Attached files
file | filename |
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EX-31.1 - TIENS BIOTECH GROUP USA INC | v194550_ex31-1.htm |
EX-31.1 - TIENS BIOTECH GROUP USA INC | v194550_ex32-1.htm |
EX-10.1 - TIENS BIOTECH GROUP USA INC | v194550_ex10-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended June 30, 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. 6,
Yuanquan Rd.
Wuqing
New Tech Industrial Park
Tianjin, China
301700
(Address
of principal executive offices) (Zip Code)
+86-22-8213-7914
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated
Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨ (Do not check if a
smaller reporting company)
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
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
PART
I - FINANCIAL INFORMATION
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
In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and 2 fair value measurements and
describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010,
except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The guidance adopted on January 1,
2010 did not have an effect on the Company’s consolidated financial statements.
Adoption of the remaining guidance is not expected to have a material impact on
the Company’s consolidated financial statements.
Note
3 – Supplemental disclosure of cash flow information
On
February 10, 2010, Tianshi Holdings, Fuhong Development Co., Ltd. (“Fuhong
Development”), and Tianshi Investment entered into an agreement, pursuant to
which liabilities in the form of a loan receivable due to Fuhong Development
from the Company in the amount of $3,000,000 were offset against assets in the
form of a loan receivable due to the Company from Tianshi Investment. Each of
Fuhong Development and Tianshi Investment is 100% owned by Jinyuan
Li.
The right
to offset existed because:
|
1.
|
Tianshi
Investment had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Fuhong
Development;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
The
Company, Fuhong Development and Tianshi Investment agreed to offset the
two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
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.
|
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.
|
13
Note
4 – Inventories
Inventories
consisted of the following at June 30, 2010 and December 31, 2009:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$ | 1,355,394 | $ | 1,937,306 | ||||
Packaging
material
|
491,352 | 729,517 | ||||||
Miscellaneous
supplies
|
1,732,110 | 848,720 | ||||||
Work
in process
|
640,181 | 476,529 | ||||||
Finished
goods
|
1,557,927 | 1,335,980 | ||||||
Total
|
$ | 5,776,964 | $ | 5,328,052 |
The
Company has not written off any obsolete goods for the six months ended June 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 June 30, 2010 and December 31, 2009 are as follows:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Advance
to suppliers
|
$ | 292,361 | $ | 655,443 | ||||
Short-term
prepaid expenses
|
59,544 | 2,750 | ||||||
Total
|
$ | 351,905 | $ | 658,193 |
Note
6 – Property, plant and equipment, net
Property,
plant and equipment consist of the following at June 30, 2010 and December 31,
2009:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Buildings
and improvements
|
$ | 1,565,436 | $ | 1,558,934 | ||||
Office
equipment
|
357,690 | 348,284 | ||||||
Computer
equipment and software
|
2,418,605 | 2,405,467 | ||||||
Machinery
and equipment
|
14,448,738 | 14,211,726 | ||||||
Automobiles
|
4,878,101 | 4,470,909 | ||||||
Total
|
23,668,570 | 22,995,320 | ||||||
Less:
accumulated depreciation
|
(13,722,540 | ) | (12,870,837 | ) | ||||
Property,
plant and equipment, net
|
$ | 9,946,030 | $ | 10,124,483 |
Depreciation
expense for the six months ended June 30, 2010 and 2009 amounted to
$814,376 and $1,112,849, respectively, and $396,907 and $568,038 for the three
months ended June 30, 2010 and 2009, respectively.
14
Note
7 - Intangible assets
Intangible
assets consist of the following at June 30, 2010 and December 31,
2009:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Land
use rights
|
$ | 13,587,889 | $ | 13,531,454 | ||||
Other
intangible assets
|
345,709 | 344,274 | ||||||
Less
accumulated amortization
|
(1,168,750 | ) | (1,011,433 | ) | ||||
Intangible
assets, net
|
$ | 12,764,848 | $ | 12,864,295 |
Amortization
expense for the six months ended June 30, 2010 and 2009 amounted to $152,516 and
$194,380, respectively, and $76,273 and $97,237 for the three months ended June
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
(6 months remaining)
|
$ | 205,480 | ||
2011
|
$ | 298,416 | ||
2012
|
$ | 298,416 | ||
2013
|
$ | 287,322 | ||
2014
|
$ | 286,689 | ||
2015
and thereafter
|
$ | 11,388,525 |
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 June 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.
15
The
transfer to this reserve fund must be made before distribution of any dividend
to shareholders. On June 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 June 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 June 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 six months ended June 30, 2010 and 2009, no transfer was made
to this fund and the amount of the Company’s enterprise fund on each of June 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.
16
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 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 |
June 30, 2010
|
December 31, 2009
|
|||||||
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 | ||||
Other
receivables – related parties
|
$ | 33,035,274 | $ | 44,561,626 | ||||
Advances
from customers – related parties
|
$ | 17,055,922 | $ | 4,426,751 | ||||
Other
payables – related parties
|
$ | 1,502,767 | $ | 3,326,110 |
Revenue - related
parties
The
details of revenue-related parties are as follows:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Tianshi
Engineering
|
$ | 4,415,082 | $ | 9,669,603 | $ | 11,198,355 | $ | 12,412,223 | ||||||||
Overseas
Related Companies
|
3,752,767 | 10,881,433 | 8,372,857 | 26,376,358 | ||||||||||||
Total
|
$ | 8,167,849 | $ | 20,551,036 | $ | 19,571,212 | $ | 38,788,581 |
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.
17
Accounts receivable, trade - related
parties
The
details of accounts receivable, trade - related parties are as
follows:
June 30, 2010
|
December 31, 2009
|
|||||||
Tianshi
Engineering
|
$ | - | $ | 5,035,320 | ||||
Overseas
Related Companies
|
10,117,424 | 11,763,170 | ||||||
Allowance
for Doubtful Accounts
|
(1,307,687 | ) | (1,419,178 | ) | ||||
Total
|
$ | 8,809,737 | $ | 15,379,312 |
Other receivables - related
parties
Other
receivables - related parties are generated by the Company making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following table
summarizes the other receivables - related parties balances:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Tianshi
Investment
|
$ | 27,300,000 | $ | 37,000,000 | ||||
Tianshi
Engineering
|
5,354,348 | 5,688,926 | ||||||
Tianjin
Tianshi Life Science Co., Ltd.
|
148,798 | 55,878 | ||||||
All-legend
Property Service (Tianjin) Co., Ltd.
|
126,391 | 77,612 | ||||||
Tiens
SmartFlow Logistics (International) Group Ltd.
|
57,037 | 74,651 | ||||||
Tianshi
Yinshi Hotel
|
36,718 | 36,566 | ||||||
Tianshi
Indonesia Logistic & Trade Co., Ltd.
|
9,860 | 9,873 | ||||||
Tianshi
Group
|
- | 1,613,168 | ||||||
All-legend
Hotel Management Co., Ltd.
|
- | 2,730 | ||||||
Others
|
2,122 | 2,222 | ||||||
Total
|
$ | 33,035,274 | $ | 44,561,626 |
Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China. On April 21, 2009, the
Company entered into a loan agreement with Tianshi Engineering. Pursuant to that
agreement, effective as of April 1, 2009, $2,562,017 of other
receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. For the six months
ended June 30, 2010, the Company did not convert any accounts
receivables-related parties to other receivables-related
parties.
18
The
Company and Tianshi Group use common meters at the Company’s headquarters for
electricity and water, and also use the same employee insurance account. When
making payments to these outside parties, the Company usually pays the fees
first and then is reimbursed by Tianshi Group. These pro-rated amounts relating
to Tianshi Group are categorized as other receivables - related
parties.
On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,797,984). As
of March 31, 2010, the amount was paid in full by Tianshi Group.
On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million. As of June 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.)
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 June 30, 2010 and December 31, 2009, advances from related party
customers amounted to $17.1 million and $4.4 million, respectively.
Other payables - related
parties
The
details of other payable-related parties are as follows:
June 30, 2010
|
December 31, 2009
|
|||||||
Tianshi
Group
|
$ | 1,076,675 | $ | - | ||||
Tianshi
Engineering
|
145,907 | 40,805 | ||||||
Tianshi
Germany Co., Ltd.
|
101,805 | 107,326 | ||||||
Tianjin
Tianshi Global International Trade Co., Ltd.
|
93,997 | 93,606 | ||||||
Tianyuan
Capital Development Co. Ltd.
|
84,359 | 84,359 | ||||||
Tianshi
Administrative Committee of Industrial Park
|
14 | 14 | ||||||
Fuhong
Development Co. Ltd.
|
- | 3,000,000 | ||||||
Others
|
10 | - | ||||||
Total
|
$ | 1,502,767 | $ | 3,326,110 |
These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.
On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009 on December
31, 2008. On June 30, 2009, the loan was paid in full by the
Company.
19
On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
to fund its capital contribution to Life Resources. On February 10, 2010, the
loan was paid in full by 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 11, 2010, the loan was
paid in full by canceling the same amount Tianshi Investment owed to the
Company.
Other Transactions with
Tianshi Engineering
On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that enable Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment to manufacture products which
Tianshi Engineering owns, or jointly owns, with Biological. Each of
the four agreements was effective as of January 1, 2008 and expired on
December 31, 2009. On December 31, 2007, Biological entered into two
supplemental agreements, which added fourteen pieces of personal care products
production equipment to, and removed two health products production workshops
from, two of the lease agreements Biological entered into on October 31,
2007.
On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group (as further described under the caption “Other
receivables - related parties” above), pursuant to which Biological
transferred to Tianshi Group four buildings which were covered by the above
mentioned lease agreements. Accordingly, the two lease agreements which covered
production workshops expired at the end of 2008.
On
November 20, 2009, the lease agreement for health products production
equipment and the lease agreement for personal care product production
equipment were renewed by Biological and Tianshi Engineering for
2010.
Rent
revenue accrued from these leases amounted to $103,730 and $109,765 for the six
months ended June 30, 2010 and 2009, respectively, and $51,876 and $54,909 for
the three months ended June 30, 2010 and 2009, respectively.
Other Transactions with
Tianshi Group
On
January 1, 2009, Biological entered an office and facilities lease agreement
with Tianshi Group. Under the terms of the agreement, Biological’s annual rent
is equal to 1% of its gross revenues. In addition, Biological is obligated to
pay insurance, maintenance and other expenses related to the premises. This
agreement expired on December 31, 2009, and was renewed by Biological and
Tianshi Group, effective as of January 1, 2010, for 2010. On January 1, 2010,
Life Resources entered an office and facilities lease agreement with Tianshi
Group on the same terms as Biological’s lease agreement with Tianshi Group. The
Company paid rent under this lease in the amounts of $259,718 and $302,688 for
the six months ended June 30, 2010 and 2009, respectively, and $100,492 and
$141,700 for the three months ended June 30, 2010 and 2009,
respectively.
20
On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the six months ended June 30,
2010 and 2009, Biological and Life Resources recorded $163,532 and
$163,331 of the rent expense, which is not paid to Tianshi Group, but recorded
as paid in capital based upon market price.
Transactions with
Tianyuan Capital
On
September 10, 2004, Tianshi Holdings entered a loan agreement with Tianyuan
Capital to borrow $10.65 million to fund Tianshi Holdings’ contribution due to
Tiens Yihai. Jinyuan Li owns 100% of Tianyuan Capital.
The loan
was pre-paid in full on December 31, 2009.
Transactions
with Tianshi
Pharmaceuticals
On
December 15, 2009, the Company entered into a one-year lease agreement with
Tianshi Pharmaceuticals. Under the terms of the lease agreement, the Company
leased equipment for the fee of RMB 25,383 (or US $3,714) per month.
In addition, the Company is obligated to pay insurance, maintenance and other
expenses related on the equipments. This agreement is effective from
January 1, 2010 and expires on December 31, 2010. The Company has paid
$22,284 of the rent expense for the six months ended June 30, 2010.
Note
10 – Additional product sales information
The
Company has a single operating segment. All of the Company’s revenues were
generated from related parties. Summarized enterprise-wide financial information
concerning the Company’s revenues based on product groups is shown in the
following table:
Revenue
by Product Group:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Wellness
products
|
$ | 7,643,664 | $ | 19,038,898 | $ | 17,809,404 | $ | 36,202,610 | ||||||||
Dietary
supplement products
|
524,185 | 1,494,033 | 1,761,808 | 2,567,866 | ||||||||||||
Personal
care products
|
- | 18,105 | - | 18,105 | ||||||||||||
Total
|
$ | 8,167,849 | $ | 20,551,036 | $ | 19,571,212 | $ | 38,788,581 |
Note
11 - 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.
21
The
Company’s subsidiaries, Biological and Life Resources, were incorporated in
the PRC. According to US GAAP, the following are the income tax credits granted
by the Chinese government, which are significant components of income taxes
associated with continuing operations required to be disclosed.
Beginning
January 1, 2008, Enterprise Income Tax (“EIT”) laws became effective.
According to the EIT, the standard tax rate is 25% and high-tech companies could
be subject to a special reduced tax rate of 15%. The qualification of a
high-tech company is to be reviewed annually. In the fiscal year 2008 and 2009,
Biological was qualified as a high-tech company. However, Biological was
required by the local tax authority to prepay income tax at a tax rate of 25%
every year, although the prepaid income tax could be refunded in the next
year. On December 17, 2009 and June 24, 2010, the prepaid
income tax amounts of $1,562,168 for 2008 and $578,267 for
2009 were fully refunded.
According
to the EIT, Life Resources could be fully exempt from PRC income taxes for two
years starting from January 1, 2008, followed by a 12.5% reduced tax rate for
the next three years. However, before the tax exemption qualification of Life
Resources was approved by the tax authority, Life Resources was required by
local tax authority to prepay income tax at a tax rate of 25%. On October 10,
2008, the approval was issued and prepaid income tax of $685,475 in Life
Resources was refunded in 2009.
Provisions
for income taxes were all current income tax expenses and for the six months
ended June 30, 2010 and 2009, were $748,123 and $482,716, respectively, and
for the three months ended June 30, 2010 and 2009 were $138,621 and $123,101,
respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate:
Three months ended June 30,
|
Six months ended June 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
|
(7.1 | ) | (23.8 | ) | (9.7 | ) | (22.6 | ) | ||||||||
Total
provision for income taxes
|
17.9 | % | 1.2 | % | 15.3 | % | 2.4 | % |
The
estimated tax savings due to the reduced tax rate for the six months ended June
30, 2010 and 2009 amounted to $611,612 and $3,565,280, respectively. The
net effect on earnings per share if the income tax had been applied would
decrease earnings per share for the six months ended June 30, 2010 and 2009 by
$0.01 and $0.05, respectively.
Note 12 – 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.
22
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 $532,883 and $451,361 for the six months ended June 30, 2010
and 2009, respectively, and $271,251 and $230,448 for the three months ended
June 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 participant. The Company made contributions to the
unemployment insurance plan of $51,411 and $45,987 for the six months
ended June 30, 2010 and 2009, respectively, and $26,103 and
$23,566 for the three months ended June 30, 2010 and 2009, respectively.
All contributions are paid to a PRC insurance company, which in turn, is
responsible for the unemployment liability. Pursuant to the Company’s medical
insurance plan for its employees, the Company is required to pay an amount equal
to 10% of its employees’ salary to a PRC insurance company, which amounted to
$268,098 and $231,759 for the six months ended June 30, 2010 and 2009,
respectively, and $136,431 and $118,329 for the three months ended June 30,
2010 and 2009, respectively.
23
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In this
Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United
States Dollars and references to “renminbi” or “RMB” are to the People’s
Republic of China Renminbi. References to “we”, “us”, “our”, the “Company” or
“Tiens” include Tiens Biotech Group (USA), Inc. and its subsidiaries, except
where the context requires otherwise.
FORWARD-LOOKING
STATEMENTS
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; (d) whether we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-Q with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date.
Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.
OVERVIEW
Tiens
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations are
conducted from our headquarters in Tianjin, People’s Republic of China (“China”
or the “PRC”) through our 80% owned subsidiary, Tianjin Tianshi Biological
Development Co. Ltd. (“Biological”) and our wholly-owned subsidiary, Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). We sell our products to
affiliated companies in China and internationally.
Tiens is
a Delaware corporation. We own 100% of Tianshi International Holdings Group
Ltd., a British Virgin Islands company (“Tianshi Holdings”). Tianshi
Holdings owns 80% of Biological and 100% of Life Resources.
Tianjin
Tianshi Biological Engineering Co. Ltd. (“Tianshi Engineering”), a Chinese
company and the entity to which we sell all of our products for consumption in
China, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned
by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”). Tianshi Group
is 90% owned by Jinyuan Li, our Chairman, President and CEO, and 10% owned by
Baolan Li, Jinyuan Li’s daughter.
24
Life
Resources is currently constructing research and development, manufacturing and
logistic facilities, as well as administrative offices in Tianjin, China
totaling approximately 420,000 square meters. We intend to move our
headquarters to these new facilities once they are completed.
25
RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30 2010 COMPARED TO THE
THREE AND SIX MONTHS ENDED JUNE 30, 2009
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||
(Unaudited)
|
(Unaudited)
|
Change
|
(Unaudited)
|
(Unaudited)
|
Change
|
|||||||||||||||||||
REVENUE
– RELATED PARTIES
|
$ | 8,167,849 | $ | 20,551,036 | -60.3 | % | $ | 19,571,212 | $ | 38,788,581 | -49.5 | % | ||||||||||||
COST
OF SALES
|
3,037,847 | 6,117,409 | -50.3 | % | 6,478,728 | 11,852,468 | -45.3 | % | ||||||||||||||||
GROSS
PROFIT
|
5,130,002 | 14,433,627 | -64.5 | % | 13,092,484 | 26,936,113 | -51.4 | % | ||||||||||||||||
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
4,069,097 | 4,014,591 | 1.4 | % | 7,566,644 | 7,145,527 | 5.9 | % | ||||||||||||||||
INCOME
FROM OPERATIONS
|
1,060,905 | 10,419,036 | -89.8 | % | 5,525,840 | 19,790,586 | -72.1 | % | ||||||||||||||||
(Interest
expense)
|
- | (53,201 | ) | -100.0 | % | - | (105,817 | ) | -100.0 | % | ||||||||||||||
Interest
income
|
3,846 | 100,779 | -96.2 | % | 5,718 | 186,547 | -96.9 | % | ||||||||||||||||
Other
expense
|
(418,260 | ) | (28,144 | ) | 1386.1 | % | (671,970 | ) | (73,432 | ) | 815.1 | % | ||||||||||||
OTHER
(EXPENSE) INCOME, NET
|
(414,414 | ) | 19,434 | -2232.4 | % | (666,252 | ) | 7,298 | -9229.2 | % | ||||||||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
646,491 | 10,438,470 | -93.8 | % | 4,859,588 | 19,797,884 | -75.5 | % | ||||||||||||||||
PROVISION
FOR INCOME TAXES
|
138,621 | 123,101 | 12.6 | % | 748,123 | 482,716 | 55.0 | % | ||||||||||||||||
NET
INCOME
|
507,870 | 10,315,369 | -95.1 | % | 4,111,465 | 19,315,168 | -78.7 | % | ||||||||||||||||
LESS:
Net income attributable to the noncontrolling interest
|
122,083 | 139,071 | -12.2 | % | 464,140 | 546,045 | -15.0 | % | ||||||||||||||||
NET
INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
|
$ | 385,787 | $ | 10,176,298 | -96.2 | % | $ | 3,647,325 | $ | 18,769,123 | -80.6 | % | ||||||||||||
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
|
$ | 0.01 | $ | 0.14 | $ | 0.05 | $ | 0.26 |
Revenue. For the
second quarter of 2010, revenue was $8.2 million, a decrease of 60.3% compared
to $20.6 million for the same period in 2009. For the six months
ended June 30, 2010, revenue was $19.6 million, a decrease of 49.5% compared to
$38.8 million for the same period in 2009. The decrease in revenue for the first
six months of 2010 was primarily due to a decrease of 68.3% in international
sales.
For the
second quarter of 2010, revenue in China was $4.4 million, a decrease of 54.3%
compared to $9.7 million for the same period in 2009. For the six months ended
June 30, 2010, revenue in China was $11.2 million, a 9.8% decrease compared to
$12.4 million for the same period in 2009. The decrease was mainly due to
domestic distributors’ reduced purchasing demand following their stocking up of
products during 2009, combined with concerns
about the world economic recovery slow down.
For the
second quarter of 2010, international revenue was $3.8 million, a decrease of
65.5% compared to $10.9 million for the same period in 2009. For the six months
ended June 30, 2010, international revenue was $8.4 million, a decrease of 68.3%
compared to $26.4 million for the same period in 2009. The possible reasons
for the decrease in international revenue are as follows: (1) During 2008,
China’s Administration of Quality Supervision, Inspection and Quarantine carried
out a national campaign against unsafe food and substandard products, which
brought on a general slow-down and backlog of export clearances for Chinese food
products. Upon the lifting of the regulations, overseas affiliated companies
began to purchase more products, thereby increasing sales in the first two
quarters of 2009; (2) Particularly, our second quarter 2010 sales to
Indonesia, Russia, Vietnam and Peru further decreased due to the
distributors in these countries purchasing more products in the first half of
2009, after the 2008 product scarcity for the reason noted above. For
example, Indonesia purchased $9.2 million from us during the
first half of 2009, which was 2.7 times their purchases for the first half
of 2008; (3) The lasting global economic recession has substantially reduced
customers’ buying power. During the early stages of the recession, the direct
selling 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 their marketing programs
and reorganization of their branch and distributor levels, which is
expected to boost sales performance over the long-run but negatively affect
sales in the short-run.
26
The
management of the Company believes that the decline in our revenues is
temporary with the additive effect of the above stated reasons. The
management of our domestic and overseas affiliated companies have indicated that
they are not seeing sizable declines of their revenue, and that they expect that
the market fluctuation will be temporary. They believe that revenue growth will
resume in the near future, consistent with what they have achieved during the
majority of the past 15 years.
Cost of Sales. Cost
of sales for the second quarter of 2010 decreased to $3.0 million, or by 50.3%,
compared to $6.1 million for the same period in 2009. For the six months ended
June 30, 2010, cost of sales was $6.5 million, a decrease of 45.3 % compared to
$11.9 million for the same period in 2009. Cost of sales for the
period decreased at a slightly lower rate than revenue, primarily due to
fixed costs, which do not increase or decrease in line with revenue
changes.
Gross Profit. Gross
profit for the second quarter of 2010 was $5.1 million, a decrease of 64.5%
compared to $14.4 million for the same period in 2009. The gross profit margin
for the second quarter of 2010 was 62.8%, compared to 70.2% for the same period
in 2009. For the six months ended June 30, 2010, gross profit was $13.1 million,
a decrease of 51.4% compared to the same period in 2010, and the gross profit
margin was 66.9% compared to 69.4% for the same period in 2009. These decreases
were mainly due to the decrease of revenue overall and fixed costs, which do not
increase or decrease in line with revenue changes.
Selling,
general and administrative expenses. Selling, general and administrative
expenses were $4.1 million for the second quarter of 2010, an increase of 1.4%
compared to $4.0 million for the same period in 2009. This increase was
primarily due to the increase in research and development expenses. Selling,
general and administrative expenses as a percentage of sales were 49.8% for
the second quarter of 2010 compared to 19.5% for the same period in 2009. For
the six months ended June 30, 2010, selling, general and administrative expenses
were $7.6 million, an increase of 5.9% compared to $7.1 million in the same
period in 2009. This increase was mainly due to the increase in research and
development expense. For
the six months ended June 30, 2010, selling, general and administrative expenses
as a percentage of sales was 38.7%, compared to 18.4% for the same period in
2009.
Other (expense) income,
net. Other expense was $0.4 million for the second quarter of
2010, compared to other income of $0.02 million for the same period in 2009. For
the six months ended June 30, 2010, other expense was $0.7 million compared to
other income of $0.01 million for the same period in 2009. These
differences were mainly due to increase in loss based on currency translation
differences between the two periods.
Provision for income
taxes. Provision for income taxes was $0.1 million for the second
quarter of 2010 compared to $0.1 million for the same period in 2009. For the
six months ended June 30, 2010, provision for income taxes was $0.7 million
compared to $0.5 million for the same period in 2009. The main reason for this
increase was that Life Resources began applying the reduced income tax rate of
12.5% from January 1, 2010, while it was exempt from income tax in 2009.
Net income. As a
result of the foregoing factors, net income for the second quarter of 2010 was
$0.5 million, a decrease of 95.1% compared to $10.3 million for the same period
in 2009. For the six months ended June 30, 2010, net income was $4.1
million, a decrease of 78.7% compared to $19.3 million for the same period in
2009.
27
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 $22.6 million for the six months ended June
30, 2010, compared to net cash provided by operating activities of $13.8 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
June 30, 2010, we had positive working capital of $9.8 million, compared to
$35.2 million as of December 31, 2009. The $6.6 million decrease
and $11.5 million decrease in accounts receivable and other receivables due from
related parties, respectively, along with the $12.6 million increase in advances
from customers contributed to the majority of this working capital
decline.
Net cash
used in investing activities decreased by $1.7 million for the six months
ended June 30, 2010 compared to the same period of 2009. During the first
six months of 2010, we collected $6 million net cash provided from
investment in Life Resource. During the first six months of 2010, we paid
$18.8 million to contractors for construction in progress, compared to $16.0
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 logistic facilities, and
administrative offices;
· the continued production of
existing products and general overhead and personnel related expenses to support
these activities;
· the development costs of new
products; and
· expansion of production scale to
meet the demands of our markets.
We
believe that the cash flow would be sufficient for the next twelve
months. Thereafter, financing may be needed to fund research and
development efforts and operations, but management is unable at this
time to determine what level of financing would be needed or desirable
then.
Critical
Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.
Revenue
recognition.
We sell
both semi-finished products and finished products to Tianshi Engineering
domestically. Revenue
from the sale of semi-finished products is recognized at FOB delivery
point, when the semi-finished products are sold to Tianshi Engineering.
Revenue from the sale of finished products is recognized only when the related
party Chinese distributor recognizes sales of our products to unaffiliated third
parties. Revenues in both cases are net of value added taxes.
28
For
overseas sales, we sell mostly finished products. We recognize revenue from
international sales (outside of China) to affiliated parties, net of value added
taxes, as goods are shipped and clear review by the customs department of the
Chinese government.
We are
generally not contractually obligated to accept returns. However, on a case by
case negotiated basis, we permit customers to return products. Revenue is
recorded net of an allowance for estimated returns. Such reserves are based upon
management’s evaluation of historical experience and estimated costs. The amount
of the reserves ultimately required could differ materially in the near term
from amounts included in the accompanying consolidated financial
statements. As we did not receive any returns of products during the past
three years, and management does not anticipate allowing any returns in 2010
related to previous revenues, no allowance for estimated returns has been
recorded as of June 30, 2010.
Bad
debts.
Our trade
accounts receivables are mainly due from related companies. We have made full
provision for accounts receivable-related parties aging over one year and a
general allowance for doubtful debts of 0.5% of the remaining accounts
receivable-related parties. Management reviews its accounts
receivable on a regular basis to determine if the bad debt allowance is adequate
at each year-end, paying particular attention to the age of
receivables outstanding.
Inventories.
Inventories
are stated at the lower of cost or market, using the moving average basis. We
review our inventory annually for possible obsolete goods or to determine if any
reserves are necessary for potential obsolescence.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and 2 fair value measurements and
describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010,
except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The guidance adopted on January
1, 2010 did not have an effect on our consolidated financial statements.
Adoption of the remaining guidance is not expected to have a material impact
on our consolidated financial statements.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We market
most our products through various domestic and international business entities
that are related to us through common ownership. As a result, most of our
consolidated sales are to related parties.
In China,
we sell our products to Tianshi Engineering, an affiliated company. Tianshi
Engineering, in turn, markets and sells the products to customers through
its branches and affiliated companies and at chain stores owned by individual
distributors.
We have a
sales contract with Tianshi Engineering which requires Tianshi Engineering to
purchase all of our products to be sold in China. We sell our finished products
to Tianshi Engineering at a price equal to 25% of the Chinese market price for
the products. This 25% figure was negotiated between the parties in 2003, before
we acquired Tianshi Holdings, and we believe that it is a reasonable sales price
for us to receive. The price of semi-finished goods sold to Tianshi Engineering
was originally set at the beginning of 2006 to provide us with a 75% gross
profit margin. However, based on fluctuations in the cost of raw materials and
quantities produced, the gross profit margin percentage varied during the year.
This 75% figure was negotiated between the parties, and we believe that it
is reasonable. The goal of this new pricing policy was to try to maintain our
gross margins on semi-finished goods at a similar level to historical gross
margins for finished goods. All of Tianshi Engineering’s Chinese affiliated
companies are owned in whole or in part by Jinyuan Li’s immediate family
members.
29
Internationally,
we sell our products directly to overseas affiliates located in 54
countries, who in turn re-package the products to meet the needs of the local
markets and sell to independent distributors or end users of our
products. Our CEO, Jinyuan Li, owns or controls these overseas related
companies. Due to the common ownership, there are no formal sales or
administrative agreements among us and those overseas related parties. The
business operations among these related entities are regulated through internal
policies.
Our
related party transactions are required to be reviewed and approved or ratified
by a majority of our non-interested Board of Directors. The following tables are
provided to facilitate your understanding of the transactions and outstanding
balances between those related parties and our company.
June 30, 2010
|
December 31, 2009
|
|||||||
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 | ||||
Other
receivables – related parties
|
$ | 33,035,274 | $ | 44,561,626 | ||||
Advances
from customers – related parties
|
$ | 17,055,922 | $ | 4,426,751 | ||||
Other
payables – related parties
|
$ | 1,502,767 | $ | 3,326,110 |
Revenue
- Related Parties
The
details of revenue-related parties are as follows:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Tianshi
Engineering
|
$ | 4,415,082 | $ | 9,669,603 | $ | 11,198,355 | $ | 12,412,223 | ||||||||
Overseas
Related Companies
|
3,752,767 | 10,881,433 | 8,372,857 | 26,376,358 | ||||||||||||
Total
|
$ | 8,167,849 | $ | 20,551,036 | $ | 19,571,212 | $ | 38,788,581 |
Accounts
Receivable, Trade - Related Parties
The
details of accounts receivable, trade – related parties are as
follows:
June 30, 2010
|
December 31, 2009
|
|||||||
Tianshi
Engineering
|
$ | - | $ | 5,035,320 | ||||
Overseas
Related Companies
|
10,117,424 | 11,763,170 | ||||||
Allowance
for Doubtful Accounts
|
(1,307,687 | ) | (1,419,178 | ) | ||||
Total
|
$ | 8,809,737 | $ | 15,379,312 |
30
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:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Tianshi
Investment
|
$ | 27,300,000 | $ | 37,000,000 | ||||
Tianshi
Engineering
|
5,354,348 | 5,688,926 | ||||||
Tianjin
Tianshi Life Science Co., Ltd.
|
148,798 | 55,878 | ||||||
All-legend
Property Service (Tianjin) Co., Ltd.
|
126,391 | 77,612 | ||||||
Tiens
SmartFlow Logistics (International) Group Ltd.
|
57,037 | 74,651 | ||||||
Tianshi
Yinshi Hotel
|
36,718 | 36,566 | ||||||
Tianshi
Indonesia Logistic & Trade Co., Ltd.
|
9,860 | 9,873 | ||||||
Tianshi
Group
|
- | 1,613,168 | ||||||
All-legend
Hotel Management Co., Ltd.
|
- | 2,730 | ||||||
Others
|
2,122 | 2,222 | ||||||
Total
|
$ | 33,035,274 | $ | 44,561,626 |
Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, to support Tianshi Engineering’s marketing efforts in anticipation of
receiving a direct selling license in China, we agreed to allow Tianshi
Engineering to defer payment. The credit terms provide an interest-free credit
term of three months. Any amounts exceeding this term are transferred from
accounts receivable - related parties to other receivable - related
parties. Beginning January 1, 2007, the other receivables - related
parties became interest bearing once a loan contract is adopted. The
interest rate is the interest rate, on the date the loan commences, that is
stipulated by the People’s Bank of China for a loan of the same
level.
On April
21, 2009, our company entered into a loan agreement with Tianshi Engineering.
Pursuant to that agreement, effective as of April 1, 2009, $2,562,017 of
other receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. During the
first quarter of 2010, we did not convert any accounts receivables-related
parties to other receivables-related parties.
Our
Company and Tianshi Group use common meters at our headquarters for
electricity and water, and also used the same employee insurance account. When
making payments to these outside parties, we usually pay the fees first and then
are reimbursed by Tianshi Group. These pro-rated amounts relating to
Tianshi Group are categorized as other receivables - related
parties.
On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,797,984). As
of March 31, 2010, the amount was paid in full by Tianshi Group.
On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million. Tiens Yihai holds land use rights for 50 acres of land located in
Shanghai, China. Tiens Yihai was originally established to build a new research
and development facility, but our company suspended the proposed development in
March 2007. Tianshi Holdings held 96% of the equity interest in Tiens
Yihai. Tianjin Tianshi Pharmaceuticals Co., Ltd. owned the remaining
4% of Tiens Yihai’s share capital. As of June 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 $27,300,000 is payable
by November 14, 2010.
31
Advances
from Customers - Related Parties
Advances
from related party customers were $17.1 million and $4.4 million as of June 30,
2010 and December 31, 2009, respectively. These advances represented
prepayments made to us to insure that customers could obtain enough of our
products to meet their market demands. The majority of the $17.1
million in advances was from Tianshi Engineering, whose
sales cover the China region, and have had a higher historical sales
growth rate than the overseas regions. The increase in advances reflects
their outlook of business in the China region.
Other
Payables - Related Parties
These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties. The details of other payable-related parties are
as follows:
June 30, 2010
|
December 31, 2009
|
|||||||
Tianshi
Group
|
$ | 1,076,675 | $ | - | ||||
Tianshi
Engineering
|
145,907 | 40,805 | ||||||
Tianshi
Germany Co., Ltd.
|
101,805 | 107,326 | ||||||
Tianjin
Tianshi Global International Trade Co., Ltd.
|
93,997 | 93,606 | ||||||
Tianyuan
Capital Development Co. Ltd.
|
84,359 | 84,359 | ||||||
Tianshi
Administrative Committee of Industrial Park
|
14 | 14 | ||||||
Fuhong
Development Co. Ltd.
|
- | 3,000,000 | ||||||
Others
|
10 | - | ||||||
Total
|
$ | 1,502,767 | $ | 3,326,110 |
On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009, on December
31, 2008. On June 30, 2009, we paid the loan in full.
On June
5, 2009, Biological, Tianshi Holdings, Tianshi Investment and Tianshi Group
entered into an agreement pursuant to which Biological agreed to pay $3.9
million to Tianshi Group on behalf of Tianshi Investment, Tianshi Investment
agreed to cancel a $3.9 million loan owed by Tianshi Holdings, and Tianshi
Holdings agreed to cancel a $3.9 million dividend owed by
Biological.
On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
to fund its capital contribution to Life Resources. On February 10, 2010, the
loan was paid in full by cancelling the same amount Tianshi Investment owed to
the Company.
On March
3, 2010, Tianshi Holdings borrowed another $3,000,000 from Fuhong Development to
fund its capital contribution to Life Resources. On June 11, 2010, the loan was
paid in full by canceling the same amount Tianshi investment owed to the
Company.
Other
Transactions with Tianshi Engineering
On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that enable Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns, with
Biological. Each of the four agreements was effective as of
January 1, 2008 and expired on December 31, 2009. On December 31, 2007,
Biological entered into two supplemental agreements, which added fourteen pieces
of personal care products production equipment to, and removed two health
products production workshops from, two of the lease agreements Biological
entered into on October 31, 2007.
32
On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group (as further described under the caption “Other Receivables – Related
Parties” above), pursuant to which Biological transferred to Tianshi Group four
buildings which were covered by the above mentioned lease agreements.
Accordingly, the two lease agreements which covered production workshops expired
at the end of fiscal 2008.
On
November 20, 2009, the lease agreement for health products production equipment
and the lease agreement for personal care product production equipment were
renewed by Biological and Tianshi Engineering for 2010. Following is a
summary of the monthly rent payable to Biological under the two leases
Biological entered into on November 20, 2009:
Lease Agreement
|
Monthly rent
|
|||
Lease
Agreement for Health Products Production Equipment
|
$ | 11,255 | ||
Lease
Agreement for Personal Care Product Production Equipment
|
$ | 6,029 |
Rent
revenue accrued from these leases amounted to $103,730 and $109,765 for the
six months ended June 30, 2010 and 2009, respectively, and $51,876 and $54,909
for the three months ended June 30, 2010 and 2009, respectively.
Other
Transactions with Tianshi Group
On
January 1, 2009, Biological entered an office and facilities lease
agreement with Tianshi Group. Under the terms of the agreement, Biological’s
annual rent is equal to 1% of its gross revenues. In addition, Biological is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expired on December 31, 2009 and was renewed by
Biological and Tianshi Group, effective as of January 1, 2010, for 2010. On
January 1, 2010, Life Resources entered an office and facilities lease agreement
with Tianshi Group on the same terms as Biological’s lease agreement with
Tianshi Group. The Company paid rent under this lease in the amounts of
$259,718 and $302,688 for the six months ended June 30, 2010 and 2009,
respectively, and $100,492 and $141,700 for the three months ended June 30, 2010
and 2009, respectively.
On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the
land use rights on the underlying property expire. For the six months ended June
30, 2010 and 2009, Biological and Life Resources recorded $163,532
and $163,331 of the rent expense, which is not paid to Tianshi Group, but
recorded as paid in capital based upon market price.
Transactions
with Tianyuan Capital
On
September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan
Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan
Capital agreed to lend $10.65 million in the aggregate to Tianshi Holdings, at
an interest rate of 5% per year, with interest payable on June 30 and December
31, commencing December 31, 2004. Tianshi Holdings used the loan proceeds to
fund its capital contribution to Tiens Yihai. Mr. Jinyuan Li owns 100% of
Tianyuan Capital. The loan was pre-paid in full by us on December 31,
2009.
33
Transactions
with Tianshi Pharmaceuticals
On
December 15, 2009, we entered into a one-year lease agreement with Tianshi
Pharmaceuticals. Under the terms of the lease agreement, we leased equipment for
the fee of RMB 25,383 (or US $3,714) per month. In addition, we are obligated to
pay insurance, maintenance and other expenses related on the
equipments. This agreement is effective from January 1, 2010 and expires on
December 31, 2010. We paid $22,284 of the rent expense for the six months ended
June 30, 2010.
MANAGEMENT
ASSUMPTIONS
Management
anticipates, based on internal forecasts and assumptions relating to our current
operations, that existing cash and funds generated from operations will be
sufficient to meet working capital needs for at least the next 12 months. In the
event that plans change, our assumptions change or prove inaccurate or if other
capital resources and projected cash flow otherwise prove to be insufficient to
fund operations (due to unanticipated expense, technical difficulties, or
otherwise), we could be required to seek additional financing. There can be no
assurance that we will be able to obtain additional financing on terms
acceptable to us, or at all.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 4T. 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
second quarter of 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM 6. EXHIBITS
The
exhibits listed on the Exhibit Index are provided as part of this
report.
34
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
August 19, 2010
|
|
/s/ Jinyuan Li
|
|
Jinyuan
Li
|
|
Chief
Executive Officer, President and Acting Chief
Financial
Officer
|
|
(Principal
Executive Officer, Principal Financial and
Accounting
Officer)
|
35
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
10.1
|
Agreement,
dated June 11, 2010 by and between Tianshi International
Holding Group Co., Ltd., Tianshi International Investment Group Co., Ltd.
and Fuhong Development 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.
|
|
31.2
|
Certification
of the Chief Executive Officer and Acting Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
36