15 August 2011

Bodisen Biotech, Inc.

 

Results for the six month period ended 30 June 2011

 

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 2011, which are extracted from the Company's Form 10-Q filed with the SEC.

 

Result of Operations

 

Three Months Ended June 30, 2011 as Compared to Three Months Ended June 30, 2010

 

 

 

Three Months Ended

 

 

 

 

 

 

June 30,

 

Change

 

 

2011

 

2010

 

$

 

%

 

 

 

 

 

 

 

 

 

Revenue

$

1,416,610

$

1,913,649

$

(497,039)

 

(26)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

558,927

 

1,854,716

 

(1,295,789)

 

(70)

 

 

 

 

 

 

 

 

 

Gross profit

 

857,683

 

58,933

 

798,750

 

1,355

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Selling expenses

 

30,277

 

204,772

 

(174,495)

 

(85)

General and administrative expenses

 

531,907

 

713,751

 

(181,844)

 

(25)

Writedown of Assets

 

-

 

-

 

-

 

-

Total operating expenses

 

562,184

 

918,523

 

(356,339)

 

(39)

 

 

 

 

 

 

 

 

Loss from operations

 

295,499

 

(859,590)

 

1,155,089

 

(134)

 

 

 

 

 

 

 

 

 

Non-oparating income (expense):

 

 

 

 

 

 

 

 

Other income (expense)

 

(2,280)

 

(19,227)

 

16,947

 

(88)

Interest income, net

 

21,217

 

(15,745)

 

36,962

 

(235)

Gain on sale of investment, net

 

-

 

-

 

-

 

-

Equity income in investment

 

-

 

-

 

-

 

-

Total non-operating income(expense)

 

18,937

 

(34,972)

 

53,909

 

(154)

 

 

 

 

 

 

 

 

 

Net income (loss)

$

314,436

$

(894,562)

$

1,208,998

 

(135)

 

 

 

 

 

 

 

 

 

 

Revenue :  We generated revenue of $1,416,610 for the three months ended June 30, 2011, a decrease of $497,039 or 26%, compared to $1,913,649 for the three months ended June 30, 2010.  The decrease in revenue is primarily attributable to the severe inflation in China which caused a decrease in spending by our customers.

 

Gross Profit (Loss): .  We experienced a gross profit of $857,683 for the three months ended June 30, 2011, an increase of $798,750 or 1,355%, compared to $58,933 for the three months ended June 30, 2010.  Gross margin (gross profit as a percentage of revenue), was 60% for the three months ended June 30, 2011, compared to 3.1% for the three months ended June 30, 2010.  The increase in the gross margin percentage was primarily attributable to the timing of collections of our accounts receivable.

 

Selling Expenses: Aggregated selling expenses accounted for $30,277 of our operating expenses for the three months ended June 30, 2011, a decrease of $174,495 or 85%, compared to $204,772 for the three months ended June 30, 2010.  The decrease in our aggregated selling expenses is primarily attributable to the decrease of sales.

 

General and Administrative Expenses: General and administrative expenses accounted for $531,907 of our operating expenses for the three months ended June 30, 2011, a decrease of $181,844 or 25%, compared to $713,751 for the three months ended June 30, 2010.  The decrease is principally due to a decrease in our bad debt expense.

 

Non Operating Income and Expenses :  We had total non-operating income of $18,937 for the three months ended June 30, 2011 a change of $53,909 compared to expense of $34,972 for the three months ended June 30, 2010.  Other income (expense) was $(2,280) for the three months ended June 30, 2011 compared to $(19,227) for the three months ended June 30, 2010.  During the three months ended June 30, 2011 and 2010, we did not incur any gains or losses related to equity income in investment.

 

Six Months Ended June 30, 2011 as Compared to Six Months Ended June 30, 2010

 

 

 

Six Months Ended

 

 

 

 

 

 

June 30,

 

Change

 

 

2011

 

2010

 

$

 

%

 

 

 

 

 

 

 

 

 

Revenue

$

2,441,287

$

3,451,991

$

(1,010,704)

 

(29)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

1,038,144

 

2,664,599

 

(1,626,455)

 

(61)

 

 

 

 

 

 

 

 

 

Gross profit

 

1,403,143

 

787,392

 

615,751

 

78

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Selling expenses

 

714,174

 

346,186

 

367,988

 

106

General and administrative expenses

 

1,048,517

 

1,461,735

 

(413,218)

 

(28)

Writedown of Assets

 

-

 

-

 

-

 

-

Total operating expenses

 

1,762,691

 

1,807,921

 

(45,230)

 

(3)

 

 

 

 

 

 

 

 

 

Loss from operations

 

(359,548)

 

(1,020,529)

 

660,981

 

(65)

 

 

 

 

 

 

 

 

 

Non-oparating income (expense):

 

 

 

 

 

 

 

 

Other income (expense):

 

(2,509)

 

(19,841)

 

17,332

 

(87)

Interest income, net

 

35,134

 

(13,237)

 

48,371

 

(365)

Gain on sale of investment, net

 

-

 

-

 

-

 

-

Equity income in investment

 

-

 

-

 

-

 

-

Total non-operating income (expense)

 

32,625

 

(33,078)

 

65,703

 

(199)

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(326,923)

$

(1,053,607)

$

726,684

 

(69)

 

 

 

 

 

 

 

 

 

 

Revenue :  We generated revenue of $2,441,287 for the six months ended June 30, 2011, a decrease of $1,010,704 or 29%, compared to $3,451,991 for the six months ended June 30, 2010.  The decrease in revenue is primarily attributable to the severe inflation in China which caused a decrease in spending by our customers.

 

Gross Profit (Loss) :  We experienced a gross profit of $1,403,143 for the six months ended June 30, 2011, an increase of $615,751 or 78%, compared to $787,392 for the six months ended June 30, 2010.  Gross margin (gross profit as a percentage of revenue), was 57.5% for the six months ended June 30, 2011, compared to 22.8% for the six months ended June 30, 2010.  The increase in the gross margin percen

tage was primarily attributable to the higher profit margins which are earned on the new products.

 

Selling Expenses: Aggregated selling expenses accounted for $714,174 of our operating expenses for the six months ended June 30, 2011, an increase of $367,988 or 106%, compared to $346,186 for the six months ended June 30, 2010.  The increase in our aggregated selling expenses is primarily attributable to an increase in marketing promotion and advertising programs.

 

General and Administrative Expenses: General and administrative expenses accounted for $1.048,517 of our operating expenses for the six months ended June 30, 2011, a decrease of $413,218 or 28%, compared to $1,461,735 for the six months ended June 30, 2010.  The decrease is principally due to a decrease in our bad debt expense.

 

Non Operating Income and Expenses :  We had total non-operating income of $32,625 for the six months ended June 30, 2011, a change of $65,703 compared to and expense of $33,078 for the six months ended June 30, 2010.  Other income (expense) was $(2,509) for the six months ended June 30, 2011 compared to $(19,841) for the six months ended June 30, 2010.     During the six months ended June 30, 2011 and 2010, we did not incur any gains or losses related to equity income in investment.

 

Liquidity and Capital Resources

 

We are primarily a parent holding company for the operations carried out by our operating subsidiary, Yang Ling, which carries out its activities in the People's Republic of China.  Because of our holding company structure, our ability to meet our cash requirements apart from our financing activities, including payment of dividends on our common stock, if any, substantially depends upon the receipt of dividends from our subsidiaries, particularly Yang Ling.

 

As of June 30, 2011 , we had $ 1,383,128 of cash compared to $3,675,209 as of December 31, 2010.  

 

Cash Flows

 

Operating:  We used $ 2,337,832 of c ash for operating activities for the six months ended June 30, 2011 compared to $1,461,401 of cash used in operating activities for the six months ended June 30, 2010. The cash used in operating consisted of a net loss of $.3 million offset by non cash expenses of depreciation and amortization of $ 855,253 . In preparation for greater sales, we increased inventory by $1,327,219 our advances to suppliers increased $ 250,773 . Deferred revenues and other payables were paid down resulting in a decrease in cash of $408,891 and $641,667, respectively.

Investing:  Our investing activities $528 of cash for the six months ended June 30, 2011, compared to $3,268 for the six months ended June 30, 2010.

Financing.  Our financing activities provided $0 of cash from a long term bank financing for the six months ended June 30, 2010 compared to $1,466,900 provided by financing activities for the six months ended June 30, 2009.

 

 

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, 2011 AND 2010 (UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

(unaudited)

$

 

(unaudited)

$

 

(unaudited)

$

 

(unaudited)

$

Net revenue

 

1,416,610

1,913,649

2,441,287

3,451,991

 

 

 

 

 

 

 

 

 

Cost of revenue

 

558,927

 

1,854,716

 

1,038,144

 

2,664,599

 

 

 

 

 

 

 

 

 

Gross profit

 

857,683

 

58,933

 

1,403,143

 

787,392

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Selling expenses

 

30,277

 

204,772

 

714,174

 

346,186

General and administrative expenses

 

531,907

 

713,751

 

1,048,517

 

1,461,735

Total operating expenses

 

562,184

 

918,523

 

1,762,691

 

1,807,921

 

 

 

 

 

 

 

 

 

Loss from operations

 

295,499

 

(859,590)

 

(359,548)

 

(1,020,529)

 

 

 

 

 

 

 

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

Other income (expense)

 

(2,280)

 

(19,227)

 

(2,509)

 

(19,841)

Interest income

 

58,659

 

4,718

 

106,726

 

7,886

Interest expense

 

(37,442)

 

(20,463)

 

(71,592)

 

(21,123)

Total non-operating income

 

18,937

 

(34,972)

 

32,625

 

(33,078)

 

 

 

 

 

 

 

 

 

Net loss

 

314,436

 

(894,562)

 

(326,923)

 

(1,053,607)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

448,219

 

168,197

 

670,658

 

168,118

Unrealized gain (loss) on marketable equity security

 

(1,998,404)

 

2,240,634

 

(6,742,091)

 

1,110,224

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

(1,235,749)

$

1,514,269

$

(6,398,356)

$

224,735

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding :

 

 

 

 

 

 

 

 

Basic

 

21,510,250

 

18,710,250

 

21,510,250

 

18,710,250

Diluted

 

21,510,250

 

18,710,250

 

21,510,250

 

18,710,250

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

0.01

 

(0.05)

 

(0.02)

 

(0.06)

Diluted

 

0.01

 

(0.05)

 

(0.02)

 

(0.06)

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

June 30,

June 30,

December 31,

 

2011

2010*

2010

 

$

$

$

ASSETS

 

 

 

CURRENT ASSETS:

 

 

 

Cash & cash equivalents

1,462,799

4,869,341

3,675,209

Accounts receivable and other receivable, net of allowance for doubtful accounts of $418,238, $3,296,095 and $1,005,992

 

4,585,063

 

3,836,753

 

4,499,673

Other receivables

11,878

38,978

9,185

Note receivable

1,547,000

-

1,517,000

Inventory

2,564,320

2,500,048

1,198,134

Advances to suppliers

852,919

1,058,441

665,765

Prepaid expense and other current assets

9,002

746,426

8,598

 

 

 

 

Total current assets

11,032,981

13,049,987

11,573,564

 

 

 

 

PROPERTY AND EQUIPMENT, net

22,531,098

11,495,948

22,870,340

MARKETABLE SECURITY, AVAILABLE-FOR-SALE

2,038,776

9,285,514

8,780,867

INTANGIBLE ASSETS, net

4,835,560

4,783,824

4,813,409

 

 

 

 

TOTAL ASSETS

40,438,415

49,080,542

48,038,180

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

CURRENT LIABILITIES:

 

 

 

Accounts payable

1,127,592

2,545,145

1,256,681

Accrued expenses

90,502

195,042

811,181

Deferred revenue

1,234,224

-

1,615,865

Note payable

1,547,000

-

-

 

 

 

 

Total current liabilities

3,999,318

2,740,187

3,683,727

 

 

 

 

Long-term note payable

-

1,473,000

1,517,000

 

 

 

 

TOTAL LIABILITIES

3,999,318

4,213,187

5,200,727

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

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

-

-

-

Common stock, $0.0001 per share; authorized 30,000,000 shares; issued and outstanding 21,510,250

2,151

1,871

2,151

Additional paid-in capital

35,345,542

33,945,822

35,345,542

Accumulated other comprehensive income

9,153,871

14,751,649

15,225,304

Statutory reserve

4,314,488

4,314,488

4,314,488

Retained Earnings

(12,376,955)

(8,146,475)

(12,050,032)

Total stockholders' equity

36,439,097

44,867,355

42,837,453

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

40,438,415

49,080,542

48,038,180

 

 

 

 

 

 

 

 

* The 2010 balance sheet figures are taken from the SEC 10-Q for the quarterly period ended 30 June 2010.

 

 


 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended June 30, 2011 and 2010

 

 

Six Months Ended June 30,

 

2011

 

2010

 

(unaudited)

 

(unaudited)

 

$

 

$

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

Net loss

(326,923)

 

(1,053,607)

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

 

 

 

Depreciation and amortization

840,916

 

501,084

Allowance (recovery) of bad debts

(600,736)

 

474,018

(Increase) / decrease in assets:

 

 

 

Accounts receivable

604,289

 

(2,560,964)

Other receivables

(2,483)

 

(12,520)

Inventory

(1,327,219)

 

(1,498,623)

Advances to suppliers

(172,009)

 

(512,340)

Prepaid expense

(231)

 

223,541

Increase / (decrease) in current liabilities:

 

 

 

Accounts payable

(151,986)

 

2,463,148

Accrued expenses

(86,465)

 

32,615

Deferred revenue

(408,891)

 

482,247

Other payables

(641,667)

 

-

Net cash used in operating activities

(1,946,482)

 

(407,794)

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

Sale (Acquisition) of property and equipment

13,810

 

(3,268)

 

 

 

 

Net cash used in investing activities

13,810

 

(3,268)

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

Proceeds from issuance of long-term note payable

-

 

1,466,900

 

 

 

 

Net cash provided by financing activities

-

 

1,466,900

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

47,185

 

42,975

 

 

 

 

NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

(2,212,410)

 

45,206

 

 

 

 

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD

3,675,209

 

4,824,135

 

 

 

 

CASH & CASH EQUIVALENTS, END OF PERIOD

1,462,799

 

4,869,341

 

2011

 

2010

 

(unaudited)

 

(unaudited)

 

$

 

$

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

Net loss

(326,923)

 

(1,053,607)

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

 

 

 

Depreciation and amortization

840,916

 

501,084

Allowance (recovery) of bad debts

(600,736)

 

474,018

(Increase) / decrease in assets:

 

 

 

Accounts receivable

604,289

 

(2,560,964)

Other receivables

(2,483)

 

(12,520)

Inventory

(1,327,219)

 

(1,498,623)

Advances to suppliers

(172,009)

 

(512,340)

Prepaid expense

(231)

 

223,541

Increase / (decrease) in current liabilities:

 

 

 

Accounts payable

(151,986)

 

2,463,148

Accrued expenses

(86,465)

 

32,615

Deferred revenue

(408,891)

 

482,247

Other payables

(641,667)

 

-

Net cash used in operating activities

(1,946,482)

 

(407,794)

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

Sale (Acquisition) of property and equipment

13,810

 

(3,268)

 

 

 

 

Net cash used in investing activities

13,810

 

(3,268)

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

Proceeds from issuance of long-term note payable

-

 

1,466,900

 

 

 

 

Net cash provided by financing activities

-

 

1,466,900

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

47,185

 

42,975

 

 

 

 

NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

(2,212,410)

 

45,206

 

 

 

 

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD

3,675,209

 

4,824,135

 

 

 

 

CASH & CASH EQUIVALENTS, END OF PERIOD

1,462,799

 

4,869,341

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

Interest paid

-

 

-

Income taxes paid

-

 

-

 

 

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (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, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

 

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 produces 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.

 

Note 2 ¨C Summary of Significant Accounting Policies

 

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¡±).

 

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 on 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.

 

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:

 

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, 2011 and December 31, 2010, respectively:

 

 

June 30,

2011

 

December 31,

2010

 

 

 

 

Operating equipment

$ 10,384,569

 

$ 10,181,140

Vehicles

613,327

 

617,703

Office equipment

100,900

 

98,420

Buildings

15,313,001

 

15,016,045

 

 

 

 

 

26,411,797

 

25,913,308

Less accumulated depreciation

(3,880,699)

 

(3,042,968)

Property and equipment, net

$ 22,531,098

 

$ 22,870,340

 

 

Depreciation expense for the three and six months ended June 30, 2011 and 2010 was $382,019 and $768,709 and $185,472 and $391,526, respectively.

 

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, 2011 and December 31, 2010, there was no impairment of its long-lived assets.

 

Intangible Assets

 

Intangible assets consist of Rights to use land and Fertilizers proprietary technology rights. The Company follows ASC Topic 350 in accounting for intangible assets, which requires impairment losses to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the assets' carrying amounts. There were no impairment losses recorded on intangible assets for the three and six months ended June 30, 2011 and 2010.

 

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.

 

Fair Value Measurements

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 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, 2011.

 

Description

Level 1

Level 2

Level 3

Assets:

 

 

 

Marketable securities

$ 2,038,776

$ -

$ -

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.

 

Revenue Recognition

 

The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Because collection is not reasonably assured, sales revenue is recognized using the cost recovery method. Under the cost recovery method, no profit is recognized until collections exceed the cost of the goods sold.

 

Advertising Costs

 

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place.

 

Stock-Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, ¡°Compensation ¨C 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, 2011.

 

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.

 

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 $9,947,091 and $9,274,169 at June 30, 2011 and December 31, 2010, 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, 2011 other comprehensive income in the consolidated statements of operations and other comprehensive income included translation gains (loss) of $448,219 and 670,658, respectively. 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 of $168,197 and $168,118, respectively. A detail of accumulated other comprehensive income is summarized below:

 

 

 

 

Foreign

Currency

 

 

 

Unrealised

Gain (loss)

 

Total

Other

Comprehensive

Income

Balance, December 31, 2010

9,274,169

 

5,951,135

 

15,225,304

Adjustments

670,658

 

(6,742,091)

 

(6,071,433)

Balance, June 30, 2011

$ 9,944,827

 

$ (790,956)

 

$ 9,153,871

 

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 options as of June 30, 2011 and 2010 that were excluded from the diluted loss per share calculation due to their exercise price being greater than the Company's average stock price for the year.

 

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 January 2010, the Financial Accounting Standards Board (¡°FASB¡±) issued Accounting Standard Update (¡°ASU¡±) No. 2010-06, Improving Disclosures about Fair Value Measurements (¡°ASU No. 2010-06¡±). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. The Company will provide the required disclosures beginning with the Company's Annual Report on Form 10-K for the year ending December 31, 2011. Based on the initial evaluation, the Company does not anticipate a material impact to the Company's financial position, results of operations or cash flows as a result of this change.

 

Note 3 ¨C Note Receivable

 

The note receivable is unsecured; bears interest at 9.1% per annum and originally due on March 25, 2011, but extended to September 25, 2011.

 

Note 4 ¨C Inventory

 

Inventory at June 30, 2011 and December 31, 2010 consisted of the following:

 

 

June 30,

2011

 

December 31,

2010

Raw materials

$ 1,176,578

 

$ 563,088

Packaging

85,498

 

45,288

Finished goods

1,302,244

 

589,758

 

2,564,320

 

1,198,134

Less obsolescence reserve

-

 

-

Inventory, net

$ 2,564,320

 

$ 1,198,134

 

Note 5 ¨C 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% (or 2,018,590 shares) 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, 2011 and December 31, 2010, the fair value of the investment is $2,038,776 and $8,780,867, respectively, which is reflected in the consolidated balance sheet.  The Company recognized an unrealized gain (loss) of $(1,998,404) and $(6,742,091) for the three and six months ended June 30, 2011, respectively and $2,240,634 and $1,110,224 for the three and six months ended June 30,2010, respectively, which is reflected as accumulated other comprehensive income in the consolidated statement of stockholder's equity. Investment has been categorized as Available for Sale.

 

Note 6¨C Intangible Assets

 

Net intangible assets at June 30, 2011 and December 31, 2010 were as follows:

 

 

June 30,

2010

 

December 31,

2009

Rights to use land

$ 5,277,016

 

$ 5,174,682

Fertilizers proprietary technology rights

1,237,600

 

1,213,600

 

6,514,616

 

6,388,282

Less accumulated amortization

(1,679,056)

 

(1,574,873)

Intangibles, net

$ 4,835,560

 

$ 4,813,409

 

 

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 on January 1, 2001with 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 $26,759 and $72,207 for the three and six months ended June 30, 2011 and $54,788 and $109,558 for the three and six months ended June 30, 2010, respectively. Amortization of intangible assets for the next five years are as follows:

 

Year End

 

Amount

2011

$

160,000

2012

 

101,000

2013

 

101,000

2014

 

101,000

2015

$

101,000

 

 

 

 

Note 7 ¨C Long-Term Note Payable

 

On March 19, 2010, the Company obtained a bank loan for 10,000,000 RMB (approximately $1,527,000 and $1,517,000 at June 30, 2011 and December 31, 2010, respectively).  The loan has an 8.1% annual interest rate, matures on March 19, 2012 and is secured by the Company's land use rights and facility.

 

Note 8 ¨C Stock Options

 

Common Stock

 

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, 2010

426,000

 

$ 1.07

 

 

Granted

-

 

 

 

 

Cancelled

-

 

 

 

 

Exercised

-

 

 

 

 

Outstanding at June 30, 2011

426,000

 

$ 1.07

 

$ -

Exercisable at June 30, 2011

426,000

 

$ 1.07

 

$ -

 

 

The following is a summary of the status of options outstanding at June 30, 2011:

 

Options Outstanding and Exerciseable

 

Range of

Exercise

Price

 

Number

Outstanding

June 30,

2011

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

 

 

 

$ 0.70

 

400,000

 

0.75

$ 6.72

 

26,000

 

0.25

 

 

 

 

 

 

 

426,000

 

 

 

 

 

 

 

 

Note 9 ¨C Employee Welfare Plans

 

The Company has established its own employee welfare plan in accordance with Chinese law and regulations. The Company makes annual contributions of 14% of all employees' salaries to employee welfare plan. The total expense for the above plan were $ 0 for the three and six months ended June 30, 2011 and 2010. The Company has recorded welfare payable of $ 0 at and June 30, 2011 and December 31, 2010.

 

Note 10 ¨C St' ;&,äÇ"øvIE' ;&,äÇ"ød

 

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:

 

  1. Making up cumulative prior years' losses, if any;

 

  1. 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;

 

  1. 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

 

  1. 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, 2011 and 2010.

 

Note 11 ¨C 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 $2,637 and the leases expire in 2013.

 

Note 12 ¨C Current Vulnerability Due to Certain Concentrations

 

Two vendors provided 28.6% and 21.0% of the Company's raw materials for the six months ended June 30, 2011 and two vendors provided 18.8%, and 18.5% of the Company's raw materials for the six months ended June 30, 2010.

 

Two customers accounted for 24.3% and 12.3% of the Company's sales for the six months ended June 30, 2011. Two customers accounted for 24% and 12% of the Company's sales for the six months ended June 30, 2010.

 

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations m' ;&,äÇ"øvIE' ;&,äÇ"ølitical, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 13 ¨C Litigation

 

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is, however, subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Other than the matters described below, we are currently not aware of any such legal proceedings or claims that we believe would or could have, individually or in the aggregate, a material adverse affect on our business, financial condition, results of operations or liquidity.

 

Note 14 ¨C Subsequent Events

 

Pursuant to Financial Accounting Standards Board Accounting Standards Codification 855-10, the Company has evaluated all events or transactions that occurred from July 1, 2010, through the filing with the SEC.  The Company did not have any material recognizable subsequent events during this period.

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the ¡°Exchange Act¡±). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as ¡°may,¡± ¡°will,¡± ¡°should,¡± ¡°could,¡± ¡°would,¡± ¡°expect,¡± ¡°plan,¡± anticipate,¡± believe,¡± estimate,¡± continue,¡± or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading ¡°Risk Factors¡± and those listed in our other SEC filings. The following discussion should be read in conjunction with our Financial Statements and related notes thereto included elsewhere in this Quarterly Report. Throughout this Quarterly Report we will refer to Shiner International, Inc., together with its subsidiaries, as ¡°Shiner,¡± the ¡°Company,¡± ¡°we,¡± ¡°us,¡± and ¡°our.

 

Overview

 

We are incorporated under the laws of the state of Delaware and our operating subsidiary, Yang Ling, is headquartered in Shaanxi Province, the People's Republic of China. We are 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. We market and sell our products to distributors throughout the People's Republic of China, and these distributors, in turn, sell our products to farmers. We also conduct research and development to further improve existing products and develop new formulas and products.

 

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.

 

Revenue Recognition

 

Our revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Because collection is not reasonably assured, sales revenue is recognized using the cost recovery method. Under the cost recovery method, no profit is recognized until cash payments exceed the cost of the goods sold.

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (¡°FASB¡±) issued Accounting Standard Update (¡°ASU¡±) No. 2010-06, Improving Disclosures about Fair Value Measurements (¡°ASU No. 2010-06¡±). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. The Company will provide the required disclosures beginning with the Company's Annual Report on Form 10-K for the year ending December 31, 2011. Based on the initial evaluation, the Company does not anticipate a material impact to the Company's financial position, results of operations or cash flows as a result of this change.

 

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.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Evaluation of our Disclosure Controls

 

Disclosure 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 and our Chief Financial Officer 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.

 

During management's assessment of the effectiveness of disclosure controls and procedures as of June 30, 2011, 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.

 

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 2010. 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 quarter ended June 30, 2011, 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 quarter ended June 30, 2011, we are working to strengthen efforts to establish an effective communication system with clear procedures that will enable us to collect, process and deliver information related to internal controls in a timely fashion.  Due to our limited staff, our Chief Financial Officer, Mr. Tong, will initially be primarily responsible for collecting and delivering such information among the different levels of Company management.

 

We believe that the foregoing steps will remediate the significant deficiency 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 quarterly 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, 2011.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in internal control over financial reporting (as defined in Rule 13a-15f under the Exchange Act) that occurred during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

A copy of our Form 10-Q is available at: www.sec.gov/Archives/edgar/data/1178552/000114420411047409/v231248_10q.htm

 

 

Copies may also be obtained by contacting the Investor Relations Department at our corporate offices by sending an e-mail message to info@bodisen.com.