Pain Continues for Tiens Biotech

Pain Continues for Tiens Biotech 11/15/2007
by Life Science: China

Tiens Biotech Group (USA), Inc. (Amex: TBV), a Tianjin, China based company engaged in the research, development, manufacturing, and marketing of nutrition supplement products, including wellness products and dietary nutrition supplement products, and personal care products. announced financial results for the third quarter ended September 30, 2007. The news reflected continued pain for the company and investors.
Revenue for Q3 2007 was US$11 million, a decline of 57% from the US$19.2 million reported for the same quarter last year. Revenues in China fell over 47% to US$3.4 million. International revenue was US$7.6 million compared to US$11.9 million for the third quarter of 2006, reflecting a nearly 64% year over year decline.
The company attributed the revenue shortfall to increased Chinese government regulatory efforts. In August of 2007, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) announced an ongoing national campaign in China against unsafe food and substandard products. As a result of this campaign by the AQSIQ, there has been a general slow-down and backlog of export clearances for Chinese food products.
The company reports that these enforcement efforts have resulted in Tiens experiencing significant delays in obtaining export clearance for its products, which are sold to its international affiliates. These delays have resulted in decreases in international revenues and several of Tiens’ international affiliates being unable to receive sufficient quantities of products to meet their demand. The company reports that to date, no deficiencies have been identified with any of Tiens’ products.
Previously, the company reported that domestic Chinese sales were negatively impacted by regulatory changes regarding companies such as Tiens that engage in direct selling to Chinese customers. Among the regulations is a requirement that firms engaging in direct selling receive government approval. The resulting “increased government and media scrutiny on the direct selling industry” was reported to result in consumer uncertainty and a sales decline in Q2 2007.
The company’s direct selling is done through a related party, Tianjin Tianshi Biological Engineering Co., Ltd (Tianshi Engineering). Management reports that Tianshi Engineering has found that it is taking more time than anticipated to work through the approval process with the Chinese authorities. If Tianshi Engineering does not receive a direct selling license in China, then its ability to compete against its competitors who have received such a license may be hurt. As a result, Tianshi Engineering may lose distributors who find a competitor’s direct selling business and compensation model more attractive. This could materially decrease the revenues that we receive from sales by Tianshi Engineering in China. In 2006 Tianshi Engineering generated over US$27 million in revenues to the company, accounting for over 40% of total revenues.
Also of note in the quarter, on September 26, 2007, Tiens received notice from its principal independent accountant, Moore Stephens Wurth Frazer & Torbet, that it was resigning as the Company’s accountant effective immediately. At that time the company reports that there was no dispute between its accountants and the company, and that no adverse audit findings had been made.
September 27th the company announced that it was extending the terms of a loan made by a Tiens subsidiary to its related party Tianshi Engineering for the third time. The loan in the amount of RMB200 million (US$26.6 million) was made in January 2006 and originally due December 31, 2006. The loan was subsequently extended to June 30, 2007 then to September 30, 2007. On September 27, 2007, this loan was extended again to December 31,2007. The company has made no further comment regarding the resignation of its principal accountant, and subsequently announced the appointment of Grobstein, Horwath & Company, LLP as principal accountant.
The corporate structure of Tiens remains an issue for investors. As reported by the company, Tiens Biotech Group (USA), Inc. is owned 4.91% by public stockholders, 2.8% by officers and 92.29% by Mr. Jinyuan Li. Tiens is the sole owner of Tianshi International Holdings Group, Ltd., a holding company based in the British Virgin Islands. Tianshi International owns 80% and 99.4%, respectively, of Tianjin Tianshi Biological Development Co., Ltd. and Tiens Yihai Co., Ltd.
These two firms are the company’s operating subsidiaries in the People’s Republic of China. These subsidiaries in turn conduct many of their operations through related parties in China, including Tianshi Engineering, Tianjin Tianshi Group Co. Ltd (Tianshi Group), and Tianjin Tianshi Pharmaceuticals Co. Ltd. (Tianshi Pharmaceuticals).
Tianshi Group in turn is owned 90% by Mr. Jinyuan Li and 10% by his daughter, Ms. Baolan Li. Tianshi Group owns 87.66% of Tianshi Pharmaceuticals and 51% of Tianshi Engineering. Tianshi Pharmaceuticals owns 20% of Biological. Ms. Baolan Li owns 49% of Tianshi Engineering and 7.29% of Tianshi Pharmaceuticals. Tianjin Feishi Transportation Co., Ltd. owns 5.05% of Tianshi Pharmaceuticals.

Declining revenues and operational difficulties have soured investors on Tiens. After hitting a high of US$6.99 on Jan. 29th, shares have fallen nearly 60%. Thursday was particularly harsh, with investors hammering shares down nearly 20% to close at US$2.86. The current report gives shareholders little reason for encouragement.


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