10-K 1 v144351_10k.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-K
 
 
For the fiscal year ended December 31, 2008
 
or
 
 
For the transition period from _____ to_____
 

Commission File Number: 001-32477
 
(Exact name of registrant as specified in its charter)
 

Delaware
75-2926439
(State or other jurisdiction of incorporation or organization )
(I.R.S. Employer Identification No.)
   
No. 6, Yuanquan Rd.
Wuqing New Tech Industrial Park
Tianjin, China 301700
(Address of principal executive offices) (Zip Code)
 
 
Registrant’s Telephone Number, including area code: (011) 86-22-8213-7626
 
Securities registered under 12(b) of the Exchange Act:

Title of Each Class
Name of Each Exchange on which Registered
Common Stock, par value $0.001
NYSE Alternext US LLC
 
Securities registered under 12(g) of the Exchange Act: None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x
 
 
 
 
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
 
Based upon the closing sale price of $1.52 per share of Common Stock on NYSE Alternext US LLC on June 30, 2008, the aggregate market value of the 5,498,586 shares of voting stock held by non-affiliates of the registrant was approximately $8,357,850.72.
 
There were 71,333,586 shares of the registrant’s common stock outstanding on March 27, 2009.
 
Documents incorporated by reference – None.
 
 



TABLE  OF CONTENTS
 
   
PART I
2
   
ITEM 1. BUSINESS.
2
   
ITEM 1A. RISK FACTORS.
7
   
ITEM 1B. UNRESOLVED STAFF COMMENTS.
15
   
ITEM 2. PROPERTIES.
15
   
ITEM 3. LEGAL PROCEEDINGS.
16
   
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
16
   
PART II
17
   
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASERS OF EQUITY SECURITIES.
17
   
ITEM 6. SELECTED FINANCIAL DATA.
19
   
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
19
   
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
24
   
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
25
   
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
25
   
ITEM 9A (T). CONTROLS AND PROCEDURES.
25
   
ITEM 9B OTHER INFORMATION.
26
   
PART
26
   
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
26
   
ITEM 11. EXECUTIVE COMPENSATION.
28
   
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
33
   
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
33
   
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
39
   
PART IV
40
   
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
40
   
SIGNATURES
44

 
 

 

 

 
 FORWARD-LOOKING INFORMATION
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates”, “believes”, “expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predict”, “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors, including the risks outlined under Risk Factors contained in Item 1A of this Annual Report may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Form 10-K is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to confirm these statements to actual results, unless required by law.
 
AVAILABILITY OF SEC FILINGS
 
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy these materials at the Securities and Exchange Commission’s (“SEC”) Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically. You may also obtain copies of our reports filed with the SEC, free of charge, on our website at http://www.tiens-bio.com.
 

 
PART I
 
 
In this Annual Report on Form 10-K, references to “dollars” and “$” are to United States Dollars and references to “RMB” and  “renminbi”  are to Chinese Renminbi (RMB).  References to “we”, “us”, “our”, the “Company” or “Tiens USA” include Tiens Biotech Group (USA), Inc. and its subsidiaries.
 
Overview
 
Tiens USA 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 for distribution in China to an affiliated company that in turn sells the products to consumers through its chain store and its Chinese affiliated companies.  Outside of China, we sell our products to overseas affiliated companies located in 46 countries that in turn sell them to independent direct sales distributors.
 
Corporate History and Organization
 
We own 100% of Tianshi International Holdings Group Ltd., a British Virgin Islands company (“Tianshi Holdings”) which owns all of the registered share capital of Tianjin Tiens Life Resources Co., Ltd., a Chinese Foreign Investment Enterprise (“Life Resources”) and 80% of Biological’s outstanding shares.  Biological is a Chinese-foreign equity joint venture company established under Chinese laws on March 27, 1998, subject to the Law on Sino Foreign Equity Joint Ventures.

 
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Tianjin Tianshi Biological Engineering Co., Ltd. (“Tianshi Engineering”), a Chinese company, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”), a Chinese company. Tianshi Group is 90% owned by Jinyuan Li, our Chairman, Chief Executive Officer and President and owner of 95.1% of our outstanding stock, and 10% owned by Baolan Li, Jinyuan Li’s daughter. Tianshi Engineering acquired its 20% interest in Biological from Tianjin Tianshi Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”) on February 28, 2008.   Tianshi Pharmaceuticals is wholly owned by Tianshi Group.
 
On December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement with Tianshi International Investment Group Co., Ltd., a British Virgin Islands Company (“Tianshi Investment”).  Jinyuan Li owns 100% of Tianshi Investment.  Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the registered share capital of Life Resources for $64.2 million.  On March 13, 2008, the Chinese government approved the transfer of the shares of Life Resources, and Tianshi Holdings became the 100% owner of Life Resources.  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.
 
On August 25, 2008, Life Resources entered a definitive agreement with the Wuqing Branch Bureau of Tianjin Municipal Land and Resources and Administrative Bureau (the “Tianjin Government”) and Tianjin Tiens Life Science Co., Ltd. (“Life Science”) pursuant to which Life Resources and Life Science will make a payment to the Tianjin Government in connection with changes to the zoning on several parcels of land on which they respectively have land use rights from “industrial” to “educational”. On August 28 and 29, 2008, Life Resources paid a total of RMB 42,252,723 ($ 6,163,827) in connection with the zoning changes to its parcel.
 
The following chart shows the ownership interests in our operating subsidiaries.
 
chart

 
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Products and Manufacturing
 
We have developed and produce 37 nutrition supplement products, which include wellness products and dietary supplements.
 
Each of our wellness products includes at least one health function and has been issued a Certificate of Domestic Wellness Product by the State Food and Drug Administration (SFDA). This SFDA certificate is required for the production and sale of wellness products in China. Dietary supplements, which do not include any health functions,  are considered to be “ordinary food,” and do not require a SFDA certificate. Each of our products has been issued a Product Standard Code by the Bureau of Technical Supervision.
 
We have put great emphasis on product quality assurance. In 2002, we were awarded a Quality System Certificate for compliance with the standard “ISO9001: 2000” in the area of Design and Development, Production and Service of Food and Health Care Food in China. In addition, many of our products have received a certificate for Hazard Analysis Critical Control Point (“HACCP”). HACCP identifies and assesses hazards and risk associated with the manufacture, distribution and use of food-handling establishments. In 2007, four of our products received a kosher certificate from the Kosher Supervision of America (“KSA”), which is recognized by rabbinical societies throughout the world.  These products bear the KSA symbol, which tells consumers that they are in compliance with kosher standards.
 
Our products are manufactured at our facilities in Tianjin, China. The manufacturing processes of our nutrition supplement products are categorized into six types depending on the different forms of the finished products:  Powder, Tea, Capsules, Tablets, Granules and Soft Gel Capsules. All of our manufacturing complies with the product standards approved by the Bureau of Technical Supervision in China.
 
The following table lists our products.
Wellness Products *
Dietary Supplement Products *
Bone Treasure Tablets (b)
Tianshi Barley Green Tablets (b)
Chewable Calcium Tablets (a) (b)
Tianshi Breast Beauty Capsules (a)
Chewable Calcium Tablets with multi-flavor (b)
Tianshi Calcium-Treasure Tablets (b)
Grape Extract Capsules (a) (b)
Tianshi Double-cellulose Tablets (a) (b)
Tianshi Beauty Face Capsules (b) (c)
Tianshi Eel Oil  Capsules (a)
Tianshi Cell Rejuvenation Capsules (a) (b)
Tianshi Hemp Seed Oil Softgels (a)
Tianshi Chitosan Capsules (a) (b)
Tianshi Lycopene Tablets (a) (b)
Tianshi Cordyceps Capsules (a) (b)
Tianshi Multi-Vit-Mine Coffee (a) (b)
Tianshi Lipid Metabolic Management Tea (a) (b) (c)
Tianshi Natto Capsules (b)
Tianshi Metabolic Balance Capsules (a) (b) (c)
Tianshi Perilla Oil Softgels (b)
Tianshi Nutrient Super Calcium Powder (a) (b)
Tianshi Pine Pollen Powder Capsules (a)
Tianshi PressureCare Tea (b)
Tianshi Propeptide Polypeptide Albumen Powder (b)
Tianshi Slimming Tea (a) (b) (c)
Tianshi Rich Selenium Green Tea (a)
Tianshi Spirulina Capsules (a) (b)
Tianshi Sea Buckthorn Oil Softgels (a) (b)
Tianshi Super Calcium Powder with Metabolic Factors (a) (b)
Tianshi Super Calcium Milk Powder (a) (b)
Tianshi Super Calcium Powder for Children (a) (b)
Tianshi Tibet-Garlic Capsules (a) (b)
Tianshi Super Calcium Capsules with Lecithin (a) (b)
 
Tianshi Sweet Dreams Granules (a) (b)
 
Tianshi Vitality  Softgels (a) (b)
 
Tianshi Throat Care Granules (b)
 
Tianshi Zinc Capsules (a) (b)
 

*   
These products are not intended to diagnose, treat, cure or prevent any disease.
(a)  
This product has received Halal Approval, which certifies that our manufacturing processes comply with the requirements of Islamic dietary law.
(b)  
This product has received an HACCP Certificate.
(c)  
This product has received KSA Kosher Certificate.
 
For the years ended December 31, 2008 and 2007, all of our revenue was generated from related party customers. See note 18 to our consolidated financial statements, for a breakdown of domestic and international revenue, and revenue by product group, for the last two fiscal years.  In 2008 and 2007, our Tianshi Cordyceps Capsules accounted for 15.4% and 18.1% of our revenue, respectively, and our Tianshi Nutrient Super Calcium Powder accounted for 16.8% and 15.8% of our revenue, respectively.

 
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Trademarks and Patents
 
We consider the “Tiens” logo important to our business and have registered our products under the logo “Tiens” with the State Administration of Industry and Commerce in China. The registration is valid for a period of ten years from May 21, 2002 and can be renewed for further ten-year periods multiple times.  We have conducted extensive research and developed Tianshi Super Calcium Powder with Metabolic Factors and Tianshi Super Calcium Powder for Children, which have each been awarded a patent from State Intellectual Properties Office in China with respective patent numbers of ZL97115067.2 and ZL97115068.0. These two patents are effective for 20 years, commencing on January 13, 2001.
 
Suppliers
 
We have established long-term relationships with most of our suppliers. We believe that the raw materials required for manufacturing our products are relatively easy to find and alternative suppliers are convenient to locate.
 
Research and Development
 
We incurred research and development expenses of $1.5 million and $0.7 million in 2008 and 2007, respectively. As of December 31, 2008, we employed 119 staff members in research and development, which includes 50 additional employees hired for our research and development team during 2008.
 
Marketing and Distribution
 
In China, we sell our products to Tianshi Engineering, an affiliated Chinese company, through our subsidiaries Biological and Life Resources.  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.  During 2008 Tianshi Engineering closed two of its less profitable branches in China.  As of December 31, 2008, Tianshi Engineering had 98 branches in China.  Prior to 2006, Biological sold all of its products to Tianshi Engineering as finished products 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. We used this pricing formula in 2008, and  currently continue to use the same pricing formula.
 
At the beginning of 2006, Biological also began selling semi-finished products to Tianshi Engineering. To qualify for a direct selling license in China, Tianshi Engineering is required to produce a part of the products that it sells in China. As a result, Biological began to sell semi-finished products to Tianshi Engineering, which jointly shares with us licenses to produce, manufacture and sell the products. 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, this 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.
 
As of June 2008, Life Resources replaced Biological in the production of semi-finished products and began to produce and sell semi-finished products to Tianshi Engineering on the same pricing terms as Biological’s previous sales. Biological currently only sells finished goods to Tianshi Engineering.
 
Internationally, our strategy is to develop a strong direct sales force through our international affiliated companies.  Currently the United States is not a significant part of our business. We sell our products to overseas affiliated companies located in 46 countries who in turn re-package the products to meet the needs of the local markets and sell them to independent direct sales distributors.   During 2008, we reduced the number of countries where we sell directly to overseas affiliates from 52 to 46.  Therefore, some of our overseas affiliate customers are now selling our products on to other overseas affiliates which are no longer our direct customers.  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 have historically been, and continue to be, regulated through internal policies. In 2008 our highest sales outside of China were to the following eleven countries, in descending order:  Indonesia, Russia, Ukraine, India, Vietnam, Nigeria, Kazakhstan, Congo, Hungary, Kenya and Peru.

 
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As operation costs vary from country to country, international market prices vary accordingly. We sell our products to overseas affiliates at the FOB (destination port) price, which consists of 25% of the Chinese retail price for similar products in Chinese market, including customs duty, value-added tax and other miscellaneous transportation cost. The overseas affiliates mark up the products to cover their expenses and realize profits of approximately 10%.
 
Backlog was $14.2 million as of December 31, 2008, compared to $12.2 million as of December 31, 2007.  We expect all of the backlog at the end of 2008 to be filled within the 2009 fiscal year.
 
Competition
 
Internationally, we engage in the direct selling industry and compete with other direct selling organizations. Some of them have a longer operating history and higher visibility, name recognition and financial resources than we do.  The leading direct selling companies in our existing markets are Avon and Alticor (Amway). Some of our competitors, including Avon and Alticor (Amway), have been granted a direct selling business license in China pursuant to China’s regulations governing direct selling. In some instances, these licenses can be limited to certain cities and/or provinces. In cities and/or provinces where Avon or Alticor (Amway) do not have a direct selling license, they use similar methods for sale as our company.  Avon and Alticor (Amway) are our main competitors in our Chinese operations because they sell products similar to ours to the same type of consumers we target. The direct selling regulations require Tianshi Engineering, our affiliate who sells our products in China, to apply for approval to conduct a direct selling enterprise in China.  Tianshi Engineering has made an application for, but has not yet received, a direct selling license in China.
 
Regulatory Framework
 
Product Regulation
 
The central governing authority in China for wellness products is the SFDA, which is under the jurisdiction of the State Council. SFDA issues administrative rules. Provincial, city and town authorities implement the rules of the SFDA. Other than the SFDA, other ministries and administrations also have certain responsibility for the management of wellness or nutrition supplement products, such as the State Administration for Industry and Commerce.
 
We develop and manufacture products that are mainly classified as nutrition supplement products, which include wellness products and dietary supplement products. Wellness products may not be sold in China without a wellness products certificate. The governmental approval process in China for a newly developed wellness product is as follows:
 
·  
An application for a product certificate is filed with SFDA, which directs the applicant to send the product samples to one of the government appointed research institutes;
 
·  
The appointed research institute conducts clinic trials, stability tests, function tests and toxicity tests on the product, makes a report and sends the report back to SFDA within 6 months; and
 
·  
The Expert Committee of SFDA makes a final decision on the application and issues a “wellness products certificate” or a refusal notice to the applicant.
 
This certificate authorizes the sales and marketing of the product in China.  The certificate does not expire and does not require renewal.  The approval process generally takes nine to 12 months.  Dietary supplement products are not subject to SFDA regulation.

 
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Sales and Marketing Regulations
 
In most countries, sales of our products are usually considered under the categories of general commodities, which do not require specific permits and are not subject to the strict regulations applied to drugs and medicine. In some countries, direct selling (or multi-level marketing) is highly regulated or prohibited. Since we sell our products to our affiliated companies for sale internationally, the local approval issues with respect to sales and distribution are addressed by our affiliates.
 
In China, we are aiming to expand our market share through the branches, chain stores, and affiliated companies of Tianshi Engineering, our affiliate who sells our products in China. The regulatory environment with respect to direct selling in this market remains fluid and the process for obtaining the necessary governmental approvals have been interpreted differently by different governmental authorities. The direct selling regulations require Tianshi Engineering to apply for approval to conduct a direct selling enterprise in China.
 
Tianshi Engineering has applied for a direct selling license in a number of provinces and must obtain a series of approvals from the Departments of Commerce in such provinces, as well as the Departments of Commerce in each city and district in which we plan to operate.  Tianshi Engineering is also required to obtain the approval of the State Ministry of Commerce, which is the national government authority overseeing direct selling.
 
Tianshi Engineering has found that it is taking more time than anticipated to work through the approval process with the Chinese authorities.  These authorities have broad discretion in interpreting the regulations and granting necessary approvals.  A delay in obtaining approvals at one level can delay its ability to obtain approvals at the next level.  The complexity of the approval process as well as the government’s continued cautious approach as direct selling develops in China makes it difficult to predict a timeline for obtaining these approvals.
 
Environmental Compliance
 
We are subject to China’s National Environmental Protection Law, as well as a number of other national and local laws and regulations regulating air, water and noise pollution and setting pollutant discharge standards. We believe that all our manufacturing operations are in material compliance with all applicable environmental laws. During 2008, we did not incur any costs to comply with environmental laws.
 
Employees
 
As of December 31, 2008, we had 1,549 employees.  We believe that our relations with our employees are satisfactory.
 
ITEM 1A. RISK FACTORS.
 
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE . REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.  WE ARE SUBJECT TO, AMONG OTHERS, THE FOLLOWING RISKS:
 
RISKS RELATED TO OUR BUSINESS
 
A GENERAL ECONOMIC DOWNTURN, A RECESSION IN CHINA OR IN ONE OR MORE OF THE 46 COUNTRIES WHERE WE SELL TO INTERNATIONAL AFFILIATED COMPANIES OR SUDDEN DISRUPTION IN BUSINESS CONDITIONS MAY AFFECT CONSUMER PURCHASES OF DISCRETIONARY ITEMS, INCLUDING NUTRITION SUPPLEMENT PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

 
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Consumer spending is generally affected by a number of factors, including general economic conditions, the level of unemployment, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. In addition, sudden disruptions in business conditions as a result of a terrorist attack, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters, pandemic situations or large scale power outages can have a short or, sometimes, long-term impact on consumer spending. A downturn in the economies in China or in one or more of the 46 countries where we sell to international affiliated companies, or where they sell to other companies, including any recession or a sudden disruption of business conditions in those economies, could adversely affect our business, financial condition, and results of operation.
 
WE MAY NOT BE ABLE TO RAISE ADEQUATE FUNDS TO COMPLETE THE CONSTRUCTION OF OUR NEW HEADQUARTERS, RESEARCH AND DEVELOPMENT AND MANUFACTURING FACILITIES BEING BUILT BY LIFE RESOURCES.
 
As of December 31, 2008, the majority of the main structures of the Life Resources facility construction project had been completed. Since September 30, 2008, the office buildings, warehouses, work plants, product exhibition center and dormitories have undergone internal decoration. The cost of the completed work of these facilities is approximately $69,581,772 (based on an exchange rate of $1 = RMB 6.85 as of September 30, 2008), which includes amounts paid for the underlying land use rights.  The main structures of the quality control center, power center, boiler room and new main material center are expected be completed in the first half of 2009 and internal decoration is expected to be completed in the second half of 2009.  As of the end of 2008, the cost of the completed work of these facilities was $78,782,353 (based on an exchange rate of $1 = RMB 6.8542 as of December 31, 2008), which includes amounts paid for the underlying land use right.  We expect that all construction work and equipment installation will be completed in 2009 and that the Life Resources facility is estimated to begin operation by the end of 2009.  We have provided for an amount of up to $72,957,554 (based on an exchange rate of $1 = RMB 6.8533 as of January 1, 2009) in our 2009 budget for capital expenditures on the Life Resources facility. Depending on the rate of construction and our cash flow, we may require additional financing to complete the funding of the Life Resources facility construction project. If we are not able to fund the completion of the new facilities, our future growth opportunities may be limited.
 
OUR REPUTATION, REVENUES AND OPERATING INCOME MAY BE ADVERSELY AFFECTED BY PRODUCT LIABILITY CLAIMS.
 
As a manufacturer of products designed for human consumption, claims may be brought against us that a product injured its consumer. Our dietary supplement products consist of vitamins, minerals, herbs and other ingredients that are not subject to pre-market regulatory approval. Our products could contain contaminated substances, and some of our products contain innovative ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. A product liability claim against us could result in increased costs and could adversely affect our reputation with our customers, which in turn could adversely affect our revenues and operating income.
 
OUR MANUFACTURING PROCESS IS SUBJECT TO RISKS.
 
There are risks associated with ingredients mixing and production processes and techniques. Our manufacturing process requires a significant degree of technical expertise. If we fail to manufacture our products to specifications or inadvertently use defective materials in the manufacturing process, the reliability and performance of our products will be compromised.
 
We rely on our manufacturing operations to produce nearly all of the proprietary products we sell. Any significant disruption in those operations for any reason, such as regulatory requirements and loss of certifications, power interruptions, fires, hurricanes, war or other force majeure, could adversely affect our sales and customer relationships.
 
OUR NEWLY DEVELOPED PRODUCTS MAY NOT BE COMPATIBLE WITH MARKET NEEDS.
 
Our business is particularly subject to changing consumer trends and preferences. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. Because markets for nutrition supplement products differentiate geographically, we must accurately assess specific demand in each specific market into which we wish to make sales. If we fail to accurately assess consumer health needs in each market we target, we may face limited market acceptance of our products, which could have a material adverse effect on our sales and revenue.

 
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OUR PRODUCTS MUST KEEP PACE WITH ADVANCES IN THE INDUSTRY OR THEY MAY BE DISPLACED BY COMPETITORS’ NEWLY DEVELOPED PRODUCTS.
 
The nutrition supplement products industry is characterized by rapid product development, with significant competitive advantages gained by companies that introduce products that are first to market, deliver constant innovation in products and techniques, offer frequent new product introductions and have competitive prices. Our future growth partially depends on our ability to develop products that are more effective in meeting consumer needs. In addition, we must be able to manufacture and effectively market those products. The sales of our existing products may decline if a competing product is introduced by other companies.
 
The success of our new product offerings depends upon a number of factors, including our ability to:
 
·  
accurately anticipate consumer needs;
 
·  
innovate and develop new products;
 
·  
successfully commercialize new products in a timely manner;
 
·  
price our products competitively;
 
·  
manufacture and deliver our products in sufficient volumes and in a timely manner; and
 
·  
differentiate our product offerings from those of our competitors.
 
If we fail to do any of the above or we focus on technologies that do not lead to more effective products, our current and future products could be surpassed by more effective or advanced products of others.
 
WE CONDUCT OUR BUSINESS WITH RELATED PARTIES, AND YOUR INVESTMENT MAY BE SUBJECT TO CONFLICT OF INTEREST AND SELF-DEALING RISKS.
 
Due to the inter-related ownership and business dealings among us and our affiliates, there are conflict of interest and self-dealing risks. We have affiliated companies or business entities that are owned by Jinyuan Li and his immediate family members (mostly his daughter Baolan Li). Although all affiliated companies and business entities were established so that they are legally and financially independent, except for the common ownership, they are centrally administrated by Tianshi Group. The decisions of Tianshi Group could materially affect the operation of our business, which could be adverse to our investors.
 
We sell all of our products for resale in China to Tianshi Engineering. As both we and Tianshi Engineering are majority owned by Jinyuan Li, even given consideration to the internal price transferring policies set among the related parties, these internal policies could be faulty or might not be strictly followed.
 
WE HAVE LIMITED CONTROL OVER THE ACTIVITIES OF OUR DISTRIBUTORS.
 
We place significant reliance on a network of affiliates to act as our primary sales force. Although a majority of our affiliated companies are controlled in whole or part by Jinyuan Li, our Chairman, Chief Executive Officer and President, such affiliates are not employed or otherwise controlled by us and are generally free to conduct their business at their own discretion. The distributors are dedicated more to establishing their own reputations and business relationships than to promoting our products. The simultaneous loss of a number of these distributors could have a material adverse effect on our business, financial condition, and results of operations.

 
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WE FACE RISKS DUE TO OUR RELIANCE ON SALES IN INTERNATIONAL MARKETS.
 
Our future success will depend in part on the continued expansion of international sales. Such international operations expose us to certain risks, including but not limited to: a need for export licenses; unexpected regulatory requirements; tariffs and other potential trade barriers and restrictions; political, legal and economic instability in foreign markets; longer account receivable cycles; difficulties in managing operations across disparate geographic areas; foreign currency fluctuations; limited protection of our intellectual property rights in some countries; dependence on local distributors; and potential disruptions in sales due to military or terrorist acts.  Any or a combination of these risks could result in a material adverse effect on our business, financial condition or results of operations.
 
OUR PRODUCTS ARE SUBJECT TO REGULATION OVER NUTRITIONAL SUPPLEMENT PRODUCTS IN MARKETS OUTSIDE CHINA.
 
Nutrition supplement products are subject to regulatory requirements that vary by country. Obtaining approval to sell nutrition supplement products internationally involves complexities of dealing with a variety of governmental regulations. We have limited experience in dealing with the specific regulations that may be required to sell our products in certain international markets, which could delay our ability to obtain relevant regulatory approval for our products. In addition, our product sales in other countries are subject to product regulatory regimes of various degrees and direct marketing or distribution regulations. Although currently these aspects are handled by our affiliated distributors in the relevant jurisdictions, there can be no assurance that the current operations of our company and our affiliates and distributors will not be adversely affected by compliance issues and changes in applicable laws and regulations in relevant jurisdictions.
 
THE DISTRIBUTION OF OUR PRODUCTS IS SUBJECT TO REGULATION OUTSIDE CHINA.
 
Products distributed outside China are subject to government regulations of different jurisdictions, which could be stricter than in China. In some developed countries, the government regulations for product approval could be stricter than in China, while in developing countries, government regulation could be uncertain. Our products could take a significantly longer time than we expect to gain regulatory approval or may never gain approval in certain countries, which could limit our ability to promote, sell and distribute products. In addition, in terms of our marketing approach, multi-level marketing may also be prohibited in some countries. As such, our sales may be adversely affected if such approval cannot be obtained in certain jurisdictions.
 
OUR MANAGEMENT LACKS EXPERIENCE OPERATING A U.S. PUBLIC COMPANY.
 
Our management had no experience operating a U.S. public company before our acquisition of Tianshi Holdings. The initial difficulties with public company regulations faced by U.S. managers of a newly public company are aggravated with respect to our management, by our unfamiliarity with Western regulatory regimes and language and time zone differences. In addition, management must integrate new accounting rules and control procedures to comply with the requirements of the Sarbanes-Oxley Act of 2002. Learning compliance is likely to distract management from operations to a greater degree than might be the case of management of a U.S. company, and the period during which our management masters the rules, when errors are more likely to occur, may be longer. Accordingly, the expense and operational risks inherent to a transition from private to public company are greater for Tiens USA than might usually be the case.
 
RISKS RELATED TO DOING BUSINESS IN CHINA
 
WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA.
 
As most of our operations are conducted in China, we are subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. Our results may be adversely affected by changes in the political and social conditions in China, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 
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Although the majority of productive assets in China are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:
 
·  
We will be able to capitalize on economic reforms;
 
·  
The Chinese government will continue its pursuit of economic reform policies;
 
·  
The economic policies, even if pursued, will be successful; and
 
·  
Economic policies will not be significantly altered from time to time.
 
A CAMPAIGN IMPOSED BY THE CHINESE GOVERNMENT AGAINST THE EXPORT OF UNSAFE FOOD AND SUBSTANDARD PRODUCTS, IN HINDERING OUR ABILITY TO EXPORT OUR PRODUCTS INTERNATIONALLY.
 
In August 2007, China’s Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”) announced an ongoing national campaign in China against unsafe food and substandard products. The special campaign against poor product quality was launched in response to a series of safety scares involving Chinese products worldwide. The campaign set 20 detailed goals, including twelve “100 percents”. For example, 100 percent of food producers should be licensed; 100 percent of agricultural wholesale markets in cities must be monitored; 100 percent of suppliers of raw materials for exported products should be inspected; and 100 percent of agricultural products must be free of five types of strong pesticides.
 
As a result of this campaign by the AQSIQ, there has been a general slow-down and backlog of export clearances for Chinese food products, and from August 2007 through the first quarter of 2008, we experienced significant delays in obtaining export clearance for all of the products which we sell to our international affiliates. Beginning in the second quarter of 2008, these export restrictions were reduced for exports to countries in Africa and Asia, but remained in place for exports to countries in Europe and the Americas. During the third quarter of 2008, these export restrictions were further reduced and the campaign ended at the end of 2008.
 
We believe that these restrictions have resulted in some of our international affiliates not being able to purchase sufficient quantities of our products to meet their demand during 2007 and 2008, resulting in a loss of sales. Any similar campaigns in the future could have a negative impact on our revenue.
 
THE RESEARCH, DEVELOPMENT, TESTING, MANUFACTURING AND MARKETING OF OUR PRODUCTS ARE SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS IN CHINA.
 
Government regulation includes inspection of and controls over testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion, record keeping and the sale and distribution of wellness products. Tianshi Engineering is also subject to government regulations with respect to the prices it will charge, the rebates it may offer to customers and the methods of its marketing. Government regulation may substantially increase the cost of developing, manufacturing and selling our products.
 
UNCERTAINTY IN THE DEVELOPMENT OF DIRECT SELLING REGULATIONS MAY ADVERSELY AFFECT SALES OF OUR PRODUCTS IN CHINA.
 
Substantially all of our assets are located in China, and approximately 41% and 48% of our revenues in 2007 and 2008, respectively, were derived from our operations in China. Accordingly, our operations are subject, to a significant degree, to Chinese law. In China, we are aiming to expand our market share through the branches, chain stores, and affiliated companies of Tianshi Engineering, our affiliate who sells our products in China. The regulatory environment with respect to direct selling in this market remains fluid and the process for obtaining the necessary governmental approvals have been interpreted differently by different governmental authorities. The direct selling regulations require Tianshi Engineering to apply for approval to conduct a direct selling enterprise in China.

 
11

 

 

 
Tianshi Engineering has applied for a direct selling license in a number of provinces and must obtain a series of approvals from the Departments of Commerce in such provinces, as well as the Departments of Commerce in each city and district in which we plan to operate. Tianshi Engineering is also required to obtain the approval of the State Ministry of Commerce, which is the national government authority overseeing direct selling.
 
Tianshi Engineering has found that it is taking more time than anticipated to work through the approval process with the Chinese authorities. These authorities have broad discretion in interpreting the regulations and granting necessary approvals. A delay in obtaining approvals at one level can delay our ability to obtain approvals at the next level. The complexity of the approval process as well as the government’s continued cautious approach as direct selling develops in China makes it difficult to predict a timeline for obtaining these approvals. If Tianshi Engineering does not receive a direct selling license in China, then its ability to compete against its competitors who have received such a license may be hurt. As a result, Tianshi Engineering may lose distributors who find a competitor’s direct selling business and compensation model more attractive. This could materially decrease the revenue that we receive from sales by Tianshi Engineering in China.
 
IF PREFERENTIAL TAX CONCESSIONS GRANTED BY THE PRC GOVERNMENT CHANGE OR EXPIRE, OUR FINANCIAL RESULTS AND RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
 
Our results of operation may be adversely affected by changes to or expiration of preferential tax concessions that our Chinese subsidiaries, Biological and Life Resources currently enjoy. The statutory tax rate generally applicable to domestic Chinese companies was 33% before January 1, 2008. On January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% is now applicable to both DES and FIEs. A reduced rate of 10% may be possible for high-tech companies which qualified by local government and reviewed annually. As a result of preferential tax rate incentives, our operations under Biological have been subject to relatively lower tax liabilities than under the statutory tax rate. The estimated tax savings for the year ended December 31, 2008 and 2007 for Biological amounted to approximately $1,563,649 and $6,851,099, respectively. According to the new EIT, Life Resources could still be fully exempt from PRC income taxes for two years starting from January 1, 2008, followed by a 12.5% reduced tax rate for the next three years. The estimated tax savings for the year ended December 31, 2008 amounted to $6,489,259 for Life Resources.

Tax laws in China are subject to interpretations by relevant tax authorities. The preferential tax treatment may not remain in effect or may change, in which case we could be required to pay the higher income tax rate generally applicable to Chinese companies, or such other rate as the relevant tax authorities may determine to be required by the laws of China.
 
WE ARE SUBJECT TO COMPLEX CHINESE BUSINESS REGULATIONS.
 
As China changes its economy from planned to more market-oriented, uncertainties arise regarding governmental policies and measures. Although, in recent years, the Chinese government has implemented measures emphasizing the use of market forces for economic reform, reduction of state ownership of productive assets, and establishment of sound corporate governance practices, a substantial portion of productive assets in China are still owned by the Chinese government. For example, all lands are state owned and leased to business entities or individuals through governmental grants of state-owned land use rights. The grant process is typically based on government policies at the time of grant, which can be lengthy and complex and may adversely affect our planned manufacturing expansion. The Chinese government also exercises significant control over China’s economic growth through allocation of resources, foreign currency control and providing preferential treatment to particular industries or companies.
 
BECAUSE MOST OF OUR DIRECTORS AND OFFICERS RESIDE OUTSIDE OF THE UNITED STATES, AND SUBSTANTIALLY ALL OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE THEIR LEGAL RIGHTS AGAINST SUCH INDIVIDUALS OR SUCH ASSETS.
 
Most of our directors and officers reside outside of the United States, and substantially all of our assets are located outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws. Although China has executed the Agreement on Mutual Judicial Assistance in Criminal Matters with the United States in June 2000, there is no extradition treaty between the United States and China. Therefore, it is unclear whether criminal penalties under United States federal securities laws would be enforced effectively in China, if at all.

 
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DUE TO VARIOUS RESTRICTIONS UNDER PRC LAWS ON THE DISTRIBUTION OF DIVIDENDS BY OUR PRC OPERATING COMPANIES, WE MAY NOT BE ABLE TO PAY DIVIDENDS TO OUR STOCKHOLDERS.
 
The Wholly Foreign Owned Enterprise Law (1986), as amended and The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended, contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises, such as Biological and Life Resources, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, Biological and Life Resources are required to set aside a certain amount of any accumulated profits each year (a minimum of 10%, and up to an aggregate amount equal to half of its registered capital), to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC.  If we ever determine to pay a dividend, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of such dividends from the profits of Biological and Life Resources.
 
THE CHINESE LEGAL SYSTEM IS NOT FULLY DEVELOPED AND HAS INHERENT UNCERTAINTIES THAT COULD LIMIT THE LEGAL PROTECTIONS AVAILABLE TO INVESTORS.
 
The Chinese legal system is a system based on written statutes and their interpretation by the Supreme People’s Court. Prior court decisions may be cited for reference but have limited legal precedent. Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. Two examples are the promulgation of the Contract Law of the PRC to unify the various economic contract laws into a single code, which went into effect on October 1, 1999, and the Securities Law of the People’s Republic of China, which went into effect on July 1, 1999. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties. In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may have a material adverse effect on our business operations.
 
WE MAY EXPERIENCE DIFFICULTIES IN RESOLUTION OF LEGAL DISPUTES.
 
As China has not developed a dispute resolution mechanism similar to the Western court system, it may be difficult to enforce contracts and dispute resolution over Chinese projects and joint ventures can be difficult.  There is no assurance that any dispute involving our business in China can be resolved expeditiously and satisfactorily.
 
CHINESE ECONOMIC, POLITICAL AND SOCIAL CONDITIONS AS WELL AS GOVERNMENT POLICIES COULD ADVERSELY AFFECT OUR BUSINESS.
 
All of our assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate,  control of foreign exchange, and allocation of resources.  The economy of China has been changing from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

 
13

 

 

 
The economy of China has experienced significant growth in the past 20 years, but growth has been uneven both geographically and among various sectors of the economy. The Chinese government has implemented various measures from time to time to control the rate of economic growth. Some of these measures benefit the overall economy of China, but may have a negative effect on us. For example, our operating results and financial condition may be adversely affected by:
 
·  
changes in the rate or method of taxation;
 
·  
imposition of additional restrictions on currency conversion and remittances abroad;
 
·  
reduction in tariff or quota protection and other import restrictions; and
 
·  
changes in the usage and costs of state-controlled transportation services.
 
FLUCTUATIONS IN THE VALUE OF THE CHINESE RENMINBI RELATIVE TO FOREIGN CURRENCIES COULD AFFECT OUR OPERATING RESULTS.
 
Substantially all our revenues and expenses are denominated in the Chinese Renminbi. However, we use the United States dollar for financial reporting purposes. The value of Chinese Renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The Chinese government values the exchange rate of the Chinese Renminbi against a number of currencies, rather than just exclusively the United States dollar. Although the Chinese government has stated its intention to support the value of the Chinese Renminbi, we cannot assure you that the government will not revalue it. As our operations are primarily in China, any significant revaluation of the Chinese Renminbi may materially and adversely affect our cash flows, revenues and financial condition. To date, we have not engaged in any hedging transactions in connection with our operations.
 

 
RISKS RELATED TO OUR COMMON STOCK
 
THE LIQUIDITY OF OUR COMMON STOCK IS AFFECTED BY ITS LIMITED TRADING MARKET.
 
Shares of our common stock are traded on NYSE Alternext US LLC under the symbol “TBV”. The trading volume of our common stock historically has been limited and sporadic. As a result , the price for our common stock is not necessarily a reliable indicator of its fair market value and may fluctuate widely.
 
OUR COMMON STOCK MAY BE SUBJECT TO REGULATIONS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION RELATING TO “PENNY STOCK.”
 
The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price (as defined in such regulations) of less than $5.00 per share, subject to certain exceptions. If our common stock meets the definition of a penny stock, it will be subjected to these regulations, which impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors.
 
WE ARE MAJORITY OWNED BY ONE STOCKHOLDER.
 
Our president and chief executive officer, Jinyuan Li, controls a majority of our common stock. Jinyuan Li beneficially owns approximately 95.1% of our outstanding common stock. As a result, Jinyuan Li has the ability to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such change of control would benefit our other shareholders.

 
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WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE, AND THE LACK OF DIVIDENDS MAY HAVE A NEGATIVE EFFECT ON THE STOCK PRICE.
 
We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.  Also, see risk factor titled “Due to Various Restrictions Under PRC Laws on the Distribution of Dividends by Our PRC Operating Companies, We May Not Be Able to Pay Dividends to Our Stockholders.”
 
 
Not applicable.
 
ITEM 2. PROPERTIES.
 
We conduct our main business activities in Tianjin, China. Our primary facilities are located at No. 6. Yuanquan Road, Wuqing New-tech Industrial Park, Tianjin, PRC.
 
Since 2003, Biological has leased office space and manufacturing facilities from Tianshi Group.  The lease expired at the end of 2007 and the annual rent was equal to 1% of our total gross revenues.  The rent was negotiated by the parties before we acquired Tianshi Holdings, and we believe that it is a reasonable rent for the facilities. In addition, we are obligated to pay insurance, maintenance and other expenses related to the premises.  Effective January 1, 2008, we entered into a new lease with Tianshi Group regarding the following properties on the same terms as the lease which expired at the end of 2007:
 
·  
three office buildings with a total area of 8,265 square meters;
 
·  
one research building with an area of 2,400 square meters; and
 
·  
one dormitory with an area of 2,365 square meters.
 
In 2008 we paid $545,192 to Tianshi Group under the lease.  Effective January 1, 2009, we entered into a new lease with Tianshi Group regarding the same properties and on the same terms as the lease which expired at the end of 2008.
 
On December 14, 2007, Biological entered a Real Property Transfer Agreement (the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement, Biological transferred to Tianshi Group title to buildings consisting of approximately 34,000 square meters of office, workshop, conference and exhibition space located at our headquarters in Tianjin China for $15,316,496.  Biological also transferred land use rights on the underlying land, which is owned by the government of China, continuing through December 30, 2054 with respect to the conference center property and May 31, 2043 with respect the other properties.  On December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement pursuant to which Biological has the right to use and occupy the office and workshop spaces being transferred under the Transfer Agreement. The lease is rent-free, but Biological is required to pay Tianshi Group for utility charges and maintenance costs on the buildings. The lease continues until the earlier of the date that we move to the new administrative offices being constructed by Life Resources, or the land use rights on the underlying property expire.
 
The following properties are covered by the December 14, 2007 lease:
 
·  
two workshops with an area of 8,600 square meters;
 
·  
two warehouses with an area of 9,447 square meters; and
 
·  
one power station with an area of 615 square meters
 
On December 25, 2008, Biological and Tianshi Group entered a Property Transfer Agreement (the “Property Transfer Agreement”). Under the Property Transfer Agreement, Biological transferred to Tianshi Group four buildings consisting of 9,974.31 square meters including three workshops and a canteen located at our headquarters in Tianjin, China. Pursuant to the Property Transfer Agreement, Tianshi Group will pay Biological RMB 32,800,000 ($4,785,520) over several installments during 2009.

 
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On January 1, 2009, each of Biological and Life Resources entered a Lease Agreement with Tianshi Group pursuant to which Biological and Life Resources will have the right to use and occupy the workshop spaces being transferred under the Property Transfer Agreement. The leases are rent-free, except that, Biological and Life Resources are required to pay Tianshi Group for utility charges and maintenance costs on the buildings. The leases continue until the earlier of the date Biological and Life Resources acquire use of alternate facilities or the land use rights on the underlying property expire.
 
Life Resources Property
 
On December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement with Tianshi Investment to buy all of the registered share capital of Life Resources for $64.2 million. The closing of the transaction was subject to government approval of transfer of the share capital of Life Resources to Tianshi Holdings.  On March 13, 2008, the Chinese government approved the transfer. Pursuant to the Sale and Purchase Agreement, the Tianshi Holdings advanced a deposit of $64,247,182 to Tianshi Investment on December 20, 2007. This acquisition deposit was settled as follows:
 
·  
$28,592,743 was paid by canceling a loan in the principal amount of RMB 200,000,000 to Tianshi Engineering owned by Biological together with interest accrued;
 
·  
$16,557,914 was paid by canceling of other receivable owned by Tianshi Engineering to Biological; and
 
·  
$19,096,525 was paid in cash.
 
Life Resources is currently constructing research and development, manufacturing and logistic facilities, as well as administrative offices totaling approximately 420,000 square meters. Construction began in July 2006. The facilities are located 7 kilometers from our current headquarters in Tianjin, China.
 
As of December 31, 2008, the majority of the main structures of the Life Resources facility construction project had been completed. Since September 30, 2008, the office buildings, warehouses, work plants, product exhibition center and dormitories have undergone internal decoration. The cost of the completed work of these facilities is approximately $69,581,772 (based on an exchange rate of $1 = RMB 6.8551 as of September 30, 2008), which includes amounts paid for the underlying land use rights.  The main structures of the quality control center, power center, boiler room and new main material center are expected be completed in the first half of 2009 and internal decoration is expected to be completed in the second half of 2009.  As of the end of 2008, the cost of the completed work of these facilities was $78,782,353 (based on an exchange rate of $1 = RMB 6.8542 as of December 31, 2008), which includes amounts paid for the underlying land use right.  We expect that all construction work and equipment installation will be complete in 2009 and that the Life Resources facility is estimated to begin operation by the end of 2009.  We have provided for an amount of up to $72,957,554 (based on an exchange rate of $1 = RMB 6.8533 as of January 1, 2009) in its 2009 budget for capital expenditures on the Life Resources facility.  We intend to move our headquarters to these new facilities upon its completion.
 
 
We are not a party to any material pending legal proceedings.
 
 
On December 4, 2008, the annual meeting of our stockholders (the “Annual Meeting”) was held at our Tianjin offices for the following purposes:
 
1.
Elect the following persons to the Board of Directors: Jinyuan Li, Zheng Wan, Yupeng Yan, Gilbert Raker, Howard Balloch, and Socorro Quintero.

 
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2.
Ratify the Board of Directors’ appointment of Grobstein, Horwath & Company LLP, the independent registered public accountants as our auditor for the fiscal year 2008.
 
In this Annual Meeting, there were accordingly present, in person or by proxy, an aggregate of 68,210,917 shares of Common Stock, such shares being a majority of the 71,333,586 shares of Common Stock entitled to notice of and to vote at the meeting.
 
The result of the vote taken for the election of directors at the meeting was as follows:

Directors
 
No. of Shares For
   
No. of Shares Against
   
Withheld Authority
 
Jinyuan Li
    68,091,345       106,522       13,050  
Zheng Wan
    68,091,645       106,222       13,050  
Yupeng Yan
    68,090,655       107,212       13,050  
Socorro Quintero
    68,197,304       563       13,050  
Howard Balloch
    68,090,255       107,612       13,050  
Gilbert Raker
    68,197,304       563       13,050  
 
 
·  
68,197,773 shares voted in favor of the proposal,
 
·  
989 shares voted against the proposal, and
 
·  
9,802 shares abstained.
 

 
PART II
 
 
Market Prices of Common Stock
 
Our common stock is listed on NYSE Alternext US LLC under the symbol “TBV”. The following table sets forth the range of high and low bid prices for our common stock reported by NYSE Alternext US LLC in each fiscal quarter from January 1, 2007 to December 31, 2008.

 
High
Low
2007
   
Quarter Ended March 31
$ 6.99
$ 3.75
Quarter Ended June 30
$ 4.55
$ 3.55
Quarter ended September 30
$ 4.55
$ 2.65
Quarter ended December 31
$ 6.85
$ 2.25
     
2008
   
Quarter Ended March 31
$ 2.42
$ 2.00
Quarter Ended June 30
$ 2.15
$ 1.42
Quarter ended September 30
$ 1.60
$ 0.92
Quarter ended December 31
$ 2.20
$ 0.76
     
 


 
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Stockholders
 
As of March 27, 2009, there were a total of 71,333,586 shares of our common stock outstanding, held by approximately 937 stockholders of record. This number of holders of record does not represent the actual number of beneficial owners of shares of our common stock because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who have the right to vote their shares.
 
Dividend Policy
 
We have not declared any dividends on our common stock since inception and do not intend to pay dividends on our common stock in the foreseeable future.  If we ever determine to pay a dividend, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency from the PRC for the payment of such dividends from the profits of Biological and Life Resources.  Please see additional discussion under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations; Financial Condition, Liquidity and Capital Resources.”

 
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ITEM 6. SELECTED FINANCIAL DATA.
 
This information has been omitted based on the Company’s status as a smaller reporting company.
 
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
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-K 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.
 
On December 20, 2007 Tianshi Holdings entered into a Sale and Purchase Agreement with Tianshi Investment.  Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the registered share capital of Life Resources for $64.2 million.  On March 13, 2008, the Chinese government approved the transfer of the shares of Life Resources, and Tianshi Holdings became the 100% owner of Life Resources.  As Tianshi Holdings and Life Resources were under common control by Jinyuan Li before the combination, the combination was treated for accounting purposes as a pooling of interests.  Our balance sheet at December 31, 2007 and financial statements for the twelve months ended December 31, 2007 year were adjusted as if Life Resources had been combined with us before January 1, 2007.
 
Overview
 
Tiens USA researches, develops, manufactures, and markets nutrition supplement products, including wellness products and dietary supplement products. Our operations are conducted from our headquarters in Tianjin, China through our 80% owned subsidiary, Biological and through our wholly-owned subsidiary, Life Resources.  We sell our products to affiliated companies in China and internationally.
 
We develop our products at our product research and development center, which employs highly qualified professionals in the fields of pharmacology, biology, chemistry and fine chemistry. We have developed and produce 37 nutrition supplement products, which include wellness products and dietary nutrition supplements.
 
In China, we sell our products to Tianshi Engineering, an affiliated company. Tianshi Engineering, in turn, sells the products to customers through its branches and affiliated companies and at chain stores which are owned by individual distributors.  Internationally, we sell our products to overseas affiliates who in turn re-package the products to meet the needs of the local markets and sell to independent distributors who use the products themselves and/or resell them to other distributors or consumers.

 
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Results of Operations
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Revenue. In 2008 revenue was $77.2 million compared to $54.9 million in 2007, an increase of 40.7%. The breakdown of revenue between Chinese and international sales is as follows:
 
Chinese and International Revenue
 
     Revenue    
Region
 
Year 2008
 
Year 2007
 
% Change
China
 
$ 33,711,474
 
$22,476,135
 
50.0%
International
 
$ 43,536,424
 
$32,423,925
 
34.3%
 
We believe that our strong sales growth in China was due to increased marketing efforts during 2008. In addition, during the third quarter of 2008, Tianshi Engineering announced plans to increase the prices of its products beginning in October 2008.  We believe this announcement prompted customers to stock up on certain products. The price increase of Tianshi Engineering products will not affect the price at which Biological sells to Tianshi Engineering.
 
The application of Tianshi Engineering for a direct selling license in China is still pending.  Until the application is approved, Tianshi Engineering will continue to sell our products through its branches, affiliated companies, and chain stores in China.
 
Increased international sales reflect a sharp increase in sales to Russia and Indonesia during 2008. In addition, in August of 2007, Administration for Quality Supervision, Inspection and Quarantine (AQSIQ) announced an ongoing national campaign in China against unsafe food and substandard products.  The special campaign against poor product quality was launched in response to a series safety scares involving Chinese products worldwide. The campaign set 20 detailed goals, including twelve “100 percents”.  For example, 100 percent of food producers should be licensed; 100 percent of agricultural wholesale markets in cities must be monitored; 100 percent of suppliers of raw materials for exported products should be inspected; and 100 percent of agricultural products must be free of five types of strong pesticides.
 
As a result of this campaign by the AQSIQ, there has been a general slow-down and backlog of export clearances for Chinese food products, and from August 2007 through the first quarter of 2008, we experienced significant delays in obtaining export clearance for all of the products which we sell to our international affiliates.  Beginning in the second quarter of 2008, these export restrictions were reduced for exports to countries in Africa and Asia, but remained in place for exports to countries in Europe and the Americas. During the last two quarters of 2008, these export restrictions were further reduced, and the campaign ended at the end of 2008.
 
Cost of sales. Cost of sales were $24.9 million in 2008 compared to $16.5 million in 2007, an increase of 50.5%.  This increase was primarily due to the corresponding increase in sales revenue. Cost of sales increased at a higher rate than revenue because of increases in the costs of raw materials and packing materials, and an increase in the portion of the products we sold in 2008 bearing a higher cost of production, relative to our other products, than in 2007.
 
Gross profit. Gross profit increased by 36.5% to $52.4 million in 2008, compared to $38.4 million in 2007. The gross profit margin for 2008 was 67.8% compared to 69.9% in 2007.  This decrease reflects an increase in the costs of raw materials and packing materials, and an increase in the portion of the products we sold in 2008 bearing a higher cost of production, relative to other products, than in 2007.
 
Selling, general and administrative expenses. Selling, general and administrative expenses increased by 24.5% to $18.6 million in 2008, compared to $14.9 million in 2007. The increase was primarily due to increases in salaries and insurance costs ($1,149,665), allowance for bad debt ($1,037,089), research and development ($828,457), advertising expenses ($392,774) and house reserve funds ($231,456). The selling and administrative expenses as a percentage of sales decreased to 24.1% in 2008 from 27.2% in 2007, because of the increase in sales.

 
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Other (expense) income, net. Other expense, net was $1.5 million of expense in 2008, compared to income of $1.5 million in 2007. On January 1, 2007, the $25.6 million loan to Tianshi Engineering became interest bearing.  In addition beginning in January 2007, we adopted a policy pursuant to which accounts receivable relating to Tianshi Engineering older than 90 days are transferred to other receivables-related parties and become interest bearing. In December 2007 Tianshi Engineering paid off the $25.6 million loan in full.  No accounts receivable relating to Tianshi Engineering remained outstanding for more than 90 days in 2008.
 
Net income. For the above stated reasons, net income in 2008 was $27.7 million compared to $17.9 million in 2007, an increase of 54.2%.
 
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 $18.8 million in 2008, compared to $7.3 million in 2007. The increase primarily reflects the increase in net income and the fact that in 2008 Tianshi Engineering paid us for products timely, while in 2007 Tianshi Engineering offset much of the amounts owed to us in purchase liabilities and other liabilities we owed Tianshi Engineering and its affiliates.
 
As of December 31, 2008, we had positive working capital of $62.0 million.  Cash was $44.9 million as of December 31, 2008, compared to $54.1 as of December 31, 2007.
 
Net cash used in investing activities was $37.3 million in 2008 compared to $33.7 million in 2007.  In August 2008, Life Resources paid RMB 42,252,723 ($6,164,672) in connection with the zoning changes to one parcel of land on which the land use rights was changed from “industrial” to “educational.”
 
Net cash provided by financing activities was $5.8 million for 2008, compared to $21.7 million for 2007.  In 2007, Life Resources received $21 million of capital contributions from Tianshi Investment.
 
Accounts receivable-related parties increased to $23.9 million as of December 31, 2008 from $14.3 million as of December 31, 2007. This is mainly due to the increase in sales in the fourth quarter of 2008 compared to that of 2007. Other receivable-related parties increased to $15.7 million as of December 31, 2008 from $13.9 million as of December 31, 2007. On December 25, 2008, Biological entered a Real Property Transfer Agreement with Tianshi Group, pursuant to which Biological transferred four buildings at the price of RMB 32,800,000 ($4,785,520). As of December 31, 2008, Tianshi Group had not paid us for the property transfer.
 
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.
 
As of December 31, 2008, the majority of the main structures of the Life Resources facility construction project had been completed. Since September 30, 2008, the office buildings, warehouses, work plants, product exhibition center and dormitories have undergone internal decoration. The cost of the completed work of these facilities is approximately $69,581,772 (based on an exchange rate of $1 = RMB 6.8551 as of September 30, 2008), which includes amounts paid for the underlying land use rights.  The main structures of the quality control center, power center, boiler room and new main material center are expected be completed in the first half of 2009 and internal decoration is expected to be completed in the second half of 2009.  As of the end of 2008, the cost of the completed work of these facilities was $78,782,353 (based on an exchange rate of $1 = RMB 6.8542 as of December 31, 2008), which includes amounts paid for the underlying land use right.  We expect that all construction work and equipment installation will be complete in 2009 and that the Life Resources facility will begin operations by the end of 2009.  We have provided for an amount of up to $72,957,554 (based on an exchange rate of $1 = RMB 6.8533 as of January 1, 2009) in its 2009 budget for capital expenditures on the Life Resources facility.

 
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The Wholly Foreign Owned Enterprise Law (1986), as amended and The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended, contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises, such as Biological and Life Resources, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, Biological and Life Resources are required to set aside a certain amount of any accumulated profits each year (a minimum of 10%, and up to an aggregate amount equal to half of its registered capital), to fund certain reserve funds. These reserves are not distributable as cash dividends, except in the event of liquidation, and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC.  We have not declared any dividends on our common stock since inception and do not intend to pay dividends on our common stock in the foreseeable future. If we ever determine to pay a dividend, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of such dividends from the profits of Biological and Life Resources.
 
We anticipate that our current operating activities will enable us to meet our anticipated cash requirements for 2009.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 
Critical Accounting Policies
 
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies.” Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
 
Revenue Recognition
 
During 2008, we sold both semi-finished products and finished products to Tianshi Engineering domestically. Revenue from semi-finished products was recognized at FOB Tianjin shipping point. Revenue from finished products was recognized only when the related party Chinese distributors recognized sales of our products to unaffiliated third parties. Revenues in both cases are net of taxes.
 
For overseas sales, we only sell finished products. We recognize 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.
 
We are generally not contractually obligated to accept returns. However, on a case by case negotiated basis, we permit customers to return their products. In accordance with SFAS No. 48, “Revenue Recognition when the Right of Return Exists”, revenue is recorded net of an allowance for estimated returns. Such reserves are based upon management’s evaluation of historical experience and estimated costs. The amount of the reserves ultimately required could differ materially in the near term from amounts included in the accompanying consolidated financial statements. As of December 31, 2008, Tianshi Engineering, an affiliated company, owned all of the related party distributors which sell our products in China.

 
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Allowance for Doubtful Accounts
 
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 receivable outstanding.
 
Inventories
 
Inventories are stated at the lower of cost or market using the moving average basis.  Management reviews inventory annually for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence.
 
Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurement" (“SFAS 157”), which provides enhanced guidance for using fair value to measure assets and liabilities.  This standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The adoption of this Statement had no effect on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective in the first quarter of fiscal 2008. The adoption of this Statement had no effect on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combination" (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets, the liabilities and any non-controlling interest in the acquiree, and the goodwill acquired in business combination or a gain from a bargain purchase. It also determines what information to disclose. The objective of SFAS 141R is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R will be effective in the first quarter of fiscal 2009. We are evaluating the impact that this statement will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements- An amendment of ARB No. 51" (“SFAS 160”). SFAS 160 provides a guide on how to report a non-controlling interest in consolidated financial statements. The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 will be effective in the first quarter of fiscal 2009. We are evaluating the impact, if any, that this statement will have on our consolidated financial statements.

 
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires an enhanced disclosure about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of SFAS 161 is to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. SFAS 161 will be effective in the first quarter of fiscal 2009. We are evaluating the impact that this statement will have on our consolidated financial statements.

 
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In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, "Determination of the Useful Life of Intangible Assets." FSP 142-3 amends the factors an entity should considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets." The intent of this FSP if to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows to measure the fair value of the asset under FASB Statement No. 141 (Revised 2007), "Business Combinations," and other U.S. generally accepted accounting principles (GAAP). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We are currently evaluating the impact, if any, that FSP 142-3 will have on our consolidated financial statements.
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this Statement had no effect on the consolidated financial statements.
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163, “Accounting for Financial Guarantee Insurance Contracts” (“SFAS 163”). SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deteriorations have occurred in an insured financial obligation. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 163 will not have a material impact on our consolidated financial statements.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Effects of Inflation
 
We are subject to commodity price risks arising from price fluctuations in the market prices of the various raw materials that comprise our products. Price risks are managed by each business unit through productivity improvements and cost-containment measures. For the time being, the management does not believe that inflation risk is material to our business or our consolidated financial position, results of operations or cash flows.
 
Effect of Fluctuations in Foreign Exchange Rates
 
Our operating subsidiary, Biological, is located in China, and buys all of its raw materials in China and sells our products in China using the renminbi as the functional currency. Based on Chinese government regulations, all foreign currencies under the category of current accounts are allowed to be freely exchanged with hard currencies. As of December 31, 2008, the exchange rate was $1 = RMB 6.85, compared to $1 = RMB 7.31 as of December 31, 2007.
 
Substantially all our revenues and expenses are denominated in the renminbi. However, we use the dollar for financial reporting purposes. The value of renminbi against the dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. As our operations are primarily in China, any significant revaluation of the renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert dollars into renminbi for our operations, appreciation of this currency against the dollar could have a material adverse effect on our business, financial condition and results of operation. Conversely, if we decide to convert our renminbi into dollars for other business purposes and the dollar appreciates against this currency, the dollar equivalent of the renminbi would be reduced.
 
We are exposed to a foreign currency risk arising from the possibility that fluctuations in foreign exchange rates could impact accounts receivable from our sales to overseas affiliate companies. Overseas affiliate companies pay for the products they purchase in US dollars; therefore, the main foreign currency risk is the fluctuation of the US dollar against other currencies. In general, our payment term for accounts receivable is approximately 180 days, during which period those overseas affiliate companies exchange their local currency for US dollars, and, when we collect the accounts receivable from them in US dollars, we exchange the US dollars for renminbi. The collection and exchange of local currency may take overseas affiliates approximately 50 days, almost one third of our payment term of 180 days.  Thus, we believe that overseas affiliates bear approximately 30% of our exposure to U.S. currency exchange rate fluctuations. Sales to overseas affiliates totaled $39.8 million in 2008, and the average balance of our renminbi-denominated bank accounts was $46.7 million. Our 70% share in an adverse exchange rate swing of 10% would amount to approximately $2.8 million of the amount of sales to overseas affiliates and $3.3 million of the amount of renminbi-denominated bank accounts, which are insignificant in relation to our assets of $204.9 million and shareholders equity of $148.9 million as of December 31, 2008.  The total amount of sales in 2008 was $77.2 million, while the impact of fluctuation of foreign exchange rates would amount to approximately $2.8 million, which is less than 4% of the total sales in 2008, and we believe it is immaterial. Therefore, the anticipated fluctuation of foreign exchange rates will not significantly impact our relative financial data.

 
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Currently we have not entered agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The financial statement required by this item may be found following the signature page of this Annual Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
Not applicable.
 
ITEM 9A (T). CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2008, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective 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.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
 
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
 
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

 
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Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company.
 
Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
 
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this Annual Report.  We are not required to include in our Annual Report an attestation report by our independent auditors under the Public Company Accounting Oversight Board’s auditing Standard No. 2 until the filing of the Annual Report for the fiscal year ending December 31, 2009.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting during the fourth quarter of 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B  OTHER INFORMATION.
 
Not applicable.
 

 
PART III
 
 
Set forth below are the names of our directors and executive officers as of March 27, 2009. Jinyuan Li has served on the Board since September 2003. Zheng Wan was appointed to the Board in November 2008. All other directors have served on the Board since January 2004.

NAME
 
AGE
 
POSITION
Jinyuan Li
 
 
51
 
Chairman,  Chief Executive Officer, President and Director
Zheng Wan
 
 
43
 
Chief Financial Officer and Director
Yupeng Yan
 
 
46
 
Executive Vice President and Director
Socorro Quintero
 
 
57
 
Director
Howard Balloch
 
 
58
 
Director
Gilbert Raker
 
 
66
 
Director
 
None of our directors and officers was selected pursuant to any agreement or understanding with any other person. There is no family relationship between any director or executive officer and any other director or executive officer.

 
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Jinyuan Li
 
Jinyuan Li has served as the Chairman of the Board and a Director since September 2003. Jinyuan Li is also our President and founder. He also serves as President of Tianshi Group and has held that position since 1995. Mr. Li has 14 years of experience in the petroleum and plastics industries. He holds a number of leadership positions in government and social associations, including as commissioner of the Tianjin Political Consultative Conference; Standing Director of China Entrepreneur’s National Council; Executive Commissioner of All-China Federation of Industry and Commerce; Vice President of Chinese Bioengineering Association; and Vice president of Chinese Healthcare Association. Mr. Li was elected as one of the Top Ten Most Outstanding Talents in the Greater China Area; one of the Ten Most Popular Personages Among the High-Ranking, by China Economic Forum; Excellent Entrepreneur, by the Organization Committee of the Second Chinese Entrepreneur Forum in 2003, and as the Most Creative Chinese Businessman of Asia in 2004. Mr. Li holds an MBA from Nankai University.
 
Zheng Wan
 
Mr. Wan has served as our Chief Financial Officer since November 2008. Prior to that, Mr. Wan served as General Manager for the Global Financial Center of the Company from June 2008, and as Manager for the Planning and Accounting Department of the Company from April 2005 to June 2008. Before joining the Company, Mr. Wan was the Vice President and Chief Financial Officer of Beijing Founder Information Technology Co. Ltd., an information technology business, from September 2001 to April 2005. Mr. Wan received his Bachelor of Economics from Capital Economic and Business University in Beijing, China, and a Master of Professional Accounting from Deakin University in Australia.  Mr. Wan is a Certified Public Accountant in China and holds the title of Senior Accountant.
 
Yupeng Yan
 
Mr. Yan has served as our Executive Vice-President since September 2003. Mr. Yan has also served as Vice-President of Tianshi Group since March 1997, acting as general manager of its Global Information Technology Center from July 2007 to January 2009 and as head of its Global Marketing Center from June 2004 to June 2007. Since August 2008 Mr. Yan has served as the General Manager of Tianshi Group’s Global Marketing Center.  Mr. Yan currently holds a number of leadership positions including Vice-Dean of Tianshi College (formerly Tianshi Occupational Technique Institute), and Vice-Chairman of Tianshi Science and Technique Association. Mr. Yan was elected as one of the Chinese Ten Outstanding Professional Managers in 2004. Mr. Yan received an Executive MBA from Nankai University in July 2004.
 
Socorro Quintero
 
Dr. Quintero serves as our director. Dr. Quintero is an Associate Professor of Finance and Managing Director of the Corporate Directors Institute at Oklahoma City University’s Meinders School of Business (“OCU”). Prior to joining OCU in 1993, she served as Assistant Professor of Finance at the University of South Florida. Dr. Quintero has extensive work experience in various industrial engineering capacities and management levels while working for Atlantic Steel Company, Abbott Laboratories and Levi Strauss & Co. She received a Bachelor of Science in Physics from the University of the Philippines, an M.S. in Industrial Engineering from the Georgia Institute of Technology, and a Doctorate in Finance from the University of Texas at Austin.
 
Gilbert Raker
 
Mr. Raker serves as our director and is currently a Partner at Wellfleet Partners, Inc., an investment banking and advisory firm in New York.  From November 1988 to January 2009 he was the President, Chief Executive Officer and Chairman the Board of SEMX Corporation, a company that manufactured materials and components used in microelectronic circuitry on a worldwide basis for the automotive, consumer electronics, defense, medical and aerospace industries.  Prior to November 1988, Mr. Raker worked at two private equity investment firms, was employed as the Chief Financial Officer and in one case the Chief Operating Officer of two New York Stock Exchange listed companies and served in a variety of capacities in numerous private companies.  Mr. Raker received his B.S. in Chemistry from Eastern University, his MBA in Production Management from Syracuse University and completed all of the course work for a PhD in Finance and Economics at Syracuse University.

 
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Howard Balloch
 
Mr. Balloch serves as our director and is the founder and President of The Balloch Group, an investment advisory and merchant banking firm located in Beijing, China.  Mr. Balloch served as the Canadian ambassador to the People’s Republic of China from February of 1996 until July of 2001. Mr. Balloch currently serves on the board of directors of the following companies: Ivanhoe Energy, Inc. (TSX: IE, NASDAQ: IVAN), Ivanhoe Mines Ltd. (TSX, NYSE, NASDAQ: IVN), East Energy Corp. (TSX: EEC), Methanex Corporation (TSX:MX, NASDAQ: MEOH), and Maple Leaf Education Holding. Mr. Balloch is also the Vice-Chairman of the Canada China Business Council.  Mr. Balloch received his B.A. and M.A. degrees from McGill University.  
 
Nominations by Stockholders
 
There have been no changes to the procedures by which the stockholders of our company may recommend nominees to the Board of Directors since the filing of the Company’s Definitive Proxy Statement on November 17, 2008 for its Annual Meeting of Stockholders, which was held on December 4, 2008.
 
Audit Committee
 
The Board of Directors has established an audit committee in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Socorro Quintero, Chairperson, Howard Balloch and Gilbert Raker, each of whom is independent as defined under Section 121(A) of NYSE Alternext US LLC listing standards currently in effect. None of the Audit Committee members is a current officer or employee of our company or any of its affiliates.
 
The Board of Directors has determined that Socorro Quintero and Gilbert Raker each qualify as an “audit committee financial expert” under Item 407(d) of Regulation S-K.
 
Code of Ethics
 
The Board has adopted a Code of Ethics to promote its commitment to the legal and ethical conduct of our company’s business. The Chief Executive Officer, Chief Financial Officer, and other senior officers are required to abide by the Code of Ethics, which provides the foundation for compliance with all corporate policies and procedures, and best business practices.
 
The Code of Ethics was filed as an exhibit to our Annual Report on Form 10-KSB for the year ended December 31, 2004. A written copy of the Code of Ethics will be provided upon request at no charge by writing to our corporate secretary, Henry Wen, at Tiens Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial Park, Tianjin, China 301700.
 
 
Based solely upon a review of Forms 3 and 4 and amendments to these forms furnished to us, all parties subject to the reporting requirements of Section 16(a) of the Exchange Act filed all such required reports during and with respect to 2008.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
Compensation Discussion and Analysis
 
All compensation decisions for our executive officers, including the salary of our CEO and President, Jinyuan Li, are made by Jinyuan Li.  Because Jinyuan Li owns more than 50% of our voting stock, we are a “controlled company” pursuant to Rule 801(a) of NYSE Alternext US LLC Rules (“NYSE Alternext Rules”).  Therefore, we are exempt from NYSE Alternext Rule 805(a), which requires that the compensation of a CEO and all other executive officers be determined, or recommended to the Board for determination, by a compensation committee composed of independent directors, or the majority of independent directors on the Board.

 
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The objectives of our compensation programs.
 
We seek to attract and retain executive officers of the highest caliber and motivate them to maximize the success of our business.
 
What our compensation program is designed to reward.
 
Our CEO believes that he is incentivized by his large equity ownership in our company. Therefore, he believes that a long-term employment contract providing a base salary is appropriate compensation for him. With respect to the other executive officers’ base salaries, our CEO bases his recommendations on past salary levels with our company and his perception of the quality of their respective performances and attempts to match their salaries with his perception of compensation levels at a small number of companies he considers comparable. The CEO also takes in to consideration the relatively low salaries provided to executive officers by companies in China compared to public companies in the United States. Our CEO assesses the normal responsibilities of each position, as well as the extra responsibilities and additional work related to special projects which such executive officers may be expected to perform. No relative weight was assigned to any of the foregoing factors.
 
Elements of compensation.
 
Each executive officer receives cash compensation as a base salary. Base salary for our executive officers is fixed by their respective employment agreements, as described under “Employment Agreements.” Jinyuan Li and Wenjun Jiao’s salaries for 2008 were fixed pursuant to employment agreements with Tianjin Tianshi Biological Development Co. Ltd. (“Biological”) entered into in 2005. Wenjun Jiao was our principal financial officer until October 30, 2008. Zheng Wan has been our principal financial officer since November 12, 2008 and his salary for 2008 was fixed pursuant to an employment agreement dated November 3, 2008.  Their base salaries were based on our CEO’s subjective perceptions of salaries paid by comparable companies for comparable positions. The amount of the payments required to be paid upon termination of employment agreements for specified reasons are determined according to local Chinese employment regulations. Our executive officers did not receive any bonuses for 2008.  Due to the fact that we does not currently and did not in 2008 give bonuses to any of its named executive officers, Jinyuan Li did not identify any individual or corporate goals when setting the remuneration of Messrs. Jiao and Wan for 2008.
 
Our strategy is to maintain its compensation for employees at levels that are equal to or in excess of those offered by companies of comparable sizes, consistent with the individual employees’ capabilities and responsibilities. We do not currently have a stock option plan, but may consider adopting one in the future to further incentivize its employees.
 
Why we chose to pay each element.
 
We have entered into long-term employment agreements with Messrs. Li, Jiao and Wan which provided for base salaries.
 
The employment agreements with Messrs. Li and Wan provide for payments upon termination for specified reasons. These payments are required by local Chinese employment regulations. Additional information regarding applicable payments under such agreements is provided under the heading “Potential Payments Upon Termination or Change of Control.”
 
How we determine the amount for each element of pay.
 
With respect to the executive officers’ base salaries, our CEO bases his recommendations on past salary levels and his perception of the quality of their respective performances and attempts to match their salaries with his perception of compensation levels at a small number of companies he considers comparable, although not necessarily included in the NYSE Alternext Composite Index or Nasdaq Biotechnology Index. Our CEO assesses the normal responsibilities of each position, as well as the extra responsibilities and additional work related to special projects which such executive officers may be expected to perform. Our CEO also takes in to consideration the relatively low salaries provided to executive officers by companies in China compared to public companies in the United States.

 
29

 

 

 
Compensation Committee Interlocks and Insider Participation
 
During 2008, the members of the Compensation Committee were Gilbert Raker and Yupeng Yan. The Compensation Committee did not deliberate on executive compensation for fiscal 2008.  Wenjun Jiao, Yupeng Yan and Zheng Wan were each an employee and officer of our company during 2008. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with Executive Officers or Directors of our company or another entity.
 
Compensation Committee Report
 
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K of the Exchange Act with management and the full Board.  Based on that review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in our Annual Report on Form 10-K for 2008.
 
The Compensation Committee
 
Gilbert Raker, Chairman
 
Yupeng Yan
 

 
Summary Compensation Table
 
The table below summarizes the total compensation paid or earned by each of the named executive officers for the fiscal years ended December 31, 2008, 2007 and 2006.

Name and
 Principal Position (1)
 
Year
   
Salary
($)
   
Total    
($)
 
Jinyuan Li
 
2008
   
$
166,660
   
$
166,660
 
Chairman, Chief Executive
 
2007
   
$
166,660
   
$
166,660
    
   
2006
   
$
166,660
   
$
166,660
    
         
 
           
Zheng Wan
 
2008
   
$
8,618
   
$
8,618
 
Chief Financial Officer (2)
       
 
           
         
 
           
Wenjun Jiao
 
2008
   
$
71,815
   
$
71,815
 
Former Chief Financial
 
2007
   
$
77,000
   
$
77,000
 
Officer (3)
 
2006
   
$
77,000
   
$
77,000
 
 
 
 
(1) Yupeng Yan was an employee Director of our company during 2008 but did not qualify as a “named executive officer” because his total compensation was less than $100,000.

(2)  Zheng Wan became Chief Financial Officer and Director on November 12, 2008 and was not an executive officer of our company prior to that.

(3)  Wenjun Jiao resigned as our Chief Financial Officer, Secretary and Director on October 30, 2008.

 
Grants of Plan Based Awards; Outstanding Equity Awards at Fiscal Year-End; Option Exercises and Stock Vested
 
We do not have any stock option plans.

 
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Pension Benefits
 
None.
 
Nonqualified Deferred Compensation
 
We do not provide any nonqualified deferred compensation to any of its employees.
 
Employment Agreements
 
Our subsidiary, Biological, has entered into a statutory employment agreement with each of the named executive officers of our company. Jinyuan Li’s contract is dated June 1, 2005 and has an indefinite period. Wenjun Jiao’s contract was dated June 1, 2005 and provided for a term through June 30, 2010. The employment contract for Yupeng Yan is dated April 1, 2004 and provides for a term through March 31, 2009. Zheng Wan also has an employment contract with Biological, dated November 3, 2008 which provides for a term through December 31, 2013.
 
Under each of these employment contracts, the employee receives vacation time and social insurance according to Chinese government regulations.  The employment agreements can be renewed within 15 days of the expiration of each agreement with the mutual consent of the parties.  Biological may rescind each agreement without notice if, among other events, the employee materially violates Biological’s rules and regulations or the employee grossly neglects his or her duties and discloses our confidential business information that harms us.  Biological may rescind each agreement on 30 days’ notice and provide economic compensation if, among other events, the employee suffers from a disease or non-work related injury and after a recovery period is unable to work, or due to material changes the performance of the agreement has become unpractical.  Pursuant to the terms of each of the employment agreements, the employee may rescind its contract on 30 days’ written notice.
 
For 2008, we paid a salary of $166,660 to Jinyuan Li and $77,000 to each of Wenjun Jiao and Yupeng Yan. Mr. Wan’s contract provides for an annual salary of $80,000.
 
Potential Payments upon Termination or Change of Control
 
The employment contracts of Messrs. Li and Wan each provide for a one-time lump sum payment equal to six months of the employee’s then current salary if we terminate their employment contract for one of the following reasons:
 
·  
The employee has a non-work-related injury and is unable to perform his responsibilities; or
 
·  
The employee is unable to perform his responsibilities for other reasons; or
 
·  
The circumstances based on which the employment contract was entered into have materially changed and the performance of the contract becomes impractical; or
 
·  
We are contemplating bankruptcy and determine to reduce staff.
 
Assuming that Messrs. Li and Wan were terminated for one of the above-stated reason, Mr. Li would receive $83,330 and Mr. Wan would receive $40,000.  There are no other circumstances, including a change of control of our company, where we are required to make any additional payment to Messrs. Li and Wan.
 
Director Compensation
 
For the fiscal year ended December 31, 2008, members of the Board who are not our employees are entitled to receive an annual cash retainer of $30,000.
 
Director Summary Compensation Table
 
The table below summarizes the compensation we paid to non-employee Directors for the fiscal year ended December 31, 2008.

 
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Name (1)
  
Fees Earned or
Paid in Cash
($)
 
Total
($)
 
Howard Balloch
  
$
30,000
    
$
30,000
 
Gilbert Raker
  
$
30,000
 
$
30,000
 
Socorro Quintero
  
$
30,000
 
$
30,000
 
Yupeng Yan (2)
 
$
0
 
$
0
 
 
 
(1)
Jinyuan Li, Wenjun Jiao and Zheng Wan are not included in this table as they were our employees during 2008 and received no compensation for their services as Directors.   Their compensation is disclosed in the table in the “Summary Compensation Table”.
   
(2)
Yupeng Yan was an employee Director of our company during 2008 and received no additional compensation for his services as Director.  He is not a named executive officer and is excluded from the “Summary Compensation Table”.


 
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The following table sets forth information with respect to the beneficial ownership of shares of common stock as of March 27, 2009 by each person or entity who is known by us to beneficially own five percent or more of our common stock; each director and executive officer of our company; and all directors and executive officers of our company as a group.

 
Name of Beneficial Owner (1)
 
 
Number of Shares
 
 
Percent of Class
Jinyuan Li
 
67,830,000
 
95.1%
Zheng Wan
 
--
 
--
Yupeng Yan
 
--
 
--
Socorro Quintero
 
--
 
--
Howard Balloch
 
--
 
--
Gilbert Raker
 
--
 
--
All Directors and Executive Officers as a Group (6 persons)
 
67,830,000
 
95.1%
TIENS (USA) Investment Holdings Group Overseas Limited (2)
 
67,830,000
 
95.1%
____________________
(1) Unless otherwise indicated, the address for each named individual or group is c/o Tiens Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial Park, Tianjin, China 301700.
(2) The shares are owned by TIENS (USA) Investment Holding Group Overseas Limited (“TIH”). As sole director of TIH, Jinyuan Li has voting and dispositive power over the shares. The business address of TIH is c/o Tiens Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial Park, Tianjin, China 301700.
 
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
Director Independence
 
The Board has determined that directors Howard Balloch, Socorro Quintero and Gilbert Raker are “independent” under Section 803(A) of the listing standards of NYSE Alternext US LLC. The remaining members of the Board do not satisfy these “independence” definitions. The ownership by Jinyuan Li, the Company’s President and Chief Executive Officer, of more than 50% of the Company’s voting stock makes it a “controlled company” to which NYSE Alternext US LLC rules requiring a majority of the directors to be independent and relating to executive compensation and Board nominations need not apply.  The Board has an Audit Committee and a Compensation Committee.  The Board’s Compensation Committee members are Messrs. Gilbert Raker and Yupeng Yan.  Mr. Gilbert Raker as a member of the Board’s Compensation Committee is independent as defined under Section 803(A) of NYSE Alternext US LLC listing standards currently in effect. The Audit Committee members are Ms. Socorro Quintero, Chairperson, and Messrs. Howard Balloch and Gilbert Raker, each of whom is independent as defined under Section 803(A) of NYSE Alternext US LLC listing standards currently in effect.  The Board does not have a Nominating Committee. The entire Board assumes the duties that would be delegated to a Nominating Committee.
 
Transactions with Related Parties
 
We market all of our products through various domestic and international business entities that are related to us through common ownership. As a result, all of our total consolidated sales in 2008 were to related parties.

 
33

 
 
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 retail market price for the products. This 25% figure was negotiated between the parties in 2003, before we acquired Tianshi Holdings, and we believe that it is a reasonable sales price for us to receive.  The price of semi-finished goods sold to Tianshi Engineering was originally set at the beginning of 2006 to provide us with a 75% gross profit margin.  However, based on fluctuations in the cost of raw materials and quantities produced, the gross profit margin percentage varied during the year.  This 75% figure was negotiated between the parties, and we believe that it is reasonable.  The goal of this new pricing policy was to try to maintain our gross margins on semi-finished goods at a similar level to historical gross margins for finished goods.  All of Tianshi Engineering’s Chinese affiliated companies are owned in whole or in part by Jinyuan Li’s immediate family members.
 
Internationally, we sell our products to overseas related companies located in 46 countries who in turn re-package and sell them to independent direct sales distributors. Our CEO, Jinyuan Li, owns or controls these overseas related companies. Due to the common ownership, there are no formal sales or administrative agreements among us and those overseas related parties. The business operations among these related entities are regulated through internal policies.
 
As operation costs vary from country to country, international market prices vary accordingly. We sell our products to overseas affiliates at the FOB (destination port) price, which consists of 25% of the Chinese retail price, including customs duty, value-added tax and other miscellaneous transportation cost. The overseas affiliates mark up the products to cover their expenses and realize profits of approximately 10%.
 
Our related party transactions are required to be reviewed and approved or ratified by a majority of our non-interested Board of Directors. The following tables are provided to facilitate your understanding of the transactions and outstanding balances between those related parties and us during 2008 and 2007.
 
   
December 31,
2008
   
December 31, 2007
As Adjusted
 
Accounts receivable, trade – related parties, net of allowance for doubtful accounts
 of $1,108,789 and $71,700 as of December 31, 2008 and 2007, respectively
  $ 23,941,431     $ 14,268,229  
Other receivables – related parties
  $ 15,729,076     $ 13,887,138  
Advances from customers – related parties
  $ 3,239,650     $ 1,700,838  
Other payables – related parties
  $ 6,373,900     $ 7,938,205  
Current portion of long-term debt - related party
  $ 2,130,000     $ 2,130,000  
Long term debt – related party
  $ 2,137,742     $ 4,267,742  
 

 
Revenue-related Parties
 
The details of revenue-related parties are as follows:
 
   
2008
   
2007
 
Tianshi Engineering
  $ 33,711,474     $ 22,476,135  
Overseas Related Companies
    43,536,424       32,423,925  
Total
  $ 77,247,898     $ 54,900,060  

In China, we sell our products to Tianshi Engineering, an affiliated company. Tianshi Engineering, in turn, sells the products to customers through its branches and affiliated companies and at chain stores which are owned by individual distributors. Internationally, we sell our products to overseas affiliates who in turn re-package the products to meet the needs of the local markets and sell to independent distributors who use the products themselves and/or resell them to other distributors or consumers.

 
34

 


 
Accounts Receivable-related Parties

The details of accounts receivables, trade-related parties are as follows:

 
December 31, 2008
 
December 31, 2007
Tianshi Engineering
$
4,362,355
 
$
2,062,333
Overseas Related Companies
 
20,687,865
   
12,277,596
Allowance for Doubtful Accounts
 
          (1,108,789)
   
(71,700)
Total
$
            23,941,431
 
$
14,268,229


Other Receivables-related Parties

Other receivables - related parties are generated by us 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:

The details of other receivables-related parties are as follows:

     
December 31, 2007
   
December 31,  2008
 
As Adjusted
Tianshi Engineering
 $
                    11,636,208
 $
                      9,460,811
Tianshi Group
 
                      4,018,078
 
                      2,347,489
Tianshi Yinshi Hotel
 
                           36,475
 
                                   -
Tianjin Xingda Travel Co., Ltd
 
                           12,932
 
                             1,939
Tianshi Pharmaceuticals
 
                             5,922
 
                             5,065
Shanghai Tianshi Jinquan Investment Co.
 
                             1,846
 
                                874
Shengshi Real Estate Development
 
                             1,657
 
                             2,238
Beijin Xingda Travel Co., Ltd
 
                             1,195
 
                             5,959
Tianjin Xiongshi Construction and
 Decoration Co., Ltd
 
                                   -
 
                      2,062,763
Others
 
                           14,763
 
                                   -
              Total
 $
                    15,729,076
 $
                    13,887,138

 
Historically, Tianshi Engineering remitted payment to us upon sales to third party customers.  However, in order to support Tianshi Engineering’s marketing efforts in anticipation of receiving a direct selling license in China, we have agreed to allow Tianshi Engineering to defer payment to us.  Balances not remitted to us within 90 days are converted to other receivables - related parties.  Beginning on January 1, 2007, the other receivables - related parties became interest bearing.  The stated interest rate is the interest rate for the same level of loan stipulated by the People’s Bank of China. 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. In 2008, Tianshi Engineering remitted payment to us timely and therefore no accounts receivable due from Tianshi Engineering were converted to interest bearing receivables. For the year ended December 31, 2008 and 2007, the interest income from the other receivables - related parties amounted to $0 and $ 435,913, respectively.
 
During the years ended December 31, 2008 and 2007, we and Tianshi Group used common meters at our headquarters for electricity and water, and also used the same employee insurance account. When making payments to these outside parties, we usually pay the fees first and then are reimbursed by Tianshi Group. These pro-rated amounts relating to Tianshi Group are categorized as other receivables - related parties.
 
On December 31, 2008, Biological entered into a Property Transfer Agreement with Tianshi Group, pursuant to which Biological transferred four buildings at the price of RMB 32,800,000 ($4,785,520).  As of December 31, 2008, Tianshi Group had not paid for the property transfer.
 
As the renminbi has been increasing in value against the dollar over the past several years, beginning in 2007, we have exchanged cash held in dollars into renminbi through Tianjin Xiongshi Construction and Decoration Co., Ltd (“Xiongshi Construction”), a related party construction company, which is 100% owned by the Company’s current Chairman, Chief Executive Officer and President, Jinyuan Li. For the years ended December 31, 2008 and 2007, the amounts transferred to Xiongshi and changed to renminbi were $12,500,000 and $21,028,671, respectively.

 
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Advances from Customers-related Parties
 
Advances from related party customers were $3.2 million and $1.7 million as of December 31, 2008 and 2007, respectively.  These advances represented prepayments made to us to insure that overseas customers could obtain enough of our products to meet their market demands.
 
Other Payables-related Parties
 
These amounts arose primarily from previous cash advances from related parties such as management fees due to related parties and various non-operational transactions incurred with related parties.  The details of other payable-related parties are as follows:
   
December 31, 2008
   
December 31, 2007
As adjusted
 
Tianshi Investment
  $ 6,080,385     $ 7,490,136  
Tianshi Germany Co., Ltd
    105,553       109,233  
Tianyuan Capital Development Co. Ltd. ("Capital")
    84,359       84,359  
Beijin Xingda Travel Co., Ltd
    80,245       -  
Tianjin Tianshi Global International Trade Co., Ltd
    23,344       -  
Tianshi Administrative Committee of Industrial Park
    14       13  
Tianshi Engineering
    -       244,980  
Tianshi Pharmaceuticals
    -       9,308  
Tianshi Shanghai Co., Ltd
    -       176  
Total
  $ 6,373,900     $ 7,938,205  
 

 
On December 21, 2007, we, Tianshi Investment and Life Resources entered a Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million to Life Resources without interest. We agreed to repay the $7.5 million to Tianshi Investment within five days of the date of the government’s approval of the transfer of the shares of Life Resources to Tianshi Holdings. On March 13, 2008, the Chinese government approved the transfer, and we repaid $7.5 million to Tianshi Investment on March 18, 2008, by canceling $7.5 million of accounts receivable owed to it by Tianshi Engineering.  (See note 4 to our consolidated financial statements.)
 
On January 21, 2008, Life Resources and Tianshi Investment entered into a loan agreement pursuant to which Tianshi Investment provided a loan to Life Resources for $6.5 million without interest. The loan was due on June 30, 2008. On June 30, 2008, the parties agreed to extend the loan until December 31, 2008. Life Resources used the loan to increase its registered share capital.  In November 2008, we paid $419,614.80 to Tianshi Investment. The remaining loan was extended to June 30, 2009 by the parties as agreed on December 31, 2008.
 
Long Term Debt-related Party
 
On September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan Capital agreed to lend $10.65 million in 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 must repay the loan in ten consecutive semi-annual installments of $1,065,000 commencing June 30, 2006 and ending June 30, 2011. Tianshi Holdings used the loan proceeds to fund its capital contribution to Tiens Yihai. Mr. Jinyuan Li owns 100% of Tianyuan Capital.   Interest of $266,273 and two installment payments totaling $2,130,000 were made in 2008.

 
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Transactions with Tianshi Group
 
Since 2003, Biological has leased office space and manufacturing facilities from Tianshi Group. The lease provides for an annual rent at 1% of our total gross revenues. The rent was negotiated by the parties before we acquired Tianshi Holdings, and we believe that it is a reasonable rent for the facilities. The term of the lease was for five years and expired on December 31, 2007. In addition, we are obligated to pay insurance, maintenance and other expenses related to the premises. We entered into a new one-year lease agreement with Tianshi Group, effective January 1, 2008 covering the same facilities and having identical rent terms.  The total amount paid on this lease amounted to $545,192 for the 12 months ended December 31, 2008.  Effective January 1, 2009, we entered into a new lease with Tianshi Group regarding the same facilities and on the same terms as the lease which expired at the end of 2008.
 
On December 14, 2007, Biological entered into a Real Property Transfer Agreement (the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement, Biological transferred to Tianshi Group title to buildings consisting of approximately 34,000 square meters total of office, workshop, conference and exhibition space, located at our headquarters in Tianjin China for $15,316,496.  Land use rights on the underlying land, which is owned by the government of China and which rights continue through December 30, 2054 with respect to the conference center property and May 31, 2043 with respect the other properties were also transferred.  Biological also assigned certain contracts with third parties related to the servicing and upkeep of the buildings being transferred (collectively, the “Third Party Contracts”).  In consideration for the transfer of the buildings and land-use rights, Tianshi Group paid Biological $15,334,037, plus $3,190,773 to cover pre-payments previously made by Biological under the Third Party Contracts.
 
On December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement pursuant to which Biological has the right to use and occupy the office and workshop spaces being transferred under the Transfer Agreement. The lease is rent-free, but Biological is required to pay Tianshi Group for utility charges and maintenance costs on the buildings. The lease continues until the earlier of the date that we move to the new administrative facilities being constructed by Life Resources, or the land use rights on the underlying property expire.
 
On December 25, 2008, Biological and Tianshi Group entered into a Property Transfer Agreement (the “Property Transfer Agreement”). Under the Property Transfer Agreement, Biological transferred to Tianshi Group four buildings consisting of 9,974.31 square meters including three workshops and a canteen located at our headquarters in Tianjin China. Pursuant to the Property Transfer Agreement, Tianshi Group will pay Biological RMB 32,800,000 ($4,785,520). This transaction resulted in a loss of RMB 1,912,983 ($274,762) for Biological. We bore 80% of the loss, or $ 219,810.
 
On January 1, 2009, each of Biological and Life Resources entered a Lease Agreement with Tianshi Group pursuant to which Biological and Life Resources will have the right to use and occupy the workshop spaces being transferred under the Property Transfer Agreement. The leases are rent-free, except that, Biological and Life Resources are required to pay Tianshi Group for utility charges and maintenance costs on the buildings. The leases continues 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.
 
Transactions with Tianshi Engineering
 
On December 31, 2005, Biological entered into four lease agreements with Tianshi Engineering which enabled Tianshi Engineering to share the use of certain of Biological’s product production workshops and equipment to manufacture products which Tianshi Engineering owns, or jointly owns with Biological for one year started from January 1, 2006. These four lease agreements were renewed in December 2006 for the 2007 fiscal year and on October 17, 2007 for the 2008 fiscal year. Rent revenue from these leases amounted to $326,965 and $379,083 for the years ended 2008 and 2007, respectively.
 
On October 31, 2007, Biological entered into four lease agreements with Tianshi Engineering which 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 is effective as of January 1, 2008 and expires 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. Following is a summary of the monthly rent payable to Biological under the four leases Biological entered into on October 31, 2007 (as amended by the two supplemental agreements entered into on December 31, 2007):

 
37

 


Lease Agreement
 
Monthly rent
 
       
Lease Agreement for Health Products Production Equipment
  $ 12,252  
Lease Agreement for Health Products Production Workshops
  $ 6,326  
Lease Agreement for Personal Care Product Production Equipment
  $ 6,014  
Lease Agreement for Personal Care Products Production Workshops
  $ 3,086  
 
On December 25, 2008, Biological entered into a Transfer Agreement with Tianshi Group, the parent company of Tianshi Engineering, pursuant to which Biological transferred to Tianshi Group four buildings which were all buildings in the Lease Agreements. The Lease Agreement for Health Products Production Workshops, entered into on October 31, 2007, the related supplemental agreement entered into on December 31, 2007, and the Lease Agreement for Personal Care Products Production Workshops, entered into on October 31, 2007, expired at the end of fiscal 2008.
 
Other Transactions with Tianshi Engineering
 
In October 2005, Biological entered into two agreements with Tianshi Engineering regarding the joint ownership of certain certificates issued by the PRC government to enable Tianshi Engineering to distribute Biological’s products in China. Biological and Tianshi Engineering continue to have joint ownership of these certificates.
 
On October 26, 2005, Biological entered an agreement with Tianshi Engineering (the “Wellness Products Agreement”) relating to the joint ownership of the Certificates of Domestic Wellness Product issued by the State Food and Drug Administration of the PRC (the “SFDA”) covering 18 of Biological’s wellness products (the “Wellness Certificates”) and the relevant production technology. Pursuant to the Wellness Products Agreement, Biological will jointly share the ownership of the Wellness Certificates and relevant production technology with Tianshi Engineering. Under the agreement, Biological and Tianshi Engineering both have the right to use the Wellness Certificates and all technology to produce, manufacture and sell wellness products pursuant to local law.
 
On October 26, 2005, Biological entered an agreement with Tianshi Engineering (the “Dietary Supplement Products Agreement”) relating to the joint ownership of the Certificates of Domestic Dietary Supplement Product covering ten of Biological’s dietary supplement products (the “Dietary Supplement Certificates”) and the relevant production technology. Pursuant to the Dietary Supplement Products Agreement, Biological will jointly share the ownership of the Dietary Supplement Certificates and relevant production technology with Tianshi Engineering. Tianshi Engineering is agreeing to share ownership of the Dietary Supplement Certificates and relevant production technology with Biological. Under the agreement, Biological and Tianshi Engineering both have the right to use the Dietary Supplement Certificates and all technology to produce, manufacture and sell the dietary supplement products pursuant to local law.
 
Tianshi Engineering paid Biological the full purchase price for the rights to the certificates in 2005. The Nutrition Supplements Market Committee of the China Health Care Association (“CHCA”) assessed the value of the certificates subject to the agreements. The CHCA is an independent, non-profit organization composed of manufacturing enterprises, research and development institutions in the medical and health industry and entrepreneurs and professionals from related fields.
 
Transactions with Tianshi Pharmaceuticals
 
In April 2004, Tianshi Holdings entered a joint venture contract with Tianshi Pharmaceuticals to establish Tiens Yihai Co. Ltd., a Chinese-Foreign Equity Joint Venture (“Tiens Yihai”). Tiens Yihai was initially 99.4% owned by Tianshi Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located in Shanghai, China, and was established to build a new research and development facility in Shanghai, China. In March 2007, we decided to suspend the proposed development by Tiens Yihai.
 
On October 14, 2008, Tiens Yihai received an approval from the local government to decrease its registered capital from $200 million to $29,989,361, an amount corresponding to its paid-in capital. Pursuant to the change in registered capital, the percentage of capital ownership of both investors changed. The share held by Tianshi Holdings decreased from 99.4% to 96% and the share owned by Tianshi Pharmaceuticals increased from 0.06% to 4% of Tiens Yihai’s share capital.

 
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Due to the continued uncertainty relating to the Tiens Yihai project, we plan to sell Tiens Yihai in 2009. Tianshi Holdings, Tianshi Pharmaceuticals and Tianshi Group entered into a letter of intent on December 31, 2008, pursuant to which Tianshi Pharmaceuticals agreed to buy Tianshi Holdings' 96% share of Tiens Yihai, with Tianshi Group guaranteeing payment.
 
Transactions with Tianshi Investments
 
On December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the registered share capital of Life Resources from Tianshi Investment for RMB 474,674,415, or $64,247,182. The closing of the transaction was subject to government approval of the transfer of Life Resources to Tianshi Holdings.  On March 13, 2008, the government approved the transfer.
 
Pursuant to the Sale and Purchase Agreement, we advanced a deposit of $64,247,182 to Tianshi Investment on December 20, 2007. This acquisition deposit was settled as follows:
 
·  
$28,592,743 was paid by canceling a loan in the principal amount of RMB 200,000,000 to Tianshi Engineering owned by Biological together with interest accrued;
·  
$16,557,914 was paid by canceling of other receivable owned by Tianshi Engineering to Biological; and
·  
$19,096,525 was paid in cash.
 
On December 21, 2007, Tianshi Holdings and Tianshi Investment entered into a Capital Contribution Agreement, pursuant to which Tianshi Investment agreed to fund a capital increase of Life Resources in the amount of $7.5 million. Tianshi Holdings agreed to pay back the $7.5 million to Tianshi Investment within five days of the date of the government approval of the transfer of the shares of Life Resources to Tianshi Holdings.   The approval was received on March 13, 2008 and the $7.5 million was paid back on March 18, 2008, by canceling $7.5 million of accounts receivable owed to us by Tianshi Engineering.
 
On January 14, 2008, Tianshi Holdings and Tianshi Investment entered into a Loan Agreement pursuant to which Tianshi Holdings loaned Tianshi Investment $4.1 million without interest.  The loan was required to be used by Tianshi Investment to increase the registered share capital of Life Resources.  The loan was due on March 31, 2008, provided however, that if the government approved the transfer of the shares of Life Resources to Tianshi Holdings prior to that date, the loan would be cancelled, as Life Resources would then be a wholly-owned subsidiary of Tianshi Holdings.  The approval was received on March 13, 2008, and therefore, the loan was cancelled on the same date.
 
Transactions with Life Sciences
 
On August 25, 2008, Life Resources entered a definitive agreement with the Wuqing Branch Bureau of Tianjin Municipal Land and Resources and Administrative Bureau (the “Tianjin Government”) and Tianjin Tiens Life Science Co., Ltd (“Life Science”) pursuant to which Life Resources and Life Science will pay the Tianjin Government in connection with changes to the zoning on several parcels of land on which they respectively have land use rights from “industrial” to “educational.” Life Resources will pay a total of RMB 41,022,061 (or approximately US$6.0 million) in connection with the zoning changes to its parcels.
 
Transactions with Baofeng
 
On September 4, 2008, we entered into a one-year storage services agreement (the “Baofeng Agreement”) with Tianjin Baofeng Construction & Engineering Co., Ltd., a third party company. Under the Baofeng Agreement, Biological leased a warehouse of 6,745.28 square meters located in Wuqing New-tech Industrial Park, Tianjin, China at the lease fees of RMB 87,688.64 per month. The agreement terminates on September 9, 2009.  The total amount paid in 2008 under this lease was $37,784.
 
 
On January 13, 2009, the Board appointed Crowe Horwath LLP (“Crowe”) as independent auditors to audit our financial statements for the fiscal year ended December 31, 2008.  From September 26, 2007 to January 13, 2009 Grobstein, Horwath & Company LLP (GH&C”) served as our independent auditors.  Prior to September 26, 2007 Moore Stephens Wurth Frazer and Torbet, LLP (“MSWF&T”) had served as our independent auditor since 2002.

 
39

 

 

 
Public Accounting Fees

Moore Stephens Wurth Frazer and Torbet, LLP
 
    
2007
 
Audit Fees
  $ 200,000  
Audit Related Fees
  $ 0  
Tax Fees
  $ 5,000  
All Other Fees
  $ 0  
 
Audit fees were for professional services rendered by MSWF&T during the 2007 fiscal year for the review of the financial statements included in our first and second quarter reports on Forms 10-Q, and services that are normally provided by MSWF&T in connection with statutory and regulatory filings or engagements for that fiscal year.  MSWF&T did not bill any other fees for services rendered to us during the fiscal year ended December 31, 2007 for assurance and related services in connection with the audit or review of our financial statements. Tax fees involved preparation of the consolidated tax returns. All other fees consisted of professional advice on our company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Grobstein, Horwath & Company LLP
 
   
2008
   
2007
 
Audit Fees
  $ 294,000     $ 20,000  
Audit Related Fees
  $ 0     $ 0  
Tax Fees
  $ 5,000     $ 0  
All Other Fees
  $ 0     $ 0  
 
Audit fees were for professional services rendered by GH&C during the 2007 fiscal year for the review of the financial statements included in our third quarter report on Form 10-Q, and services that are normally provided by GH&C in connection with statutory and regulatory filings or engagements for that fiscal year. Audit fees were for professional services rendered by GH&C during the 2008 fiscal year for the audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Forms 10-Q, and services that are normally provided by GH&C in connection with statutory and regulatory filings or engagements for that fiscal year. Tax fees involved preparation of the consolidated tax returns. GH&C did not bill any other fees for services rendered to us during the fiscal years ended December 31, 2007 and 2008 for assurance and related services in connection with the review of our financial statements.
 
Pre-approval of Services
 
The Audit Committee has adopted pre-approval policies for all services, including both audit and non-audit services, provided by our independent auditors.  For audit services, each year the independent auditor provides the Audit Committee with an engagement letter outlining the scope of the audit services proposed to be performed during the year, which must be formally accepted by the Audit Committee before the audit commences.  The independent auditor also submits an audit services fee proposal, which also must be approved by the Committee before the audit commences.  The audit, tax, and all other fees and services described above were pre-approved for 2007 and 2008.
 

 
PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following are filed with this report:

(1)  The financial statements listed on the Financial Statements Table of Contents.

 
40

 



(2)  Not applicable.

(3)  The exhibits referred to below, which include the following managerial contracts or compensatory plans or arrangements:

·  
Form of Labor Contract; and

·  
Labor Contract dated November 3, 2008 between Tianjin Tianshi Biological Development Co., Ltd. and Zheng Wan.

(b) The exhibits listed on the Exhibit Index are filed as part of this report.

(c) Not applicable.


 
41

 


 
EXHIBIT INDEX
 

 
Exhibit No.
 
Description
2.1
Agreement and Plan of Reorganization, as amended, dated as of August 22, 2003, by and among Strategika, Tianshi Holdings and the Stockholders of Tianshi Holdings. (1)
3.1
Certificate of Incorporation of Tiens Biotech Group (USA), Inc., as amended (11)
3.2
By-laws of Tiens Biotech Group (USA), Inc. (2)
4.1
Specimen Stock Certificate (2)
10.1
Product Purchase and Sales Agreement, dated June 25, 2003, by and between Tianjin Tianshi Biological Development Co., Ltd. And Tianjin Tianshi Biological Engineering Co. Ltd. (3)
10.2
Term Loan Agreement, dated March 29, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (4)
10.3
Term Loan Agreement, dated April 24, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (5)
10.4
Term Loan Extension Agreement, dated June 28, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (5)
10.5
Term Loan Agreement, dated July 23, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (11)
10.6
Term Loan Extension Agreement, dated September 27, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (6)
10.7
Term Loan Agreement, dated October 15, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (11)
10.8
Health Products Production Workshops Lease Agreement, dated October 31, 2007 by and between Tianjin Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (11)
10.9
Personal Care Products Production Workshops Lease Agreement, dated October 31, 2007 by and between Tianjin Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (11)
10.10
Health Products Production Equipment Lease Agreement, dated October 31, 2007 by and between Tianjin Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (11)
10.11
Personal Care Products Production Equipment Lease Agreement, dated October 31, 2007 by and between Tianjin Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (11)
10.12
Real Property Transfer Agreement, dated December 14, 2007, by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd. (11)
10.13
Lease Agreement, dated December 14, 2007, by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd. (11)
10.14
Sale and Purchase Agreement dated December 20, 2007 by and among Tianshi International Investment Group Co., Ltd., Tianshi International Holdings Group Limited, Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (11)
10.15
Capital Contribution Agreement dated December 21, 2007 by and between Tianshi International Holdings Group Co., Ltd. and Tianshi International Investment Group  Co. Ltd. (11)
10.16
Health Products Production Workshops Supplemental Agreement, dated December 31, 2007 by and between Tianjin Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (11)
10.17
Personal Care Products Production Equipment Supplemental Agreement, dated December 31, 2007 by and between Tianjin Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (11)
10.18
Loan Agreement dated January 14, 2008 by and between Tianshi International Holdings Group Co., Ltd. and Tianshi International Investment Group  Co. Ltd. (11)
10.19
Lease Agreement, dated January 17, 2008, by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd. (11)
10.20
Form of Labor Contract (3)
10.21
Loan Agreement dated January 14, 2008 by and between Tianshi International Holdings Group Limited and Tianshi International Investment Group Co., Ltd. (7)


 
42

 


10.22
Loan Agreement dated January 21, 2008 by and between Tianshi International Investment Group Co., Ltd. and Tianjin Tiens Life Resources Co., Ltd. (7)
10.23
Agreement dated April 9, 2008 by and between Tianshi International Holdings Group Limited, Tianshi International Investment Group Co., Ltd., Tianjin Tianshi Biological Development Co., Ltd, and Tianjin Tianshi Biological Engineering Co., Ltd. (8)
10.24
Loan Agreement Amendment dated June 30, 2008 by and between Tianshi International Investment Group Co., Ltd. and Tianjin Tiens Life Resources Co., Ltd. (8)
10.25
Supplementary Agreement for Grant Contract of State-Owned Land Use Right dated August 25, 2008 by and among Tianjin Tiens Life Resources Co., Ltd., Wuqing Branch Bureau of Tianjin Municipal Land and Resources and Administrative Bureau and Tianjin Tiens Life Science Co., Ltd. (9)
10.26*
Labor Contract dated November 3, 2008 between Tianjin Tianshi Biological Development Co., Ltd. and Zheng Wan
10.27*
Property Transfer Agreement dated December 25, 2008 between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
10.28*
Lease Agreement dated January 1, 2009 between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
10.29*
Equipment Lease Agreement dated January 1, 2009 between Tianjin Tiens Life Resources Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
10.30*
Storage Service Agreement dated September 4, 2008 between Tianjin Tianshi Biological Development Co., Ltd.  and Tianjin Baofeng Construction & Engineering Co., Ltd.
10.31*
Loan Agreement Amendment dated December 31, 2008 between Tianjin Tiens Life Resources Co., Ltd. and Tianshi International Investment Group Co., Ltd.
10.32*
Supplemental Agreement of Lease Agreement for Health Products Production Workshops dated December 31, 2007 between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
10.33*
Supplemental Agreement of Lease Agreement for Personal Care Products Production Equipment dated December 31, 2007 between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
14.1
Code of Ethics (10)
21.1*
Subsidiaries
31.1*
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

(1) Filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005.
(2) Filed as an exhibit to the Registrant’s Form 10-KSB filed with the Securities and Exchange Commission on March 7, 2002.
(3) Filed as an exhibit to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2006.
(4) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on May 15, 2007.
(5) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on August 14, 2007.
(6) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2007.
(7) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on May 15, 2008.
(8) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on August 14, 2008.
(9) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2008.
(10) Filed as an exhibit to the Registrant’s Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2005.
(11) Filed as an exhibit to the Registrant’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2008.

 
43

 

 
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
TIENS BIOTECH GROUP (USA), INC.
   
Date:  March 31, 2009
 
 
/s/ Jinyuan Li
 
Jinyuan Li
 
Chief Executive Officer and President
 
(Principal Executive Officer)
Date:  March 31, 2009
 
 
/s/ Zheng Wan
 
Zheng Wan
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)

 
44

 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
/s/ Jinyuan Li
 
Chairman of the Board, Chief Executive
 
March 31, 2009
Jinyuan Li
 
Officer and President (Principal Executive Officer)
   
         
/s/ Zheng Wan
 
Chief Financial Officer (Principal
 
March 31, 2009
Zheng Wan
 
Financial and Accounting Officer) and Director
   
         
/s/ Yupeng Yan
 
Executive Vice President and Director
 
March 31, 2009
Yupeng Yan
       
         
/s/ Gilbert Raker
 
Director
 
March 31, 2009
Gilbert Raker
       
         
/s/ Howard Balloch
 
Director
 
March 31, 2009
Howard Balloch
       
         
/s/ Socorro Quintero
 
Director
 
March 31, 2009
Socorro Quintero
       
 


 
45

 

 
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2008
 

TABLE OF CONTENTS
 
Report of Independent Registered Public Accounting Firm
F-1
   
Report of Independent Registered Public Accounting Firm  
  F-2
   
Consolidated Balance Sheets
F-3
   
Consolidated Statements of Income and Other Comprehensive Income
F-4
   
Consolidated Statements of Shareholders’ Equity
F-5
   
Consolidated Statements of Cash Flows
F-6
   
Notes to Consolidated Financial Statements
F-7
 
 

 


 

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To the Stockholders and Board of Directors of Tiens Biotech Group (USA), Inc.

We have audited the accompanying consolidated balance sheet of Tiens Biotech Group (USA), Inc.  as of December 31, 2008, and the related consolidated statements of income and other comprehensive income, shareholders’ equity, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2008 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2008, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1, 3, 10, 11, 12 and 13 to the consolidated financial statements, the Company has had numerous significant transactions with entities that are under common control, including that all of the Company’s sales are currently and have historically been made to related parties controlled by the majority shareholder of the Company.
 
/s/ Crowe Horwath LLP
 
Sherman Oaks, California
March 26, 2009

 
F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Stockholders and Board of Directors of Tiens Biotech Group (USA), Inc.

We have audited the accompanying consolidated balance sheet of Tiens Biotech Group (USA), Inc. (the “Company”) as of December 31, 2007 and the related consolidated statements of income and other comprehensive income, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2007 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tiens Biotech Group (USA), Inc. as of December 31, 2007, and the consolidated results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1, 10, 11 and 12 to the consolidated financial statements, the Company has had numerous significant transactions with entities that are under common control. The most significant of these transactions is that all of the Company’s sales are currently and have historically been made to a related party controlled by the shareholder of the Company

 
/s/ GROBSTEIN, HORWATH & COMPANY LLP

Sherman Oaks, California
March 25, 2008, except for Note 3, as to
which date is May 9, 2008

 

 


 
F-2

 
 
               
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND DECEMBER 31, 2007
               
 

         
2007
 
   
2008
   
As Adjusted
 
A S S E T S
           
             
CURRENT ASSETS:
           
Cash
  $ 20,992,573     $ 54,081,848  
Cash related to assets held for sale
    23,861,938       -  
Total cash                             44,854,511       54,081,848  
Accounts receivable, trade - related parties, net of
               
allowance for doubtful accounts of $1,108,789 and $71,700
               
as of December 31, 2008 and 2007, respectively
    23,941,431       14,268,229  
Accounts receivable, trade - third parties
    -       104,398  
Inventories
    8,365,607       5,949,963  
Other receivables
    813,591       1,068,343  
Other receivables - related parties
    15,729,076       13,887,138  
Employee advances
    112,591       65,901  
Prepaid expenses
    301,898       623,638  
Prepaid income taxes
    1,531,207       -  
Assets held for Sale
    10,904,842       -  
Total current assets
    106,554,754       90,049,458  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    10,274,643       16,071,900  
                 
OTHER ASSETS:
               
Construction in progress
    72,300,104       39,792,774  
Construction deposits
    2,586,302       1,089,216  
Intangible assets, net
    13,137,195       9,246,879  
Other assets
    87,541       5,301,847  
Total other assets
    88,111,142       55,430,716  
                 
Total assets
  $ 204,940,539     $ 161,552,074  
                 
L I A B I L I T I E S    A N D    S H A R E H O L D E R S'    E Q U I T Y
 
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 6,283,849     $ 4,070,906  
Advances from customers - related parties
    3,239,650       1,700,838  
Wages and benefits payable
    1,449,146       1,250,685  
Other taxes payable
    117,818       536,819  
Income taxes payable
    -       665,726  
Contractor deposits
    163,248       595,128  
Contractor payables
    11,871,456       7,820,285  
Other payables
    1,933,743       1,133,539  
Other payables - related parties
    6,373,900       7,938,205  
Dividend payable to minority interest
    -       4,902,629  
Current portion of long term debt, related party
    2,130,000       2,130,000  
Liabilities directly associated with assets classified as held for sale
    122,047       -  
Total current liabilities
    33,684,857       32,744,760  
                 
NON-CURRENT LIABILITIES
               
Long term debt, net of current portion, related party
    2,137,742       4,267,742  
Other payables-non current
    -       538,130  
Deferred income
    11,208,844       4,895,049  
Total non current liabilities
    13,346,586       9,700,921  
                 
Total liabilities
    47,031,443       42,445,681  
                 
MINORITY INTEREST
    9,006,438       6,144,063  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
Common stock, $0.001 par value, 250,000,000 shares authorized,
               
71,333,586 issued and outstanding, respectively
    71,334       71,334  
Paid-in-capital
    9,234,123       8,842,009  
Statutory reserves
    9,420,783       9,420,783  
Retained earnings
    106,325,356       78,668,160  
Accumulated other comprehensive income
    23,851,062       15,960,044  
Total shareholders' equity
    148,902,658       112,962,330  
Total liabilities and shareholders' equity
  $ 204,940,539     $ 161,552,074  

 
The accompanying notes are an integral part of this statement.
 
 
F-3

 
 
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
         
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 and 2007
         
         

             
         
2007
 
   
2008
   
As Adjusted
 
REVENUE - RELATED PARTIES
  $ 77,247,898     $ 54,900,060  
                 
COST OF SALES - RELATED PARTIES
    24,870,178       16,526,695  
                 
GROSS PROFIT
    52,377,720       38,373,365  
                 
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES
    18,574,719       14,921,414  
                 
INCOME FROM OPERATIONS
    33,803,001       23,451,951  
                 
   (Interest expense)
    (266,273 )     (399,773 )
    Interest income
    881,070       3,038,755  
    Other (expense) income, net
    (2,099,913 )     (1,161,071 )
OTHER (EXPENSE) INCOME, NET
    (1,485,116 )     1,477,911  
                 
INCOME BEFORE PROVISION FOR INCOME TAXES
               
   AND MINORITY INTEREST
    32,317,885       24,929,862  
                 
PROVISION FOR INCOME TAXES
    2,345,474       2,026,875  
                 
INCOME BEFORE MINORITY INTEREST
    29,972,411       22,902,987  
                 
MINORITY INTEREST
    2,315,215       4,966,397  
                 
NET INCOME
    27,657,196       17,936,590  
                 
OTHER COMPREHENSIVE INCOME:
               
    Foreign currency translation adjustment
    7,891,018       9,915,740  
                 
COMPREHENSIVE INCOME
  $ 35,548,214     $ 27,852,330  
                 
EARNINGS PER SHARE, BASIC AND DILUTED
  $ 0.39     $ 0.25  
                 
WEIGHTED AVERAGE NUMBER OF SHARES
    71,333,586       71,333,586  

         
The accompanying notes are an integral part of this statement.
       
 
 
F-4

 

 

TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
                                           
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
   
                                 
Accumulated
       
                                 
other
       
   
Number
   
Common
   
Paid-in
   
Statutory
   
Retained
   
comprehensive
       
   
of shares
   
stock
   
capital
   
reserves
   
earnings
   
income
   
Totals
 
BALANCE, January 1, 2007,
as adjusted,
    71,333,586     $ 71,334     $ 8,842,009     $ 9,420,783     $ 60,731,570     $ 6,044,304     $ 85,110,000  
                                                         
Net Income
                                    17,936,590               17,936,590  
Foreign currency translation gain
                                            9,915,740       9,915,740  
                                                         
BALANCE, December 31, 2007
    71,333,586     $ 71,334     $ 8,842,009     $ 9,420,783     $ 78,668,160     $ 15,960,044     $ 112,962,330  
                                                         
Net Income
                                    27,657,196               27,657,196  
Foreign currency translation gain
                                            7,891,018       7,891,018  
Paid-in-capital
                    392,114                               392,114  
                                                         
BALANCE, December 31, 2008
    71,333,586     $ 71,334     $ 9,234,123     $ 9,420,783     $ 106,325,356     $ 23,851,062     $ 148,902,658  
                                                         
The accompanying notes are an integral part of this statement.
                                                 
 


 
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CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
             
         
2007
 
   
2008
   
As Adjusted
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 27,657,196     $ 17,936,590  
Adjustments to reconcile net income to cash
               
provided by (used in) operating activities:
               
Provision for doubtful accounts
    1,037,089       (15,076 )
Minority interest
    2,315,215       4,966,397  
Depreciation
    2,681,167