About EDGAR Online | Login
 
Enter your Email for a Free Trial:
The following is an excerpt from a 10-Q SEC Filing, filed by TIENS BIOTECH GROUP USA INC on 11/14/2007.
Next Section Next Section Previous Section Previous Section
TIENS BIOTECH GROUP USA INC - 10-Q - 20071114 - NOTES_TO_FINANCIAL_STATEMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Note 1 - Background

Tiens Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July 13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition Corp. In February 2002, it changed its name to Strategika, Inc., and in August 2003 to the current name.

As of September 30, 2007, Tiens is owned 4.91% by public stockholders, 2.8% by officers and 92.29% by Mr. Jinyuan Li. Tiens owns 100% of Tianshi International Group Limited (“Tianshi International”). Tianshi International owns 80% of Tianjin Tianshi Biological Development Co., Ltd. (“Biological”).

On April 20, 2004, Tianshi International entered a joint venture contract (the "Joint Venture Project") with Tianjin Tianshi Pharmaceuticals Co. Ltd. ("Tianshi Pharmaceuticals") to establish Tiens Yihai Co. Ltd. ("Tiens Yihai"). Tiens Yihai is located in Shanghai, PRC, and was established to build a new research facility which would also produce the Company’s nutrition supplement, home care, and personal care products. Tiens Yihai is a foreign investment joint venture which is incorporated under the laws of PRC. Tiens Yihai is classified as a Foreign Investment Enterprise (“FIE”) in the PRC and is subject to the FIE laws of the PRC. Tiens Yihai is a Chinese registered limited liability company with a legal structure similar to a regular corporation and a limited liability company organized under state laws in the United States of America. The Articles of Association provide for a 50-year term beginning on May 27, 2004 with registered capital of $200,000,000. Tianshi International contributes 99.4% of the registered capital and Tianshi Pharmaceuticals owns the remaining 0.6%.

The Company through its subsidiaries is primarily engaged in the manufacturing of nutritional supplement products, including wellness products and dietary supplement products, and personal care products. In the People’s Republic of China (“PRC”), the Company sells its products to Tianjin Tianshi Biological Engineering Co. Ltd. ("Tianshi Engineering"), a related party through common ownership. Tianshi Engineering, in turn, sells the products to end-users through its chain stores and Chinese affiliated companies. Outside the PRC, the Company sells its products to an extensive direct sales force of overseas affiliates and independent distributors who use the products themselves and/or resell them to other distributors or consumers. The Company sells to affiliated companies located in 63 countries.
 
Note 2 - Summary of significant accounting policies
 
7


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Basis of presentation

The financial statements of the Company and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These Consolidated Financial Statements for interim periods are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States. These Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed on March 29, 2007.

The reporting entity

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

Subsidiary
 
Jurisdiction of formaion
 
% Ownership
Tianshi International Holdings Group, Ltd.
 
British Virgin Islands
 
100.0%
Tianjin Tianshi Biological Development Co., Ltd.
 
P.R.C.
 
80.0%
Tiens Yihai Co., Ltd.
 
P.R.C.
 
99.4%
 
Principles of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances are eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.
 
Foreign currency translation

The reporting currency of the Company is the US dollar. Biological's and Tiens Yihai's financial records are maintained and the statutory financial statements are stated in its local currency, Renminbi (RMB), as their functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of each reporting period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders' equity.
 
8


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Translation adjustments amounted to $10,645,475 and $5,714,988 as of September 30, 2007 and December 31, 2006, respectively. Asset and liability accounts at September 30, 2007 were translated at 7.52 RMB to $1.00 USD as compared to 7.80 RMB at December 31, 2006. Equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the nine months ended September 30, 2007 and 2006 were 7.68 RMB and 8.00 RMB, respectively. Cash flows are also translated at average translation rates for the period. Therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. These amounts are not material to the consolidated financial statements.

Fair value of financial instruments

The Company's financial instruments consist primarily of cash, trade accounts receivable, trade payables, advances, other receivables, and debt instruments. The carrying amounts of the Company's financial instruments generally approximate their fair values at September 30, 2007 and December 31, 2006, except for long-term debt, which has a fixed interest rate. The fair value of the long-term debt is estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The carrying value and fair value of long-term debt is as follows:

   
September 30, 2007
 
December 31, 2006
 
   
Balance sheet amount
 
Fair value
 
Balance sheet
amount
 
Fair value
 
Long-term debt - related party
 
$
(7,462,742
)
$
(7,410,790
)
$
(8,527,742
)
$
(8,527,742
)
 
Cash and cash equivalents

Cash includes cash on hand and demand deposits in accounts maintained with banks of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Allowances for doubtful accounts

The Company's trade accounts receivable are mainly due from related companies. Management reviews its accounts receivable on a regular basis to determine if the bad debt allowance is adequate, paying particular attention to the age of receivables outstanding. At September 30, 2007 and December 31, 2006 receivables outstanding more than 180 days totaled $6,661,476 and $31,586, respectively. The Company did not incur any losses on receivables for the periods reported. The following table represents the changes of allowance of doubtful accounts:

   
Balance at Beginning of Period
 
Charged to Costs and Expenses
 
Recovery
 
Balance at End of Period
 
Period ended September 30, 2007
                 
Reserves and allowances
                 
deducted from assets accounts:
                 
Allowance for doubtful accounts:
 
$
86,776
 
$
75,456
 
$
86,776
 
$
75,456
 
                           
Year ended December 31, 2006
                         
Reserves and allowances
                         
deducted from assets accounts:
                         
Allowance for doubtful accounts:
 
$
206,916
 
$
86,776
 
$
206,916
 
$
86,776
 
 
9


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Inventories

Inventories are stated at the lower of cost or market, using the moving weighted average method. The Company reviews its inventory annually for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence.

Prepaid expense

Prepaid expense consists of advances to suppliers and short-term prepaid expenses. The Company reviews its advances to suppliers annually for determining whether provisions should be recorded.

Loans receivable - related party

The loans receivable - related party represents a $26,604,000 loan that has been made to Tianshi Engineering and $1,110,328 in interest has been accrued on the loan as of September 30, 2007 (see Note 4).

Property, plant and equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the assets are as follows:

   
Estimated Useful Life
Buildings and improvement
 
20 years
Equipment
 
10 years
Computer equipment and software
 
5 years
Office equipment
 
5 years
Vehicles
 
5 years
 
10


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company's plant facilities. No depreciation is provided for construction in progress until such time as construction is completed and the assets are ready for their intended use.

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

Long-term assets of the Company are reviewed periodically as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2007, the Company expects these assets to be fully recoverable.

Other assets

All the land located in the PRC is owned by the government and cannot be sold to any individual or company. However, the government grants "land use rights." The Company acquired two land use rights for fifty years from the PRC on December 1, 1999 and October 4, 2004 for $673,627 in total. The costs are being amortized over fifty years since the third quarter of 2007, using the straight-line method. The Company is currently evaluating the extent of the adjustment with the respect of the amortization during the prior period. Other intangible assets include patents and trademarks and are amortized over the estimated useful life ranging from five to ten years.

A portion of long-term prepaid expense represents a deposit made in October 2004 with a local government agency in the amount of $3.59 million to acquire the land use right for approximately 263 acres of land located in Shanghai, China. The deposit is in connection with Tiens Yihai Industrial Park Project (“Tiens Yihai Project”) described in Note 10. The land use right is for a term of 50 years and as of September 30, 2007, the Company had obtained the land use rights for approximately 50 acres.

On November 10, 2006, the Company signed a Supplemental Agreement for the Construction and Development of Tiens Yihai Project (the “Supplemental Agreement”) with the same local government agency, agreeing to provide a loan of $6,475,000 to the local government agency for the Tiens Yihai Project (see Note 10). Half of the loan, $3,237,500 was funded on November 27, 2006. Since this loan was related to the acquisition of land use rights, it was also included in long-term prepaid expense.
 
11


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Minority interest

Minority interest represents the outside shareholder’s 20% ownership of Biological and 0.6% ownership of Tiens Yihai. Net income is net of minority interest.
 
Revenue recognition

The Company recognizes revenue from sales in China (“domestic sales”), net of commissions and taxes, only after the distributor recognizes sales to unaffiliated third parties. The Company recognizes revenue from international sales (non-Chinese) to both affiliated and unaffiliated third parties, net of commissions and taxes as goods are shipped and cleared by the international customs department.

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 Statement of Financial Accounting Standards (“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.

Shipping and Handling
 
Shipping and handling costs related to costs of goods sold are included in Revenue and totaled $852,334 and $650,112 for the nine months ended September 30, 2007 and 2006 and $523,789 and $101,624 for the three months ended September 30, 2007 and 2006.
 
Research and Development
 
Research and development expenses include salaries, supplies, and overhead such as depreciation, utilities and other costs. These costs are expensed as incurred in accordance with SFAS No. 2, "Accounting for Research and Development Costs." The Company expensed research and development costs of $515,421 and $812,963 for the nine months ended September 30, 2007 and 2006, respectively, and $169,127 and $173,421 for the three months ended September 30, 2007 and 2006, respectively. These costs are included in selling, general and administrative expenses in the accompanying statements.

Income taxes

The Company adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes. There are no deferred tax amounts at September 30, 2007 and December 31, 2006.
 
12


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed, using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that management believes it probable that taxable profit will be available against which deductible temporary differences can be used.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when related items are credited or charged directly to equity, in which case the deferred tax is also recorded in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if management considers it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is believed greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements.

Earnings per share

The Company adopted SFAS No. 128, "Earnings per Share" (“SFAS 128”). SFAS 128 requires the presentation of earnings per share (“EPS”) as Basic EPS and Diluted EPS. Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. There are no differences between Basic and Diluted EPS for the nine months and three months ended September 30, 2007 and 2006.

Other comprehensive income

Other comprehensive income represents the foreign currency translation adjustment for the year. The amounts shown in the Consolidated Statements of Income and Other Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not include other comprehensive income attributed to minority interest.
 
13


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Recently issued accounting pronouncements

In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement" ("EITF No. 06-3"). EITF No. 06-3 permits that such taxes to be presented on either a gross basis or a net basis, as long as that presentation is used consistently. The adoption of EITF No. 06-3 on January 1, 2007 did not impact the Company’s consolidated financial statements. The Company presents the taxes within the scope of EITF No. 06-3 on a net basis .

In July 2006, the FASB issued FIN 48, which the Company adopted on January 1, 2007. (See Income Taxes in this Note 2.)

In September 2006, the 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.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on net income or cash flows.
 
14


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Note 3 - Supplemental disclosure of cash flow information

In February 2007, the Company received part of the land use right that the Company prepaid in 2004; accordingly, a total of $2,331,043 was reclassified from long-term prepaid expenses to intangible asset.

On June 29, 2007, Tianshi Engineering paid $1,276,441 to Tianyuan Capital Development Corporation Ltd. ("Tianyuan Capital") on behalf of the Company, representing one installment of the loan and the interest on the remaining loan for the six months ended June 30, 2007 (see note 11). In return, a part of loan made to Tianshi Engineering by the Company on April 24, 2007 relating to other receivables-related parties was offset.
The right of offset existed because:
 
 
1.
Tianshi Engineering had a determinable outstanding debt payable to the Company;
 
 
2.
The Company had a determinable outstanding debt payable to Tianyuan Capital;
 
 
3.
The Company had the right to offset the two amounts;
 
 
4.
Both the Company and Tianshi Engineering agreed to offset the two amounts; and
 
 
5.
The agreement to offset is enforceable under Chinese contract law.
 
On September 27, 2007, Tianshi Engineering paid $1,000,000 to Tianshi International on behalf of Biological, representing a payment of dividend by Biological. In return, a part of Biological’s accounts receivable to Tianshi Engineering was offset. The right to offset existed because:

 
1.
Tianshi Engineering had a determinable outstanding debt payable to the Company;
 
 
2.
Biological had a determinable outstanding dividend payable to Tianshi International;
 
 
3.
The Company had the right to offset the two amounts;
 
 
4.
Both the Company and Tianshi Engineering agreed to offset the two amounts; and
 
 
5.
The agreement to offset is enforceable under Chinese contract law.

Note 4 - Loan receivable - related parties

During the last quarter of 2005, Tianshi Engineering borrowed RMB 200,000,000 ($26,604,000) from Biological. The purpose of the loan is to help Tianshi Engineering strengthen its sales network in China. This amount was repaid to Biological by December 31, 2005. Then this amount was loaned to Tianshi Engineering again on January 1, 2006 with a due date of December 31, 2006. The loan was originally interest free. On December 22, 2006, the loan was extended to June 30, 2007 and was converted to an interest-bearing loan at a rate of 5.58%. The stated interest rate is the current interest rate for the same level of loan stipulated by the People’s Bank of China. On June 28, 2007, the loan was further extended to September 30, 2007. On September 27, 2007, this loan was extended again to December 31, 2007. The Company accrued $1,110,328 of interest for this loan as of September 30, 2007.

Note 5 - Employee advances

Employee advances represent cash advances to various employees of the Company. These cash advances represent monies advanced to certain employees to pay for various expenses and purchases related to the Company's daily operations. Employee advances amounted to $85,716 and $111,121 as of September 30, 2007 and December 31, 2006, respectively.
 
15


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Note 6 - Inventories

Inventories consist of the following:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
     
Raw materials
 
$
1,820,199
 
$
2,106,929
 
Packing materials
   
829,485
   
1,113,360
 
Miscellaneous supplies
   
101,560
   
377,819
 
Work in process
   
306,945
   
688,007
 
Processing materials
   
422,938
   
369,618
 
Finished goods
   
2,154,221
   
2,189,375
 
Total
 
$
5,635,349
 
$
6,845,108
 

The Company wrote off obsolete goods that amounted to $158,768 and $59,832 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively.
 
Note 7 - Property, plant and equipment, net

Property, plant and equipment consists of the following:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
     
Buildings and improvements
 
$
16,353,348
 
$
14,829,748
 
Office equipment
   
343,337
   
323,753
 
Computer equipment and software
   
1,781,624
   
1,622,731
 
Equipment
   
10,803,019
   
9,329,628
 
Vehicles
   
5,382,610
   
5,187,572
 
Construction in progress
   
10,515,991
   
7,629,623
 
Total
   
45,179,929
   
38,923,055
 
Less: accumulated depreciation
   
(10,974,511
)
 
(8,411,736
)
Property, plant and equipment, net
 
$
34,205,418
 
$
30,511,319
 
 
16


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Depreciation expense for the nine months ended September 30, 2007 and 2006 amounted to $2,213,931 and $1,738,855, respectively. Depreciation expense for the three months ended September 30, 2007 and 2006 amounted to $790,425 and $610,193, respectively.

Note 8 - 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:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
     
Tianjin Tianshi Biological Engineering Co., Ltd
 
$
15,420,459
 
$
5,592,772
 
Shengshi Real Estate Development
   
1,325
   
1,039
 
Tianjin Tianshi Technical School
   
-
   
46,589
 
JinMao (Group) Holding
   
108,394
   
104,466
 
Shanghai Tianshi Jinquan Investment Co.
   
2,473
   
2,129
 
Tianjin Tianshi Group Co., Ltd
   
3,041,275
   
2,650,232
 
Total
 
$
18,573,926
 
$
8,397,227
 
 
See Note 17 for discussion of how these entities are related to Tiens.
 
Note 9 - Intangible assets

Intangible assets consists of the following:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
     
Land use rights
 
$
3,029,996
 
$
673,627
 
Other intangible assets
   
591,220
   
267,815
 
Less accumulated amortization
   
(559,885
)
 
(431,259
)
Intangible assets, net
 
$
3,061,331
 
$
510,183
 
 
Amortization expense for the nine months ended September 30, 2007 and 2006 amounted to $120,452 and $61,199, respectively. As of September 30, 2007, $38,851 was amortized for the land use right of Tiens Yihai. Amortization expense for the three months ended September 30, 2007 and 2006 amounted to $67,819 and $20,606, respectively.
 
17


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)

Estimated amortization expense for
     
the year ending December 31,
 
Amount
 
Remainder of 2007
 
$
42,540
 
2008
 
$
170,161
 
2009
 
$
165,434
 
2010
 
$
116,950
 
2011
 
$
111,028
 

Note 10 - Investment in Tiens Yihai Co. Ltd.

On April 20, 2004, Tianshi International entered a Joint Venture Project with Tianshi Pharmaceuticals to establish Tiens Yihai. On September 15, 2004, the board of directors of Tianshi International ratified the Joint Venture Project. The total amount to be invested in Tiens Yihai was to be $400 million, of which $200 million was to be registered capital. Tianshi International was to contribute $198.8 million, representing approximately 99.4% of the registered capital of Tiens Yihai, and Tianshi Pharmaceuticals was to contribute $1.2 million representing 0.6% of the registered capital.

In October 2004, the Company paid a 10% deposit totaling of $3.59 million to Zhu Jia Jiao Industrial Park Economic Development Ltd (representative of the local government, “Local Government”) to acquire the land use right of approximately 263 acres of land 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 readjusted and re-allocated projects, including investment, construction and reconstruction of state-owned resources. As a result, projects and enterprises that had been affected, including Tiens Yihai, were required to wait for decisions by state and local government before proceeding with development.

On November 10, 2006, Tiens International and the Local Government entered into the Supplemental Agreement pursuant to which the parties agreed to the acquisition of land use right by Tiens Yihai of a reduced 80 acre parcel of land . At that time, it was not clear whether the remaining approximately 183 acres would be available for purchase in the future. Therefore, the Local Government has agreed to refund to Tiens $1.6 million of the original $3.6 million deposit when it receives a construction license for the development. In order to proceed with the purchase of the property by Tiens Yihai, Tianshi International was required to provide a loan of RMB50,000,000 (approximately $6,475,000) to the Local Government for relocation costs for people living on the property. The loan was to be funded in two installments:

 
·
The first installment of RMB25,000,000 (approximately $3,237,500) was paid on November 27, 2006.
 
18


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
 
·
The second installment of RMB25,000,000 (approximately $3,237,500) was to be paid after Tiens Yihai obtains a construction engineering license to develop the property. The parties have agreed to allow Tiens to reduce this second installment by the amount of the $1.6 million refund due to it.

In return for the loan, Tiens Yihai will receive a tax credit equal to the amount of the loan, plus interest. The loan accrues interest at a fixed rate of 6.12%, which was the interest rate stipulated by the People’s Bank of China for a loan of the same level on November 27, 2006.

For the nine months and three months ended September 30, 2007, the Company accrued $152,222 and $53,809, respectively, of interest receivable which was added to the loan and included in Loan receivable. In addition, Tianjin Tianshi Group Co., Ltd (“Tianshi Group”), a related party, has agreed to provide a guarantee on behalf of the Local Government for an additional loan from a commercial bank of RMB50,000,000 (approximately $6,475,000).
 
As of September 30, 2007, Tiens Yihai had obtained the land use right for approximately 50 acres. Therefore, the Company reclassified $2,331,042 to intangible assets from long-term prepaid expenses. Due to the decrease in the size of the property for which the Company has received land use rights and continued uncertainty relating to the Tiens Yihai project, the Company has decided to suspend the development of the property as an industrial park and is currently considering alternative commercial uses. 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 the initial loan of $3.3 million made in November 2006.

A total of 15%, or approximately $30,000,000, of the registered capital was required to be contributed by the joint venture partners, within three months of when the business license was issued. Tianshi International made its required capital contribution in the amount of $29,861,853. The remaining registered capital was required to be contributed by each joint venture partner by May 27, 2007. Because of the significant reduction by the Local Government in the number of acres approved for the Tiens Yihai project, the Company did not make the additional capital contribution of $170 million to Tiens Yihai by May 27, 2007. After negotiating with the local government in Shanghai, the deadline of the payment was extended for one year.

Note 11 - Long term debt

On September 10, 2004, Tianshi International signed a loan agreement with Tianyuan Capital to borrow $10.65 million to fund Tianshi International's contribution due to Tiens Yihai. Mr. Jinyuan Li, the president and major shareholder of the Company owns 100% of Tianyuan Capital, and is a director of Tiens Yihai. The loan bears 5% interest and matures on June 30, 2011.
 
19


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
The principal of the loan will be paid in ten consecutive semi-annual installments of $1,065,000 on the last day of June and December, commencing June 2006. Interest of $211,441 was paid for the six months ended June 30, 2007. Interest of $93,284 for the remaining loan was accrued for the three months ended September 30, 2007. Total principal payments for the next five years on all long-term debt are as follows:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
     
Note payable to Tianyuan Capital
         
Development Corp. Ltd., related party
 
$
7,462,742
 
$
8,527,742
 
Less current portion of long term debt
   
(2,130,000
)
 
(2,130,000
)
Total
 
$
5,332,742
 
$
6,397,742
 

Year Ending September 30,
 
Amount
 
2008
 
$
2,130,000
 
2009
   
2,130,000
 
2010
   
2,130,000
 
2011
   
1,072,742
 
Total
 
$
7,462,742
 

Note 12 - Minority interest and distribution

The rollforward of Minority Interest in the Balance Sheet is shown below:

       
Biological
     
Yihai
     
       
Minority
     
Minority
 
Total
 
   
Biological
 
Owners
 
Yihai
 
Owners
 
Minority
 
   
USD
 
(20%)
 
(USD)
 
(0.60%)
 
Interest
 
December 31, 2005
 
$
58,769,254
 
$
11,753,851
 
$
29,198,163
 
$
175,189
 
$
11,929,040
 
Comprehensive income
   
37,464,431
   
7,492,886
   
1,356,883
   
8,141
   
7,501,027
 
Dividend distribution
   
(37,733,723
)
 
(7,546,745
)
 
-
   
-
   
(7,546,745
)
December 31, 2006
 
$
58,499,962
 
$
11,699,992
 
$
30,555,046
 
$
183,330
 
$
11,883,322
 
Comprehensive income
   
21,468,396
   
4,293,679
   
782,529
   
4,695
   
4,298,374
 
Dividend distribution
   
(33,380,512
)
 
(6,676,102
)
 
-
   
-
   
(6,676,102
)
September 30, 2007
 
$
46,587,846
 
$
9,317,569
 
$
31,337,575
 
$
188,025
 
$
9,505,594
 
 
Dividends declared by Biological are split pro rata between the shareholders according to their ownership interest. The payment of the dividends to the shareholders may occur at different times, resulting in distributions which do not appear to be reflective of the minority ownership percentages. As of September 30, 2007, minority shareholders owned approximately 20% of the Company’s subsidiaries. The table below shows the outstanding dividends payable of Biological, as well as the allocation of dividends between Tianshi International and the minority shareholder.
 
20


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
   
Tianshi
 
Minority
     
Date
 
International
 
Shareholder
 
Totals
 
Dividends outstanding, December 31, 2005 Balance
 
$
15,885,843
 
$
-
 
$
15,885,843
 
Dividends declared
   
30,186,978
   
7,546,745
   
37,733,723
 
Dividends paid
   
(1,557,742
)
 
(7,308,434
)
 
(8,866,176
)
Accumulated Other Comprehensive Income (loss)
   
1,463,775
   
-
   
1,463,775
 
Dividends outstanding, December 31, 2006 Balance
 
$
45,978,854
 
$
238,311
 
$
46,217,165
 
Dividends declared
   
26,704,410
   
6,676,102
   
33,380,512
 
Dividends paid
   
(2,276,441
)
 
(6,676,102
)
 
(8,952,543
)
Accumulated Other Comprehensive Income (loss)
   
2,513,390
   
18,272
   
2,531,662
 
Dividends outstanding, September 30, 2007 Balance
 
$
72,920,213
 
$
256,583
 
$
73,176,796
 
 
Note 13 - Income taxes

The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled. The Company's subsidiary, Tianshi International, was incorporated in the British Virgin Islands and is not liable for income taxes.

The Company's subsidiaries, Biological and Tiens Yihai, are Sino-Foreign Joint Ventures incorporated in the PRC. Pursuant to the income tax laws of the PRC concerning Foreign Investment Enterprises and foreign enterprises and various local income tax laws, Sino-foreign joint venture enterprises generally are subject to income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income as reported in their statutory financial statements, unless the enterprise is located in specially-designated regions or cities for which more favorable effective rates apply.

Biological is located in a Special Economic 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.
 
21


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
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 100% exemption for income taxes expired for Biological and it became subject to income tax at a reduced rate of 7.5%.
 
Tiens Yihai is located in a Special Industry Zone and is subject to the special reduced income tax rate of 15%. Pursuant to the approval of the relevant local Chinese tax authorities, Tiens Yihai is fully exempt from PRC income taxes for two years starting from the first year profits are made, followed by a 7.5% reduced tax rate for the next three years. In addition, in order to encourage Tiens Yihai doing business in the Special Industry Zone, the local Chinese tax authorities agreed to refund 50% of the total income tax after the five-year tax break. As of June 30, 2007, Tiens Yihai operations have not yet begun.

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. The Company is currently evaluating the effect of the new EIT law will have on its financial position.
 
Provision for income taxes for the nine months ended September 30, 2007 and 2006 were $1,610,653, and $2,188,491, respectively, and $344,248 and $878,931 for the three months ended September 30, 2007 and 2006, respectively.

The following table reconciles the U.S. statutory rates to the Company's effective tax rate at June 30, 2007 and 2006, respectively:
 
   
2007
 
2006
 
U.S. Statutory rate
   
34.0
%
 
34.0
%
Foreign income not recognized in USA
   
(34.0
)
 
(34.0
)
China income taxes
   
33.0
   
33.0
 
China income taxes savings
   
(25.5
)
 
(25.5
)
Total provision for income taxes
   
7.5
%
 
7.5
%
 

VAT Added Tax

Enterprises or individuals who sell products, engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with Chinese laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the contract and production of the Company's finished products can be used to offset the VAT due on sales of the finished goods. According to the current tax laws of the PRC, manufacturing enterprises do no need to pay VAT on sales of goods exported overseas, and the corresponding VAT on purchases will not be offset.
 
22


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
VAT on sales and VAT on purchases amounted to $3 816 975and $1 618 433, respectively, for the nine months ended September 30, 2007 and $4,314,238 and $1,791,667, respectively, for the nine months ended September 30, 2006. VAT on sales and VAT on purchases amounted to $897,739 and $587,252, respectively, for the three months ended September 30, 2007 and $1,701,616 and $803,801, respectively, for the three months ended September 30, 2006. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.
 

       
Tianshi
   
   
Biological
 
Yihai
 
International
 
Total
 
Balance as of December 31, 2005
 
$
1,088,433
 
$
732,331
 
$
413,449
 
$
2,234,213
 
Increase during the year
   
1,020,641
   
995,361
   
1,464,773
   
3,480,775
 
Balance as of December 31, 2006
 
$
2,109,074
 
$
1,727,692
 
$
1,878,222
 
$
5,714,988
 
Increase during the year
   
1,282,937
   
1,134,403
   
2,513,147
   
4,930,487
 
Balance as of September 30, 2007
 
$
3,392,011
 
$
2,862,095
 
$
4,391,369
 
$
10,645,475
 
 
Accumulated Other Comprehensive Income incurred in Biological and Tiens Yihai is due to exchange rate differences. Results of operations are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of each reporting period. Accumulated Other Comprehensive Income incurred in Tianshi International is due to the effect of foreign exchange rates on dividends receivable from Biological. Since this income is not realized, it is included in Accumulated Other Comprehensive Income.

Note 15 - Retirement plan

Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all employees. All Biological employees are entitled to a retirement pension amount calculated based upon salary and length of service at their date of retirement in accordance with a government managed pension plan. The PRC government is responsible for the pension liability to the retired staff.

Biological is required to make contributions to the state retirement plan at 20% of the employees' monthly salary. Employees are required to contribute 8% of their salaries to the plan. Total pension expense incurred by the Company amounted to $450,680 and $359,863 for the nine months ended September 30, 2007 and 2006, respectively, and amounted to $152,436 and $119,615 for the three months ended September 30, 2007 and 2006, respectively.
 
23


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
The Company also has an unemployment insurance plan for its employees. The plan requires each employee to contribute 1% of salary to the plan. The Company matches the contributions in an amount equal to two times the contribution of each participant. The Company made contributions to the unemployment insurance plan of $44,979 and $34,510 for the nine months ended September 30, 2007 and 2006, respectively, and $15,227 and $11,400 for the three months ended September 30, 2007 and 2006, respectively. All contributions are paid to a PRC insurance company, which in turn, is responsible for the liability. On January 1, 2002, the Company introduced a basic medical insurance plan for its employees. Pursuant to the medical insurance plan, the Company is required to pay an amount equal to 10% of its employees' salaries to a PRC insurance company, which amounted to $245,302 and $195,970 for the nine months ended September 30, 2007 and 2006, respectively, and $82,942 and $64,316 for the three months ended September 30, 2007 and 2006, respectively.

Note 16 - Statutory reserves

The laws and regulations of the People’s Republic of China require that before a Sino-foreign cooperative joint venture enterprise distributes profits to its partners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserve. The statutory reserves represent restricted retained earnings and include the surplus reserve fund, the common welfare fund, and the enterprise fund.

Statutory reserve fund

The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. During 2005, the Company's statutory reserve fund had reached 50% of the Company's registered capital, therefore, no statutory reserve is required thereafter.

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholdings, or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

Common welfare fund

The Company is required to transfer 5% to 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to the statutory common welfare fund. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The transfer to this fund must be made before distribution of any dividend to shareholders. For the nine months ended September 30, 2007 and 2006, no transfer was made to this fund.
 
24


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Enterprise fund

The enterprise fund may be used to acquire fixed assets or to increase the working capital for production and operation of the business. No minimum contribution is required. For the nine months ended September 30, 2007 and 2006, no transfer was made to this fund.

The Chinese government restricts distributions of registered capital and the additional investment amounts required by the Chinese joint ventures. Approval by the Chinese government must be obtained before these amounts can be returned to the shareholders.

Note 17 - Related party transactions
 
Tianshi Group is owned 90% by Mr. Jinyuan Li and 10% by his daughter, Ms. Baolan Li. Tianshi Group owns 87.66% of Tianshi Pharmaceuticals and 51% of Tianshi Engineering. Tianshi Pharmaceuticals owns 20% of Biological. Ms. Baolan Li owns 49% of Tianshi Engineering and 7.29% of Tianshi Pharmaceuticals. Tianjin Feishi Transportation Co., Ltd. owns 5.05% of Tianshi Pharmaceuticals.

Transactions with Tianshi Engineering

The Company sells products to Tianshi Engineering, a related party through common ownership. The related party distributors in turn market and sell the Company's products to independent distributors or end users of the products. The related party distributors are solely responsible for all marketing and payments of sales commissions to independent distributors.

Total sales to the related party amounted to $15,736,494 and $20,281,510 for the nine months ended September 30, 2007 and 2006, respectively. For the three months ended September 30, 2007 and 2006, total sales to the related party amounted to $3,388,880 and $7,240,485, respectively. This represents 100% of total sales in China for the years then ended. Historically, Tianshi Engineering remitted payment to the Company 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, the Company has agreed to allow Tianshi Engineering to retain those collections.
 
Beginning on January 1, 2007, balances under accounts receivable relating to Tianshi Engineering which are not remitted to the Company within 90 days are converted to other receivables-related parties. On January 1, 2007, we entered into a loan agreement with Tianshi Engineering. Pursuant to that agreement, beginning on January 1, 2007, $4.2 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The loan was due on March 31, 2007 and the stated interest rate was 6.3%. Both of the principal and interest of the loan were paid off on March 31, 2007.
 
25


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
On April 24, 2007, a Term Loan Agreement similar to the loan agreement signed on January 1, 2007 described above was signed between the Company and Tianshi Engineering. Pursuant to that agreement, beginning on April 1, 2007, $4.8 million of other receivables - related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The loan was due on April 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 the loan were paid off on June 30, 2007.
 
On July 23, 2007, a Term Loan Agreement similar to the Term Loan Agreement signed on April 24, 2007 described above was signed between the Company and Tianshi Engineering. Pursuant to that agreement, beginning on July 1, 2007, $8.5million of other receivables - related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The loan was due on 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 loan was paid off.

On October 1, 2005, Biological loaned Tianshi Engineering RMB 200,000,000 ($26,604,000). The loan was non-interest bearing, matured on December 31, 2005 and was repaid upon maturity. The purpose of the loan was to enable Tianshi Engineering to strengthen its sales network in China. On January 1, 2006, this amount was loaned to Tianshi Engineering again, with a maturity date of December 31, 2006. In order to continue support of Tianshi Engineering's efforts 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 is the interest rate stipulated by the People’s Bank of China for a loan of the same amount or 5.58% at January 1, 2007. On June 28, 2007, the loan was further extended to September 30, 2007. On September 30, 2007, this loan was extended again to December 31, 2007. All receivables from Tianshi Engineering will be settled by cash payment. As of September 30, 2007, $1,110,328 of interest receivable had been accrued and is included in loans receivable - related party.

Amounts due from Tianshi Engineering were as follows:

   
September 30,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
     
Accounts receivable - related parties
 
$
4,419,231
 
$
7,827,372
 
Other receivable - related parties
   
15,420,459
   
5,592,772
 
Loan receivable - related parties
   
27,714,327
   
25,640,000
 
Total receivables from Tianshi Engineering
 
$
47,554,017
 
$
39,060,144
 
 
26


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Transactions with Tianshi Group

On June 30, 2003, the Company entered into an office and facilities lease agreement with Tianshi Group, a company owned 90% by Jinyuan Li and 10% by Baolan Li. Under the terms of the five year agreement, the Company’s annual rent is equal to 1% of gross revenues. In addition, the Company is obligated to pay insurance, maintenance and other expenses related to the premises. Rent expense totaled $432,727 and $450,506 for the nine months ended September 30, 2007 and 2006, respectively.

On November 10, 2006, Tiens International signed an agreement with Shanghai Zhu Jia Jiao Industrial Park Economic Development Ltd (see Note 10). Tianshi Group has also agreed to provide a guarantee on behalf of the local government for a loan from a commercial bank of RMB50,000,000.

At September 30, 2007 and December 31, 2006, amounts due from Tianshi Group were $3,041,275 and $2,650,232, respectively and were included in Other receivable - related parties.

Transaction with international related party distributors

The Company sells products to international distributors. The Company’s CEO Jinyuan Li, is one of the owners of these distributors. The distributors market and sell the Company's products to independent distributors or end users of the products. Total sales to these related parties international distributors were $25,848,255 and $29,921,796 for the nine months ended September 30, 2007 and 2006. For the three months ended September 30, 2007 and 2006, total sales to these related parties international distributors were $7,638,598 and $11,947,263, respectively. Total accounts receivable as of September 30, 2007 and December 31, 2006 were $10,596,428 and $5,099,298, respectively.

Transaction with other related parties

Shengshi Real Estate Development is owned by the Company’s CEO Jinyuan Li. Total other receivables from Shengshi Real Estate Development as of September 30, 2007 and December 31, 2006 amounted to $1,325 and $1,039.

Tianjin Tianshi Technical School is owned by Jinyuan Li. Total other receivables from Tianjin Tianshi Technical School as of September 30, 2007 and December 31, 2006 amounted to $0 and $46,589, respectively.

JinMao (Group) Holding is owned by Jinyuan Li. Total other receivables from JinMao (Group) Holding as of September 30, 2007 and December 31, 2006 were $108,394 and $104,466

Shanghai Tianshi Jinquan Investment Co., is owned by Jinyuan Li. Total balances due from the related party amounted to $2,473 and $2,129 as of September 30, 2007 and December 31, 2006, respectively.

27


TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(UNAUDITED)
 
Note 18 - Additional product sales information

The Company has a single operating segment. 100% of the Company's revenues were generated from related parties for the nine months ended September 30, 2007 and 2006. Summarized enterprise-wide financial information concerning the Company’s revenues based on geographic area and product groups is shown in the following tables:

Revenue by Geographic Area:

   
Nine months ended September 30,
 
Three months ended September 30,
 
Revenue
 
2007
 
2006
 
2007
 
2006
 
   
( Unaudited)
 
( Unaudited)
 
( Unaudited)
 
( Unaudited)
 
China
 
$
15,736,494
 
$
20,281,510
 
$
3,388,880
 
$
7,240,485
 
International
   
25,848,255
   
29,921,796
   
7,638,598
   
11,947,263
 
Total
 
$
41,584,749
 
$
50,203,306
 
$
11,027,478
 
$
19,187,748
 
 
Revenue by Product Group:

   
Nine months ended September 30,
 
Three months ended September 30,
 
   
2007
 
2006
 
2007
 
2006
 
Wellness products
 
$
37,342,692
 
$
43,457,716
 
$
9,535,575
 
$
16,609,578
 
Dietary supplement products
   
3,878,449
   
2,997,157
   
1,433,867
   
1,145,516
 
Personal care products
   
363,608
   
3,748,433
   
58,036
   
1,432,654
 
Total
 
$
41,584,749
 
$
50,203,306
 
$
11,027,478
 
$
19,187,748
 
 
28

EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission. EDGAR®Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.