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The following is an excerpt from a 10-K SEC Filing, filed by TIENS BIOTECH GROUP USA INC on 3/31/2008.
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TIENS BIOTECH GROUP USA INC - 10-K - 20080331 - BUSINESS
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.
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