10-K 1 v108272_10-k.htm Unassociated Document
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number: 001-32477
 
TIENS BIOTECH GROUP (USA), INC.
(Exact name of registrant as specified in its charter) 

Delaware
75-2926439
(State or other jurisdiction 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
The American Stock Exchange

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 not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o


Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large Accelerated Filer o 
Accelerated Filer o
Non-Accelerated Filer x
Smaller Reporting Company o
 

Based upon the closing sale price of $3.83 per share of Common Stock on the American Stock Exchange on June 30, 2007, the aggregate market value of the 3,503,586 shares of voting stock held by non-affiliates of the Registrant was approximately $13,418,734.

There were 71,333,586 shares of the Company’s common stock outstanding on March 28, 2008.

 

 
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 the Company’s future financial performance. The Company has 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 the Company’s 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 the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company expectations are as of the date this Form 10-K is filed, and the Company does 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

The Company files 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 450 Fifth Street, NW, Washington, D.C. 20549. 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 the Company and other companies that file materials with the SEC electronically. You may also obtain copies of the Company’s reports filed with the SEC, free of charge, on our website at http://www.tiens-bio.com.

PART I
 
ITEM 1. BUSINESS.

In this Annual Report on Form 10-K, references to “dollars” and “$” are to United States Dollars and references to “RMB” 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”). 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 52 countries that in turn sell them to independent direct sales distributors.

Corporate History and Organization

Our Company was incorporated on July 13, 1990 as Super Shops, Inc. under the laws of the State of Michigan. In October 2000, Super Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition Corp. On February 11, 2002, in connection with a change in control transaction, MIA Acquisition Corp changed its name to Strategika, Inc. From 2000 until the reorganization described below, our Company had only nominal assets and liabilities and was a development stage company attempting to provide network security services to companies.
 
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On September 9, 2003, pursuant to an Agreement and Plan of Reorganization, dated August 22, 2003, among the Company, Tianshi International Holdings Group Ltd., a British Virgin Islands company (“Tianshi Holdings”), and Jinyuan Li, Wenjun Jiao and Yupeng Yan, all Chinese Nationals who were stockholders of Tianshi Holdings, the Company received from the Tianshi Holdings stockholders all of the issued and outstanding common stock of Tianshi Holdings in exchange for the issuance by the Company of 68,495,000 shares of our common stock to the Tianshi Holdings stockholders, representing 95% of the issued and outstanding common stock of the Company at such time, after giving effect to the issuance.

On June 18, 2003, Tianshi Holdings acquired 80% of Biological’s outstanding shares from Tianshi Hong Kong International Development Co., Ltd., which is 100% owned by our Chairman, Chief Executive Officer and President, Jinyuan Li. 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. On December 31, 2003 the Company changed its name from Strategika, Inc. to Tiens Biotech Group (USA), Inc.

Tianjin Tianshi Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”), a Chinese company, owns the remaining 20% of Biological. Tianjin Pharmaceuticals is 87.66% owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”), a Chinese company, and 7.29% owned by Mr. Li’s daughter, Baolan Li. Tianshi Group is 90% owned by Jinyuan Li and 10% owned by Baolan Li. Tianshi Group also owns 51% of Tianjin Tianshi Biological Engineering Co., Ltd. (“Tianshi Engineering”), the entity to which we sell all of our products for consumption in China. Baolan Li owns the remaining 49% of Tianshi Engineering.

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 is 99.4% owned by Tianshi Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located in Shanghai, China, and was established to build a new research and development facility in Shanghai, China. In March 2007, the Company decided to suspend the proposed development by Tiens Yihai.

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 Tianjin Tiens Life Resources Co., Ltd., a Chinese Foreign Investment Enterprise (“Life Resources”) for $64.2 million. Life Resources was incorporated on April 29, 2005 as a Foreign Investment Enterprise (“FIE”) in Wuqing, Tianjin, PRC, with a registered share capital of $30,000,000. On March 13, 2008 the Chinese government approved an increase in the registered capital of Life Resources from $30,000,000 to $50,000,000. 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 of the shares of Life Resources. Life Resources is currently constructing research and development, manufacturing and logistic facilities, as well as administrative offices in Tianjin, China.
 
The following chart shows the ownership interests in our subsidiaries.
 
 
Products and Manufacturing

We have developed and produce 33 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.
 
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Our products are manufactured at our facility 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 *
Tianshi Nutrient Super Calcium Powder (a) (b)
Tianshi Super Calcium Milk Powder (a) (b)
Tianshi Super Calcium Powder with Metabolic Factors (a) (b)
Tianshi Double-cellulose Tablets (a) (b)
Tianshi Super Calcium Powder for Children (a) (b)
Tianshi Lycopene Tablets (a) (b)
Tianshi Super Calcium Capsules with Lecithin (a) (b)
Tianshi Tibet-Garlic Capsules (a)
Tianshi Throat Care Granules (b)
Tianshi Pine Pollen Powder Capsules (a) (b)
Tianshi Lipid Metabolic Management Tea (a) (b) (c)
Tianshi Protein Powder (b)
Tianshi Slimming Tea (a) (b) (c)
Tianshi Eel Oil Capsules (a)
Tianshi Spirulina Tablets (b)
Tianshi Multi-Vit-Mine Coffee (a) (b)
Tianshi Spirulina Capsules (a) (b)
Tianshi Gourmet Powder with Super Calcium (b)
Tianshi Cell Rejuvenation Capsules (a) (b)
Tianshi Hemp Seed Oil Softgels (a) (b)
Tianshi Zinc Capsules (a) (b)
Tianshi Snak-powder Capsules
Tianshi Cordyceps Capsules (a) (b)
 
Tianshi Chitosan Capsules (a) (b)
 
Tianshi Sweet Dreams Granules (a) (b)
 
Tianshi Vitality Softgels (a) (b)
 
Tianshi Metabolic Balance Capsules (a) (b) (c)
 
Chewable Calcium Tablets (a) (b)
 
Chewable Calcium Tablets with multi-flavor (a) (b)
 
Grape Extract Capsules (a) (b)
 
Tianshi Beauty Face Capsules (a) (b) (c)
 
Bone Treasure Tablets (a) (b)
 
Tianshi Ginkgo Leaf Tablet (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.

During 2007, we phased out production of our personal care line of products, which had not been a material part of our business, to focus on our wellness products and dietary supplements. For the years ended December 31, 2007, 2006 and 2005, all of our revenue was generated from related party customers. See note 16 to our consolidated financial statements for a breakdown of domestic and international revenue, and revenue by product group for the last three fiscal years. In 2007, 2006 and 2005 our Tianshi Cordyceps Capsules accounted for 18.1%, 16.5% and 14.1% of our revenue, respectively, and our Tianshi Nutrient Super Calcium Powder accounted for 15.8%, 14.1% and 17.3% of our revenue, respectively.

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.
 
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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 $0.7 million, $1.0 million and $0.6 million in 2007, 2006 and 2005 respectively. As of December 31, 2007, we employed 69 staff members in research and development, and we anticipate hiring an additional 19 research and development employees in 2008.

Marketing and Distribution

In China, we sell our products to Tianshi Engineering, an affiliated Chinese company. Tianshi Engineering, in turn, sells the products to customers through its branches and affiliated companies and at chain stores which are owned by individual distributors. During 2007 Tianshi Engineering closed eleven of its less profitable branches in China. As of December 31, 2007, Tianshi Engineering had 100 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.

At the beginning of 2006, we 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, we 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 the Company’s gross margins on semi-finished goods at a similar level to historical gross margins for finished goods.

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 52 countries who in turn sell them to independent direct sales distributors. During 2007, in order to consolidate our international distribution, we reduced the number of countries where we sell directly to overseas affiliates from 63 to 52. Therefore, some of our overseas affiliate customers also now sell our products on to other overseas affiliates which are no longer our direct customers. In 2007 our highest sales outside of China were to the following ten countries, in descending order: Indonesia, Russia, Ukraine, Kazakhstan, Congo, Hungary, South Africa, Peru, India and Columbia.

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%.

Backlog was $12.2 million as of December 31, 2007, compared to $15.4 million as of December 31, 2006. We expect all of the backlog at the end of 2007 to be filled within the 2008 fiscal year.

Competition

We compete with other direct selling organizations, some of which 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 recent regulations governing direct selling. In some instances, these licenses can be limited to certain cities and/or provinces. 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.
 
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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 includes 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:

1.
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;

2.
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

3.
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 whole process generally takes 9 to 12 months. Dietary supplement products are not subject to SFDA regulation.

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. Because direct selling was only recently authorized in China, the regulatory environment with respect to direct selling in this market remains fluid and the process for obtaining the necessary governmental approvals have been interpreted differently by different governmental authorities. The direct selling regulations require Tianshi Engineering to apply for approval to conduct a direct selling enterprise in China.

Tianshi Engineering has applied for a direct selling license in a number of provinces and must obtain a series of approvals from the Departments of Commerce in such provinces, as well as the Departments of Commerce in each city and district in which we plan to operate. Tianshi Engineering is also required to obtain the approval of the State Ministry of Commerce, which is the national government authority overseeing direct selling.
 
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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. Until the application is approved, Tianshi Engineering will continue to sell our products through its branches, chain stores, and affiliated companies in China.

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.

Employees

As of December 31, 2007, we had 1,405 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 THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. 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

WE MAY NOT BE ABLE TO RAISE ADEQUATE FUNDS TO COMPLETE THE CONSTRUCTION OF OUR NEW HEADQUARTERS, RESEARCH AND DEVELOPMENT AND MANUFACTURING FACITILITIES BEING BUILT BY LIFE RESOURCES.

In December 2007, we entered into an agreement to acquire Life Resources, a company which is currently constructing research and development, manufacturing and logistic facilities, as well as administrative offices totaling approximately 420,000 square meters in Tianjin, China. We currently estimate that the budget for completion of the Life Resources project will be approximately $220 million, including the $64 million already spent to acquire all of the registered share capital of Life Resources. We intend to construct the facilities in phases over several years, based on available cash and capacity needs. Depending on the rate of construction and our cash flow, we may require additional financing to complete the funding of that 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.
 
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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 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.

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.

OUR PRODUCTS MAY BE COPIED BY OUR COMPETITORS.

In general, we rely on trade secrets to protect our intellectual property. We have been issued patents from the State Intellectual Properties Office in China for two of our products: Tianshi Super Calcium Powder with Metabolic Factors and Tianshi Super Calcium Powder for Children. These two patents are effective for 20 years, which commenced on January 13, 2001. If we fail to adequately protect our intellectual property and trade secrets, our competitors may copy our products, which could hurt our business.

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.
 
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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.

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 and increased potential for manipulation of financial results. 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 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.
 
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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. 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.

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 RECENT 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 safety scares involving Chinese products worldwide. The campaign set 20 detailed goals, including twelve "100 percents". For example, 100 percent of food producers should be licensed; 100 percent of agricultural wholesale markets in cities must be monitored; 100 percent of suppliers of raw materials for exported products should be inspected; and 100 percent of agricultural products must be free of five types of strong pesticides. The campaign, which was originally scheduled to finish at the end of 2007, is currently scheduled to continue throughout 2008.

As a result of this campaign by the AQSIQ, there has been a general slow-down and backlog of export clearances for Chinese food products, and we have experienced significant delays in obtaining export clearance for all of the products which we sell to our international affiliates. We believe that these delays have resulted in some of our international affiliates not being able to purchase sufficient quantities of our products to meet their demand, resulting in a loss of sales. Continued delays in the export clearance for our products may continue to result in us not being able to meet the demand for our products from our international affiliates and future loss of sales. Currently we are not able to provide an estimate as to the timing for the clearance of our products for export.
 
10

 
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 56.0%, 40.5% and 40.9% of our revenues in 2005, 2006 and 2007, respectively, were derived from our operations in China. Accordingly, our operations are subject, to a significant degree, to Chinese law. In China, we are aiming to expand our market share through the branches, chain stores, and affiliated companies of Tianshi Engineering, our affiliate who sells our products in China. Because direct selling was only recently authorized in China, the regulatory environment with respect to direct selling in this market remains fluid and the process for obtaining the necessary governmental approvals have been interpreted differently by different governmental authorities. The direct selling regulations require Tianshi Engineering to apply for approval to conduct a direct selling enterprise in China.

Tianshi Engineering has applied for a direct selling license in a number of provinces and must obtain a series of approvals from the Departments of Commerce in such provinces, as well as the Departments of Commerce in each city and district in which we plan to operate. Tianshi Engineering is also required to obtain the approval of the State Ministry of Commerce, which is the national government authority overseeing direct selling.

Tianshi Engineering has found that it is taking more time than anticipated to work through the approval process with the Chinese authorities. These authorities have broad discretion in interpreting the regulations and granting necessary approvals. A delay in obtaining approvals at one level can delay our ability to obtain approvals at the next level. The complexity of the approval process as well as the government’s continued cautious approach as direct selling develops in China makes it difficult to predict a timeline for obtaining these approvals. If Tianshi Engineering does not receive a direct selling license in China, then its ability to compete against its competitors who have received such a license may be hurt. As a result, Tianshi Engineering may lose distributors who find a competitor’s direct selling business and compensation model more attractive. This could materially decrease the revenues that we receive from sales by Tianshi Engineering in China.

WE MAY NOT BE REFUNDED MONIES WE HAVE PAID FOR THE TIENS YIHAI PROPERTY.

In 2005, the Chinese central government issued its “Adjustment of Macro-Economic Policy”. This policy implemented a new system of investment and use of state-owned assets, including land. Pursuant to this policy, local government organizations adjusted and re-allotted projects, including investment, construction and reconstruction of state-owned resources. As a result, projects and enterprises that had been affected, including Tiens Yihai, were awaiting further decisions by state and local government.

On November 10, 2006, Tiens International and the Local Government entered into a supplemental agreement pursuant to which the parties have agreed to the acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres) parcel of land. In order to proceed with the purchase of land use rights of the property by Tiens Yihai, Tianshi Holdings is required to provide a loan of $6.4 million to the Local Government for relocation costs for people living on the property. The $6.4 million loan is to be funded in two installments:

 
·
The first installment of $3.2 million was paid on November 27, 2006.

 
·
The second installment of $3.2 million is to be paid after Tiens Yihai obtains a construction license to develop the property. The parties have agreed to allow Tianshi Holdings to reduce this second installment by the amount of the $1.6 million refund due to it.
 
11

 
In return for the loan, Tiens Yihai will receive a tax credit in the amount of the loan. In March 2007, we received notice that the Local Government had approved the land use rights for 50 acres of the Tiens Yihai property. As a result of the reduction in the number of acres for which we have received land use rights and continued uncertainty relating to the Tiens Yihai project, management made a decision to suspend the development of the project. We are currently reviewing alternative commercial uses for the Tiens Yihai site, as well as the possibility of selling the land use rights to a third party. If Tiens Yihai does not proceed with construction on the Tiens Yihai site or is not able to sell the land use rights to a third party, it is not clear whether the Local Government will return the $1.6 million it previously agreed to refund or repay the initial loan of $3.2 million made in November 2006.
 
THE LEGAL AUTHORITIES IN CHINA ARE IN THE PROCESS OF EVALUATING HERETOFORE TAX AND FEE BENEFITS PROVIDED TO FOREIGN INVESTORS AND COMPANIES TO ENCOURAGE DEVELOPMENT WITHIN THE COUNTRY SUCH THAT THESE BENEFITS MAY BE LESSENED OR REMOVED WITH THE CONSEQUENCE THAT EXPENSES MAY RISE IMPACTING MARGINS AND NET INCOME.

Biological is located in Tianjin Wuqing Development Area, a national new technology development zone, and is subject to the special reduced income tax rate of 15%. Pursuant to the approval of the relevant PRC tax authorities, Biological is fully exempt from PRC income taxes for two years starting from the year profits are first made, followed by a 7.5% reduced tax rate for the next three years.

Prior to the year ended December 31, 2002, Biological suffered operating losses. Biological started generating taxable profits in the year ended December 31, 2003. Effective January 1, 2005, the two-year full exemption for income taxes expired for Biological and it became subject to income tax at a reduced rate of 7.5%.

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently applicable to both DES and FIEs. The two years tax exemption, three years 50% tax reduction tax holiday for production-oriented FIEs will be eliminated. According to the new EIT, high-tech companies could be subject to a special reduced tax rate of 15%. The qualification of a high-tech company is to be reviewed annually. Biological currently qualifies as a high-tech company. However, there are no detailed regulations regarding the implementation of new EIT. In the first quarter of 2008, we were required by local tax authority to prepay income tax at a tax rate of 25%. We are currently evaluating the effect of the new EIT law will have on our financial position.

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.
 
12

 
OUR OPERATING COMPANY IS SUBJECT TO RESTRICTIONS ON DIVIDEND PAYMENTS AND OTHER DISTRIBUTIONS TO US.

Current regulations in China would permit our operating company in China to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our operating company in China will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if our operating company in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

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 precedents. 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.

ENFORCEMENT OF REGULATIONS IN CHINA MAY BE INCONSISTENT.

Although the Chinese government introduced new laws and regulations to modernize its securities and tax systems on January 1, 1994, China does not yet possess an expansive body of business law. As a result, the enforcement, interpretation and implementation of regulations may prove to be inconsistent and it may be difficult to enforce contracts.

WE MAY EXPERIENCE LENGTHY DELAYS IN RESOLUTION OF LEGAL DISPUTES.

As China has not developed a dispute resolution mechanism similar to the Western court system, dispute resolution over Chinese projects and joint ventures can be difficult and 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 transitioning 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. For example, to the extent that we need to convert United States dollars into Chinese Renminbi for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operation. Conversely, if we decide to convert our Chinese Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Chinese Renminbi would be reduced. 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 the American Stock Exchange under the symbol “TBV”. There is currently no broadly followed established trading market for our common stock. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of shares. The trading volume of our common stock historically has been limited and sporadic. As a result of this trading activity, the quoted price for our common stock is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our common stock and the market value of our common stock likely would decline.

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. Mr. Li beneficially owns approximately 92% of our outstanding common stock. As a result, Mr. 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.

OUR COMMON STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS.

The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of securities of many companies, including companies in our industry. The changes often appear to occur without regard to specific operating performance. In addition, there has been a limited public market for our common stock. We cannot predict the extent to which investor interest in us will be maintained. Such interest is necessary for an active, liquid trading market for our common stock. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. The price and trading volumes of our common stock may fluctuate widely due to the limited public market for our stock.
 
14

 
SHARES AVAILABLE FOR FUTURE SALE MAY DILUTE AND DEPRESS THE PRICE OF OUR COMMON STOCK.

A significant number of our shares are eligible for sale pursuant to Rule 144, and their sale could depress the market price of our stock. Some or all of the shares of common stock may be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for the shares of common stock. In general, a person who has held restricted shares for a period of one year may, upon filing with the SEC a notification on Form 144, sell into the market common stock in an amount equal to the greater of 1% of the outstanding shares or the average weekly number of shares sold in the last four weeks prior to such sale. Such sales may be repeated once each three months, and any of the restricted shares may be sold by a non-affiliate after they have been held two years.

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.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.

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.
 
15

 
Since 2003, Biological has leased office space and manufacturing facilities from Tianshi Group. The lease expired at the end of 2007 and required 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. In 2007 we paid $522,318 to Tianshi Group under the lease. 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.

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 of office, workshop, conference and exhibition space located at the Company’s 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

Tiens Yihai Property

In April 2004, Tianshi Holdings entered a joint venture contract with Tianshi Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is 99.4% owned by Tianshi Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located in Shanghai, China, and was established to build a new research and development facility, which would also produce certain of our products. In October 2004, the Company paid a deposit of $3.6 million to Zhu Jia Jiao Industrial Park Economic Development Ltd (representative of the local government, “Local Government”) for acquiring the land use right of 1,600 mu (263 acres) located in Shanghai. However, in 2005, the Chinese central government issued its “Adjustment of Macro-Economic Policy”. This policy implemented a new system of investment and use of state-owned assets, including land. Pursuant to this policy, local government organizations adjusted and re-allotted projects, including investment, construction and reconstruction of state-owned resources. As a result, projects and enterprises that had been affected, including Tiens Yihai, were awaiting further decisions by state and local government.

On November 10, 2006, Tiens International and the Local Government entered into a supplemental agreement pursuant to which the parties have agreed to the acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres) parcel of land. The remaining 1,114 mu (184 acres) may not be available for purchase in the future. Therefore, the Local Government has agreed to refund to us $1.6 million of the original $3.6 million deposit when we receive a construction license for the development.

In order to proceed with the purchase of the property by Tiens Yihai, Tianshi Holdings is required to provide a loan of $6.4 million to the Local Government for relocation costs for people living on the property. The $6.4 million loan is to be funded in two installments:

 
·
The first installment of $3.2 million was paid on November 27, 2006.

 
·
The second installment of $3.2 million is to be paid after Tiens Yihai obtains a construction license to develop the property. The parties have agreed to allow Tianshi Holdings to reduce this second installment by the amount of the $1.6 million refund due to it.
 
16

 
In return for the loan, Tiens Yihai will receive a tax credit in the amount of the loan. In March 2007, we received notice that the Local Government had approved the land use rights for 50 acres of the Tiens Yihai property. As a result of the reduction in the number of acres for which we have received land use rights and continued uncertainty relating to the Tiens Yihai project, management made a decision to suspend the development of the project. We are currently reviewing alternative commercial uses for the Tiens Yihai site, as well as the possibility of selling the land use rights to a third party.

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 RMB200,000,000 to Tianshi Engineering owned by Biological together with interest accrued;
 
·
$16,557,914 was paid by canceling of other receivable owned by Tianshi Engineering to Biological; and
 
·
$19,096,525 was paid in cash.

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. We currently estimate that the budget for completion of the Life Resources project will be approximately $220 million, including the $64 million already spent to acquire all of the registered share capital of Life Resources. We intend to move our headquarters to these new facilities upon its completion.
 
ITEM 3. LEGAL PROCEEDINGS.
 
We are not a party to any material pending legal proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On December 4, 2007, the annual meeting of stockholders of the Company (the “Annual Meeting”) was held at the Company’s Tianjin offices for the following purposes:

1.
Elect the following persons to the Board of Directors: Jinyuan Li, Wenjun Jiao, Yupeng Yan, Gilbert Raker, Howard Balloch, and Socorro Quintero.

2.
Ratify the Board of Directors’ appointment of Grobstein, Horwath & Company LLP, the independent public accountants as the auditor of the Company for the fiscal year 2007.

In this Annual Meeting, there were accordingly present, in person or by proxy, an aggregate of 67,970,169 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
 
67,959,959
 
10,210
 
0
Wenjun Jiao
 
67,959,959
 
10,210
 
0
Yupeng Yan
 
67,959,959
 
10,210
 
0
Socorro Quintero
 
67,959,959
 
10,210
 
0
Howard Balloch
 
67,959,359
 
10,810
 
0
Gilbert Raker
 
67,959,959
 
10,210
 
0
 
The result of the vote taken for the ratification of the appointment of Grobstein, Horwath & Company LLP was as follows:

 
·
67,959,924 shares voted in favor of the proposal,

 
·
7,208 shares voted against the proposal, and

 
·
3,037 shares abstained.
 
17

 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASERS OF EQUITY SECURITIES.

Stock Performance Presentation

The following chart compares the cumulative stockholder return on the Company’s common stock with the cumulative total stockholder return of (i) the AMEX Composite Index and (ii) the Nasdaq Biotechnology Index.

Cumulative Total Return
Among Tiens Biotech Group (USA), Inc.,
AMEX Composite Market Index and NASDAQ Biotech Index (1) (2)

  


   
October 7,
2003
 
December 31,
2003
 
December 31,
2004
 
December 31,
2005
 
December 31,
2006
 
December 31,
2007
 
Tiens Biotech Group (USA), Inc.
 
$
100.00
 
$
301.25
 
$
175.00
 
$
90.50
 
$
98.25
 
$
58.50
 
Amex Composite Index
 
$
100.00
 
$
115.51
 
$
141.18
 
$
173.14
 
$
202.41
 
$
237.17
 
Nasdaq Biotechnology Index
 
$
100.00
 
$
95.61
 
$
101.47
 
$
104.35
 
$
105.42
 
$
110.25
 

(1) Assumes $100 invested on October 7, 2003 and assumes dividends reinvested. The Company has not paid any dividends on its common stock, and no dividends are included in the report of the Company’s performance. Measurement points are at the last trading day of the fiscal years ended December 31, 2003, 2004, 2005, 2006 and 2007. The material in this chart is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this proxy statement and irrespective of any general incorporation language in such filing.

(2) The Company was listed on the American Stock Exchange as of April 25, 2005. The Company’s common stock began quotation on the OTC Bulletin Board on October 7, 2003. Prior to October 7, 2003, the Company’s common stock was eligible for quotation on the OTC Bulletin Board, but there was no trading activity.

18


Market Prices of Common Stock

Our common stock was listed on the OTC Bulletin Board under the symbol “TBGU” from January 1, 2004 to April 24, 2005. On April 25, 2005, our common stock was listed on the American Stock Exchange under the symbol “TBV”. The following table sets forth the range of high and low bid prices for our common stock reported by the American Stock Exchange in each fiscal quarter from January 1, 2006 to December 31, 2007.

   
High
 
Low
 
Fiscal 2006
         
Quarter Ended March 31, 2006
 
$
5.02
 
$
3.62
 
Quarter Ended June 30, 2006
 
$
7.47
 
$
4.01
 
Quarter ended September 30, 2006
 
$
4.40
 
$
2.61
 
Quarter ended December 31, 2006
 
$
4.02
 
$
2.80
 
               
Fiscal 2007
             
Quarter Ended March 31, 2007
 
$
6.99
 
$
3.75
 
Quarter Ended June 30, 2007
 
$
4.55
 
$
3.55
 
Quarter ended September 30, 2007
 
$
4.55
 
$
2.65
 
Quarter ended December 31, 2007
 
$
6.85
 
$
2.25
 

Shareholders

As of March 25, 2008, there were a total of 71,333,586 shares of our common stock outstanding, held by approximately 941 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.

Recent Sales of Unregistered Securities

None.

Authorization of Securities for Issuance Under Equity Compensation Plans

None.

Issuer Purchases of Equity Securities

None.

19


ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth certain of our historical financial data. The selected consolidated historical financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and accompanying notes included elsewhere in this document. The following selected financial data as of and each of the five years ended December 31, 2003 through 2007 have been derived from our audited consolidated financial statements.

   
Year Ended December 31
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
               
Income Statement Data:
                     
                       
Revenue - related parties
 
$
54,900,060
 
$
66,790,466
 
$
68,688,669
 
$
58,910,532
 
$
38,392,208
 
Cost of sales
   
16,526,695
   
18,082,441
   
17,451,605
   
17,483,739
   
12,725,161
 
Gross profit
   
38,373,365
   
48,708,025
   
51,237,064
   
41,426,793
   
25,667,047
 
Selling, general and administrative expenses
   
14,306,660
   
12,789,810
   
13,413,875
   
7,363,248
   
3,171,338
 
Income from operations
   
24,066,705
   
35,918,215
   
37,823,189
   
34,063,545
   
22,495,709
 
Other income (expense), net
   
1,520,208
   
161,091
   
(639,137
)
 
388,266
   
(1,178,389
)
Income before provision for income taxes
                       
and minority interest
   
25,586,913
   
36,079,306
   
37,184,052
   
34,451,811
   
21,317,320
 
Provision for income taxes
   
2,026,875
   
2,823,899
   
2,984,302
   
0
   
0
 
Income before minority interest
   
23,560,038
   
33,255,407
   
34,199,750
   
34,451,811
   
21,317,320
 
Minority interest
   
4,966,397
   
6,963,330
   
7,321,630
   
7,013,515
   
4,263,498
 
Net income
   
18,593,641
   
26,292,077
   
26,878,120
   
27,438,296
   
17,053,822
 
Other comprehensive income
                               
Foreign currency translation adjustment
   
8,265,358
   
3,480,775
   
2,246,380
   
(8,239
)
 
0
 
Comprehensive income
 
$
26,858,999
 
$
29,772,852
 
$
29,124,500
 
$
27,430,057
 
$
17,053,822
 
Weighted average number of shares outstanding
   
71,333,586
   
71,333,586
   
71,333,586
   
71,801,819
   
44,730,609
 
Earnings per share, basic and diluted
 
$
0.26
 
$
0.37
 
$
0.38
 
$
0.38
 
$
0.38
 
                                 
Balance Sheet Data (at end of period):
                               
                                 
Cash and cash equivalents and current investments
 
$
48,678,945
 
$
54,270,065
 
$
77,545,991
 
$
39,243,872
 
$
12,725,043
 
Working capital
   
59,323,558
   
74,008,466
   
81,067,056
   
53,716,852
   
28,121,818
 
Total assets
   
181,627,637
   
148,746,998
   
121,624,154
   
83,518,933
   
57,101,642
 
Current potion of long-term debt
   
2,130,000
   
2,130,000
   
2,130,000
   
155,442
   
259,364
 
Long-term debt
   
4,267,742
   
6,397,742
   
8,527,742
   
10,657,742
   
155,591
 
Stockholders’ equity
 
$
146,348,355
 
$
119,420,251
 
$
89,647,399
 
$
60,522,899
 
$
33,086,192
 

20

 
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.

The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.

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. 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 33 nutrition supplement products, which include wellness products and dietary nutrition supplements. During 2007, we phased out production of our personal care line of products, which had not been a material part of our business, to focus on our wellness products and dietary 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 sell to independent distributors who use the products themselves and/or resell them to other distributors or consumers.

21


Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenue. In 2007 revenue was $54.9 million compared to $66.8 million in 2006, a decrease of 17.8%. The breakdown of revenue between Chinese and international sales is as follows.

Chinese and International Revenue

Revenue
 
Year 2007
 
Year 2006
 
% Change
China
 
$
22,476,135
 
$
27,074,979
   
-17.0%
International
 
$
32,423,925
 
$
39,715,487
   
-18.4%

In 2007 revenue from China decreased to $22.5 million, or 17.0% compared to $27.1 million in 2006, primarily due to a decrease in sales. In order to qualify for a direct selling license in China, Tianshi Engineering, our related party customer in China, is required to produce a part of the products that it sells in China. Therefore, at the beginning of 2006, we began selling semi-finished products to Tianshi Engineering, which jointly shares with us licenses to produce, manufacture and sell the products. These semi-finished products have a lower sales price than the finished products we had previously sold to Tianshi Engineering. During 2006 we still had a considerable inventory of finished products that we continued to sell to Tianshi Engineering. As a result, during 2006 we were still selling some of the higher-priced finished products. In 2007, substantially all of the products we sold to Tianshi Engineering were semi-finished products.

In addition, in the third quarter of 2006, Tianshi Engineering conducted a special promotion to stimulate sales in China. No similar promotion was held in 2007. 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.

In 2007, international sales decreased by 18.4% to $32.4 million, compared to $39.7 million in 2006. This mainly reflects a sharp decrease in sales to countries in Africa during the second quarter of 2007 and a decrease in sales generally in other countries. In addition, in August of 2007, 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. The campaign, which was originally scheduled to finish at the end of 2007, is currently scheduled to continue throughout 2008.

As a result of this campaign by the AQSIQ, there has been a general slow-down and backlog of export clearances for Chinese food products, and we have experienced significant delays in obtaining export clearance for all of the products which we sell to our international affiliates. However, to date, there have not been any specific problems identified with our products. We believe that these delays have resulted in some of our international affiliates not being able to purchase sufficient quantities of our products to meet their demand and a corresponding decrease in our international revenues. Continued delays in the export clearance for our products may continue to result in us not being able to meet the demand for our products from our international affiliates.

Cost of sales. Cost of sales were $16.5 million in 2007 compared to $18.1 million in 2006, a decrease of 8.6%. This decrease was primarily due to the corresponding decrease in sales revenue. Cost of sales decreased at a lesser rate than revenue because the cost of raw materials increased during 2007 while our product prices remained unchanged.

Gross profit. Gross profit decreased by 21.2% to $38.4 million in 2007, compared to $48.7 million in 2006. The gross profit margin for 2007 was 69.9% compared to 72.9% in 2006. The semi-finished products which we were selling in China during 2007 had a lower profit margin than the finished products which we were selling in 2006.
 
22

 
Selling, general and administrative expenses. Selling, general and administrative expenses increased by 11.9% to $14.3 million in 2007, compared to $12.8 million in 2006. The increase was primarily due to increases in salaries and benefits ($629,769), consulting expenses ($392,751), insurance costs ($340,571) and depreciation expenses ($247,071). The selling and administrative expenses as a percentage of sales increased to 26.1% in 2007 from 19.1% in 2006.

Other income, net. Other income, net was $1.5 million of income in 2007, compared to income of $0.2 million in 2006. Other income mainly includes interest income. On January 1, 2007, the $25.6 million loan to Tianshi Engineering became interest bearing. In addition beginning in January 2007, accounts receivable relating to Tianshi Engineering and which are older than 90 days are transferred to other receivables-related parties and become interest bearing.

Net income. For the above stated reasons, net income in 2007 was $18.6 million compared to $26.3 million in 2006, a decrease of 29%.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenue. In 2006 revenue was $66.8 million compared to $68.7 million in 2005, a decrease of 2.8%. The breakdown of revenue between Chinese and international sales is as follows.

Chinese and International Revenue

Revenue
 
Year 2006
 
Year 2005
 
% Change
China
 
$
27,074,979
 
$
38,181,090
   
-29.1%
International
 
$
39,715,487
 
$
30,507,579
   
30.2%

In 2006 revenue from China decreased to $27.1 million, or 29.1% compared to $38.2 million in 2005. At the beginning of 2006, we began selling semi-finished products to Tianshi Engineering. In order to qualify for a direct selling license in China, Tianshi Engineering, our related party customer in China, is required to produce a part of the products that it sells in China. As a result, in 2006, we began to sell semi-finished products to Tianshi Engineering, which jointly shares with us licenses to produce, manufacture and sell the products. These semi-finished products have a lower sales price than the finished products we had previously sold to Tianshi Engineering.

In addition, we believe that sales to China in 2006 were negatively impacted by other factors, including:

 
·
continued consumer uncertainty in China regarding the impact of direct selling regulations and uncertainty regarding the timing of the direct selling license application process and approval; and

 
·
increased government and media scrutiny on the direct selling industry, particularly following publication of new direct selling regulations at the end of 2005.

In 2006, international sales increased to $39.7 million, or 30.2% compared to $30.5 million in 2005. The strong growth reflected a significant increase in demand for our products in Indonesia, as well as strong revenue growth in Kazakhstan, South Africa, Thailand, Ukraine, Congo and Ghana.

Cost of sales. Cost of sales increased by $0.6 million in 2006, a 3.6% increase compared with 2005. Cost of sales as a percentage of revenue increased to 27.1% for the twelve months ended December 31, 2006 compared to 25.4% for 2005. In order to improve the quality of our products, during 2006 we introduced some new manufacturing procedures and stricter quality control testing than previously, which added to our manufacturing costs. In addition, due to the uncertainty of the Chinese market, we did not achieve domestic sales growth and the average fixed cost per unit was higher than in 2005.

Gross profit. Gross profit decreased by 4.9% to $48.7 million in 2006, compared to $51.2 million in 2005. The gross profit margin for 2006 was 72.9% compared to 74.6% in 2005 as a result of the reasons discussed under cost of sales.
 
23

 
Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $12.8 million in 2006, or 4.7% compared to $13.4 million in 2005. This decrease primarily reflects a decrease in transportation expenses, as well as a decrease in low cost supplies expenses and expenses relating to the startup costs of Tiens Yihai. In 2006 we began to sell semi-finished goods to Tianshi Engineering and the transportation costs that were previously incurred by us are now incurred by Tianshi Engineering. The selling and administrative expenses as a percentage of sales decreased to 19.1% in 2006 from 19.5% in 2005.

Other income (expense), net. Other income (expense), net was $0.2 million of income in 2006, compared to expense of $0.6 million in 2005.

The increase was a result of improved cash management, including the purchase of an investment product and deposits in higher interest-bearing accounts.

Net income. For the above stated reasons, net income in 2006 was $26.3 million compared to $26.9 million in 2005, a decrease of 2.2%.

Quarterly Results of Operations

The following table sets forth selected unaudited quarterly data for the periods shown.
 
   
Quarter Ended
 
   
Dec. 31,
2007
 
Sept. 30,
2007
 
June 30,
2007
 
March 31,
2007
 
Dec. 31,
2006
 
Sept. 30,
2006
 
June 30,
2006
 
March 31, 2006
 
Revenue-related parties
 
$
13,315,311
 
$
11,027,478
 
$
14,320,482
 
$
16,236,789
 
$
16,587,160
 
$
19,187,748
 
$
14,292,998
 
$
16,722,560
 
Cost of sales
   
4,546,711
   
3,089,791
   
4,454,594
   
4,435,599
   
4,367,702
   
5,066,051
   
3,842,392
   
4,806,296
 
Gross profit
   
8,768,600
   
7,937,687
   
9,865,888
   
11,801,190
   
12,219,458
   
14,121,697
   
10,450,606
   
11,916,264
 
Selling, general and administrative expenses
   
3,953,263
   
3,801,914
   
3,328,727
   
3,222,756
   
4,148,297
   
2,803,859
   
3,271,232
   
2,566,422
 
Income from operations
   
4,815,337
   
4,135,773
   
6,537,161
   
8,578,434
   
8,071,161
   
11,317,838
   
7,179,374
   
9,349,842
 
Other (expense) income, net
   
475,918
   
149,683
   
446,994
   
447,613
   
33,633
   
164,104
   
1,075
   
(37,721
)
Income before provision for income taxes and minority interest
   
5,291,255
   
4,285,456
   
6,984,155
   
9,026,047
   
8,104,794
   
11,481,942
   
7,180,449
   
9,312,121
 
Provision for income taxes
   
416,222
   
344,248
   
555,395
   
711,010
   
635,408
   
878,931
   
576,029
   
733,531
 
Income before minority interest
   
4,875,033
   
3,941,208
   
6,428,760
   
8,315,037
   
7,469,386
   
10,603,011
   
6,604,420
   
8,578,590
 
Minority interest
   
995,606
   
848,212
   
1,369,361
   
1,753,218
   
1,566,759
   
2,167,747
   
1,419,943
   
1,808,881
 
Net income
   
3,879,427
   
3,092,996
   
5,059,399
   
6,561,819
   
5,902,627
   
8,435,264
   
5,184,477
   
6,769,709
 
Other comprehensive income foreign currency translation adjustment
   
3,334,871
   
1,593,144
   
2,062,282
   
1,275,061
   
1,083,976
   
1,411,012
   
267,960
   
717,827
 
Comprehensive income
 
$
7,214,298
 
$
4,686,140
 
$
7,121,681
 
$
7,836,880
 
$
6,986,603
 
$
9,846,276
 
$
5,452,437
 
$
7,487,536
 
Weighted average number of shares outstanding
   
71,333,586
   
71,333,586
   
71,333,586
   
71,333,586
   
71,333,586
   
71,333,586
   
71,333,586
   
71,333,586
 
Earnings per share, basic and diluted
 
$
0.05
 
$
0.04
 
$
0.07
 
$
0.09
 
$
0.08
 
$
0.12
 
$
0.07
 
$
0.09
 

24

 
Contractual Obligations and Commercial Commitments

The following table sets forth payments due by period for fixed contractual obligations as of December 31, 2007.

   
Payments due by period (1)
 
   
Total
 
Less than
1 year
 
 
1-3 years
 
 
3-5 years
 
More than
5 years
 
Long-term Debt Obligations
 
$
6,397,742
 
$
2,130,000
 
$
4,260,000
 
$
7,742
 
$
0
 
Operating Lease Obligations
   
574,550
   
574,550
   
0
   
0
   
0
 
Total fixed contractual obligations
 
$
6,972,292
 
$
2,704,550
 
$
4,260,000
 
$
7,742
 
$
0
 

(1) We lease our office building and manufacturing facilities in Tianjin, China from Tianshi Group, a related party, through common ownership. On June 30, 2002, we entered into a written lease agreement with Tianshi Group to pay annual rent at 1% of our total gross revenues. This agreement expired on December 31, 2007. We have entered into a new on-year lease agreement with Tianshi Group, effective January 1, 2008, with the same terms. Because the rent is based upon a percentage of our gross total revenues, we are not able to include a fixed figure in the table relating to this obligation. The total amount paid in 2007 under this lease was $522,318.

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 $5.5 million in 2007, compared to $12.9 million in 2006. The decrease primarily reflects the decrease in net income and the fact that, during 2007, Tianshi Engineering did not pay us cash for products it purchased from us, but offset such amounts from other liabilities we owed Tianshi Engineering and other affiliates.

As of December 31, 2007, we had positive working capital of $59.3 million. Cash was $48.7 million as of December 31, 2007, compared to $54.3 as of December 31, 2006.

Net cash used in investing activities was $8.3 million in 2007 compared to $35.9 million in 2006. In 2006 we made a $25.6 million loan to Tianshi Engineering. That loan was paid off on December 20, 2007 by canceling an equal amount of the consideration due to Tianshi Investment for the acquisition of Life Resources.

Net cash used in financing activities was $6.2 million for 2007, compared to $2.1 million for 2006. In 2007 Biological paid a $6.7 million dividend to its minority shareholder.

Accounts receivable-related parties increased slightly to $14.3 million as of December 31, 2007 from $12.9 million as of December 31, 2006. Other receivable-related parties increased to $13.1 million as of December 31, 2007 from $8.4 million as of December 31, 2006. Historically, Tianshi Engineering remitted payment to us upon sales to third-party customers. However, to support Tianshi Engineering’s marketing efforts in anticipation of receiving a direct selling license in China, we agreed to allow Tianshi Engineering to defer payment to us. Beginning in January 2007, accounts receivable relating to Tianshi Engineering older than 90 days are transferred to other receivables-related parties and become interest bearing.
 
25

 
Going forward, our primary requirements for cash consist of:

 
·
construction by Life Resources of new research and development, manufacturing and logistic facilities, and administrative offices;

 
·
the continued production of existing products and general overhead and personnel related expenses to support these activities;

 
·
the development costs of new products; and

 
·
expansion of production scale to meet the demands of our markets.

We estimate that the completion of the Life Resources project will require approximately $220 million, including the $64 million already spent to acquire all of the registered share capital of Life Resources. We intend to construct the facilities in phases over several years, based on available cash and capacity needs. Depending on the rate of construction and our cash flow, we may require additional financing to complete the funding of that project. We anticipate that our current operating activities will enable us to meet our anticipated cash requirements for 2008.

Management Assumptions

Management anticipates, based on internal forecasts and assumptions relating to our current operations that existing cash and funds generated from operations will be sufficient to meet working capital for at least the next 12 months. In the event that our business plans change, our assumptions change or prove inaccurate or if other capital resources and projected cash flow otherwise prove to be insufficient to fund operations (due to unanticipated expense, technical difficulties, or otherwise), we could be required to seek additional financing. There can be no assurance that we will be able to obtain additional financing on terms acceptable to us, or at all.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 2007, the Company 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 the Company's products to unaffiliated third parties. Revenues in both cases are net of taxes.

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

The Company is generally not contractually obligated to accept returns. However, on a case by case negotiated basis, the Company permits customers to return their products. In accordance with SFAS No. 48, "Revenue Recognition when the Right of Return Exists", revenue is recorded net of an allowance for estimated returns. Such reserves are based upon management's evaluation of historical experience and estimated costs. The amount of the reserves ultimately required could differ materially in the near term from amounts included in the accompanying consolidated financial statements. As of December 31, 2007, Tianshi Engineering, an affiliated company, owned all of the related party distributors which sell our products in China.
 
26

 
Allowance for Doubtful Accounts

Our trade accounts receivables are mainly due from related companies. We have a general allowance for doubtful debts of 0.5% of the year-end balance of accounts receivable-related parties. Management reviews its accounts receivable on a regular basis to determine if the bad debt allowance is adequate 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

On 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 standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 12, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating whether the adoption of SFAS 157 will have a material effect on its consolidated results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective in the first quarter of fiscal 2009. The Company is evaluating the impact that this statement will have on its consolidated financial statements.

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

In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements- and amendment of ABB No. 51" (“SFAS 160”). SFAS 160 provide a guide on how to report non-controlling interest in consolidated financial statement. The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS 160 will be effective in the first quarter of fiscal 2009. The Company is evaluating the impact that this statement will have on its consolidated financial statements.
 
27

 
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, 2007, the exchange rate was $1 = RMB 7.31, compared to $1 = RMB 7.80 as of December 31, 2006.

Substantially all our revenues and expenses are denominated in the renminbi. However, we use the dollar for financial reporting purposes. The value of renminbi against the dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. As our operations are primarily in China, any significant revaluation of the renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert dollars into renminbi for our operations, appreciation of this currency against the dollar could have a material adverse effect on our business, financial condition and results of operation. Conversely, if we decide to convert our renminbi into dollars for other business purposes and the dollar appreciates against this currency, the dollar equivalent of the renminbi would be reduced.

Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations or financial condition. Currently we have not entered agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future.

ITEM 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.

On September 26, 2007, we received notice from our principal independent accountant, Moore Stephens Wurth Frazer & Torbet, LLP (“MSWF&T”), that it was resigning as our accountant effective immediately.
 
During the two most recent fiscal years through the date of MSWF&T’s resignation, there was no disagreement between us and MSWF&T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of MSWF&T, would have caused MSWF&T to make reference to the subject matter of the disagreement in connection with its report, and MSWF&T did not advise us that the internal controls necessary for us to develop reliable financial statements did not exist. None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred during the two most recent fiscal years through the date of MSWF&T’s resignation.
 
The audit report of MSWF&T on our financial statements for the past two fiscal years did not contain any adverse opinion or disclaimer of opinion, and such audit report was not qualified or modified as to uncertainty, audit scope or accounting principles.
 
On September 26, 2007, we engaged Grobstein, Horwath & Company LLP (“GH&C”) to serve as our new principal independent accountant in connection with the review of our third quarter financial statements for the three months ended September 30, 2007 and the audit of our financial statements for the year ended December 31, 2007. The decision to engage GH&C as our principal independent accountants was approved by our Audit Committee on September 26, 2007.
 
28

 
During the fiscal years ended December 31, 2006 and 2005 and in the subsequent interim periods prior to the engagement of GH&C, neither we nor any person on our behalf consulted with GH&C concerning (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and no written report was provided to us or oral advice was provided that GH&C concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).


Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our chief executive officer and the chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of December 31, 2007. Based on this evaluation, our chief executive officer and chief financial officer concluded as of December 31, 2007 that our disclosure controls and procedures were effective such that the material information required to be included in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including our consolidating subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.

Management’s Report on Internal Control Over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief 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.

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 the Company’s 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, 2007.
 
29

 
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.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the fourth quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Set forth below are the names of the directors and executive officers of the Company as of March 29, 2008. With the exception of Jinyuan Li, who served on the Board since the reorganization in September 2003, all other directors served on the Board since January 2004.

NAME
 
AGE
 
POSITION
         
Jinyuan Li
 
50
 
Chairman, Chief Executive Officer, President and Director
         
Wenjun Jiao
 
44
 
Chief Financial Officer, Director and Secretary
         
Yupeng Yan
 
45
 
Executive Vice President and Director
         
Socorro Quintero
 
56
 
Director
         
Howard Balloch
 
57
 
Director
         
Gilbert Raker
 
64
 
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.

Jinyuan Li

Mr. Li has served as the Chairman of the Board and a Director since September 2003. Mr. Li is also the President and founder of the Company. 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.

Wenjun Jiao

Mr. Jiao has served as the Chief Financial Officer of the Company since September 2003 and Secretary since February 2007. Prior to that, Mr. Jiao served as the Chief Financial Officer of Tianjin Tianshi Biological Development Co. Ltd from May 2001 through 2003. Mr. Jiao is a Certified Public Accountant in China. Before he joined Tianjin Tianshi Biological Development Co. Ltd, Mr. Jiao served as CFO of various large companies and as chairman of a consulting company in China. Mr. Jiao has 19 years of financial management experience in the manufacturing, trade, construction and consulting industries and received the 2005 and 2006 “Top Ten CFO of China Award” jointly from the China Enterprise Confederation, CFO World Magazine and International Data Group. Mr. Jiao holds a Doctorate in Accounting from Tianjin University of Finance and Economics and an MBA from Oklahoma City University.
 
30

 
Yupeng Yan

Mr. Yan has served as Executive Vice-President of the Company since September 2003. Mr. Yan has also served as Vice-President of Tianshi Group since March 1997, acting as general manager of its Information Technology Center since June 2007 and as head of Tianshi Marketing Group from June 2004 to June 2007. Mr. Yan currently holds a number of leadership positions including Vice-Dean of 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 a director of the Company. 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 a director of the Company, and has served as the President, Chief Executive Officer and Chairman of the Board of SEMX Corporation (Pink Sheets: SEMX) since 1988. SEMX Corporation manufactures materials and components used in microelectronic circuitry, primarily for the automotive, consumer electronics, defense, medical and aerospace industries. Prior to 1988, Mr. Raker worked at two private equity investment firms and was employed as Chief Financial Officer by two New York Stock Exchange listed companies and several private companies. Mr. Raker received his B.S. in Chemistry from Eastern University and his MBA in Production Management from Syracuse University.

Howard Balloch

Mr. Balloch serves as a director of the Company 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: Magic Lantern Group (AMEX: GML), Zi Corporation (TSX: ZIC, NASDAQ: ZICA), Oztime Media, a wholly-owned subsidiary of Zi Corporation, 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), Maple Leaf Education Holding and Capital Club, Beijing. Mr. Balloch is also the Vice-Chairman of the Canada China Business Council and currently serves as an Adjunct Professor of International Business at the University of British Columbia. Mr. Balloch received his B.A. and M.A. degrees from McGill University.

Audit Committee

The Board of Directors has established an audit committee in accordance with Rule 10A-3 of the Exchange Act. The members of the Audit Committee are Socorro Quintero (Chairman), Howard Balloch and Gilbert Raker, each of whom is independent as defined under Section 121(A) of the American Stock Exchange listing standards currently in effect. None of the Audit Committee members is a current officer or employee of the 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 401(b) of Regulation S-K of the Exchange Act.
 
31

 
Code of Business Conduct and Ethics

The Board has adopted a Code of Business Conduct and Ethics to promote its commitment to the legal and ethical conduct of the Company’s business. The Chief Executive Officer, Chief Financial Officer, and other senior officers are required to abide by the Code of Business Conduct and Ethics, which provides the foundation for compliance with all corporate policies and procedures, and best business practices.

The Code of Business Conduct and Ethics was filed as an exhibit to the Company’s annual report on Form 10-KSB for the year ended December 31, 2004. A written copy of the Code of Business Conduct and Ethics will be provided upon request at no charge by writing to the Company’s corporate secretary, Alexander Jiao, at Tiens Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial Park, Tianjin, China 301700.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3 and 4 and amendments to these forms furnished to the Company, 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 2007.

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 Mr. Li owns more than 50% of our voting stock, we are a “controlled company” pursuant to Rule 801(a) of the American Stock Exchange Rules (“Amex Rules”). Therefore, we are exempt from Amex 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.

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 the 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 the 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. Our CEO also takes into consideration the relatively low salary 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 2007 were fixed pursuant to employment agreements with Biological entered into in 2005. 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.
 
32

 
Jinyuan Li holds 92.3% of our shares of common stock. Our other executive officers have also been holders of our common stock as disclosed under “Security Ownership Table” since the reorganization of our Company in September 2003. Each of our executive officers received shares in the Company as a result of their share ownership of our business before the reorganization. Our CEO believes that the executive officers’ equity interests in our Company motivate them to maximize the success of our business and therefore did not consider bonuses for 2007.

Why we chose to pay each element.

We have entered into long-term employment agreements with Messrs. Li and Jiao which provide for a base salary.

Our employment agreements with Messrs. Li and Jiao 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 AMEX 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 salary provided to executive officers by companies in China compared to public companies in the United States.

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 the Company’s Annual Report on Form 10-K for 2007.

The Compensation Committee

Gilbert Raker, Chairman

Wenjun Jiao

Yupeng Yan

Compensation Committee Interlocks and Insider Participation

During 2007, the members of the Compensation Committee were Gilbert Raker, Wenjun Jiao, Yupeng Yan, and Ping Bai (who resigned as a director as of February 25, 2007). The Compensation Committee did not deliberate on executive compensation for fiscal 2007. Wenjun Jiao, Yupeng Yan and Ping Bai were each an employee and officer of the Company during 2007. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with Executive Officers or Directors of the Company or another entity.
 
33

 
Summary Compensation Table

The table below summarizes the total compensation paid or earned by each of the named executive officers for the fiscal year ended December 31, 2007.

Name and
Principal Position (1)
 
Year
 
Salary
($)
 
 Total
($)
 
Jinyuan Li
   
2007
 
$
166,660
 
$
166,660
 
Chairman, Chief Executive
   
2006
 
$
166,660
 
$
166,660
 
     
2005
 
$
145,455
 
$
145,455
 
     
 
             
Wenjun Jiao
   
2007
 
$
77,000
 
$
77,000
 
Chief Financial Officer
   
2006
 
$
77,000
 
$
77,000
 
     
2005
 
$
48,000
 
$
48,000
 
 
(1)
Ping Bai and Yupeng Yan were employee Directors of the Company during 2007 but did not qualify as a “named executive officer” because their respective total compensation was less than $100,000.
 
Grants of Plan Based Awards; Outstanding Equity Awards at Fiscal Year-End; Option Exercises and Stock Vested

The Company does not have any stock option plans.

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 an employment agreement with each of its named executive officers and employee directors of the Company. Jinyuan Li’s contract is dated June 1, 2005 and has an indefinite period. Wenjun Jiao’s contract is dated June 1, 2005 and terminates on June 30, 2010. The employment contracts for Ping Bai and Yupeng Yan are dated April 1, 2004 and expire on March 31, 2009. Under each of these employment contracts, the employee may terminate the contract with 30 days written notice. For 2007, we paid a salary of $166,660 to Jinyuan Li and $77,000 to each of Ping Bai, Wenjun Jiao and Yupeng Yan.

34


Potential Payments Upon Termination or Change of Control

The employment contracts of Messrs. Li and Jiao 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 Jiao were terminated for one of the above-stated reason, Mr. Li would receive $83,330 and Mr. Jiao would receive $38,500. 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 Jiao.

Director Compensation

For the fiscal year ended December 31, 2007, 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, 2007.

Name (1)
 
Fees Earned or
Paid in Cash
($)
 
Total
($)
 
Howard Balloch
 
$
30,000
 
$
30,000
 
Ping Bai (2)
 
$
0  
$
0  
Gilbert Raker
 
$
30,000  
$
30,000  
Socorro Quintero
 
$
30,000  
$
30,000  
Yupeng Yan (2)
 
$
0  
$
0  
 
(1)
Jinyuan Li and Wenjun Jiao are not included in this table as they are our employees and thus receive no compensation for their services as Directors. Their compensation is disclosed in the table in the “Summary Compensation Table”.
(2)
Yupeng Yan and Ping Bai were employee Directors of the Company during 2007 and received no additional compensation for their services as Directors. They are not named executive officers and are excluded from the “Summary Compensation Table”.
 
35

 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information with respect to the beneficial ownership of shares of common stock as of March 28, 2008 by each person or entity who is known by the Company to beneficially own five percent or more of the common stock; each director and executive officer of the Company; and all directors and executive officers of the Company as a group.

Name of Beneficial Owner (1)
 
Number of Shares
 
Percent of Class
Jinyuan Li
   
65,835,000
   
92.3%
Wenjun Jiao
   
665,000
   
*
Yupeng Yan
   
665,000
   
*
Socorro Quintero
   
--
   
--
Howard Balloch
   
--
   
--
Gilbert Raker
   
--
   
--
All Directors and Executive Officers as a Group (6 persons)
   
67,165,000
   
94.2%
____________________
* Less than one percent.
(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.

Unless otherwise indicated, the Company believes 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.

We markets 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 2007 were to related parties.

We have a sales contract with Tianshi Engineering which requires Tianshi Engineering to purchase all of our products to be sold in China. We sell our finished products to Tianshi Engineering at a price equal to 25% of the Chinese market price for the products. This 25% figure was negotiated between the parties in 2003, before we acquired Tianshi Holdings, and we believe that it is a reasonable sales price for us to receive. The price of semi-finished goods sold to Tianshi Engineering was originally set at the beginning of 2006 to provide us with a 75% gross profit margin. However, based on fluctuations in the cost of raw materials and quantities produced, the gross profit margin percentage varied during the year. This 75% figure was negotiated between the parties, and we believe that it is reasonable. The goal of this new pricing policy was to try to maintain the Company’s gross margins on semi-finished goods at a similar level to historical gross margins for finished goods. All of Tianshi Engineering’s Chinese affiliated companies are owned in whole or in part by Jinyuan Li’s immediate family members.

Internationally, we sell our products to overseas related companies located in 52 countries who in turn sell them to independent direct sales distributors. Our CEO, Jinyuan Li, owns or controls these overseas related companies. During 2007, in order to consolidate our international distribution, we reduced the number of countries where we sell directly to overseas affiliates from 63 to 52. Therefore, some of our overseas affiliate customers also now sell our products on to other overseas affiliates which are no longer our direct customers. 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 ordinances.
 
36

 
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 2007 and 2006.

   
December 31, 2007
 
December 31, 2006
 
Revenue-related party
 
$
54,900,060
 
$
66,790,466
 
Accounts receivable, trade - related parties, net of allowance for doubtful accounts of $71,700 and $86,776 as of December 31, 2007 and 2006, respectively
 
$
14,268,229
 
$
12,926,670
 
Other receivables - related parties
 
$
13,070,907
 
$
8,397,227
 
Loans receivable - related parties
 
$
0
 
$
25,640,000
 
Advances from customers - related parties
 
$
1,700,838
 
$
1,570,120
 
Other payables - related parties
 
$
7,938,205
 
$
522,105
 
Current portion of long-term debt - related party
 
$
2,130,000
 
$
2,130,000
 
Long term debt - related party
 
$
4,267,742
 
$
6,397,742
 

Revenue-related Parties

The details of revenue-related parties are as follows:

   
2007
 
2006
 
Tianshi Engineering
 
$
22,476,135
 
$
27,074,979
 
Overseas Related Companies
   
32,423,925
   
39,715,487
 
Total
 
$
54,900,060
 
$
66,790,466
 

Accounts Receivable-related Parties

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

   
December 31, 2007
 
 December 31, 2006
 
Tianshi Engineering
 
$
2,062,333
 
$
7,827,372
 
Overseas Related Companies
   
12,277,596
   
5,186,074
 
Allowance for Doubtful Accounts
   
(71,700
)
 
(86,776
)
Total
 
$
14,268,229
 
$
12,926,670
 
 
37

 
Other Receivables-related Parties

Other receivables - related parties are generated by the Company making various cash advances and short term loans, the allocation of various expenses to related parties, and amounts transferred from accounts receivable. The following table summarizes the other receivables- related parties balances:
 
The details of other receivables-related parties are as follows:
 
   
December 31, 2007
 
December 31, 2006
 
Tianshi Engineering
 
$
9,460,811
 
$
5,592,772
 
Shengshi Real Estate Development
   
2,238
   
1,039
 
Tianjin Tianshi Technical School
   
-
   
46,589
 
JinMao (Group) Holding
   
-
   
104,466
 
Shanghai Tianshi Jinquan Investment Co.
   
874
   
2,129
 
Tianshi Group
   
2,334,493
   
2,650,232
 
Tianshi Pharmaceuticals
   
5,065
   
-
 
Life Resource
   
1,259,528
   
-
 
Beijin Xingda Travel Co., Ltd
   
5,959
   
-
 
Tianjin Xingda Travel Co., Ltd
   
1,939
   
-
 
 Total
 
$
13,070,907
 
$
8,397,227
 

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 will then become interest bearing once a loan contract is adopted. The interest rate is the interest rate, on the date the loan commences, that is stipulated by the People’s Bank of China for a loan of the same level.

On January 1, 2007, Biological entered into a loan agreement (the “Q1 Loan”) with Tianshi Engineering. The Q1 Loan provided that, beginning January 1, 2007, $4.5 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The Q1 Loan was due March 31, 2007 and the stated interest rate was 6.3%. Both of the principal and interest of $41,876 were paid off February 28, 2007.

On April 24, 2007, a loan agreement (the “Q2 Loan”) was signed between Biological and Tianshi Engineering. The Q2 Loan provided that beginning April 1, 2007, $5.1 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The Q2 Loan was due June 30, 2007 and the stated interest rate was 5.67%, the interest rate for a loan of the same principal amount stipulated by the People’s Bank of China as of the date the loan was made. Both of the principal and interest of $65,882 were repaid on June 30, 2007.

On July 23, 2007, a loan agreement (the “Q3 Loan”) was signed between Biological and Tianshi Engineering. The Q3 Loan provided that, beginning July 1, 2007, $8.8 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The Q3 Loan was due September 30, 2007 and the stated interest rate was 5.85%, the interest rate for a loan of the same principal amount stipulated by the People’s Bank of China as of the date the loan was made. On September 30, 2007, $1 million of the Q3 Loan was repaid.

On October 15, 2007, a loan agreement (the “Q4 Loan”) was signed between Biological and Tianshi Engineering. Pursuant to the Q4 Loan, beginning October 1, 2007, $6.5 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The loan was due December 31, 2007 and the stated interest rate was 6.48%, the interest rate for a loan of the same principal amount stipulated by the People’s Bank of China as of the date the loan was made. On December 20, 2007, the remaining principal balance of $14,294,686 on the Q3 Loan and the Q4 Loan plus interest on the two loans of $306,360 was repaid by canceling an equal amount of the consideration paid by us for the acquisition of Life Resources from Tianshi Investment.
 
38

 
During the years ended December 31, 2007 and 2006, we and Tianshi Group used common meters at our headquarters for electricity and water, and also used the same employee insurance account. When making payments to these outside parties, we usually pay the fees first and then are reimbursed by Tianshi Group. These pro-rated amounts relating to Tianshi Group are categorized as other receivables - related parties. In addition, during 2006 we were owed other receivables-related parties in the amount of RMB 7,560,000 ($1,033,603) from Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party owned by Jinyuan Li. On March 31, 2006, Juchao declared termination of its operations, and all of its rights and liabilities were transferred to Tianshi Group. This amount was also included in other receivables - related parties.

In June 2007, Biological signed four agreements with equipment suppliers in Europe and Australia, pursuant to which Biological agreed to purchase four production lines for use at its headquarters in Tianjin, China. At that time Biological paid $996,711, one-third of the total consideration, to those equipment suppliers. But, due to a government investment limitation policy, Biological could not clear the equipment with Chinese customs without having to pay a large import duty. However, no such import duty would need to be paid if Life Resources imported the production lines. Therefore, on August 16, 2007, Biological, Life Resources and the equipment suppliers entered into a new agreement. In this new agreement, Life Resources agreed: (i) to replace Biological as the purchaser of the equipment, (ii) to pay $996,711 to Biological, and (iii) to pay the remaining balance of the consideration to the equipment suppliers. As of December 31, 2007, Life Resources had paid the consideration due to the equipment suppliers and received the equipment, and the amount of $996,711 due to Biological had not been paid.

As Life Resources is still in the construction process and all of the construction is outsourced to third party contractors, it currently has no employees. All of the administrative work relating to the construction has been performed by employees of the construction department of Biological. In December 2007, Biological charged Life Resources $262,817 for this administrative work. At December 31, 2007 and 2006, amounts due from Life Resources were $1,259,528 and $0 respectively.

Loans Receivable-related Party

Related party loans receivable were $0 and $25.6 million as of December 31, 2007 and 2006 respectively. On January 1, 2006, Biological loaned Tianshi Engineering $25.6 million. The loan was non-interest bearing and matured on December 31, 2006. The purpose of the loan was to enable Tianshi Engineering to strengthen its sales network in China. On December 22, 2006, the loan was extended to June 30, 2007 and was converted to an interest-bearing loan. The interest rate for the loan was 22 base points plus the current interest rate for the same level of loan stipulated by the People’s Bank of China, which was 5.58%. The actual interest rate on this loan totaled to 5.8%, On June 28, the loan was further extended to September 30, 2007. On September 30, 2007, the loan was extended to December 31, 2007. On December 20, 2007, the principal loan and accrued interest of $1,461,248, was repaid by canceling an equal amount of the consideration payable by us for the acquisition of Life Resources from Tianshi Investment.

Advances from Customers-related Parties

Advances from related party customers were $1.7 million and $1.6 million as of December 31, 2007 and 2006, respectively. These advances represented prepayments made to us to insure that overseas customers could obtain enough of our products to meet their market demands.
 
39

 
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, 2007
 
December 31, 2006
 
Tianshi Investment
 
$
7,490,136
 
$
-
 
Tianshi Engineering
   
244,980
   
-
 
Tianshi Germany Co., Ltd
   
109,233
   
98,581
 
Beijin Xingda Travel Co., Ltd
   
-
   
255
 
Shenzhen Logistics Co., Ltd
   
-
   
295,333
 
Tianshi Administrative Committee of Industrial Park
   
13
   
13
 
Tianyuan Capital Development Co. Ltd.
   
84,359
   
84,359
 
Tianshi Pharmaceuticals
   
9,308
   
8,728
 
Tianshi Shanghai Co., Ltd
   
176
   
165
 
Director - Jinyuan Li
   
-
   
34,671
 
Total
 
$
7,938,205
 
$
522,105
 
 
On December 21, 2007 Tianshi Holdings signed an agreement with Tianshi Investment pursuant to which it agreed to reimburse Tianshi Investment for a $7.5 million capital contribution to be made to Life Resources. The reimbursement was to be made after the government approved the acquisition of Life Resources by Tianshi Holdings. As of December 31, 2007 such approval had not been received.

Long Term Debt-related Party

In 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 in Tiens Yihai. Mr. Jinyuan Li owns 100% of Tianyuan Capital. Interest of $399,543 and two installment payments totaling $2,130,000 were made in 2007.

Other Transactions with Tianshi Group

Since 2003, Biological has leased office space and manufacturing facilities from Tianshi Group. The lease provides for an annual rent 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. The total amount paid on this lease amounted to $522,318 for the 12 months ended December 31, 2007. 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.

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 the Company’s 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.
 
40

 
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.

Other Transactions with Tianshi Engineering

On December 31, 2005, Biological entered into four lease agreements with Tianshi Engineering which enabled Tianshi Engineering to share the use of certain of Biological’s product production workshops and equipment to manufacture products which Tianshi Engineering owns, or jointly owns with Biological for one year started from January 1st, 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 $379,083 and $295,588 for the years ended 2007 and 2006 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. Following is a summary of the monthly rent payable to Biological under the leases:

Lease Agreement
 
Monthly rent
 
       
Lease Agreement for Health Products Production Equipment
 
$
11,481
 
Lease Agreement for Health Products Production Workshops
 
$
13,367
 
Lease Agreement for Personal Care Product Production Equipment
 
$
5,160
 
Lease Agreement for Personal Care Products Production Workshops
 
$
2,891
 

On December 14, 2007, Biological entered into the Transfer Agreement with Tianshi Group, the parent company of Tianshi Engineering, pursuant to which Biological transferred to Tianshi Group title to two of the four buildings included in the Lease Agreement for Health Products Production Workshops. On December 31, Biological and Tianshi Engineering entered into a Supplement Agreement of Lease Agreement for Health Products Production Workshops. The Supplement Agreement removed the two buildings purchased by Tianshi Group from the lease and reduced the rent to $5,928 per month.

On December 31, 2007, Biological and Tianshi Engineering entered into a Supplement Agreement of Lease Agreement for Personal Care Products Production Equipment. The Supplement Agreement added additional production equipment to the lease and increased the rent to $5,635 per month.

In November 2007, we sold two cars to a supplier of Tianshi Engineering for $110,275. The proceeds from the sale to the supplier of Tianshi Engineering were recorded as other receivables from Tianshi Engineering, as both parties agree that we transferred our right to receive the proceeds from the sale of the cars to Tianshi Engineering.

Transactions with Tianshi Investments

On December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the registered share capital of Life Resources from Tianshi Investment for RMB474,674,415 ($64,247,182). The closing of the transaction was subject to government approval of the transfer of Life Resources to Tianshi Holdings. On March 13, 2008, the government approved the transfer.
 
41

 
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 RMB200,000,000 to Tianshi Engineering owned by Biological together with interest accrued;
 
·
$16,557,914 was paid by canceling of other receivable owned by Tianshi Engineering to Biological; and
 
·
$19,096,525 was paid in cash.

On 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.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

On September 26, 2007, the Board appointed Grobstein, Horwath & Company LLP (GH&C”) as independent auditors to audit our financial statements for the fiscal year ended December 31, 2007. Prior to September 26, 2007 Moore Stephens Wurth Frazer and Torbet, LLP (“MSWF&T”) had served as our independent auditor since 2002.

Public Accounting Fees

Moore Stephens Wurth Frazer and Torbet, LLP
 
   
2007
 
2006
 
Audit Fees
 
$
200,000
 
$
240,000
 
Audit Related Fees
 
$
0
 
$
0
 
Tax Fees
 
$
5,000
 
$
5,000
 
All Other Fees
 
$
0
 
$
11,000
 

Audit fees were for professional services rendered by MSWF&T during the 2006 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 MSWF&T in connection with statutory and regulatory filings or engagements for that fiscal year. 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 years ended December 31, 2006 and 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 the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
 
42


Grobstein, Horwath & Company LLP
 
   
2007
 
2006
 
Audit Fees
 
$
20,000
 
$
0
 
Audit Related Fees
 
$
0
 
$
0
 
Tax Fees
 
$
0
 
$
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. GH&C 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 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 the Company’s 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 2006 and 2007.

43


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Exhibits
 
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 the Company, as amended
3.2
 
By-laws of the Company (2)
4.1
 
Specimen Stock Certificate (2)
10.1
 
Lease Agreement, dated June 30, 2002, by and between Tianshi Group Co., Ltd. and Tianjin Tianshi Biological Development Co., Ltd. (3)
10.2
 
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)
10.3
 
Supplemental Agreement for the Construction and Development of Tiens Yihai Industrial Park Project, dated November 10, 2006 by and between Shanghai Zhu Jia Jiao Industrial Park Economic Development Ltd. Company, Tianshi International Holdings Group Ltd. Company and Zhu Jia Jiao Townhouse, Qing Pu District, Shanghai (4)
10.4
 
Term Loan Agreement, dated March 29, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (5)
10.5
 
Term Loan Agreement, dated April 24, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (6)
10.6
 
Term Loan Extension Agreement, dated June 28, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (6)
10.7*
 
Term Loan Agreement, dated July 23, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
10.8
 
Term Loan Extension Agreement, dated September 27, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd. (7)
10.9*
 
Term Loan Agreement, dated October 15, 2007 by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
10.10*
 
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.
10.11*
 
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.
10.12*
 
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.
10.13*
 
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.
10.14*
 
Real Property Transfer Agreement, dated December 14, 2007, by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
10.15*
 
Lease Agreement, dated December 14, 2007, by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
10.16*
 
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.
10.17*
 
Capital Contribution Agreement dated December 21, 2007 by and between Tianshi International Holdings Group Co., Ltd. and Tianshi International Investment Group Co. Ltd.
10.18*
 
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.
10.19*
 
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.
 
44

 
      
10.20*
Loan Agreement dated January 14, 2008 by and between Tianshi International Holdings Group Co., Ltd. and Tianshi International Investment Group Co. Ltd.
10.21*
Lease Agreement, dated January 17, 2008, by and between Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
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-K filed with the Securities and Exchange Commission on March 29, 2007.
(5) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on May 15, 2007.
(6) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on August 14, 2007.
(7) Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 14, 2007.
 
45


SIGNATURES

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, 2008
   
 
/s/ Jinyuan Li
 
 
Jinyuan Li
 
Chief Executive Officer and President
 
(Principal Executive Officer)
     
Date: March 31, 2008
   
 
/s/ Wenjun Jiao
 
 
Wenjun Jiao
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
46


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

Jinyuan Li
 
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer)
 
March 31, 2008
         
/s/ Wenjun Jiao

Wenjun Jiao
 
Chief Financial Officer (Principal Executive and Accounting Officer) and Director
 
March 31, 2008
         
/s/ Yupeng Yan
Yupeng Yan
 
 
Executive Vice President And Director
 
March 31, 2008
         
/s/ Gilbert Raker

Gilbert Raker
 
Director
 
March 31, 2008
         
/s/ Howard Balloch

Howard Balloch
 
Director
 
March 31, 2008
         
/s/ Socorro Quintero

Socorro Quintero
 
Director
 
March 31, 2008

47

 

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 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

F-1

 
Report of Independent Registered Public Accounting Firm

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


We have audited the accompanying consolidated balance sheets of Tiens Biotech Group (USA), Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of income and other comprehensive income, and equity, and cash flows for each of the years in the two-year period ended December 31, 2006. 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 audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tiens Biotech Group (USA), Inc. and Subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.


/S/ Moore Stephens Wurth Frazer and Torbet, LLP


Walnut, California


March 19, 2007
 
F-2

 
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND DECEMBER 31, 2006

   
2007
 
2006
 
ASSETS
 
           
CURRENT ASSETS:
         
Cash
 
$
48,678,945
 
$
54,270,065
 
Accounts receivable, trade - related parties, net of
             
allowance for doubtful accounts of $71,700 and $86,776 
             
as of December 31, 2007 and 2006, respectively 
   
14,268,229
   
12,926,670
 
Accounts receivable, trade - third parties
   
104,398
   
18,135
 
Inventories
   
5,949,963
   
6,845,108
 
Other receivables
   
892,489
   
349,905
 
Other receivables - related parties
   
13,070,907
   
8,397,227
 
Employee advances
   
64,336
   
111,121
 
Prepaid expenses
   
623,638
   
2,135,917
 
Total current assets 
   
83,652,905
   
85,054,148
 
               
PROPERTY, PLANT AND EQUIPMENT, net
   
18,322,619
   
30,511,319
 
               
OTHER ASSETS:
             
Intangible assets, net
   
2,603,084
   
510,183
 
Long-term prepaid expenses
   
5,301,847
   
7,031,348
 
Loans receivable - related party
   
-
   
25,640,000
 
Acquisition deposit
   
71,747,182
   
-
 
Total other assets 
   
79,652,113
   
33,181,531
 
               
Total assets
 
$
181,627,637
 
$
148,746,998
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
             
Accounts payable
 
$
4,070,906
 
$
4,123,105
 
Advances from customers - related parties
   
1,700,838
   
1,570,120
 
Wages and benefits payable
   
1,250,685
   
992,068
 
Other taxes payable
   
536,819
   
93,714
 
Income taxes payable
   
665,726
   
876,046
 
Other payables
   
1,133,539
   
500,213
 
Other payables - related parties
   
7,938,205
   
522,105
 
Dividend payable to minority interest
   
4,902,629
   
238,311
 
Current portion of long term debt, related party
   
2,130,000
   
2,130,000
 
Total current liabilities 
   
24,329,347
   
11,045,682
 
               
NON-CURRENT LIABILITIES
             
Long term debt, net of current portion, related party
   
4,267,742
   
6,397,742
 
Other payables-non current
   
538,130
   
-
 
Total non current liabilities 
   
4,805,872
   
6,397,742
 
               
Total liabilities
   
29,135,219
   
17,443,424
 
               
MINORITY INTEREST
   
6,144,063
   
11,883,323
 
               
SHAREHOLDERS' EQUITY:
             
Common stock, $0.001 par value, 250,000,000 shares authorized,
             
71,333,586 issued and outstanding, respectively 
   
71,334
   
71,334
 
Paid-in-capital
   
8,842,009
   
8,842,009
 
Additional paid-in-capital
   
69,105
   
-
 
Statutory reserves
   
9,420,783
   
9,420,783
 
Retained earnings
   
113,964,778
   
95,371,137
 
Accumulated other comprehensive income
   
13,980,346
   
5,714,988
 
Total shareholders' equity 
   
146,348,355
   
119,420,251
 
Total liabilities and shareholders' equity
 
$
181,627,637
 
$
148,746,998
 
 
F-3


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005

   
 2007
 
2006
 
2005
 
REVENUE - RELATED PARTIES
 
$
54,900,060
 
$
66,790,466
 
$
68,688,669
 
                     
COST OF SALES - RELATED PARTIES
   
16,526,695
   
18,082,441
   
17,451,605
 
                     
GROSS PROFIT
   
38,373,365
   
48,708,025
   
51,237,064
 
                     
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
14,306,660
   
12,789,810
   
13,413,875
 
                     
INCOME FROM OPERATIONS
   
24,066,705
   
35,918,215
   
37,823,189
 
                     
(Interest expense)
   
(399,773
)
 
(532,887
)
 
(542,414
)
Interest income
   
3,019,153
   
859,720
   
204,489
 
Other (expense) income, net
   
(1,099,172
)
 
(165,742
)
 
(301,212
)
OTHER (EXPENSE) INCOME, NET
   
1,520,208
   
161,091
   
(639,137
)
                     
INCOME BEFORE PROVISION FOR INCOME TAXES
                   
AND MINORITY INTEREST
   
25,586,913
   
36,079,306