December 31, 2007 Balance
|
|
$
|
8,429,632
|
|
$
|
4,902,629
|
|
$
|
13,332,261
|
|
Dividends
declared
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dividends
paid
|
|
|
-
|
|
|
(5,070,091
|
)
|
|
(5,070,091
|
)
|
Accumulated
Other Comprehensive Income (loss)
|
|
|
542,574
|
|
|
167,462
|
|
|
710,036
|
|
Dividends
outstanding, June 30, 2008 Balance
|
|
$
|
8,972,206
|
|
$
|
-
|
|
$
|
8,972,206
|
|
Note
11 – Accumulated other comprehensive income (loss)
|
|
|
|
Dongfeng
|
|
|
|
Life
|
|
Tianshi
|
|
|
|
|
|
Biological
|
|
Biological
|
|
Tiens
Yihai
|
|
Resources
|
|
Holdings
|
|
Total
|
|
Balance
as of December 31, 2006
|
|
$
|
2,109,074
|
|
$
|
-
|
|
$
|
1,727,692
|
|
$
|
-
|
|
$
|
1,878,222
|
|
$
|
5,714,988
|
|
Increase
during the year
|
|
|
2,358,134
|
|
|
-
|
|
|
2,007,211
|
|
|
-
|
|
|
3,900,014
|
|
|
8,265,359
|
|
Balance
as of December 31, 2007, as previously reported
|
|
$
|
4,467,207
|
|
$
|
-
|
|
$
|
3,734,903
|
|
$
|
-
|
|
$
|
5,778,236
|
|
$
|
13,980,346
|
|
Add
adjustment for the acquisition of Life Resources
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,979,698
|
|
|
-
|
|
|
1,979,698
|
|
Balance
as of December 31, 2007, restated
|
|
$
|
4,467,207
|
|
$
|
-
|
|
$
|
3,734,903
|
|
$
|
1,979,698
|
|
$
|
5,778,236
|
|
$
|
15,960,044
|
|
Increase
during the year
|
|
|
1,749,624
|
|
|
2,772
|
|
|
2,068,579
|
|
|
2,772,769
|
|
|
505,884
|
|
|
7,099,628
|
|
Balance
as of June 30, 2008
|
|
$
|
6,216,831
|
|
$
|
2,772
|
|
$
|
5,803,482
|
|
$
|
4,752,467
|
|
$
|
6,284,120
|
|
$
|
23,059,672
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accumulated
other comprehensive income recorded in Biological, Tiens Yihai and Life
Resources are due to foreign currency translation adjustments. Accumulated
other
comprehensive income was recorded in Tianshi Holdings due to the effect of
foreign exchange rate on dividend receivables from Biological.
Note
12 – 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 geographic area and product groups is
shown in the following tables:
Revenue
by Geographic Area:
|
|
Six
months ended June 30,
|
|
Three
months ended June 30,
|
|
Revenue
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
China
|
|
$
|
14,615,711
|
|
$
|
12,347,614
|
|
$
|
8,509,932
|
|
$
|
5,137,313
|
|
Russia
|
|
|
6,283,257
|
|
|
3,223,315
|
|
|
4,337,017
|
|
|
2,064,153
|
|
Indonesia
|
|
|
3,415,273
|
|
|
2,228,138
|
|
|
1,140,485
|
|
|
479,721
|
|
Ukraine
|
|
|
1,660,951
|
|
|
3,347,125
|
|
|
813,522
|
|
|
2,250,192
|
|
Other
international countries
|
|
|
6,500,076
|
|
|
9,411,079
|
|
|
4,853,491
|
|
|
4,389,103
|
|
Total
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
Revenue
by Product Group:
|
|
Six
months ended June 30,
|
|
Three
months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Wellness
products
|
|
$
|
29,737,966
|
|
$
|
27,807,117
|
|
$
|
17,980,913
|
|
$
|
13,080,070
|
|
Dietary
supplement products
|
|
|
2,699,711
|
|
|
2,444,582
|
|
|
1,669,745
|
|
|
1,093,700
|
|
Personal
care products
|
|
|
37,591
|
|
|
305,572
|
|
|
3,789
|
|
|
146,712
|
|
Total
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
Note
13 - 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, Tiens Yihai and Life Resources, are
Sino-Foreign Joint Ventures incorporated in the PRC.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior
to
2008, pursuant to the income tax laws of the PRC concerning Foreign Investment
Enterprises and Foreign Enterprises and various local income tax laws (the
"Income Tax Law"), Sino-foreign joint venture enterprises generally were
subject
to income tax at an effective rate of 33% (30% state income taxes plus 3%
local
income taxes) on income as reported in their statutory financial statements
unless the enterprise is located in specially-designated regions or cities
for
which more favorable effective rates apply.
Biological
is located in Tianjin Wuqing Development Area, a national new technology
development zone and is subject to the special reduced income tax rate of
15%.
Pursuant to the approval of the relevant PRC tax authorities, Biological
was
fully exempt from PRC income taxes for two years starting from the year profits
were first made, followed by a 7.5% reduced tax rate for the next three years.
Biological
started generating taxable profits in the year ended December 31, 2003.
Effective January 1, 2005, the two-year 100% exemption for income taxes expired
for Biological and it became subject to income tax at a reduced rate of 7.5%,
which expired on January 1, 2008.
Tiens
Yihai is located in a Special Industry Zone and is subject to a special reduced
income tax rate of 15%. Pursuant to the approval of the relevant local Chinese
tax authorities, Tiens Yihai was fully exempt from PRC income taxes for two
years starting from the first year profits were made, followed by a 7.5%
reduced
tax rate for the next three years. In addition, in order to encourage Tiens
Yihai to do business in the Special Industry Zone, the local Chinese tax
authorities agreed to refund 50% of the total income tax after the five-year
tax
break. As of June 30, 2008, Tiens Yihai was in the developmental stage of
its
organization and did not have any operating income.
Life
Resources is located in Tianjin Wuqing Development Area, a national new
technology development zone. Pursuant to the approval of the relevant PRC
tax
authorities, Life Resources was fully exempt from PRC income taxes for two
years
starting from the year profits are first made, followed by a 7.5% reduced
tax
rate for the next three years.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing
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, in the first and second quarters of 2008
Biological was required by the local tax authority to prepay income tax at
a tax
rate of 25%.
According
to the new EIT, 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. However, as there is no detailed regulation
regarding the implementation of the new EIT, Life Resources was required
by
local tax authority to prepay income tax at a tax rate of 25% till its tax
exemption qualification was approved by the tax authority. The approval is
expected to be issued in August 2008 and the prepaid income tax in Life
Resources could be refunded after the approval. The prepaid income tax in
Life
Resources of $734,772 is treated as deferred income taxes in the consolidated
financial statements of the Company.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Provisions
for income taxes
were
all
current income tax expenses and for the six months ended June 30, 2008 and
2007,
were $3,144,448 and $1,266,405, respectively, and for the three months ended
June 30, 2008 and 2007 were $1,664,054 and $555,395, respectively.
The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:
|
|
2008
|
|
2007
|
|
U.S.
Statutory rate
|
|
|
34.0%
|
|
|
34.0%
|
|
Foreign
income not recognized in USA
|
|
|
(34.0)
|
|
|
(34.0)
|
|
China
income taxes
|
|
|
25.0
|
|
|
33.0
|
|
Effect
of reduced tax rate
|
|
|
-
|
|
|
(25.5)
|
|
Total
provision for income taxes
|
|
|
25.0
%
|
|
|
7.5%
|
|
The
estimated tax savings due to the reduced tax rate for the six months ended
June
30, 2008 and 2007 amounted to $891,460 and $4,305,778 respectively. The net
effect on earnings per share if the income tax had been applied would decrease
earnings per share for the six months ended June 30, 2008 and 2007 by $0.01
and
$0.05, respectively
Note
14 – Retirement plan
Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Biological 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.
Biological
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
$379,255 and $298,244 for the six months ended June 30, 2008 and 2007,
respectively, and $192,885 and $153,380 for the three months ended June 30,
2008
and 2007, 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 $37,868 and $29,702 for the six months ended
June
30, 2008 and 2007, respectively, and $19,492 and $15,315 for the three months
ended June 30, 2008 and 2007, respectively. All contributions are paid to
a PRC
insurance company, which in turn, is responsible for the unemployment liability.
On January 1, 2002, the Company introduced a basic medical insurance plan
for
its employees. Pursuant to that medical insurance plan, the Company is required
to pay an amount equal to 10% of its employees' salary to a PRC insurance
company, which amounted to $192,833 and $162,360 for the six months ended
June
30, 2008 and 2007, respectively, and $97,723 and $83,551 for the three months
ended June 30, 2008 and 2007, respectively.
ITEM
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Of
OPERATIONS
In
this
Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United
States Dollars. References to “we”, “us”, 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, and personal care
products. Our operations are conducted from our headquarters in Tianjin,
People’s Republic of China (“China”) through our 80% owned subsidiary, Tianjin
Tianshi Biological Development Co. Ltd. (“Biological”). We sell our products to
affiliated companies in China and internationally.
Tiens
Biotech Group (USA), Inc. 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.
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. Tianjin Tianshi Group Co., Ltd.
(“Tianshi Group”), a Chinese company, owns 51% of Tianshi Engineering. Baolan
Li, the daughter of our Chairman, President and CEO, Jinyuan Li, owns the
remaining 49% of Tianshi Engineering. Tianshi Group is 90% owned by Jinyuan
Li
and 10% owned by Baolan Li. Tianshi Engineering acquired its 20% interest in
Biological from Tianjin Tianshi Pharmaceuticals Co., Ltd. (“Tianshi
Pharmaceuticals”) on February 25, 2008. Tianshi Pharmaceuticals is 87.66% owned
by Tianshi Group, and 7.29% owned by Baolan Li.
On
April
20, 2004, Tianshi Holdings entered a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is 99.4% owned by Tianshi
Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located
in
Shanghai, China, and was established to build a new research and development
facility, which would also produce certain of our products. In October 2004,
the
Company paid a deposit of $3.6 million to Zhu Jia Jiao Industrial Park Economic
Development Ltd (representative of the local government, “Local Government”) for
acquiring the land use right of 1,600 mu (263 acres) located in Shanghai.
However, in 2005, the Chinese central government issued its “Adjustment of
Macro-Economic Policy”. This policy implemented a new system of investment and
use of state-owned assets, including land. Pursuant to this policy, local
government organizations adjusted and re-allotted projects, including
investment, construction and reconstruction of state-owned resources. As a
result, projects and enterprises that had been affected, including Tiens Yihai,
were awaiting further decisions by state and local government.
On
November 10, 2006, Tiens International and the Local Government entered into
a
supplemental agreement pursuant to which the parties have agreed to the
acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres)
parcel of land. As of June 30, 2008, land use rights for only 50 of the 80
acres
had been received. As a result of the reduction in the number of acres for
which
we have received land use rights and continued uncertainty relating to the
Tiens
Yihai project, management made a decision to suspend the development of the
project. We are currently reviewing alternative commercial uses for the Tiens
Yihai site, as well as the possibility of selling the land use rights to a
third
party.
On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi International Investment Group Co., Ltd. (“Tianshi Investment”).
Jinyuan Li owns 100% of Tianshi Investment. Pursuant to the Sale and Purchase
Agreement, Tianshi Holdings agreed to buy all of the registered share capital
of
Life Resources for $64.2 million. The closing of the transaction was subject
to
government approval of transfer of all of the share capital of Life Resources
to
Tianshi Holdings. On March 13, 2008, the Chinese government approved the
transfer and Tianshi Holdings became the 100% shareholder of Life
Resources.
Life
Resources is currently constructing research and development, manufacturing
and
logistic facilities, as well as administrative offices totaling approximately
420,000 square meters. We intend to move our headquarters to these new
facilities once they are completed.
On
May
22, 2008, Biological entered a joint venture contract with Mr. Fulin Zhu to
establish Dongfeng Tianshi Biological Development Co., Ltd. (“Dongfeng
Biological”). Dongfeng Biological is incorporated in Jilin Province, PRC, and
was established to export our products overseas in light of the slow-down and
backlog of export clearances arising out of the AQSIQ campaign described in
this
Quarterly Report. Biological invested RMB 1,980,000 (or US $288,130) in Dongfeng
Biological and owns 99% of Dongfeng Biological and Mr. Fulin Zhu owns the
remaining 1%. Mr. Fulin Zhu, a resident of Jilin Province, is not a related
party. As of June 30, 2008, Dongfeng Biological had not conducted any
operations. The Company is evaluating whether to use Dongfeng Biological in
the
future to address the export restrictions.
We
research, develop, and manufacture nutrition supplement products, including
wellness products and dietary supplement products. Our operations are conducted
from our headquarters in Tianjin, China through our subsidiary, Biological.
We
develop our products at our product research and development center, which
employs highly qualified professionals in the fields of pharmacology, biology,
chemistry and fine chemistry. We have developed and produce 33 nutrition
supplement products, which include wellness products and dietary nutrition
supplements.
In
China,
we sell our products to Tianshi Engineering, an affiliated 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. Outside of China, we sell our products
to
overseas affiliated companies located in 52 countries that in turn sell them
to
independent direct sales distributors.
RESULTS
OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO
THE
SIX AND THREE MONTHS ENDED JUNE 30, 2007
On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi Investment. Pursuant to the Sale and Purchase Agreement, Tianshi
Holdings agreed to buy all of the registered share capital of Life Resources
for
$64.2 million. The closing of the transaction was subject to government approval
of transfer of all of the share capital of Life Resources to Tianshi Holdings.
On March 13, 2008, the Chinese government approved the transfer. As Tianshi
Holdings and Life Resources were under common control by Jinyuan Li before
the
combination, the combination was treated for accounting purposes as a pooling
of
interests. The balance sheet of the Company at December 31, 2007 and comparative
interim financial statements for the corresponding periods of the preceding
fiscal year were adjusted as if Life Resources had been combined with the
Company before January 1, 2007.
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
(Unaudited)
|
|
As Adjusted
|
|
Change
|
|
(Unaudited)
|
|
As Adjusted
|
|
Change
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
|
37.2%
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
|
6.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
6,203,705
|
|
|
4,454,594
|
|
|
39.3%
|
|
|
10,243,765
|
|
|
8,890,193
|
|
|
15.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
13,450,742
|
|
|
9,865,888
|
|
|
36.3%
|
|
|
22,231,503
|
|
|
21,667,078
|
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND
ADMINISTRATIVE
EXPENSES
|
|
|
5,088,597
|
|
|
3,388,675
|
|
|
50.2%
|
|
|
8,335,796
|
|
|
6,653,582
|
|
|
25.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
8,362,145
|
|
|
6,477,213
|
|
|
29.1%
|
|
|
13,895,707
|
|
|
15,013,496
|
|
|
-7.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
(1,057,848
|
)
|
|
437,935
|
|
|
-
|
|
|
(613,677
|
)
|
|
888,147
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES AND MINORITY
INTEREST
|
|
|
7,304,297
|
|
|
6,915,148
|
|
|
5.6%
|
|
|
13,282,030
|
|
|
15,901,643
|
|
|
-16.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
1,664,054
|
|
|
555,395
|
|
|
199.6%
|
|
|
3,144,448
|
|
|
1,266,405
|
|
|
148.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE MINORITY INTEREST
|
|
|
5,640,243
|
|
|
6,359,753
|
|
|
-11.3%
|
|
|
10,137,582
|
|
|
14,635,238
|
|
|
-30.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
998,642
|
|
|
1,369,361
|
|
|
-27.1%
|
|
|
1,887,079
|
|
|
3,122,579
|
|
|
-39.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
4,641,601
|
|
|
4,990,392
|
|
|
-7.0%
|
|
|
8,250,503
|
|
|
11,512,659
|
|
|
-28.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
2,675,768
|
|
|
2,383,905
|
|
|
12.2%
|
|
|
7,099,628
|
|
|
3,773,257
|
|
|
88.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
7,317,369
|
|
$
|
7,374,297
|
|
|
-0.8%
|
|
$
|
15,350,131
|
|
$
|
15,285,916
|
|
|
0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.07
|
|
$
|
0.07
|
|
|
|
|
$
|
0.12
|
|
$
|
0.16
|
|
|
|
|
Revenue
.
For the
second quarter of 2008, revenue was $19.7 million, an increase of 37.2% compared
to $14.3 million for the same period in 2007. For the six months ended June
30,
2008, revenue was $32.5 million, an increase of 6.3% compared to $30.6 million
for the same period in 2007. The breakdown of revenue between Chinese and
international sales is as follows.
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
China
|
|
$
|
8,509,932
|
|
$
|
5,137,313
|
|
|
65.6%
|
|
$
|
14,615,711
|
|
$
|
12,347,614
|
|
|
18.4%
|
|
International
|
|
$
|
11,144,515
|
|
$
|
9,183,169
|
|
|
21.4%
|
|
$
|
17,859,557
|
|
$
|
18,209,657
|
|
|
-1.9%
|
|
Total
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
|
37.2%
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
|
6.3%
|
|
For
the
second quarter of 2008, revenue in China was $8.5 million, an increase of 65.6%
compared to $5.1 million for the same period in 2007. This increase was due
to
increased marketing efforts in China and to the increase in the value of the
renminbi against the dollar. For the six months ended June 30, 2008, revenue
in
China was $14.6 million, an 18.4% increase compared to $12.3 million for the
same period in 2007. The growth in revenue during the second quarter was offset
by a 15% decrease in revenue in China during the first quarter of 2008. During
the first quarter of 2008, we believe that sales in China were negatively
impacted by continued uncertainty in China regarding the impact of direct
selling regulations and uncertainty regarding the timing of the direct selling
license application process and approval.
For
the
second quarter of 2008, international revenue was $11.1 million, an increase
of
21.4% compared to $9.2 million for the same period in 2007. In August 2007,
China’s Administration of Quality Supervision, Inspection and Quarantine
(“AQSIQ”) announced an ongoing national campaign in China against unsafe food
and substandard products. The special campaign against poor product quality
was
launched in response to a series of safety scares involving Chinese products
worldwide. The campaign set 20 detailed goals, including twelve "100 percents".
For example, 100 percent of food producers should be licensed; 100 percent
of
agricultural wholesale markets in cities must be monitored; 100 percent of
suppliers of raw materials for exported products should be inspected; and 100
percent of agricultural products must be free of five types of strong
pesticides. The campaign, which was originally scheduled to finish at the end
of
2007, is currently scheduled to continue throughout 2008.
As
a
result of this campaign by the AQSIQ, there has been a general slow-down and
backlog of export clearances for Chinese food products, and, from August 2007
through the first quarter of 2008, we experienced significant delays in
obtaining export clearance for all of the products which we sell to our
international affiliates. Beginning in the second quarter of 2008, these export
restrictions were reduced for exports to countries in Africa and Asia, but
remained in place for exports to countries in Europe and the Americas. To
facilitate the export of our product in the future, in May 2008 we established
a
new subsidiary, Dongfeng Biological in Liaoyuan, Jilin Province. To date,
Dongfeng Biological has not yet conducted any operations.
For
the
six months ended June 30, 2008, international revenue was $17.9 million, a
decrease of 1.9% compared to $18.2 million for the same period in 2007. This
decrease reflects the impact of the export restrictions, which were introduced
in third quarter of 2007, on the first quarter of 2008, offset by the increase
in international revenue in the second quarter of 2008 due to a reduction on
the
export restrictions in that period.
Cost
of Sales
.
Cost of
sales for the second quarter of 2008 increased to $6.2 million, or by 39.3%,
compared to $4.5 million for the same period in 2007. This increase was in
line
with the increase in revenue for the period and was due to both the increase
in
sales and the increase in the value of the renminbi against the dollar. For
the
six months ended June 30, 2008, cost of sales was $10.2 million, an increase
of
15.2% compared to $8.9 million for the same period in 2007. Cost of sales for
the period increased at a greater rate than revenue primarily due to increases
in the costs of raw materials.
Gross
Profit
.
Gross
profit for the second quarter of 2008 was $13.5 million, an increase of 36.3%
compared to $9.9 million for the same period in 2007. For the six months ended
June 30, 2008, gross profit was $22.2 million, an increase of 2.6% compared
to
the same period in 2007. The gross profit margin for the second quarter of
2008
was 68.4%, compared to 68.9% for the same period in 2007. For the six months
ended June 30, 2008, the gross profit margin was 68.5% compared to 70.9% for
the
same period in 2007. This decrease reflects the increase in the cost of our
raw
materials while the price at which we sell our products has remained constant.
Selling,
general and administrative expenses
.
Selling, general and administrative expenses were $5.1 million for the second
quarter of 2008, an increase of 50.2% compared to $3.4 million for the same
period in 2007. The selling and administrative expenses as a percentage of
sales
was 25% for the second quarter of 2008 compared to 23.7% for the same period
in
2007. For the six months ended June 30, 2008, selling, general and
administrative expenses were $8.3 million, an increase of 25.3% compared to
$6.7
million in the same period in 2007. For the six months ended June 30, 2008,
selling, general and administrative expenses as a percentage of sales was 25.7%,
compared to 21.8% for the same period in 2007. This increase was primarily
due
to an increase in salary and insurance expenses, advertising, research and
development expenses, general administration expenses relating to the
construction of the Life Resources project, and the appreciation of the
renminbi.
Other
income (expense), net
.
Other
income (expense), net was $1.1 million of expense for the second quarter of
2008, compared to $0.4 million of income for the same period in 2007. The
difference was primarily due to a $1.2 million donation we made in June 2008
towards the Sichuan earthquake relief efforts. For the six months ended June
30,
2008, other income (expense), net was $0.6 of expense compared to $0.9 million
income for the same period in 2007. The difference was primarily due to interest
earned on a RMB200 million (or approximately $29.4 million) loan which we made
to Engineering and which was paid off in December 2007.
Provision
for income taxes
.
Provision for income taxes was $1.7 million for the second quarter of 2008
compared to $0.6 million for the same period in 2007. For the six months ended
June 30, 2008, provision for income taxes was $3.1 million compared to $1.3
million for the same period in 2007. From January 1, 2005 through December
31,
2007, Biological was subject to income tax at a reduced rate of 7.5%. Beginning
on January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
previous laws for Foreign Invested Enterprises (“FIEs”). A new standard EIT rate
of 25% will apply to 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 are not yet any detailed regulations
regarding the implementation of the new EIT and in the first and second quarters
of 2008, Biological was required by the local tax authority to prepay income
tax
at a tax rate of 25%.
Net
income
.
As a
result of the foregoing factors, and primarily the increase in general
administration expenses relating to the construction of the Life Resources
project, the increase in income tax rate, and the donation we made towards
the
Sichuan earthquake relief efforts, net income for the second quarter of 2008
was
$4.6 million, a decrease of 7.0% compared to $5.0 million for the same period
in
2007. For the six months ended June 30, 2008, net income was $8.3 million,
a
decrease of 28.3% compared to the same period in 2007.
Other
comprehensive income
.
Other
comprehensive income increased to $2.7 million for the second quarter of 2008,
compared to $2.4 million for the same period in 2007. Other comprehensive income
represents foreign currency translation adjustments for the year. Accumulated
other comprehensive income was recorded in Biological, Tiens Yihai and Life
Resources due to balance sheet translations. Accumulated other comprehensive
income was recorded in Tianshi Holdings due to the effect of foreign exchange
rate on dividend receivables from Biological. The amounts shown in the Income
Statement are net of minority interests. The sharp increase in other
comprehensive income was due to the increase in the value of the renminbi
against the dollar from RMB7.71 to $1 at June 30, 2007 to RMB6.87 to $1 at
June
30, 2008. For the six months ended June 30, 2008, other comprehensive income
was
$7.1 million, compared to $3.8 million for the same period in 2007.
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
used in operating activities was $1.1 million for the six months ended June
30,
2008, compared to net cash provided by operating activities of $9.9 million
for
the same period of 2007. The decrease reflects a decrease in net income of
$3.3
million in the two comparable periods. In addition, accounts receivable-related
parties increased by $8.9 million to $23.2 million as of June 30, 2008 from
$14.3 million as of December 31, 2007. This increase was primarily due to the
increase in revenue during the second quarter of 2008. Other receivable-related
parties decreased to $11.8 million as of June 30, 2008 from $13.9 million as
of
December 31, 2007.
As
of
June 30, 2008, we had positive working capital of $57.8 million. Cash was $47.7
million as of June 30, 2008, compared to $54.1 million as of December 31,
2007.
Net
cash
used in investing activities decreased by $9.0 million for the six months ended
June 30, 2008 compared to the same period of 2007. Net cash provided by
financing activities was $1.3 million for the six months ended June 30, compared
to $10.5 million for the same period of 2007. During the first six months of
2008, we received a loan from Tianshi Investment in the amount of $6.9 million
relating to Life Resources. During the same period in 2007, a capital
contribution of $18.0 million was provided to Life Resources by Tianshi
Investment, its parent company at that time.
Going
forward, our primary requirements for cash consist of:
|
o
|
construction
by Life Resources of new research and development, manufacturing
and
logistic facilities, and administrative
offices;
|
|
o
|
the
continued production of existing products and general overhead and
personnel related expenses to support these
activities;
|
|
o
|
the
development costs of new products;
and
|
|
o
|
expansion
of production scale to meet the demands of our
markets.
|
We
estimate that the completion of the Life Resources project will require
approximately $220 million, including the $64 million already spent to acquire
all of the registered share capital of Life Resources and $12 million spent
on
the project in the first six months of 2008. We intend to construct the
facilities in phases over several years, based on available cash and capacity
needs. Depending on the rate of construction and our cash flow, it is likely
that we will require additional financing in the future to complete the
long-term funding requirements of that project. However, we anticipate that
our
current operating activities will enable us to meet our anticipated cash
requirements, including the Life Resources project, for the next twelve
months.
Critical
Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations
are
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
.
The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products was recognized
at
FOB Tianjin shipping point. Revenue from finished products was recognized only
when the related party Chinese distributors recognize 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 only sells finished products. The Company recognizes
revenue from international sales (non-Chinese) to both affiliated and
unaffiliated third parties, net of value added 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. In accordance with SFAS No. 48, "Revenue Recognition when the Right
of
Return Exists", 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, no allowance for estimated returns has
been recorded as of June 30, 2008.
Bad
debts
.
Our
business operations are conducted primarily in China. During the normal course
of business, we extend unsecured credit to our customers, all of whom are
affiliated parties. Management reviews our accounts receivable on a regular
basis to determine if the bad debt allowance is adequate at each fiscal year
end. We record a provision for accounts receivable at 0.5% of our outstanding
accounts receivable balance.
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
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combination" (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets, the liabilities and any non-controlling interest in the
acquiree, and the goodwill acquired in business combination or a gain from
a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141R will
be effective in the first quarter of fiscal 2009. Management is evaluating
the
impact that this statement will have on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51" (“SFAS 160”).
SFAS 160 provides a guide on how to report non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve
the
relevance, comparability, and transparency of the financial information that
a
reporting entity provides in its consolidated financial statements. SFAS 160
will be effective in the first quarter of fiscal 2009. Management is evaluating
the impact that this statement will have on our consolidated financial
statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. The objective of SFAS 161 is to provide
adequate information about how derivative and hedging activities affect an
entity’s financial position, financial performance, and cash flows. SFAS 161
will be effective in the first quarter of fiscal 2009. The Company is evaluating
the impact that this statement will have on its consolidated financial
statements.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be
used
in the preparation of financial statements of nongovernmental entities that
are
presented in conformity with U.S. GAAP. SFAS 162 shall be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
(“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles”. The Company is
evaluating the impact that this statement will have on its consolidated
financial statements.
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS 163”). SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deteriorations has occurred in an
insured financial obligation. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The adoption of
SFAS
163 will not have a material impact on the Company’s consolidated financial
statements.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
market
all of our products through various domestic and international business entities
that are related to us through common ownership. As a result, all of our
consolidated sales are to related parties.
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 the
Company’s 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 to overseas related companies located in 52 countries,
which in turn sell them to independent direct sales distributors. 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 us.
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Accounts receivable, trade - related
parties, net of allowance for doubtful accounts of $109,415 and $71,700
as
of June 30, 2008 and December 31, 2007, respectively
|
|
$
|
23,176,490
|
|
$
|
14,268,229
|
|
Other
receivables - related parties
|
|
$
|
11,844,719
|
|
$
|
13,887,138
|
|
Advances
from customers - related parties
|
|
$
|
2,493,135
|
|
$
|
1,700,838
|
|
Other
payables - related parties
|
|
$
|
7,437,449
|
|
$
|
7,938,205
|
|
Current
portion of long-term debt - related party
|
|
$
|
2,130,000
|
|
$
|
2,130,000
|
|
Long
term debt - related party
|
|
$
|
3,202,742
|
|
$
|
4,267,742
|
|
Revenue
- Related Parties
The
details of revenue-related parties are as follows:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Tianshi Engineering
|
|
$
|
8,509,932
|
|
$
|
5,137,313
|
|
$
|
14,615,711
|
|
$
|
12,347,614
|
|
Overseas Related Companies
|
|
|
11,144,515
|
|
|
9,183,169
|
|
|
17,859,557
|
|
|
18,209,657
|
|
Total
|
|
$
|
19,654,447
|
|
$
|
14,320,482
|
|
$
|
32,475,268
|
|
$
|
30,557,271
|
|
Accounts
Receivable, Trade - Related Parties
The
details of accounts receivables, trade-related parties are as
follows:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Tianshi Engineering
|
|
$
|
4,945,115
|
|
$
|
2,062,333
|
|
Overseas
Related Companies
|
|
|
18,340,790
|
|
|
12,277,596
|
|
Allowance
for Doubtful Accounts
|
|
|
(109,415
|
)
|
|
(71,700
|
)
|
Total
|
|
$
|
23,176,490
|
|
$
|
14,268,229
|
|
Accounts
receivables-related parties increased from December 31, 2007 as a result of
the
increase in revenue, which was greatest in the second quarter of
2008.
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 details of other
receivables-related parties are as follows:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Tianshi Engineering
|
|
$
|
10,973,059
|
|
$
|
9,460,811
|
|
Tianshi
Group
|
|
|
838,605
|
|
|
2,347,489
|
|
Tianjin
Xingda Travel Co., Ltd
|
|
|
15,718
|
|
|
1,939
|
|
Beijing
Xingda Travel Co., Ltd
|
|
|
7,925
|
|
|
5,959
|
|
Tianshi
Pharmaceuticals
|
|
|
3,207
|
|
|
5,065
|
|
Shanghai
Tianshi Jinquan Investment Co.
|
|
|
3,083
|
|
|
874
|
|
Shengshi
Real Estate Development
|
|
|
2,047
|
|
|
2,238
|
|
Shanghai
Gujia
|
|
|
1,075
|
|
|
-
|
|
Xiongshi
Construction
|
|
|
-
|
|
|
2,062,763
|
|
Total
|
|
$
|
11,844,719
|
|
$
|
13,887,138
|
|
Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, in order to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, we have agreed
to
allow Tianshi Engineering to defer payment to us. The credit terms provide
an
interest-free credit term of three months. Balances not remitted to us within
90
days are converted to other receivables - related parties. Beginning on 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.
We
and
Tianshi Group used 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 are reimbursed by
Tianshi Group. These pro-rated amounts relating to Tianshi Group are categorized
as other receivables - related parties. In addition, during 2006 we were owed
other receivables-related parties in the amount of RMB 7,560,000 ($1,033,603)
from Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party
owned by Jinyuan Li. On March 31, 2006, Juchao declared termination of its
operations, and all of its rights and liabilities were transferred to Tianshi
Group. This amount was also included in other receivables - related parties
as
of December 31, 2007.
Advances
from Customers - Related Parties
Advances
from related party customers were $2.5 million and $1.7 million as of June
30,
2008 and December 31, 2007, respectively. These advances represented prepayments
made to us to insure that overseas 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:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Tianshi
Investment
|
|
$
|
6,708,852
|
|
$
|
7,490,136
|
|
Tianshi
Group
|
|
|
526,181
|
|
|
-
|
|
Tianshi
Germany Co., Ltd
|
|
|
118,043
|
|
|
109,233
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
84,359
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
14
|
|
|
13
|
|
Tianshi
Pharmaceuticals
|
|
|
-
|
|
|
9,308
|
|
Tianshi
Shanghai Co., Ltd
|
|
|
-
|
|
|
176
|
|
Tianshi
Engineering
|
|
|
-
|
|
|
244,980
|
|
Total
|
|
$
|
7,437,449
|
|
$
|
7,938,205
|
|
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
December 21, 2007, the Company, Tianshi Investment and Life Resources entered
a
Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million to
Life
Resources without interest. The Company agreed to repay the $7.5 million to
Tianshi Investment within five days of the date of the government approval
of
the transfer of the shares of Life Resources to Tianshi Holdings. On March
13,
2008, the Chinese government approved the transfer and the Company repaid $7.5
million to Tianshi Investment on March 18, 2008 by canceling $7.5 million of
accounts receivable owed to it by Tianshi Engineering.
On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement pursuant to which Tianshi Investment provided a loan to Life Resources
for $6.5 million without interest. The loan was due on June 30, 2008. On June
30, 2008, the parties agreed to extend the loan until December 31, 2008. Life
Resources used the loan to increase its registered share capital.
Long
Term Debt - Related Party
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 aggregate principal amount) to Tianshi
Holdings, at an interest rate of 5% per year, with interest payable on June
30
and December 31, commencing December 31, 2004. Tianshi Holdings must repay
the
loan in ten consecutive semi-annual installments of $1,065,000 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.
Other
Transactions with Tianshi Engineering
On
December 31, 2005, Biological entered into four lease agreements with Tianshi
Engineering which enabled 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, for one year
beginning January 1, 2006. These four lease agreements were renewed in December
2006 for the 2007 fiscal year and on October 17, 2007 for the 2008 fiscal year.
Rent revenue from these leases amounted to $160,929 and $187,275 for the six
months ended June 30, 2008 and 2007, respectively.
Other
Transactions with Tianshi Group
Since
2003, Biological has leased office space and manufacturing facilities from
Tianshi Group. The lease provides for an annual rent equal to 1% of our total
gross revenues. The rent was negotiated by the parties before we acquired
Tianshi Holdings, and we believe that it is a reasonable rent for the
facilities. The term of the lease was for five years and expired on December
31,
2007. In addition, we are obligated to pay insurance, maintenance and other
expenses related to the premises. We entered into a new one-year lease agreement
with Tianshi Group, effective January 1, 2008 covering the same facilities
and
having identical rent terms. The total amount paid on this lease for six months
ended June 30, 2008 and 2007 was $399,632 and $319,832,
respectively.
Transactions
with Tianshi Investments
On
December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement
with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the
Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the
registered share capital of Life Resources from Tianshi Investment for
RMB474,674,415 ($64,247,182). The closing of the transaction was subject to
government approval of the transfer of Life Resources to Tianshi Holdings.
On
March 13, 2008, the government approved the transfer.
Pursuant
to the Sale and Purchase Agreement, we advanced a deposit of $64,247,182 to
Tianshi Investment on December 20, 2007. This acquisition deposit was settled
as
follows:
|
o
|
$28,592,743
was paid by canceling a loan in the principal amount of RMB200,000,000
to
Tianshi Engineering owned by Biological together with interest
accrued;
|
|
o
|
$16,557,914
was paid by canceling of other receivable owned by Tianshi Engineering
to
Biological; and
|
|
o
|
$19,096,525
was paid in cash.
|
On
December 21, 2007, Tianshi Holdings and Tianshi Investment entered into a
Capital Contribution Agreement, pursuant to which Tianshi Investment agreed
to
fund a capital increase of Life Resources in the amount of $7.5 million. Tianshi
Holdings agreed to pay back the $7.5 million to Tianshi Investment within five
days of the date of the government approval of the transfer of the shares of
Life Resources to Tianshi Holdings. The approval was received on March 13,
2008
and the $7.5 million was paid back on March 18, 2008, by canceling $7.5 million
of accounts receivable owed to us by Tianshi Engineering.
On
January 14, 2008, Tianshi Holdings and Tianshi Investment entered into a loan
agreement pursuant to which Tianshi Holdings loaned Tianshi Investment $4.1
million without interest. The loan was required to be used by Tianshi Investment
to increase the registered share capital of Life Resources. The loan was due
on
March 31, 2008, provided however, that if the government approved the transfer
of the shares of Life Resources to Tianshi Holdings prior to that date, the
loan
would be cancelled, as Life Resources would then be a wholly-owned subsidiary
of
Tianshi Holdings. The approval was received on March 13, 2008, and therefore,
the loan was cancelled on the same date.
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 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 it, or at all.
OFF-BALANCE
SHEET ARRANGEMENTS
We
have
no off-balance sheet arrangements.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECTS
OF INFLATION
We
are
subject to commodity price risks arising from price fluctuations in the market
prices of the various raw materials that comprise our products. Price risks
are
managed by each business unit through productivity improvements and
cost-containment measures. For the time being, management does not believe
that
inflation risk is material to our business or our consolidated financial
position, results of operations or cash flows.
EFFECT
OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our
operating subsidiary, Biological, is located in China, and buys all of its
raw
materials in China and sells our products in China using the renminbi as the
functional currency. Based on Chinese government regulations, all foreign
currencies under the category of current accounts are allowed to be freely
exchanged with hard currencies. As of June 30, 2008, the exchange rate was
$1 =
RMB 6.87 compared to $1 = RMB 7.31 as of December 31, 2007.
Substantially
all our revenues and expenses are denominated in the renminbi. However, we
use
the dollar for financial reporting purposes. The value of renminbi against
the
dollar and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. As our operations
are primarily in China, any significant revaluation of the renminbi may
materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert dollars into
renminbi for our operations, appreciation of this currency against the dollar
could have a material adverse effect on our business, financial condition and
results of operation. Conversely, if we decide to convert our renminbi into
dollars for other business purposes and the dollar appreciates against this
currency, the dollar equivalent of the renminbi would be reduced.
Given
the
uncertainty of exchange rate fluctuations, we cannot estimate the effect of
these fluctuations on our future business, product pricing, results of
operations or financial condition. Currently we have not entered agreements
or
purchased instruments to hedge our exchange rate risks, although we may do
so in
the future.
ITEM
4.
CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
Under
the
supervision and with the participation of management, including our chief
executive officer and the chief financial officer, we conducted an evaluation
of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of the end of the period covered by this report (the
“Evaluation Date”). Based on this evaluation, our chief executive officer and
chief financial officer concluded as of the Evaluation Date that our disclosure
controls and procedures were effective such that the material information
required to be included in our Securities and Exchange Commission (“SEC”)
reports is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms relating to our company, including our
consolidating subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being
prepared.
Changes
in Internal Control Over Financial Reporting
There
has
been no change in our internal control over financial reporting during the
second quarter of 2008 that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1A.
RISK
FACTORS
Our
2007
Annual Report on Form 10-K includes a detailed discussion of our risk factors.
The information presented below updates those risk factors and should be read
in
conjunction with the risk factors and information disclosed in that Form
10-K.
A
RECENT CAMPAIGN IMPOSED BY THE CHINESE GOVERNMENT AGAINST THE EXPORT OF UNSAFE
FOOD AND SUBSTANDARD PRODUCTS, IS HINDERING OUR ABILITY TO EXPORT OUR PRODUCTS
INTERNATIONALLY.
In
August
2007, China’s Administration of Quality Supervision, Inspection and Quarantine
(“AQSIQ”) announced an ongoing national campaign in China against unsafe food
and substandard products. The special campaign against poor product quality
was
launched in response to a series of safety scares involving Chinese products
worldwide. The campaign set 20 detailed goals, including twelve "100 percents".
For example, 100 percent of food producers should be licensed; 100 percent
of
agricultural wholesale markets in cities must be monitored; 100 percent of
suppliers of raw materials for exported products should be inspected; and 100
percent of agricultural products must be free of five types of strong
pesticides. The campaign, which was originally scheduled to finish at the end
of
2007, is currently scheduled to continue throughout 2008.
As
a
result of this campaign by the AQSIQ, there has been a general slow-down and
backlog of export clearances for Chinese food products, and from August 2007
through the first quarter of 2008, we experienced significant delays in
obtaining export clearance for all of the products which we sell to our
international affiliates. Beginning in the second quarter of 2008, these export
restrictions were reduced for exports to countries in Africa and Asia, but
remained in place for exports to countries in Europe and the Americas. To
facilitate the export of our products, in May 2008 we established a new
subsidiary, Dongfeng Biological, in Liaoyuan, Jilin Province. To date, Dongfeng
Biological has not conducted any operations. The Company is evaluating whether
to use Dongfeng Biological in the future to address the export
restrictions.
We
believe that these restrictions have resulted in some of our international
affiliates not being able to purchase sufficient quantities of our products
to
meet their demand, resulting in a loss of sales. Continued delays in the export
clearance for our products may continue to result in us not being able to meet
the demand for our products from our international affiliates and future loss
of
sales. Currently we are not able to provide an estimate as to the timing for
the
clearance of our products for export.
UNCERTAINTY
IN THE DEVELOPMENT OF DIRECT SELLING REGULATIONS MAY ADVERSELY AFFECT SALES
OF
OUR PRODUCTS IN CHINA.
Substantially
all of our assets are located in China, and approximately 56.0%, 40.5% and
40.9%
of our revenues in 2005, 2006 and 2007, respectively, were derived from our
operations in China. Accordingly, our operations are subject, to a significant
degree, to Chinese law. In China, we are aiming to expand our market share
through the branches, chain stores, and affiliated companies of Tianshi
Engineering, our affiliate who sells our products in China. Because direct
selling was only recently authorized in China, the regulatory environment with
respect to direct selling in this market remains fluid and the process for
obtaining the necessary governmental approvals have been interpreted differently
by different governmental authorities. The direct selling regulations require
Tianshi Engineering to apply for approval to conduct a direct selling enterprise
in China.
Tianshi
Engineering has applied for a direct selling license in a number of provinces
and must obtain a series of approvals from the Departments of Commerce in such
provinces, as well as the Departments of Commerce in each city and district
in
which we plan to operate. Tianshi Engineering is also required to obtain the
approval of the State Ministry of Commerce, which is the national government
authority overseeing direct selling.
Tianshi
Engineering has found that it is taking more time than anticipated to work
through the approval process with the Chinese authorities. These authorities
have broad discretion in interpreting the regulations and granting necessary
approvals. A delay in obtaining approvals at one level can delay our ability
to
obtain approvals at the next level. The complexity of the approval process
as
well as the government’s continued cautious approach as direct selling develops
in China makes it difficult to predict a timeline for obtaining these approvals.
If Tianshi Engineering does not receive a direct selling license in China,
then
its ability to compete against its competitors who have received such a license
may be hurt. As a result, Tianshi Engineering may lose distributors who find
a
competitor’s direct selling business and compensation model more attractive.
This could materially decrease the revenue that we receive from sales by Tianshi
Engineering in China.
ITEM
6.
EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
10.1
|
|
Agreement
dated April 9, 2008 by and between Tianshi International Holdings
Group
Limited, Tianshi International Investment Group Co., Ltd., Tianjin
Tianshi
Biological Development Co., Ltd, and Tianjin Tianshi Biological
Engineering Co., Ltd.
|
|
|
|
10.2
|
|
Loan
Agreement Amendment dated June 30, 2008 by and between Tianshi
International Investment Group Co., Ltd. and Tianjin Tiens Life Resources
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
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date:
August 14, 2008
|
|
|
|
|
/s/
Jinyuan Li
|
|
|
|
Jinyuan
Li
|
|
Chief
Executive Officer and President
|
|
(Principal
Executive Officer)
|
|
|
Date:
August 14, 2008
|
|
|
|
|
/s/
Wenjun Jiao
|
|
|
|
Wenjun
Jiao
|
|
Chief
Financial Officer
|
|
(Principal
Accounting Officer)
|
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