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16 August 2010

Bodisen Biotech, Inc.

 

Results for the six month period ended 30 June 2010

 

Review & Extracts of the Form10-Q as required by the Securities & Exchange Commission

 

Bodisen Biotech, Inc. (the ※Company§) (OTC Pink Sheets: BBCZ; London AIM: BODI; website: www.bodisen.com) recently announced its six months unaudited results for the period ended 30 June 2010, which are extracted from the Company*s Form 10-Q filed with the SEC.

 

Result of Operations

 

Three Months Ended June 30, 2010 as Compared to Three Months Ended June 30, 2009

 

Revenue. We generated revenue of $2,902,929 for the three months ended June 30, 2010, an increase of $1,832,436 or 171%, compared to $1,070,493 for the three months ended June 30, 2009. The increase in revenue is primarily attributable to the overall recovery of the economic environment and the launch of new products during the quarter.

 

Gross Profit. We achieved a gross profit of $1,048,213 for the three months ended June 30, 2010, an increase of $871,151 or 492%, compared to $177,062 for the three months ended June 30, 2009. Gross margin (gross profit as a percentage of revenues), was 36% for the three months ended June 30, 2010, compared to 17% for the three months ended June 30, 2009. The increase in the gross margin percentage was primarily attributable to the higher profit margins which are earned on the new products.

 

Aggregated selling expenses accounted for $204,772 of our operating expenses for the three months ended June 30, 2010, an increase of $189,900 or 1,277%, compared to $14,872 for the three months ended June 30, 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 $1,097,655 of our operating expenses for the three months ended June 30, 2010, an increase of $2,108,553 or 209%, compared to income of $1,010,898 for the three months ended June 30, 2009. The increase in general and administrative expenses is primarily attributable to a decrease in bad debt recoveries in 2010 compared to 2009. During the three months ended June 30, 2009 the Company recorded a bad debt recovery of $888,737 compared to a charge to bad debt of $562,525 for the three months ended June 30, 2010.

 

Non Operating Income and Expenses. We had total non-operating expenses of $34,972 for the three months ended June 30, 2010, a decrease of $383,164 compared to expense of $418,136 for the three months ended June 30, 2009. Other income (expense) was $(19,227) for the three months ended June 30, 2010 compared to $(484,081) for the three months ended June 30, 2009. Also included in non-operating income (expense) for the three months ended June 30, 2009 is a loss $81,363 related to a loss on the sale of investment and a gain of $147,259 related to equity income of an investment that we account for under the equity method. During the three months ended June 30, 2010, we did not incur any gains or losses related to the sale on investment or equity income in investment.

 

Six Months Ended June 30, 2010 as Compared to Six Months Ended June 30, 2009

 

Revenue. We generated revenue of $3,934,238 for the six months ended June 30, 2010, an increase of $1,328,710 or 51%, compared to $2,605,528 for the six months ended June 30, 2009. The increase in revenue is primarily attributable to the overall recovery of the economic environment and the launch of new products in May 2010.

 

Gross Profit. We achieved a gross profit of $1,269,639 for the six months ended June 30, 2010, an increase of $880,826 or 227%, compared to $388,813 for the six months ended June 30, 2009. Gross margin (gross profit as a percentage of revenues), was 32% for the six months ended June 30, 2010, compared to 15% for the six months ended June 30, 2009. The increase in the gross margin percentage was primarily attributable to the higher profit margins which are earned on the new products.

Aggregated selling expenses accounted for $346,186 of our operating expenses for the six months ended June 30, 2010, an increase of $319,068 or 1,177%, compared to $27,118 for the six months ended June 30, 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 $1,518,737 of our operating expenses for the six months ended June 30, 2010, an increase of $2,377,153 or 277%, compared to income of $858,416 for the six months ended June 30, 2009. The increase in general and administrative expenses is primarily attributable to a decrease in bad debt recoveries in 2010 compared to 2009. During the six months ended June 30, 2009 the Company recorded a bad debt recovery of $1,372,251 compared to a charge to bad debts of $531,020 for the six months ended June 30, 2010.

 

Non Operating Income and Expenses. We had total non-operating expense of $33,078 for the six months ended June 30, 2010, a decrease of $127,252 compared to income of $94,174 for the six months ended June 30, 2009. Other income (expense) was $(19,841) for the six months ended June 30, 2010 compared to $(1,284) for the six months ended June 30, 2009. Also included in non-operating income (expense) for the six months ended June 30, 2009 is a loss of $211,610 related to a loss on the sale of investment and a gain of $306,902 related to equity income of an investment that we account for under the equity method. During the six months ended June 30, 2010, we did not incur any gains or losses related to the sale on investment or equity income in investment.

 

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.

 

On March 19, 2010, we obtained a bank loan for 10,000,000 RMB (approximately $1,437,000). The loan has an 8.1% annual interest rate, matures on March

19, 2010 and is secured by our land and production facility.

 

As of June 30, 2010, we had $4, 869,341 of cash and cash equivalents compared to $4,824,135 as of December 31, 2009.

 

Cash Flows

 

Operating. We used $1,461,401 of cash for operating activities for the six months ended June 30, 2010 compared to $721,762 for the six months ended June 30, 2009.

 

Investing. Our investing activities used $3,268 of cash for the six months ended June 30, 2010, compared to $720,371 of cash provided by investing activities for the six months ended June 30, 2009. The decrease is primarily attributable to the proceeds from the sale of investment in 2009 of $735,656 for which there were no sales in 2010.

 

Financing. Our financing activities provided $1,466,900 of cash from a long term bank financing for the six months ended June 30, 2010 compared to no cash provided by financing activities for the six months ended June 30, 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.

 

About Bodisen Biotech, Inc.

 

Bodisen Biotech, Inc. is a manufacturer of liquid and organic compound fertilizers, pesticides, insecticides and agricultural raw material certified by the Petroleum Chemical Industry Administrative office of China (Chemical Petroleum Production Administrative Bureau), Shaanxi provincial government and Chinese government.  The company is headquartered in Shaanxi province and is a Delaware corporation.  The company files annual and periodic reports with the U.S. Securities and Exchange Commission, which are accessible at www.sec.gov.

 

 

Safe Harbor Statement

 

This press release may contain forward-looking statements within the meaning of the ※safe harbor§ provisions of the Private Securities Litigation Reform Act of 1995.  These statements are based on the current expectations or beliefs of Bodisen Biotech, Inc. management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

 

 

Enquiries:

 

Bodisen Biotech, Inc.

Bo Chen                                                            0086 29 8707 4957

 

Charles Stanley Securities

(Nominated Adviser)

Russell Cook / Carl Holmes                                020 7149 6000

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)

 

 

Three Month Periods Ended

June 30

Six Month Periods Ended

June 30

 

2010

2009

2010

2009

 

$

$

$

$

 

 

 

 

 

Net revenue

2,902,929

1,070,493

3,934,238

2,605,528

 

 

 

 

 

Cost of revenue

1,854,716

893,431

2,664,599

2,216,715

 

------------------

------------------

------------------

------------------

Gross profit

1,048,213

177,062

1,269,639

388,813

 

 

 

 

 

Operating expenses:

 

 

 

 

Selling expenses

204,772

14,872

346,186

27,118

General and administrative expenses

1,097,655

(1,010,898)

1,518,737

(858,416)

Write down of assets

-

92,340

-

104,254

 

------------------

------------------

------------------

------------------

Total operating expenses

1,302,427

(903,686)

1,864,923

(727,044)

 

------------------

------------------

------------------

------------------

 

 

 

 

 

Loss from operations

(254,214)

1,080,748

(595,284)

1,115,857

 

 

 

 

 

 

Non-operating Income (expense):

 

 

 

 

Other income (expense)

(19,227)

(484,081)

(19,841)

(1,284)

Interest income

4,718

122

7,886

314

Interest expense

(20,463)

(73)

(21,123)

(148)

Loss on the sale of investment

-

(81,363)

-

(211,610)

Equity income in investment

-

147,259

-

306,902

 

------------------

------------------

------------------

------------------

Total non-operating income (expense)

(34,972)

(418,136)

(33,078)

94,174

 

------------------

------------------

------------------

------------------

 

 

 

 

 

Income (loss) before provision for income taxes

(289,186)

662,612

(628,362)

1,210,031

 

 

 

 

 

Provision (benefit) for income taxes

-

-

-

-

 

------------------

------------------

------------------

------------------

 

 

 

 

 

Net income (loss)

(289,186)

662,612

(628,362)

1,210,031

 

 

 

 

 

Other comprehensive income

 

 

 

 

Foreign currency translation gain (loss)

168,197

(558)

168,118

(54,908)

Unrealised gain (loss) on marketable equity security

2,240,634

 

5,613,449

1,110,224

4,891,130

 

------------------

------------------

------------------

------------------

Comprehensive Income (loss)

2,119,645

6,275,503

649,980

6,046,253

 

==========

==========

==========

==========

Weighted average shares outstanding:

 

 

 

 

Basic

18,710,250

18,710,250

18,710,250

18,710,250

 

==========

==========

==========

==========

Diluted

18,710,250

18,710,250

18,710,250

18,710,250

 

==========

==========

==========

==========

 

 

 

 

 


Earnings per share:

 

 

 

 

Basic

(0.02)

0.04

(0.03)

0.06

 

==========

==========

==========

==========

Diluted

(0.02)

0.04

(0.03)

0.06

 

==========

==========

==========

==========

 


 

CONSOLIDATED BALANCE SHEET

June 30, 2009

 

 

June 30, 2010

June 30, 2009*

 

$

$

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

Cash & cash equivalents

4,869,341

84,112

Accounts receivable, net of allowance for doubtful accounts of $3,296,095 and $2,751,613

 

 

3,836,753

 

 

3,247,194

Other receivables

38,978

407,454

Inventory, net

2,500,048

1,907,000

Advances to suppliers

1,058,441

398,977

Prepaid expense and other current assets

746,426

739,601

 

-------------------------

-------------------------

Total current assets

13,049,987

6,784,338

 

 

 

PROPERTY & EQUIPMENT, net

11,495,948

12,212,016

 

 

 

CONSTRUCTION IN PROGRESS

10,465,269

10,394,027

 

 

 

MARKETABLE SECURITY, AVAILABLE-FOR-SALE

9,285,514

11,082,434

 

 

 

INTANGIBLE ASSETS, net

4,783,824

4,976,701

 

 

 

OTHER ASSETS

-

2,648,199

 

 

 

 

-------------------------

-------------------------

TOTAL ASSETS

49,080,542

48,097,715

 

==============

==============

 

 

 

LIABILITIES AND STOCKHOLDERS* EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

Accounts payable

2,545,145

294,679

Accrued expenses

195,042

82,042

 

-------------------------

-------------------------

Total current liabilities

2,740,187

376,721

 

Long-term note payable

 

1,473,000

 

 

TOTAL LIABILITIES

 

STOCKHOLDERS* EQUITY

4,213,187

376,721

Preferred stock, $0.0001 per share; authorised 5,000,000 shares; nil issued and outstanding

 

 

Common stock, $0.0001 per share; authorised 30,000,000 shares; issued and outstanding 18,710,250 and 18, 710,250 shares

 

 

1,871

 

 

1,871

Additional paid in capital

33,945,822

33,945,822

Other comprehensive income

14,751,649

16,277,184

Statutory reserve

4,314,488

4,314,488

Retained earnings

(8,146,475)

(6,818,371)

 

-------------------------

-------------------------

Total stockholders* equity

44,867,355

47,720,994

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS* EQUITY

 

49,080,542

 

48,097,715

 

==============

==============

 

* The 2009 balance sheet figures are taken from the SEC 10-Q for the quarterly period ended 30 June 2009.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended June 30, 2010 and 2009

 

 

 

Six Month Periods Ended

June 30,

 

2010

2009

 

$

$

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

Net Income (loss)

(628,362)

1,210,031

Adjustments to reconcile net income to net cash used in operating activities:

 

 

Depreciation and amortisation

501,084

296,110

Loss on disposal of assets

-

104,254

Loss on the sale of investment

-

211,610

Allowance (recovery) of bad debts

531,020

(1,372,251)

Equity income in investment

-

(306,902)

(Increase) / decrease in assets:

 

 

Accounts receivable

(2,560,964)

(1,157,526)

Other receivables

(12,520)

(32,201)

Inventory

(1,498,623)

1,097,828

Advances to suppliers

(512,340)

(399,168)

Prepaid expense

223,541

62,424

 

 

 

Increase/(decrease) in current liabilities:

 

 

Accounts payable

2,463,148

(415,572)

Accrued expenses

32,615

(20,399)

 

----------------------

----------------------

Net cash used in operating activities

(1,461,401)

(721,762)

 

----------------------

----------------------

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

Acquisition of property and equipment

(3,268)

-

Additions to construction in progress

-

(15,285)

Proceeds from other assets

-

735,656

 

----------------------

----------------------

Net cash provided by (used in) investing activities

(3,268)

720,371

 

----------------------

----------------------

 

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of long-term debt

 

Net cash provided by (used in) investing activities

 

 

 

1,466,900

 

1,466,900

 

 

-

 

-

Effect of exchange rate changes on cash and cash equivalents

 

42,975

 

(5,213)

 

----------------------

----------------------

NET DECREASE IN CASH & CASH EQUIVALENTS

45,206

(6,604)

 

 

 

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD

 

4,824,135

 

90,716

 

----------------------

----------------------

CASH & CASH EQUIVALENTS, END OF PERIOD

4,869,341

84,112

 

============

============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

Interest paid

-

-

 

============

============

Income taxes paid

-

-

 

============

============

 

 

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITES:

 

 

Transfer of construction in process to property and equipment

 

 

 

7,143,372

 

============

============

Exchange of investment for inventory

 

378,789

 

============

============

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 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., and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Note 2 每 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).

 

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

 


 

 

The following are the details of the property and equipment at June 30, 2010 and December 31, 2009, respectively:

 

 

June 30

2010

 

December 31,

2009

 

 

 

 

Operating equipment

$ 4,671,161

 

$ 4,650,919

Vehicles

690,604

 

687,791

Office equipment

87,910

 

87,552

Buildings

8,693,542

 

8,656,077

 

 

 

 

 

14,143,217

 

14,082,339

Less accumulated depreciation

(2,647,269)

 

(2,244,933)

Property and equipment, net

$ 11,495,948

 

$ 11,837,406

 

 

Depreciation expense for the three and six months ended June 30, 2010 and 2009 was $185,472 and $391,526 and $94,246 and $186,629, respectively.

 

On June 30, 2010 and December 31, 2009, the Company had ※Capital Work in Progress§ representing the construction in progress of the Company*s manufacturing plant amounting $10,465,269 and $10,422,641. During the six months ended June 30, 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 June 30, 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.

 

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 June 30, 2010.

 

Description

Level 1

Level 2

Level 3

Assets:

 

 

 

Marketable securities

$ 9 ,285,514

$ -

$ -

 

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. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

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 and six months ended June 30, 2010 and 2009 were insignificant.

 

Stock-Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, ※Compensation 每 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 June 30, 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 $8,295,867 and $8,127,749 at June 30, 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 and six months ended June 30, 2010, other comprehensive income in the consolidated statements of operations and other comprehensive income included translation gains (loss) of $168,197 and $168,118, respectively, and ($558) and ($54,908) for the three and six months ended June 30, 2009, respectively.

 

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 426,000 and 436,000 options as of June 30, 2010 and 2009 that were excluded from the diluted loss per share calculation due to their antidilutive

effect.

 

Statement of Cash Flows

 

In accordance with 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.

 

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.

 

In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, ※Milestone Method of Revenue Recognition.§ FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010 每 17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.

 

Note 3 每 Inventory

 

Inventory at June 30, 2010 and December 31, 2009 consisted of the following:

 

 

June 30,

2010

 

December 31,

2009

Raw materials

$ 1,310,251

 

$ 355,714

Packaging

21,164

 

59,729

Finished goods

1,168,633

 

652,202

 

2,500,048

 

1,067,645

Less obsolescence reserve

-

 

(76,505)

Inventory, net

$ 2,500,048

 

$ 991,140

 

Note 5 每 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 June 30, 2010 and December 31, 2009, the fair value of the investment is $9,285,514 and $8,175,290, respectively, which is reflected in the consolidated balance sheet. The company recognized an unrealized gain of $2,240,634 and $1,110,224 for the three and six months ended June 30, 2010, respectively, and an unrealized gain of $5,613,449 and $4,891,130 for the three and six months ended June 30, 2009, respectively, which is reflected as other comprehensive income in the consolidated statement of stockholder*s equity.

 

Note 6每 Intangible Assets

 

Net intangible assets at June 30, 2010 and December 31, 2009 were as follows:

 

 

June 30,

2010

 

December 31,

2009

Rights to use land

$ 5,020,173

 

$ 4,999,725

Fertilizers proprietary technology rights

1,178,400

 

1,173,600

 

6,198,573

 

6,173,325

Less accumulated amortization

(1,414,749)

 

(1,299,421)

Intangibles, net

$ 4,783,824

 

$ 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 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 amounted to $54,788 and $109,558 for the three and six months ended June 30, 2010, respectively and $54,763 and $109,481 for the three and six months ended June 30, 2009, respectively.

 

Note 7 每 Long-Term Note Payable

 

On March 19, 2010, the Company obtained a bank loan for 10,000,000 RMB (approximately $1,437,000). The loan has an 8.1% annual interest rate, matures on March 19, 2010 and is secured by the Company*s land and facility.

 

Note 8 每 Stock Options

 

Stock Options

 

The following is a summary of the stock option activity:

 

 

 

Options

Outstanding

 

Weighted

Average

Exercise Price

 

Aggregate

Intrinsic

Value

Outstanding at December 31, 2009

426,000

 

$ 1.07

 

 

Granted

-

 

 

 

 

Cancelled

-

 

 

 

 

Exercised

-

 

 

 

 

Outstanding at June 30, 2010 (unaudited)

426,000

 

$ 1.07

 

 

Exercisable at June 30, 2010 (unaudited)

426,000

 

$ 1.07

 

$ -

 

Note 9 每 Statutory Common Welfare Fund

 

As stipulated by the Company Law of the People*s Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 

         i.            Making up cumulative prior years* losses, if any;

 

       ii.            Allocations to the ※Statutory surplus reserve§ of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company*s registered capital;

 

      iii.            Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company*s ※Statutory common welfare fund§, which is established for the purpose of providing employee facilities and other collective benefits to the Company*s employees; and

 

     iv.            Allocations to the discretionary surplus reserve, if approved in the stockholders* general meeting.

 

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 six months ended June 30, 2010 and 2009.

 

Note 10 每 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 11 每 Current Vulnerability Due to Certain Concentrations

 

Two vendors provided 18.8% and 18.5% of the Company*s raw materials for the six months ended June 30, 2010 and three vendors provided 49.4%, 12.6% and 11.5% of the Company*s raw materials for the six months ended June 30, 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.

 

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.

 

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 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.

 

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.

 

In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, ※Milestone Method of Revenue Recognition.§ FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010 每 17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.

 

Results of Operations

 

Three Months Ended June 30, 2010 as Compared to Three Months Ended June 30, 2009

 

Revenue. We generated revenue of $2,902,929 for the three months ended June 30, 2010, an increase of $1,832,436 or 171%, compared to $1,070,493 for the three months ended June 30, 2009. The increase in revenue is primarily attributable to the overall recovery of the economic environment and the launch of new products during the quarter.

 

Gross Profit. We achieved a gross profit of $1,048,213 for the three months ended June 30, 2010, an increase of $871,151 or 492%, compared to $177,062 for the three months ended June 30, 2009. Gross margin (gross profit as a percentage of revenues), was 36% for the three months ended June 30, 2010, compared to 17% for the three months ended June 30, 2009. The increase in the gross margin percentage was primarily attributable to the higher profit margins which are earned on the new products.

 

Aggregated selling expenses accounted for $204,772 of our operating expenses for the three months ended June 30, 2010, an increase of $189,900 or 1,277%, compared to $14,872 for the three months ended June 30, 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 $1,097,655 of our operating expenses for the three months ended June 30, 2010, an increase of $2,108,553 or 209%, compared to income of $1,010,898 for the three months ended June 30, 2009. The increase in general and administrative expenses is primarily attributable to a decrease in bad debt recoveries in 2010 compared to 2009. During the three months ended June 30, 2009 the Company recorded a bad debt recovery of $888,737 compared to a charge to bad debt of $562,525 for the three months ended June 30, 2010.

 

Non Operating Income and Expenses. We had total non-operating expenses of $34,972 for the three months ended June 30, 2010, a decrease of $383,164 compared to expense of $418,136 for the three months ended June 30, 2009. Other income (expense) was $(19,227) for the three months ended June 30, 2010 compared to $(484,081) for the three months ended June 30, 2009. Also included in non-operating income (expense) for the three months ended June 30, 2009 is a loss $81,363 related to a loss on the sale of investment and a gain of $147,259 related to equity income of an investment that we account for under the equity method. During the three months ended June 30, 2010, we did not incur any gains or losses related to the sale on investment or equity income in investment.

 

Six Months Ended June 30, 2010 as Compared to Six Months Ended June 30, 2009

 

Revenue. We generated revenue of $3,934,238 for the six months ended June 30, 2010, an increase of $1,328,710 or 51%, compared to $2,605,528 for the six months ended June 30, 2009. The increase in revenue is primarily attributable to the overall recovery of the economic environment and the launch of new products in May 2010.

 

Gross Profit. We achieved a gross profit of $1,269,639 for the six months ended June 30, 2010, an increase of $880,826 or 227%, compared to $388,813 for the six months ended June 30, 2009. Gross margin (gross profit as a percentage of revenues), was 32% for the six months ended June 30, 2010, compared to 15% for the six months ended June 30, 2009. The increase in the gross margin percentage was primarily attributable to the higher profit margins which are earned on the new products.

 

Aggregated selling expenses accounted for $346,186 of our operating expenses for the six months ended June 30, 2010, an increase of $319,068 or 1,177%, compared to $27,118 for the six months ended June 30, 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 $1,518,737 of our operating expenses for the six months ended June 30, 2010, an increase of $2,377,153 or 277%, compared to income of $858,416 for the six months ended June 30, 2009. The increase in general and administrative expenses is primarily attributable to a decrease in bad debt recoveries in 2010 compared to 2009. During the six months ended June 30, 2009 the Company recorded a bad debt recovery of $1,372,251 compared to a charge to bad debts of $531,020 for the six months ended June 30, 2010.

 

Non Operating Income and Expenses. We had total non-operating expense of $33,078 for the six months ended June 30, 2010, a decrease of $127,252 compared to income of $94,174 for the six months ended June 30, 2009. Other income (expense) was $(19,841) for the six months ended June 30, 2010 compared to $(1,284) for the six months ended June 30, 2009. Also included in non-operating income (expense) for the six months ended June 30, 2009 is a loss of $211,610 related to a loss on the sale of investment and a gain of $306,902 related to equity income of an investment that we account for under the equity method. During the six months ended June 30, 2010, we did not incur any gains or losses related to the sale on investment or equity income in investment.

 

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.

 

On March 19, 2010, we obtained a bank loan for 10,000,000 RMB (approximately $1,437,000). The loan has an 8.1% annual interest rate, matures on March 19, 2010 and is secured by our land and production facility.

 

As of June 30, 2010, we had $4, 869,341 of cash and cash equivalents compared to $4,824,135 as of December 31, 2009.

 

Cash Flows

 

Operating. We used $1,461,401 of cash for operating activities for the six months ended June 30, 2010 compared to $721,762 for the six months ended June 30, 2009.

 

Investing. Our investing activities used $3,268 of cash for the six months ended June 30, 2010, compared to $720,371 of cash provided by investing activities for the six months ended June 30, 2009. The decrease is primarily attributable to the proceeds from the sale of investment in 2009 of $735,656 for which there were no sales in 2010.

 

Financing. Our financing activities provided $1,466,900 of cash from a long term bank financing for the six months ended June 30, 2010 compared to no cash provided by financing activities for the six months ended June 30, 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.

 

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 June 30, 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 每 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 June 30, 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.

 

         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 six months ended June 30, 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 material weakness 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 June 30, 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.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during our second quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

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