BODISEN BIOTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Net icome:
As reported		$	3,488,746
Compensation recognized under APB 25			—
Compensation recognized under SFAS 123			(12,000	)
Pro forma		$	3,476,746
Basic earnings per share:
As reported		$	0.23
Pro forma		$	0.23
Diluted earnings per share:
As reported		$	0.22
Pro forma		$	0.22

 

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.

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:

		Options outstanding			Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding, December 31, 2005			136,000		$	5.39		$	1,171,280
Granted			—			—
Forfeited			—			—
Exercised			—			—
Outstanding, June 30, 2006			136,000		$	5.39		$	1,104,640

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BODISEN BIOTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Following is a summary of the status of options outstanding at June 30, 2006:

Outstanding Options								Exercisable Options
Exercise Price		Number			Average Remaining Contractual Life			Average Exercise Price			Number			Average Exercise Price
$5.00			100,000			2.93		$	5.00			100,000		$	5.00
$5.80			10,000			3.50		$	5.80			10,000		$	5.80
$6.72			26,000			4.27		$	6.72			26,000		$	6.72

For options granted during the year ended December 31, 2005, the weighted-average fair value of such options was $3.76.

The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:

Risk-free interest rate			4.0	%
Expected life of the options			5.00 years
Expected volatility			62	%
Expected dividend yield			0

For options granted during the year ended December 31, 2004, the weighted-average fair value of such options was $1.92.

The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model are as follows:

First 100,000 stock options granted on June 4, 2004:

Risk-free interest rate			4.0	%
Expected life of the options			5.00 years
Expected volatility			35	%
Expected dividend yield			0

Second 10,000 stock options granted on December 28, 2004

Risk-free interest rate			4.0	%
Expected life of the options			5.00 years
Expected volatility			40	%
Expected dividend yield			0

 

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BODISEN BIOTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Warrants

Following is a summary of the warrant activity:

Outstanding, December 31, 2005			165,333
Granted			—
Forfeited			—
Exercised			32,000
Outstanding, June 30, 2006			133,333

Following is a summary of the status of warrants outstanding at June 30, 2006:

Outstanding Warrants								Exercisable Warrants
Exercise Price		Number			Average Remaining Contractual Life			Average Exercise Price			Number			Average Exercise Price
$7.50			133,333			4.44		$	7.50			133,333		$	7.50

Note 11 - 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 $36,924 for the six months ended June 30, 2006 and 2005, respectively. The Company has recorded welfare payable of $263,034 at June 30, 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 12 - 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;

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BODISEN BIOTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 six months ended June 30, 2006 and 2005 amounted to $458,687 and $174,437, respectively.

 

Note 13 - Statutory Reserve

In accordance with the Chinese Company Law, the company has allocated 10% of its annual net income, amounting $917,373 and $348,875 as statutory reserve for the six months ended June 30, 2006 and 2005, respectively.

Note 14 - Earnings Per Share

Earnings per share for six months June 30, 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 Months Ended June 30,
		2006									2005
								Per									Per
		Income			Shares			Share			Income			Shares			Share
Basic earnings per share
Net income		$	5,879,678								$	2,692,014
Weighed shares outstanding						18,176,917									15,272,926
								$	0.32								$	0.18
Diluted earnings per share
Net income		$	5,879,678								$	2,692,014
Weighed shares outstanding						18,176,917									15,272,926
Effect of dilutive securities
Options						78,777									419,279
Warrants						55,237									—
						18,310,931									15,692,205
								$	0.32								$	0.17

 

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BODISEN BIOTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

		Six Months Ended June 30,
		2006									2005
								Per									Per
		Income			Shares			Share			Income			Shares			Share
Basic earnings per share
Net income		$	8,562,321								$	3,488,746
Weighed shares outstanding						17,698,731									15,270,759
								$	0.48								$	0.23
Diluted earnings per share
Net income		$	8,562,321								$	3,488,746
Weighed shares outstanding						17,698,731									15,270,759
Effect of dilutive securities
Options						85,419									291,251
Warrants						64,302									—
						17,848,452									15,562,010
								$	0.48								$	0.22

 

 Note 15 - Current Vulnerability Due to Certain Concentrations

Four vendors provided 79% of the Company’s raw materials for the six months ended June 30, 2006 and five vendors provided 81% of the Company’s raw materials for the six months ended June 30, 2005. The payable balance for these parties amounted to $1,532,101 at June 30, 2006.

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 16 - Reclassifications

Certain prior period amounts have been reclassified to conform to the six months ended June 30, 2006 presentation.

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Item 2. Management's Discussion and Analysis or Plan of Operations 

 

INTRODUCTION

 

Overview

The Company is incorporated under the laws of the state of Delaware and its operating subsidiary, Yang Ling Bodisen Biology Science and Technology Development Company Limited (“BBST”), 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.

Critical 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. It is possible that accounting estimates and assumptions may be material to the company due to the levels of subjectivity and judgment involved.

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.

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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 and other long-lived assets 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.

Revenue recognition

 

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.

 

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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

 

The majority of Bodisen Biotech, Inc. revenues and majority of the expenses in 2006 are 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.