Attached files
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EX-31.1 - BODISEN BIOTECH, INC | v199890_ex31-1.htm |
EX-31.2 - BODISEN BIOTECH, INC | v199890_ex31-2.htm |
EX-32.1 - BODISEN BIOTECH, INC | v199890_ex32-1.htm |
EX-32.2 - BODISEN BIOTECH, INC | v199890_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment
No.1
(Mark
One)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the
quarterly period ended: March
31, 2010
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the
transition period from ____________ to _____________
Commission File No.
000-31539
BODISEN
BIOTECH, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
98-0381367
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
Room
2001, FanMei Building
|
||
No.
1 Naguan Zhengjie
|
||
Xi’an,
Shaanxi
|
||
People’s
Republic of China
|
710068
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
852-2482-5168
|
(Registrant’s
Telephone Number, Including Area Code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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. Yes x No ¨
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. o (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 ¨ No x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. ¨
Yes ¨
No
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. The number of shares outstanding of
each of the issuer’s classes of common stock as of October 15, 2010:
18,710,250
Explanatory
Note
The
Company changed its revenue recognition policy to the cost recovery method as
the Company does not believe that collection is reasonably assured. Under
the cost recovery method, no profit is recognized until cash payments exceed the
cost of the goods sold and the Company records deferred revenue which is the
gross profit that has not been realized. As a result of the change in the
revenue recognition policy, the Company is filing an amendment to the Form 10-Q
that was originally filed with the Securities and Exchange Commission on May 14,
2010.
TABLE
OF CONTENTS
Page
|
|||
PART
I
|
|||
Item
1.
|
Financial
Statements
|
3
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
15
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
Item
4.
|
Controls
and Procedures
|
19
|
|
PART
II
|
|||
Item
1.
|
Legal
Proceedings
|
20
|
|
Item
1A.
|
Risk
Factors
|
21
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
21
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
21
|
|
Item
4.
|
(Removed
and Reserved)
|
21
|
|
Item
5.
|
Other
Information
|
21
|
|
Item
6.
|
Exhibits
|
21
|
|
SIGNATURES
|
22
|
2
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
As Restated
|
As Restated
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
& cash equivalents
|
$
|
4,293,375
|
$
|
4,824,135
|
||||
Accounts
receivable and other receivable, net of allowance for doubtful accounts of
$2,491,458 and $2,196,072
|
2,387,632
|
2,346,583
|
||||||
Other
receivables
|
32,364
|
26,298
|
||||||
Inventory
|
794,035
|
991,140
|
||||||
Advances
to suppliers
|
976,735
|
541,754
|
||||||
Prepaid
expense and other current assets
|
833,839
|
966,942
|
||||||
Total
current assets
|
9,317,980
|
9,696,852
|
||||||
PROPERTY
AND EQUIPMENT, net
|
11,634,551
|
11,837,406
|
||||||
CONSTRUCTION
IN PROGRESS
|
10,422,641
|
10,422,641
|
||||||
MARKETABLE
SECURITY, AVAILABLE-FOR-SALE
|
7,044,879
|
8,175,290
|
||||||
INTANGIBLE
ASSETS, net
|
4,819,114
|
4,873,904
|
||||||
TOTAL
ASSETS
|
$
|
43,239,165
|
$
|
45,006,093
|
||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$
|
93,624
|
$
|
71,504
|
||||
Accrued
expenses
|
169,192
|
161,673
|
||||||
Deferred
revenue
|
410,114
|
917,147
|
||||||
Total
current liabilities
|
672,930
|
1,150,324
|
||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Preferred
stock, $0.0001 per share; authorized 5,000,000 shares; nil issued and
outstanding
|
||||||||
Common
stock, $0.0001 per share; authorized 30,000,000 shares; issued and
outstanding 18,710,250 and 18,710,250
|
1,871
|
1,871
|
||||||
Additional
paid-in capital
|
33,945,822
|
33,945,822
|
||||||
Other
comprehensive income
|
12,342,818
|
13,473,307
|
||||||
Statutory
reserve
|
4,314,488
|
4,314,488
|
||||||
Retained
Earnings
|
(8,038,764
|
)
|
(7,879,719
|
)
|
||||
Total
stockholders' equity
|
42,566,235
|
43,855,769
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
43,239,165
|
$
|
45,006,093
|
The
accompanying notes are an integral part of these consolidated financial
statements
3
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME
(LOSS)
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
As Restated
|
As Restated
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Net
Revenue
|
$
|
1,538,342
|
$
|
2,185,881
|
||||
Cost
of Revenue
|
809,883
|
1,323,284
|
||||||
Gross
profit
|
728,459
|
862,597
|
||||||
Operating
expenses
|
||||||||
Selling
expenses
|
141,414
|
12,246
|
||||||
General
and administrative expenses
|
747,984
|
487,329
|
||||||
Writedown
of assets
|
-
|
11,914
|
||||||
Total
operating expenses
|
889,398
|
511,489
|
||||||
Loss
from operations
|
(160,939
|
)
|
351,108
|
|||||
Non-operating
income (expense):
|
||||||||
Other
income (expense)
|
(614
|
)
|
(717
|
)
|
||||
Interest
income
|
3,168
|
192
|
||||||
Interest
expense
|
(660
|
)
|
(75
|
)
|
||||
Loss
on the sale of investment
|
-
|
(130,247
|
)
|
|||||
Equity
income in investment
|
-
|
159,643
|
||||||
Total
non-operating income (expense)
|
1,894
|
28,796
|
||||||
Income
(loss) before provision for income taxes
|
(159,045
|
)
|
379,904
|
|||||
Provision
(benefit) for income taxes
|
-
|
-
|
||||||
Net
income (loss)
|
(159,045
|
)
|
379,904
|
|||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
(79
|
)
|
(54,350
|
)
|
||||
Unrealized
loss on marketable equity security
|
(1,130,410
|
)
|
(722,319
|
)
|
||||
Comprehensive
income (loss)
|
$
|
(1,289,534
|
)
|
$
|
(396,765
|
)
|
||
Weighted
average shares outstanding :
|
||||||||
Basic
|
18,710,250
|
18,710,250
|
||||||
Diluted
|
18,710,250
|
18,710,250
|
||||||
Earnings
per share:
|
||||||||
Basic
|
$
|
(0.01
|
)
|
$
|
0.02
|
|||
Diluted
|
$
|
(0.01
|
)
|
$
|
0.02
|
The
accompanying notes are an integral part of these consolidated financial
statements
4
BODISEN
BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
As Restated
|
As Restated
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (loss)
|
$
|
(159,045
|
)
|
$
|
379,904
|
|||
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
260,824
|
147,101
|
||||||
Loss
on disposal of fixed asset
|
-
|
11,914
|
||||||
Loss
on the sale of investment
|
-
|
130,247
|
||||||
Allowance
(recovery) of bad debts
|
295,397
|
334,847
|
||||||
Equity
income in investment
|
-
|
(159,643
|
)
|
|||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivable
|
(336,320
|
)
|
(861,484
|
)
|
||||
Other
receivables
|
(6,064
|
)
|
(26,589
|
)
|
||||
Inventory
|
197,037
|
627,397
|
||||||
Advances
to suppliers
|
(434,833
|
)
|
(174,154
|
)
|
||||
Prepaid
expense
|
133,058
|
14,817
|
||||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
22,112
|
(335,494
|
)
|
|||||
Accrued
expenses
|
7,516
|
(16,640
|
)
|
|||||
Deferred
revenue
|
(507,033
|
)
|
(650,846
)
|
|||||
Net
cash used in operating activities
|
(527,351
|
)
|
(578,623
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Acquisition
of property and equipment
|
(3,267
|
)
|
-
|
|||||
Additions
to construction in progress
|
-
|
(14,624
|
)
|
|||||
Proceeds
from sale of investment
|
-
|
735,480
|
||||||
Net
cash provided by (used in) investing activities
|
(3,267
|
)
|
720,856
|
|||||
Effect
of exchange rate changes on cash and cash equivalents
|
(142
|
)
|
(8,344
|
)
|
||||
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
(530,760
|
)
|
133,889
|
|||||
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
4,824,135
|
90,716
|
||||||
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
$
|
4,293,375
|
$
|
224,605
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$
|
-
|
$
|
-
|
||||
Income
taxes paid
|
$
|
-
|
$
|
-
|
||||
SUPPLEMENTAL
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Transfer
of construction in process to property and equipment
|
$
|
-
|
$
|
7,166,581
|
The
accompanying notes are an integral part of these consolidated financial
statements
5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Note
1 - Organization and Basis of Presentation
The
unaudited consolidated financial statements have been prepared by Bodisen
Biotech, Inc., a Delaware corporation (the “Company” or “Bodisen”), pursuant to
the rules and regulations of the Securities Exchange Commission (“SEC”).
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-K. The
results for the three months ended March 31, 2010 are not necessarily indicative
of the results to be expected for the full year ending December 31,
2010.
Organization and Line of
Business
The
accompanying consolidated financial statements include the accounts of Bodisen
Biotech, Inc., its 100% wholly-owned subsidiaries Bodisen Holdings, Inc. (BHI),
Yang Ling Bodisen Agricultural Technology Co., Ltd (Agricultural), which was
incorporated in March 2005, and Sinkiang Bodisen Agriculture Material Co., Ltd.
(Material), which was incorporated in June 2006, as well as the accounts of
Agricultural’s 100% wholly- owned subsidiary Yang Ling Bodisen Biology Science
and Technology Development Company Limited (BBST). The Company is engaged
in developing, manufacturing and selling organic fertilizers, liquid
fertilizers, pesticides and insecticides in the People’s Republic of China
and produce numerous proprietary product lines, from pesticides to crop-specific
fertilizers. The Company markets and sells its products to distributors
throughout the People's Republic of China, and these distributors, in turn, sell
the products to farmers.
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. All significant intercompany transactions and balances have been
eliminated. The Company’s functional currency is the Chinese Yuan Renminbi
(“RMB”); however the accompanying consolidated financial statements have been
translated and presented in United States Dollars ($ or “USD”).
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of Bodisen
Biotech, Inc., its subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Note
2 – Summary of Significant Accounting Policies
Reclassifications
Certain
amounts in the 2009 consolidated financial statements have been reclassified to
conform with the 2010 presentation with no effect to previously reported net
income (loss).
6
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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. It is possible that accounting estimates and assumptions may be
material to the Company due to the levels of subjectivity and judgment
involved.
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 for 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. Reserves are recorded based on the Company’s
historical collection history.
Advances to
Suppliers
The
Company advances to certain vendors for purchase of its material. The advances
to suppliers are interest free and unsecured.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower.
Property & Equipment and
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
|
7
The
following are the details of the property and equipment at March 31, 2010 and
December 31, 2009, respectively:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Operating
equipment
|
$
|
4,652,135
|
$
|
4,650,919
|
||||
Vehicles
|
687,791
|
687,791
|
||||||
Office
equipment
|
87,552
|
87,552
|
||||||
Buildings
|
8,658,131
|
8,656,077
|
||||||
14,085,609
|
14,082,339
|
|||||||
Less
accumulated depreciation
|
(2,451,058
|
)
|
(2,244,933
|
)
|
||||
Property
and equipment, net
|
$
|
11,634,551
|
$
|
11,837,406
|
Depreciation
expense for the three months ended March 31, 2010 and 2009 was $206,054 and
$92,383, respectively.
On March
31, 2010 and December 31, 2009, the Company had “Capital Work in Progress”
representing the construction in progress of the Company’s manufacturing plant
amounting $10,422,641. During the three months ended March 31, 2010, there were
no transfers from construction in progress to property and
equipment.
Marketable
Securities
The
Company applies the guidance of ASC Topic 320 “Investments-Debt and Equity
Securities,” which requires investments in equity securities to be classified as
either trading securities or available-for-sale securities. Marketable
securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities and are reported at fair
value, with unrealized gains and losses recognized in earnings. Marketable
equity securities not classified as trading are classified as available for
sale, and are carried at fair market value, with the unrealized gains and
losses, net of tax, included in the determination of comprehensive income and
reported in shareholders’ equity.
Long-Lived
Assets
The
Company applies the provisions of ASC Topic 360, “Property, Plant, and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC 360 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair value of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the
cost of disposal. Based on its review, the Company believes that as of March 31,
2010 and December 31, 2009, there was no significant impairment of its
long-lived assets.
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.
8
Fair Value of Financial
Instruments
For
certain of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, accrued
liabilities and short-term debt, the carrying amounts approximate their fair
values due to their short maturities. In addition, the Company has long-term
debt with financial institutions. The carrying amounts of the line of credit and
other long-term liabilities approximate their fair values based on current rates
of interest for instruments with similar characteristics.
ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such
instruments and their expected realization and their current market rate of
interest. The three levels of valuation hierarchy are defined as
follows:
|
·
|
Level 1 inputs to the valuation
methodology are quoted prices for identical assets or liabilities in
active markets.
|
|
·
|
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the
financial instrument.
|
|
·
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
The
following table represents our assets and liabilities by level measured at fair
value on a recurring basis as of March 31, 2010.
Description
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
Assets
|
||||||||||||
Marketable
securities
|
$
|
7,044,879
|
$
|
-
|
$
|
-
|
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with ASC 825.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Because collection is not reasonably assured, sales revenue
is recognized using the cost recovery method.Under the cost recovery method, no
profit is recognized until cash payments exceed the cost of the goods
sold.
Advertising
Costs
The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the three months
ended March 31, 2010 and 2009 were insignificant.
9
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with ASC Topic 718,
“Compensation – Stock Compensation.” ASC 718 requires companies to measure
compensation cost for stock-based employee compensation at fair value at the
grant date and recognize the expense over the employee’s requisite service
period. 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. There were 426,000 options outstanding as of March
31, 2010.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion, or all of,
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.
In March
2005, Bodisen Biotech Inc. formed Agricultural. 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 BBST, which resulted in Agricultural
owning 100% of BBST.
Foreign Currency
Translation
The
accounts of the Company’s Chinese subsidiaries are maintained in the RMB and the
accounts of the U.S. parent company are maintained in the USD. The
accounts of the Chinese subsidiaries are were translated into USD in accordance
with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency
Matters,” with the RMB as the functional currency for the Chinese
subsidiaries. According to Topic 830, all assets and liabilities were
translated at the exchange rate on the balance sheet date, stockholders’ equity
is translated at historical rates and statement of operations items are
translated at the weighted average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income in
accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses
resulting from the translations of foreign currency transactions and balances
are reflected in the statement of operations.
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’s Chinese
subsidiaries is the Chinese Yuan Renminbi. Translation gains of $8,127,671
and $8,127,749 at March 31, 2010 and December 31, 2009, respectively 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, 2010 and 2009, other comprehensive income in the consolidated
statements of operations and other comprehensive income included translation
gains (loss) of $(79) and $(54,350), respectively.
10
Basic and Diluted Earnings
Per Share
Earnings
per share is calculated in accordance with the ASC Topic 260, “Earnings Per
Share.” Basic earnings per share is based upon the weighted average number
of common shares outstanding. Diluted earnings per share is based on the
assumption that all dilutive convertible shares and stock warrants were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. There were 436,000 and 536,000 options as of March 31, 2010
and 2009 that were excluded from the diluted loss per share calculation due to
their anti-dilutive effect.
Statement of C ash
Flows
In
accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Segment
Reporting
ASC Topic
280, “Segment Report,” 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. ASC Topic 280 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 and all of the Company’s assets are located in People’s Republic of
China.
Recent Accounting
Pronouncements
In
October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU
2009-15") regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. This ASU
requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or
other financing, the shares issued shall be measured at fair value and be
recognized as an issuance cost, with an offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or after
December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The adoption
of this ASU did not have a significant impact on the Company’s consolidated
financial statements.
On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”. This ASU requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
11
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. The FASB believes these amendments
remove potential conflicts with the SEC’s literature. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on the Company’s consolidated financial
statements.
Note
3 – Inventory
Inventory
at March 31, 2010 and December 31, 2009 consisted of the following:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$
|
244,238
|
$
|
355,714
|
||||
Packaging
|
45,473
|
59,729
|
||||||
Finished
goods
|
504,324
|
652,202
|
||||||
794,035
|
1,067,645
|
|||||||
Less
obsolescence reserve
|
-
|
(76,505
|
)
|
|||||
Inventory,
net
|
$
|
794,035
|
$
|
991,140
|
Note
5 – Marketable Security
During
2008, the Company exchanged $3,291,264 of receivables for a 28.8% ownership
interest in a Chinese company, Shanxi Jiali Pharmaceutical Co. Ltd
(“Jiali”). The Company had written down the value of this investment by
$987,860 at December 31, 2008. This investment was originally accounted
for under the equity method and the Company recorded equity income in this
investment through September 30, 2009. During the fourth quarter of 2009,
Jiali was purchased by China Pediatric Pharmaceuticals, Inc. (“China
Pediatric”), a public company. After the transaction, the Company owned
18.8% of China Pediatric. The Company then changed the accounting method
for the investment from the equity method to the fair value method. At the
date of the change, the investment was valued at $2,829,732. As of March
31, 2010 and December 31, 2009, the fair value of the investment is $7,044,879
and $8,175,290, respectively, which is reflected in the consolidated balance
sheet. The company recognized an unrealized loss of $1,130,411 and
$722,319 for the three months ended March 31, 2010 and 2009, respectively, which
is reflected as other comprehensive income in the consolidated statement of
stockholder’s equity.
12
Note
6– Intangible Assets
Net
intangible assets at March 31, 2010 and December 31, 2009 were as
follows:
March 31,
|
December 31,
|
|||||||
2009
|
2009
|
|||||||
Rights
to use land
|
$
|
4,999,724
|
$
|
4,999,725
|
||||
Fertilizers
proprietary technology rights
|
1,173,600
|
1,173,600
|
||||||
6,173,324
|
6,173,325
|
|||||||
Less
accumulated amortization
|
(1,354,210
|
)
|
(1,299,421
|
)
|
||||
Intangibles,
net
|
$
|
4,819,114
|
$
|
4,873,904
|
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.
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.
On July
15, 2008, the Company entered into a 50 year land rights agreement.
Amortization
expense for the Company’s intangible assets for the three month periods ended
March 31, 2010 and 2009 amounted to $54,770 and $54,718,
respectively.
Note
7 – Stock Options
Stock
Options
Following
is a summary of the stock option activity:
Weighted
|
|
|||||||||||
Average
|
Aggregate
|
|||||||||||
Options
|
Exercise Price
|
Intrinsic
|
||||||||||
Outstanding
|
Price
|
Value
|
||||||||||
Outstanding
at December 31, 2009
|
426,000 | $ | 1.07 | |||||||||
Granted
|
- | |||||||||||
Canceled
|
- | |||||||||||
Exercised
|
- | |||||||||||
Outstanding
at March 31, 2010 (unaudited)
|
426,000 | $ | 1.07 | |||||||||
Exercisable
at March 31, 2010 (unaudited)
|
426,000 | $ | 1.07 | $ | - |
Note
8 – 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:
13
|
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.
|
Pursuant
to the new Corporate Law effective on January 1, 2006, there is now only one
"Statutory surplus reserve" requirement. The reserve is 10 percent of
income after tax, not to exceed 50 percent of registered capital.
The
Company did not appropriate a reserve for the statutory surplus reserve and
welfare fund for the three months ended March 31, 2010 and 2009.
Note
9 – Factory Location and Lease Commitments
The
Company’s principal executive offices are located at North Part of Xinquia Road,
Yang Ling Agricultural High-Tech Industries Demonstration Zone Yang Ling,
Shaanxi province, People’s Republic of China. BBST owns two factories, which
includes three production lines, an office building, one warehouse, and two
research labs and, is located on 10,900 square meters of land. These leases
require monthly rental payments of $2,546 and the leases expire in
2013.
Note
10 – Current Vulnerability Due to Certain Concentrations
Two
vendors provided 48.4% and 31.3% of the Company’s raw materials for the three
months ended March 31, 2010 and three vendors provided 48.6%, 33.5% and 10.7% of
the Company’s raw materials for the three months ended March 31,
2009.
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
11 – Restatement
The
Company changed its revenue recognition policy to the cost recovery method as
the Company does not believe that collection is reasonably assured. Under
the cost recovery method, no profit is recognized until cash payments exceed the
cost of the goods sold and the Company records deferred revenue which is the
gross profit that has not been realized. As a result of the change in the
revenue recognition policy, the Company is filing an amendment to the Form 10-Q
that was originally filed with the Securities and Exchange Commission on May 14,
2010.
The
following adjustments were made to the March 31, 2010 and 2009 financial
statements.
March 31, 2010
|
March 31, 2010
|
|||||||||||
As Reported
|
Adjustment
|
Restated
|
||||||||||
Accounts
receivable
|
$ | 2,158,993 | $ | 228,639 | $ | 2,387,632 | ||||||
Current
assets
|
9,089,341 | 228,639 | 9,317,980 | |||||||||
Total
assets
|
43,010,526 | 228,639 | 43,239,165 | |||||||||
Deferred
revenue
|
- | 410,114 | 410,114 | |||||||||
Total current
liabilities
|
262,816 | 410,114 | 672,930 | |||||||||
Retained
earnings
|
(7,857,289 | ) | (181,475 | ) | (8,038,764 | ) | ||||||
Total
stockholders' equity
|
42,747,710 | (181,475 | ) | 42,566,235 | ||||||||
Total
liabilities and stockholders' equity
|
$ | 43,010,526 | $ | 228,639 | $ | 43,239,165 |
For the Three
|
For the Three
|
|||||||||||
Months Ended
|
Months Ended
|
|||||||||||
March 31, 2010
|
March 31, 2010
|
|||||||||||
As Reported
|
Adjustment
|
Restated
|
||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||
Net
revenue
|
$ | 1,031,309 | $ | 507,033 | $ | 1,538,342 | ||||||
Gross
profit
|
221,426 | 507,033 | 728,459 | |||||||||
General
and administrative expenses
|
421,082 | 326,902 | 747,984 | |||||||||
Total
operating expenses
|
562,496 | 326,902 | 889,398 | |||||||||
Income
(loss) from operations
|
(341,070 | ) | 180,131 | (160,939 | ) | |||||||
Income
(loss) before provision for income taxes
|
(339,176 | ) | 180,131 | (159,045 | ) | |||||||
Net
income (loss)
|
(339,176 | ) | 180,131 | (159,045 | ) | |||||||
Comprehensive
loss
|
(1,469,665 | ) | 180,131 | (1,289,534 | ) | |||||||
Basic
earnings (loss) per share
|
(0.02 | ) | 0.01 | (0.01 | ) | |||||||
Diluted
earnings (loss) per share
|
$ | (0.02 | ) | $ | 0.01 | $ | (0.01 | ) |
For the Three
|
For the Three
|
|||||||||||
Months Ended
|
Months Ended
|
|||||||||||
March 31, 2009
|
March 31, 2009
|
|||||||||||
As Reported
|
Adjustment
|
Restated
|
||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||
Net
revenue
|
$ | 1,535,035 | $ | 650,846 | $ | 2,185,881 | ||||||
Gross
profit
|
211,751 | 650,846 | 862,597 | |||||||||
General
and administrative expenses
|
(331,032 | ) | 818,361 | 487,329 | ||||||||
Total
operating expenses
|
(306,872 | ) | 818,361 | 511,489 | ||||||||
Income
(loss) from operations
|
518,623 | (167,515 | ) | 351,108 | ||||||||
Income
(loss) before provision for income taxes
|
547,419 | (167,515 | ) | 379,904 | ||||||||
Net
income (loss)
|
547,419 | (167,515 | ) | 379,904 | ||||||||
Comprehensive
loss
|
(229,250 | ) | (167,515 | ) | (396,765 | ) | ||||||
Basic
earnings (loss) per share
|
0.03 | (0.01 | ) | 0.02 | ||||||||
Diluted
earnings (loss) per share
|
$ | 0.03 | $ | (0.01 | ) | $ | 0.02 |
Note
12 – Subsequent Events
Pursuant
to Financial Accounting Standards Board Accounting Standards Codification
855-10, the Company has evaluated all events or transactions that occurred from
April 1, 2010, through the filing with the SEC. The Company did not have
any material recognizable subsequent events during this period.
14
ITEM
2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary
Note Regarding Forward-Looking Statements
We make
certain forward-looking statements in this report. Statements concerning our
future operations, prospects, strategies, financial condition, future economic
performance (including growth and earnings), demand for our services, and other
statements of our plans, beliefs, or expectations, including the statements
contained under the captions “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business,” as well as captions elsewhere
in this document, are forward-looking statements. In some cases these statements
are identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,”
“may,” “should,” “will,” “would,” and similar expressions. We intend such
forward-looking statements to be covered by the safe harbor provisions contained
in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)
and in Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). The forward-looking statements we make are not guarantees of
future performance and are subject to various assumptions, risks, and other
factors that could cause actual results to differ materially from those
suggested by these forward-looking statements. Because such statements are
subject to risks and uncertainties, actual results may differ materially from
those expressed or implied by the forward-looking statements. Indeed, it is
likely that some of our assumptions will prove to be incorrect. Our actual
results and financial position will vary from those projected or implied in the
forward-looking statements and the variances may be material. You are cautioned
not to place undue reliance on such forward-looking statements. These risks and
uncertainties, together with the other risks described from time to time in
reports and documents that we file with the SEC should be considered in
evaluating forward-looking statements.
The
nature of our business makes predicting the future trends of our revenue,
expenses, and net income difficult. Thus, our ability to predict results or the
actual effect of our future plans or strategies is inherently uncertain. The
risks and uncertainties involved in our business could affect the matters
referred to in any forward-looking statements and it is possible that our actual
results may differ materially from the anticipated results indicated in these
forward-looking statements. Important factors that could cause actual results to
differ from those in the forward-looking statements include, without limitation,
the following:
|
·
|
the effect of political,
economic, and market conditions and geopolitical
events;
|
|
·
|
legislative and regulatory
changes that affect our
business;
|
|
·
|
the availability of funds and
working capital;
|
|
·
|
the actions and initiatives of
current and potential
competitors;
|
|
·
|
investor sentiment;
and
|
|
·
|
our
reputation.
|
We do not
undertake any responsibility to publicly release any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this report. Additionally, we do not undertake any
responsibility to update you on the occurrence of any unanticipated events which
may cause actual results to differ from those expressed or implied by any
forward-looking statements.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto as filed with
the SEC and other financial information contained elsewhere in this
Report.
Except as
otherwise indicated by the context, references in this Form 10-Q to “we,” “us,”
“our,” “the Registrant”, “our Company,” or “the Company” are Bodisen Biotech,
Inc., a Delaware corporation and its consolidated subsidiaries, including Yang
Ling Bodisen Biology Science and Technology Development Company Limited, (“Yang
Ling”), our operating subsidiary. Unless the context otherwise requires, all
references to (i) “PRC” and “China” are to the People’s Republic of China; (ii)
“U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are to
Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of 1933,
as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934,
as amended.
15
Critical
Accounting Policies and Estimates
Our
financial statements and related public financial information are based on the
application of accounting principles generally accepted in the United States
("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenues and expenses amounts reported. These estimates can
also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.
We
believe the following is among the most critical accounting policies that impact
our consolidated financial statements. We suggest that our significant
accounting policies, as described in our condensed consolidated financial
statements in the Summary of Significant Accounting Policies, be read in
conjunction with this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Accounts
receivable
We
maintain reserves for potential credit losses on accounts receivable and record
them primarily on a specific identification basis. In order to establish
reserves, we review the composition of accounts receivable and analyze
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. This analysis and evaluation requires the use of
judgments and estimates. Because of the nature of the evaluation, certain of the
judgments and estimates are subject to change, which may require adjustments in
future periods.
Inventories
We value
inventories at the lower of cost (determined on a weighted average basis) or
market. When evaluating our inventory, we compare the cost with the market value
and make allowance to write them down to market value, if lower. The
determination of market value requires the use of estimates and judgment by our
management.
Intangible
assets
We
evaluate 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. This evaluation
requires the use of judgments and estimates, in particular with respect to
recoverability. 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.
Recent
Accounting Pronouncements
In
October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU
2009-15") regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. This ASU
requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or
other financing, the shares issued shall be measured at fair value and be
recognized as an issuance cost, with an offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or after
December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The adoption
of this ASU did not have a significant impact on the Company’s consolidated
financial statements.
On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”. This ASU requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
16
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of U.S. GAAP. The FASB believes these amendments
remove potential conflicts with the SEC’s literature. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on the Company’s consolidated financial
statements.
Results
of Operations
Three Months Ended March 31,
2010 as Compared to Three Months Ended March 31, 2009
Revenue . We generated
revenue of $1,538,342 for the three months ended March 31, 2010, a decrease of
$647,539 or 29.6%, compared to $2,185,881 for the three months ended March 31,
2009. The decrease in revenue is primarily attributable to the overall
slowdown in the global economy. The decrease in revenue is attributed to
lower sales volume.
Gross Profit . We
achieved a gross profit of $728,459 for the three months ended March 31, 2010, a
decrease of $134,138 or 15.6%, compared to $862,597for the three months ended
March 31, 2009. Gross margin (gross profit as a percentage of revenues),
was 47.5% for the three months ended March 31, 2010, compared to 39.5% for the
three months ended March 31, 2009. The increase in the gross margin
percentage was primarily attributable to an overall decrease in production
costs.
Operating expenses. We
incurred net operating expenses of $889,398 for the three months ended March 31,
2010, an increase of $377,909 or 145.8%, compared to operating expenses of
$511,489 for the three months ended March 31, 2009. The increase in our
operating expenses is primarily attributable to an increase in marketing
promotion and advertising programs and depreciation and amortization
expenses.
Aggregated
selling expenses accounted for $141,414 of our operating expenses for the three
months ended March 31, 2010, an increase of $129,168 or 1,055%, compared to
$12,246 for the three months ended March 31, 2009. The increase in our
aggregated selling expenses is primarily attributable to an increase in
marketing promotion and advertising programs.
General
and administrative expenses accounted for the remainder of our net operating
expenses of $747,984 for the three months ended March 31, 2010, an increase of
$260,655 or 53.3%, compared to $487,329 for the three months ended March 31,
2009. The increase in general and administrative expenses is primarily
attributable to an increase in and depreciation and amortization expenses.
For the three months ended March 31, 2010 depreciation and amortization expense
increased by $113,723 or 77% due to the increase in property and
equipment.
17
Non Operating Income and
Expenses . We had total non-operating income of $1,894 for the
three months ended March 31, 2010, a decrease of $26,902 compared to $28,796 for
the three months ended March 31, 2009. Other income (expense) was $(614)
for the three months ended March 31, 2010 compared to $(717) for the three
months ended March 31, 2009. Also included in non-operating income
(expense) for the three months ended March 31, 2009 is a loss $130,247
related to a loss on the sale of investment and a gain of $159,643 related to
equity income of an investment that we account for under the equity
method. During the three months ended March 31, 2010, we did not incur any
gains or losses related to the above transactions.
Net Income . For the
foregoing reasons, we had a net loss of $159,045 for the three months ended
March 31, 2010, a decrease of $538,949 or 141.9%, compared to net income of
$379,904 for the three months ended March 31, 2009. We had earnings (loss)
per share of $(0.01) and $0.02 for the three months ended March 31, 2010 and
2009, respectively.
Liquidity
and Capital Resources
We are
primarily a parent holding company for the operations carried out by our
indirect operating subsidiary, Yang Ling, which carries out its activities in
the People’s Republic of China. Because of our holding company structure,
our ability to meet our cash requirements apart from our financing activities,
including payment of dividends on our common stock, if any, substantially
depends upon the receipt of dividends from our subsidiaries, particularly Yang
Ling.
As of
March 31, 2010, we had $4,293,375 of cash and cash equivalents compared to
$4,824,135 as of December 31, 2009.
Cash
Flows
Operating.
We used $527,351 of cash for operating activities for the three months ended
March 31, 2010 compared to $578,623 for the three months ended March 31,
2009.
Investing.
Our investing activities used $3,267 of cash for the three months ended March
31, 2010, compared to $720,856 of cash provided by investing activities for the
three months ended March 31, 2009. The decrease is primarily attributable
to the proceeds from the sale of investment in 2009 of $735,480 for which there
were no sales in 2010.
Financing.
We had no cash provided by financing activities for the three months ended March
31, 2010 and 2009.
Contractual
Commitments
In August
2006, we entered into a 30-year land-lease arrangement with the government of
the People’s Republic of China, under which we pre-paid $2,529,818 upon
execution of the contract of lease expense for the next 15 years. We agreed to
make a prepayment for the next eight years in November 2021, and will make a
final pre-payment in November 2029 for the remaining seven years. The annual
lease expense amounts to approximately $169,580. Our land-lease arrangement is
currently our only material on- and off-balance sheet expected or contractually
committed future obligation.
Off-Balance
Sheet Arrangements
We
currently do not have any material off-balance sheet arrangements except for the
remaining pre-payments under the land-lease arrangement described
above.
18
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not
Applicable.
ITEM
4. CONTROLS AND
PROCEDURES.
Evaluation
of our Disclosure Controls
As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including our
Chief Executive Officer, Bo Chen, and our Chief Financial Officer, Junyan Tong,
as appropriate to allow timely decisions regarding required disclosure. Our
management does not expect that our Disclosure Controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, Messrs. Bo and Tong concluded that because of the
material weakness in internal control over financial reporting described below,
our disclosure controls and procedures were not effective as of March 31,
2010.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”). Management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009. In making
this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework.
Notwithstanding
the aforementioned controls implemented in December 2006, during management’s
assessment of the effectiveness of internal control over financial
reporting as of December 31, 2009, management identified deficiencies
related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) a
lack of segregation of duties within accounting functions, (iii) our
internal risk assessment functions, and (iv) our communication functions..
Management believes that these deficiencies amount to a material weakness that
render our internal controls over financial reporting ineffective as of March
31, 2010.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
In order
to correct the foregoing deficiencies, we have taken the following remediation
measures:
|
·
|
Although our accounting staff is
professional and experienced in accounting requirements and procedures
generally accepted in the PRC, management has determined that they require
additional training and assistance in U.S. GAAP matters. Management
has determined that our internal audit function is also significantly
deficient due to insufficient qualified resources to perform internal
audit functions. We retained an outside consulting firm in September 2006,
which has since been assisting us in the implementation of Section
404.
|
19
|
·
|
We have committed to the
establishment of effective internal audit functions and have instituted
various anti-fraud control and financial and account management policies
and procedures to strengthen our internal controls over financial
reporting. Due to the scarcity of qualified candidates with
extensive experience in U.S. GAAP reporting and accounting in the region,
we were not able to hire sufficient internal audit resources before the
end of 2009. However, we will increase our search for qualified candidates
with assistance from recruiters and through
referrals.
|
|
·
|
Due to our size and nature,
segregation of all conflicting duties may not always be possible and may
not be economically feasible. However, to the extent possible, we
will implement procedures to assure that the initiation of transactions,
the custody of assets and the recording of transactions will be performed
by separate individuals.
|
|
·
|
As of the fiscal year ended
December 31, 2009, we have not yet established an effective risk
assessment system that enables us to collect related information
comprehensively and systematically, assess risks in a timely, realistic
manner, and take appropriate measures to control risks effectively. The
Company is working with its outside consultant to devise an effective risk
assessment system and our Chief Financial Officer Junyan Tong is
responsible for overseeing such
measures.
|
|
·
|
As of the three months ended
March 31, 2010, we are working to strengthen efforts to establish an
effective communication system with clear procedures that will enable us
to collect, process and deliver information related to internal controls
in a timely fashion. Due to our limited staff, our Chief Financial
Officer, Mr. Tong, will initially be primarily responsible for collecting
and delivering such information among the different levels of Company
management.
|
We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate.
Notwithstanding
the conclusion that our internal control over financial reporting was not
effective as of the end of the period covered by this report, the Chief
Executive Officer and the Chief Financial Officer believe that the financial
statements and other information contained in this annual report present fairly,
in all material respects, our business, financial condition and results of
operations. Nothing has come to the attention of management that causes
them to believe that any material inaccuracies or errors exist in our financial
statements as of March 31, 2010. The reportable conditions and other areas
of our internal control over financial reporting identified by us as needing
improvement have not resulted in a material restatement of our financial
statements. Nor are we aware of any instance where such reportable conditions or
other identified areas of weakness have resulted in a material misstatement of
omission in any report we have filed with or submitted to the
Commission.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
In
addition to the above mentioned deficiencies, subsequent to March 31, 2010, as a
result of comments raised by the SEC, we determined that accounting errors were
made in our revenue recognition procedures which have resulted in the
restatement of our previously issued financial statements.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
our first quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS.
From time
to time, we may become involved in various lawsuits and legal proceedings that
arise in the ordinary course of business. Litigation is, however, subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe would or could have,
individually or in the aggregate, a material adverse affect on our business,
financial condition, results of operations or liquidity.
20
ITEM
1A. RISK
FACTORS.
Not
Applicable.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES.
None.
ITEM
4. (REMOVED
AND RESERVED)
ITEM
5. OTHER
INFORMATION.
Not
applicable.
ITEM
6. EXHIBITS.
Copies of
the following documents are included as exhibits to this report pursuant to Item
601 of Regulation S-K.
Exhibit
No.
|
Exhibit
Description
|
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.
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
21
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.
|
|
Dated:
October 27, 2010
|
/s/Bo
Chen
|
Bo
Chen
|
|
Chairman,
Chief Executive Officer and President
|
|
(principal
executive officer)
|
|
Dated:
October 27, 2010
|
/s/Junyan
Tong
|
Junyan
Tong
|
|
Chief
Financial Officer
|
|
(principal
financial officer and accounting officer
)
|
22