UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 333-99101
BODISEN BIOTECH, INC.
-------------------------------------------
(Name of small business issuer in its charter)
Delaware 98-0381367
--------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
North Part of Xinquia Road, Yang Ling Agricultural High-Tech Industries
Demonstration Zone, Yang Ling, People's Republic of China 712100
-----------------------------------------------------------------------
(Address of principal executive offices)
86-29-87074957
-------------------------
(Issuer's telephone number)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 15,268,000 shares of common stock,
par value $.0001 per share
Table of Contents
Part I. Financial Information
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Income
for the Three Months Ended March 31, 2005 and 2004................................................3
Consolidated Balance Sheet
for the Three Months Ended March 31, 2005 and 2004................................................4
Consolidated Statement of Cash Flows
as of March 31, 2005 and December 31, 2004........................................................5
Notes to Condensed Consolidated Financial Statements..............................................6
Item 2 Management's Discussion and Analysis or Plan of Operation.........................................15
Item 3 Controls and Procedures...........................................................................20
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K..................................................................20
Signatures......................................................................................................22
Exhibit Index...................................................................................................23
2
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
BODISEN BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTH
PERIODS ENDED
March 31, 2005 March 31, 2004
----------------- -----------------
Net revenue $ 4,701,675 $ 2,186,089
Cost of revenue 3,047,498 1,313,304
----------------- -----------------
Gross profit 1,654,178 872,785
Operating expenses
Selling expenses 148,140 123,346
General and administrative expenses 278,470 226,714
----------------- -----------------
Total operating expenses 426,610 350,060
Income from operations 1,227,567 522,725
Non-operating Income (expense):
Finance charge (416,703) -
Interest expense (14,132) (27,415)
----------------- -----------------
Total non-operating income (expense) (430,835) (27,415)
----------------- -----------------
Income before income tax 796,733 495,311
Provision for income tax 74,337
----------------- -----------------
Net Income 796,733 420,974
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain - 40,575
----------------- -----------------
COMPREHENSIVE INCOME $ 796,733 $ 461,549
================= =================
Basic weighted average shares outstanding 15,268,000 15,268,000
Basic earnings per share 0.05 0.03
Diluted weighted average shares outstanding 15,529,458 15,325,760
Diluted earnings per share 0.05 0.03
The accompanying notes are an integral part of these consolidated
financial statements.
3
BODISEN BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
AS OF MARCH 31,
2005
-----------------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 2,793,132
Accounts receivable, net 7,881,837
Advances to Suppliers 600,073
Inventory 967,597
Other Assets 600,443
-----------------
Total current assets $ 12,843,081
PROPERTY AND EQUIPMENT, NET 3,384,620
CAPITAL WORK IN PROGRESS 410,977
INTANGIBLE ASSETS, NET 2,167,169
-----------------
TOTAL ASSETS $ 18,805,847
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 286,958
Accrued expenses 279,677
Short term loan 968,000
Convertible debenture, net discount due to beneficial conversion 2,542,723
-----------------
Total current liabilities $ 4,077,358
LONG TERM LIABILITIES:
Long term loans 12,100
-----------------
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 15,268,000 shares 1,527
Additional paid in capital 6,885,401
Accumulated other comprehensive gain 68,855
Statutory reserve 1,137,415
Retained earnings 6,623,192
-----------------
Total stockholders' equity 14,716,389
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,805,847
=================
The accompanying notes are an integral part of these consolidated
financial statements.
4
BODISEN BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2005 MARCH 31, 2004
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 796,733 $ 420,974
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 77,509 72,098
(Increase) / decrease in current assets:
Accounts receivable (2,892,853) (933,104)
Advances to suppliers 155,137 (677,372)
Inventory (200,253) 225,064
Other assets (551,707) 0
Increase / (decrease) in current liabilities:
Accounts payable 174,614 34,171
Unearned revenue 0 133
Other payables 0 625,756
Accrued expenses 34,772 3,992
----------------- ----------------
Net cash used in operating activities (2,406,047) (228,288)
----------------- ----------------
Effect of exchange rate on cash 47,554
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property & equipment (890,633) (72,822)
Work in Progress - (242,000)
----------------- ----------------
Net cash used in investing activities (890,633) (314,822)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debt 3,000,000 -
Loans receivable 968,000 -
----------------- ----------------
Net cash provided by financing activities 3,968,000 -
----------------- ----------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 671,320 (495,556)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 2,121,811 2,974,773
----------------- ----------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 2,793,132 $ 2,479,217
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
5
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. ORGANIZATION AND DESCRIPTION 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"), a Delaware Corporation, was 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 shareholders 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 shareholders
of BBST owned 1500 shares of common stock of BII, which represented 100% of
BII's issued and outstanding shares. For U.S. Federal income tax purpose, the
transaction was 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 shareholders 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 shareholders 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 for each share of its common stock outstanding
for all stockholders of 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 shareholders 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 the legal acquiree are not
significant; therefore, no pro forma financial information is submitted.
6
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the interim periods are not necessarily
indicative of the results for any future period. These statements should be read
in conjunction with the Company's audited financial statements and notes thereto
for the fiscal year ended December 31, 2004.
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 $216,395
at March 31, 2005. 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 amounted to $600,073 at March 31, 2005.
Income taxes
The Company utilizes Statement of Financial Accounting Standard ("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 March 31, 2005.
Fair value of financial instruments
7
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
the Company to disclose estimated fair values of financial instruments. The
carrying amounts reported in the statements of financial position for current
assets and current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
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. The functional currency of the Company is the Chinese
Renminbi. The unit of Renminbi is in Yuan. Translation gains are classified as
an item of other comprehensive income in the stockholders' equity section of the
consolidated balance sheet. During the three month period ended March 31, 2005
comprehensive income in the consolidated statements of operation included no
translation gain and in the three month period of March 31, 2004 the
consolidated statements of operation included translation gains of $40,575.
Segment reporting 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
On May 15 2003, the Financial Accounting Standards Board ("FASB"), issued FASB
Statement No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS 150 changes the
accounting for certain financial instruments that, under previous guidance,
could be classified as equity or "mezzanine" equity, by now requiring those
instruments to be classified as liabilities (or assets in some circumstances) in
the statement of financial position. Further, SFAS 150 requires disclosure
regarding the terms of those instruments and settlement alternatives. SFAS 150
affects an entity's classification of the following freestanding instruments:
(a) Mandatorily redeemable instruments (b) Financial instruments to repurchase
an entity's own equity instruments, (c) Financial instruments embodying
obligations that the issuer must or could choose to settle by issuing a variable
number of its shares or other equity instruments based solely on (i) a fixed
monetary amount known at inception or (ii) something other than changes in its
own equity instruments and (d) SFAS 150 does not apply to features embedded in a
financial instrument that is not a derivative in its entirety. The guidance in
SFAS 150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
8
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
first interim period beginning after June 15, 2003. For private companies,
mandatorily redeemable financial instruments are subject to the provisions of
SFAS 150 for the fiscal period beginning after December 15, 2003. The Company
does not expect the adoption of SFAS No. 150 to have a material impact on its
financial position or results of operations or cash flows.
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R addresses
consolidation by business enterprises of variable interest entities and
significantly changes the consolidation application of consolidation policies to
variable interest entities and, thus improves comparability between enterprises
engaged in similar activities when those activities are conducted through
variable interest entities. The Company does not hold any variable interest
entities.
3. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Bodisen Biotech, Inc. (from the merger date), its 100% wholly-owned subsidiary
"BHI" and BHI's 100% wholly-owned subsidiary Yang Ling Bodisen Biology Science
and Technology Development Company Limited. All significant inter-company
accounts and transactions have been eliminated in consolidation.
4. MAJOR VENDORS
Five vendors provided 85% of the Company's raw materials for the three month
period ended March 31, 2005 and two vendors provided 42% of the Company's raw
materials for the three month period ended March 31, 2005. The payable balance
for these parties amounted to $197,648 and $3,560 at March 31, 2005 and 2004,
respectively.
5. INTANGIBLE ASSETS
Net intangible assets at March 31, 2005 were as follows:
Rights to use land $ 1,666,920
Fertilizers proprietary technology rights 968,000
------------------
$ 2,634,920
Less Accumulated amortization (467,751)
------------------
$ 2,167,169
The Company's office and manufacturing site is located in the 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. As set forth in the People's Republic of China's
governmental regulations, the Government owns all land.
9
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
During July 2003, the Company leased another parcel of land under 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 recognizes the amounts paid for the acquisition of the "Rights to
Use Land" as intangible assets and amortizes them over a period of fifty (50)
years.
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 month
period ending March 31, 2005 and 2004 amounted to $32,470 each period.
Amortization expense for the Company's intangible assets over the next five
fiscal years is estimated to be: 2005-$130,000, 2006-$130,000, 2007-$130,000,
2008-$130,000 and 2009-$100,000.
6. SHAREHOLDERS' EQUITY
On February 24, 2004, BII entered into a merger agreement with Stratabid to
exchange 12,000,000 shares of Stratabid to the shareholders of BII (note 12). As
a part of the merger, Stratabid cancelled 3,000,000 shares of its issued and
outstanding stock owned by a majority shareholder and declared a stock dividend
of three shares for each share of its common stock outstanding for all
stockholders of record as of February 27, 2004. The Company has a total of
15,268,000 shares of common stock outstanding as of March 31, 2005.
7. CONVERTIBLE DEBENTURE
On March 16, 2005, the Company completed a private placement offering. The
Company received the sum of $3 million and 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; a three year warrant to
purchase 187,500 shares of common stock at $4.80 per share; and a three year
warrant to purchase 40,000 shares of common stock at $6.88 per share.
This debenture was considered to have an embedded beneficial conversion feature
because the conversion price was less than the quoted market price at the time
of the issuance. Accordingly, the beneficial conversion feature was valued
separately and the intrinsic value in the amount of $476,875 was recorded as an
increase to additional pay-in capital and a corresponding amount, less the
amortized interest costs of $19,598, was recorded as a reduction of the carrying
value of the convertible debenture.
In connection with the convertible debenture, the Company issued a three year
warrant to purchase 187,500 shares of common stock at $4.80 per share and a
three year warrant to purchase 40,000 shares of common stock at $6.88 per share.
The aggregate fair value of the warrants of $416,703 was charged against net
income
10
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
in the 3-month period ending March 31, 2005 and a corresponding amount was
recorded as an increase to additional pay-in capital.
8. STOCK OPTIONS AND WARRANTS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003.
In compliance with SFAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for the three month period ended March 31, 2005 as follows: ($ in
thousands, except per share amounts)
---------------------------------------------------------- --------------------------- ---------------------------
Three month period ended Three month period ended
March 31, 2005 March 31, 2004
---------------------------------------------------------- --------------------------- ---------------------------
Net Income - as reported $840 $421
-------------------------------------------------------- --------------------------- ---------------------------
Stock-Based employee compensation expense included in
reported net income, net of tax
-------------------------------------------------------- --------------------------- ---------------------------
Total stock-based employee compensation under (12) 0
fair-value-based method for all rewards, net of tax
-------------------------------------------------------- --------------------------- ---------------------------
Pro forma net income $828 $421
---------------------------------------------------------- --------------------------- ---------------------------
Earnings per share:
------------------------------------- ----------------------------------- -----------------------------------
Three month period ended Three month period ended
March 31, 2005 March 31, 2004
------------------------------------- ----------------------------------- -----------------------------------
Basic, as reported $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
Diluted, as reported $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
Basic, pro forma $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
Diluted, pro forma $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
11
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
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, the Company granted 110,000 stock options to
two Directors (55,000 options each) during the year ended December 31, 2004, of
which 100,000 stock options were granted on June 4, 2004 and the balance of the
10,000 were granted on Dec. 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 Dec. 28, 2004 vested on
Dec. 31, 2004.
The option exercise price was $5 for the first 100,000 stock options which was
equal to the market price of the shares at the time the options were granted.
The option exercise price was $5.80 for the second 10,000 stock options which
was the market price of the shares at the time the options were granted.
The Company did not grant any option during the three month period ended March
31, 2005.
On March 16, 2005, in connection to the convertible debenture the Company issued
three year warrants to purchase 187,500 shares of common stock at $4.80 per
share and three year warrants to purchase 40,000 shares of common stock at $6.88
per share.
As of March 31, 2005, there were a total of 110,000 stock options granted and
outstanding, and there were no stock options issued and outstanding as of March
31, 2004. As of March 31, 2005, there were a total of 227,000 warrants issued
and outstanding, and there were no warrants issued and outstanding as of March
31, 2004.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the SFAS No. 95. Accordingly, the Company paid $37,794 and $27,415
for interest and $0 and $0 for income tax during the three month period ended
March 31, 2005 and 2004, respectively.
10. STATUTORY COMMON WELFARE FUND AND RESERVE
As stipulated by the Company Law of the People's Republic of China, 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
People's Republic of China 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
shareholders' general meeting.
12
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
In accordance with the Chinese Company Law, the company has allocated 10% of its
annual net income, amounting $79,673 and $42,097 as statutory reserves for the
three month period ended March 31, 2005 and 2004, respectively.
The Company makes annual contributions of 14% of all employees' salaries to
employee welfare plan. The total expense for the above plan $20,502 and $14,669
for the three month period ended March 31, 2005 and 2004, respectively.
11. FACTORY LOCATION AND LEASE COMMITMENTS
Our 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, 712100. We own two factories, which
include three production lines, an office building, one warehouse, and two
research labs which are located on 10,900 square meters of land. The rent of the
office building is $121 a month from May 20, 2004 through May 20, 2005. We also
lease a warehouse in Yang Ling near the site of our factories. This warehouse is
300 square meters in area. The rent of the warehouse is $194 a month from
January 2005 through May 2005. We completed a new 609,840 square foot
manufacturing facility on March 15, 2005 and we believe that our owned and
leased property is sufficient for our current and immediately foreseeable
operating needs. Total future commitments through June 30, 2005 amount to
$1,276.
12. EARNINGS PER SHARE
Earnings per share for the three month periods ended March 31, 2005 and 2004
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 SFAS No. 128, "Earnings Per Share".
Three month period ended Three month period ended
March 31, 2005 March 31, 2004
----------------------------------------------------- ------------------------ -------------------------
Weighted average common shares outstanding 15,268,000 15,268,000
Effect of dilutive securities: stock options 261,458 0
Weighted average common shares outstanding 15,529,458 15,268,000
and common share equivalents
13
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
13. MERGER AGREEMENT
On February 11, 2004, Stratabid entered into an Agreement and Plan of Merger
with BHI, a wholly-owned subsidiary of Stratabid, BII and the shareholders of
BII. BII has one 100% wholly-owned subsidiary in Shaanxi, China, BBST. Under the
terms of the agreement, BHI acquired 100 percent of BII's stock in exchange for
the issuance by Stratabid of three million shares of its common stock to the
holders of BII. The new shares constitute approximately 79 percent of the
outstanding shares of Stratabid, which changed its name to Bodisen Biotech, Inc.
(the "Company"). The Agreement and Plan of Merger was closed on February 24,
2004.
BII's Chairman of the Board was appointed the Company's Chief Executive
Officer.
At the Effective Time, by virtue of the Merger and without any action on
the part of the BHI, BII or the BII Shareholders, the shares of capital stock of
each of BII and the BHI were converted as follows:
(a) Capital Stock of the BHI. Each issued and outstanding share of the BHI's
capital stock continued to be issued and outstanding and was converted into one
share of validly issued, fully paid, and non-assessable common stock of the
surviving company. Each stock certificate of the BHI evidencing ownership of any
such shares continued to evidence ownership of such shares of capital stock of
the Surviving Company.
(b) Conversion of BII Shares. Each BII Share that was issued and
outstanding at the Effective Time was automatically cancelled and extinguished
and converted, without any action on the part of the holder thereof, into the
right to receive at the time and in the amounts described in the Agreement an
amount of Acquisition Shares equal to the number of Acquisition Shares divided
by the number of BII Shares outstanding immediately prior to Closing. All such
BII Shares, so converted, were no longer outstanding and were automatically
cancelled and retired and ceased to exist, and each holder of a certificate
representing any such shares ceased to have any rights with respect thereto,
except the right to receive the Acquisition Shares paid in consideration
therefore upon the surrender of such certificate in accordance with the
Agreement.
(c) Within thirty (30) days from the Closing Date, Stratabid was required
to sell its business operations, as they exist immediately prior to the Closing,
to Derek Wasson, former president. In consideration of the sale, Mr. Wasson
returned 750,000 Common Shares to Stratabid for cancellation. In addition, Mr.
Wasson forgave all indebtedness owed by Stratabid to Mr. Wasson. Other than
indebtedness of BII, Stratabid had no indebtedness or other liability of any
kind or nature after the sale of the business to Mr. Wasson, save and except for
liabilities incurred in connection with the Merger.
14. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the People's Republican of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in China and by the general state of China' 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.
15. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the period
ended March 31, 2005 presentation.
14
BODISEN BIOTECH, INC.
Management's Discussion and Analysis or Plan of Operation
Item 2. Management's Discussion and Analysis or Plan of Operation
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto set forth in Item
1 of this Quarterly Report. In addition to historical information, this
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions, which could cause actual results to differ
materially from Management's expectations. Factors that could cause differences
include, but are not limited to, expected market demand for the Company's
services, fluctuations in pricing for products distributed by the Company and
services offered by competitors, as well as general conditions of the
agricultural products marketplace.
Some of the information in this Form 10-QSB contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in our filings with the
Securities and Exchange Commission.
Overview
We are incorporated under the laws of the state of Delaware and are
headquartered in the Shaanxi Province, People's Republic of China. We engage in
the business of manufacturing and marketing a brand of organic fertilizers in
China. We produce numerous proprietary product lines, from pesticides to crop
specific fertilizer. These products are then marketed and sold to farmers
throughout the 20 provinces of China. We conduct 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 us 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.
15
BODISEN BIOTECH, INC.
Management's Discussion and Analysis or Plan of Operation
Accounts Receivable
We maintain reserves for potential credit losses on accounts receivable. 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.
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. We compare the cost of inventories with the market value and
allowance is made for writing down the inventories to their market value, if
lower.
Property & 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. 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.
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
Our revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 101. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
16
BODISEN BIOTECH, INC.
Management's Discussion and Analysis or Plan of Operation
the delivery is completed, no other significant obligations by us 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
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had we adopted the new fair value method. We use the
intrinsic value method prescribed by APB 25 and have opted for the disclosure
provisions of SFAS No. 123.
Income Taxes
We utilize 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, our Document of Reductions and Exemptions of Income Tax have been
approved by the local tax bureau and the Management Regulation of Yang Ling
Agricultural High-Tech Industries Demonstration Zone. As a result, we were
exempted from income tax in our first two years of operations which ended March
31, 2005.
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. Our transactions occur in Chinese Renminbi, in units of
Yuan.
Recent Accounting Pronouncements
17
BODISEN BIOTECH, INC.
Management's Discussion and Analysis or Plan of Operation
On May 15 2003, the FASB issued FASB Statement No. 150 ("SFAS 150"), Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments: (a) Mandatorily redeemable instruments, (b) Financial
instruments to repurchase an entity's own equity instruments, (c) Financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (i) a fixed monetary amount known at inception or (ii) something other
than changes in its own equity instruments, and (d) SFAS 150 does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety. The guidance in SFAS 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. For private companies, mandatorily redeemable financial instruments are
subject to the provisions of SFAS 150 for the fiscal period beginning after
December 15, 2003. The Company does not expect the adoption of SFAS No. 150 to
have a material impact on its financial position or results of operations or
cash flows.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46R). FIN 46R addresses consolidation by business enterprises of variable
interest entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities.
Three Months Ended March 31, 2005 Compared To Three Months Ended March 31, 2004
Revenue. For the three month period ended March 31, 2005 as compared to the
three month period ended March 31, 2004, the Company generated net revenues of
$4,701,675 and $2,186,089, respectively, reflecting an increase of $2,515,586 or
115%. The increase in revenues was primarily attributable to increased marketing
efforts, which resulted in an increase in our customer base and related volume
of recurring and new customer sales.
Gross Profit. The Company achieved a gross profit of $1,654,178 for the three
months ended March 31, 2005, an increase of $781,393 or 90%, compared to
$872,785 for the three months ended March 31, 2004. Gross margin, as a
percentage of revenues, decreased from 40% for the three months ended March 31,
2004, to 35% for the three months ended March 31, 2005. The decrease in gross
margin is primarily attributable to an increase in sales of lower margin
fertilizer products.
Operating expenses. The Company incurred operating expenses of $426,610 for the
three months ended March 31, 2005, an increase of $76,550 or 22%, compared to
$350,060 for the three months ended March 31, 2004. This increase is a direct
result of net revenue in March 31, 2005 being 215% of the net revenue for the
18
BODISEN BIOTECH, INC.
Management's Discussion and Analysis or Plan of Operation
same period in 2004. Aggregated selling expenses of $148,140 accounted for
expenses related to costs associated with sales and marketing of the Company's
products. Operating expenses included general and administrative expenses of
$278,470 for the first quarter 2005 which related to the cost of maintaining the
company's facilities, salaries and research and development.
Net Income. The Company's net income was $796,733 for the three months ended
March 31, 2005, an increase of $375,759 or 89% compared to $420,974 for the
three months ended March 31, 2004. The increase is attributed to the substantial
growth in the demand for the Company's products throughout China. The net income
reflects a one-time charge of $416,703 associated with the aggregate fair value
of the warrants which were issued in connection with the $3 million convertible
financing which we completed on March 16, 2005. The net income would have been
$1,213,436 in the absence of this one-time charge, reflecting the substantial
increase in the demand for our products in the markets in which we operate.
Liquidity and Capital Resources
As of March 31, 2005 the Company had $2,793,132 cash and cash equivalents, and
we believe that our current cash needs for the next twelve months can be met
from working capital. The Company had net cash outflows from operations of
$2,406,046 for the three month period ended March 31, 2005 as compared to net
cash outflows from operations of $228,288 for the three month period ended March
31, 2004. The decrease in net cash flows from operations in the current period
as compared to the corresponding period last year, was mainly due to an increase
in the account receivables, which resulted in the usage of cash of $2,892,853.
The increase in receivables is due to the increase in sales.
Cashflows from investing activities resulted in net usage of $890,633 in the
current period as compared to net usage of $314,822 in the corresponding period
last year. The greater usage in the current period was mainly due to an increase
of investment in property and equipment of $890,633 in the three month period
ended March 31, 2005 as compared to $72,822 in the corresponding period last
year.
Cashflows from financing activities in the current period resulted in a net
increase in cash of $3,968,000 compared to no financing activities in the
corresponding period last year. The increase in cash from financing activities
is primarily due to the proceeds raised from the $3 million convertible
debentures and warrants issued on March 16, 2005.
The Company had a net increase in cash and cash equivalents of $671,321 in the
current period as compared to a net decrease of $495,556 in the corresponding
period last year.
The majority of the Company's revenues and expenses were denominated primarily
in Renminbi, the currency of the People's Republic of China. There is no
assurance that exchange rates between the Renminbi and the U.S. dollar will
remain stable. A revaluation of the Renminbi relative to the U.S. dollar could
adversely affect our business, financial condition and results of operations. We
do not engage in currency hedging. Inflation has not had a material impact on
our business.
19
Item 3. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer conducted an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as
of the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report. There were no significant changes in internal controls
over financial reporting that occurred during the first quarter of 2005 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Company
3.2 Amendment to Certificate of Incorporation of the Company,
changing name to Bodisen Biotech, Inc. 3.3 By-Laws of the of
the Company
4.1 Form of Debenture issued March 16, 2005
10.1 Loan Agreement, dated as of September 28, 2003, between the
Company and Xianyang City Commercial Bank
10.2 Bodisen Biotech, Inc. 2004 Stock Option Plan
10.3 Form of Bodisen Biotech, Inc. Nonstatutory Stock Option
Agreement
10.4 Securities Subscription Agreement dated March 16, 2005
between the Company and Amulet Limited
10.5 Registration Rights Agreement dated March 16, 2005 between
the Company and Amulet Limited
10.6 Form of Common Stock Warrant issued March 16, 2005
31.1 Certification by the Chief Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a)
31.2 Certification by the Chief Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a)
32.1 Certification of the Chief Executive Officer and the Chief
Financial Officer pursuant 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
20
(b) Reports on Form 8-K during the quarter ended March 31, 2005:
(i) Form 8-K dated March 16, 2005, disclosing the completion of a $3
million financing
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.
By: /s/ Wang Qiong
---------------------------
Name: Wang Qiong
Title: Chief Executive Officer
Date May 16, 2005 /s/Wang Qiong
-------------------------------
Wang Qiong
Chief Executive Officer
Date May 16, 2005 /s/ Shuiwang Wei
-------------------------------
Shuiwang Wei
Chief Financial Officer
22
EXHIBIT INDEX
Exhibit Number Description Method of Filing
-------------------- ------------------------------------------------- ------------------------------------------
3.1 Certificate of Incorporation of the Filed as Exhibit 3.1 to the registration
Company statement on Form SB-2 filed with the
Commission on September 3, 2002.
-------------------- ------------------------------------------------- ------------------------------------------
3.2 Amendment to Certificate of Filed as Exhibit 3.2 to the annual report
Incorporation of the Company, changing on Form 10-KSB filed with the Commission
name to Bodisen Biotech, Inc. on March 30, 2004
-------------------- ------------------------------------------------- ------------------------------------------
3.3 By-Laws of the of the Company Filed as Exhibit 3.2 to the registration
statement on Form SB-2 filed with the
Commission on September 3, 2002.
-------------------- ------------------------------------------------- ------------------------------------------
4.1 Form of Debenture issued March 16, 2005 Filed as Exhibit 10.6 to the registration
statement on Form SB-2 filed with the
Commission on April 22, 2005
-------------------- ------------------------------------------------- ------------------------------------------
10.1 Loan Agreement, dated as of September Filed as Exhibit 10.2 to the annual
28, 2003, between the Company and report on Form 10-KSB filed with the
Xianyang City Commercial Bank Commission on March 30, 2004
-------------------- ------------------------------------------------- ------------------------------------------
10.2 Bodisen Biotech, Inc. 2004 Stock Option Filed as Exhibit 10.2 to the annual
Plan report on Form 10-KSB filed with the
Commission on March 31, 2005.
-------------------- ------------------------------------------------- ------------------------------------------
10.3 Form of Bodisen Biotech, Inc. Filed as Exhibit 10.3 to the annual
Nonstatutory Stock Option Agreement report on Form 10-KSB filed with the
Commission on March 31, 2005.
-------------------- ------------------------------------------------- ------------------------------------------
10.4 Securities Subscription Agreement dated File as Exhibit 10.4 to the registration
March 16, 2005 between the Company and statement on Form SB-2 filed with the
Amulet Limited Commission on April 22, 2005
-------------------- ------------------------------------------------- ------------------------------------------
10.5 Registration Rights Agreement dated Filed as Exhibit 10.5 to the registration
March 16, 2005 between the Company and statement on Form SB-2 filed with the
Amulet Limited Commission on April 22, 2005
-------------------- ------------------------------------------------- ------------------------------------------
10.6 Form of Common Stock Warrant issued Filed as Exhibit 10.6 to the registration
March 16, 2005 statement on Form SB-2 filed with the
Commission on April 22, 2005
-------------------- ------------------------------------------------- ------------------------------------------
31.1 Certification by the Chief Executive Officer Filed herewith as Exhibit 31.1
pursuant to Rule 13a-14(a) or 15d-14(a)
-------------------- ------------------------------------------------- ------------------------------------------
31.2 Certification by the Chief Financial Officer Filed herewith as Exhibit 31.2
pursuant to Rule 13a-14(a) or 15d-14(a)
-------------------- ------------------------------------------------- ------------------------------------------
32.1 Certification of the Chief Executive Officer Filed herewith as Exhibit 32.1
and the Chief Financial Officer pursuant 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-------------------- ------------------------------------------------- ------------------------------------------
23