- Quarterly Report (10-Q)

UNITED STATES

 

 

SECURITIES AND EXCHANGE COMMISSION

 

 

Washington, D.C. 20549

 

 

FORM 10-Q

 

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________ to _______________

 

 

CHINA DASHENG BIOTECHNOLOGY COMPANY

(Exact name of registrant as specified in its charter)

Nevada	333-141327	26-0162321
(State or other jurisdiction of incorporation or organization)	Commission File Number	(I.R.S. Employer Identification No.)

Building B 17th Floor

Century Plaza

Qingyang Road

Lanzhou, Gansu

People's Republic of China

Telephone number: （ 86 ） 931 8441248

(Address and telephone number of principal executive offices)

c/o American Union Securities

100 Wall Street 15th Floor

New York, NY 10005

Telephone number: （ 212) 232-0058

(Address and telephone number of United States agent offices)

 

 

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

 

 

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer       o			Accelerated filer      o
Non-accelerated filer         o	(Do not check if a smaller reporting company)		Smaller reporting company      þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

Yes o No þ

 

 

As of November 14, 2008, 30,000,000 shares of common stock, par value $.001 per share, were outstanding.

 

 

 

 

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TABLE OF CONTENTS	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1
Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and June 30, 2008	1
Consolidated Statements of Operations for three months ended September 30, 2008 and 2007 (Unaudited)	2
Consolidated Statements of Cash Flows for the three months ended September 30, 2008 and 2007 (Unaudited)	3
Notes to Consolidated Financial Statements	4-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	13
Item 4. Controls and Procedures	13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3. Defaults Upon Senior Securities	14
Item 4. Submission of Matters to a Vote of Security Holders	14
Item 5. Other Information	14

Item 6. Exhibitions	14
Signatures	15

 

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

 

CHINA DASHENG BIOTECHNOLOGY COMPANY
(FORMERLY NAMED AS MAX NUTRITION INC.)
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2008 and JUNE 30, 2008
(in US DOLLARS)
		30-Sep-08				30-Jun-08
		(UNAUDITED)
ASSETS
Current assets:
Cash & cash equivalents		$	2,381,735			$	1,561,403
Accounts receivable, net of allowance for doubtful			5,113,965				3,244,476
accounts of $16,470 and $16,303, respectively
Inventory			435,538				561,883
Advances to suppliers			859,784				1,486,379
Due from related parties			1,596,931				1,580,820
Prepayments and other current assets			22,153				35,675
Total current assets			10,410,106				8,470,636
Investment in Real Estate Ventures			6,549,514				6,483,437
Property, plant and equipmen t, net of accumulated depreciation			1,551,703				1,618,829
Other Assets
Land use right, net of accumulated amortization			1,519,575				1,531,555
Notes receivable			1,030,225				998,502
Long-term prepayments			1,508,146				1,150,082
Total other assets			4,057,946				3,680,139
Total Assets		$	22,569,269			$	20,253,041
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	854,144			$	725,680
Accrued expenses and other payables			806,155				809,463
Payable to related parties			321,088				-
Total current liabilities			1,981,387				1,535,143
Long-term payable - land use right			1,474,008				1,459,137
Minority Interest			1,986,483				1,564,957
Stockholders' Equity:
Preferred stock, $0.001 par value, 1,000,000 shares authorized,
- 0 - shares issued and outstanding at September 30, 2008 and June 30, 2008			-				-
Common stock, $0.001 and $0.1208 par value, 74,000,000 and 74,000,000 shares
authorized, 30,000,000 and 30,000,000 shares issued and outstanding at
September 30, 2008 and June 30, 2008, respectively			30,000				30,000
Additional paid-in-capital			3,846,035				3,846,035
Statutory surplus reserve and common welfare fund			1,837,187				1,837,187
Retained earnings			9,338,072				8,009,800
Accumulated other comprehensive income			2,076,097				1,970,782
Total stockholders' equity			17,127,391				15,693,804
Total Liabilities and Stockholders' Equity		$	22,569,269			$	20,253,041
See accompanying notes to the Consolidated Financial Statements

1 

 

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CHINA DASHENG BIOTECHNOLOGY COMPANY
(FORMERLY NAMED AS MAX NUTRITION INC.)
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(in US DOLLARS)
		For the three months ended September 30,
		2008				2007
		(Unaudited)				(Unaudited)
Net Sales		$	5,107,515			$	3,006,437
Cost of Sales			(2,666,604	)			(1,811,755	)
Gross profit			2,440,911				1,194,682
Operating Expenses:
Selling expenses			350,927				150,077
Genernal and administration expense			454,915				199,670
Total operating expenses			805,842				349,747
Income from Operations			1,635,069				844,935
Other Income and Expenses:
Interest income (expenses)			26,237				(22,383	)
Other income			2,925				4,546
Other expenses			(4,923	)			-
Total other income and (expense)			24,239				(17,837	)
Income before income taxes and minority interest			1,659,308				827,098
Minority Interest			(331,036	)			(171,243	)
Net income		$	1,328,272			$	655,855
Other Comprehensive Income:
Foreign currency translation adjustment			97,236				175,384
Comprehensive income		$	1,425,508			$	831,239
Basic and Diluted Income per common share
Basic		$	0.04			$	0.02
Diluted		$	0.04			$	0.02
Weighted average common share outstanding
Basic			30,000,000				32,080,000
Diluted			30,000,000				32,080,000
See accompanying notes to the Consolidated Financial Statements

 

2

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CHINA DASHENG BIOTECHNOLOGY COMPANY
(FORMERLY NAMED AS MAX NUTRITION INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
( in US DOLLARS)
		For the three months ended September 30,
		2008				2007
		(Unaudited)				(Unaudited)
Cash Flows From Operating Activities:
Net income		$	1,328,272			$	655,855
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in net income of consoldiated subsidiaries			331,036				171,243
Interest income from real estate project			(21,396	)			-
Bad debt expense			(167	)			-
Depreciation expense			67,126				74,897
Amortization expense			11,980				36,600
Changes in operating assets and liabilities:
Accounts receivable			(1,869,320	)			(1,200,754	)
Inventory			(43,794	)			228,764
Advance to suppliers			626,595
Prepayments and other current assets			(344,543	)			(103,480	)
Accounts payable			298,603				695,756
Accrued expenses and other current liabilities			(3,308	)			(1,217,448	)
Cash provided (used) by operating activities			381,084				(658,567	)
Cash Flows From Investing Activities:
Purchases of property, plant and equipment			-				(21,198	)
Cash used in investing activities			-				(21,198	)
Cash Flows From Financing Activities:
Repayment of loans payable			321,088				-
Advances received from related parties			-				1,816,110
Cash provided by financing activities			321,088				1,816,110
Effect of currency exchange rate on cash and cash equivalents			118,160				27,884
Increase in cash and cash equivalents			820,332				1,164,229
Cash and Cash Equivalents - Beginning of the year			1,561,403				1,316,569
Cash and Cash Equivalents - Ending of the year		$	2,381,735			$	2,480,798
Supplemental disclosures of cash flow information:
Interest paid		$	41,760			$	22,383
Income Taxes paid			-				-
See accompanying notes to the Consolidated Financial Statements

 

3 

 

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CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008

(Unaudited)

NOTE 1 – ORGANIZATION AND OPERATIONS

 

                      China Dasheng Biotechnology Company (“Dasheng” or the “Company”) was incorporated in the state of Nevada on January 12, 2007, under the original name of Max Nutrition Inc, as a holding vehicle for selling the nutritional supplements.

 

                      On January 29, 2008, Pursuant to an Agreement and Plan of Reorganization, American Spring Pharmaceutical, Inc., a Delaware corporation (“ASPI”) purchased an aggregate of 7,700,000 shares of the 10,000,000 issued and outstanding shares of Max Nutrition common stock for $183,000 and ASPI’s transfer of 100% of the issued and outstanding shares of Gansu Dasheng Biology Science and Technology Stock Co., Ltd. (“Dasheng”) to Max Nutrition in exchange for 20,000,000 shares of the common stock of Max Nutrition. Upon completion of the transaction, ASPI distributed 27,700,000 shares of Max Nutrition common stock it received from Max Nutrition and the Max Nutrition’ previous principal stockholder to Dasheng’s shareholders, pro rata. At the effective time of the merger, the total number of shares of Max Nutrition acquired and number of shares of Max Nutrition Common Stock issued to the shareholders of Dasheng pursuant to the agreement, represented approximately 92.33% of the outstanding shares of Max Nutrition’s common stock after giving effect to Max Nutrition’s acquisition of Dasheng. As a result of the ownership interests of the former shareholders of Dasheng, for financial statement reporting purposes, the merger between the Company and Dasheng has been treated as a reverse acquisition with Dasheng deemed as the accounting acquirer and the Max Nutrition deemed the accounting acquire in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS No. 141”). The reverse merger is deemed as a recapitalization of Dasheng and the net assets of Dasheng (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their historical carrying value before the combination. The assets and liabilities of Dasheng are recorded at historical cost.

 

                     Gansu Dasheng Biology Science and Technology Stock Co., Ltd. was incorporated on October 16, 2002, in the City of Lanzhou, Gansu Province, People’s Republic of China (“PRC”). Dasheng operates within the biological products and agents market. This space includes organic fertilizers, non-chemical agents, and biological agents based additives.

 

                     On March 6, 2008, the Company changed its name to China Dasheng Biotechnology Company.

 

                    The Company derived its revenues from the sale of products in the biological products and agents market. All revenues generated are from sales to customers in China. The Company has two majority-owned subsidiaries in China. It has 80% interest in Hainan Lüshen Biology Technology Co., Ltd. (“Lüshen”) located in HaiKou, Hainan Province, China. Lüshen engages in developing, manufacturing and marketing artificial microorganisms (“AM”), high-efficiency microorganism (“HM”) based biological bacterium blends, and biological preservatives. The Company also has a 60% interest in

                    Yangling Elemiss Foods Co., Ltd.  (“Elemiss”) located in City of Yangling, Shaanxi Province, China. Elemiss engages in developing, manufacturing and marketing artificial microorganism (“AM”) based biological bacterium blends, and Bulgarian lactobacillus live stock feed additives.

 

4

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CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Statements

 

                     The accompanying unaudited interim financial statements of China DaSheng Biotechnology Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Amendment No. 1 to Annual Report filed with the SEC on Form 10-K/A. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for 2008 as reported in the 10-K/A have been omitted.

 

Basis of presentation and consolidation

 

The consolidated financial statements include the financial statements of DaSheng, and its wholly owned subsidiary, and its majority-owned subsidiaries, Lüshen and Elemiss. All significant inter-company transactions and balances among the Company and its subsidiary are eliminated upon consolidation.

                  

Reclassifications

 

                    Certain previously reported amounts have been reclassified to conform to classifications adopted in the period ended September 30, 2008.

 

Accounts receivable

 

Accounts receivables consist primarily of receivables resulting from sales of products. The Company establishes provisions for doubtful accounts receivable based on management’s estimates of amounts that it believes are unlikely to be collected.  Collectability of receivables is reviewed and the allowance for doubtful accounts is adjusted at least quarterly, based on aging of specific accounts and other available information about the associated customers. The allowance for uncollectible amounts as of September 30, 2008 and June 30, 2008 was $16,470 and $16,303, respectively.

 

Investment in real estate ventures

                   The Company had two joint ventures for real estate projects in China to develop commercial and residential real estate in China. The Company’s ownership interests in the two ventures are 17.5% and 16.5%, respectively. As a result, the Company accounts for these two ventures based on cost method of accounting.

Land use rights

 

                   Land use rights represent the cost to obtain the right to use land in China. Land use rights are carried at cost and amortized on a straight-line basis over the lives of the rights, ranging from 17 to 50 years.

 

5

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  CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Patent and purchased formulae

 

                 The Company has adopted the guidelines as set out in Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”) for the patent and purchased formulae. Under the requirements as set out in SFAS No. 142, the Company amortizes the costs of acquired patent and formulae over their remaining legal lives or the term of the contract, whichever is shorter. All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs. Patent application costs, generally legal costs, thereafter incurred, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally 15 to 20 years for domestic patents and 5 to 20 years for foreign patents, or expensed if the patent application is rejected. The costs of defending and maintaining patents are expensed as incurred. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

 

Impairment of long-lived assets

 

               Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

               Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. No impairment loss is recorded for three months ended September 30, 2008 and 2007.

 

Income taxes

 

              The Company accounts for income tax under the provisions of SFAS No.109 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.  There are no deferred tax amounts as at September 30, 2008 and June 30, 2008.

 

Revenue recognition

 

             The Company utilizes the accrual method of accounting.  In accordance with the provisions of Staff Accounting Bulletin (“SAB”) 104, sales revenue is recognized when products are shipped and payments of the customers and collection are reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

             The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin 104 (“SAB No.104”) for revenue recognition. The Company records revenue when persuasive evidence of an arrangement exists, product delivery has occurred and the title and risk of loss transfer to the buyer, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. For sale of additive for livestock feed and crop cultivation, the Company derives the majority of its revenue from sales contracts with customers with revenues being generated upon the shipment of goods. Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the trucking or rail company and title transfers upon shipment, based on either free on board (“FOB”) factory or destination terms; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

Earnings per share

            

             The Company computes earnings per share (“EPS’) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” ("FAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS.  Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period.  Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later.  Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There are 30,000,000 and 30,000,000 shares of common stock equivalent available in the computation of dilute earnings per share at September 30, 2008 and June 30, 2008 respectively.

 

Risks and uncertainties

 

             The operations of the Company are located 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, as well as by the general state of the PRC economy.

             The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

 

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CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign currency translation

 

            The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income.  There is no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

   

NOTE 3 – INVENTORY

            The inventory consists of the following:                 

		Balance as of
		September 30,2008				June 30, 2008
Raw materials		$	9,108			$	218,985
Packing materials			35,209				14,461
Work-in-process			347,206				246,695
Finished goods			44,015				81,742
Total		$	435,538			$	561,883

            No allowance for inventory was made for as of September 30, 2008 and June 30, 2008.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

           The detail of related party transactions is as follows:

           (i) Office space

            On December 1, 2006, Lüshen entered into a non-cancellable operating lease for its manufacturing facility in Hainan Province from Dasheng Industries Co., Ltd., an affiliate of the Company, expiring November 30, 2026. Lüshen prepaid the total lease obligation of RMB3.0 million (equivalent to $441,833 and $437,375 at September 30, 2008 and June 30, 2008 respectively) upon signing the lease, which approximates the present fair market value of the lease.

 

           (ii) Due from (+) and to (-) related parties

 

		Balance as of
		September 30, 2008				June 30, 2008
Receivables from shareholders/officers		$	1,596,931			$	1,580,820
Payable to shareholder			(321,088	)			-
Total		$	1,275,843			$	1,580,820

          The advances to shareholders/officers bear no interest and have no formal repayment terms.

 

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  CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 5 – REAL ESTATE

               i) Dasheng Garden Development Project

              On March 19, 2005, the Company signed a joint venture property development ("JV") agreement with an unrelated developer (the "Developer"). Under the agreement, the Company was required to (1) contribute RMB14 million (equivalent to $1,924,002 at date of signing) in cash as the investment into the project, (2) assist the Developer in the project planning and (3) assist the Developer in applying for and obtaining relevant approvals.  The Developer was required to contribute RMB71million (equivalent to $8,578,505 at date of signing) in cash into the project.

              Upon completion of Phase I, representing approximately 50% of the Company owned land use rights in the City of Lanzhou, the Company will receive RMB7 million (equivalent to $845,768 at date of signing) from the JV and will retain the ownership of all the commercial retail units on the first floor and the basement which will be sold as a parking lot, and the Developer will obtain all remaining units.

 

              Upon completion of Phase II, (which concerns the development of the remaining 50% of the land use rights, the Company and the Developer will be entitled to 29% and 71% of the net profits, respectively.

 

              The Company ownership percentage in the real estate venture is 16.5%.

              On June 30, 2005 the Company transferred the land use right associated with Phase I valued at RMB 2,929,686 (equivalent to $353,976 at date of transfer) less accumulated amortization of RMB459,142 (equivalent to $55,475 at date of transfer) from the land use right account and reclassified the net amount to investment in real estate ventures, with no further amortization of the land use right to be taken.

              On December 31, 2007, the Company received cash from Dasheng Garden Development of RMB 7,000,000 (equivalent to US$1,020,542), which was accounted for as a reduction of the investment in real estate investment (return of capital).

 

              (ii) Changlin Real Estate Development project

             On May 31, 2008, the Company contributed RMB35m (equivalent to US$5,102,710) to set up a joint venture of Changlin Real Estate Development Co., Ltd. The joint venture intends to develop residential real estate in an old manufacturing site in Lanzhou within 2 years. The Company's share of the joint venture project is 17.5%.

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  CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 6 - PROPERTY, PLANT ADN EQUIPMENT, NET

          The detail of property, plant and equipment is as follows:

 

		Balance as of
		September 30,2008				June 30, 2008
Buildings and improvements		$	1,610,801			$	1,594,550
Machinery and equipments			1,162,135				1,278,136
Transportation equipments			333,251				258,194
Office equipments			104,731				62,729
Sub-total			3,210,918				3,193,609
Less: Accumulated Depreciation			(1,659,215	)			(1,574,780	)
Total		$	1,551,703			$	1,618,829

 

           Depreciation expense for the three months ended September 30, 2008 and 2007 was $67,126 and $74,897, respectively.

 

9

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CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 7 - LAND USE RIGHTS

 

          All land in the People’s Republic of China is government owned and cannot be sold to any individual or company. Instead, the government grants the user a “Land use right” (the “Right”) to use the land.

          On August 17, 2006, Elemiss entered into an agreement with and obtained a certificate of a land use right from the Chinese government, whereby Elemiss acquired for RMB 703,200 (equivalent to $88,247 at date of acquisition) the right to use certain land until August 16, 2056. The purchase price is being amortized over the term of the right, which is 50 years.

          Net land use right at September 30, 2008 and June 30, 2008 were as follows:

		Balance as of
		September 30,2008				June 30, 2008
Land use right		$	1,902,492			$	1,883,298
Less: Accumulated amortization			(382,917	)			(351,743	)
Total		$	1,519,575			$	1,531,555

 

          Amortization expense for the three months ended September 30, 2008 and 2007 was $11,980 and $36,600, respectively. Amortization expense for the next five years is approximately $70,510 per year.

NOTE 8.  NOTES RECEIVABLE

         As of September 30, 2008 and June 30, 2008, the Company had notes receivable due from Weiye Forestry Ecosystem and Development Co., Ltd (“Weiye Forestry”).  On May 24, 2007, the Company sold its forestry development rights at RMB 10,439,340 (equivalent to US$1,364,174  at date of signing) to Weiye Forestry for 5 installments from 5/23/2008 to 5/23/2012.  According to this agreement, the Company would collect RMB 2,000,000 annually, with the remaining RMB 439,340 collected at the last year.  Weiye Forestry was a related party at the time the transaction occurred. The CEO of one of the Company’s affiliates was the owner of Weiye. During the year ended June 30, 2008, this person was no longer the CEO of the affiliated company. As a result, Weiye is no longer a related party.

         As this sale of forestry development right payment term is five years and there is no specified interest rate, the Company used discounted rate of 8.5%, which approximate five year China bank loan rate, to calculate present value of the future payments.

 

  NOTE 9.  PREPAYMENTS

          As of September 30, 2008 and June 30, 2008, long-term prepayments consisted of the followings:

 

		Balance as of
		September 30,2008				June 30, 2008
Consulting Fees		$	987,152			$	538,850
Land Lease Exp.			344,261				406,394
Rental			-				4,374
Advertisement			176,733				200,464
Total		$	1,508,146			$	1,150,082

NOTE 10.  ACCRUED EXPENSES AND OTHER PAYABLES

          As of September 30, 2008 and June 30, 2008, accrued expenses and other payables consisted of the followings:

		Balance as of
		September 30,2008				June 30, 2008
Accrued expenses		$	476,351			$	477,512
Other payables and accruals			329,804				331,951
Total		$	806,155			$	809,463

 

NOTE 11.  LONG-TERM PAYABLE-LAND USE RIGHTS

 

          In April 2001, Lüshen obtained a land use right from the Chinese government, for RMB 10,008,364 (equivalent to $1,200,381 at the date of acquisition). The term of the land use right is through May 18, 2031. The purchase price is being amortized over the term of the right. The payment of the original purchase price was deferred and due on or before June 24, 2011.  The long-term payable bears no interest.

 

NOTE 12 – INCOME TAXES

         The Company is governed by the Income Tax Law of the People’s Republic of China concerning foreign invested companies, which, until January 2008, generally subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on income reported in the statutory financial statements after appropriate tax adjustments.

         Substantially all of the Company’s taxable income and related tax expense are from PRC sources. Dasheng, Lüshen and Elemiss file separate income tax returns under the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the “PRC Income Tax Law”). In accordance with the relevant income tax laws, the profits of the Company derived from agribusiness are fully exempted from income taxes and the profits of the Company derived from real estate investment are subject to income taxes. As of September 30, 2008 and 2007, the Company derived all of its revenues and profits from its agriculture business.

         On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), which is effective from January 1, 2008. Under the new law, the corporate income tax rate applicable to all Companies, including both domestic and foreign-invested companies, will be 25%, replacing the current applicable tax rate of 33%.  However, tax concession granted to eligible companies prior to the new CIT laws will be grand fathered in.

         The Company has been formally approved by the local tax bureau for the favorable tax benefit enjoyed by the foreign invested company, which allows two-year tax exemption from income tax from January 1, 2007 through December 31, 2008, and three-year 50% tax reduction from January 1, 2009 to December 31, 2011. As a result of this tax reduction benefit, the Company is still subject to income tax exemption for the three months ended September 30, 2008.

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  CHINA DASHENG BIOTECHNOLOGY COMPANY AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

September 30, 2008 (Continued)

(Unaudited)

NOTE 13.  FOREIGN OPERATION

 

         (i) Operations

        Substantially all of the Company’s operations are carried out and all of its assets are located 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. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.

        (ii) Profit Appropriation & Statutory Reserves

        Under the laws of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) cumulative prior years’ losses, if any; (ii) allocations to the "Statutory Surplus Reserve" of at least 10% of net 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 to any discretionary surplus reserve, if approved by stockholders.

        The statutory reserves represent restricted retained earnings and is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

        As of September 30, 2008 and June 30, 2008, the Company established and segregated in retained earnings an aggregate amount for the Statutory Surplus Reserve of $1,837,187 and $1,837,187, respectively.

 

Note 14.  CONCENTRATIONS AND CREDIT RISK

 

        Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.  As of September 30, 2008 and June 30, 2008, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, none of which are insured. However, the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts.

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ITEM 2. MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Forward Looking Statements

 

         This Quarterly Report on Form 10-Q contains “forward-looking” statements as such term is defined in the Private Securities Litigation Reform Act of 1995 and information relating to the Company that is based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein and in other filings made by the company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

         RESULTS OF OPERATIONS – Th ree Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

 

         Revenues for the three months ended September 30, 2008 were $5,107,515, compared to $3,006,437 for the same period in 2007. The $2,101,078, or 69.8% increase in revenues was primarily due to an increase in AM/HM livestock feed additive products and bacterial based fertilizer sales volume. For the three months ended September 30, 2008, we sold a total of 1,694.12 and 227.96 tons of AM/HM livestock feed additives and bacterial based fertilizer respectively in comparison to 863.14 and 49.90 tons in the same period in 2007. Overall, we saw a healthy growth in the sales volume of all four of our major product lines.

 

         The following is a breakdown of revenue by product, by region, and by subsidiary and as a percentage of total revenue:

 

		Percentage of Q1 2008								Percentage of Q1 2009
Product line
AM/HM™ Crop additives		$	1,919,328				63.84	%		$	2,729,170				53.43	%
AM/HM™ Livestock feed additives		$	926,669				30.82	%		$	1,896,619				37.13	%
FGW™ Preservatives		$	90,991				3.03	%		$	151,059				2.96	%
Bacterial based Fertilizer		$	69,449				2.31	%		$	330,690				6.47	%
Total		$	3,006,437							$	5,107,515

 

		Revenue				Percentage of Revenue
Region
Northwest		$	1,751,895				34.30	%
Southwest		$	102,252				2.00	%
Northern		$	464,367				9.09	%
Northeast		$	152,385				2.98	%
Central		$	87,690				1.72	%
Eastern		$	466,680				9.14	%
South		$	2,082,268				40.77	%

 

		Revenue				Percentage of Revenue
Subsidiaries
Hainan Lüshen		$	2,082,268				40.77	%
Yangling Elemiss		$	1,263,173				24.73	%
Gansu Dasheng		$	1,762,097				34.50	%

 

                Gross profit for the three months ended September 30, 2008 was $2,440,911, an increase of $1,246,229 or 104.3% compared to the same period in 2007. The increase in gross profit is a direct result of our increase in revenues as we experienced an increase in demand for our products.

 

		Gross Margin
		for the quarter ended Sept 30, 2008
Product line
AM/HM™ Crop Additives			48.73	%
AM/HM™ Livestock feed Additives			46.19	%
FGW™ Preservatives			39.05	%
Bacterial based Fertilizer			53.21	%
Over all			47.79	%

 

               Operating expenses for the three months ended September 30, 2008 were $805,842 compared to $349,747 in the same period for 2007. This increase of $456,095 or 130.4% is primarily due to the significantly increase Selling and General Administrative expenses. Our selling and general administrative expenses were increased by $200,850 and $255,245 respectively. The cause for the increase is primarily because of the increase of  advertising and sales promotion expense and professional fees. The advertising and sales promotion expense has significantly increased by $130,456 or 330% from the same period of 2007. The professional fee of $212,125 which did not incurred for the same period of 2007 also materially increased our current quarter's operation expenses.

 

                Net income for the three months ended September 30, 2008 was $1,328,272, an increase of $672,417 or 102.5% compared to the same period in 2007. The increase in net income is due to our higher sales volume which is a result of greater market demand.

 

                LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, we had $8,428,719 in working capital, an increase of $1,493,226 since the end of the last fiscal year on June 30, 2008.  The increase was primarily a result of our net income for the quarter.  In addition to $2,381,735 in cash and cash equivalents, the greater portion of our current working capital consists of account receivables of $5,113,965.  We expect that account receivables will be significantly reduced the end of calendar year 2008. In addition, we are owed $1,596,931 by Weiye Forestry Ecosystem and Development Co., Ltd (“Weiye Forestry”).  On May 24, 2007, the Company sold its forestry development rights at RMB10, 439,340 (equivalent to US$ 1,364,174  at date of signing) to Weiye Forestry for 5 installments from 5/23/2008 to 5/23/2012.  According to this agreement, the Company would collect RMB2,000,000 annually.

 

               Net cash used in operating activities totaled $381,084 for the three months ended September 30, 2008, as compared to cash used by operating activities of $658,567 for the three months ended September 30, 2007. The net cash used in operations was largely due to the increase in account receivable of $1,869,320.

               We had no investing activities for the three month period ended September 30, 2008 as compared to the same period in 2007 when we had $21,198 in purchase of plant and equipment.

               Net cash provided by financing activities was $321,088 for the three months ended September 30, 2008 as compared to $1,816,110 for the same period in 2007.

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              CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

              The discussion and analysis of our financial condition and results of operations are based on our unaudited financial statements, which have been prepared according to U.S. generally accepted accounting principles. In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate these estimates on an on-going basis. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be the most important to the portrayal of our financial condition and that require the most subjective judgment.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

               The Company is subject to certain market risks, including changes in interest rates and currency exchange rates. The Company does not undertake any specific actions to limit those exposures.

 

ITEM 4. CONTROLS AND PROCEDURES

 

              (a)  Evaluation of Disclosure Controls and Procedures

 

             We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

             As of March 31, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.

 

             (b)  Changes in Internal Controls

 

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

 

OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

 

 

              The company is not party to any material legal proceeding.

 

 

ITEM 2. CHANGES IN SECURITIES

 

 

              None.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

 

              None.

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

             None.

 

 

ITEM 5. OTHER INFORMATION

 

 

            None.

 

 

ITEM 6. EXHIBITS

 

 

EXHIBIT 31 Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

 

EXHIBIT32 Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

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SIGNATURES

 

 

            Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 14, 2008
		China Dasheng Biotechnology Company
	By:	/s/ JiJun Qi
		JiJun Qi
		Chief Executive Officer and President (Principal Executive, Financial and Accounting Officer)

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