UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
quarterly period ended March 31, 2010.





 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
transition period from _____ to_____.





Commission
File Number: 001-32477





TIENS
BIOTECH GROUP (USA), INC.


(Exact
name of registrant as specified in its charter)





Delaware
              75-2926439(State
      or other jurisdiction
              (I.R.S.
      Employerof
      incorporation or organization)
              Identification
      No.)





No. 6,
Yuanquan Rd.


Wuqing
New Tech Industrial Park


Tianjin, China
301700


(Address
of principal executive offices)  (Zip Code)





+86-22-8213-7914


(Registrant’s
telephone number, including area code)








(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.YesxNo ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes ̈  No ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large Accelerated Filer   ̈
            Accelerated Filer   ̈Non-Accelerated Filer ̈(Do not check if a smaller reporting company)
            Smaller Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes ̈  Nox





There
were 71,333,586 shares of the registrant’s common stock outstanding on May 14,
2010.





TIENS
BIOTECH GROUP (USA), INC.


INDEX
TO FORM 10-Q


PAGEPART
      I - FINANCIAL INFORMATION
                  
                  3ITEM
      1. FINANCIAL STATEMENTS
                  
                  3Consolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
      2009
                  
                  3Consolidated
      Statements of Income and Other Comprehensive Income for the Three Months
      Ended March 31, 2010 and 2009 (Unaudited)
                  
                  4Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2010 and
      2009 (Unaudited)
                  
                  5Notes
      to Consolidated Financial Statements (Unaudited)
                  
                  6ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                  
                  21ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                  
                  29ITEM
      4T. CONTROLS AND PROCEDURES
                  
                  29PART
      II - OTHER INFORMATION
                  
                  29ITEM
      6. EXHIBITS
                  
                  29




2


PART I -
FINANCIAL INFORMATION





ITEM 1. FINANCIAL
STATEMENTS





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
MARCH 31, 2010 (UNAUDITED) AND DECEMBER 31, 2009





March 31,
                                                                
                                                                
                                                                December 31,2010
                                                                
                                                                
                                                                2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                                                                
                                                                $
                                                                9,873,298
                                                                
                                                                
                                                                $
                                                                1,848,328Accounts
      receivable, trade - related parties, net ofallowance
      for doubtful accounts of $1,621,619 and $1,419,178as
      of March 31, 2010 and December 31, 2009, respectively
                                                                
                                                                
                                                                10,245,625
                                                                
                                                                
                                                                
                                                                15,379,312Inventories
                                                                
                                                                
                                                                5,024,331
                                                                
                                                                
                                                                
                                                                5,328,052Other
      receivables
                                                                
                                                                
                                                                902,216
                                                                
                                                                
                                                                
                                                                995,657Other
      receivables - related parties
                                                                
                                                                
                                                                39,458,619
                                                                
                                                                
                                                                
                                                                44,561,626Employee
      advances
                                                                
                                                                
                                                                101,755
                                                                
                                                                
                                                                
                                                                115,673Prepaid
      expenses
                                                                
                                                                
                                                                594,263
                                                                
                                                                
                                                                
                                                                658,193Prepaid
      taxes
                                                                
                                                                
                                                                171,715
                                                                
                                                                
                                                                
                                                                407,534Total
      current assets
                                                                
                                                                
                                                                66,371,822
                                                                
                                                                
                                                                
                                                                69,294,375PROPERTY,
      PLANT AND EQUIPMENT, net
                                                                
                                                                
                                                                9,811,115
                                                                
                                                                
                                                                
                                                                10,124,483OTHER
      ASSETS:Construction
      in progress
                                                                
                                                                
                                                                133,225,733
                                                                
                                                                
                                                                
                                                                125,572,621Construction
      deposits
                                                                
                                                                
                                                                3,763,996
                                                                
                                                                
                                                                
                                                                1,405,997Intangible
      assets, net
                                                                
                                                                
                                                                12,789,812
                                                                
                                                                
                                                                
                                                                12,864,295Other
      assets
                                                                
                                                                
                                                                13,400,435
                                                                
                                                                
                                                                
                                                                11,847,937Total
      other assets
                                                                
                                                                
                                                                163,179,976
                                                                
                                                                
                                                                
                                                                151,690,850Total
      assets
                                                                
                                                                $
                                                                239,362,913
                                                                
                                                                
                                                                $
                                                                231,109,708LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                                
                                                                $
                                                                4,211,661
                                                                
                                                                
                                                                $
                                                                5,012,157Advances
      from customers - related parties
                                                                
                                                                
                                                                8,461,804
                                                                
                                                                
                                                                
                                                                4,426,751Wages
      and benefits payable
                                                                
                                                                
                                                                1,068,256
                                                                
                                                                
                                                                
                                                                1,484,852Income
      taxes payable
                                                                
                                                                
                                                                314,266
                                                                
                                                                
                                                                
                                                                -Contractor
      deposits
                                                                
                                                                
                                                                183,420
                                                                
                                                                
                                                                
                                                                183,395Contractor
      payables
                                                                
                                                                
                                                                18,834,263
                                                                
                                                                
                                                                
                                                                18,513,216Other
      payables
                                                                
                                                                
                                                                1,168,820
                                                                
                                                                
                                                                
                                                                1,151,551Other
      payables - related parties
                                                                
                                                                
                                                                4,405,557
                                                                
                                                                
                                                                
                                                                3,326,110Total
      current liabilities
                                                                
                                                                
                                                                38,648,047
                                                                
                                                                
                                                                
                                                                34,098,032NON-CURRENT
      LIABILITIESDeferred
      income
                                                                
                                                                
                                                                11,238,037
                                                                
                                                                
                                                                
                                                                11,236,501Total
      non current liabilities
                                                                
                                                                
                                                                11,238,037
                                                                
                                                                
                                                                
                                                                11,236,501Total
      liabilities
                                                                
                                                                
                                                                49,886,084
                                                                
                                                                
                                                                
                                                                45,334,533EQUITY:Shareholders'
      equity of the Company:Common
      stock, $0.001 par value, 250,000,000 shares authorized,71,333,586
      issued and outstanding, respectively
                                                                
                                                                
                                                                71,334
                                                                
                                                                
                                                                
                                                                71,334Paid-in-capital
                                                                
                                                                
                                                                18,118,007
                                                                
                                                                
                                                                
                                                                18,042,189Statutory
      reserves
                                                                
                                                                
                                                                13,217,217
                                                                
                                                                
                                                                
                                                                13,217,217Retained
      earnings
                                                                
                                                                
                                                                129,631,801
                                                                
                                                                
                                                                
                                                                126,370,263Accumulated
      other comprehensive income
                                                                
                                                                
                                                                18,277,093
                                                                
                                                                
                                                                
                                                                18,262,123Total
      shareholders' equity of the Company
                                                                
                                                                
                                                                179,315,452
                                                                
                                                                
                                                                
                                                                175,963,126Noncontrolling
      interest
                                                                
                                                                
                                                                10,161,377
                                                                
                                                                
                                                                
                                                                9,812,049Total
      equity
                                                                
                                                                
                                                                189,476,829
                                                                
                                                                
                                                                
                                                                185,775,175Total
      liabilities and equity
                                                                
                                                                $
                                                                239,362,913
                                                                
                                                                
                                                                $
                                                                231,109,708





The
accompanying notes are an integral part of this statement.


3




TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
THREE  MONTHS ENDED MARCH 31, 2010 and 2009 (UNAUDITED)





Three months ended March 31,2010
                                            
                                            
                                            2009REVENUE
      - RELATED PARTIES
                                            
                                            $
                                            11,403,363
                                            
                                            
                                            $
                                            18,237,545COST
      OF SALES - RELATED PARTIES
                                            
                                            
                                            3,440,881
                                            
                                            
                                            
                                            5,735,059GROSS
      PROFIT
                                            
                                            
                                            7,962,482
                                            
                                            
                                            
                                            12,502,486SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                            
                                            
                                            3,497,547
                                            
                                            
                                            
                                            3,130,936INCOME
      FROM OPERATIONS
                                            
                                            
                                            4,464,935
                                            
                                            
                                            
                                            9,371,550Interest
      expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (52,616
                                            )Interest
      income
                                            
                                            
                                            1,872
                                            
                                            
                                            
                                            85,768Other
      expense
                                            
                                            
                                            (253,710
                                            )
                                            
                                            
                                            (45,288
                                            )OTHER
      (EXPENSE) INCOME, NET
                                            
                                            
                                            (251,838
                                            )
                                            
                                            
                                            (12,136
                                            )INCOME
      BEFORE INCOME TAXES
                                            
                                            
                                            4,213,097
                                            
                                            
                                            
                                            9,359,414INCOME
      TAXES
                                            
                                            
                                            609,502
                                            
                                            
                                            
                                            359,615NET
      INCOME
                                            
                                            
                                            3,603,595
                                            
                                            
                                            
                                            8,999,799LESS:
      Net income attributable to the noncontrolling interest
                                            
                                            
                                            (342,057
                                            )
                                            
                                            
                                            (406,974
                                            )NET
      INCOME ATTRIBUTABLE TO THE COMPANY
                                            
                                            
                                            3,261,538
                                            
                                            
                                            
                                            8,592,825OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                                            
                                            
                                            14,970
                                            
                                            
                                            
                                            200,003COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE COMPANY
                                            
                                            
                                            3,276,508
                                            
                                            
                                            
                                            8,792,828COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                                            
                                            
                                            343,398
                                            
                                            
                                            
                                            419,595COMPREHENSIVE
      INCOME
                                            
                                            $
                                            3,619,906
                                            
                                            
                                            $
                                            9,212,423EARNINGS
      PER SHARE, BASIC AND DILUTED
                                            
                                            $
                                            0.05
                                            
                                            
                                            $
                                            0.12WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                                            
                                            
                                            71,333,586
                                            
                                            
                                            
                                            71,333,586





The
accompanying notes are an integral part of this statement.


4





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)





Three months ended March 31,2010
                                                  
                                                  
                                                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                                  
                                                  $
                                                  3,603,595
                                                  
                                                  
                                                  $
                                                  8,999,799Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:Provision
      for doubtful accounts
                                                  
                                                  
                                                  202,247
                                                  
                                                  
                                                  
                                                  (184,568
                                                  )Depreciation
                                                  
                                                  
                                                  417,469
                                                  
                                                  
                                                  
                                                  544,811Amortization
                                                  
                                                  
                                                  83,557
                                                  
                                                  
                                                  
                                                  97,143Interest
      expense
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,372Gain
      on sale of assets
                                                  
                                                  
                                                  (15,082
                                                  )
                                                  
                                                  
                                                  (11,652
                                                  )Rental
      expense borne by a related party
                                                  
                                                  
                                                  81,749
                                                  
                                                  
                                                  
                                                  81,626(Increase)
      decrease in assets:Accounts
      receivable, trade - related parties
                                                  
                                                  
                                                  4,933,543
                                                  
                                                  
                                                  
                                                  (1,493,130
                                                  )Other
      receivables
                                                  
                                                  
                                                  93,577
                                                  
                                                  
                                                  
                                                  (17,415
                                                  )Other
      receivables - related parties
                                                  
                                                  
                                                  (1,200,159
                                                  )
                                                  
                                                  
                                                  (2,567,169
                                                  )Inventories
                                                  
                                                  
                                                  304,560
                                                  
                                                  
                                                  
                                                  1,398,175Employee
      advances
                                                  
                                                  
                                                  13,935
                                                  
                                                  
                                                  
                                                  (76,407
                                                  )Prepaid
      expense
                                                  
                                                  
                                                  64,017
                                                  
                                                  
                                                  
                                                  (589,907
                                                  )Increase
      (decrease) in liabilities:Accounts
      payable
                                                  
                                                  
                                                  (819,926
                                                  )
                                                  
                                                  
                                                  (567,056
                                                  )Advances
      from customers - related parties
                                                  
                                                  
                                                  4,034,448
                                                  
                                                  
                                                  
                                                  1,364,661Wages
      and benefits payable
                                                  
                                                  
                                                  (416,798
                                                  )
                                                  
                                                  
                                                  (393,303
                                                  )Other
      taxes payable
                                                  
                                                  
                                                  550,140
                                                  
                                                  
                                                  
                                                  (270,424
                                                  )Other
      payables
                                                  
                                                  
                                                  19,487
                                                  
                                                  
                                                  
                                                  (565,726
                                                  )Other
      payables - related parties
                                                  
                                                  
                                                  1,079,414
                                                  
                                                  
                                                  
                                                  106,916Net
      cash provided by operating activities
                                                  
                                                  
                                                  13,029,773
                                                  
                                                  
                                                  
                                                  5,857,746CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in Life Resources
                                                  
                                                  
                                                  3,000,000
                                                  
                                                  
                                                  
                                                  -Proceeds
      from disposal of a subsidiary
                                                  
                                                  
                                                  700,000
                                                  
                                                  
                                                  
                                                  -Construction
      deposits
                                                  
                                                  
                                                  (562,642
                                                  )
                                                  
                                                  
                                                  (1,163,628
                                                  )Contractor
      deposits
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  48,930Addition
      to construction in progress
                                                  
                                                  
                                                  (9,112,590
                                                  )
                                                  
                                                  
                                                  (4,483,010
                                                  )Equipment
      deposits
                                                  
                                                  
                                                  (1,558,192
                                                  )
                                                  
                                                  
                                                  -Proceeds
      from sales of properties
                                                  
                                                  
                                                  2,621,021
                                                  
                                                  
                                                  
                                                  17,031Purchase
      of equipment and automobiles
                                                  
                                                  
                                                  (88,505
                                                  )
                                                  
                                                  
                                                  (1,035,910
                                                  )Net
      cash used in investing activities
                                                  
                                                  
                                                  (5,000,908
                                                  )
                                                  
                                                  
                                                  (6,616,587
                                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      cash provided by (used in) financing activities
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                                  
                                                  
                                                  (3,895
                                                  )
                                                  
                                                  
                                                  55,752NET
      INCREASE (DECREASE) IN CASH
                                                  
                                                  
                                                  8,024,970
                                                  
                                                  
                                                  
                                                  (703,089
                                                  )CASH,
      beginning of period
                                                  
                                                  
                                                  1,848,328
                                                  
                                                  
                                                  
                                                  44,854,511CASH,
      end of period
                                                  
                                                  $
                                                  9,873,298
                                                  
                                                  
                                                  $
                                                  44,151,422Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  266,273Income
      taxes
                                                  
                                                  $
                                                  213,625
                                                  
                                                  
                                                  $
                                                  3,877,420





The
accompanying notes are an integral part of this statement.


5





Note
1 - Background





Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.





The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO and President. The Company owns 100% of
Tianshi International Holdings Group Limited ("Tianshi Holdings"). Tianshi
Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd.
("Biological") and 100% of Tianjin Tiens Life Resources Co., Ltd. (“Life
Resources”).





Nature ofoperations





The
Company through its subsidiaries is primarily engaged in the manufacturing of
nutritional supplement products, including wellness products and dietary
supplement products. In the People’s Republic of China (“PRC”), the Company
sells its products to Tianjin Tianshi Biological Engineering Co. Ltd. (“Tianshi
Engineering”), a Chinese company. Tianshi Engineering, in turn, sells the
products to customers through its branches and affiliated companies and at chain
stores which are owned by individual distributors. Tianshi Engineering is 100%
owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”).  Tianshi
Group is 90% owned by Jinyuan Li, the Company’s Chairman, President and CEO, and
10% owned by Baolan Li, Jinyuan Li’s daughter. Outside the PRC, the Company
sells its products to overseas affiliated companies located in 54 countries who
in turn re-package them and sell to independent direct sales
distributors.





Note
2 – Summary of significant accounting policies





Basis of
presentation





The
financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). These Consolidated Financial Statements for interim
periods are unaudited. In the opinion of management, the consolidated financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation.The results reported in
these Consolidated Financial Statements are not necessarily indicative of the
results that may be reported for the entire year. The accompanying consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and do not
include all information and footnotes necessary for a complete presentation
of financial statements in conformity with U.S. GAAP. These Consolidated
Financial Statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009, filed with the
Securities and Exchange Commission on April 2, 2010.





The reporting
entity





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


6





Subsidiary
                      
                      JurisdictionofFormation
                      
                      %OwnershipTianshi Holdings
                      
                      British
      Virgin Islands
                      
                      100.0%Biological
                      
                      P.R.C.
                      
                      80.0%Life
      Resources
                      
                      P.R.C.
                      
                      100.0%





Principles of
consolidation





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





Use of
estimates





In
preparing financial statements in conformity with U.S. GAAP, the Company makes
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and sales and expenses
during the reported periods. Significant estimates include useful life of
long lived asset, provision for bad debt and allowance for sales
return.  Management bases its estimates on historical experience and
on various other assumptions that they believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results could differ from those
estimates.





Foreign currency
translation





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





Translation
adjustments amounted to $14,970 and $200,003 for the three months ended
March 31, 2010 and 2009, respectively. Asset and liability accounts at March 31,
2010 were translated at RMB6.84 to $1.00 USD compared to RMB6.85 at March
31, 2009. Equity accounts are stated at their historical rate. The average
translation rates applied to income statement accounts for the three months
ended March 31, 2010 and 2009 were 6.84 RMB and 6.85 RMB, respectively. Cash
flows are also translated at average translation rates for the period.
Therefore, amounts reported on the statements of cash flows will not necessarily
agree with changes in the corresponding balances on the balance
sheets.





Fair value of financial
instruments





Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants at the
measurement date. Fair value hierarchy prioritizes the inputs used in measuring
fair value into three broad levels as follows:





•   
Level one — Quoted market prices in active markets for
identical  assets or liabilities;


7





•   
Level two — Inputs other than level one inputs that are either directly or
indirectly observable; and





•   
Level three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions that a
market participant would use.





Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company's financial instruments consist primarily of
cash, trade accounts receivable, trade payables, advances, and other
receivables. The carrying amounts of the Company's financial instruments
generally approximate their fair values at March 31, 2010 and December 31,
2009.





Cash





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





Accounts
receivable





The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties’ ability to collect their
receivables and a general allowance for doubtful debt of 0.5% of the remaining
accounts receivable-related parties. Management reviews its accounts receivable
on a regular basis to determine if the provision for doubtful debts is adequate,
paying particular attention to the age of receivables outstanding. At March 31,
2010 and December 31, 2009, there were no receivables due from Tianshi
Engineering outstanding more than 90 days. At March 31, 2010 and December 31,
2009, receivables due from overseas related companies outstanding more than 180
days totaled $6,139,508 and $5,089,510, respectively. The Company did not
charge-off any receivables for the periods reported. The following table
represents the changes in the allowance for doubtful accounts:





Provision forDoubtful
                      AccountsThree
      month period ended March 31, 2010Balance
      at Beginning of Period
                    
                    $
                    1,419,178Increase
      of provision for Doubtful Accounts
                    
                    
                    202,441Balance
      at End of Period
                    
                    $
                    1,621,619Three
      month period ended March 31, 2009Balance
      at Beginning of Period
                    
                    $
                    1,108,789Decrease
      of provision for Doubtful Accounts
                    
                    
                    (183,224
                    )Balance
      at End of Period
                    
                    $
                    925,565




8





Inventories





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





Employee
advances





Employee
advances represent cash advances to various employees of the Company. In the
PRC, a majority of business transactions are completed in cash. These cash
advances represent monies advanced to certain employees to pay for various
expenses and purchases related to the Company's daily operations.





Prepaid
expenses





Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
Company reviews its advances to suppliers annually to determine whether
provisions should be made. The amount included in prepaid expenses is net of any
provisions. Provisions for prepaid expenses are as follows:





Provision for Doubtful
                    AccountsThree
      month period ended March 31, 2010Balance
      at Beginning of Period
                  
                  $
                  1,018,474Increase
      of provision for Doubtful Accounts
                  
                  
                  139Balance
      at End of Period
                  
                  $
                  1,018,613Three
      month period ended March 31, 2009Balance
      at Beginning of Period
                  
                  $
                  952,071Increase
      of provision for Doubtful Accounts
                  
                  
                  1,175Balance
      at End of Period
                  
                  $
                  953,246





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:





EstimatedUsefulLifeBuildings
      and improvements
                      20
      yearsMachinery
      and equipment
                      10
      yearsComputer,
      office equipment and furniture
                      5
      yearsAutomobiles
                      5
      years





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





Construction in
progress





Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets are
completed and are ready for their intended use.


9





Construction
deposits





Construction
deposits represent advances paid by the Company to contractors for construction
in progress.





Intangible
assets





Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. However, the
government grants "land use rights" for a specified period of time. The Company
amortizes its land use rights according to the actual useful life of 50 years.
Other intangible assets include patents and trademarks and are amortized over
their estimated useful lives ranging from five to ten years.





Other
assets





Other
assets consist of deposits made to purchase equipment and a long-term
prepaid expense. The Company will transfer the deposits made to purchase
equipment from other assets to property, plant and equipment upon taking
ownership. The Company amortizes its long-term prepaid expense according to the
service period.





Impairment of long-lived
assets





Long-lived
assets, including intangible assets, of the Company are reviewed annually as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.





Deferred
income





Deferred
income consists of government grants. On August 2, 2005 and November 20, 2006,
the Company received two government grants related to the purchase of land use
rights in the amount of RMB 35,803,461 (or US $5,237,330). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or US $6,000,707) for the zoning changes to
one parcel of land on which the land use rights were changed from “industrial”
to “educational”. On September 12, 2008, the Company received RMB 41,022,061 (or
US $6,000,707) from a government grant. The grants are treated as deferred
income and will be amortized over the life of the buildings on the
land.





Noncontrollinginterest





Noncontrolling
interest represents the outside shareholder’s 20% ownership of Biological and 4%
ownership of Tiens Yihai Co. Ltd. (“Tiens Yihai”) . Effective as of November 15,
2009, the Company transferred its interest in Tiens Yihai to Tianshi
International Investment Group Co., Ltd. (“Tianshi Investment”),
a  company 100% owned by Jinyuan Li.





Revenue
recognition





The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products is recognized at
delivery point. Revenue from finished products is recognized only when the
related party Chinese distributors recognized sales of the Company's products to
unaffiliated third parties. Revenues in both cases are net of value
added taxes.


10





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





The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. Revenue is recorded net of an allowance for estimated returns. Such
reserves are based upon management's evaluation of historical experience and
estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns of
products during the past three years, and management does not anticipate
allowing any returns in 2010 related to previous revenues, no allowance for
estimated returns has been recorded as of March 31, 2010 and December 31,
2009.





Advertisingcosts





The
Company sells its products to related parties, and these related parties are
primarily responsible for marketing. The Company did not incur any advertising
costs for the three months ended March 31, 2010 and 2009.





Shipping andhandling





Shipping
and handling costs totaled $209,005 and $140,702 for the three months ended
March 31, 2010 and 2009, respectively. The Company sells products on FOB
condition, however, it usually prepays shipping and handling expenses to
transportation companies on behalf of customers and collects these shipping and
handling expenses when it receives payments from customers. The payments
received from customers are included in revenue and the related shipping and
handling costs are included in selling, general and administrative
expenses.





Research anddevelopment





Research
and development expenses include salaries, supplies, and overhead such as
depreciation, utilities and other costs. These costs are expensed as incurred.
The Company expensed research and development costs of $298,133 and $379,460 for
the three months ended March 31, 2010 and 2009, respectively. These costs are
included in selling, general and administrative expenses in the accompanying
statements.





Income
taxes





The
Company accounts for income taxes under the liability method. Deferred
income taxes are recognized for the estimated tax consequences in future years,
as differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized when, in management’s
opinion, it is more likely than not that some portion of the deferred tax assets
will not be realized. The provision for income taxes represents current taxes
payable net of the change during the period in deferred tax assets and
liabilities.


11





The
Company has not been subjected to income tax examinations by taxing authorities
for the three months ended March 31, 2010 and the year ended December 31, 2009.
The Company is subject to tax examination in the PRC for all years, as tax
returns remain open to examination until notified by the taxing authorities, and
the Company has not received any notifications to date. The company records
interest and penalties as other expense on the consolidated income and other
comprehensive income statements.  During the three months ended March
31, 2010 and the year ended December 31, 2009, the Company did not recognize any
amount in interest and penalties.





Earnings per
share





Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing net
income (loss) attributable to common stockholders by the weighted average number
of common shares outstanding for the period. There are no differences between
Basic and Diluted EPS for the three months ended March 31, 2010 and
2009.





Recently issued accounting
pronouncements





In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and 2 fair value measurements and
describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010,
except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The guidance adopted on January 1,
2010 did not have an effect on the Company’s consolidated financial statements.
Adoption of the remaining guidance is not expected to have a material impact on
the Company’s consolidated financial statements.





Note
3 – Supplemental disclosure of cash flow information





On
February 10, 2010, Tianshi Holdings, Fuhong Development Co., Ltd. (“Fuhong
Development”), and Tianshi Investment entered into an agreement, pursuant to
which liabilities in the form of a loan receivable due to Fuhong Development
from the Company in the amount of $3,000,000 were offset against assets in the
form of a loan receivable due to the Company from Tianshi
Investment.  Each of Fuhong Development and Tianshi Investment is 100%
owned by Jinyuan Li.





The right
to offset existed because:





1.
            Tianshi
      Investment had a determinable outstanding debt payable to the
      Company;


2.
            The
      Company had a determinable outstanding debt payable to Fuhong
      Development;


3.
            The
      Company had the right to offset the two
amounts;


4.
            The
      Company, Fuhong Development and Tianshi Investment agreed to offset the
      two amounts; and


5.
            The
      agreement to offset is enforceable under Chinese contract
    law.


12


Note
4 – Inventories





Inventories
consisted of the following at March 31, 2010 and December 31, 2009:




March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Raw
      materials
                  
                  $
                  1,411,012
                  
                  
                  $
                  1,937,306Packaging
      material
                  
                  
                  679,890
                  
                  
                  
                  729,517Miscellaneous
      supplies
                  
                  
                  1,011,723
                  
                  
                  
                  848,720Work
      in process
                  
                  
                  273,441
                  
                  
                  
                  476,529Finished
      goods
                  
                  
                  1,648,265
                  
                  
                  
                  1,335,980Total
                  
                  $
                  5,024,331
                  
                  
                  $
                  5,328,052





The
Company has not written off any obsolete goods for the three months ended March
31, 2010 and 2009.




Note
5 – Prepaid expenses





Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses, net of the allowance as disclosed in Note 2,
at March 31, 2010 and December 31, 2009 are as follows:





March 31,
                
                
                December 31,2010
                
                
                2009Advance
      to suppliers
                
                $
                592,263
                
                
                $
                655,443Short-term
      prepaid expenses
                
                
                2,000
                
                
                
                2,750Total
                
                $
                594,263
                
                
                $
                658,193





Note
6 – Property, plant and equipment, net





Property,
plant and equipment consist of the following at March 31, 2010 and December 31,
2009:





March 31,
                
                
                December 31,2010
                
                
                2009Buildings
      and improvements
                
                $
                1,559,147
                
                
                $
                1,558,934Office
      equipment
                
                
                355,408
                
                
                
                348,284Computer
      equipment and software
                
                
                2,408,127
                
                
                
                2,405,467Machinery
      and equipment
                
                
                14,309,135
                
                
                
                14,211,726Automobiles
                
                
                4,449,974
                
                
                
                4,470,909Total
                
                
                23,081,791
                
                
                
                22,995,320Less:
      accumulated depreciation
                
                
                (13,270,676
                )
                
                
                (12,870,837
                )Property,
      plant and equipment, net
                
                $
                9,811,115
                
                
                $
                10,124,483





Depreciation
expense for the three months ended March 31, 2010 and 2009 amounted to $417,469
and $544,811, respectively.


13


Note
7 - Intangible assets




Intangible
assets consist of the following at March 31, 2010 and December 31,
2009:





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009Land
      use rights
                    
                    $
                    13,533,305
                    
                    
                    $
                    13,531,454Other
      intangible assets
                    
                    
                    344,321
                    
                    
                    
                    344,274Less
      accumulated amortization
                    
                    
                    (1,087,814
                    )
                    
                    
                    (1,011,433
                    )Intangible
      assets, net
                    
                    $
                    12,789,812
                    
                    
                    $
                    12,864,295





Amortization
expense for the three months ended March 31, 2010 and 2009 amounted to
$76,243 and $97,143, respectively.




The
estimated amortization expense for the next five years is as
follows:





Estimated amortization expense fortheyearendingDecember31,
                    
                    Amount2010
                    
                    $
                    304,9272011
                    
                    $
                    298,4162012
                    
                    $
                    298,4162013
                    
                    $
                    287,3222014
                    
                    $
                    286,6892015
      and thereafter
                    
                    $
                    11,388,525





Note
8 – Related party transactions and balances





The
Company mainly conducts related party transactions with Tianshi Group, Tianshi
Engineering, Tianshi Investment, Fuhong Development, Tianjin Tianshi
Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”) and overseas related
companies of Tianshi Group. Tianshi Group is owned 90% by Jinyuan Li and 10% by
his daughter, Baolan Li. Tianshi Engineering is owned 51% by Tianshi Group and
49% by Baolan Li. Tianshi Pharmaceuticals is wholly owned by Tianshi Group.
Tianshi Investment and Fuhong Development are each 100% owned by Jinyuan
Li. Jinyuan Li owns or controls the overseas related companies of Tianshi
Group.




The
Company’s related party transactions are required to be reviewed and approved or
ratified by the Board of Directors. No director that is a related person in a
related party transaction may participate in any discussion, approval or
ratification of the related party transaction except to provide information
concerning it. The following tables are provided to facilitate an understanding
of the transactions and outstanding balances between those related
parties.




Three months ended March 31,2010
                      
                      
                      2009Revenue-related
      parties
                      
                      $
                      11,403,363
                      
                      
                      $
                      18,237,545




14




March31,2010
                  
                  
                  December31,2009Accounts
      receivable, trade – related parties,net
      of allowance for doubtful accounts of$1,621,619
      and $1,419,178 as of March 31,2010
      and December 31, 2009, respectively
                  
                  $
                  10,245,625
                  
                  
                  $
                  15,379,312Other
      receivables – related parties
                  
                  $
                  39,458,619
                  
                  
                  $
                  44,561,626Advances
      from customers – related parties
                  
                  $
                  8,461,804
                  
                  
                  $
                  4,426,751Other
      payables – related parties
                  
                  $
                  4,405,557
                  
                  
                  $
                  3,326,110




Revenue -related
parties




The
details of revenue-related parties are as follows:




Three months ended March 31,2010
                          
                          
                          2009Tianshi
      Engineering
                          
                          $
                          6,783,273
                          
                          
                          $
                          2,742,620Overseas
      Related Companies
                          
                          
                          4,620,090
                          
                          
                          
                          15,494,925Total
                          
                          $
                          11,403,363
                          
                          
                          $
                          18,237,545




The
Company markets its products through various domestic and international business
entities that are related to the Company through common ownership.




In China,
the Company sells products to Tianshi Engineering, a related party through
common ownership. Tianshi Engineering, in turn, markets and sells the products
to customers through its branches and affiliated companies and at chain stores
owned by individual distributors. Tianshi Engineering is solely responsible for
all marketing and payments of sales commissions to independent
distributors.




Internationally,
the Company sells its products directly to overseas affiliates. These overseas
related companies re-packagethe Company’s products
and then sell to overseas independent distributors or end users of the products.
Due to the common ownership, there are no formal sales or administrative
agreements among Biological and those overseas related companies. The business
operations among these related entities are regulated through internal
ordinances.




Accounts receivable, trade -
related parties




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





March31,2010
                
                
                December31,2009Tianshi
      Engineering
                
                $
                -
                
                
                $
                5,035,320Overseas
      Related Companies
                
                
                11,867,244
                
                
                
                11,763,170Allowance
      for Doubtful Accounts
                
                
                (1,621,619
                )
                
                
                (1,419,178
                )Total
                
                $
                10,245,625
                
                
                $
                15,379,312




Other receivables - related
parties





Other
receivables - related parties are generated by the Company making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following table
summarizes the other receivables - related parties balances:


15




March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Tianshi
      Investment
                  
                  $
                  33,300,000
                  
                  
                  $
                  37,000,000Tianshi
      Engineering
                  
                  
                  5,841,491
                  
                  
                  
                  5,688,926Tianshi
      Group
                  
                  
                  -
                  
                  
                  
                  1,613,168Sego
      Property Service (Tianjin) Co., Ltd.
                  
                  
                  114,085
                  
                  
                  
                  77,612Tiens
      SmartFlow Logistics (International) Group Ltd.
                  
                  
                  57,104
                  
                  
                  
                  74,651Tianjin
      Tianshi Life Science Co., Ltd.
                  
                  
                  94,429
                  
                  
                  
                  55,878Tianshi
      Yinshi Hotel
                  
                  
                  36,570
                  
                  
                  
                  36,566Tianshi
      Indonesia Logistic & Trade Co., Ltd.
                  
                  
                  9,872
                  
                  
                  
                  9,873Sego
      Hotel Management Co., Ltd.
                  
                  
                  2,731
                  
                  
                  
                  2,730Others
                  
                  
                  2,337
                  
                  
                  
                  2,222Total
                  
                  $
                  39,458,619
                  
                  
                  $
                  44,561,626




Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China. On April 21, 2009, the
Company entered into a loan agreement with Tianshi Engineering. Pursuant to that
agreement, effective as of April 1, 2009, $2,562,017 of other
receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. During the
first quarter of 2010, the company did not convert any accounts
receivables-related parties to other receivables-related parties.





The
Company and Tianshi Group use common meters at the Company’s headquarters for
electricity and water, and also used the same employee insurance account. When
making payments to these outside parties, the Company usually pays the fees
first and then is reimbursed by Tianshi Group. These pro-rated amounts relating
to Tianshi Group are categorized as other receivables - related
parties.




On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,797,984). As
of March 31, 2010, the amount was paid in full by Tianshi Group.





On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million. As of March 31, 2010, $3,700,000 of the purchase price was
paid.


16




Advances from
customers -
related parties




These
advances represent prepayments made to the Company to insure that related party
customers could obtain enough of the Company’s products to meet their market
demands. As of March 31, 2010 and December 31, 2009, advances from related party
customers amounted to $8.5 million and $4.4 million, respectively.




Other
payables - related parties




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





March31,2010
                    
                    
                    December31,2009Fuhong
      Development Co. Ltd.
                    
                    $
                    3,000,000
                    
                    
                    $
                    3,000,000Tianshi
      Group
                    
                    
                    1,035,972
                    
                    
                    
                    -Tianshi
      Germany Co., Ltd.
                    
                    
                    101,396
                    
                    
                    
                    107,326Tianjin
      Tianshi Global International Trade Co., Ltd.
                    
                    
                    93,619
                    
                    
                    
                    93,606Tianyuan
      Capital Development Co. Ltd.
                    
                    
                    84,359
                    
                    
                    
                    84,359Tianshi
      Engineering
                    
                    
                    90,197
                    
                    
                    
                    40,805Tianshi
      Administrative Committee of Industrial Park
                    
                    
                    14
                    
                    
                    
                    14Total
                    
                    $
                    4,405,557
                    
                    
                    $
                    3,326,110





These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.





On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009 on December
31, 2008. On June 30, 2009, the loan was paid in full by the
Company.





On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
to fund its capital contribution to Life Resources. On February 10, 2010, the
loan was paid in full by cancelling the same amount Tianshi Investment owed
to the Company. On March 3, 2010, Tianshi Holdings borrowed another $3,000,000
from Fuhong Development to fund its capital contribution to Life
Resources.





Other Transactions with
Tianshi Engineering





On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that enable Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment to manufacture products which
Tianshi Engineering owns, or jointly owns, with Biological.  Each of
the four agreements was effective as of January 1, 2008 and expired on
December 31, 2009. On December 31, 2007, Biological entered into two
supplemental agreements, which added fourteen pieces of personal care products
production equipment to, and removed two health products production workshops
from, two of the lease agreements Biological entered into on October 31,
2007.




On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group (as further described under note 7), pursuant to which Biological
transferred to Tianshi Group four buildings which were covered by the above
mentioned lease agreements. Accordingly, the two lease agreements which covered
production workshops expired at the end of 2008.




17




On
November 20, 2009, the lease agreement for health products
production equipment and the lease agreement for personal care product
production equipment were renewed by Biological and Tianshi Engineering for
2010.




Rent
revenue accrued from these leases amounted to $51,854 and $54,856 for the three
months ended March 31, 2010 and 2009, respectively.





Other Transactions with
Tianshi Group





On
January 1, 2009, Biological entered an office and facilities lease agreement
with Tianshi Group. Under the terms of the agreement, Biological’s annual rent
is equal to 1% of its gross revenues. In addition, Biological is obligated to
pay insurance, maintenance and other expenses related to the premises. This
agreement expired on December 31, 2009, and was renewed by Biological and
Tianshi Group, effective as of January 1, 2010, for 2010. On January 1, 2010,
Life Resources entered an office and facilities lease agreement with Tianshi
Group on the same terms as Biological’s lease agreement with Tianshi Group. Rent
expense totaled $159,226 and $160,988 for the three months ended March 31, 2010
and 2009, respectively.





On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the three months ended March
31, 2010 and 2009,  Biological and Life Resources recorded $81,749 and
$81,638 of the rent expense, which is not paid to Tianshi Group, but recorded as
paid in capital based upon market price.




Transactions with
TianyuanCapital





On
September 10, 2004, Tianshi Holdings entered a loan agreement with Tianyuan
Capital to borrow $10.65 million to fund Tianshi Holdings' contribution due to
Tiens Yihai. Jinyuan Li owns 100% of Tianyuan Capital.





The
principal of the loan is being paid in consecutive semi-annual installments of
$1,065,000 on the last day of June and December, commencing June 2006. Interest
of $186,543 was paid for the year ended December 31, 2009, and the loan was
pre-paid in full on December 31, 2009.




Transactions
withTianshi
Pharmaceuticals





On
December 15, 2009, the Company entered into a one-year lease agreement with
Tianshi Pharmaceuticals. Under the terms of the lease agreement, the Company
leased equipment for the fee of RMB 25,383 (or US $3,713) per month.
In addition, the Company is obligated to pay insurance, maintenance and other
expenses related  on the equipments. This agreement is effective from
January 1, 2010 and expires on December 31, 2010. The company had paid $11,139
of the rent expense for the first quarter of 2010.


18





Note
9 – Additional product sales information





The
Company has a single operating segment. All of the Company's revenues were
generated from related parties. Summarized enterprise-wide financial information
concerning the Company’s revenues based on product groups is shown in the
following table:





Revenue
by Product Group:





Three months ended March 31,2010
                                      
                                      
                                      2009Wellness
      products
                                      $
                                      10,165,740
                                      
                                      
                                      $
                                      17,163,712Dietary
      supplement products
                                      
                                      1,237,623
                                      
                                      
                                      
                                      1,073,833Total
                                      $
                                      11,403,363
                                      
                                      
                                      $
                                      18,237,545





Note
10 - Income taxes




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





The
Company's subsidiaries, Biological and Life Resources, were incorporated in
the PRC. According to US GAAP, the following are the income tax credits granted
by the Chinese government, which are significant components of income taxes
associated with continuing operations required to be disclosed.





Beginning
January 1, 2008, Enterprise Income Tax (“EIT”) laws became effective.
According to the EIT, the standard tax rate is 25% and high-tech companies could
be subject to a special reduced tax rate of 15%. The qualification of a
high-tech company is to be reviewed annually. In the fiscal year 2008 and 2009,
Biological was qualified as a high-tech company . However, Biological was
required by the local tax authority to prepay income tax at a tax rate of 25%
every year, although the prepaid income tax could be refunded in the next
year. On December 17, 2009, the prepaid income tax $1,562,168 for 2008 was
fully refunded.





According
to the EIT, Life Resources could be fully exempt from PRC income taxes for two
years starting from January 1, 2008, followed by a 12.5% reduced tax rate for
the next three years. However, before the tax exemption qualification of Life
Resources was approved by the tax authority, Life Resources was required by
local tax authority to prepay income tax at a tax rate of 25%. On October 10,
2008, the approval was issued and the prepaid income tax $685,475 in Life
Resources was refunded in 2009.




Provisions
for income taxes were all current income tax expenses and for the three months
ended March 31, 2010 and 2009 were $609,502 and $359,615,
respectively.





The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:




19




Three months ended March 31,2010
                              
                              
                              2009Biological
                              
                              
                              Life
      Resources
                              
                              
                              Biological
                              
                              
                              Life
      ResourcesU.S.
      Statutory rate
                              
                              
                              34.0
                              %
                              
                              
                              34.0
                              %
                              
                              
                              34.0
                              %
                              
                              
                              34.0
                              %Foreign
      income not recognized in USA
                              
                              
                              (34.0
                              )
                              
                              
                              (34.0
                              )
                              
                              
                              (34.0
                              )
                              
                              
                              (34.0
                              )China
      income taxes
                              
                              
                              25.0
                              
                              
                              
                              25.0
                              
                              
                              
                              25.0
                              
                              
                              
                              25.0Effect
      of reduced tax rate
                              
                              
                              (10.0
                              )
                              
                              
                              (12.5
                              )
                              
                              
                              (10.0
                              )
                              
                              
                              (25.0
                              )Total
      provision for income taxes
                              
                              
                              15.0
                              %
                              
                              
                              12.5
                              %
                              
                              
                              15.0
                              %
                              
                              
                              0.0
                              %





The
estimated tax savings due to the reduced tax rate for the three months ended
March 31, 2010 and 2009 amounted to $508,897 and $1,324,958, respectively.
The net effect on earnings per share if the income tax had been applied would
decrease earnings per share for the three months ended March 31, 2010 and 2009
by $0.01and $0.02, respectively.




Note11–Retirement plan





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




The
Company 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
salary to the plan. Total pension expense incurred by the Company amounted to
$261,632 and $220,913 for the three months ended March 31, 2010 and 2009,
respectively.




The
Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of his or her salary to the plan. The
Company matches the contributions in an amount equal to two times the
contribution of each participant. The Company made contributions to the
unemployment insurance plan of $25,308 and $22,421 for the three months ended
March 31, 2010 and 2009, respectively. All contributions are paid to a PRC
insurance company, which in turn, is responsible for the unemployment liability.
Pursuant to the Company’s medical insurance plan for its employees, the Company
is required to pay an amount equal to 10% of its employees' salary to a PRC
insurance company, which amounted to $131,667 and $113,430 for the
three months ended March 31, 2010 and 2009, respectively.


20


ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




In this
Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United
States Dollars and references to “renminbi” or “RMB” are to the People’s
Republic of China Renminbi. References to “we”, “us”, “our”, the “Company” or
“Tiens” include Tiens Biotech Group (USA), Inc. and its subsidiaries, except
where the context requires otherwise.




FORWARD-LOOKING
STATEMENTS





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; (d) whether we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-Q with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date.





Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.




The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.




OVERVIEW




Tiens
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations are
conducted from our headquarters in Tianjin, People’s Republic of China (“China”
or the “PRC”) through our 80% owned subsidiary, Tianjin Tianshi Biological
Development Co. Ltd. (“Biological”) and our wholly-owned subsidiary, Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). We sell our products to
affiliated companies in China and internationally.Tiens is a Delaware
corporation. We own 100% of Tianshi International Holdings Group Ltd., a British
Virgin Islands company (“Tianshi Holdings”). Tianshi Holdings owns 80% of
Biological and 100% of Life Resources.




Tianjin
Tianshi Biological Engineering Co. Ltd. (“Tianshi Engineering”), a Chinese
company and the entity to which we sell all of our products for consumption in
China, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned
by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”). Tianshi Group is 90% owned
by Jinyuan Li, our Chairman, President and CEO, and 10% owned by Baolan Li,
Jinyuan Li’s daughter.




Life
Resources is currently constructing research and development, manufacturing and
logistic facilities, as well as administrative offices in Tianjin, China
totaling approximately 420,000 square meters. We intend to move our headquarters
to these new facilities once they are completed.


21


RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2009





Three months ended March 31,2010
                                                                
                                                                
                                                                2009(Unaudited)
                                                                
                                                                
                                                                (Unaudited)
                                                                
                                                                
                                                                ChangeREVENUE
      - RELATED PARTIES
                                                                
                                                                $
                                                                11,403,363
                                                                
                                                                
                                                                $
                                                                18,237,545
                                                                
                                                                
                                                                
                                                                -37.5
                                                                %COST
      OF SALES
                                                                
                                                                
                                                                3,440,881
                                                                
                                                                
                                                                
                                                                5,735,059
                                                                
                                                                
                                                                
                                                                -40.0
                                                                %GROSS
      PROFIT
                                                                
                                                                
                                                                7,962,482
                                                                
                                                                
                                                                
                                                                12,502,486
                                                                
                                                                
                                                                
                                                                -36.3
                                                                %SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                                                                
                                                                
                                                                3,497,547
                                                                
                                                                
                                                                
                                                                3,130,936
                                                                
                                                                
                                                                
                                                                11.7
                                                                %INCOME
      FROM OPERATIONS
                                                                
                                                                
                                                                4,464,935
                                                                
                                                                
                                                                
                                                                9,371,550
                                                                
                                                                
                                                                
                                                                -52.4
                                                                %(Interest
      expense)
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (52,616
                                                                )
                                                                
                                                                
                                                                -100.0
                                                                %Interest
      income
                                                                
                                                                
                                                                1,872
                                                                
                                                                
                                                                
                                                                85,768
                                                                
                                                                
                                                                
                                                                -97.8
                                                                %Other
      (expense) income
                                                                
                                                                
                                                                (253,710
                                                                )
                                                                
                                                                
                                                                (45,288
                                                                )
                                                                
                                                                
                                                                460.2
                                                                %OTHER
      (EXPENSE) INCOME, NET
                                                                
                                                                
                                                                (251,838
                                                                )
                                                                
                                                                
                                                                (12,136
                                                                )
                                                                
                                                                
                                                                1975.1
                                                                %INCOME
      BEFORE PROVISION FOR INCOME TAXES
                                                                
                                                                
                                                                4,213,097
                                                                
                                                                
                                                                
                                                                9,359,414
                                                                
                                                                
                                                                
                                                                -55.0
                                                                %PROVISION
      FOR INCOME TAXES
                                                                
                                                                
                                                                609,502
                                                                
                                                                
                                                                
                                                                359,615
                                                                
                                                                
                                                                
                                                                69.5
                                                                %NET
      INCOME
                                                                
                                                                
                                                                3,603,595
                                                                
                                                                
                                                                
                                                                8,999,799
                                                                
                                                                
                                                                
                                                                -60.0
                                                                %LESS:
      Net income attributable to the noncontrolling interest
                                                                
                                                                
                                                                342,057
                                                                
                                                                
                                                                
                                                                406,974
                                                                
                                                                
                                                                
                                                                -16.0
                                                                %NET
      INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
                                                                
                                                                $
                                                                3,261,538
                                                                
                                                                
                                                                $
                                                                8,592,825
                                                                
                                                                
                                                                
                                                                -62.0
                                                                %WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                                                                
                                                                
                                                                71,333,586
                                                                
                                                                
                                                                
                                                                71,333,586EARNINGS
      PER SHARE, BASIC AND DILUTED
                                                                
                                                                $
                                                                0.05
                                                                
                                                                
                                                                $
                                                                0.12





Revenue. For the
first quarter of 2010, revenue was $11.4 million, a decrease of 37.5% compared
to $18.2 million for the same period in 2009.




Revenue
in China was $6.8 million for the first quarter of 2010, an increase
of 147.3% compared to $2.7 million for the same period in 2009. Revenue in
China for the first quarter of 2009 was lower than any other quarter
in 2009. We believe that Tianshi Engineering’s announcement of plans to
increase the price of its products during the third quarter of 2008 caused
consumers to stock up on certain products in late 2008, thereby decreasing
customer demand in the first quarter of 2009. Our 2010 first quarter sales in
China was, however, comparable to the 2009 average quarterly sales in China of
$6.8 million.




For the
first quarter of 2010, international revenue was $4.6 million, a decrease of
70.2% compared to $15.5 million for the same period in 2009. Management
believes that uneven bulk ordering magnified the decrease significantly since
2009 international quarterly average revenue was only $8.7 million, as some
international distributors purchase products only once or twice during each
year. The decrease in international revenue is also due to our declined sales to
Indonesia and Vietnam. In the first two quarters of 2009 customers in Indonesia
and Vietnam stocked up on our products significantly, which depressed subsequent
sales in the later half of 2009 and continued through the first quarter of
2010. Another factor that contributed to the sales decline in these
regions is the recent adjustment by our international distributors of
the direct selling rules for customers in these regions, which is expected to
boost sales performance over the long-run but negatively affect sales in the
short-run. Additionally, during 2008, China’s Administration of Quality
Supervision, Inspection and Quarantine (“AQSIQ”) carried out a national campaign
against unsafe food and substandard products, which brought on a general
slow-down and backlog of export clearances for Chinese food products. Upon
the lifting of the regulations, overseas affiliated companies began to purchase
more products, thereby increasing sales in the first quarter of
2009.


22





Cost of Sales. Cost
of sales for the first quarter of 2010 decreased to $3.4 million, a
decrease of 40.0% compared to $5.7 million for the same period in 2009. This
decrease was mainly due to the decrease in sales for the period. However,
the decrease in cost of sales was at a higher rate than the decrease in
revenues. This is mainly attributable to the increased sales percentage of
certain products, such as Cordyceps Capsules, which have a higher
profit margin.




Gross Profit. Gross
profit for the first quarter of 2010 was $8.0 million, a decrease of 36.3%
compared to $12.5 million for the same period in 2009. This decrease reflects
the decrease in sales. The gross profit margin for the first quarter of 2010 was
69.8%, compared to 68.6% for the same period in 2009.




Selling, general and
administrative expenses. Selling, general and administrative expenses
were $3.5 million for the first quarter of 2010, an increase of 11.7%
compared to $3.1 million for the same period in 2009. The increase was
primarily due to increases in bad debts. The selling and administrative expenses
as a percentage of sales was 30.7% for the first quarter of 2010, compared to
17.2% for the same period in 2009. This is primarily due to fixed costs which do
not change as a result of the decrease in sales.




Other income (expense),
net. Other expense was $0.3 million for the first quarter of 2010,
compared to $0.01 million of expense for the same period in 2009. The difference
was mainly due to increase in loss based on currency translation differences
between the two periods.





Provision for income
taxes. Provision for income taxes was $0.6 million for the first
quarter of 2010 compared to $0.4 million for the same period in 2009. The main
reason was that Life Resources began applying the reduced income tax rate of
12.5% from January 1, 2010, while it was exempt from income tax in the
first quarter of 2009.




Net income. As a
result of the foregoing factors, net income for the first quarter of 2010 was
$3.6 million, a decrease of 60.0% compared to $9.0 million for the same period
in 2009.




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 $13.0 million for the three months
ended March 31, 2010, compared to net cash provided by operating activities of
$5.9 million for the same period of 2009. This increase was primarily due to the
collection of accounts receivable from Tianshi Engineering.





As of
March 31, 2010, we had positive working capital of $27.7 million. Cash was $9.9
million as of March 31, 2010, compared to $1.8 million as of December 31,
2009.





Net cash
used in investing activities decreased by $1.6 million for the three months
ended March 31, 2010 compared to the same period of 2009. During the first
three months of 2010, we paid $9.1 million to contractors for construction in
progress, compared to $4.5 million for the same period in 2009. In addition, we
used $1.6 million in connection with purchasing large machinery and equipment
for the first quarter of 2010.




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.


23




We
believe that the cash flow would be sufficient for the next nine to twelve
months. Thereafter, financing may be needed to fund research and
development efforts and operations, but management is unable at this
time to determine what level of financing would be needed or desirable
then.





Critical
Accounting Policies




Management’s
discussion and analysis of its financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.




Revenue
recognition.




We sell
both semi-finished products and finished products to Tianshi Engineering
domestically. Revenue from the sale of semi-finished products is recognized
at FOB delivery point, when the semi-finished products are sold to Tianshi
Engineering. Revenue from the sale of finished products is recognized only when
the related party Chinese distributor recognizes sales of our products to
unaffiliated third parties. Revenues in both cases are net of value added
taxes.





For
overseas sales, we sell mostly finished products. We recognize revenue from
international sales (outside of China) to affiliated parties, net of value added
taxes, as goods are shipped and clear review by the customs department of the
Chinese government.




We are
generally not contractually obligated to accept returns. However, on a case by
case negotiated basis, we permit customers to return products. Revenue is
recorded net of an allowance for estimated returns. Such reserves are based upon
management’s evaluation of historical experience and estimated costs. The amount
of the reserves ultimately required could differ materially in the near term
from amounts included in the accompanying consolidated financial
statements. As we did not receive any returns of products during the past
three years, and management does not anticipate allowing any returns in 2010
related to previous revenues, no allowance for estimated returns has been
recorded as of March 31, 2010.




Bad
debts.





Our trade
accounts receivables are mainly due from related companies. We have made full
provision for accounts receivable-related parties aging over one year and a
general allowance for doubtful debts of 0.5% of the remaining accounts
receivable-related parties. Management reviews its accounts receivable on a
regular basis to determine if the bad debt allowance is adequate at each
year-end, paying particular attention to the age of
receivables outstanding.




Inventories.




Inventories
are stated at the lower of cost or market, using the moving average basis. We
review our inventory annually for possible obsolete goods or to determine if any
reserves are necessary for potential obsolescence.




Recent
Accounting Pronouncements





In
January 2010, the FASB issued new guidance for fair value measurements and
disclosures which requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and 2 fair value measurements and
describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and
settlements in the reconciliation for fair value measurements using significant
unobservable inputs (Level 3). The guidance was effective on January 1, 2010,
except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The guidance adopted on January 1,
2010 did not have an effect on our consolidated financial statements.
Adoption of the remaining guidance is not expected to have a material impact
on our consolidated financial statements.


24





CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS




We market
most our products through various domestic and international business entities
that are related to us through common ownership. As a result, most of our
consolidated sales are to related parties.





In China,
we sell our products to Tianshi Engineering, an affiliated company. Tianshi
Engineering, in turn, markets and sells the products to customers through
its branches and affiliated companies and at chain stores owned by individual
distributors.





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





Internationally,
we sell our products directly to overseas affiliates located in 54
countries, who in turn re-package the products to meet the needs of the local
markets and sell to independent distributors or end users of our
products. Our CEO, Jinyuan Li, owns or controls these overseas related
companies. Due to the common ownership, there are no formal sales or
administrative agreements among us and those overseas related parties. The
business operations among these related entities are regulated through internal
policies.





Our
related party transactions are required to be reviewed and approved or ratified
by a majority of our non-interested Board of Directors. The following tables are
provided to facilitate your understanding of the transactions and outstanding
balances between those related parties and our company.





March 31, 2010
                      
                      
                      December 31, 2009Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of $1,621,619 and $1,419,178 as of March 31, 2010 and December
      31, 2009, respectively
                      
                      $
                      10,245,625
                      
                      
                      $
                      15,379,312Other
      receivables – related parties
                      
                      $
                      39,458,619
                      
                      
                      $
                      44,561,626Advances
      from customers – related parties
                      
                      $
                      8,461,804
                      
                      
                      $
                      4,426,751Other
      payables – related parties
                      
                      $
                      4,405,557
                      
                      
                      $
                      3,326,110





Revenue
- Related Parties





The
details of revenue-related parties are as follows:





Three months ended March 31,2010
                            
                            
                            2009Tianshi
      Engineering
                            
                            $
                            6,783,273
                            
                            
                            $
                            2,742,620Overseas
      Related Companies
                            
                            
                            4,620,090
                            
                            
                            
                            15,494,925Total
                            
                            $
                            11,403,363
                            
                            
                            $
                            18,237,545




25





Accounts
Receivable, Trade - Related Parties





The
details of accounts receivable, trade – related parties are as
follows:





March 31, 2010
                  
                  
                  December 31, 2009Tianshi
      Engineering
                  
                  $
                  -
                  
                  
                  $
                  5,035,320Overseas
      Related Companies
                  
                  
                  11,867,244
                  
                  
                  
                  11,763,170Allowance
      for Doubtful Accounts
                  
                  
                  (1,621,619
                  )
                  
                  
                  (1,419,178
                  )Total
                  
                  $
                  10,245,625
                  
                  
                  $
                  15,379,312




Other
Receivables - Related Parties





Other
receivables - related parties are generated by our making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The details of other
receivables-related parties are as follows:





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Tianshi
      Investment
                  
                  $
                  33,300,000
                  
                  
                  $
                  37,000,000Tianshi
      Engineering
                  
                  
                  5,841,491
                  
                  
                  
                  5,688,926Tianshi
      Group
                  
                  
                  -
                  
                  
                  
                  1,613,168Sego
      Property Service (Tianjin) Co., Ltd.
                  
                  
                  114,085
                  
                  
                  
                  77,612Tiens
      SmartFlow Logistics (International) Group Ltd.
                  
                  
                  57,104
                  
                  
                  
                  74,651Tianjin
      Tianshi Life Science Co., Ltd.
                  
                  
                  94,429
                  
                  
                  
                  55,878Tianshi
      Yinshi Hotel
                  
                  
                  36,570
                  
                  
                  
                  36,566Tianshi
      Indonesia Logistic & Trade Co., Ltd.
                  
                  
                  9,872
                  
                  
                  
                  9,873Sego
      Hotel Management Co., Ltd.
                  
                  
                  2,731
                  
                  
                  
                  2,730Others
                  
                  
                  2,337
                  
                  
                  
                  2,222Total
                  
                  $
                  39,458,619
                  
                  
                  $
                  44,561,626





Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, to support Tianshi Engineering’s marketing efforts in anticipation of
receiving a direct selling license in China, we agreed to allow Tianshi
Engineering to defer payment. The credit terms provide an interest-free credit
term of three months. Any amounts exceeding this term are transferred from
accounts receivable - related parties to other receivable - related
parties.  Beginning January 1, 2007, the other receivables - related
parties became interest bearing once a loan contract is adopted.  The
interest rate is the interest rate, on the date the loan commences, that is
stipulated by the People’s Bank of China for a loan of the same
level.




On April
21, 2009, our company entered into a loan agreement with Tianshi Engineering.
Pursuant to that agreement, effective as of April 1, 2009, $2,562,017 of
other receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. During the
first quarter of 2010, we did not convert any accounts receivables-related
parties to other receivables-related parties.





Our
company and Tianshi Group use common meters at our headquarters for electricity
and water, and also used the same employee insurance account. When making
payments to these outside parties, we usually pay the fees first and then is
reimbursed by Tianshi Group. These pro-rated amounts relating to Tianshi Group
are categorized as other receivables - related parties.




On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,797,984). As
of March 31, 2010, the amount was paid in full by Tianshi Group.




26




On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered into a
Transfer Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million. Tiens Yihai holds land use rights for 50 acres of land located in
Shanghai, China. Tiens Yihai was originally established to build a new research
and development facility, but our company suspended the proposed development in
March 2007. Tianshi Holdings held 96% of the equity interest in Tiens
Yihai.  Tianjin Tianshi Pharmaceuticals Co., Ltd. owned the remaining
4% of Tiens Yihai’s share capital. The first payment of $3,700,000 was
settled during the first quarter of 2010 and another payment of $3,000,000 was
settled on April 9, 2010. The remaining $30,300,000 is payable by November 14,
2010.





Advances
from Customers - Related Parties





Advances
from related party customers were $8.5 million and $4.4 million as of March 31,
2010 and December 31, 2009, respectively. These advances represented
prepayments made to us to insure that customers could obtain enough of our
products to meet their market demands.




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:





March 31, 2010
                  
                  
                  December 31, 2009Fuhong
      Development Co. Ltd.
                  
                  $
                  3,000,000
                  
                  
                  $
                  3,000,000Tianshi
      Group
                  
                  
                  1,035,972
                  
                  
                  
                  -Tianshi
      Germany Co., Ltd.
                  
                  
                  101,396
                  
                  
                  
                  107,326Tianjin
      Tianshi Global International Trade Co., Ltd.
                  
                  
                  93,619
                  
                  
                  
                  93,606Tianyuan
      Capital Development Co. Ltd.
                  
                  
                  84,359
                  
                  
                  
                  84,359Tianshi
      Engineering
                  
                  
                  90,197
                  
                  
                  
                  40,805Tianshi
      Administrative Committee of Industrial Park
                  
                  
                  14
                  
                  
                  
                  14Total
                  
                  $
                  4,405,557
                  
                  
                  $
                  3,326,110





On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009, on December
31, 2008. On June 30, 2009, we paid the loan in full.





On June
5, 2009, Biological, Tianshi Holdings, Tianshi Investment and Tianshi Group
entered into an agreement pursuant to which Biological agreed to pay $3.9
million to Tianshi Group on behalf of Tianshi Investment, Tianshi Investment
agreed to cancel a $3.9 million loan owed by Tianshi Holdings, and Tianshi
Holdings agreed to cancel a $3.9 million dividend owed by
Biological.





On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
to fund its capital contribution to Life Resources. On February 10, 2010, the
loan was paid in full by cancelling the same amount Tianshi Investment owed to
the Company. On March 3, 2010, Tianshi Holdings borrowed another $3,000,000 from
Fuhong Development to fund its capital contribution to Life
Resources.





Other
Transactions with Tianshi Engineering





On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that enable Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns, with
Biological.  Each of the four agreements was effective as of
January 1, 2008 and expired on December 31, 2009. On December 31, 2007,
Biological entered into two supplemental agreements, which added fourteen pieces
of personal care products production equipment to, and removed two health
products production workshops from, two of the lease agreements Biological
entered into on October 31, 2007.





27


On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group (as further described under the caption “—Other Receivables – Related
Party” above), pursuant to which Biological transferred to Tianshi Group four
buildings which were covered by the above mentioned lease agreements.
Accordingly, the two lease agreements which covered production workshops expired
at the end of fiscal 2008.




On
November 20, 2009, the lease agreement for health products
production equipment and the lease agreement for personal care product
production equipment were renewed by Biological and Tianshi Engineering for
2010. Following is a summary of the monthly rent payable to Biological
under the two leases Biological entered into on November 20, 2009:





Lease Agreement
                  
                  Monthly rentLease
      Agreement for Health Products Production Equipment
                  
                  $
                  11,255Lease
      Agreement for Personal Care Product Production Equipment
                  
                  $
                  6,029





Rent
revenue accrued from these leases amounted to $51,854 and $54,856 for the three
months ended March 31, 2010 and 2009, respectively.





Other
Transactions with Tianshi Group





On
January 1, 2009, Biological entered an office and facilities lease
agreement with Tianshi Group. Under the terms of the agreement, Biological’s
annual rent is equal to 1% of its gross revenues. In addition, Biological is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expired on December 31, 2009, and was renewed by
Biological and Tianshi Group, effective as of January 1, 2010, for 2010. On
January 1, 2010, Life Resources entered an office and facilities lease agreement
with Tianshi Group on the same terms as Biological’s lease agreement with
Tianshi Group. Rent expense totaled $159,226 and $160,988 for the three
months ended March 31, 2010 and 2009, respectively.





On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the 2008
Transfer Agreement (as further described under the caption “—Other Receivables –
Related Party” above). The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the three months ended March
31, 2010 and 2009,  Biological and Life Resources recorded $81,749 and
$81,638 of the rent expense, which is not paid to Tianshi Group, but recorded as
paid in capital based upon market price.




Transactions
with Tianyuan Capital




On
September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan
Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan
Capital agreed to lend $10.65 million in the aggregate to Tianshi Holdings, at
an interest rate of 5% per year, with interest payable on June 30 and December
31, commencing December 31, 2004. Pursuant to this agreement, Tianshi Holdings
must repay the loan in ten consecutive semi-annual installments of $1,065,000
commencing June 30, 2006 and ending June 30, 2011. Tianshi Holdings used the
loan proceeds to fund its capital contribution to Tiens Yihai. Mr. Jinyuan Li
owns 100% of Tianyuan Capital. The loan was pre-paid in full by us on December
31, 2009.




Transactions
with Tianshi Pharmaceuticals




On
December 15, 2009, we entered into a one-year lease agreement with Tianshi
Pharmaceuticals. Under the terms of the lease agreement, we leased equipment for
the fee of RMB 25,383 (or US $3,713) per month. In addition, we are obligated to
pay insurance, maintenance and other expenses related  on the
equipments. This agreement is effective from January 1, 2010 and expired on
December 31, 2010. We paid $11,139 of the rent expense for the first quarter of
2010.


28





MANAGEMENT
ASSUMPTIONS




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




OFF-BALANCE
SHEET ARRANGEMENTS




We have
no off-balance sheet arrangements.




ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
applicable.





ITEM 4T. CONTROLS
AND PROCEDURES




Disclosure
Controls and Procedures




Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness, as of the end of the
period covered by this report, of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation,
our principal executive officer and principal financial officer concluded that,
as of such date, the Company’s disclosure controls and procedures were
effective.





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in our Exchange Act reports is recorded, processed, summarized,
and reported, within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.





Changes
in Internal Control Over Financial Reporting




There has
been no change in our internal control over financial reporting during the first
quarter of 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




PART II - OTHER INFORMATION




ITEM 6. EXHIBITS





The
exhibits listed on the Exhibit Index are provided as part of this
report.


29




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Date:
      May 17, 2010/s/ Jinyuan
      LiJinyuan
      LiChief
      Executive Officer and President(Principal
      Executive Officer)Date:
      May 17, 2010/s/Manbo
      HeManbo
      HeChief
      Financial Officer(Principal
      Financial and Accounting Officer)




30


EXHIBIT
INDEX


Exhibit No.
                
                Description10.1
                
                Agreement,
      dated January 1, 2010 by and between Tianjin Tianshi Biological
      Development Co., Ltd. and Tianjin Tianshi Group Co.
Ltd.10.2
                
                Agreement,
      dated January 1, 2010 by and between Tianjin Tiens Life Resources Co.,
      Ltd. and Tianjin Tianshi Group Co. Ltd.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


31