Outstanding, December 31, 2005			136,000
Granted			—
Forfeited			—
Exercised			—
Outstanding, March 31, 2006			136,000

 

Following is a summary of the status of options outstanding at March 31, 2006:

Outstanding Options			Exercisable Options
Exercise Price	Number	Average Remaining Contractual Life	Average Exercise Price	Number	Average Exercise Price
$5.00	100,000	3.17	$5.00	100,000	$5.00
$5.80	10,000	3.74	$5.80	10,000	$5.80
$6.72	26,000	4.51	$6.72	26,000	$6.72

		Three month periods ended March 31,
		2006									2005
								Per									Per
		Income			Shares			Share			Income			Shares			Share
Basic earnings per share
Net income		$	2,682,643								$	796,733
Weighed shares outstanding						17,215,232									15,268,000
								$	0.16								$	0.05
Diluted earnings per share
Net income		$	2,682,643								$	796,733
Weighed shares outstanding						17,215,232									15,268,000
Effect of dilutive securities
Options						89,537									261,458
Warrants						69,922									—
						17,374,691									15,529,458
								$	0.15								$	0.05

 

 

 Note 14 - Current Vulnerability Due to Certain Concentrations

Four vendors provided 58.74%, 13.58%, 5.43% and 4.78% of the Company’s raw materials for the three months ended March 31, 2006 and four vendors provided 22%, 18%, 16% and 16% of the Company’s raw materials for the three months ended March 31, 2005. The payable balance for these parties amounted to $450,758 at March 31, 2006.

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BODISEN BIOTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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

 

Note 15 - Reclassifications

Certain prior period amounts have been reclassified to conform to the three months ended March 31, 2006 presentation.

 

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

 

INTRODUCTION

 

Overview

The Company is incorporated under the laws of the state of Delaware and its operating subsidiary, Yang Ling, is headquartered in the Shaanxi Province, the People’s Republic of China. The Company engages in the business of manufacturing and marketing organic fertilizers, pesticides, and agricultural raw materials in the People’s Republic of China. It produces numerous product lines, from pesticides to crop specific fertilizers. These products are then marketed and distributed through approximately 600 distribution centers throughout the 20 provinces of the People’s Republic of China. The Company conducts research and development to further improve existing products and develop new formulas and products.

Significant Accounting Policies

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts receivable

The Company maintains reserves for potential credit losses on accounts receivable. It reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Company compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower.

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Property and equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of: 30 years for building, 10 years for machinery, 5 years for office equipment and 8 years for vehicles.

Intangible assets

Intangible assets consist of rights to use land and proprietary technology rights to fertilizers. The Company evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. Potential impairment of goodwill after July 1, 2002 is being evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to the financial statements of the Company beginning July 1, 2002.

Revenue recognition

 

Stock-based compensation

The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." The Company recognizes in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Income taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

According to the Provisional Regulations of the People’s Republic of China on Income Tax, the Document of Reductions and Exemptions of Income Tax for the Company have been approved by the local tax bureau and the Management Regulation of Yang Ling Agricultural High-Tech Industries Demonstration Zone. The Company is exempted from income tax in its first two years of operations.

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Foreign currency transactions and comprehensive income (loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Transactions occur in Chinese Renminbi. The unit of Renminbi is in Yuan.

Recent Accounting Pronouncements

 

In March 2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:

 

1.	Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.

 

2.	Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.

 

3.	Permits an entity to choose ‘Amortization method’ or  ‘Fair value measurement method’ for each class of separately recognized servicing assets and servicing liabilities:

 

4.

At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.

 

5.	Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.

 

This Statement is effective as of the beginning of the Company’s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the consolidated financial statements.

Three months ended March 31, 2006 compared to three months ended March 31, 2005

Revenue. The Company generated revenues of $10,535,360 for the three months ended March 31, 2006, an increase of $5,833,685 or 124.1%, compared to $4,701,675 for the three months ended March 31, 2005. The growth in revenue was primarily attributable to the increase in the customer base as the company continued to aggressively market their products and the growing awareness in the agricultural industry in the markets in which they do business of the efficacy of their products. The Bodisen brand name has become synonymous with proven higher crop yields. The completion of the new factory in early 2005 enabled the company to meet the growing demand for all of its products.

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Gross profit. The Company achieved a gross profit of $4,236,239 for the three months ended March 31, 2006, an increase of $2,582,062 or 156.1%, compared to $1,654,177 for the three months ended March 31, 2005. Gross margin, as a percentage of revenues, increased from 35.2% for the three months ended March 31, 2005, to 40.2% for the three months ended March 31, 2006. The increase in gross margin was primarily attributable to the increase in the prices of main products. During the quarter the Company raised its prices two times. The first was due to price increases throughout the industry and then it was realized that the marketplace would accept paying a premium for Bodisen brand products, so the Company raised its prices again. In addition, the Company used the $5,000,000 from the short term note that was issued in December 2005, to enter into purchasing agreements that locked in the 2005 price levels for all raw materials the Company purchases during 2006.

Operating expenses. The Company incurred operating expenses of $778,398 for the three months ended March 31, 2006, an increase of $351,788 or 82.5%, compared to $426,610 for the three months ended March 31, 2005. These operating expenses are related to increased sales and marketing costs related to the 124.1% increase in sales for the first quarter 2006.

Aggregated selling expenses of $474,174 for the three months ended March 31, 2006, an increase of $326,034 or 220% compared to $148,140 for the three months ended March 31, 2005, account for expenses related to costs associated with sales and marketing of the Company’s products and with transportation of its products. As the Company continues to grow revenues, it is selling Bodisen products greater distances from its factories, leading to increased shipping costs, most notably on the compound fertilizer product which is sold in 50 kilogram (110 pounds) units. The increase in the cost of fuel has also had an effect on operating expenses. Operating expenses include general and administrative expenses of $304,224 for the three months ended March 31, 2006 and $278,470 for the three months ended March 31, 2005, an increase of $25,754 or 9.2%. Operating expenses are related to the cost of maintaining the company's facilities, salaries and research and development.

Net Income. Net income increased by 236.7% to $2,682,643 during the three months ended March 31, 2006, an increase of $1,885,910, from $796,733 for the three months ended March 31, 2005. Earnings per share (EPS) rose to $0.16 for the three months ended March 31, 2006 from $0.05 for the three months ended March 31, 2005. The increase was attributed to a very strong marketing campaign that has 2 goals: first, to saturate the markets where the company has sold product in the past so that it can achieve greater market penetration and secondly to grow the demand in new markets and regions throughout China. The strong growth in net income also occurred as a result of management's strategic decision to place the $5,000,000 note in December 2005 and lock in raw material costs before any announced increases.

Liquidity and Capital Resources

As of March 31, 2006 the Company had $26,085,746 of cash and cash equivalents on hand, compared to $6,276,897 cash and cash equivalents on hand as of December 31, 2005. The significant increase is due to the sale of Company stock during the three months ended March 31, 2006 that resulted in gross proceeds of $26,682,511.

On March 16, 2005, the Company completed a $3 million convertible debenture private placement through an institutional investor. The Company issued a one year 9% debenture convertible into shares of common stock by dividing the aggregate principal and accrued interest by a conversion price of $4.80; and three year warrants to purchase 187,500 shares of common stock at $4.80 per share, In connection with the placement a three year warrant was issued to purchase 40,000 shares of common stock at $6.88 per share. During the course of 2005 the note was fully converted to 657,402 shares of common stock. 195,500 of the warrants were exercised during December 2005 and 32,000 warrants were exercised during January 2006. The net proceeds from this offering were used towards capital contribution of the registration of a wholly-owned Bodisen subsidiary by the name of Yang Ling Bodisen Agricultural Technology Co., Ltd.

On February 3, 2006, we entered into an agreement to sell 1,643,836 shares of the Company’s common stock at 730 pence (approximately $12.99). These shares are to be traded on the AIM Market of the London Stock Exchange. The resulting proceeds were approximately 12,000,000 British pounds sterling (approximately $21,360,000). The proceeds are intended for construction of two factories in the Northwest and Northeast of China, allowing the Company to greatly increase the geographical area in which it can sell its products by overcoming the logistical issues in selling and shipping its products over increasingly greater distances. In addition, proceeds will also be used to purchase raw materials and for general corporate purposes.

On March 15, 2006 the Company completed a financing of US$5,322,506 by issuing 380,179 restricted shares of common stock at $14.00 per share to private institutional investors in a private placement. The proceeds of this financing were used to repay the $5,000,000 short term note plus interest which the Company entered into on December 2005.

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As of March 31, 2006 accounts payable was $777,648, other payables were $3,408,113 and accrued expenses were $473,253. Cash outflows used in investing activities decreased from $890,633 in the three month period ended March 31, 2005 to $392,923 in the three month period ended March 31, 2006, as a result of a decrease in acquisitions of property and equipment. Accounts receivable at March 31, 2006, were $11,848,040. Based on past performance and current expectations, the Company believes its cash and cash equivalents and cash generated from operations will satisfy its working capital needs, capital expenditures and other liquidity requirements associated with its operations.

The majority of Bodisen Biotech, Inc. revenues and majority of the expenses in 2006 were denominated primarily in Renminbi ("RMB"), the currency of the People's Republic of China. There is no assurance that exchange rates between the RMB and the U.S. dollar will remain stable. A devaluation of the RMB relative to the U.S. dollar could adversely affect our business, financial condition and results of operations. Bodisen does not engage in currency hedging. Inflation has not had a material impact on Bodisen’s business.