June 4, 2010
Mr. Robert Babula
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
Re: Reponses to May 27, 2010 Questions about 10K for File No. 0-51021
Mr. Babula:
Below are the responses to your May 27, 2010 questions about our June 30,
2009 10K filing. As requested each response has been keyed to your
question/comment by restatement of the question in black type followed by
our responses.
1. We note your response to comment one of our letters dated March 31,
2010. We reissue our prior comment. In this regard, you indicate in
your letter to us dated March 22, 2010 the plastics recycling
technology license is recorded at $1,880,000 and your intelligent
traffic system technology license is recorded at $2,894,781 as of
June 30, 2009. This does not agree with your disclosure in footnote 9
to your Form 10-K, where you state, "[a] total of 1,750,000 shares
(valued at $1.00 per share) were issued to acquire the exclusive North
American rights to intelligent traffic systems technology. A total of
2,894,781 shares (valued at $1.00 each) were issued to acquire the
exclusive North American rights to a Chinese proprietary plastics
recycling process." It appears the valuation amounts in your response
letter dated March 22, 2010 were incorrectly transposed. Please
clarify for us if your footnote disclosure is correct, or revise
accordingly.
Response: Yes, the figures in the chart contained in Response #1 of
our letter dated March 22, 2020 were transposed. The
footnote 9 in the 10K is correct. Company stock worth
$1,750,000, plus $130,000 cash was paid for the intelligent
traffic system license. Company stock worth $2,894,781 was
paid for the plastics recycling technology license.
2. We note your response to comment two of our letter dated March 31,
2010. Please provide us a copy of the independent appraisal report
with regard to your acquired technology licenses. We may have further
comment.
Response: A copy of the independent appraisal report is attached to
this response letter. You should know that Avalon Appraisals
was truly independent as we had never met the appraisers.
Further, the company came highly recommended by its other
clients.
3. We note your response to comment three of our letter dated March 31,
2010. We read your allowance for doubtful accounts is based on
specific identification of customer accounts. Your response indicates
the sales broker assumed the collection risk related to these
receivables. You disclose that the same payable amount to the broker
were offset by the same receivable amount from the customers after the
mutual agreement between you and the broker In this regard, we remain
unclear about your GAAP basis in maintaining the $150,000 until the
filing of the next Form 10-K. It appears that the allowance should
have been written off as of December 31, 2009 when the agreement was
made. If so, advise us why it is appropriate to correct this apparent
accounting error in the next Form 10-K for the fiscal year ended June
30, 2010.
Response: The allowance was not established based specifically on
the account receivables that related to the sales broker
agreement. The allowance was established in response to
changes in our overall customer base due to the swine flu
scarce. OBN had long standing relationships with its core
customers where payments had always been made within 30 days.
However, the swine flu situation made it necessary to replace
some customers. Given the uncertainty of payments from new
customers, management concluded, that it would be prudent to
establish the allowance at $150,000. The subsequent "slow
payments" from the new customers for which the sales broker
assumed the risk of collection proved that management's
decision was correct. At the time of our March 22, 2010
response letter we thought that we could reduce the allowance
by the next 10K filing because the relationship with these
new customer would improve. However, since that broker
agreement, even more additional new customers have been added
to our customer base. Moreover, we are experiencing more
"slow payments" from these new customers as well. So once
again, the allowance appears to be prudent. Thus, under
GAAP's conservative principle, management believes that the
allowance should remain.
4. We note your response to comment seven of our letter dated March 31,
2010. It appears that the latest proposed disclosures identify the
framework used in evaluating the effectiveness of your internal
control over financial reporting (ICFR) but it also suggests removing
the entire management's report on internal control over financial
report from the prior proposed disclosures in your letter dated March
22, 2010. Note that you were required to provide the management's
report on ICFR in your June 30, 2009 Form 10-K, and that the report
should identify the COSO framework as well as the other disclosures as
you proposed in your prior response letter dated March 22, 2010. As
such, please amend your Form 10-K to provide such report. Refer to
the disclosure requirements within Item 308(T)(a) of Regulation S-K.
Response: It was not our intention to delete the language from our
earlier response letter. The entire language for Item 9A to
be contained our 10K is as follows:
ITEM 9A. Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as
defined in Rule 131-15(e) and 15d-15(c) under the Securities
Exchange Act of 1934 is routinely conducted.
(a) Evaluation of Disclosure Controls and Procedures. The
Company carried out an evaluation under the supervision and
with the participation of the Company's management, including
the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") of the effectiveness of the Company's
disclosure controls and procedures using the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based upon that evaluation, the CEO and CFO
concluded that the design and operations of these disclosure
controls and procedures were effective. Our disclosure
controls and procedures were effective in timely alerting
management to the material information relating to the
Company's (or the Company's consolidated subsidiaries)
periodic filing with the SEC, subject to the various
limitations on the effectiveness set forth below. Information
relating to the Company, required to be disclosed in SEC
reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and
is accumulated and communicated to the Company's management,
including our CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting.
There has been no change in the Company's internal control
over financial reporting that occurred during the year ended
June 30, 2009 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control
over financial reporting.
Management's Report on Internal Control Over Financial Reporting
OBN Holdings understands that it is management's
responsibility to establish and maintain adequate internal
control over financial reporting as defined in Rules 13a-
15(f) and 15d-15(f) under the Securities and Exchange Act of
1934, as amended. Management's internal control over
financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statement for external
purposes in accordance with generally accepted accounting
principles. The Company's internal control over financial
reporting includes policies and procedures that recognize:
a. All financial reporting is centralized at the corporate
office and is managed by the Chief Financial Officer
and/or Chief Executive Officer. No other persons are
involved in financial reporting.
b. The framework for financial reporting is task-oriented
and investigative in nature. Financial information is
gathered from all subsidiary personnel by the Chief
Financial Officer during weekly meetings, telephone
conversations, faxes and/or e-mails. Requests for data
and explanation are made by the Chief Financial Officer
who in turn is questioned by the Board of Directors and
the independent financial auditors. The effectiveness
of this approach for a small business has proven to be
effective as there have been no incidences of fraud or
inadequately explained transactions.
c. All required information is obtained and verified by
the Chief Financial Officer which provides reasonable
assurance of accuracy regarding:
- prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's
assets;
- recording of receipts and expenditures in accordance
with authorizations of management and directors; and
- maintenance of records that accurately and fairly
reflects accounting transactions.
Limitations on the Effectiveness of internal controls. The
Company's management, including the CEO and CFO, does not
expect that our disclosure controls and procedures or our
internal controls over financial reporting will necessarily
prevent all fraud and material error. An internal control
system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design
of the control system must reflect the fact that there are
resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that
breakdowns can occur because of simple effort or mistake.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or
by management override of the internal control. The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there
can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over
time, control may become inadequate because of changes in
conditions, and/or the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of the Company's
internal control over financial reporting as of June 30,
2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework. Based on management's
assessment and those criteria, management concluded that the
Company's internal control over financial reporting was
effective with no material weaknesses as of June 30, 2009.
This annual report does not include an attestation report of
OBN Holdings' registered public accounting firm regarding
internal controls over financial reporting. Management's
report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit OBN Holdings
to provide only management's report in this annual report.
5. Please tell us how your failure to provide a management report on
internal control over financial reporting affects your conclusion
regarding the effectiveness of your disclosure controls and procedures
as of June 30, 2009.
Response: Our failure to provide the management report on internal
control over financial reporting in our June 30, 2009 10K had
no affect on our conclusion regarding the effectiveness of
OBN internal controls. Again, all transactions are handled by
a few individuals, two of which sign the certification.
Moreover, the CFO manages all accounts payables, accounts
receivables, general ledger, consolidations, bank
reconciliations and other financial-related transactions. He
prepares the consolidated financial statements and quarterly
reports. One of the advantages of such a small company is
that extensive controls are not necessary.
We are hopeful that the above responses adequately addresses each of your
questions; however should you have additional questions or need to
communicate further on any of these matters, please do not hesitate to
contact me by e-mail at larry.taylor@obnholdings, or by fax at (323) 299-
3118 or by telephone at (310) 988-1077. Again, please be aware that I am
located in Los Angeles, not the Las Vegas office. Mailings to Las Vegas
would slow my responses.
Sincerely,
/s/ LarryTaylor
Larry Taylor
Chief Financial Officer