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 September 30, 2010.




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


EXCHANGE
ACT OF 1934




For the
transition period from _____ to_____.




Commission
File Number: 001-32477




TIENS
BIOTECH GROUP (USA), INC.


(Exact
name of registrant as specified in its charter)


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


No. 17,
Xinyuan 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)





No. 6,
Yuanquan Rd.


Wuqing
New Tech Industrial Park


Tianjin, China
301700




(Former
address)





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 November
12, 2010.





TIENS
BIOTECH GROUP (USA), INC.


INDEX
TO FORM 10-Q


PAGEPART
      I - FINANCIAL INFORMATION
                
                3ITEM
      1. FINANCIAL STATEMENTS
                
                3Consolidated
      Balance Sheets as of September 30, 2010 (Unaudited) and December 31,
      2009
                
                3Consolidated
      Statements of Income and Other Comprehensive Income for the Three and Nine
      Months Ended September 30, 2010 and 2009 (Unaudited)
                
                4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
      2009 (Unaudited)
                
                5Notes
      to Consolidated Financial Statements (Unaudited)
                
                6ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                
                24ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                
                32ITEM
      4T. CONTROLS AND PROCEDURES
                
                33PART
      II - OTHER INFORMATION
                
                33ITEM
      6. EXHIBITS
                
                33




2





PART
I - FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009





September 30,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                      
                      $
                      7,632,304
                      
                      
                      $
                      1,848,328Accounts
      receivable, trade - related parties, net of allowance for doubtful
      accounts of $1,538,200 and $1,419,178 as of September 30, 2010 and
      December 31, 2009, respectively
                      
                      
                      10,795,741
                      
                      
                      
                      15,379,312Inventories
                      
                      
                      5,287,668
                      
                      
                      
                      5,328,052Other
      receivables
                      
                      
                      1,256,939
                      
                      
                      
                      995,657Other
      receivables - related parties
                      
                      
                      45,040,773
                      
                      
                      
                      44,561,626Employee
      advances
                      
                      
                      114,444
                      
                      
                      
                      115,673Prepaid
      expenses, net of allowance for doubtful accounts of $1,039,643 and
      $1,018,474 as of September 30, 2010 and December 31, 2009,
      respectively
                      
                      
                      431,442
                      
                      
                      
                      658,193Prepaid
      taxes
                      
                      
                      3,001,473
                      
                      
                      
                      407,534Total
      current assets
                      
                      
                      73,560,784
                      
                      
                      
                      69,294,375PROPERTY,
      PLANT AND EQUIPMENT, net
                      
                      
                      9,910,704
                      
                      
                      
                      10,124,483OTHER
      ASSETS:Construction
      in progress
                      
                      
                      170,971,153
                      
                      
                      
                      125,572,621Construction
      deposits
                      
                      
                      8,250,520
                      
                      
                      
                      1,405,997Intangible
      assets, net
                      
                      
                      12,898,229
                      
                      
                      
                      12,864,295Other
      assets
                      
                      
                      13,507,370
                      
                      
                      
                      11,847,937Total
      other assets
                      
                      
                      205,627,272
                      
                      
                      
                      151,690,850Total
      assets
                      
                      $
                      289,098,760
                      
                      
                      $
                      231,109,708LIABILITIESANDSHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                      
                      $
                      6,350,030
                      
                      
                      $
                      5,012,157Advances
      from customers - related parties
                      
                      
                      13,045,749
                      
                      
                      
                      4,426,751Wages
      and benefits payable
                      
                      
                      808,228
                      
                      
                      
                      1,484,852Short-term
      debt - related party
                      
                      
                      8,958,000
                      
                      
                      
                      -Income
      taxes payable
                      
                      
                      570,185
                      
                      
                      
                      -Contractor
      deposits
                      
                      
                      204,451
                      
                      
                      
                      183,395Contractor
      payables
                      
                      
                      35,554,584
                      
                      
                      
                      18,513,216Other
      payables
                      
                      
                      1,164,677
                      
                      
                      
                      1,151,551Other
      payables - related parties
                      
                      
                      15,630,625
                      
                      
                      
                      3,326,110Total
      current liabilities
                      
                      
                      82,286,529
                      
                      
                      
                      34,098,032NON-CURRENT
      LIABILITIESDeferred
      income
                      
                      
                      11,470,050
                      
                      
                      
                      11,236,501Total
      non current liabilities
                      
                      
                      11,470,050
                      
                      
                      
                      11,236,501Total
      liabilities
                      
                      
                      93,756,579
                      
                      
                      
                      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
                      
                      
                      18,271,518
                      
                      
                      
                      18,042,189Statutory
      reserves
                      
                      
                      16,465,144
                      
                      
                      
                      13,217,217Retained
      earnings
                      
                      
                      128,490,119
                      
                      
                      
                      126,370,263Accumulated
      other comprehensive income
                      
                      
                      21,394,864
                      
                      
                      
                      18,262,123Total
      shareholders' equity of the Company
                      
                      
                      184,692,979
                      
                      
                      
                      175,963,126Noncontrolling
      interest
                      
                      
                      10,649,202
                      
                      
                      
                      9,812,049Total
      equity
                      
                      
                      195,342,181
                      
                      
                      
                      185,775,175Total
      liabilities and equity
                      
                      $
                      289,098,760
                      
                      
                      $
                      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 AND NINE MONTHS ENDED SEPTEMBER 30, 2010 and 2009 (UNAUDITED)





Three months ended September 30,
                
                
                Nine months ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009REVENUE
      - RELATED PARTIES
                
                $
                10,381,886
                
                
                $
                9,439,739
                
                
                $
                29,953,098
                
                
                $
                48,228,320COST
      OF SALES - RELATED PARTIES
                
                
                4,145,014
                
                
                
                3,144,650
                
                
                
                10,623,742
                
                
                
                14,997,118GROSS
      PROFIT
                
                
                6,236,872
                
                
                
                6,295,089
                
                
                
                19,329,356
                
                
                
                33,231,202SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                4,060,812
                
                
                
                2,916,202
                
                
                
                11,627,456
                
                
                
                10,061,729INCOME
      FROM OPERATIONS
                
                
                2,176,060
                
                
                
                3,378,887
                
                
                
                7,701,900
                
                
                
                23,169,473Interest
      expense
                
                
                (117,165
                )
                
                
                (40,363
                )
                
                
                (117,165
                )
                
                
                (146,180
                )Interest
      income
                
                
                2,523
                
                
                
                76,154
                
                
                
                8,241
                
                
                
                262,701Other
      income (expense)
                
                
                120,665
                
                
                
                (16,122
                )
                
                
                (551,305
                )
                
                
                (89,554
                )OTHER
      (EXPENSE) INCOME, NET
                
                
                6,023
                
                
                
                19,669
                
                
                
                (660,229
                )
                
                
                26,967INCOME
      BEFORE INCOME TAXES
                
                
                2,182,083
                
                
                
                3,398,556
                
                
                
                7,041,671
                
                
                
                23,196,440INCOME
      TAXES
                
                
                319,776
                
                
                
                544,688
                
                
                
                1,067,899
                
                
                
                1,027,404NET
      INCOME
                
                $
                1,862,307
                
                
                $
                2,853,868
                
                
                $
                5,973,772
                
                
                $
                22,169,036LESS:
      Net income attributable to the noncontrolling interest
                
                
                (141,849
                )
                
                
                (617,638
                )
                
                
                (605,989
                )
                
                
                (1,163,683
                )NET
      INCOME ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY
                
                
                1,720,458
                
                
                
                2,236,230
                
                
                
                5,367,783
                
                
                
                21,005,353OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                
                
                2,826,688
                
                
                
                182,028
                
                
                
                3,951,957
                
                
                
                406,870COMPREHENSIVE
      INCOME
                
                
                4,547,146
                
                
                
                2,418,258
                
                
                
                9,319,740
                
                
                
                21,412,223COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                
                
                312,353
                
                
                
                11,390
                
                
                
                819,216
                
                
                
                25,240COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE SHAREHOLDERS OF THE COMPANY
                
                $
                4,234,793
                
                
                $
                2,406,868
                
                
                $
                8,500,524
                
                
                $
                21,386,983EARNINGS
      PER SHARE, BASIC AND DILUTED
                
                $
                0.02
                
                
                $
                0.03
                
                
                $
                0.08
                
                
                $
                0.29WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                
                
                71,333,586
                
                
                
                71,333,586
                
                
                
                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
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (UNAUDITED)





Nine months ended September 30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                5,973,772
                
                
                $
                22,169,036Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Bad
      debt expense
                
                
                88,205
                
                
                
                (902,297
                )Depreciation
                
                
                1,172,597
                
                
                
                1,662,206Amortization
                
                
                252,075
                
                
                
                291,418Interest
      expense
                
                
                117,165
                
                
                
                (9,357
                )Gain
      on sale of assets
                
                
                (43,377
                )
                
                
                (14,846
                )Rental
      expense borne by a related party
                
                
                246,623
                
                
                
                -(Increase)
      decrease in assets:Accounts
      receivable, trade - related parties
                
                
                4,742,772
                
                
                
                10,678,476Other
      receivables
                
                
                (237,041
                )
                
                
                (121,058
                )Other
      receivables - related parties
                
                
                (92,265
                )
                
                
                (1,306,527
                )Inventories
                
                
                166,337
                
                
                
                2,801,809Employee
      advances
                
                
                3,579
                
                
                
                (80,873
                )Prepaid
      expense
                
                
                236,536
                
                
                
                (336,620
                )Increase
      (decrease) in liabilities:Accounts
      payable
                
                
                1,195,483
                
                
                
                (1,687,613
                )Advances
      from customers - related parties
                
                
                8,401,340
                
                
                
                808,830Wages
      and benefits payable
                
                
                (697,018
                )
                
                
                (768,334
                )Deferred
      income taxes
                
                
                217,131
                
                
                
                -Other
      taxes payable
                
                
                (2,202,718
                )
                
                
                (31,337
                )Other
      payables
                
                
                (8,613
                )
                
                
                (176,274
                )Other
      payables - related parties
                
                
                13,972,418
                
                
                
                (76,484
                )Net
      cash provided by operating activities
                
                
                33,505,001
                
                
                
                32,900,155CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from disposal of a subsidiary
                
                
                700,000
                
                
                
                -Collections
      from loans to local government
                
                
                -
                
                
                
                105,208Construction
      deposits
                
                
                (6,381,248
                )
                
                
                (3,465,755
                )Contractor
      deposits
                
                
                16,990
                
                
                
                85,498Addition
      to construction in progress
                
                
                (37,556,932
                )
                
                
                (26,936,754
                )Equipment
      deposits
                
                
                (1,414,417
                )
                
                
                (8,700,872
                )Proceeds
      from sales of properties
                
                
                2,668,075
                
                
                
                17,041Purchase
      of equipment and automobiles
                
                
                (742,954
                )
                
                
                (1,755,815
                )Net
      cash used in investing activities
                
                
                (42,710,486
                )
                
                
                (40,651,449
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from (repayment to) related parties
                
                
                14,826,000
                
                
                
                (3,946,050
                )Increase
      in paid in capital
                
                
                -
                
                
                
                245,030Net
      cash provided by (used in) financing activities
                
                
                14,826,000
                
                
                
                (3,701,020
                )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                
                
                163,461
                
                
                
                100,433NET
      INCREASE (DECREASE) IN CASH
                
                
                5,783,976
                
                
                
                (11,351,881
                )CASH,
      beginning of period
                
                
                1,848,328
                
                
                
                44,854,511CASH,
      end of period
                
                $
                7,632,304
                
                
                $
                33,502,630Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                
                $
                -
                
                
                $
                105,817Income
      taxes
                
                $
                993,857
                
                
                $
                871,764





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, President and Acting Chief Financial
Officer. 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 and 10% owned by Baolan Li, Jinyuan Li’s
daughter, who is a member of the Company’s Board of Directors. 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





Basisof
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.


6





The reporting
entity





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





Subsidiary
                    
                    Jurisdiction of Formation
                    
                    % 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 assets, provision for bad debt, allowance for sales returns and
provision for prepaid expenses. 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 U.S. 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 OANDA.com 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 $3,951,956 and $1,570,553 for the nine months ended
September 30, 2010 and 2009, respectively. Asset and liability accounts at
September 30, 2010 were translated at RMB 6.70 to $1.00 compared
to RMB 6.84 at September 30, 2009. Equity accounts are stated at
their historical rate. The average translation rates applied to income statement
accounts for the nine months ended September 30, 2010 and 2009 were
RMB 6.80 and RMB 6.84, 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.


7





Fair value of
financialinstruments





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;





• 
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 September 30, 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 accounts 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
accounts is adequate, paying particular attention to the age of receivables
outstanding. At September 30, 2010 and December 31, 2009, there were no
receivables due from Tianshi Engineering outstanding more than 90 days. At
September 30, 2010 and December 31, 2009, receivables due from overseas related
companies outstanding more than 180 days totaled $5,709,664and
$3,481,334, respectively. The Company did not incur any losses on receivables
for the periods reported. The following table represents the changes in the
allowance for doubtful accounts:


8





ProvisionforDoubtful
                    AccountsNine
      month period ended September 30, 2010Balance
      at Beginning of Period
                  
                  $
                  1,419,178Increase
      in provision for Doubtful Accounts
                  
                  
                  119,022Balance
      at End of Period
                  
                  $
                  1,538,200Nine
      month period ended September 30, 2009Balance
      at Beginning of Period
                  
                  $
                  1,108,789Decrease
      of provision for Doubtful Accounts
                  
                  
                  (900,254
                  )Balance
      at End of Period
                  
                  $
                  208,535





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:





ProvisionforDoubtful
                    AccountsNine
      month period ended September 30, 2010Balance
      at Beginning of Period
                  
                  $
                  1,018,474Increase
      in provision for Doubtful Accounts
                  
                  
                  21,169Balance
      at End of Period
                  
                  $
                  1,039,643Nine
      month period ended September 30, 2009Balance
      at Beginning of Period
                  
                  $
                  952,071Increase
      in provision for Doubtful Accounts
                  
                  
                  2,284Balance
      at End of Period
                  
                  $
                  954,355





Prepaidtaxes





Prepaid
taxes consist of payments of value added tax (“VAT”) to the Chinese government
related to the purchase of new production equipment. Effective January 1, 2009,
the Chinese government allows VAT amounts paid on new production equipment to be
used to offset future VAT liabilities, in order to encourage
investment.


9





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 expense 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.





In October
2010, a portion of the Company's facilities moved to the newly constructed plant
facilities. Approximately $43,000,000 of construction in progress was
transferred to fixed assets at that time. Depreciation of those assets began in
November 2010.





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. Amortization expense for the nine months ended
September 30, 2010 and 2009 amounted to $22,065 and $62,508,
respectively, and $7,434 and $11,390 for the three months ended September
30, 2010 and 2009, respectively.


10





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 U.S. $5,258,454). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or U.S. $6,024,910) 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 U.S. $6,024,910) 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.





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 recognize sales of the Company's products to
unaffiliated third parties. Revenues in both cases are net of value
added taxes.





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 September 30, 2010 and December 31,
2009.


11





Advertisingcosts





The
Company sells its products to related parties, and these related parties are
primarily responsible for marketing. Advertising costs of the Company for the
nine months ended September 30, 2010 and 2009 amounted to $13,092 and $6,211,
respectively, and for the three months ended September 30, 2010 and 2009
amounted to $6,289 and $0, respectively, and were expensed as
incurred.





Shipping andhandling





Shipping
and handling costs totaled $279,651 and $314,194 for the nine months
ended September 30, 2010 and 2009, respectively, and $87,015 and $71,422 for the
three months ended September 30, 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 $1,255,262 and
$960,484 for the nine months ended September 30, 2010 and 2009,
respectively, and $330,587 and $291,764 for the three months ended September 30,
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.





The
Company has not been subjected to income tax examinations by taxing authorities
for the nine months ended September 30, 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 nine months ended
September 30, 2010 and the year ended December 31, 2009, the Company did not
recognize any amount in interest and penalties.


12





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 nine months ended September 30, 2010 and
2009.





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.





On June
10, 2010, Tianshi Holdings, Fuhong Development, and Tianshi Investment entered
into another 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.





The right
to offset existed because:





1.
            7

              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.





During
the nine months ended September 30, 2010, $20,300,964 of trade accounts
receivable from Tianshi Engineering were offset against $20,300,964 of
advances from customers received from Tianshi Engineering.


13





Note
4 – Inventories





Inventories
consisted of the following at September 30, 2010 and December 31,
2009:





September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Raw
      materials
                  
                  $
                  865,062
                  
                  
                  $
                  1,937,306Packaging
      material
                  
                  
                  541,591
                  
                  
                  
                  729,517Miscellaneous
      supplies
                  
                  
                  1,937,015
                  
                  
                  
                  848,720Work
      in process
                  
                  
                  611,083
                  
                  
                  
                  476,529Finished
      goods
                  
                  
                  1,332,917
                  
                  
                  
                  1,335,980Total
                  
                  $
                  5,287,668
                  
                  
                  $
                  5,328,052





The
Company has not written off any obsolete goods for the nine months ended
September 30, 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 September 30, 2010 and December 31, 2009 are as follows:





September 30,
                
                
                December 31,2010
                
                
                2009Advance
      to suppliers
                
                $
                393,815
                
                
                $
                655,443Short-term
      prepaid expenses
                
                
                37,627
                
                
                
                2,750Total
                
                $
                431,442
                
                
                $
                658,193





Note
6 – Property, plant and equipment, net





Property,
plant and equipment consist of the following at September 30, 2010 and December
31, 2009:





September 30,
                
                
                December 31,2010
                
                
                2009Buildings
      and improvements
                
                $
                1,591,336
                
                
                $
                1,558,934Office
      equipment
                
                
                370,434
                
                
                
                348,284Computer
      equipment and software
                
                
                2,474,049
                
                
                
                2,405,467Machinery
      and equipment
                
                
                14,850,650
                
                
                
                14,211,726Automobiles
                
                
                4,952,722
                
                
                
                4,470,909Total
                
                
                24,239,191
                
                
                
                22,995,320Less:
      accumulated depreciation
                
                
                (14,328,487
                )
                
                
                (12,870,837
                )Property,
      plant and equipment, net
                
                $
                9,910,704
                
                
                $
                10,124,483





Depreciation
expense for the nine months ended September 30, 2010 and 2009 amounted to
$1,172,597 and $1,662,206, respectively, and $358,221 and $549,357 for the three
months ended September 30, 2010 and 2009, respectively.


14





Note
7 - Intangible assets





Intangible
assets consist of the following at September 30, 2010 and December 31,
2009:





September 30,
                
                
                December 31,2010
                
                
                2009Land
      use rights
                
                $
                13,812,704
                
                
                $
                13,531,454Other
      intangible assets
                
                
                351,429
                
                
                
                344,274Less
      accumulated amortization
                
                
                (1,265,904
                )
                
                
                (1,011,433
                )Intangible
      assets, net
                
                $
                12,898,229
                
                
                $
                12,864,295





Amortization
expense for the nine months ended September 30, 2010 and 2009 amounted to
$230,010 and $228,910 respectively, and $77,493 and $85,648 for the three months
ended September 30, 2010 and 2009, respectively.





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





Estimated amortization expense fortheyearendingDecember31,
                      
                      Amount2010
      (3 months remaining)
                      
                      $
                      77,8162011
                      
                      $
                      304,6192012
                      
                      $
                      304,6192013
                      
                      $
                      293,2942014
                      
                      $
                      292,6472015
      and thereafter
                      
                      $
                      11,625,234





Note
8 – Statutory reserves





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





Statutory reserve
fund




Each of
the Company’s Chinese subsidiaries is required to transfer 10% of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve balance
reaches 50% of that entity’s registered capital. During 2005, Biological's
statutory reserve fund had reached 50% of its registered capital, so no
statutory reserve was required thereafter. Life Resources, which has not reached
its statutory reserve fund level, is currently required to make this transfer.
On June 21, 2010, Life Resources transferred $2,165,285, representing 10% of its
2009 net income, as determined in accordance with PRC accounting rules and
regulations, to this reserve. As of September 30, 2010, Life Resources is
required to transfer a remaining $12,193,914 in future periods to the statutory
reserve fund to meet the 50% requirement.




15





The
transfer to this reserve fund must be made before distribution of any dividend
to shareholders. On September 30, 2010 and December 31, 2009, the amounts of the
statutory reserve fund were $7,151,510 and $4,986,225,
respectively.





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





Common welfare
fund




Each of
the Company’s Chinese subsidiaries is required to transfer part of its net
income in accordance with the PRC accounting rules and regulations, which is
determined by its board of directors, to a statutory common welfare fund until
the statutory reserve fund reaches 50% of that entity’s registered capital.
Beginning 2005, Biological was not required to transfer any additional net
income to the statutory reserve fund, so no transfer to the common welfare was
required thereafter. Life Resources, which has not reached its statutory reserve
fund level, is still required to make this transfer accompanying the transfer of
statutory reserves. On June 21, 2010, Life Resources transferred $1,082,642,
representing 5% of its 2009 net income, as determined by its board of directors,
to this fund. As of September 30, 2010, Life Resources is required to transfer a
remaining $6,096,957 in future periods to the common welfare fund.





This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than
upon liquidation. The transfer to this fund must be made before distribution of
any dividend to shareholders. On September 30, 2010 and December 31, 2009, the
amounts of the Company’s common welfare fund were $7,057,619 and $5,974,977,
respectively.




Enterprise
fund




The
enterprise fund may be used to acquire fixed assets or to increase the working
capital for production and operation of the business. No minimum contribution is
required. For the nine months ended September 30, 2010 and 2009, no transfer was
made to this fund and the amount of the Company’s enterprise fund on each of
September 30, 2010 and December 31, 2009 was $2,256,015.





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





Note 9 – 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.


16




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 September 30,
                
                
                Nine months ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenue-related
      parties
                
                $
                10,381,886
                
                
                $
                9,439,739
                
                
                $
                29,953,098
                
                
                $
                48,228,320




September30,2010
                
                
                December31,2009Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of $1,538,200 and $1,419,178 as of September 30, 2010 and
      December 31, 2009, respectively
                
                $
                10,795,741
                
                
                $
                15,379,312Other
      receivables – related parties
                
                $
                45,040,773
                
                
                $
                44,561,626Advances
      from customers – related parties
                
                $
                13,045,749
                
                
                $
                4,426,751Short-term
      debt - related party
                
                $
                8,958,000
                
                
                $
                -Other
      payables – related parties
                
                $
                15,630,625
                
                
                $
                3,326,110




Revenue -related
parties




The
details of revenue-related parties are as follows:





Three months ended September 30,
                    
                    
                    Nine months ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Tianshi
      Engineering
                    
                    $
                    6,152,896
                    
                    
                    $
                    4,663,939
                    
                    
                    $
                    17,351,251
                    
                    
                    $
                    17,076,163Overseas
      Related Companies
                    
                    
                    4,228,990
                    
                    
                    
                    4,775,800
                    
                    
                    
                    12,601,847
                    
                    
                    
                    31,152,158Total
                    
                    $
                    10,381,886
                    
                    
                    $
                    9,439,739
                    
                    
                    $
                    29,953,098
                    
                    
                    $
                    48,228,320




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.


17




Accounts receivable, trade -
related parties




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





September30,2010
                
                
                December31,2009Tianshi
      Engineering
                
                $
                -
                
                
                $
                5,035,320Overseas
      Related Companies
                
                
                12,333,941
                
                
                
                11,763,170Allowance
      for Doubtful Accounts
                
                
                (1,538,200
                )
                
                
                (1,419,178
                )Total
                
                $
                10,795,741
                
                
                $
                15,379,312




Sales to
Tianshi Engineering for the nine months ended September 30, 2010 were
$17,351,251. The receivables that arose from these sales were fully offset
against advances from Tianshi Engineering as of September 30, 2010.




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:


18





September 30,
                
                
                December 31,2010
                
                
                2009Tianshi
      Investment
                
                $
                27,300,000
                
                
                $
                37,000,000Tianshi
      Engineering
                
                
                5,682,839
                
                
                
                5,688,926Tianjin
      Tianshi Life Science Co., Ltd.
                
                
                11,828,993
                
                
                
                55,878All-legend
      Property Service (Tianjin) Co., Ltd.
                
                
                139,071
                
                
                
                77,612Tiens
      SmartFlow Logistics (International) Group Ltd.
                
                
                -
                
                
                
                74,651Tianshi
      Yinshi Hotel
                
                
                37,325
                
                
                
                36,566Taijisheng
      Health Management Co.,Ltd
                
                
                4,447
                
                
                
                -Tianshi
      Indonesia Logistic & Trade Co., Ltd.
                
                
                9,891
                
                
                
                9,873Tianshi
      Group
                
                
                -
                
                
                
                1,613,168All-legend
      Hotel Management Co., Ltd.
                
                
                37,002
                
                
                
                2,730Others
                
                
                1,205
                
                
                
                2,222Total
                
                $
                45,040,773
                
                
                $
                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. For the nine months
ended September 30, 2010, the Company did not convert any accounts receivables -
related parties to other receivables - related parties.





On
December 25, 2008, Biological entered into 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 U.S. $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
$37,000,000. As of September 30, 2010, $9,700,000 of the purchase price was
paid; $3,700,000 was received in cash, while $6,000,000 was offset against
payables owed to Fuhong (as further described under the caption "Other payables
– related parties" below.)The remaining balance outstanding is due in
November  2010.





A portion
of the construction in progress recorded and paid for by Life
Resources is built on the land owned by Tianshi Life Science.
Tianshi Life Science intends to reimburse Life Resources for the cost
of this portion of the construction in progress. The agreement is
currently being drafted for the amount of RMB 78,017,869 (approximately
U.S. $11,648,068). and is expected to be collected by December 31,
2010. This amount has been reclassified as other
receivable - related party as of September 30, 2010,
accordingly.




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 September 30, 2010 and December 31, 2009, advances from related
party customers amounted to $13.0 million and $4.4 million,
respectively.




19


Short-term
debt–related
party
 
 On August
24, 2010, Tianshi Engineering and Life Resources entered into a loan agreement.
In order to support the business development of Life Resources, Tianshi
Engineering agreed to make a loan to Life Resources equal to the amount of
outstanding advances from customers as of June 30, 2010. The amount of the loan,
which was reclassified to short - term debt – related party from advances from
customers, is RMB 60,000,000 (or U.S. $8,958,000), and is due in full on
December 31, 2010. Interest is caculated based on the benchmark interest rate of
the People's Bank of China on July 1, 2010 (5.31%APR).
  Other
payables - related parties
  The details of other payable-related
parties are as
follows:
 
 September 30, 2010
                  
                  
                  December 31, 2009Tianshi
      Group
                  
                  $
                  8,751,840
                  
                  
                  $
                  -Tianshi
      Engineering
                  
                  
                  6,596,720
                  
                  
                  
                  40,805Tianshi
      Germany Co., Ltd.
                  
                  
                  102,129
                  
                  
                  
                  107,326Tianjin
      Tianshi Global International Trade Co., Ltd.
                  
                  
                  95,552
                  
                  
                  
                  93,606Tianyuan
      Capital Development Co. Ltd.
                  
                  
                  84,359
                  
                  
                  
                  84,359Tianshi
      Administrative Committee of Industrial Park
                  
                  
                  15
                  
                  
                  
                  14Fuhong
      Development Co. Ltd.
                  
                  
                  -
                  
                  
                  
                  3,000,000Others
                  
                  
                  10
                  
                  
                  
                  -Total
                  
                  $
                  15,630,625
                  
                  
                  $
                  3,326,110
  These amounts arose primarily fromcash advancesto Life Recourcesfrom related partiestosupport its operations.Otheramountsareforprevious cash advances from related
parties such as management fees due to related parties and various non-operational
transactions incurred with related parties.
 
 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 loanwas paidin fullby canceling 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.On June 11, 2010, the loan was paid in
full bycancelingthe same amount TianshiInvestment owed to the
Company.
 
 Duringthe third quarter of 2010,the Companyreceived$7,614,300and$6,270,600from Tianshi Group and Tianshi
Engineering, respectively, in order to fund a portion of the
construction in progress.The amountsare expected tobe returned in November, 2010.
  20
  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 expires on December 31, 2010. 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.
 
 Rent revenue accrued from these leases
amounted to $156,435 and $164,670 for the nine months ended September 30, 2010
and 2009, respectively, and $52,705and $54,905 for the three months ended
September 30, 2010 and 2009, respectively.
 
 Other
Transactions with Tianshi
Group
 
 On
January 1, 2009, Biological entered into 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 expires on December 31, 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. The Company
paid rent under these leases in the amount of $330,358 and $375,931 for the nine
months ended September 30,
2010 and 2009, respectively, and $70,640 and $73,243 for the three months ended
September 30, 2010 and
2009, respectively.
 
 On
January 1, 2009, Biological and Life Resources entered into 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 nine months ended September 30, 2010 and
2009,  Biological and Life Resources recorded $247,265 and $245,019 of
the rent expense, which is not paid to Tianshi Group, but recorded as paid in
capital based upon market price.
  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 ofRMB25,383 (orU.S.$3,714)per month. In addition, the Company is
obligated to pay insurance, maintenance and other expenses
relatedtothe equipment. This agreementbecameeffectiveonJanuary 1,2010 and expireson December 31, 2010.TheCompany haspaid $33,605</f ont>of rent expense for theninemonths endedSeptember30,2010.
 
 Note10–Additional product sales
information
 
 The Company has a single operating
segment.Allof 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:
  21
  Revenue by Product
Group:
 
 Three months ended September
      30,
                  
                  
                  Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Wellness
      products
                  
                  $
                  9,185,407
                  
                  
                  $
                  8,575,183
                  
                  
                  $
                  26,994,811
                  
                  
                  $
                  44,777,793Dietary
      supplement products
                  
                  
                  1,196,479
                  
                  
                  
                  864,556
                  
                  
                  
                  2,958,287
                  
                  
                  
                  3,432,422Personal
      care products
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,105Total
                  
                  $
                  10,381,886
                  
                  
                  $
                  9,439,739
                  
                  
                  $
                  29,953,098
                  
                  
                  $
                  48,228,320
 
 Note11- Income taxes
 
 TheCompany 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 liablefor income taxes.
 
 The Company's subsidiaries,
Biologicaland Life Resources,wereincorporated 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 becameeffective.According to the EIT,the standard tax rate is 25% andhigh-tech companies could
be subject to a special reducedtax rate of 15%. The qualification of a
high-tech company is to be reviewed annually.Forthe fiscal years2008,2009and 2010Biological qualifiedas a high-tech company. However,
Biological was required by the local tax authority to prepay income tax
ata tax rate of
25%every year, although
the prepaid income tax could be refunded in the next year.On December 17, 2009and June24,2010, the prepaid income taxamounts of$1,562,168 for 2008and $578,267 for 2009werefully
refunded.
 
 According to the EIT, Life Resourceswasexempt from PRC income taxesfor the fiscal years 2008 and 2009.
Beginning on January 1, 2010, Life Resources qualifies fora 12.5% reduced tax rateforthreeyears.
 
 Provisions for income taxeswere all current income tax expenses
andfor theninemonths endedSeptember30, 2010and 2009,were$1,067,899and$1,027,404, respectively, and for the three months
endedSeptember30, 2010and 2009were $319,776and $544,688, respectively.
 
 The following table reconciles the U.S.
statutoryrates to the
Company's effective tax rate:
  22
 
 Three months ended September
      30,
                  
                  
                  Nine months ended September
    30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009U.S.
      Statutory rate
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %Foreign
      income not recognized
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )China
      income taxes
                  
                  
                  25.0
                  
                  
                  
                  25.0
                  
                  
                  
                  25.0
                  
                  
                  
                  25.0Effect
      of reduced tax rate
                  
                  
                  (10.3
                  )
                  
                  
                  (9.0
                  )
                  
                  
                  (9.8
                  )
                  
                  
                  (20.6
                  )Total
      provision for income taxes
                  
                  
                  14.7
                  %
                  
                  
                  16.0
                  %
                  
                  
                  15.2
                  %
                  
                  
                  4.4
                  %
 
 The estimated tax savings due to the
reduced tax rate for the nine months ended September 30, 2010 and 2009 amounted
to $889,667 and $3,715,841, respectively. The net effect on earnings per share
if the income tax had been applied would decrease earnings per share for the
nine months ended September 30, 2010 and 2009 by $0.01 and $0.05, respectively.
 
 Note12–Retirement
plan
 
 Regulations in the PRC require the
Company to contribute toa
defined contribution retirement plan for all employees. AllCompanyemployees are entitled to a retirement
pension amount calculated based upon salary at date of retirement and length of
service in accordance with a government managed pension plan. ThePRC 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
salaries. Employees are required to contribute 8% of their salaries to the plan.
Total pension expense incurred by the Company amounted to $770,476 and $699,755
for the nine months ended September 30, 2010 and 2009, respectively, and
$237,593 and $248,394 for the three months ended September 30, 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$76,001and$70,280for theninemonths endedSeptember30, 2010and 2009, respec tively, and $24,590and $24,293for thethree months endedSeptember30, 2010and 2009, respectively.All contributions are paid to a PRC
insurance company, which in turn, is responsible for the unemployment liability.Pursuant to the
Company’smedical 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$389,237and$357,105for theninemonths endedSeptember30, 2010and 2009, respectively, and $121,139and $125,346for thethree months endedSeptember30, 2010and 2009,
respectively.
  23
  ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  In this
Quarterly Report on Form 10-Q, references to “dollars” and “$” 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, CEO and Acting CFO, and 10%
owned by Baolan Li, Jinyuan Li’s daughter, who is a member of our Board
of  Directors.
  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 moved
our administrative offices to the newly constructed Industrial Park on October
16, 2010. We expect to complete the move of our other facilities during the
fourth quarter of 2010 and during 2011.
  24
  RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2009
 
 Three
      months ended September 30,
                    
                    
                    
                    
                    
                    Nine
      months ended September 30,2010
                    
                    
                    2009
                    
                    
                    
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    Change
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    ChangeREVENUE
      - RELATED PARTIES
                    
                    $
                    10,381,886
                    
                    
                    $
                    9,439,739
                    
                    
                    
                    10.0
                    %
                    
                    $
                    29,953,098
                    
                    
                    $
                    48,228,320
                    
                    
                    
                    -37.9
                    %COST
      OF SALES
                    
                    
                    4,145,014
                    
                    
                    
                    3,144,650
                    
                    
                    
                    31.8
                    %
                    
                    
                    10,623,742
                    
                    
                    
                    14,997,118
                    
                    
                    
                    -29.2
                    %GROSS
      PROFIT
                    
                    
                    6,236,872
                    
                    
                    
                    6,295,089
                    
                    
                    
                    -0.9
                    %
                    
                    
                    19,329,356
                    
                    
                    
                    33,231,202
                    
                    
                    
                    -41.8
                    %SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                    
                    
                    4,060,812
                    
                    
                    
                    2,916,202
                    
                    
                    
                    39.3
                    %
                    
                    
                    11,627,456
                    
                    
                    
                    10,061,729
                    
                    
                    
                    15.6
                    %INCOME
      FROM OPERATIONS
                    
                    
                    2,176,060
                    
                    
                    
                    3,378,887
                    
                    
                    
                    -35.6
                    %
                    
                    
                    7,701,900
                    
                    
                    
                    23,169,473
                    
                    
                    
                    -66.8
                    %(Interest
      expense)
                    
                    
                    (117,165
                    )
                    
                    
                    (40,363
                    )
                    
                    
                    190.3
                    %
                    
                    
                    (117,165
                    )
                    
                    
                    (146,180
                    )
                    
                    
                    -19.8
                    %Interest
      income
                    
                    
                    2,523
                    
                    
                    
                    76,154
                    
                    
                    
                    -96.7
                    %
                    
                    
                    8,241
                    
                    
                    
                    262,701
                    
                    
                    
                    -96.9
                    %Other
      income (expense)
                    
                    
                    120,665
                    
                    
                    
                    (16,122
                    )
                    
                    
                    -848.4
                    %
                    
                    
                    (551,305
                    )
                    
                    
                    (89,554
                    )
                    
                    
                    515.6
                    %OTHER
      (EXPENSE) INCOME, NET
                    
                    
                    6,023
                    
                    
                    
                    19,669
                    
                    
                    
                    -69.4
                    %
                    
                    
                    (660,229
                    )
                    
                    
                    26,967
                    
                    
                    
                    -2548.3
                    %INCOME
      BEFORE PROVISION FOR INCOME TAXES
                    
                    
                    2,182,083
                    
                    
                    
                    3,398,556
                    
                    
                    
                    -35.8
                    %
                    
                    
                    7,041,671
                    
                    
                    
                    23,196,440
                    
                    
                    
                    -69.6
                    %PROVISION
      FOR INCOME TAXES
                    
                    
                    319,776
                    
                    
                    
                    544,688
                    
                    
                    
                    -41.3
                    %
                    
                    
                    1,067,899
                    
                    
                    
                    1,027,404
                    
                    
                    
                    3.9
                    %NET
      INCOME
                    
                    
                    1,862,307
                    
                    
                    
                    2,853,868
                    
                    
                    
                    -34.7
                    %
                    
                    
                    5,973,772
                    
                    
                    
                    22,169,036
                    
                    
                    
                    -73.1
                    %LESS:
      Net income attributable to the noncontrolling interest
                    
                    
                    141,849
                    
                    
                    
                    617,638
                    
                    
                    
                    -77.0
                    %
                    
                    
                    605,989
                    
                    
                    
                    1,163,683
                    
                    
                    
                    -47.9
                    %NET
      INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
                    
                    $
                    1,720,458
                    
                    
                    $
                    2,236,230
                    
                    
                    
                    -23.1
                    %
                    
                    $
                    5,367,783
                    
                    
                    $
                    21,005,353
                    
                    
                    
                    -74.4
                    %WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                    
                    
                    71,333,586
                    
                    
                    
                    71,333,586
                    
                    
                    
                    
                    
                    
                    
                    71,333,586
                    
                    
                    
                    71,333,586EARNINGS
      PER SHARE, BASIC AND DILUTED
                    
                    $
                    0.02
                    
                    
                    $
                    0.03
                    
                    
                    
                    
                    
                    
                    $
                    0.08
                    
                    
                    $
                    0.29
 
 Revenue.For the third quarter of 2010, revenue
was $10.4 million, anincrease of 10.0%
compared to $9.4 million
for the same period in 2009.For the nine months ended September 30,
2010, revenue was $30.0 million, adecrease of 37.9% compared to $48.2
million for the same period in 2009.The decrease in revenue for the first
nine months of 2010 was due
to thedecrease of 59.5% in international
sales.
 
 For the third quarter of 2010, revenue
in China was $6.2 million, anincrease of 31.9% compared to $4.7
million for the same period in 2009. Forthe nine months ended September 30,
2010, revenue in China was
$17.4million, a 1.6% increase compared to $17.1 million for
the same period in2009.Third quarter salesfor2009weredown due to domestic distributorsstockingup on our productsin prior quarters. Therefore,the salesforthe same quarter in 2010 increased.The amount of domestic sales this quarterapproximatesthe average quarterlysalesin2009.
 
 For the third quarter of 2010,
international revenue was $4.2 million, adecrease of11.4% compared to $4.8 million for the same
period in 2009. Forthe nine months ended September 30,
2010, international revenue was $12.6million, a decrease of 59.5% compared to $31.2 million for the same
periodin 2009. The reasons for the decrease in
international revenue include,butarenot limited tothefollowing: (1) During 2008, China’s Administration of QualitySupervision, Inspection and Quarantine
(“AQSIQ”) carried out a nationalcampaign against unsafe food and
substandard products, which brought on ageneral slow-down and backlog of export
clearances for Chinese
foodproducts. Upon the lifting of the
regulations, overseas affiliatedcompanies began to purchase more
products, thereby increasing sales in thefirstthreequarters of 2009; (2)OurIndonesiaaffiliated companyhasnot purchasedfrom us during thefirst</f ont>nine months2010, giventheypurchasedmore products in 2009 after the 2008
product scarcity for the reason noted above.During the first half of2009,ourIndonesiaaffiliated companypurchased $9.2 millionof finished and unfinished
productfromus,which was 2.7 times their purchases for
the first half of 2008.In addition,localOriginal Equipment
Manufacturers(“OEM”)havebeenproducing the healthcare products with ourunfinishedgoods for the country,andtheir total sales dropped by 33%.
Thesales decline to
Indonesiaaccounts
for57% of our total
internationalrevenuedeclinefor theninemonths.(3) Thelasting global economic recession has
generally reduced customers' buyingpower. During the early stages of the
recession, the direct sellingbusiness is
generally  benefited with the new sales force joined by
theunemployed population. This positive
effect has been fading away during thelater stages of the recession;
(4) Our affiliated companies in many
regionshavemadecertain adjustmentsto theirmarketing programsand reorganizations attheirbranch andhigherlevels, which is expected to boost
salesperformance over the long-run but
negatively affect sales in the short-run.
  25
  Cost ofsales. Cost of sales for the third
quarter of 2010 increased to $4.1 million, or by 31.8%, compared to $3.1 million
for the same period in 2009. For the nine months ended September 30, 2010, cost
of sales was $10.6 million, a decrease of 29.2% compared to $15.0 million for
the same period in 2009. The increase in cost of sales for the current
quarter, as compared to the same quarter of 2009, is due to the sale of products
with higher costs.
 
 Grossprofit.Gross profit for the third
quarter of 2010 was $6.2 million, a decrease of 0.9% compared to $6.3 million
for the same period in 2009. The gross profit margin for the third quarter of
2010 was 60.1%, compared to 66.7% for the same period in 2009. For the nine
months ended September 30, 2010, gross profit was $19.3 million, a decrease of
41.8% compared to $33.2 million for the same period in 2010, and the gross
profit margin was 64.5% compared to 68.9% for the same period in 2009.  The
decrease in profit margin for the current quarter is due to the following: (1)
Sales of our products with more than 65% profit margins amounted to only 27.4%
of revenues as compared to 31.1% in the third quarter of 2009; and (2) The U.S.
dollar depreciated approximately 2% between September 30, 2009 and September 30,
2010. Our international sales are quoted in U.S. dollars and collected in RMB;
therefore, our gross profit margin decreased by the same percentage as the
depreciation of the dollar.
 
 Selling,
general and administrative expenses.Selling, general and administrative
expenses were $4.1 million for the third quarter of 2010, an increase of 39.3%
compared to $2.9 million for the same period in 2009. This increase was
primarily due to changes in our provision for doubtful accounts. During the
third quarter of 2009, based on a significant overall improvement in the aging
of our accounts receivable, we reduced our provision for doubtful accounts by
$0.7 million, which was recorded as a reduction of $0.7 million in our bad debt
expense. During the third quarter of 2010, based on an overall worsening in the
aging of our accounts receivable, we increased our provision for doubtful
accounts by $0.2 million, which was recorded as an increase of $0.2 million in
our bad debt expense. Selling, general and administrative expenses as a
percentage of sales were 39.1% for the third quarter of 2010 compared to 30.9%
for the same period in 2009. For the nine months ended September 30, 2010,
selling, general and administrative expenses were $11.6 million, an increase of
15.6% compared to $10.1 million in the same period in 2009. This increase
was mainly due to changes in our provision for doubtful accounts as described
above. During the nine months ended September 30, 2009, we reduced our provision
for doubtful accounts by $0.9 million, which was recorded as a reduction of $0.9
million in our bad debt expense. During the nine months ended September 30,
2010, we increased our provision for doubtful accounts by $0.1 million, which
was recorded as a increase of $0.1 million in our bad debt expense. For the nine months ended September 30,
2010, selling, general and administrative expenses as a percentage of sales were
38.8%, compared to 20.9% for the same period in 2009.
 
 Other(expense)income,
net. Other income was
$0.01 million for the third quarter of 2010, compared to other income of $0.02
million for the same period in 2009. For the nine months ended September 30,
2010, other expense was $0.7 million compared to other income of
$0.03 million for the same period in 2009. Thesedifferencesweremainly due toincrease in lossbased on currencytranslationdifferences between the two
periods.
 
 Provision
for income taxes.Provision for income taxes was $0.3
million for the third quarter of 2010 compared to $0.5 million for the same
period in 2009.The main reasonfor
thisdecrease was the
decrease in net income. For the nine months ended September 30, 2010, provision
for income taxes was $1.1 million compared to $1.0 million for the same period
in 2009.The main reasonfor this
increasewas that Life Resources
began applying the reduced income tax rate of 12.5%onJanuary 1, 2010, whileit wasexempt from income tax in
2009.According to the EIT,
Life Resourceswasfully exempt frompayingPRC income
taxes for two years startingonJanuary 1, 2008,
followed by a 12.5% reduced tax rate for the next three years.
  26
  Net
income.As a result of the
foregoing factors, net income for the third quarter of 2010 was $1.9 million, a
decrease of 34.7% compared to $2.9 million for the same period in
2009.  For the nine months ended September 30, 2010, net income was
$6.0 million, a decrease of 73.1% compared to $22.2 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 $33.5 million for the nine months ended
September 30, 2010, compared to net cash provided by operating activities of
$32.9 million for the same period of 2009. This increase was primarily due to
the collection of accounts receivable and advance receipts from Tianshi
Engineering for expected future shipment of product.
 
 As of
September 30, 2010, we had negative working capital of $8.7 million, compared to
positive working capital of $35.2 million as of December
31, 2009. During the first nine months of the year, we collected $14.2
million of accounts receivable due from related parties and received
$13.3 million of other payables and $22.8 million of advances from
customers from related parties. Simultaneously, the contractor payables
increased to $35.6 million. The administrative building in our Industrial Park
has been completed, and we have paid the construction payable in high frequency,
as the construction in process increased $45.4 million compared to $17 million
increase in contractor payables in the first nine months 2010. Cash was
$7.6 million as of September 30, 2010, compared to $1.8 million as of December
31, 2009.
 
 Net cash
used in investing activities increased by $2.1 million for the nine months
ended September 30, 2010 compared to the same period of 2009. During the
first nine months of 2010, we paid $37.6 million to contractors for
construction in progress, compared to $26.9 million for the same period in
2009
 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 scaleto meet the demands of our
markets.
 
 Should the cashflow from operation be
insufficient in the next twelve months, the company has also established
creditfacility with local commercial bank.
However, at this timemanagement is not able to determine the
exact financingamount needed.
 
 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.
  27
  Revenue
recognition.
  Wesell both semi-finished products and
finished products to
Tianshi Engineering domestically.Revenue from the sale
of  semi-finished productsis recognized at FOBdeliverypoint,when the semi-finished productsaresold to Tianshi Engineering. Revenue
from the sale of finished products is recognized only when the related party Chinese
distributor recognizessales ofourproducts to unaffiliated third parties.
Revenues in both cases are net of value added taxes.
 
 For overseas sales,wesellmostlyfinished products.Werecognize 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 caseby 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 reservesultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements.Aswedid not receive any returns of products
during the past three years, and management does not anticipate allowingany returns in
2010related to previous revenues, no
allowance for estimated returns has been recorded as ofSeptember30, 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 isadequate at each year-end, paying
particular attention to the age of receivablesoutstanding.
 
 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.
  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
  We marketmostofour products through various domestic
and international business entities that are related to us through
commonownership. As a
result,mostof our consolidated sales are to
related parties.
 
 In China, we sell our products to
Tianshi Engineering, an affiliated company. Tianshi Engineering, in turn,markets andsells the products to
customersthrough 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 TianshiEngineering 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 maintainourgross margins on semi-finished goods at
a similar level to historicalgross 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.
  28
  Internationally, we sell ourproductsdirectlyto overseas affiliateslocated in54countries,who in turn re-package the products to
meet the needs of the local markets and sell to independent
distributorsor end users of ourproducts.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.
 
 September 30, 2010
                  
                  
                  December 31, 2009Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of$1,538,200 and
      $1,419,178 as of September 30, 2010 and December 31, 2009,
      respectively
                  
                  $
                  10,795,741
                  
                  
                  $
                  15,379,312Other
      receivables – related parties
                  
                  $
                  45,040,773
                  
                  
                  $
                  44,561,626Advances
      from customers – related parties
                  
                  $
                  13,045,749
                  
                  
                  $
                  4,426,751Short-term
      debt - related party
                  
                  $
                  8,958,000
                  
                  
                  $
                  -Other
      payables – related parties
                  
                  $
                  15,630,625
                  
                  
                  $
                  3,326,110
 
 Revenue - Related
Parties
 
 The details of revenue-related parties
are as follows:
 
 Three
      months ended September 30,
                    
                    
                    Nine
      months ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Tianshi
      Engineering
                    
                    $
                    6,152,896
                    
                    
                    $
                    4,663,939
                    
                    
                    $
                    17,351,251
                    
                    
                    $
                    17,076,163Overseas
      Related Companies
                    
                    
                    4,228,990
                    
                    
                    
                    4,775,800
                    
                    
                    
                    12,601,847
                    
                    
                    
                    31,152,158Total
                    
                    $
                    10,381,886
                    
                    
                    $
                    9,439,739
                    
                    
                    $
                    29,953,098
                    
                    
                    $
                    48,228,320
  Accounts Receivable, Trade - Related
Parties
 
 The details of accounts receivable,
trade–related parties are as
follows:
 
 September 30, 2010
                    
                    
                    December 31, 2009Tianshi
      Engineering
                    
                    $
                    -
                    
                    
                    $
                    5,035,320Overseas
      Related Companies
                    
                    
                    12,333,941
                    
                    
                    
                    11,763,170Allowance
      for Doubtful Accounts
                    
                    
                    (1,538,200
                    )
                    
                    
                    (1,419,178
                    )Total
                    
                    $
                    10,795,741
                    
                    
                    $
                    15,379,312
  29
  Other Receivables - Related
Parties
 
 Other receivables - related parties are
generated byourmaking 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:
  September
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009Tianshi
      Investment
                  
                  $
                  27,300,000
                  
                  
                  $
                  37,000,000Tianshi
      Engineering
                  
                  
                  5,682,839
                  
                  
                  
                  5,688,926Tianjin
      Tianshi Life Science Co., Ltd.
                  
                  
                  11,828,993
                  
                  
                  
                  55,878All-legend
      Property Service (Tianjin) Co., Ltd.
                  
                  
                  139,071
                  
                  
                  
                  77,612Tiens
      SmartFlow Logistics (International) Group Ltd.
                  
                  
                  -
                  
                  
                  
                  74,651Tianshi
      Yinshi Hotel
                  
                  
                  37,325
                  
                  
                  
                  36,566Taijisheng
      Health Management Co.,Ltd
                  
                  
                  4,447
                  
                  
                  
                  -Tianshi
      Indonesia Logistic & Trade Co., Ltd.
                  
                  
                  9,891
                  
                  
                  
                  9,873Tianshi
      Group
                  
                  
                  -
                  
                  
                  
                  1,613,168All-legend
      Hotel Management Co., Ltd.
                  
                  
                  37,002
                  
                  
                  
                  2,730Others
                  
                  
                  1,205
                  
                  
                  
                  2,222Total
                  
                  $
                  45,040,773
                  
                  
                  $
                  44,561,626
  Historically, Tianshi Engineering
remitted payment to the Company upon sales to third party customers. However, to
support Tianshi Engineering’s marketing effortsin 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 January1, 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.For the nine months endedSeptember30, 2010, theCompany did not convert any accounts
receivables-related parties to other
receivables-related parties.
 
 On December 25, 2008, Biological enteredintoa 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 U.S. $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 enteredinto aTransfer Contract, pursuant to
which Tianshi Holdings
agreed to sell all of the registered share capital of Tiens Yihai it owned to
Tianshi Investment for $37,000,000.As of September30, 2010, $9,700,000 of the purchase price was paid;
$3,700,000 was received in cash, while $6,000,000 wasoffset against payables owed to Fuhong
(as further described under the caption "Other payables–related parties"
below.)
 
 A portion of the construction in
progressrecordedand paid for byLife Resourcesisbuilt on the plantowned byTianshi Life Science. Tianshi Life Science intends toreimburse Life Resources
forthe cost ofthis portion of theconstructionin progress. The agreement iscurrently being drafted for theamount of RMB78,017,869(approximately U.S.$11,648,068).Thisamount has been reclassifiedasother receivable-related partyas ofSeptember 30, 2010, accordingly.
 
 Advances from Customers - Related
Parties
 
 Advances from related party customers
were $13.0million and $4.4million as ofSeptember30, 2010and 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.Themajorityof the $7.6millionin advances wasfrom Tianshi Engineering,whose salescover the China region, and haveh ad ahigher historical sales growthratethan the overseas regions.The increase in advancesreflectstheir outlook of businessin the China region.
 
 30
  Short-term debt–related party
 
 On August 24, 2010,Tianshi EngineeringandLife Resourcesenteredintoaloanagreement.In order to support the business
development ofLife
Resources, Tianshi
Engineering agreedto make a loan toLife Resources equal to the amount of outstanding
advances from customers as of June 30, 2010and then they willreinforcethe advances from customers to cover
their purchase of next quarter.The amount of the loan, which wasreclassifiedtoshort - termdebt–relatedparty fromadvances from customers, isRMB 60,000,000 (or U.S.$8,958,000),and is due in full on December 31, 2010.Interest iscaculatedbased on thebenchmark interest rate of thePeople'sBank ofChinaon July 1, 2010(5.31%APR).
  Other
Payables - Related Parties
 
 These amounts arose primarily fromcash advancesfrom related partiesto Life Resources tosupport its operations.Otheramountsare previous cash advances from related
parties such as management fees due to related parties and various
non-operational transactions incurred with related parties.
 
 September 30, 2010
                  
                  
                  December 31, 2009Tianshi
      Group
                  
                  $
                  8,751,840
                  
                  
                  $
                  -Tianshi
      Engineering
                  
                  
                  6,596,720
                  
                  
                  
                  40,805Tianshi
      Germany Co., Ltd.
                  
                  
                  102,129
                  
                  
                  
                  107,326Tianjin
      Tianshi Global International Trade Co., Ltd.
                  
                  
                  95,552
                  
                  
                  
                  93,606Tianyuan
      Capital Development Co. Ltd.
                  
                  
                  84,359
                  
                  
                  
                  84,359Tianshi
      Administrative Committee of Industrial Park
                  
                  
                  15
                  
                  
                  
                  14Fuhong
      Development Co. Ltd.
                  
                  
                  -
                  
                  
                  
                  3,000,000Others
                  
                  
                  10
                  
                  
                  
                  -Total
                  
                  $
                  15,630,625
                  
                  
                  $
                  3,326,110
 
 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 loanwas paidin fullby canceling 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. On June 11, 2010, the loan was paid in full
bycancelingthe same amount TianshiInvestment owed to the
Company.
 
 Duringthe third quarter of 2010,the Companyreceived$7,614,300and$6,270,600from Tianshi Group and Tianshi
Engineering, respectively, in order to fund a portion of the construction
in progress.The amountsare expected to be returned in November,
2010.
  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 agreementswas effective as of January
1,2008 and expire on
December 31, 2010. 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, twoof the lease
agreements.
 
 Rent revenueaccruedfrom these leases amounted to $156,435
and $164,670for the nine months endedSeptember30, 2010 and 2009,
respectively, and
$52,705and $54,905 for the three months ended
September 30, 2010and 2009, respectively.
  31
  Other
Transactions with Tianshi Group
 
 On
January 1, 2009, Biological entered into 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 expires on December 31, 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. The Company
paid rent under these leases in the amount of $330,358 and $375,931 for the nine
months ended September 30, 2010 and 2009, respectively, and $70,640 and $73,243
for the three months ended September 30, 2010 and 2009,
respectively.
 
 On
January 1, 2009, Biological and Life Resources entered into 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 nine months ended
September 30, 2010 and 2009,  Biological and Life Resources recorded
$247,265 and $245,019 of the rent expense, which is not paid to Tianshi Group,
but recorded as paid in capital based upon market price.
  Transactions
with Tianshi 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 ofRMB 25,383 (or U.S.$3,714)per month. In addition, the Company is
obligated to pay insurance, maintenance and other expenses related  to
the equipment. This agreement became effective on January 1, 2010
and expireson December 31, 2010.TheCompany haspaid $33,605of rent expense for the nine months
endedSeptember30, 2010.
  Transactions
with Tianshi Life Science
 
 A portion of the construction in
progress recordedand paid
for by  Life Resources is built on the plant owned by Tianshi Life
Science. Tianshi Life Science intends toreimburse Life Resources forthe cost of this portion of the
construction in progress. The agreement is currently being drafted for the
amount of RMB 78,017,869
(approximately U.S. $11,648,068). This amount has been reclassified as other
receivable - related party as of September 30, 2010,
accordingly.
 
 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 capitalneedsfor 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 thatwe 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.
  32
  ITEM4T.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 thethirdquarter of 2010that 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
areprovidedas part of this
report.
 
 33
  SIGNATURES
  Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed onits behalf by the
undersigned thereunto duly authorized.
  Date:November15,2010/s/ Jinyuan
      LiJinyuan
  LiChief Executive Officer, President
      and Acting Chief
                Financial
      Officer(Principal Executive Officer, Principal
      Financial and
                Accounting
      Officer)
  34
  EXHIBIT
INDEX
 Exhibit No.
                
                Description10.1
                
                LoanAgreement, datedAugust 24, 2010 by and betweenTianjin Tiens Life Resources Co., Ltd. and Tianjin Tianshi
      Biological Engineering Co., Ltd.31.1
                
                Certification of the Principal
      Executive Officer and Principal Financial and Accounting Officer pursuant
      to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
                
                Certification of the Chief
      Executive Officer and Acting Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002
 35