---

 

TIENS BIOTECH GROUP (USA), INC.

INDEX TO FORM 10-Q

	PAGE
PART I - FINANCIAL INFORMATION	3
ITEM 1. FINANCIAL STATEMENTS	3
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009	3
Consolidated Statements of Income and Other Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)	4
Consolidated Statements of Cash Flows for the Six Months Ended June 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	34
ITEM 4T. CONTROLS AND PROCEDURES	34
PART II - OTHER INFORMATION	34
ITEM 6. EXHIBITS	34

 

2

---

 

TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	5,660,772			$	1,848,328
Accounts receivable, trade - related parties, net of
allowance for doubtful accounts of $1,307,687 and $1,419,178
as of June 30, 2010 and December 31, 2009, respectively			8,809,737				15,379,312
Inventories			5,776,964				5,328,052
Other receivables			2,354,237				995,657
Other receivables - related parties			33,035,274				44,561,626
Employee advances			238,075				115,673
Prepaid expenses			351,905				658,193
Prepaid taxes			121,542				407,534
Total current assets			56,348,506				69,294,375
PROPERTY, PLANT AND EQUIPMENT, net			9,946,030				10,124,483
OTHER ASSETS:
Construction in progress			146,343,059				125,572,621
Construction deposits			5,068,290				1,405,997
Intangible assets, net			12,764,848				12,864,295
Other assets			18,039,203				11,847,937
Total other assets			182,215,400				151,690,850
Total assets		$	248,509,936			$	231,109,708
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	4,387,829			$	5,012,157
Advances from customers - related parties			17,055,922				4,426,751
Wages and benefits payable			788,451				1,484,852
Income taxes payable			330,095				-
Contractor deposits			258,403				183,395
Contractor payables			20,942,557				18,513,216
Other payables			1,248,953				1,151,551
Other payables - related parties			1,502,767				3,326,110
Total current liabilities			46,514,977				34,098,032
NON-CURRENT LIABILITIES
Deferred income			11,283,364				11,236,501
Total non current liabilities			11,283,364				11,236,501
Total liabilities			57,798,341				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			18,194,133				18,042,189
Statutory reserves			16,465,144				13,217,217
Retained earnings			126,769,661				126,370,263
Accumulated other comprehensive income			18,880,529				18,262,123
Total shareholders' equity of the Company			180,380,801				175,963,126
Noncontrolling interest			10,330,794				9,812,049
Total equity			190,711,595				185,775,175
Total liabilities and equity		$	248,509,936			$	231,109,708

The accompanying notes are an integral part of this statement.

 

3

---

 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 and 2009 (UNAUDITED)

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
REVENUE - RELATED PARTIES		$	8,167,849			$	20,551,036			$	19,571,212			$	38,788,581
COST OF SALES - RELATED PARTIES			3,037,847				6,117,409				6,478,728				11,852,468
GROSS PROFIT			5,130,002				14,433,627				13,092,484				26,936,113
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES			4,069,097				4,014,591				7,566,644				7,145,527
INCOME FROM OPERATIONS			1,060,905				10,419,036				5,525,840				19,790,586
(Interest expense)			-				(53,201	)			-				(105,817	)
Interest income			3,846				100,779				5,718				186,547
Other expense			(418,260	)			(28,144	)			(671,970	)			(73,432	)
OTHER (EXPENSE) INCOME, NET			(414,414	)			19,434				(666,252	)			7,298
INCOME BEFORE INCOME TAXES			646,491				10,438,470				4,859,588				19,797,884
INCOME TAXES			138,621				123,101				748,123				482,716
NET INCOME		$	507,870				10,315,369				4,111,465				19,315,168
LESS: Net income attributable to the noncontrolling interest			(122,083	)			(139,071	)			(464,140	)			(546,045	)
NET INCOME ATTRIBUTABLE TO THE COMPANY			385,787				10,176,298				3,647,325				18,769,123
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment			766,901				151,289				1,125,269				770,887
COMPREHENSIVE INCOME			1,152,688				10,327,587				4,772,594				19,540,010
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST			163,465				140,300				506,863				559,895
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY		$	989,223			$	10,187,287			$	4,265,731			$	18,980,115
EARNINGS PER SHARE, BASIC AND DILUTED		$	0.01			$	0.14			$	0.05			$	0.26
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.

 

4

---

 

TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)

		Six months ended June 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,111,465			$	19,315,168
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Bad debt expense			(116,962	)			(196,863	)
Depreciation			814,376				1,112,849
Amortization			167,147				194,380
Interest expense			-				2,710
Gain on sale of assets			(15,085	)			(15,717	)
Rental expense borne by a related party			163,532				163,331
(Increase) decrease in assets:
Accounts receivable, trade - related parties			6,725,384				(5,532,449	)
Other receivables			(1,349,264	)			10,743
Other receivables - related parties			213,304				(992,241	)
Inventories			(421,815	)			3,355,993
Employee advances			(121,454	)			(80,805	)
Prepaid expense			307,795				(435,576	)
Increase (decrease) in liabilities:
Accounts payable			(662,699	)			(1,579,065	)
Advances from customers - related parties			12,562,625				(219,470	)
Wages and benefits payable			(699,884	)			(703,898	)
Other taxes payable			615,431				8,920
Other payables			94,272				(395,970	)
Other payables - related parties			191,991				(202,847	)
Net cash provided by operating activities			22,580,159				13,809,193
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Life Resources			6,000,000				-
Collections from loans to local government			-				105,193
Proceeds from disposal of a subsidiary			700,000				-
Construction deposits			(2,678,074	)			(3,846,961	)
Contractor deposits			73,959				158,551
Addition to construction in progress			(18,790,772	)			(15,954,182	)
Equipment deposits			(6,133,065	)			-
Proceeds from sales of properties			2,621,558				17,039
Purchase of equipment and automobiles			(578,794	)			(921,388	)
Net cash used in investing activities			(18,785,188	)			(20,441,748	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from (repayment to) related parties			-				(3,945,510	)
Net cash used in financing activities			-				(3,945,510	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			17,473				64,084
NET INCREASE (DECREASE) IN CASH			3,812,444				(10,513,981	)
CASH, beginning of period			1,848,328				44,854,511
CASH, end of period		$	5,660,772			$	34,340,530
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	-			$	105,817
Income taxes		$	913,722			$	667,347

The accompanying notes are an integral part of this statement.

 

5

---

 

Note 1 - Background

Tiens Biotech Group (USA), Inc. (the “Company” or “Tiens”) was incorporated on July 13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition Corp., and subsequently to Strategika, Inc. in February 2002. On December 31, 2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group (USA), Inc.

The Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan Li, the Company’s current Chairman, CEO and President. The Company owns 100% of Tianshi International Holdings Group Limited (“Tianshi Holdings”). Tianshi Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd. (“Biological”) and 100% of Tianjin Tiens Life Resources Co., Ltd. (“Life Resources”).

Nature of operations

The Company through its subsidiaries is primarily engaged in the manufacturing of nutritional supplement products, including wellness products and dietary supplement products. In the People’s Republic of China (“PRC”), the Company sells its products to Tianjin Tianshi Biological Engineering Co. Ltd. (“Tianshi Engineering”), a Chinese company. Tianshi Engineering, in turn, sells the products to customers through its branches and affiliated companies and at chain stores which are owned by individual distributors. Tianshi Engineering is 100% owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”).  Tianshi Group is 90% owned by Jinyuan Li, the Company’s Chairman, President and CEO, and 10% owned by Baolan Li, Jinyuan Li’s daughter. Outside the PRC, the Company sells its products to overseas affiliated companies located in 54 countries who in turn re-package them and sell to independent direct sales distributors.

Note 2 – Summary of significant accounting policies

Basis of presentation

The financial statements of the Company and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These Consolidated Financial Statements for interim periods are unaudited. In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal, recurring adjustments, necessary for their fair presentation. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with U.S. GAAP. These Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on April 2, 2010.

The reporting entity

The Company’s consolidated financial statements reflect the activities of the following Company subsidiaries:

 

6

---

 

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 US dollar. Biological and Life Resources’ financial records are maintained and the statutory financial statements are stated in its local currency, Renminbi (RMB), as their functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of each reporting period. Translation adjustments resulting from this process are included in other comprehensive income in the statement of income and other comprehensive income.

Translation adjustments amounted to $620,443 and $210,992 for the six months ended June 30, 2010 and 2009, respectively. Asset and liability accounts at June 30, 2010 were translated at RMB 6.81 to $1.00 compared to RMB 6.85 at June 30, 2009. Equity accounts are stated at their historical rate. The average translation rates applied to income statement accounts for the six months ended June 30, 2010 and 2009 were RMB 6.83 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:

 

7

---

 

•      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 June 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 debt of 0.5% of the remaining accounts receivable-related parties. Management reviews its accounts receivable on a regular basis to determine if the provision for doubtful debts is adequate, paying particular attention to the age of receivables outstanding. At June 30, 2010 and December 31, 2009, there were no receivables due from Tianshi Engineering outstanding more than 90 days. At June 30, 2010 and December 31, 2009, receivables due from overseas related companies outstanding more than 180 days totaled $6,486,902 and $5,089,510, 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:

 

8

---

 

		Provision for Doubtful Accounts
Six month period ended June 30, 2010
Balance at Beginning of Period		$	1,419,178
Decrease of provision for Doubtful Accounts			(111,491	)
Balance at End of Period		$	1,307,687
Six month period ended June 30, 2009
Balance at Beginning of Period		$	1,108,789
Decrease of provision for Doubtful Accounts			(195,303	)
Balance at End of Period		$	913,486

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
Six month period ended June 30, 2010
Balance at Beginning of Period		$	1,018,474
Increase of provision for Doubtful Accounts			4,248
Balance at End of Period		$	1,022,722
Six month period ended June 30, 2009
Balance at Beginning of Period		$	952,071
Increase of provision for Doubtful Accounts			1,305
Balance at End of Period		$	953,376

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:

 

9

---

 

	Estimated Useful Life
Buildings and improvements	20 years
Machinery and equipment	10 years
Computer, office equipment and furniture	5 years
Automobiles	5 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss is included in the consolidated statements of income and other comprehensive income. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and betterments to buildings and equipment are capitalized.

Construction in progress

Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction in progress until such time as the relevant assets are completed and are ready for their intended use. The Company expects to place certain buildings into service during the third quarter of 2010 and will begin depreciating those assets accordingly. The Company’s manufacturing plant facilities are not expected to be placed into service until a future period.

Construction deposits

Construction deposits represent advances paid by the Company to contractors for construction in progress.

Intangible assets

Intangible assets mainly consist of land use rights. All land located in the PRC is owned by the government and cannot be sold to any individual or company. However, the government grants “land use rights” for a specified period of time. The Company amortizes its land use rights according to the actual useful life of 50 years. Other intangible assets include patents and trademarks and are amortized over their estimated useful lives ranging from five to ten years.

Other assets

Other assets consist of deposits made to purchase equipment and a long-term prepaid expense. The Company will transfer the deposits made to purchase equipment from other assets to property, plant and equipment upon taking ownership. The Company amortizes its long-term prepaid expense according to the service period.

Impairment of long-lived assets

Long-lived assets, including intangible assets, of the Company are reviewed annually as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.

 

10

---

 

Deferred income

Deferred income consists of government grants. On August 2, 2005 and November 20, 2006, the Company received two government grants related to the purchase of land use rights in the amount of RMB 35,803,461 (or US $5,258,454). On August 28, 2008, Life Resources paid RMB 41,022,061 (or US $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 US $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 and 4% ownership of Tiens Yihai Co. Ltd. (“Tiens Yihai”). Effective as of November 15, 2009, the Company transferred its interest in Tiens Yihai to Tianshi International Investment Group Co., Ltd. (“Tianshi Investment”), a  company 100% owned by Jinyuan Li.

Revenue recognition

The Company sells both semi-finished products and finished products to Tianshi Engineering domestically. Revenue from semi-finished products is recognized at delivery point. Revenue from finished products is recognized only when the related party Chinese distributors recognized sales of the Company’s products to unaffiliated third parties. Revenues in both cases are net of value added taxes.

For overseas sales, the Company sells mostly finished products. The Company recognizes revenue from international sales (non-Chinese) to affiliated parties, net of taxes, as goods are shipped and clear review by the customs department of the Chinese government.

The Company is generally not contractually obligated to accept returns. However, on a case by case negotiated basis, the Company permits customers to return their products. Revenue is recorded net of an allowance for estimated returns. Such reserves are based upon management’s evaluation of historical experience and estimated costs. The amount of the reserves ultimately required could differ materially in the near term from amounts included in the accompanying consolidated financial statements. As the Company did not receive any returns of products during the past three years, and management does not anticipate allowing any returns in 2010 related to previous revenues, no allowance for estimated returns has been recorded as of June 30, 2010 and December 31, 2009.

Advertising costs

The Company sells its products to related parties, and these related parties are primarily responsible for marketing. Advertising costs of the Company for the six months ended June 30, 2010 and 2009 amounted to $6,803 and $6,211, respectively, and for the three months ended June 30, 2010 and 2009 amounted to $6,803 and $6,211, respectively, and were expensed as incurred.

 

11

---

 

Shipping and handling

Shipping and handling costs totaled $192,636 and $242,772 for the six months ended June 30, 2010 and 2009, respectively, and $69,884 and $102,070 for the three months ended June 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 development

Research and development expenses include salaries, supplies, and overhead such as depreciation, utilities and other costs. These costs are expensed as incurred. The Company expensed research and development costs of $924,675 and $668,720 for the six months ended June 30, 2010 and 2009, respectively, and $626,542 and $289,260 for the three months ended June 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 six months ended June 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 six months ended June 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 six months ended June 30, 2010 and 2009.

 

12

---

 

Recently issued accounting pronouncements