UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended September 30, 2010.
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: 001-32477
TIENS
BIOTECH GROUP (USA), INC.
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
75-2926439
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
|
|
No. 17,
Xinyuan Rd.
Wuqing
New Tech Industrial Park
Tianjin, China
301700
(Address
of principal executive offices) (Zip Code)
+86-22-8213-7914
(Registrant’s
telephone number, including area code)
No. 6,
Yuanquan Rd.
Wuqing
New Tech Industrial Park
Tianjin, China
301700
(Former
address)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
¨
|
Accelerated
Filer
¨
|
Non-Accelerated
Filer
¨
(Do not check if a smaller
reporting company)
|
Smaller
Reporting Company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
x
There
were 71,333,586 shares of the registrant’s common stock outstanding on November
12, 2010.
TIENS
BIOTECH GROUP (USA), INC.
INDEX
TO FORM 10-Q
|
|
PAGE
|
PART
I - FINANCIAL INFORMATION
|
|
3
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
3
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2010 (Unaudited) and December 31,
2009
|
|
3
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Three and Nine
Months Ended September 30, 2010 and 2009 (Unaudited)
|
|
4
|
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
2009 (Unaudited)
|
|
5
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
|
6
|
|
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
|
24
|
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
32
|
|
|
|
ITEM
4T. CONTROLS AND PROCEDURES
|
|
33
|
|
|
|
PART
II - OTHER INFORMATION
|
|
33
|
|
|
|
ITEM
6. EXHIBITS
|
|
33
|
PART
I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
7,632,304
|
|
|
$
|
1,848,328
|
|
Accounts
receivable, trade - related parties, net of allowance for doubtful
accounts of $1,538,200 and $1,419,178 as of September 30, 2010 and
December 31, 2009, respectively
|
|
|
10,795,741
|
|
|
|
15,379,312
|
|
Inventories
|
|
|
5,287,668
|
|
|
|
5,328,052
|
|
Other
receivables
|
|
|
1,256,939
|
|
|
|
995,657
|
|
Other
receivables - related parties
|
|
|
45,040,773
|
|
|
|
44,561,626
|
|
Employee
advances
|
|
|
114,444
|
|
|
|
115,673
|
|
Prepaid
expenses, net of allowance for doubtful accounts of $1,039,643 and
$1,018,474 as of September 30, 2010 and December 31, 2009,
respectively
|
|
|
431,442
|
|
|
|
658,193
|
|
Prepaid
taxes
|
|
|
3,001,473
|
|
|
|
407,534
|
|
Total
current assets
|
|
|
73,560,784
|
|
|
|
69,294,375
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
9,910,704
|
|
|
|
10,124,483
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
170,971,153
|
|
|
|
125,572,621
|
|
Construction
deposits
|
|
|
8,250,520
|
|
|
|
1,405,997
|
|
Intangible
assets, net
|
|
|
12,898,229
|
|
|
|
12,864,295
|
|
Other
assets
|
|
|
13,507,370
|
|
|
|
11,847,937
|
|
Total
other assets
|
|
|
205,627,272
|
|
|
|
151,690,850
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
289,098,760
|
|
|
$
|
231,109,708
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
6,350,030
|
|
|
$
|
5,012,157
|
|
Advances
from customers - related parties
|
|
|
13,045,749
|
|
|
|
4,426,751
|
|
Wages
and benefits payable
|
|
|
808,228
|
|
|
|
1,484,852
|
|
Short-term
debt - related party
|
|
|
8,958,000
|
|
|
|
-
|
|
Income
taxes payable
|
|
|
570,185
|
|
|
|
-
|
|
Contractor
deposits
|
|
|
204,451
|
|
|
|
183,395
|
|
Contractor
payables
|
|
|
35,554,584
|
|
|
|
18,513,216
|
|
Other
payables
|
|
|
1,164,677
|
|
|
|
1,151,551
|
|
Other
payables - related parties
|
|
|
15,630,625
|
|
|
|
3,326,110
|
|
Total
current liabilities
|
|
|
82,286,529
|
|
|
|
34,098,032
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
|
11,470,050
|
|
|
|
11,236,501
|
|
Total
non current liabilities
|
|
|
11,470,050
|
|
|
|
11,236,501
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
93,756,579
|
|
|
|
45,334,533
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
|
|
|
Shareholders'
equity of the Company:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 250,000,000 shares authorized, 71,333,586
issued and outstanding, respectively
|
|
|
71,334
|
|
|
|
71,334
|
|
Paid-in-capital
|
|
|
18,271,518
|
|
|
|
18,042,189
|
|
Statutory
reserves
|
|
|
16,465,144
|
|
|
|
13,217,217
|
|
Retained
earnings
|
|
|
128,490,119
|
|
|
|
126,370,263
|
|
Accumulated
other comprehensive income
|
|
|
21,394,864
|
|
|
|
18,262,123
|
|
Total
shareholders' equity of the Company
|
|
|
184,692,979
|
|
|
|
175,963,126
|
|
Noncontrolling
interest
|
|
|
10,649,202
|
|
|
|
9,812,049
|
|
Total
equity
|
|
|
195,342,181
|
|
|
|
185,775,175
|
|
Total
liabilities and equity
|
|
$
|
289,098,760
|
|
|
$
|
231,109,708
|
|
The
accompanying notes are an integral part of this statement.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 and 2009 (UNAUDITED)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
10,381,886
|
|
|
$
|
9,439,739
|
|
|
$
|
29,953,098
|
|
|
$
|
48,228,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
4,145,014
|
|
|
|
3,144,650
|
|
|
|
10,623,742
|
|
|
|
14,997,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
6,236,872
|
|
|
|
6,295,089
|
|
|
|
19,329,356
|
|
|
|
33,231,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,060,812
|
|
|
|
2,916,202
|
|
|
|
11,627,456
|
|
|
|
10,061,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
2,176,060
|
|
|
|
3,378,887
|
|
|
|
7,701,900
|
|
|
|
23,169,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(117,165
|
)
|
|
|
(40,363
|
)
|
|
|
(117,165
|
)
|
|
|
(146,180
|
)
|
Interest
income
|
|
|
2,523
|
|
|
|
76,154
|
|
|
|
8,241
|
|
|
|
262,701
|
|
Other
income (expense)
|
|
|
120,665
|
|
|
|
(16,122
|
)
|
|
|
(551,305
|
)
|
|
|
(89,554
|
)
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
6,023
|
|
|
|
19,669
|
|
|
|
(660,229
|
)
|
|
|
26,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
2,182,083
|
|
|
|
3,398,556
|
|
|
|
7,041,671
|
|
|
|
23,196,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
319,776
|
|
|
|
544,688
|
|
|
|
1,067,899
|
|
|
|
1,027,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
1,862,307
|
|
|
$
|
2,853,868
|
|
|
$
|
5,973,772
|
|
|
$
|
22,169,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
Net income attributable to the noncontrolling interest
|
|
|
(141,849
|
)
|
|
|
(617,638
|
)
|
|
|
(605,989
|
)
|
|
|
(1,163,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY
|
|
|
1,720,458
|
|
|
|
2,236,230
|
|
|
|
5,367,783
|
|
|
|
21,005,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
2,826,688
|
|
|
|
182,028
|
|
|
|
3,951,957
|
|
|
|
406,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
4,547,146
|
|
|
|
2,418,258
|
|
|
|
9,319,740
|
|
|
|
21,412,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
|
|
|
312,353
|
|
|
|
11,390
|
|
|
|
819,216
|
|
|
|
25,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY
|
|
$
|
4,234,793
|
|
|
$
|
2,406,868
|
|
|
$
|
8,500,524
|
|
|
$
|
21,386,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
The
accompanying notes are an integral part of this statement.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,973,772
|
|
|
$
|
22,169,036
|
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
88,205
|
|
|
|
(902,297
|
)
|
Depreciation
|
|
|
1,172,597
|
|
|
|
1,662,206
|
|
Amortization
|
|
|
252,075
|
|
|
|
291,418
|
|
Interest
expense
|
|
|
117,165
|
|
|
|
(9,357
|
)
|
Gain
on sale of assets
|
|
|
(43,377
|
)
|
|
|
(14,846
|
)
|
Rental
expense borne by a related party
|
|
|
246,623
|
|
|
|
-
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade - related parties
|
|
|
4,742,772
|
|
|
|
10,678,476
|
|
Other
receivables
|
|
|
(237,041
|
)
|
|
|
(121,058
|
)
|
Other
receivables - related parties
|
|
|
(92,265
|
)
|
|
|
(1,306,527
|
)
|
Inventories
|
|
|
166,337
|
|
|
|
2,801,809
|
|
Employee
advances
|
|
|
3,579
|
|
|
|
(80,873
|
)
|
Prepaid
expense
|
|
|
236,536
|
|
|
|
(336,620
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,195,483
|
|
|
|
(1,687,613
|
)
|
Advances
from customers - related parties
|
|
|
8,401,340
|
|
|
|
808,830
|
|
Wages
and benefits payable
|
|
|
(697,018
|
)
|
|
|
(768,334
|
)
|
Deferred
income taxes
|
|
|
217,131
|
|
|
|
-
|
|
Other
taxes payable
|
|
|
(2,202,718
|
)
|
|
|
(31,337
|
)
|
Other
payables
|
|
|
(8,613
|
)
|
|
|
(176,274
|
)
|
Other
payables - related parties
|
|
|
13,972,418
|
|
|
|
(76,484
|
)
|
Net
cash provided by operating activities
|
|
|
33,505,001
|
|
|
|
32,900,155
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from disposal of a subsidiary
|
|
|
700,000
|
|
|
|
-
|
|
Collections
from loans to local government
|
|
|
-
|
|
|
|
105,208
|
|
Construction
deposits
|
|
|
(6,381,248
|
)
|
|
|
(3,465,755
|
)
|
Contractor
deposits
|
|
|
16,990
|
|
|
|
85,498
|
|
Addition
to construction in progress
|
|
|
(37,556,932
|
)
|
|
|
(26,936,754
|
)
|
Equipment
deposits
|
|
|
(1,414,417
|
)
|
|
|
(8,700,872
|
)
|
Proceeds
from sales of properties
|
|
|
2,668,075
|
|
|
|
17,041
|
|
Purchase
of equipment and automobiles
|
|
|
(742,954
|
)
|
|
|
(1,755,815
|
)
|
Net
cash used in investing activities
|
|
|
(42,710,486
|
)
|
|
|
(40,651,449
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Loan
from (repayment to) related parties
|
|
|
14,826,000
|
|
|
|
(3,946,050
|
)
|
Increase
in paid in capital
|
|
|
-
|
|
|
|
245,030
|
|
Net
cash provided by (used in) financing activities
|
|
|
14,826,000
|
|
|
|
(3,701,020
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
163,461
|
|
|
|
100,433
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
5,783,976
|
|
|
|
(11,351,881
|
)
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
1,848,328
|
|
|
|
44,854,511
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
7,632,304
|
|
|
$
|
33,502,630
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
105,817
|
|
Income
taxes
|
|
$
|
993,857
|
|
|
$
|
871,764
|
|
The
accompanying notes are an integral part of this statement.
Note
1 - Background
Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.
The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO, President and Acting Chief Financial
Officer. The Company owns 100% of Tianshi International Holdings Group Limited
("Tianshi Holdings"). Tianshi Holdings owns 80% of Tianjin Tianshi Biological
Development Co., Ltd. ("Biological") and 100% of Tianjin Tiens Life Resources
Co., Ltd. (“Life Resources”).
Nature of
o
perations
The
Company through its subsidiaries is primarily engaged in the manufacturing of
nutritional supplement products, including wellness products and dietary
supplement products. In the People’s Republic of China (“PRC”), the Company
sells its products to Tianjin Tianshi Biological Engineering Co. Ltd. (“Tianshi
Engineering”), a Chinese company. Tianshi Engineering, in turn, sells the
products to customers through its branches and affiliated companies and at chain
stores which are owned by individual distributors. Tianshi Engineering is 100%
owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”). Tianshi
Group is 90% owned by Jinyuan Li and 10% owned by Baolan Li, Jinyuan Li’s
daughter, who is a member of the Company’s Board of Directors. Outside the PRC,
the Company sells its products to overseas affiliated companies located in 54
countries who in turn re-package them and sell to independent direct sales
distributors.
Note
2 – Summary of significant accounting policies
Basis
of
presentation
The
financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). These Consolidated Financial Statements for interim
periods are unaudited. In the opinion of management, the consolidated financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation
.
The results reported in
these Consolidated Financial Statements are not necessarily indicative of the
results that may be reported for the entire year. The accompanying consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and do not include all
information and footnotes necessary for a complete presentation of financial
statements in conformity with U.S. GAAP. These Consolidated Financial Statements
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009, filed with the Securities and Exchange
Commission on April 2, 2010.
The reporting
entity
The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
Subsidiary
|
|
Jurisdiction of Formation
|
|
% Ownership
|
|
Tianshi
Holdings
|
|
British
Virgin Islands
|
|
|
100.0
|
%
|
Biological
|
|
P.R.C.
|
|
|
80.0
|
%
|
Life
Resources
|
|
P.R.C.
|
|
|
100.0
|
%
|
Principles of
consolidation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances are eliminated in consolidation.
Use of
estimates
In
preparing financial statements in conformity with U.S. GAAP, the Company makes
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and sales and expenses
during the reported periods. Significant estimates include useful life of
long lived assets, provision for bad debt, allowance for sales returns and
provision for prepaid expenses. Management bases its estimates on
historical experience and on various other assumptions that they believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
from those estimates.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. Biological and Life
Resources’ financial records are maintained and the statutory financial
statements are stated in its local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are translated at
the unified exchange rate as quoted by OANDA.com at the end of each
reporting period. Translation adjustments resulting from this process are
included in other comprehensive income in the statement of income and other
comprehensive income.
Translation
adjustments amounted to $3,951,956 and $1,570,553 for the nine months ended
September 30, 2010 and 2009, respectively. Asset and liability accounts at
September 30, 2010 were translated at RMB 6.70 to $1.00 compared
to RMB 6.84 at September 30, 2009. Equity accounts are stated at
their historical rate. The average translation rates applied to income statement
accounts for the nine months ended September 30, 2010 and 2009 were
RMB 6.80 and RMB 6.84, respectively. Cash flows are also translated at
average translation rates for the period. Therefore, amounts reported on the
statements of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheets.
Fair value of
financial
instruments
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants at the
measurement date. Fair value hierarchy prioritizes the inputs used in measuring
fair value into three broad levels as follows:
•
Level one — Quoted market prices in active markets for
identical assets or liabilities;
•
Level two — Inputs other than level one inputs that are either directly or
indirectly observable; and
•
Level three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions that a
market participant would use.
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company's financial instruments consist primarily of
cash, trade accounts receivable, trade payables, advances, and other
receivables. The carrying amounts of the Company's financial instruments
generally approximate their fair values at September 30, 2010 and December 31,
2009.
Cash
Cash
includes cash on hand and demand deposits in accounts maintained with banks of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on its cash in bank accounts.
Accounts
receivable
The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties’ ability to collect their
receivables and a general allowance for doubtful accounts of 0.5% of the
remaining accounts receivable-related parties. Management reviews its accounts
receivable on a regular basis to determine if the provision for doubtful
accounts is adequate, paying particular attention to the age of receivables
outstanding. At September 30, 2010 and December 31, 2009, there were no
receivables due from Tianshi Engineering outstanding more than 90 days. At
September 30, 2010 and December 31, 2009, receivables due from overseas related
companies outstanding more than 180 days totaled $5,709,664
and
$3,481,334, respectively. The Company did not incur any losses on receivables
for the periods reported. The following table represents the changes in the
allowance for doubtful accounts:
|
|
Provision
for
Doubtful
Accounts
|
|
Nine
month period ended September 30, 2010
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,419,178
|
|
Increase
in provision for Doubtful Accounts
|
|
|
119,022
|
|
Balance
at End of Period
|
|
$
|
1,538,200
|
|
|
|
|
|
|
Nine
month period ended September 30, 2009
|
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,108,789
|
|
Decrease
of provision for Doubtful Accounts
|
|
|
(900,254
|
)
|
Balance
at End of Period
|
|
$
|
208,535
|
|
Inventories
Inventories
are stated at the lower of cost or market using the moving average basis. The
Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence.
Employee
advances
Employee
advances represent cash advances to various employees of the Company. In the
PRC, a majority of business transactions are completed in cash. These cash
advances represent monies advanced to certain employees to pay for various
expenses and purchases related to the Company's daily operations.
Prepaid
expenses
Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
Company reviews its advances to suppliers annually to determine whether
provisions should be made. The amount included in prepaid expenses is net of any
provisions. Provisions for prepaid expenses are as follows:
|
|
Provision
for
Doubtful
Accounts
|
|
Nine
month period ended September 30, 2010
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,018,474
|
|
Increase
in provision for Doubtful Accounts
|
|
|
21,169
|
|
Balance
at End of Period
|
|
$
|
1,039,643
|
|
|
|
|
|
|
Nine
month period ended September 30, 2009
|
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
952,071
|
|
Increase
in provision for Doubtful Accounts
|
|
|
2,284
|
|
Balance
at End of Period
|
|
$
|
954,355
|
|
Prepaid
tax
e
s
Prepaid
taxes consist of payments of value added tax (“VAT”) to the Chinese government
related to the purchase of new production equipment. Effective January 1, 2009,
the Chinese government allows VAT amounts paid on new production equipment to be
used to offset future VAT liabilities, in order to encourage
investment.
Property, plant and
equipment, net
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of the assets are as
follows:
|
Estimated
Useful
Life
|
Buildings
and improvements
|
20
years
|
Machinery
and equipment
|
10
years
|
Computer,
office equipment and furniture
|
5
years
|
Automobiles
|
5
years
|
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts, and any gain or loss is included in the
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expense as incurred. Major
additions and betterments to buildings and equipment are
capitalized.
Constructio
n 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 relev
ant assets are completed and are ready
for their intended use.
In October
2010, a portion of the Company's facilities moved to the newly constructed plant
facilities. Approximately $43,000,000 of construction in progress was
transferred to fixed assets at that time. Depreciation of those assets began in
November 2010.
Construction
deposits
Construction
deposits represent advances paid by the Company to contractors for construction
in progress.
Intangible
assets
Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. However, the
government grants "land use rights" for a specified period of time. The Company
amortizes its land use rights according to the actual useful life of 50 years.
Other intangible assets include patents and trademarks and are amortized over
their estimated useful lives ranging from five to ten years.
Other
assets
Other
assets consist of deposits made to purchase equipment and a long-term
prepaid expense. The Company will transfer the deposits made to purchase
equipment from other assets to property, plant and equipment upon taking
ownership. The Company amortizes its long-term prepaid expense according to the
service period. Amortization expense for the nine months ended
September 30, 2010 and 2009 amounted to $22,065 and $62,508,
respectively, and $7,434 and $11,390 for the three months ended September
30, 2010 and 2009, respectively.
Impairment of long-lived
assets
Long-lived
assets, including intangible assets, of the Company are reviewed annually as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
Deferred
income
Deferred
income consists of government grants. On August 2, 2005 and November 20, 2006,
the Company received two government grants related to the purchase of land use
rights in the amount of RMB 35,803,461 (or U.S. $5,258,454). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or U.S. $6,024,910) for the zoning changes
to one parcel of land on which the land use rights were changed from
“industrial” to “educational”. On September 12, 2008, the Company received RMB
41,022,061 (or U.S. $6,024,910) from a government grant. The grants are treated
as deferred income and will be amortized over the life of the buildings on the
land.
Noncontrolling
interest
Noncontrolling
interest represents the outside shareholder’s 20% ownership of
Biological.
Revenue
recognition
The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products is recognized at
delivery point. Revenue from finished products is recognized only when the
related party Chinese distributors 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 sells mostly finished products. The Company
recognizes revenue from international sales (non-Chinese) to affiliated parties,
net of taxes, as goods are shipped and clear review by the customs department of
the Chinese government.
The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. Revenue is recorded net of an allowance for estimated returns. Such
reserves are based upon management's evaluation of historical experience and
estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns of
products during the past three years, and management does not anticipate
allowing any returns in 2010 related to previous revenues, no allowance for
estimated returns has been recorded as of September 30, 2010 and December 31,
2009.
Advertising
c
osts
The
Company sells its products to related parties, and these related parties are
primarily responsible for marketing. Advertising costs of the Company for the
nine months ended September 30, 2010 and 2009 amounted to $13,092 and $6,211,
respectively, and for the three months ended September 30, 2010 and 2009
amounted to $6,289 and $0, respectively, and were expensed as
incurred.
Shipping and
h
andling
Shipping
and handling costs totaled $279,651 and $314,194 for the nine months
ended September 30, 2010 and 2009, respectively, and $87,015 and $71,422 for the
three months ended September 30, 2010 and 2009, respectively. The Company sells
products on FOB condition, however, it usually prepays shipping and handling
expenses to transportation companies on behalf of customers and collects these
shipping and handling expenses when it receives payments from customers. The
payments received from customers are included in revenue and the related
shipping and handling costs are included in selling, general and administrative
expenses.
Research and
d
evelopment
Research
and development expenses include salaries, supplies, and overhead such as
depreciation, utilities and other costs. These costs are expensed as incurred.
The Company expensed research and development costs of $1,255,262 and
$960,484 for the nine months ended September 30, 2010 and 2009,
respectively, and $330,587 and $291,764 for the three months ended September 30,
2010 and 2009, respectively. These costs are included in selling, general and
administrative expenses in the accompanying statements.
Income
taxes
The
Company accounts for income taxes under the liability method. Deferred
income taxes are recognized for the estimated tax consequences in future years,
as differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized when, in management’s
opinion, it is more likely than not that some portion of the deferred tax assets
will not be realized. The provision for income taxes represents current taxes
payable net of the change during the period in deferred tax assets and
liabilities.
The
Company has not been subjected to income tax examinations by taxing authorities
for the nine months ended September 30, 2010 and the year ended December 31,
2009. The Company is subject to tax examination in the PRC for all years, as tax
returns remain open to examination until notified by the taxing authorities, and
the Company has not received any notifications to date. The Company records
interest and penalties as other expense on the consolidated income and other
comprehensive income statements. During the nine months ended
September 30, 2010 and the year ended December 31, 2009, the Company did not
recognize any amount in interest and penalties.
Earnings per
share
Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing net
income (loss) attributable to common stockholders by the weighted average number
of common shares outstanding for the period. There are no differences between
Basic and Diluted EPS for the nine months ended September 30, 2010 and
2009.
Note
3 – Supplemental disclosure of cash flow information
On
February 10, 2010, Tianshi Holdings, Fuhong Development Co., Ltd. (“Fuhong
Development”), and Tianshi Investment entered into an agreement, pursuant to
which liabilities in the form of a loan receivable due to Fuhong Development
from the Company in the amount of $3,000,000 were offset against assets in the
form of a loan receivable due to the Company from Tianshi Investment. Each of
Fuhong Development and Tianshi Investment is 100% owned by Jinyuan
Li.
The right
to offset existed because:
|
1.
|
Tianshi
Investment had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Fuhong
Development;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
The
Company, Fuhong Development and Tianshi Investment agreed to offset the
two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
On June
10, 2010, Tianshi Holdings, Fuhong Development, and Tianshi Investment entered
into another agreement, pursuant to which liabilities in the form of a loan
receivable due to Fuhong Development from the Company in the amount of
$3,000,000 were offset against assets in the form of a loan receivable due to
the Company from Tianshi Investment.
The right
to offset existed because:
|
1.
|
7
Tianshi
Investment had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Fuhong
Development;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
The
Company, Fuhong Development and Tianshi Investment agreed to offset the
two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
During
the nine months ended September 30, 2010, $20,300,964 of trade accounts
receivable from Tianshi Engineering were offset against $20,300,964 of
advances from customers received from Tianshi Engineering.
Note
4 – Inventories
Inventories
consisted of the following at September 30, 2010 and December 31,
2009:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
865,062
|
|
|
$
|
1,937,306
|
|
Packaging
material
|
|
|
541,591
|
|
|
|
729,517
|
|
Miscellaneous
supplies
|
|
|
1,937,015
|
|
|
|
848,720
|
|
Work
in process
|
|
|
611,083
|
|
|
|
476,529
|
|
Finished
goods
|
|
|
1,332,917
|
|
|
|
1,335,980
|
|
Total
|
|
$
|
5,287,668
|
|
|
$
|
5,328,052
|
|
The
Company has not written off any obsolete goods for the nine months ended
September 30, 2010 and 2009.
Note
5 – Prepaid expenses
Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses, net of the allowance as disclosed in Note 2,
at September 30, 2010 and December 31, 2009 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Advance
to suppliers
|
|
$
|
393,815
|
|
|
$
|
655,443
|
|
Short-term
prepaid expenses
|
|
|
37,627
|
|
|
|
2,750
|
|
Total
|
|
$
|
431,442
|
|
|
$
|
658,193
|
|
Note
6 – Property, plant and equipment, net
Property,
plant and equipment consist of the following at September 30, 2010 and December
31, 2009:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Buildings
and improvements
|
|
$
|
1,591,336
|
|
|
$
|
1,558,934
|
|
Office
equipment
|
|
|
370,434
|
|
|
|
348,284
|
|
Computer
equipment and software
|
|
|
2,474,049
|
|
|
|
2,405,467
|
|
Machinery
and equipment
|
|
|
14,850,650
|
|
|
|
14,211,726
|
|
Automobiles
|
|
|
4,952,722
|
|
|
|
4,470,909
|
|
Total
|
|
|
24,239,191
|
|
|
|
22,995,320
|
|
Less:
accumulated depreciation
|
|
|
(14,328,487
|
)
|
|
|
(12,870,837
|
)
|
Property,
plant and equipment, net
|
|
$
|
9,910,704
|
|
|
$
|
10,124,483
|
|
Depreciation
expense for the nine months ended September 30, 2010 and 2009 amounted to
$1,172,597 and $1,662,206, respectively, and $358,221 and $549,357 for the three
months ended September 30, 2010 and 2009, respectively.
Note
7 - Intangible assets
Intangible
assets consist of the following at September 30, 2010 and December 31,
2009:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Land
use rights
|
|
$
|
13,812,704
|
|
|
$
|
13,531,454
|
|
Other
intangible assets
|
|
|
351,429
|
|
|
|
344,274
|
|
Less
accumulated amortization
|
|
|
(1,265,904
|
)
|
|
|
(1,011,433
|
)
|
Intangible
assets, net
|
|
$
|
12,898,229
|
|
|
$
|
12,864,295
|
|
Amortization
expense for the nine months ended September 30, 2010 and 2009 amounted to
$230,010 and $228,910 respectively, and $77,493 and $85,648 for the three months
ended September 30, 2010 and 2009, respectively.
The
estimated amortization expense for the next five years is as
follows:
Estimated amortization expense for
|
|
|
|
the
year
ending
December
31,
|
|
Amount
|
|
2010
(3 months remaining)
|
|
$
|
77,816
|
|
2011
|
|
$
|
304,619
|
|
2012
|
|
$
|
304,619
|
|
2013
|
|
$
|
293,294
|
|
2014
|
|
$
|
292,647
|
|
2015
and thereafter
|
|
$
|
11,625,234
|
|
Note
8 – Statutory reserves
The laws
and regulations of the PRC require that before a foreign enterprise distributes
profits to its partners, it must first satisfy all tax liabilities, provide for
losses in previous years, and make allocations, in proportions determined at the
discretion of its board of directors, after the statutory reserve. The Company’s
statutory reserves represent restricted retained earnings and include the
surplus reserve fund, the common welfare fund, and the enterprise
fund.
Statutory reserve
fund
Each of
the Company’s Chinese subsidiaries is required to transfer 10% of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve balance
reaches 50% of that entity’s registered capital. During 2005, Biological's
statutory reserve fund had reached 50% of its registered capital, so no
statutory reserve was required thereafter. Life Resources, which has not reached
its statutory reserve fund level, is currently required to make this transfer.
On June 21, 2010, Life Resources transferred $2,165,285, representing 10% of its
2009 net income, as determined in accordance with PRC accounting rules and
regulations, to this reserve. As of September 30, 2010, Life Resources is
required to transfer a remaining $12,193,914 in future periods to the statutory
reserve fund to meet the 50% requirement.
The
transfer to this reserve fund must be made before distribution of any dividend
to shareholders. On September 30, 2010 and December 31, 2009, the amounts of the
statutory reserve fund were $7,151,510 and $4,986,225,
respectively.
The
surplus reserve fund is non-distributable other than upon liquidation but can be
used to fund the entity’s previous years’ losses, if any, and may be utilized
for business expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholdings, or by increasing the
par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the entity’s registered
capital.
Common welfare
fund
Each of
the Company’s Chinese subsidiaries is required to transfer part of its net
income in accordance with the PRC accounting rules and regulations, which is
determined by its board of directors, to a statutory common welfare fund until
the statutory reserve fund reaches 50% of that entity’s registered capital.
Beginning 2005, Biological was not required to transfer any additional net
income to the statutory reserve fund, so no transfer to the common welfare was
required thereafter. Life Resources, which has not reached its statutory reserve
fund level, is still required to make this transfer accompanying the transfer of
statutory reserves. On June 21, 2010, Life Resources transferred $1,082,642,
representing 5% of its 2009 net income, as determined by its board of directors,
to this fund. As of September 30, 2010, Life Resources is required to transfer a
remaining $6,096,957 in future periods to the common welfare fund.
This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than
upon liquidation. The transfer to this fund must be made before distribution of
any dividend to shareholders. On September 30, 2010 and December 31, 2009, the
amounts of the Company’s common welfare fund were $7,057,619 and $5,974,977,
respectively.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the working
capital for production and operation of the business. No minimum contribution is
required. For the nine months ended September 30, 2010 and 2009, no transfer was
made to this fund and the amount of the Company’s enterprise fund on each of
September 30, 2010 and December 31, 2009 was $2,256,015.
The
Chinese government restricts distributions of registered capital and the
additional investment amounts required by the Chinese joint ventures. Approval
by the Chinese government must be obtained before these amounts can be returned
to the shareholders.
Note 9 – Related party transactions and
balances
The
Company mainly conducts related party transactions with Tianshi Group, Tianshi
Engineering, Tianshi Investment, Fuhong Development, Tianjin Tianshi
Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”) and overseas related
companies of Tianshi Group. Tianshi Group is owned 90% by Jinyuan Li and 10% by
his daughter, Baolan Li. Tianshi Engineering is owned 51% by Tianshi Group and
49% by Baolan Li. Tianshi Pharmaceuticals is wholly owned by Tianshi Group.
Tianshi Investment and Fuhong Development are each 100% owned by Jinyuan
Li. Jinyuan Li owns or controls the overseas related companies of Tianshi
Group.
The
Company’s related party transactions are required to be reviewed and approved or
ratified by the Board of Directors. No director that is a related person in a
related party transaction may participate in any discussion, approval or
ratification of the related party transaction except to provide information
concerning it. The following tables are provided to facilitate an understanding
of the transactions and outstanding balances between those related
parties.
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenue-related
parties
|
|
$
|
10,381,886
|
|
|
$
|
9,439,739
|
|
|
$
|
29,953,098
|
|
|
$
|
48,228,320
|
|
|
|
September
30,
2010
|
|
|
December
31,
2009
|
|
Accounts
receivable, trade – related parties, net of allowance for doubtful
accounts of $1,538,200 and $1,419,178 as of September 30, 2010 and
December 31, 2009, respectively
|
|
$
|
10,795,741
|
|
|
$
|
15,379,312
|
|
Other
receivables – related parties
|
|
$
|
45,040,773
|
|
|
$
|
44,561,626
|
|
Advances
from customers – related parties
|
|
$
|
13,045,749
|
|
|
$
|
4,426,751
|
|
Short-term
debt - related party
|
|
$
|
8,958,000
|
|
|
$
|
-
|
|
Other
payables – related parties
|
|
$
|
15,630,625
|
|
|
$
|
3,326,110
|
|
Revenue -
related
parties
The
details of revenue-related parties are as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Engineering
|
|
$
|
6,152,896
|
|
|
$
|
4,663,939
|
|
|
$
|
17,351,251
|
|
|
$
|
17,076,163
|
|
Overseas
Related Companies
|
|
|
4,228,990
|
|
|
|
4,775,800
|
|
|
|
12,601,847
|
|
|
|
31,152,158
|
|
Total
|
|
$
|
10,381,886
|
|
|
$
|
9,439,739
|
|
|
$
|
29,953,098
|
|
|
$
|
48,228,320
|
|
The
Company markets its products through various domestic and international business
entities that are related to the Company through common ownership.
In China,
the Company sells products to Tianshi Engineering, a related party through
common ownership. Tianshi Engineering, in turn, markets and sells the products
to customers through its branches and affiliated companies and at chain stores
owned by individual distributors. Tianshi Engineering is solely responsible for
all marketing and payments of sales commissions to independent
distributors.
Internationally,
the Company sells its products directly to overseas affiliates. These overseas
related companies re-package
the Company’s products
and then sell to overseas independent distributors or end users of the products.
Due to the common ownership, there are no formal sales or administrative
agreements among Biological and those overseas related companies. The business
operations among these related entities are regulated through internal
ordinances.
Accounts receivable, trade -
related parties
The
details of accounts receivable, trade - related parties are as
follows:
|
|
September
30,
2010
|
|
|
December
31,
2009
|
|
Tianshi
Engineering
|
|
$
|
-
|
|
|
$
|
5,035,320
|
|
Overseas
Related Companies
|
|
|
12,333,941
|
|
|
|
11,763,170
|
|
Allowance
for Doubtful Accounts
|
|
|
(1,538,200
|
)
|
|
|
(1,419,178
|
)
|
Total
|
|
$
|
10,795,741
|
|
|
$
|
15,379,312
|
|
Sales to
Tianshi Engineering for the nine months ended September 30, 2010 were
$17,351,251. The receivables that arose from these sales were fully offset
against advances from Tianshi Engineering as of September 30, 2010.
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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Investment
|
|
$
|
27,300,000
|
|
|
$
|
37,000,000
|
|
Tianshi
Engineering
|
|
|
5,682,839
|
|
|
|
5,688,926
|
|
Tianjin
Tianshi Life Science Co., Ltd.
|
|
|
11,828,993
|
|
|
|
55,878
|
|
All-legend
Property Service (Tianjin) Co., Ltd.
|
|
|
139,071
|
|
|
|
77,612
|
|
Tiens
SmartFlow Logistics (International) Group Ltd.
|
|
|
-
|
|
|
|
74,651
|
|
Tianshi
Yinshi Hotel
|
|
|
37,325
|
|
|
|
36,566
|
|
Taijisheng
Health Management Co.,Ltd
|
|
|
4,447
|
|
|
|
-
|
|
Tianshi
Indonesia Logistic & Trade Co., Ltd.
|
|
|
9,891
|
|
|
|
9,873
|
|
Tianshi
Group
|
|
|
-
|
|
|
|
1,613,168
|
|
All-legend
Hotel Management Co., Ltd.
|
|
|
37,002
|
|
|
|
2,730
|
|
Others
|
|
|
1,205
|
|
|
|
2,222
|
|
Total
|
|
$
|
45,040,773
|
|
|
$
|
44,561,626
|
|
Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China. For the nine months
ended September 30, 2010, the Company did not convert any accounts receivables -
related parties to other receivables - related parties.
On
December 25, 2008, Biological entered into a Real Property Transfer Agreement
(the “2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or U.S. $4,797,984).
As of March 31, 2010, the amount was paid in full by Tianshi Group.
On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for
$37,000,000. As of September 30, 2010, $9,700,000 of the purchase price was
paid; $3,700,000 was received in cash, while $6,000,000 was offset against
payables owed to Fuhong (as further described under the caption "Other payables
– related parties" below.)The remaining balance outstanding is due in
November 2010.
A portion
of the construction in progress recorded and paid for by Life
Resources is built on the land owned by Tianshi Life Science.
Tianshi Life Science intends to reimburse Life Resources for the cost
of this portion of the construction in progress. The agreement is
currently being drafted for the amount of RMB 78,017,869 (approximately
U.S. $11,648,068). and is expected to be collected by December 31,
2010. This amount has been reclassified as other
receivable - related party as of September 30, 2010,
accordingly.
Advances from customers -
related parties
These
advances represent prepayments made to the Company to insure that related party
customers could obtain enough of the Company’s products to meet their market
demands. As of September 30, 2010 and December 31, 2009, advances from related
party customers amounted to $13.0 million and $4.4 million,
respectively.
Short-term
debt
–
related
party
On August
24, 2010, Tianshi Engineering and Life Resources entered into a loan agreement.
In order to support the business development of Life Resources, Tianshi
Engineering agreed to make a loan to Life Resources equal to the amount of
outstanding advances from customers as of June 30, 2010. The amount of the loan,
which was reclassified to short - term debt – related party from advances from
customers, is RMB 60,000,000 (or U.S. $8,958,000), and is due in full on
December 31, 2010. Interest is caculated based on the benchmark interest rate of
the People's Bank of China on July 1, 2010 (5.31
%
APR).
Other
payables - related parties
The details of other payable-related
parties are a
s
follows:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Tianshi
Group
|
|
$
|
8,751,840
|
|
|
$
|
-
|
|
Tianshi
Engineering
|
|
|
6,596,720
|
|
|
|
40,805
|
|
Tianshi
Germany Co., Ltd.
|
|
|
102,129
|
|
|
|
107,326
|
|
Tianjin
Tianshi Global International Trade Co., Ltd.
|
|
|
95,552
|
|
|
|
93,606
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
|
84,359
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
15
|
|
|
|
14
|
|
Fuhong
Development Co. Ltd.
|
|
|
-
|
|
|
|
3,000,000
|
|
Others
|
|
|
10
|
|
|
|
-
|
|
Total
|
|
$
|
15,630,625
|
|
|
$
|
3,326,110
|
|
These amounts arose primarily from
cash advances
to Life Recources
from related parties
to
support its operations
.
O
ther
amounts
are
for
previous cash advances from related
parties such as management fees due to related p
arties and various non-operational
transactions incurred with related parties.
On November 10, 2009, Tianshi Holdings
borrowed $3,000,000 from Fuhong Development to fund its capital contribution to
Life Resources. On February 10, 2010, the loan
was paid
i
n full
by canceling the same amount Tianshi
Investment owed to the Company.
On March 3, 2010, Tianshi Holdings
borrowed another $3,000,000 from Fuhong Development to fund its capital
contribution to Life Resources.
On June 1
1
, 2010, the loan was paid in
f
ull by
canceling
the same amount Tianshi
I
nvestment owed to the
Company.
During
the third quarter of 2010,
the Company
received
$
7,614,300
and
$6,270,60
0
from Tianshi Group and Tianshi
Engineering, respect
ive
ly
, in order to fund a portion of the
construc
tion in progress.
The amounts
are expected to
be returned in November
, 2010
.
Other
Transactions with Tianshi Engineering
On October 31, 2007, Biological entered
into four lease agreements with Tianshi Engineering that enable Tianshi
Engineering to share the use of certain of Biological’s production workshops and
equipment to manufacture products which Tianshi Engineering owns, or jointly
owns, with Biological. Each of the four agreements was effective as of January
1, 2008 and expires on December 31, 2010. On December 31, 2007, Biological
entered into two supplemental agreements, which added fourteen pieces of
personal care products production equipment to, and removed two health products
production workshops from, two of the lease agreements.
Rent revenue accrued from these leases
amounted to $156,435 and $164,670 for the nine months ended September 30, 2010
and 2009, respectively, and $52,705and $54,905 for the three months ended
September 30, 2010 and 2009, respectively.
Other
Transactions with Tia
nshi
Group
On
January 1, 2009, Biological entered into an office and facilities lease
agreement with Tianshi Group. Under the terms of the agreement, Biological’s
annual rent is equal to 1% of its gross revenues. In addition, Biological is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expires on December 31, 2010. On January 1, 2010, Life
Resources entered an office and facilities lease agreement with Tianshi Group on
the same terms as Biological’s lease agreement with Tianshi Group. The Company
paid rent under these leases in the amount of $330,358 and $375,931 for the nine
months ended
September
30,
2010 and 2009, respectively, and $70,640 and $73,243 for the three months ended
September
30, 2010 and
2009, respectively.
On
January 1, 2009, Biological and Life Resources entered into a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the nine months ended
September
30, 2010 and
2009, Biological and Life Resources recorded $247,265 and $245,019 of
the rent expense, which is not paid to Tianshi Group, but recorded as paid in
capital based upon market price.
Transactions
with
Tianshi
Pharmaceuticals
On December 15, 2009, the Company
entered into a one-year lease agreement with Tianshi Pharmaceutical
s
. Under the terms of the
leas
e agreement, the
Company leased equipment for the fee of
RMB
25,383 (
or
U
.
S
.
$3,71
4
)
per month. In addition, the Company is
obligated to pay insurance, maintenance and other expenses
related
to
the equipment. This agreement
became
effective
on
January 1,
2010 and expire
s
on December 31, 2010.
The
C
ompany ha
s
paid $
33,605
</f ont>
of rent expense for the
nine
months ended
September
30,
2010.
Note
10
–
Additional product sales
information
The Company has a single operating
segment.
All
of the Company's revenues
we
re generated from related
parties. Summarized enterprise-wide financial information concerning the
Company
’
s revenues based on product groups is
shown in the following table:
Revenue by Product
Group:
|
|
Three months ended September
30,
|
|
|
Nine months ended September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Wellness
products
|
|
$
|
9,185,407
|
|
|
$
|
8,575,183
|
|
|
$
|
26,994,811
|
|
|
$
|
44,777,793
|
|
Dietary
supplement products
|
|
|
1,196,479
|
|
|
|
864,556
|
|
|
|
2,958,287
|
|
|
|
3,432,422
|
|
Personal
care products
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,105
|
|
Total
|
|
$
|
10,381,886
|
|
|
$
|
9,439,739
|
|
|
$
|
29,953,098
|
|
|
$
|
48,228,320
|
|
Note
1
1
- 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,
Biologica
l
and Life Resource
s,
were
incorporated in the PRC. According to
US GAAP, the following are the income tax credits granted by the Chinese
government, which are significant components of income taxes a
ssociated with continuing operations
required to be disclosed.
Beginning January 1, 2008,
Enterprise Income Tax (“
EIT”
) laws became
effective
.
According to the EIT,
the standard tax rate is 25% and
high-tech companies could
be subject to a special reduced
tax rate of 15%. The qualification of a
high-tech company is to be reviewed annually.
For
the fiscal year
s
2008,
200
9
and 20
10
Biological qualifie
d
as a high-tech company. However,
Biological was required by the local tax authority to prepay income tax
at
a tax rate of
25%
every year, although
the prepaid income tax could be refunded in the next year.
On December 17, 2009
and June
24
,
2010
, the prepaid income tax
amounts of
$1,562,168 for 2008
and $578,267 for 2009
w
ere
fully
refunded.
According to the E
IT, Life Resources
was
exempt from PRC income taxes
for the fiscal years 2008 and 2009.
Beginning on January 1, 2010, Life Resources qualifies for
a 12.5% reduced tax rate
for
three
years.
Provisions for income taxes
were all current income tax expenses
a
nd
for the
nine
months end
ed
September
30, 20
10
and 200
9
,
were
$
1,067,899
and
$
1,027,404
, respectively, and for the three months
ended
September
30, 20
10
and 200
9
were $
319,776
and $
544,68
8
, respectively
.
The following table reconciles the U.S.
statutory
rates to the
Company's effective tax rate:
|
|
Three months ended September
30,
|
|
|
Nine months ended September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
U.S.
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign
income not recognized
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
China
income taxes
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
Effect
of reduced tax rate
|
|
|
(10.3
|
)
|
|
|
(9.0
|
)
|
|
|
(9.8
|
)
|
|
|
(20.6
|
)
|
Total
provision for income taxes
|
|
|
14.7
|
%
|
|
|
16.0
|
%
|
|
|
15.2
|
%
|
|
|
4.4
|
%
|
The estimated tax savings due to the
reduced tax rate for the nine months ended September 30, 2010 and 2009 amounted
to $889,667 and $3,715,841, respectively. The net effect on earnings per share
if the income tax had been applied would decrease earnings per share for the
nine months ended September 30, 2010 and 2009 by $0.01 and $0.05, respectively.
Note
1
2
–
Retirement
plan
Regulations in the PRC require the
Company to contribute to
a
defined contribution retirement plan for all employees. All
Company
employees are entitled to a retirement
pension amount calculated based upon salary at date of retirement and length of
service in accordance with a government managed pension plan. The
PRC government is responsible for the
pension liability to the retired staff.
The Company is required to make
contributions to the state retirement plan at 20% of the employees' monthly
salaries. Employees are required to contribute 8% of their salaries to the plan.
Total pension expense incurred by the Company amounted to $770,476 and $699,755
for the nine months ended September 30, 2010 and 2009, respectively, and
$237,593 and $248,394 for the three months ended September 30, 2010 and 2009,
respectively.
The Company also has an unemployment
insurance plan for its employees. The plan requires each employee to contribute
1% of his or her salary to the plan. The Company matches the contributions in an
amount equal to two times the contribution of each par
ticipant.
The Company made contributions to the
unemployment insurance plan of
$
76,00
1
and
$
70,280
for the
nine
months end
ed
September
30, 2010
and 200
9
, respec tively, and $
24,5
90
and $
24,293
for the
three months ended
September
30, 20
10
and 200
9
, respecti
vely.
All contributions are paid to a PRC
insurance company, which in turn, is responsible for the unemployment liability.
Pursuant to the
Company
’
s
medical insurance plan for its
employees
,
the Company is required to pay an
amount equal to 10% of its empl
oyees' salary to a PRC insurance
company,
which amounted to
$
389,23
7
and
$
357,105
for the
nine
months end
ed
September
30, 20
10
and 200
9
, respectively, and $
121,13
9
and $
125,346
for the
three months ended
September
30, 20
10
and 2009,
respectively.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In this
Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United
States Dollars and references to “renminbi” or “RMB” are to the People’s
Republic of China Renminbi. References to “we”, “us”, “our”, the “Company” or
“Tiens” include Tiens Biotech Group (USA), Inc. and its subsidiaries, except
where the context requires otherwise.
FORWARD-LOOKING
STATEMENTS
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; (d) whether we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-Q with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date.
Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.
OVERVIEW
Tiens
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations are
conducted from our headquarters in Tianjin, People’s Republic of China (“China”
or the “PRC”) through our 80% owned subsidiary, Tianjin Tianshi Biological
Development Co. Ltd. (“Biological”) and our wholly-owned subsidiary, Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). We sell our products to
affiliated companies in China and internationally.
Tiens is
a Delaware corporation. We own 100% of Tianshi International Holdings Group
Ltd., a British Virgin Islands company (“Tianshi Holdings”). Tianshi
Holdings owns 80% of Biological and 100% of Life Resources.
Tianjin
Tianshi Biological Engineering Co. Ltd. (“Tianshi Engineering”), a Chinese
company and the entity to which we sell all of our products for consumption in
China, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned
by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”). Tianshi Group
is 90% owned by Jinyuan Li, our Chairman, President, CEO and Acting CFO, and 10%
owned by Baolan Li, Jinyuan Li’s daughter, who is a member of our Board
of Directors.
Life Resources is currently constructing research and
development, manufacturing and logistic facilities, as well as administrative
offices in Tianjin, China totaling approximately 420,000 square meters. We moved
our administrative offices to the newly constructed Industrial Park on October
16, 2010. We expect to complete the move of our other facilities during the
fourth quarter of 2010 and during 2011.
RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2009
|
|
Three
months ended September 30,
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Change
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Change
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
10,381,886
|
|
|
$
|
9,439,739
|
|
|
|
10.0
|
%
|
|
$
|
29,953,098
|
|
|
$
|
48,228,320
|
|
|
|
-37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
4,145,014
|
|
|
|
3,144,650
|
|
|
|
31.8
|
%
|
|
|
10,623,742
|
|
|
|
14,997,118
|
|
|
|
-29.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
6,236,872
|
|
|
|
6,295,089
|
|
|
|
-0.9
|
%
|
|
|
19,329,356
|
|
|
|
33,231,202
|
|
|
|
-41.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,060,812
|
|
|
|
2,916,202
|
|
|
|
39.3
|
%
|
|
|
11,627,456
|
|
|
|
10,061,729
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
2,176,060
|
|
|
|
3,378,887
|
|
|
|
-35.6
|
%
|
|
|
7,701,900
|
|
|
|
23,169,473
|
|
|
|
-66.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Interest
expense)
|
|
|
(117,165
|
)
|
|
|
(40,363
|
)
|
|
|
190.3
|
%
|
|
|
(117,165
|
)
|
|
|
(146,180
|
)
|
|
|
-19.8
|
%
|
Interest
income
|
|
|
2,523
|
|
|
|
76,154
|
|
|
|
-96.7
|
%
|
|
|
8,241
|
|
|
|
262,701
|
|
|
|
-96.9
|
%
|
Other
income (expense)
|
|
|
120,665
|
|
|
|
(16,122
|
)
|
|
|
-848.4
|
%
|
|
|
(551,305
|
)
|
|
|
(89,554
|
)
|
|
|
515.6
|
%
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
6,023
|
|
|
|
19,669
|
|
|
|
-69.4
|
%
|
|
|
(660,229
|
)
|
|
|
26,967
|
|
|
|
-2548.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
2,182,083
|
|
|
|
3,398,556
|
|
|
|
-35.8
|
%
|
|
|
7,041,671
|
|
|
|
23,196,440
|
|
|
|
-69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
319,776
|
|
|
|
544,688
|
|
|
|
-41.3
|
%
|
|
|
1,067,899
|
|
|
|
1,027,404
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,862,307
|
|
|
|
2,853,868
|
|
|
|
-34.7
|
%
|
|
|
5,973,772
|
|
|
|
22,169,036
|
|
|
|
-73.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS:
Net income attributable to the noncontrolling interest
|
|
|
141,849
|
|
|
|
617,638
|
|
|
|
-77.0
|
%
|
|
|
605,989
|
|
|
|
1,163,683
|
|
|
|
-47.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
|
|
$
|
1,720,458
|
|
|
$
|
2,236,230
|
|
|
|
-23.1
|
%
|
|
$
|
5,367,783
|
|
|
$
|
21,005,353
|
|
|
|
-74.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
|
|
|
|
|
|
71,333,586
|
|
|
|
71,333,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.08
|
|
|
$
|
0.29
|
|
|
|
|
|
Revenue
.
For the third quarter of 2010, revenue
was $10.4 million, a
n
increase of 10.0%
compar
ed to $9.4 million
for the same period in 2009.
For the nine months ended September 30,
2010, revenue was $30.0 million, a
decrease of 37.9% compared to $48.2
million for the same period in 2009.
The decrease in revenue for the first
nine months of 2010 wa
s due
to the
decrease of 59.
5
% in international
sales.
For the third quarter of 2010, revenue
in China was $6.2 million, a
n
increase of 31.9% compared to $4.7
million for the same period in 2009. For
the nine months ended September 30,
2010, revenue in Ch
ina was
$17.4
million, a 1.
6
% increase compared to $17.1 million for
the same period in
2009.
T
hird quarter sale
s
f
or
2009
w
ere
down due to domestic distributors
stock
ing
up on our products
in prior quarters
. Therefore
,
the sale
s
f
or
the same quarter in 20
10 increased.
T
he amount of domestic sales this quarter
approximates
the average quarter
ly
sales
in
2009.
For the third quarter of 2010,
international revenue was $4.2 million, a
decrease of
11.4
% compared to $4.8 million for the same
period in 2009. For
the nine months ended September 30,
2010, international revenue was $12.6
million, a decrease of 59.
5
% compared to $31.2 million for the same
period
in 2009. The reasons for the decrease in
international revenue include
,
but
are
not limited to
the
follow
in
g
: (1) During 2008, China
’
s Administration of Quality
Supervision, Inspection and Quarantine
(“
AQSIQ”
) carried out a national
campaign against unsafe food and
substandard products, which brought on a
general slow-down and backlog of export
clearances for C
hinese
food
products. Upon the lifting of the
regulations, overseas affiliated
companies began to purchase more
products, thereby increasing sales in the
first
three
quarters of 2009; (2)
Our
Indonesia
affiliated company
has
not purchase
d
from us during th
e
first
</f ont>
nine months
2010
, given
the
y
purchas
ed
more products in 2009 after the 2008
product scarcity for the reason noted above.
D
uring the first half of
2009
,
our
Indonesia
affiliated company
purchased $9.2 million
of finished and unfinished
product
from
us
,
which was 2.7 times their purchases for
the first half of 2008
.
In addition,
l
ocal
Original Equipment
Manufacture
rs
(
“
OEM
”
)
ha
ve
been
produc
ing the healthcare products with our
unfinished
goods for the country
,
and
their total sales dropped by 33%.
The
sales decline to
Indonesia
accounts
for
57% of our total
int
ernational
revenue
decline
for the
nine
m
o
nths.
(
3
) The
lasting global economic recession has
generally reduced customers' buying
power. During the early stages of the
recession, the direct selli
ng
business is
generally benefited with the new sales force joined by
the
unemployed population. This positive
effect has been fading away during the
later stages of the recession;
(
4
) Our affiliated companies in many
regions
have
made
certain adjustments
to the
ir
marketing program
s
and reorganization
s at
the
ir
branch and
higher
levels, which is expected to boost
sales
performance over the long-run but
negatively affect sales in the short-run.
Cost of
s
ales
.
Cost of sales for the third
quarter of 2010 increased to $4.1 million, or by 31.8%, compared to $3.1 million
for the same period in 2009. For the nine months ended September 30, 2010, cost
of sales was $10.6 million, a decrease of 29.2% compared to $15.0 million for
the same period in 2009. The increase in cost of sales for the current
quarter, as compared to the same quarter of 2009, is due to the sale of products
with higher costs.
Gross
p
rofit
.
Gross profit for the third
quarter of 2010 was $6.2 million, a decrease of 0.9% compared to $6.3 million
for the same period in 2009. The gross profit margin for the third quarter of
2010 was 60.1%, compared to 66.7% for the same period in 2009. For the nine
months ended September 30, 2010, gross profit was $19.3 million, a decrease of
41.8% compared to $33.2 million for the same period in 2010, and the gross
profit margin was 64.5% compared to 68.9% for the same period in 2009. The
decrease in profit margin for the current quarter is due to the following: (1)
Sales of our products with more than 65% profit margins amounted to only 27.4%
of revenues as compared to 31.1% in the third quarter of 2009; and (2) The U.S.
dollar depreciated approximately 2% between September 30, 2009 and September 30,
2010. Our international sales are quoted in U.S. dollars and collected in RMB;
therefore, our gross profit margin decreased by the same percentage as the
depreciation of the dollar.
Selling,
general and administrative expenses
.
Selling, general and administrative
expenses were $4.1 million for the third quarter of 2010, an increase of 39.3%
compared to $2.9 million for the same period in 2009. This increase was
primarily due to changes in our provision for doubtful accounts. During the
third quarter of 2009, based on a significant overall improvement in the aging
of our accounts receivable, we reduced our provision for doubtful accounts by
$0.7 million, which was recorded as a reduction of $0.7 million in our bad debt
expense. During the third quarter of 2010, based on an overall worsening in the
aging of our accounts receivable, we increased our provision for doubtful
accounts by $0.2 million, which was recorded as an increase of $0.2 million in
our bad debt expense. Selling, general and administrative expenses as a
percentage of sales were 39.1% for the third quarter of 2010 compared to 30.9%
for the same period in 2009. For the nine months ended September 30, 2010,
selling, general and administrative expenses were $11.6 million, an increase of
15.6% compared to $10.1 million in the same period in 2009. This increase
was mainly due to changes in our provision for doubtful accounts as described
above. During the nine months ended September 30, 2009, we reduced our provision
for doubtful accounts by $0.9 million, which was recorded as a reduction of $0.9
million in our bad debt expense. During the nine months ended September 30,
2010, we increased our provision for doubtful accounts by $0.1 million, which
was recorded as a increase of $0.1 million in our bad debt expense.
For the nine months ended September 30,
2010, selling, general and administrative expenses as a percentage of sales were
38.8%, compared to 20.9% for the same period in 2009.
Other
(expense)
income,
net
.
Other income was
$0.01 million for the third quarter of 2010, compared to other income of $0.02
million for the same period in 2009. For the nine months ended September 30,
2010, other expense was $0.7 million compared to other income of
$0.03 million for the same period in 2009.
T
he
se
difference
s
w
ere
mainly due to
increase in loss
based on currency
tra
nslation
differences between the two
periods.
Provision
for income taxes
.
P
rovision for income taxes was $0.3
million for the third quarter of 2010 compared to $0.5 million for the same
period in 2009.
The main reason
for
this
decrease was the
decrease in net income. For the nine months ended September 30, 2010, provision
for income taxes was $1.1 million compared to $1.0 million for the same period
in 2009.
The main reason
for this
increase
was that Life Resources
began applying the reduced income tax ra
te of 12.5%
on
January 1, 2010, while
it was
ex
e
mpt from income tax in
2009.
According to the EIT,
Life Resources
was
fully exempt from
paying
PRC income
taxes for two years starting
on
January 1, 2008,
followed by a 12.5% reduced tax rate for the next thr
ee years
.
Net
income
.
As a result of the
foregoing factors, net income for the third quarter of 2010 was $1.9 million, a
decrease of 34.7% compared to $2.9 million for the same period in
2009. For the nine months ended September 30, 2010, net income was
$6.0 million, a decrease of 73.1% compared to $22.2 million for the same period
in 2009.
Financial Condition, Liquidity and
Capital Resources
We have
historically met our working capital and capital expenditure requirements,
including funding for expansion of operations, through net cash flow provided by
operating activities. Our principal source of liquidity is our operating cash
flow.
Net cash
provided by operating activities was $33.5 million for the nine months ended
September 30, 2010, compared to net cash provided by operating activities of
$32.9 million for the same period of 2009. This increase was primarily due to
the collection of accounts receivable and advance receipts from Tianshi
Engineering for expected future shipment of product.
As of
September 30, 2010, we had negative working capital of $8.7 million, compared to
positive working capital of $35.2 million as of December
31, 2009. During the first nine months of the year, we collected $14.2
million of accounts receivable due from related parties and received
$13.3 million of other payables and $22.8 million of advances from
customers from related parties. Simultaneously, the contractor payables
increased to $35.6 million. The administrative building in our Industrial Park
has been completed, and we have paid the construction payable in high frequency,
as the construction in process increased $45.4 million compared to $17 million
increase in contractor payables in the first nine months 2010. Cash was
$7.6 million as of September 30, 2010, compared to $1.8 million as of December
31, 2009.
Net cash
used in investing activities increased by $2.1 million for the nine months
ended September 30, 2010 compared to the same period of 2009. During the
first nine months of 2010, we paid $37.6 million to contractors for
construction in progress, compared to $26.9 million for the same period in
2009
Going forward, our primary requirements
for cash consist of:
·
construction by Life Resources of new
research and development, manufacturing and logis
tic facilities, and administrative
offices;
·
the continued production of existing
products and general overhead and personnel related expenses to support these
activities;
·
the development costs of new products;
and
·
expansion of production scale
to meet the demands of our
markets.
Should the cashflow from operation be
insufficient in the next twelve months, the company has also established
credit
facility with local commercial bank.
However, at this time
management is not able to determine the
exa
ct financing
amount needed
.
Critical Accounting
Policies
Management’s
discussion and analysis of its financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.
Revenue
recognition
.
We
sell both semi-finished products and
finis
hed products to
Tianshi Engineering domestically.
Revenue from the sale
of semi-finished products
i
s recognized at FOB
delivery
point
,
when the semi-finished products
are
sold to Tianshi Engineering. Revenue
from the sale of finished products is recognize
d only when the related party Chinese
distributor recognize
s
sales of
our
products to unaffiliated third parties.
Revenues in both cases are net of value added taxes.
For overseas sales,
we
sell
mostly
finished products.
We
recognize revenue from
internat
ional sales
(outside of China) to affiliated parties, net of value added taxes
,
as goods are shipped and clear review
by the customs department of the Chinese government.
We are generally not contractually
obligated to accept returns. However, on a case
by case negotiated basis, we permit
customers to return products. Revenue is recorded net of an allowance for
estimated returns. Such reserves are based upon management
’
s evaluation of historical experience
and estimated costs. The amount of the reserves
u
ltimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements.
As
we
did not receive any returns of products
during the past three years, and management does not anticipate allowing
any returns in
20
10
related to previous revenues, no
allowance for estimated returns has bee
n recorded as of
September
3
0
, 20
10
.
Bad
debts
.
Our trade accounts receivables are
mainly due from related companies. We have made full provision for accounts
re
ceivable-related parties
aging over one year and a general allowance for doubtful debts of 0.5% of the
remaining accounts receivable-related parties. Management reviews its
accounts receivable on a regular basis to determine if the bad debt allowance is
a
dequate at each year-end, paying
particular attention to the age of receivable
s
outstanding.
Inventories
.
Inventories are stated at the lower of
cost or market
,
using the moving average basis. We
review our inventory annually for possible obsolete good
s or to determine if any reserves are
necessary for potential obsolescence.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
We market
most
of
our products through various domestic
and international business entities that are related to us through
common
ownership. As a
result,
most
of our consolidated sales are to
related parties.
In China, we sell our products to
Tianshi Engineering, an affiliated company. Tianshi Engineering, in turn,
markets and
sells the products to
customers
through its branches an
d affiliated companies and at chain
stores owned by individual distributors.
We have a sales contract with Tianshi
Engineering which requires Tianshi Engineering to purchase all of our products
to be sold in China. We sell our finished products to Tianshi
Engineering at a price equal to 25% of
the Chinese market price for the products. This 25% figure was negotiated
between the parties in 2003, before we acquired Tianshi Holdings, and we believe
that it is a reasonable sales price for us to receive. The p
r
ice 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 p
e
rcentage varied during the year. This
75% figure was negotiated between the parties, and we believe that it is
reasonable. The goal of this new pricing policy was to try to maintain
our
gross margins on semi-finished goods at
a similar level to historical
gross margins for finished goods. All of
Tianshi Engineering
’
s Chinese affiliated companies are owned
in whole or in part by Jinyuan Li
’
s immediate family
members.
Internationally, we sell our
products
directly
to overseas affiliates
located in
54
countri
es
,
who in turn re-package the products to
meet the needs of the local markets and sell to independent
distributors
or end users of our
products
.
Our CEO, Jinyuan Li, owns or controls
these overseas related companies. Due to the common ownership, there
ar
e 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 approv
ed 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
betw
een those related
parties and our company
.
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Accounts
receivable, trade – related parties, net of allowance for doubtful
accounts of
$1,538,200 and
$1,419,178 as of September 30, 2010 and December 31, 2009,
respectively
|
|
$
|
10,795,741
|
|
|
$
|
15,379,312
|
|
Other
receivables – related parties
|
|
$
|
45,040,773
|
|
|
$
|
44,561,626
|
|
Advances
from customers – related parties
|
|
$
|
13,045,749
|
|
|
$
|
4,426,751
|
|
Short-term
debt - related party
|
|
$
|
8,958,000
|
|
|
$
|
-
|
|
Other
payables – related parties
|
|
$
|
15,630,625
|
|
|
$
|
3,326,110
|
|
Revenue - Related
Parties
The details of revenue-related parties
are as follows:
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Engineering
|
|
$
|
6,152,896
|
|
|
$
|
4,663,939
|
|
|
$
|
17,351,251
|
|
|
$
|
17,076,163
|
|
Overseas
Related Companies
|
|
|
4,228,990
|
|
|
|
4,775,800
|
|
|
|
12,601,847
|
|
|
|
31,152,158
|
|
Total
|
|
$
|
10,381,886
|
|
|
$
|
9,439,739
|
|
|
$
|
29,953,098
|
|
|
$
|
48,228,320
|
|
Accounts Receivable, Trade - Related
Parties
The details of accounts receivable,
trade
–
related parties are as
follows:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Tianshi
Engineering
|
|
$
|
-
|
|
|
$
|
5,035,320
|
|
Overseas
Related Companies
|
|
|
12,333,941
|
|
|
|
11,763,170
|
|
Allowance
for Doubtful Accounts
|
|
|
(1,538,200
|
)
|
|
|
(1,419,178
|
)
|
Total
|
|
$
|
10,795,741
|
|
|
$
|
15,379,312
|
|
Other Receivables - Related
Parties
Other receivables - related parties are
generated by
our
making various cash advances and short
term loans, the allocation of various expenses to related parties, and amounts
transferred from accounts receivable.
The details of other receivables-related
parties are as follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Tianshi
Investment
|
|
$
|
27,300,000
|
|
|
$
|
37,000,000
|
|
Tianshi
Engineering
|
|
|
5,682,839
|
|
|
|
5,688,926
|
|
Tianjin
Tianshi Life Science Co., Ltd.
|
|
|
11,828,993
|
|
|
|
55,878
|
|
All-legend
Property Service (Tianjin) Co., Ltd.
|
|
|
139,071
|
|
|
|
77,612
|
|
Tiens
SmartFlow Logistics (International) Group Ltd.
|
|
|
-
|
|
|
|
74,651
|
|
Tianshi
Yinshi Hotel
|
|
|
37,325
|
|
|
|
36,566
|
|
Taijisheng
Health Management Co.,Ltd
|
|
|
4,447
|
|
|
|
-
|
|
Tianshi
Indonesia Logistic & Trade Co., Ltd.
|
|
|
9,891
|
|
|
|
9,873
|
|
Tianshi
Group
|
|
|
-
|
|
|
|
1,613,168
|
|
All-legend
Hotel Management Co., Ltd.
|
|
|
37,002
|
|
|
|
2,730
|
|
Others
|
|
|
1,205
|
|
|
|
2,222
|
|
Total
|
|
$
|
45,040,773
|
|
|
$
|
44,561,626
|
|
Historically, Tianshi Engineering
remitted payment to the Company upon sales to third party customers. However, to
support Tianshi Engineering
’
s marketing efforts
in anticipation of receiving a direct
selling license in China, the Company agreed to allow Tianshi Engineering to
defer payment. Balances not remitted to the Company within 90 days are converted
to other receivables - related parties. Beginning January
1
, 2007, the other receivables - related
parties became interest bearing. The stated interest rate is the interest rate
for the same level of loan stipulated by the People
’
s Bank of China.
For the nine months ended
September
30, 2010, the
C
ompany did not co
nvert any accounts
receivables
-
related parties to other
receivables
-
related parties.
On December 25, 2008, Biological entered
into
a Real Property Transfer Agreement (the
“
2008 Transfer
Agreement”
) with Tianshi
Group, pursuant to which Biological tran
sferred four buildings at the price of
RMB 32,800,000 (or U.S. $4,7
97,984
).
As of March 31, 2010, the amount was
paid in full by Tianshi Group.
On November 15, 2009, Tianshi Holdings
and Tianshi Investment entered
into a
Transfer Contract, pursuant to
whi
ch Tianshi Holdings
agreed to sell all of the registered share capital of Tiens Yihai it owned to
Tianshi Investment for $37,000,000.
As of September
3
0
, 2010, $
9
,700,000 of the purchase price was paid;
$3,700,000 was received in cash, while $6,000,000 was
offset against payables owed to Fuhong
(as further described under the caption "Other payables
–
related parties"
below.)
A portion of the construction in
progress
recorded
and paid for by
Life Resource
s
is
built on the plant
owned by
Tianshi Life Scienc
e. Tianshi Life Science intends to
reimburse Life Resources
for
the cost of
this portion of the
construction
in progress
. The agreement is
currently being drafted for the
amount of RMB
78,017,869
(a
pproximately U.S.
$
11,648,068
).
This
amount has been reclas
sified
as
other receivable
-
related party
as of
September 30, 2010
, accordingly
.
Advances from Customers - Related
Parties
Advances from related party customers
were $
13.0
million and $
4.
4
million as of
September
3
0
, 20
10
and December 31, 200
9
, respecti
vely. These advances represented
prepayments made to us to insure that customers could obtain enough of our
products to meet their market demands.
The
m
ajority
of the $
7.6
million
in advances was
from Tianshi Engineering,
wh
ose sales
cover the China regio
n, and have
h ad a
higher historical sales growth
rate
than the overseas regions.
T
h
e increase in advances
reflect
s
their outlook of business
in the China region
.
Short-term debt
–
related party
On August 24, 2010,
Tianshi Engineering
and
Life Resource
s
entered
into
a
loan
agreement
.
In order to support the business
development of
Life
Resource
s, Tianshi
Engineering agree
d
to make a loan to
Life Resource
s equal to the amount of outstanding
advances from customers as of June 30, 2010
and then they will
rei
nforce
the advances from customers to cover
their purchase of next quarter
.
The amount of the loan
, which was
reclassified
to
s
hort - term
d
ebt
–
r
elated
p
arty from
advances from customers
, is
RMB 60,000,000 (or U.S.
$
8,958,000)
,
and is due in full on Dec
ember 31, 2010.
Interest is
caculated
based on the
benchmark interest rate of the
P
eople's
B
ank of
C
hina
o
n July 1
, 2010
(5.31
%
APR).
Other
Payables - Related Parties
These amounts arose primarily from
cash advances
from related parties
to Life Resources to
support its operations
.
Other
amounts
are previous cash advances from related
parties such as management fees due to r
elated parties and various
non-operational transactions incurred with related parties.
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Tianshi
Group
|
|
$
|
8,751,840
|
|
|
$
|
-
|
|
Tianshi
Engineering
|
|
|
6,596,720
|
|
|
|
40,805
|
|
Tianshi
Germany Co., Ltd.
|
|
|
102,129
|
|
|
|
107,326
|
|
Tianjin
Tianshi Global International Trade Co., Ltd.
|
|
|
95,552
|
|
|
|
93,606
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
|
84,359
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
15
|
|
|
|
14
|
|
Fuhong
Development Co. Ltd.
|
|
|
-
|
|
|
|
3,000,000
|
|
Others
|
|
|
10
|
|
|
|
-
|
|
Total
|
|
$
|
15,630,625
|
|
|
$
|
3,326,110
|
|
On November 10, 2009, Tianshi Holdings
borrowed $3,000,000 from Fuhong Development to fund its capital contribution to
Life Resources. On Fe
bruary
10, 2010, the loan
was paid
in full
by canceling the same amount Tianshi
Investment owed to the Company.
On March 3, 2010, Tianshi Holdings
borrowed another $3,000,000 from Fuhong Development to fund its capital
contribution to Life Resources. On J
une 11, 2010, the loan was paid in full
by
canceling
the same amount Tianshi
I
nvestment owed to the
Company.
During
the third quarter of 2010,
the Company
received
$7,614,300
and
$6,270,60
0
from Tianshi Group and Tianshi
Engineering, respect
ive
ly
, in ord
er to fund a portion of the construction
in progress.
The amounts
are expected to be returned in November,
2010.
Other
Transactions with Tianshi Engineering
On October 31, 2007, Biological entered
into four lease agreements with Tianshi Engineering tha
t enable Tianshi Engineering to share
the use of certain of Biological
’
s production workshops and equipment to
manufacture products which Tianshi Engineering owns, or jointly owns, with
Biological.
Each of the four agreements
was effective as of January
1,
2008 and expire on
December 31, 2010. On December 31, 2007, Biological entered into two
supplemental agreements, which added fourteen pieces of personal care products
production equipment to, and removed two health products production workshops
from, two
of the lease
agreements.
Rent revenue
accrued
from these leases amounted to $156,435
and $
164,670
for the nine months ended
September
30, 2010 and 2009,
respectively
, and
$
52,705
and $54,905 for the three months ended
September 30, 20
10
and 200
9
, respect
ively
.
Other
Transactions with Tianshi Group
On
January 1, 2009, Biological entered into an office and facilities lease
agreement with Tianshi Group. Under the terms of the agreement, Biological’s
annual rent is equal to 1% of its gross revenues. In addition, Biological is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expires on December 31, 2010. On January 1, 2010, Life
Resources entered an office and facilities lease agreement with Tianshi Group on
the same terms as Biological’s lease agreement with Tianshi Group. The Company
paid rent under these leases in the amount of $330,358 and $375,931 for the nine
months ended September 30, 2010 and 2009, respectively, and $70,640 and $73,243
for the three months ended September 30, 2010 and 2009,
respectively.
On
January 1, 2009, Biological and Life Resources entered into a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the nine months ended
September 30, 2010 and 2009, Biological and Life Resources recorded
$247,265 and $245,019 of the rent expense, which is not paid to Tianshi Group,
but recorded as paid in capital based upon market price.
Transactions
with Tianshi Pharmaceuticals
On December 15, 2009, the Company
entered into a one-year lease agreement with Tianshi Pharmaceu
tical
s
. Under the terms of the lease
agreement, the Company leased equipment for the fee of
RMB 25,383 (or U
.
S
.
$3,71
4)
per month. In addition, the Company is
obligated to pay insurance, maintenance and other expenses related to
the equipment. This agreem
ent became effective on January 1, 2010
and expire
s
on December 31, 2010.
The
C
ompany ha
s
paid $
33,605
of rent expense for the nine months
ended
September
30, 2010.
Transactions
with Tianshi Life Science
A portion of the construction in
progress recorded
and paid
for by Life Resources is built on the plant owned by Tianshi Life
Science. Tianshi Life Science intends to
reimburse Life Resources for
the cost of this portion of the
construction in progress. The agreement is currently being drafted for the
am
ount of RMB 78,017,869
(approximately U.S. $11,648,068). This amount has been reclassified as other
receivable - related party as of September 30, 2010,
accordingly.
MANAGEMENT
ASSUMPTIONS
Management anticipates, based on
internal forecasts and assumpti
ons relating to our current operations,
that existing cash and funds generated from operations will be sufficient to
meet working capital
needs
for at least the next
12 months. In the event that plans change, our assumptions change or prove
inaccurate or i
f other
capital resources and projected cash flow otherwise prove to be insufficient to
fund operations (due to unanticipated expense, technical difficulties, or
otherwise), we could be required to seek additional financing. There can be no
assurance that
we will be able to obtain additional
financing on terms acceptable to us, or at all.
OFF-BALANCE SHEET
ARRANGEMENTS
We have no off-balance sheet
arrangements.
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4
T
.
CONTROLS
AND PROCEDURES
Disclosure Controls and
Procedures
Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness, as of the end of the
period covered by this report, of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation,
our principal executive officer and principal financial officer concluded that,
as of such date, the Company’s disclosure controls and procedures were
effective.
Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in our Exchange Act reports is recorded, processed, summarized,
and reported, within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes in
Internal Control Over Financial Reporting
There has been no change in our internal
control over financial reporting during the
third
quarter of 20
10
that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER
INFORMATION
ITEM 6.
EXHIBITS
The exhibits listed on the Exhibit Index
are
provided
as part of this
report.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has
duly cau
sed this report to be signed on
its behalf by the
undersigned thereunto duly authorized.
Date
:
November
15
,
2010
|
|
|
|
|
/s/ Jinyuan
Li
|
|
|
|
Jinyuan
Li
|
|
Chief Executive Officer, President
and Acting Chief
Financial
Officer
|
|
(Principal Exe
cutive Officer, Principal
Financial and
Accounting
Officer)
|
EXHIBIT
INDEX
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Loan
Agreement, dated
August 24
, 2010 by and between
Tianjin Tiens Life Resources Co., Ltd. and Tianjin Tianshi
Biological Engineering Co., Ltd.
|
|
|
|
31.1
|
|
Certification of the Principal
Executive Officer and Principal Financial and Accounting Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
3
1
.
2
|
|
Certification of the Chief
Executive Officer and Acting Chief Fina
ncial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
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