UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended February 28, 2007
¨ TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transitional period from ______ to ______
Commission File No. 0-32923
AOB BIOTECH, INC.
(Exact Name of Small Business Issuer in its Charter)
CALIFORNIA | | 90-0110902 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
301 N. Lake Avenue, Ste. 202, Pasadena CA 91101
(Address of principal executive office)
(626) 796-3988
(Issuer's telephone number)
Check whether the issuer has (1) filed all reports required by Section 12 or 5(d) of the Exchange Act during the past 12 months, and (2) been subject to such filing requirements for the past ninety (90) days. Yes x No ¨
As of April 10, 2007, the Company had 14,395,036 shares of Common Stock issued and outstanding.
TABLE OF CONTENTS
Report on Form 10-QSB for the quarter ended February 28, 2007
| | Page |
PART I FINANCIAL INFORMATION | |
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| Item 1. Financial Statements | |
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| Condensed Balance Sheets (Unaudited) | 4 |
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| Condensed Statements of Operations (Unaudited) | 5 |
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| Condensed Statements of Cash Flows (Unaudited) | 6 |
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| Notes to the Condensed Financial Statements (Unaudited) | 7 - 9 |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 |
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| Item 3. Controls and Procedures | 13 |
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PART II OTHER INFORMATION | |
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| Item 1. Legal Proceedings | 13 |
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| Item 2. Changes in Securities | 13 |
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| Item 3. Defaults upon Senior Securities | 13 |
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| Item 4. Submission of Matters to Vote of Security Holders | 13 |
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| Item 5. Other Information | 13 |
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| Item 6. Exhibits and Reports on Form 8-K | 14 |
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| Signatures | 14 |
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| Certifications | |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
AOB BIOTECH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TABLE OF CONTENTS
| | Page |
| | |
| Condensed Balance Sheets | 4 |
| | |
| Condensed Statements of Operations | 5 |
| | |
| Condensed Statements of Cash Flows | 6 |
| | |
| Notes to Condensed Financial Statements | 7 - 9 |
AOB BIOTECH, INC.
CONDENSED BALANCE SHEETS
| | | February 28, 2007 (Unaudited) | | May 31, 2006 | |
ASSETS | |
| | | | | | |
| Current assets | | | | | |
| Cash and equivalents | | $ | 414,196 | | $ | 636,645 | |
| Accounts receivable | | | 206,797 | | | 256,797 | |
| Inventory | | | 89,235 | | | 90,808 | |
| Loan to affiliate | | | 81,000 | | | -- | |
| Prepaid expenses | | | 3,315 | | | 915 | |
| Total current assets | | | 794,543 | | | 985,165 | |
| | | | | | | | |
| Property and equipment | | | | | | | |
| Office furniture and equipment, net | | | 10,829 | | | 12,214 | |
| Software, net | | | 361 | | | 491 | |
| Total property and equipment, net | | | 11,190 | | | 12,705 | |
| | | | | | | | |
| Other assets | | | | | | | |
| Deposit | | | 33,500 | | | 33,500 | |
| | | | | | | | |
Total assets | | $ | 839,233 | | $ | 1,031,370 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable | | $ | 1,400 | | $ | 30,719 | |
| Deferred revenue | | | 100,000 | | | 300,000 | |
| Accrued expenses | | | 70,485 | | | 72,212 | |
| Loan from affiliate | | | 135,907 | | | 81,344 | |
| Loan from officer | | | 77,124 | | | 77,124 | |
| Total current liabilities | | | 384,916 | | | 561,399 | |
| | | | | | | | |
| Stockholders’ equity | | | | | | | |
| Common stock, no par value, 50,000,000 shares authorized, 14,395,036 and 14,273,836 shares issued and outstanding as of 2/28/07 and 5/31/06, respectively | | | 631,518 | | | 570,918 | |
| Stock subscriptions receivable | | | (25,000 | ) | | (25,000 | ) |
| Retained earnings | | | (152,201 | ) | | (75,947 | ) |
| Total stockholders’ equity | | | 454,317 | | | 469,971 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 839,233 | | $ | 1,031,370 | |
See Accompanying Notes to Financial Statements
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Three Months Ended February 28, | | Nine Months Ended February 28, | |
| | | 2007 | | 2006 | | 2007 | | 2006 | |
| | | | | | | | | | |
| Revenues | | | | | | | | | |
| Product Sales | | $ | 152 | | $ | 983 | | $ | 3,371 | | $ | 983 | |
| Marketing consulting service | | | -- | | | -- | | | -- | | | 5,000 | |
| Formula development | | | 22,000 | | | 200,000 | | | 222,000 | | | 200,000 | |
| Total revenues | | | 22,152 | | | 200,983 | | | 225,371 | | | 205,983 | |
| | | | | | | | | | | | | | |
| Cost of revenues | | | | | | | | | | | | | |
| Cost of goods sold | | | 8 | | | 147 | | | 960 | | | 147 | |
| Marketing consulting service | | | -- | | | -- | | | -- | | | 1,413 | |
| Formula development | | | 616 | | | 51,573 | | | 20,146 | | | 51,573 | |
| Total cost of revenues | | | 624 | | | 51,720 | | | 21,106 | | | 53,133 | |
| | | | | | | | | | | | | | |
| Gross profit | | | 21,528 | | | 149,263 | | | 204,265 | | | 152,850 | |
| | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 112,725 | | | 21,902 | | | 290,504 | | | 149,329 | |
| | | | | | | | | | | | | | |
| Income (Loss) from operations | | | (91,197 | ) | | 127,361 | | | (86,239 | ) | | 3,521 | |
| | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | |
| Other income | | | -- | | | 98 | | | -- | | | 98 | |
| Other expense | | | (613 | ) | | -- | | | (98 | ) | | -- | |
| Interest income | | | 5,626 | | | 6,923 | | | 17,936 | | | 14,031 | |
| Interest expense | | | (2,549 | ) | | (675 | ) | | (7,053 | ) | | (2,758 | ) |
| Total other income (expense) | | | 2,464 | | | 6,346 | | | 10,785 | | | 11,371 | |
| | | | | | | | | | | | | | |
| Net income (loss) before income taxes | | | (88,733 | ) | | 133,707 | | | (75,454 | ) | | 14,892 | |
| | | | | | | | | | | | | | |
| Provision for income taxes | | | -- | | | -- | | | 800 | | | 800 | |
| | | | | | | | | | | | | | |
| Net income (loss) | | $ | (88,733 | ) | $ | 133,707 | | $ | (76,254 | ) | $ | 14,092 | |
| | | | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic and fully diluted | | | 14,354,711 | | | 14,333,517 | | | 14,284,880 | | | 14,292,179 | |
| | | | | | | | | | | | | | |
| Net income (loss) per share -- basic and fully diluted | | $ | (0.0062 | ) | $ | 0.0093 | | $ | (0.0053 | ) | $ | 0.0010 | |
See Accompanying Notes to Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Nine Months Ended February 28, | |
| | | 2007 | | 2006 | |
| | | | | | |
Cash flows from operating activities | | | | | |
| Net income (loss) | | $ | (76,254 | ) | $ | 14,092 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation and amortization expenses | | | 1,515 | | | 583 | |
| (Increase) Decrease in accounts receivable | | | 50,000 | | | (163 | ) |
| (Increase) in prepaid expenses | | | (2,400 | ) | | (3,705 | ) |
| (Increase) Decrease in inventory | | | 1,573 | | | (87,191 | ) |
| Decrease in deposits | | | -- | | | (10,500 | ) |
| Increase (Decrease) in accounts payable | | | (29,319 | ) | | 52,393 | |
| Increase (Decrease) in deferred revenue | | | (200,000 | ) | | 300,000 | |
| Increase (Decrease) in accrued expenses | | | (1,727 | ) | | 3,675 | |
Net cash provided by (used in) operating activities | | | (256,612 | ) | | 269,184 | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | |
| (Increase) in loan to affiliate | | | (81,000 | ) | | -- | |
| Cash used to purchase fixed assets | | | -- | | | (10,218 | ) |
Net cash provided by investing activities | | | (81,000 | ) | | (10,218 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | |
| Increase (Decrease) in loan from affiliate | | | 54,563 | | | (50,000 | ) |
| Increase in loan from shareholder | | | -- | | | 20,663 | |
| Proceeds from issuance of common stock | | | 60,600 | | | 411,918 | |
Net cash provided by financing activities | | | 115,163 | | | 382,581 | |
| | | | | | | | |
Net increase (decrease) in cash | | | (222,449 | ) | | 641,547 | |
| | | | | | | | |
| Cash - beginning | | | 636,645 | | | 80,734 | |
| Cash - ending | | $ | 414,196 | | $ | 722,281 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES | | | | | | | |
| | | | | | | | |
| Interest paid | | $ | -- | | $ | -- | |
| Income taxes paid | | $ | 800 | | $ | 2,600 | |
See Accompanying Notes to Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 2007
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by AOB Biotech, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) Item 310 of Regulation S-B and generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the nine-month period ended February 28, 2007 are not necessarily indicative of the results that may be expected for the year ended May 31, 2007.
Organization
AOB Biotech Inc. (thereinafter “the Company”), formerly known as New Weisheng USA Co, Inc., was incorporated under the laws of State of California on June 3 2002. In January 2003, New Weisheng changed its name to AOB Capital, Inc. (AOB Capital). In September 2004, AOB Capital changed its name to AOB Biotech, Inc. The Company was primarily engaged in financial service including issuing and collecting Letter of Credit (L/C) on behalf of an entity controlled by its officer, AOB Commerce, Inc. (AOB Commerce). The Company received funds from AOB Commerce, then issues Letter of Credit (L/C) for AOB Commerce’s clients. Upon the receipt of funds from L/C, the Company returned funds to AOB Commerce and received income from AOB Commerce for financing services provided.
In May 2004, the Company ceased the financial service operation. The Company did not have any cash flow from the financial service operation after May 2004, and all business assets are continually used by new business. Therefore, the financial service business was completely disposed in May 2004. In June 2004 the Company entered into business to help its customers formulate herbal and nutritional supplement products, provide marketing consulting services for sales of these products in Asia. The Company also sells these products wholesale to distributors.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and disclosure of contingent assets and liabilities. Accordingly, actual results could differ from those estimates.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on the net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value.
Inventory consisted 100% of finished goods of herbal and nutritional supplement products totaling $89,235 and $90,808 as of February 28, 2007, and May 31, 2006, respectively.
NOTE 2 - RELATED PARTY TRANSACTIONS
From time to time the Company borrows funds from AOB Commerce Inc., an entity controlled by its officer, to fund working capital needs from the operation. As of February 28, 2007 and May 31, 2006, the loan balance due to AOB Commerce, Inc. totaled $135,907 and $81,344, respectively. Interest was charged at 5% per annum and for the nine months ended February 28, 2007 and 2006, total interest charged were $4,169 and $1,332, respectively.
The Company subleases from AOB Commerce, Inc. for its offices located in Pasadena, California, Beijing, and Shanghai, China. The monthly base rent for the Pasadena office is $7,482. This sublease will expire in February 2009. Rental expense for this lease consisted of $67,338 and $0 for the nine months ended February 28, 2007 and 2006, respectively. The monthly rent for the Beijing office is $2,000. This sublease will expire in October 2007. For the nine months ended February 28, 2007 and 2006, the rental expense for the Beijing office consisted of $18,000 and $0, respectively. The monthly rent for the Shanghai office is $3,500. This sublease will expire in January 2008. For the nine months ended February 28, 2007 and 2006, the rental expense for the Shanghai office consisted of $31,500 and $0, respectively.
From time to time, the Company borrows from its president for general and administrative expenses. As of February 28, 2007 and May 31 2006, the Company had $77,124 and $77,124, respectively, in loan from officer which is unsecured, and due on demand. Interest was charged at 5% per annum, and for the nine months ended February 28, 2007 and 2006, total interest charged were $2,884 and $1,426, respectively.
NOTE 3 - CAPITAL STOCK
The Company was authorized to issue 1,000,000 no par shares common stock at its inception. In September 2004, the Company amended its Articles of Incorporation to increase its authorized common stock to 50,000,000 shares.
On June 1, 2003, the Company issued 810,000 shares of common stock at $0.01 per share for the amount of $8,100.
On December 1, 2004, the Company issued additional 12,590,000 shares of common stock at $0.01 per share for the amount of $125,900.
On May 1, 2005, the Company sold stocks through private placement at $0.50 per share. The shares are being offered pursuant to an exemption provided by Rule 504 of Regulation D Promulgated under the Securities Act of 1933, as amended. The shares are not registered for sale under the securities laws of any State. As of February 28, 2007, $497,518 was raised from the above offering of which $25,000 remains outstanding as subscriptions receivable.
NOTE 4 - COMMITMENTS
On March 30, 2005, the Company entered into a Development Agreement with SuperMax USA, Inc., to develop five formulas of food and nutritional supplement products and deliver them to SuperMax for a total contract price of $500,000. The Company has concluded that the main cost factor of developing these formulas is the salary expense of the R & D personnel, and that other costs are considered to be insignificant. Furthermore, the formulas to be developed have essentially similar characteristics and are estimated to take approximately equivalent amounts of time and overhead to develop and finish. As such, the Company determined the fair values of the formulas to be $100,000 each. In the year ended May 31, 2006, the Company received $500,000 from SuperMax and delivered two formulas. In the nine months ended February 28, 2007, the company developed and delivered another two formulas to SuperMax. The Company has no future obligations to SuperMax for the delivered formulas. Accordingly, $400,000 of the $500,000 received from SuperMax has been recognized as formula sales revenue and the remaining $100,000 remains as deferred revenue as of February 28, 2007. As of February 28, 2007, the process of developing the only remaining formula has not commenced, and therefore, no costs in relations to this commitment have been incurred. Accordingly, as of February 28, 2007, the Company bears the contractual commitment of developing and delivering the one remaining formula to SuperMax.
Operating Leases - The Company subleases its office with its related party- AOB Commerce, Inc. for an office located in Pasadena, California. The monthly base rent is $7,482. This sublease will expire in February 2009. The Company also subleases with AOB Commerce, Inc. for its offices located in Beijing and Shanghai, China. The monthly rent for the Beijing office is $2,000. This sublease will expire in October 2007. The monthly rent for the Shanghai office is $3,500. This sublease will expire in January 2008. The Company has another lease agreement for a laboratory located in Seattle, Washington. This operating lease calls for a monthly base rent of $350 and will expire in May 2007. The Company has future minimum lease obligations from these leases as follows:
| For the year ended November, | | Amount | |
| | | | |
| 2007 | | $ | 129,920 | |
| 2008 | | | 96,754 | |
| 2009 | | | 22,446 | |
| | | | | |
| Total | | $ | 249,120 | |
NOTE 5 - SEGMENT INFORMATION
AOB Biotech, Inc. operates in three reportable segments: (1) the product sales division, (2) the formula development division, and (3) marketing consulting service division. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expenses, as well as research and development expenses, interest income/expense, net realized investment gain/loss, other income/expense, and provision for income taxes are reported on an entity wide basis only. There are no inter-segment revenues.
All business assets are used by each business. As such, asset information by reportable segment is not reported by the Company. Corporate assets consist of cash and cash equivalents, unallocated fixed assets of support divisions and common facilities, and certain other assets.
Sales by Reportable Segment
The following table presents information about the sales and gross profit of our reportable segments for the nine months ended February 28, 2007 and 2006:
| | | Nine Months Ended February 28, | |
| | | 2007 | | 2006 | |
| | | Revenue | | Gross Profit | | Revenue | | Gross Profit | |
| | | | | | | | | | |
| Product Sales | | $ | 3,371 | | $ | 2,411 | | $ | 983 | | $ | 836 | |
| Formula development | | | 222,000 | | | 201,854 | | | 200,000 | | | 148,427 | |
| Marketing consulting service | | | -- | | | -- | | | 5,000 | | | 3,587 | |
| | | $ | 225,371 | | $ | 204,265 | | $ | 205,983 | | $ | 152,850 | |
Sales by Geographic Region
The table below presents sales information by geographic region for the nine months ended February 28, 2007 and 2006:
| | | Nine Months Ended February 28, | |
| | | 2007 | | 2006 | |
| | | | | | |
| United States | | $ | 3,371 | | $ | 5,983 | |
| Japan | | | 222,000 | | | 200,000 | |
| Total | | $ | 225,371 | | $ | 205,983 | |
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
The Company was incorporated on June 3, 2002 under the name New Weisheng USA Co, Inc. and later under the name AOB Capital, Inc. The Company was primarily engaged in providing financial consulting services, including issuing and collecting letters of credit on behalf of AOB Commerce, Inc. (“AOB Commerce”), an entity controlled by its officer, director and founder. The Company would receive funds from AOB Commerce, then issue letters of credit for AOB Commerce’s clients. Upon receipt of funds from the letter of credit, the Company returned funds to AOB Commerce and received income from AOB Commerce for the financial services provided. In May 2004 the Company ceased all financial service operations.
For the year ended May 31, 2005, the Company received all of its revenues from its marketing and consulting services and of those revenues over 90% was from one customer, FINA International Co., Ltd. In the year ended May 31, 2006 the Company was able to develop its product sales business which represented approximately 56% of total revenues. Over 95% of the Company’s revenues was generated by only one customer. This customer who purchased the Company’s products owes the Company, as of August 31, 2006, $206,440. These monies should all be paid by December 31, 2006. Super Max USA, Inc. was responsible for all of the Company’s formula development business. The Company received $500,000 for the development of five products. Two products were delivered to the customer in April 2006. The remaining three products are scheduled to be delivered to the customer between November 2006 and April 2007.
Although the Company continues to seek customers for its marketing consulting business and its formula development business, its general concentration is in the development of product sales in China through internet and through the development of its own retail stores. Location, advertising, and staffing of the stores are some of the more important operating issues challenging the Company. Management believes that it can meet these challenges in a positive manner. Of course there is no assurance that the Company’s efforts will be successful.
Results of Operations
Nine Months Ended February 28, 2007 Compared to Nine Months Ended February 28, 2006
For the nine months ended February 28, 2007, revenues were $225,371 compared to $205,983 for the same period in the previous year. This represents an increase of $19,388, or 9.4%. The increase is attributable to revenues of $200,000 from formula development for the first six months, a new business operation that began in 2006.
Costs of revenues for the nine months ended February 28, 2007 were $21,106 compared to $53,133 for the nine months ended February 28, 2006, a decrease of $32,027 or 60.3%. Almost all the costs in the 2006 period were attributable to formula development. All of the decrease was attributable to the decrease allocation percentage of rent and salaries.
Selling, general and administrative expenses for the nine months ended February 28, 2007 were $290,504 compared to $149,329 for the same period in 2006. The increase of $141,175, or 94.5%, was primarily attributable to advertising, promotion and consulting expenses.
For the nine months ended February 28, 2007 compared to 2006, interest income increased from $14,031 to $17,936. Interest income relates to interest earned on the Company’s money market account.
For the nine months ended February 28, 2007 compared to 2006, interest expenses increased from $2,758 to $7,053. Interest expenses increased due to the increase in the loan from affiliate.
Net loss for the nine months ended February 28, 2007 was $76,254 compared to a net income of $14,092 for the same period in 2006. The substantial turnaround from a net income to net loss is the result of an increase in selling, general and administrative expenses from the Company’s new formula development business which began in 2006.
Three Months Ended February 28, 2007 Compared to Three Months Ended February 28, 2006
During the three months ended February 28, 2007, the Company had revenues of $22,152 compared to $200,983 for the same period in 2006. The decrease of $178,831 was attributable to the Company’s deferring the recognition of revenues during the three months ended February 28, 2007 for its new formula development business, which it began in 2006. In addition, product sales were not material due to a restructuring of the product sales division.
Cost of revenues for the three months ended November 30, 2006 were $20,395 compared to $1,413 for the three months ended November 30, 2005. Almost all of the $18,982 increase was due to the deferring the recognition of revenue for its new formula sales business.
Selling, general, and administrative expenses for the three months ended February 28, 2007 were $112,725 compared to $21,902 for the three months ended February 28, 2006. This increase of $90,823 was principally due to an increase in rent and an increase legal and accounting associated with being a public company.
Net loss for the three months ended February 28, 2007, was $88,733 compared to a net income of $133,707 for the same period in 2006. The increase in net loss is partly the result of an increase in selling, general, and administrative expenses incurred and the substantial decrease in formula development revenues of only $22,000 compared to $200,000.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through cash generated from operations and from the sale of equity securities.
As of February 28, 2007, the Company had working capital of $409,627, a decrease of $423,766 in working capital as compared to May 31, 2006. The primary reason for the decrease in working capital is due to the decrease in cash and equivalents, the decrease in deferred revenues, and the increase in cash from affiliate.
The Company believes that its current capital resources and current funding will enable it to maintain its current and planned operations through the next 12 months. The Company anticipates, however, that it will need to raise additional capital in order to sustain and grow its operations over the next few years.
To the extent that the Company's capital resources are insufficient to meet current or planned operating requirements, the Company will seek additional funds through equity or debt financing, collaborative or other arrangements with corporate partners, licensees or others, and from other sources, which may have the effect of diluting the holdings of existing shareholders. The Company has no current arrangements with respect to, or sources of, such additional financing and the Company does not anticipate that existing shareholders will provide any portion of the Company's future financing requirements.
No assurance can be given that additional financing will be available when needed or that such financing will be available on terms acceptable to the Company. If adequate funds are not available, the Company may be required to delay or terminate expenditures for certain of its programs that it would otherwise seek to develop and commercialize. This would have a material adverse effect on the Company.
Our discussion and analysis or plan of operation is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of its financial statements.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superceded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and services performed and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defers any revenue for which the product has not been delivered or service has not been performed or is subject to refund until such time that we and the customer jointly determine that the product or service has been delivered or performed or no refund will be required.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in SFAS No. 109, "Accounting for Income Taxes." As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts in order to record accounts receivable at their net realizable value. A significant amount of judgment is involved in recording and making adjustments to this reserve. Allowances have been recorded for receivables believed to be uncollectible, including amounts for the resolution of potential credit and other collection issues such as disputed invoices, customer satisfaction claims and pricing discrepancies. Depending on how such potential issues are resolved, or if the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, adjustments to the allowance may be required.
Inventory Reserves
We writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company's principal operating segments.
Caution Regarding Forward-Looking Statements
The Company occasionally makes forward-looking statements concerning its plans, goals, product and service offerings, and anticipated financial performance. These forward-looking statements may generally be identified by introductions such as "outlook" for an upcoming period of time, or words and phrases such as "should," "expect," "hope," "plans," "projected," "believes," "forward-looking" (or variants of those words and phrases) or similar language indicating the expression of an opinion or view concerning the future.
These forward-looking statements are subject to risks and uncertainties based on a number of factors and actual results or events may differ materially from those anticipated by such forward-looking statements. These factors include, but are not limited to: the growth rate of the Company's revenue and market share; the consummation of new, and the non-termination of, existing contracts; new competitors entering the Company's business, the Company's ability to effectively manage its business functions while growing its business in a rapidly changing environment; the Company's ability to adapt and expand its services in such an environment; the Company's ability to successfully refinance or extend its line of credit or obtain alternative sources of financing; the effective and efficient management of the Company's inventory levels and processing of sales orders; the quality of the Company's plans and strategies; and the Company's ability to execute such plans and strategies.
In addition, forward-looking statements concerning the Company's expected revenue or earnings levels are subject to many additional uncertainties applicable to competitors generally and to general economic conditions over which the Company has no control. The Company does not plan to generally publicly update prior forward-looking statements for unanticipated events or otherwise and, accordingly, prior forward-looking statements should not be considered to be "fresh" simply because the Company has not made additional comments on those forward-looking statements.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures: The Company maintains controls and procedures designed to ensure that information required to be disclosed in this report is recorded, processed, accumulated and communicated to our management, including our chief executive officer and principal accounting officer, to allow timely decisions regarding the required disclosure. Within the 90 days prior to the filing date of this report, our management, with the participation of our chief executive officer and principal accounting officer, carried out an evaluation of the effectiveness of the design and operation of these disclosure controls and procedures. Our chief executive officer and principal accounting officer concluded, as of fifteen days prior to the filing date of this report, that these disclosure controls and procedures are effective.
Changes in internal controls: Subsequent to the date of the above evaluation, the Company made no significant changes in its internal controls or in other factors that could significantly affect these controls, nor did it take any corrective action, as the evaluation revealed no significant deficiencies or material weaknesses.
PART II - OTHER INFORMATION
None.
None.
None.
None.
None.
Item 6. Exhibits and Reports on Form 8-K
| Exhibit number | | Description |
| | | |
| 31.1 | | Section 302 Certification |
| | | |
| 31.2 | | Section 302 Certification |
| | | |
| 32.1 | | Section 906 Certification |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: April 13, 2007 | AOB Biotech, Inc. |
| | |
| | By: /s/ Nelson Liao |
| | Nelson Liao |
| | Chief Executive Officer |
