UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
[X]
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2006
[_]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For
the
transition period from ________________ to _______________
001-32616
(Commission
file number)
BODISEN
BIOTECH, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
98-0381367
|
(State
or other jurisdiction
|
(IRS
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
North
Part of Xinquia Road, Yang Ling AG
High-Tech
Industries Demonstration Zone
Yang
Ling, China 712100
(Address
of principal executive offices)
86-29-870749
(Issuer's
telephone number)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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. Yes [X] No [_]
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of May 8, 2006 - 18,176,917 shares of
common stock
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[_]
No [X]
Transitional
Small Business Disclosure Format (check one): Yes [_] No [X]
BODISEN
BIOTECH, INC.
Index
|
|
Page
|
|
|
Number
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheet as of March 31, 2006 (unaudited)
|
2
|
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income
|
|
|
for
the three months ended March 31, 2006 and 2005 (unaudited)
|
3
|
|
|
|
|
Consolidated
Statements of Cash Flows for the
|
|
|
three
months ended March 31, 2006 and 2005 (unaudited)
|
4
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
5
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis or Plan of Operations
|
17
|
|
|
|
Item
3.
|
Controls
and Procedures
|
21
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
21
|
|
|
|
Item
1.
|
Legal
Proceedings
|
21
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
21
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
22
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
22
|
|
|
|
Item
5.
|
Other
Information
|
22
|
|
|
|
Item
6.
|
Exhibits
|
22
|
|
|
|
SIGNATURES
|
|
23
|
.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
AS
OF MARCH 31, 2006
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
|
2006
|
|
ASSETS
|
|
|
|
(unaudited)
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
& cash equivalents
|
|
$
|
26,085,746
|
|
Accounts
receivable, net of allowance for doubtful accounts of $398,509
|
|
|
11,848,040
|
|
Other
receivable
|
|
|
1,058,775
|
|
Inventory
|
|
|
1,377,426
|
|
Advances
to suppliers
|
|
|
3,021,216
|
|
Prepaid
expense
|
|
|
60,961
|
|
Other
current assets
|
|
|
2,770
|
|
|
|
|
|
|
Total
current assets
|
|
|
43,454,934
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
4,894,079
|
|
|
|
|
|
|
CONSTRUCTION
IN PROGRESS
|
|
|
2,236,125
|
|
|
|
|
|
|
MARKETABLE
SECURITY
|
|
|
9,101,217
|
|
|
|
|
|
|
INTANGIBLE
ASSETS
|
|
|
2,100,175
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
61,786,530
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable
|
|
$
|
777,648
|
|
Other
payables
|
|
|
3,408,113
|
|
Accrued
expenses
|
|
|
473,253
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,659,014
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
Preferred
stock, $0.0001 per share; authorized 5,000,000 shares; none issued
|
|
|
|
|
Common
stock, $0.0001 per share; authorized 30,000,000 shares;
|
|
|
|
|
issued
and outstanding 18,176,917
|
|
|
1,818
|
|
Additional
paid-in capital
|
|
|
32,860,075
|
|
Other
comprehensive income
|
|
|
6,781,292
|
|
Statutory
reserve
|
|
|
2,892,854
|
|
Retained
earnings
|
|
|
14,591,477
|
|
Total
stockholders' equity
|
|
|
57,127,516
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
61,786,530
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE
INCOME
|
FOR
THE THREE MONTHS ENDED MARCH 31, 2006 AND
2005
|
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
10,535,360
|
|
$
|
4,701,675
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
6,299,121
|
|
|
3,047,498
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,236,239
|
|
|
1,654,177
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
474,174
|
|
|
148,140
|
|
General
and administrative expenses
|
|
|
304,224
|
|
|
278,470
|
|
Total
operating expenses
|
|
|
778,398
|
|
|
426,610
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,457,841
|
|
|
1,227,567
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(124,541
|
)
|
|
(416,703
|
)
|
Interest
income
|
|
|
28,063
|
|
|
—
|
|
Interest
expense
|
|
|
(678,720
|
)
|
|
(14,131
|
)
|
|
|
|
|
|
|
|
|
Total
non-operating income (expense)
|
|
|
(775,198
|
)
|
|
(430,834
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,682,643
|
|
$
|
796,733
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
Foreign
currency translation (loss)
|
|
|
(40,500
|
)
|
|
—
|
|
Unrealized
gain on marketable equity security
|
|
|
2,290,783
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
4,932,926
|
|
$
|
796,733
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding :
|
|
|
|
|
|
|
|
Basic
|
|
|
17,215,232
|
|
|
15,268,000
|
|
Diluted
|
|
|
17,374,691
|
|
|
15,529,458
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
2,682,643
|
|
$
|
796,733
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
103,161
|
|
|
77,509
|
|
Amortization
of debt discounts
|
|
|
603,886
|
|
|
—
|
|
Exchange
loss
|
|
|
124,541
|
|
|
—
|
|
Value
of vested option issued to directors
|
|
|
7,523
|
|
|
—
|
|
(Increase)
/ decrease in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(4,300,470
|
)
|
|
(2,892,853
|
)
|
Other
receivable
|
|
|
(14,144
|
)
|
|
—
|
|
Inventory
|
|
|
(188,722
|
)
|
|
(200,253
|
)
|
Advances
to suppliers
|
|
|
1,565,316
|
|
|
155,137
|
|
Other
assets
|
|
|
765
|
|
|
(551,707
|
)
|
Increase
/ (decrease) in current liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
724,157
|
|
|
174,614
|
|
Other
payables
|
|
|
1,792
|
|
|
—
|
|
Accrued
expenses
|
|
|
61,118
|
|
|
34,773
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,371,566
|
|
|
(2,406,047
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(43,776
|
)
|
|
(890,633
|
)
|
Additions
to construction in progress
|
|
|
(349,147
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(392,923
|
)
|
|
(890,633
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
on note payable
|
|
|
(5,000,000
|
)
|
|
—
|
|
Repayments
of loans to officers
|
|
|
—
|
|
|
968,000
|
|
Proceeds
from issuance of convertible note
|
|
|
—
|
|
|
3,000,000
|
|
Proceeds
from issuance of common stock
|
|
|
26,682,511
|
|
|
—
|
|
Payment
of offering costs
|
|
|
(2,747,227
|
)
|
|
—
|
|
Proceeds
from the exercise of warrants
|
|
|
220,160
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
19,155,444
|
|
|
3,968,000
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(325,238
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
|
|
19,808,849
|
|
|
671,320
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
6,276,897
|
|
|
2,121,811
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
|
$
|
26,085,746
|
|
$
|
2,793,131
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
112,500
|
|
$
|
37,794
|
|
Income
taxes paid
|
|
$
|
—
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
Note
1 - Organization and Basis of Presentation
Organization
and Line of Business
Yang
Ling
Bodisen Biology Science and Technology Development Company Limited (“BBST”) was
founded in the People’s Republic of China on August 31, 2001. BBST, located in
Yang Ling Agricultural High-Tech Industries Demonstration Zone, is primarily
engaged in developing, manufacturing and selling pesticides and compound organic
fertilizers in the People’s Republic of China. Bodisen International, Inc.
(“BII”) is a Delaware Corporation, incorporated on November 19, 2003. BII was a
non-operative holding company of BBST. On December 15, 2003, BII entered in
to
an agreement with all the stockholders of BBST to exchange all of the
outstanding stock of BII for all the issued and outstanding stock of BBST.
After
the consummation of the agreement, the former stockholders of BBST own 1,500
shares of common stock of BII, which represent 100% of BII’s issued and
outstanding shares. For U.S. Federal income tax purpose, the transaction is
intended to be qualified as a tax-free transaction under section 351 of the
Internal Revenue Code of 1986, as amended.
The
exchange of shares with BBST has been accounted for as a reverse acquisition
under the purchase method of accounting since the stockholders of the BBST
obtained control of the consolidated entity. Accordingly, the merger of the
two
companies has been recorded as a recapitalization of BBST, with BBST being
treated as the continuing entity. The historical financial statements presented
are those of BBST. The continuing company has retained December 31 as its fiscal
year end. The financial statements of the legal acquirer are not significant;
therefore, no pro forma financial information is submitted.
On
February 24, 2004, BII consummated a merger agreement with Stratabid.com, Inc.
(“Stratabid”), a Delaware corporation, to exchange 12,000,000 shares of
Stratabid to the stockholders of BII, in which BII merged into Bodisen Holdings,
Inc. (BHI), an acquisition subsidiary of Stratabid, with BHI being the surviving
entity. As a part of the merger, Stratabid cancelled 3,000,000 shares of its
issued and outstanding stock owned by its former president and declared a stock
dividend of three shares on each share of its common stock outstanding for
all
stockholders on record as of February 27, 2004.
Stratabid
was incorporated in the State of Delaware on January 14, 2000 and before the
merger, was a start- up stage Internet based commercial mortgage origination
business based in Vancouver, BC, Canada. The
exchange of shares with Stratabid has been accounted for as a reverse
acquisition under the purchase method of accounting since the stockholders
of
BII obtained control of Stratabid. On March 1, 2004, Stratabid was renamed
Bodisen Biotech, Inc. (the “Company”). Accordingly, the merger of the two
companies has been recorded as a recapitalization of the Company, with the
Company being treated as the continuing entity. The financial statements of
legal acquirer are not significant; therefore, no pro forma financial
information is submitted.
In
March
2005, Bodisen Biotech Inc. completed a $3 million convertible debenture private
placement through an institutional investor. Approximately $651,000 in expenses
relating to this private placement has been amortized over the term of the
convertible debenture. The net proceeds from this offering were sent to China
towards capital contribution of the registration of a wholly-owned Bodisen
subsidiary by the name of “Yang Ling Bodisen Agricultural Technology Co., Ltd.
(“Agricultural”). In June 2005, Agricultural completed a transaction with Yang
Ling Bodisen Biology Science and Technology Development Company Limited (“Yang
Ling”), Bodisen Biotech, Inc.’s operating subsidiary in China, which resulted in
Agricultural owning 100% of Yang Ling.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis
of Presentation
The
unaudited consolidated financial statements have been prepared by Bodisen
Biotech, Inc. (the “Company”), pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and adjustments) which
are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company’s Annual
Report on Form 10-KSB. The results of the three months ended March 31, 2006
are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2006.
Foreign
Currency Translation
As
of
March 31, 2006 and 2005, the accounts of the Company were maintained, and their
consolidated financial statements were expressed in the Chinese Yuan Renminbi
(CNY). Such consolidated financial statements were translated into U.S. Dollars
(USD) in accordance with Statement of Financial Accounts Standards ("SFAS")
No.
52, "Foreign Currency Translation," with the CNY as the functional currency.
According to the Statement, all assets and liabilities were translated at the
exchange rate on the balance sheet date, stockholder's equity are translated
at
the historical rates and statement of operations items are translated at the
weighted average exchange rate for the year. The resulting translation
adjustments are reported under other comprehensive income in accordance with
SFAS No. 130, "Reporting Comprehensive Income
Note
2 - Summary of Significant Accounting Policies
Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash in hand and cash in time deposits, certificates
of
deposit and all highly liquid debt instruments with original maturities of
three
months or less.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate
the
adequacy of these reserves. Terms of the sales vary from COD through a credit
term up to 9 to 12 months. Reserves are recorded primarily on a specific
identification basis. Allowance for doubtful debts amounted to $398,509 as
at
March 31, 2006.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Advances
to Suppliers
The
Company advances to certain vendors for purchase of its material. The advances
to suppliers are interest free and unsecured. The advances to suppliers amounted
to $3,021,216 at March 31, 2006.
Property
& Equipment & Capital Work In Progress
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
Operating
equipment
|
10
years
|
Vehicles
|
8
years
|
Office
equipment
|
5
years
|
Buildings
|
30
years
|
At
March
31, 2006, the following are the details of the property and
equipment:
Operating
equipment
|
|
$
|
929,960
|
|
Vehicles
|
|
|
404,655
|
|
Office
equipment
|
|
|
68,188
|
|
Buildings
|
|
|
4,169,606
|
|
|
|
|
5,572,409
|
|
Less
accumulated depreciation
|
|
|
(678,330
|
)
|
|
|
$
|
4,894,079
|
|
Depreciation
expense for the three months ended March 31, 2006 and 2005 was $68,842 and
$44,974, respectively.
On
March
31, 2006, the Company has “Capital Work in Progress” representing the
construction in progress of the Company’s manufacturing plant amounting
$2,236,125.
Marketable
Securities
Marketable
securities consist of 2,063,768 shares of China Natural Gas, Inc. (traded on
the
OTCBB: CHNG). This investment is classified as available-for-sale as the Company
plans to hold this investment for the long-term. This investment is reported
at
fair value with unrealized gains and losses included in other comprehensive
income. The fair value is determined by using the securities quoted market
price
as obtained from stock exchanges on which the security trades.
Investment
income, principally dividends, is recorded when earned. Realized capital gains
and losses are calculated based on the cost of securities sold, which is
determined by the "identified cost" method.
Intangible
Assets
Intangible
assets consist of Rights to use land and Fertilizers proprietary technology
rights. The Company evaluates intangible assets for impairment, at least on
an
annual basis and whenever events or changes in circumstances indicate that
the
carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill
is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test
is
performed to measure the amount of impairment loss.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." The Company
recognizes in the statement of operations the grant- date fair value of stock
options and other equity-based compensation issued to employees and
non-employees. During the three months ended March 31, 2006, the Company
recognized compensation expense of $7,523 related to certain employee option
issued in 2005 that vested during the three months ended March 31,
2006.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
According
to the Provisional Regulations of the People’s Republic of China on Income Tax,
the Document of Reductions and Exemptions of Income Tax for the Company had
been
approved by the local tax bureau and the Yang Ling Agricultural High-Tech
Industries Demonstration Zone. The Company is exempted from income tax through
October 2007.
In
March
2005, Bodisen Biotech Inc. formed a new 100% wholly-owned subsidiary named
Yang
Ling Bodisen Agricultural Technology Co., Ltd. (“Agricultural”) in China. Under
Chinese law, a newly formed wholly owned subsidiary of a foreign company enjoys
an income tax exemption for the first two years and a 50% reduction of normal
income tax rates for the following 3 years. In order to extend such tax
benefits, in June 2005, Agricultural completed a transaction with Yang Ling
Bodisen Biology Science and Technology Development Company Limited (“Yang Ling”,
Bodisen Biotech, Inc.’s operating subsidiary in China), which resulted in
Agricultural owning 100% of Yang Ling.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Foreign
Currency Transactions and Comprehensive Income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain statements, however, require entities to
report specific changes in assets and liabilities, such as gain or loss on
foreign currency translation, as a separate component of the equity section
of
the balance sheet. Such items, along with net income, are components of
comprehensive income. The functional currency of the Company is Chinese
Renminbi. The unit of Renminbi is in Yuan. Translation gains of $547,421 at
March 31, 2006 are classified as an item of other comprehensive income in the
stockholders’ equity section of the consolidated balance sheet. During the three
months ended March 31, 2006 and 2005, other comprehensive income in the
consolidated statements of income and other comprehensive income included
translation loss of $40,500 and $0, respectively.
Segment
Reporting
Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About
Segments of an Enterprise and Related Information” requires use of the
“management approach” model for segment reporting. The management approach model
is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company.
SFAS
131 has no effect on the Company’s consolidated financial statements as the
Company consists of one reportable business segment. All revenue is from
customers in People’s Republic of China. All of the Company’s assets are located
in People’s Republic of China.
Recent
Pronouncements
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006.
In
March
2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:
1. |
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
2. |
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if practicable.
|
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. |
Permits
an entity to choose ‘Amortization method’ or Fair value measurement
method’ for each class of separately recognized servicing assets and
servicing liabilities:
|
4. |
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
5. |
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
Note
3 - Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of Bodisen
Biotech, Inc., its 100% wholly-owned subsidiary Bodisen Holdings, Inc. (“BHI”),
BHI’s 100% wholly- owned subsidiary Yang Ling Bodisen Biology Science and
Technology Development Company Limited, and a 100% wholly-owned subsidiary,
incorporated in March 2005, named Yang Ling Bodisen Agricultural Technology
Co.,
Ltd. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Note
4 - Marketable Security
During
the year ended December 31, 2005, the Company purchased 2,063,768 shares of
China Natural Gas, Inc. (traded on the OTCBB: CHNG) for $2,867,346. At March
31,
2006, the fair value of this investment was $9,101,217 which resulted in an
unrealized gain of $2,290,783 for the three months ended March 31, 2006, which
is included in other comprehensive income. At March 31, 2006, this represented
an 8.6% interest in China Natural Gas, Inc.
Note
5 - Intangible Assets
Net
intangible assets at March 31, 2006 were as follows:
Rights
to use land
|
|
$
|
1,705,069
|
|
Fertilizers
proprietary technology rights
|
|
|
997,880
|
|
|
|
|
2,702,949
|
|
Less
Accumulated amortization
|
|
|
(602,774
|
)
|
|
|
$
|
2,100,175
|
|
The
Company’s office and manufacturing site is located in Yang Ling Agricultural
High-Tech Industries Demonstration Zone in the province of Shaanxi, People’s
Republic of China. The Company leases land per a real estate contract with
the
government of People’s Republic of China for a period from November 2001 through
November 2051. Per the People’s Republic of China’s governmental regulations,
the Government owns all land.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During
July 2003, the Company leased another parcel of land per a real estate contract
with the government of the People’s Republic of China for a period from July
2003 through June 2053.
The
Company has recognized the amounts paid for the acquisition of rights to use
land as intangible asset and amortizing over a period of fifty years. The
“Rights to use land” is being amortized over a 50 year period.
The
Company acquired Fluid and Compound Fertilizers proprietary technology rights
with a life ending December 31, 2011. The Company is amortizing Fertilizers
proprietary technology rights over a period of ten years.
Amortization
expense for the Company’s intangible assets for the three months ended March 31,
2006 and 2005 amounted to $33,319 and $32,470, respectively.
Amortization
expense for the Company’s intangible assets over the next five fiscal years is
estimated to be: 2007-$130,000, 2008-$130,000, 2009-$130,000, 20010-$130,000
and
20110-$130,000.
Note
6 - Other Payable
Other
Payable represents fees and commission payable to third parties in connection
wit the financing in the United Kingdom.
Note
7 - Note Payable
On
December 8, 2005, the Company issued a $5,000,000 note payable to Amaranth
Partners LLC that accrues interest at 9% per annum and was due on March 8,
2006.
In connection with this note payable agreement, the Company also issued to
Amaranth Partners LLC a warrant to purchase 133,333 shares of the Company common
stock for $7.50 per shares. The Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
note payable. The estimated value of the warrants of $968,282 was determined
using the Black-Scholes option pricing model and the following assumptions:
term
of 5 years, a risk free interest rate of 4.00%, a dividend yield of 0% and
volatility of 31%. The face amount of the note payable of $5,000,000 was
proportionately allocated to the note payable and the warrant in the amount
of
$4,188,810 and $811,190, respectively. The amount allocated to the warrants
of
$811,190 was recorded as a discount on the note payable and will be amortized
over the year life of the note payable. For the three months ended March 31,
2006, $603,886 has been amortized to interest expense as the note was repaid.
The $5,000,000 note plus $112,500 of accrued interest were repaid in March
2006.
Note
8
- Stockholders’ Equity
On
February 3, 2006, the Company entered into a placing agreement (the "Placing
Agreement") with Charles Stanley Securities ("Charles Stanley”) relating to the
sale of up to 1,643,836 shares of the Company's common stock. Pursuant to the
Placing Agreement, Charles Stanley has agreed to use its reasonable effort
to
sell all such shares of common stock at a price of 730 pence (approximately
US$12.99) per share, resulting in gross proceeds of approximately 12 million
British pounds sterling (US$21,360,005). The Company incurred offering costs
and
expenses of $5,144,356 related to this sale of common stock.
In
connection with the placement, the Company's shares would be admitted to trading
on the AIM Market of the London Stock Exchange. The Company's shares will
continue to be listed on the American Stock Exchange.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
March
15, 2006, the Company completed financing of $5,322,506 by issuing 380,179
restricted shares of common stock of the Company at $14.00 per share to
institutional investors in a private placement pursuant to Regulation S. The
Company incurred offering costs and expenses of $988,351 related to this sale
of
common stock. The proceeds from this financing were used to repay the $5 million
short term note that the Company entered in December 2005.
During
the three months ended March 31, 2006, 32,000 warrants were exercised and the
Company received proceeds of $220,160.
Note
9 - Stock Options and Warrants
Stock
Options
The
Company adopted SFAS No. 123 (Revised 2004), Share
Based Payment (“SFAS
No. 123R”), under the modified-prospective transition method on
January 1, 2006. SFAS No. 123R requires companies to measure and
recognize the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value. Share-based compensation
recognized under the modified-prospective transition method of SFAS
No. 123R includes share-based compensation based on the grant-date fair
value determined in accordance with the original provisions of SFAS
No. 123, Accounting
for Stock-Based Compensation, for
all
share-based payments granted prior to and not yet vested as of January 1,
2006 and share-based compensation based on the grant-date fair-value determined
in accordance with SFAS No. 123R for all share-based payments granted after
January 1, 2006. SFAS No. 123R eliminates the ability to account for
the award of these instruments under the intrinsic value method proscribed
by
Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
allowed under the original provisions of SFAS No. 123. Prior to the
adoption of SFAS No. 123R, the Company accounted for our stock option plans
using the intrinsic value method in accordance with the provisions of APB
Opinion No. 25 and related interpretations.
Primarily
as a result of adopting SFAS No. 123R, the Company recognized 7,523 in
share-based compensation expense for the three months ended March 31, 2006.
The impact of this share-based compensation expense on the Company’s basic and
diluted earnings per share was $0.00 per share. The fair value of our stock
options was estimated using the Black-Scholes option pricing model.
For
periods presented prior to the adoption of SFAS No. 123R, pro forma
information regarding net income and earnings per share as required by SFAS
No. 123R has been determined as if we had accounted for our employee stock
options under the original provisions of SFAS No. 123. The fair value of
these options was estimated using the Black-Scholes option pricing model. For
purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option’s vesting period. There is no pro forma
expense to recognize during the three months ended March 31, 2005.
In
2004
the board of directors approved the creation of the 2004 Stock Option Plan.
This
plan provides for the grant of incentive stock options to employees, directors
and consultants. Options issued under this plan will expire over a maximum
term
of five years from the date of grant.
Pursuant
to the Stock Option Plan, during the twelve months ended December 31, 2004,
the Company granted 110,000 stock options to two directors (55,000 options
each), of which 100,000 stock options was granted on June 4, 2004 and the
balance of the 10,000 was granted on December 28, 2004.
On
the
first 100,000 stock options granted, 50,000 stock options vested immediately
and
50,000 stock options became vested over 8 equal quarterly installments, with
the
first installment vesting at the end of the second quarter of 2004. The 10,000
stock options granted on December 28, 2004 vested on December 31, 2004.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
option exercise price was $5 for the first 100,000 stock options which was
the
same as fair value of the shares at the time of granting of the options. The
option exercise price was $5.80 for the second 10,000 stock options which was
the same as fair value of the shares at the time of granting of the options.
On
October 4, 2005, the Company granted 26,000 stock options to two directors
(13,000 options each). 20,000 stock options vested immediately and the remaining
6,000 stock options became vested over the next three months. The option
exercise price was $6.72 which was the same as fair value of the shares at
the
time of granting of the options. Following is a summary of the stock option
activity:
Outstanding,
December 31, 2005
|
|
|
136,000
|
|
Granted
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
Outstanding,
March 31, 2006
|
|
|
136,000
|
|
Following
is a summary of the status of options outstanding at March 31, 2006:
Outstanding
Options
|
|
Exercisable
Options
|
|
|
|
|
|
Exercise
Price
|
Number
|
Average
Remaining Contractual Life
|
Average
Exercise
Price
|
Number
|
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
$5.00
|
100,000
|
3.17
|
$5.00
|
100,000
|
$5.00
|
|
$5.80
|
10,000
|
3.74
|
$5.80
|
10,000
|
$5.80
|
|
$6.72
|
26,000
|
4.51
|
$6.72
|
26,000
|
$6.72
|
|
Following
is a summary of the warrant activity:
Outstanding,
December 31, 2005
|
|
|
165,333
|
|
Granted
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Exercised
|
|
|
32,000
|
|
Outstanding,
March 31, 2006
|
|
|
133,333
|
|
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following
is a summary of the status of warrants outstanding at March 31,
2006:
Outstanding
Warrants
|
|
Exercisable
Warrants
|
|
|
|
|
|
Exercise
Price
|
Number
|
Average
Remaining Contractual Life
|
Average
Exercise
Price
|
Number
|
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
$7.50
|
133,333
|
4.69
|
$7.50
|
133,333
|
$7.50
|
|
Note
10 - Employee Welfare Plans
The
Company has established its own employee welfare plan in accordance with Chinese
law and regulations. The Company makes annual contributions of 14% of all
employees’ salaries to employee welfare plan. The total expense for the above
plan $0 and $20,502 for the three months ended March 31, 2006 and 2005,
respectively. The Company has recorded welfare payable of $ 259,151 at March
31,
2006 which is included in accrued expenses in the accompanying consolidated
balance sheet.
Since
September, 2005, the Company was not required to accrue welfare contributions
as
the Company became a foreign investment Company.
Note
11 - Statutory Common Welfare Fund
As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:
i. |
Making
up cumulative prior years’ losses, if any;
|
ii. |
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the
fund
amounts to 50% of the Company’s registered capital;
|
iii. |
Allocations
of 5-10% of income after tax, as determined under PRC accounting
rules and
regulations, to the Company’s “Statutory common welfare fund”, which is
established for the purpose of providing employee facilities and
other
collective benefits to the Company’s employees; and
|
iv. |
Allocations
to the discretionary surplus reserve, if approved in the stockholders’
general meeting.
|
The
Company established a reserve for the annual contribution of 5% of net income
to
the welfare fund in 2006 and 2005. The amount included in the statutory reserve
for the three months ended March 31, 2006 and 2005 amounted to $175,308 and
$39,837, respectively.
Note
12 - Statutory Reserve
In
accordance with the Chinese Company Law, the company has allocated 10% of its
annual net income, amounting $350,615 and $79,673 as statutory reserve for
the
three months ended March 31, 2006 and 2005, respectively.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
13 - Earnings Per Share
Earnings
per share for three months March 31, 2006 and 2005 were determined by dividing
net income for the periods by the weighted average number of both basic and
diluted shares of common stock and common stock equivalents outstanding.
The
following is an analysis of the differences between basic and diluted earnings
per common share in accordance with Statement of Financial Accounting Standards
No. 128, “Earnings Per Share”.
|
|
Three
month periods ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
Income
|
|
Shares
|
|
Share
|
|
Income
|
|
Shares
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,682,643
|
|
|
|
|
|
|
|
$
|
796,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed
shares outstanding
|
|
|
|
|
|
17,215,232
|
|
|
|
|
|
|
|
|
15,268,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,682,643
|
|
|
|
|
|
|
|
$
|
796,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed
shares outstanding
|
|
|
|
|
|
17,215,232
|
|
|
|
|
|
|
|
|
15,268,000
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
89,537
|
|
|
|
|
|
|
|
|
261,458
|
|
|
|
|
Warrants
|
|
|
|
|
|
69,922
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
17,374,691
|
|
|
|
|
|
|
|
|
15,529,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
$
|
0.05
|
|
Note
14 - Current Vulnerability Due to Certain Concentrations
Four
vendors provided 58.74%, 13.58%, 5.43% and 4.78% of the Company’s raw materials
for the three months ended March 31, 2006 and four vendors provided 22%, 18%,
16% and 16% of the Company’s raw materials for the three months ended March 31,
2005. The payable balance for these parties amounted to $450,758 at March 31,
2006.
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by
the
political, economic and legal environments in the PRC, by the general state
of
the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods
of
taxation, among other things.
Note
15 - Reclassifications
Certain
prior period amounts have been reclassified to conform to the three months
ended
March 31, 2006 presentation.
Item
2. Management's
Discussion and Analysis or Plan of Operations
INTRODUCTION
The
following discussion should be read in conjunction with the Audited Financial
Statements and Notes thereto included in our Annual Report on Form 10KSB for
the
year ended December 31, 2005. This document contains certain forward-looking
statements including, among others, anticipated trends in our financial
condition and results of operations and our business strategy. (See “Factors
Which May Affect Future Results”). These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from these forward-looking
statements. Important factors to consider in evaluating such forward-looking
statements include (i) changes in external factors or in our internal budgeting
process which might impact trends in our results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in
our
business strategy or an inability to execute our strategy due to unanticipated
changes in the industries in which the Company operates; and (iv) various
competitive market factors that may prevent us from competing successfully
in
the marketplace.
Overview
The
Company is incorporated under the laws of the state of Delaware and its
operating subsidiary, Yang Ling, is headquartered in the Shaanxi Province,
the
People’s Republic of China. The Company engages in the business of manufacturing
and marketing organic fertilizers, pesticides, and agricultural raw materials
in
the People’s Republic of China. It produces numerous product lines, from
pesticides to crop specific fertilizers. These products are then marketed and
distributed through approximately 600 distribution centers throughout the 20
provinces of the People’s Republic of China. The Company conducts research and
development to further improve existing products and develop new formulas and
products.
Significant
Accounting Policies
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounts
receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
It reviews the composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of
these reserves. Reserves are recorded primarily on a specific identification
basis.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Company compares the cost of inventories with the market value
and
allowance is made for writing down the inventories to their market value, if
lower.
Property
and equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of: 30 years for building, 10
years for machinery, 5 years for office equipment and 8 years for
vehicles.
Intangible
assets
Intangible
assets consist of rights to use land and proprietary technology rights to
fertilizers. The Company evaluates intangible assets for impairment, at least
on
an annual basis and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill
is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test
is
performed to measure the amount of impairment loss. Potential impairment of
goodwill after July 1, 2002 is being evaluated in accordance with SFAS No.
142.
The SFAS No. 142 is applicable to the financial statements of the Company
beginning July 1, 2002.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations by the Company
exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
Stock-based
compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." The Company
recognizes in the statement of operations the grant- date fair value of stock
options and other equity-based compensation issued to employees and
non-employees.
Income
taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
According
to the Provisional Regulations of the People’s Republic of China on Income Tax,
the Document of Reductions and Exemptions of Income Tax for the Company have
been approved by the local tax bureau and the Management Regulation of Yang
Ling
Agricultural High-Tech Industries Demonstration Zone. The Company is exempted
from income tax in its first two years of operations.
Foreign
currency transactions and comprehensive income (loss)
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain statements, however, require entities to
report specific changes in assets and liabilities, such as gain or loss on
foreign currency translation, as a separate component of the equity section
of
the balance sheet. Such items, along with net income, are components of
comprehensive income. Transactions occur in Chinese Renminbi. The unit of
Renminbi is in Yuan.
Recent
Accounting Pronouncements
In
March
2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:
1. |
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
2. |
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if practicable.
|
3. |
Permits
an entity to choose ‘Amortization method’ or ‘Fair value measurement
method’ for each class of separately recognized servicing assets and
servicing liabilities:
|
4. |
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
5. |
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
Three
months ended March 31, 2006 compared to three months ended March 31,
2005
Revenue.
The Company generated revenues of $10,535,360 for the three months ended March
31, 2006, an increase of $5,833,685 or 124.1%, compared to $4,701,675 for the
three months ended March 31, 2005. The growth in revenue was primarily
attributable to the increase in the customer base as the company continued
to
aggressively market their products and the growing awareness in the agricultural
industry in the markets in which they do business of the efficacy of their
products. The Bodisen brand name has become synonymous with proven higher crop
yields. The completion of the new factory in early 2005 enabled the company
to
meet the growing demand for all of its products.
Gross
profit. The Company achieved a gross profit of $4,236,239 for the three months
ended March 31, 2006, an increase of $2,582,062 or 156.1%, compared to
$1,654,177 for the three months ended March 31, 2005. Gross margin, as a
percentage of revenues, increased from 35.2% for the three months ended March
31, 2005, to 40.2% for the three months ended March 31, 2006. The increase
in
gross margin was primarily attributable to the increase in the prices of main
products. During the quarter the Company raised its prices two times. The first
was due to price increases throughout the industry and then it was realized
that
the marketplace would accept paying a premium for Bodisen brand products, so
the
Company raised its prices again. In addition, the Company used the $5,000,000
from the short term note that was issued in December 2005, to enter into
purchasing agreements that locked in the 2005 price levels for all raw materials
the Company purchases during 2006.
Operating
expenses. The Company incurred operating expenses of $778,398 for the three
months ended March 31, 2006, an increase of $351,788 or 82.5%, compared to
$426,610 for the three months ended March 31, 2005. These operating expenses
are
related to increased sales and marketing costs related to the 124.1% increase
in
sales for the first quarter 2006.
Aggregated
selling expenses of $474,174 for the three months ended March 31, 2006, an
increase of $326,034 or 220% compared to $148,140 for the three months ended
March 31, 2005, account for expenses related to costs associated with sales
and
marketing of the Company’s products and with transportation of its products. As
the Company continues to grow revenues, it is selling Bodisen products greater
distances from its factories, leading to increased shipping costs, most notably
on the compound fertilizer product which is sold in 50 kilogram (110 pounds)
units. The increase in the cost of fuel has also had an effect on operating
expenses. Operating expenses include general and administrative expenses of
$304,224 for the three months ended March 31, 2006 and $278,470 for the three
months ended March 31, 2005, an increase of $25,754 or 9.2%. Operating expenses
are related to the cost of maintaining the company's facilities, salaries and
research and development.
Net
Income. Net income increased by 236.7% to $2,682,643 during the three months
ended March 31, 2006, an increase of $1,885,910, from $796,733 for the three
months ended March 31, 2005. Earnings per share (EPS) rose to $0.16 for the
three months ended March 31, 2006 from $0.05 for the three months ended March
31, 2005. The increase was attributed to a very strong marketing campaign that
has 2 goals: first, to saturate the markets where the company has sold product
in the past so that it can achieve greater market penetration and secondly
to
grow the demand in new markets and regions throughout China. The strong growth
in net income also occurred as a result of management's strategic decision
to
place the $5,000,000 note in December 2005 and lock in raw material costs before
any announced increases.
Liquidity
and Capital Resources
As
of
March 31, 2006 the Company had $26,085,746 of cash and cash equivalents on
hand,
compared to $6,276,897 cash and cash equivalents on hand as of December 31,
2005. The significant increase is due to the sale of Company stock during the
three months ended March 31, 2006 that resulted in gross proceeds of
$26,682,511.
On
March
16, 2005, the Company completed a $3 million convertible debenture private
placement through an institutional investor. The Company issued a one year
9%
debenture convertible into shares of common stock by dividing the aggregate
principal and accrued interest by a conversion price of $4.80; and three year
warrants to purchase 187,500 shares of common stock at $4.80 per share, In
connection with the placement a three year warrant was issued to purchase 40,000
shares of common stock at $6.88 per share. During the course of 2005 the note
was fully converted to 657,402 shares of common stock. 195,500 of the warrants
were exercised during December 2005 and 32,000 warrants were exercised during
January 2006. The net proceeds from this offering were used towards capital
contribution of the registration of a wholly-owned Bodisen subsidiary by the
name of Yang Ling Bodisen Agricultural Technology Co., Ltd.
On
February 3, 2006, we entered into an agreement to sell 1,643,836 shares of
the
Company’s common stock at 730 pence (approximately $12.99). These shares are to
be traded on the AIM Market of the London Stock Exchange. The resulting proceeds
were approximately 12,000,000 British pounds sterling (approximately
$21,360,000). The proceeds are intended for construction of two factories in
the
Northwest and Northeast of China, allowing the Company to greatly increase
the
geographical area in which it can sell its products by overcoming the logistical
issues in selling and shipping its products over increasingly greater distances.
In addition, proceeds will also be used to purchase raw materials and for
general corporate purposes.
On
March
15, 2006 the Company completed a financing of US$5,322,506 by issuing 380,179
restricted shares of common stock at $14.00 per share to private institutional
investors in a private placement. The proceeds of this financing were used
to
repay the $5,000,000 short term note plus interest which the Company entered
into on December 2005.
As
of
March 31, 2006 accounts payable was $777,648, other payables were $3,408,113
and
accrued expenses were $473,253. Cash outflows used in investing activities
decreased from $890,633 in the three month period ended March 31, 2005 to
$392,923 in the three month period ended March 31, 2006, as a result of a
decrease in acquisitions of property and equipment. Accounts receivable at March
31, 2006, were $11,848,040. Based on past performance and current expectations,
the Company believes its cash and cash equivalents and cash generated from
operations will satisfy its working capital needs, capital expenditures and
other liquidity requirements associated with its operations.
The
majority of Bodisen Biotech, Inc. revenues and majority of the expenses in
2006
were denominated primarily in Renminbi ("RMB"), the currency of the People's
Republic of China. There is no assurance that exchange rates between the RMB
and
the U.S. dollar will remain stable. A devaluation of the RMB relative to the
U.S. dollar could adversely affect our business, financial condition and results
of operations. Bodisen does not engage in currency hedging. Inflation has not
had a material impact on Bodisen’s business.
Part
II. OTHER
INFORMATION
Item
1. Legal
Proceedings
None.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Previously
disclosed in Form 8-K filed March 20, 2006.
Item
3. Defaults
Upon Senior Securities
None.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None.
Item
6. Exhibits
Exhibit
Number
|
Description
of Exhibit
|
3.1
|
Certificate
of Incorporation (incorporated by reference to Company’s Form SB-2 filed
September 3, 2002).
|
|
|
3.2
|
Amendment
to Certificate of Incorporation (incorporated by reference to Company’s
Form 10-KSB filed March 30, 2004).
|
|
|
3.3
|
By-Laws
(incorporated by reference to Company’s Form SB-2 filed September 3,
2002).
|
|
|
10.1
|
Loan
Agreement, dated as of September 28, 2003, between the Company and
Xianyang City Commercial Bank. (incorporated by reference to Company’s
Form 10-KSB filed March 30, 2004).
|
|
|
10.2
|
Bodisen
Biotech, Inc. 2004 Stock Option Plan (incorporated by reference to
Company’s Form 10-KSB filed March 31, 2005).
|
|
|
10.3
|
Form
of Bodisen Biotech, Inc. Nonstatutory Stock Option Agreement (incorporated
by reference to Company’s Form 10-KSB filed March 31,
2005).
|
|
|
21.1
|
Schedule
of Subsidiaries (incorporated by reference to Company’s Form 10-KSB filed
March 31, 2005).
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d
14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
|
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Bodisen
Biotech, Inc.
|
|
|
|
May
9, 2006
|
By:
|
/s/ Wang
Qiong
|
|
Wang
Qiong
Chief
Executive Officer (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
May
9, 2006
|
By:
|
/s/ Yiliang
Lai
|
|
Yiliang
Lai
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|