BODISEN BIOTECH, INC Files SEC form 10QSB, Quarterly Report

Form 10QSB for BODISEN BIOTECH, INC

16-May-2005

Quarterly Report

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:

• discuss our future expectations;
• contain projections of our future results of operations or of our financial condition; and
• 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.

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,

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

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

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.