June 30, 2010
Mr. Robert Babula
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
Re: Reponses to June 22, 2010 Questions about 10K for File No. 0-51021
Mr. Babula:
Below are the responses to your June 22, 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 followed by our
responses.
1. Please file your March 31 2010 Form 10Q as soon as possible or
advise us the reasons why you are unable to do so.
Response: The March 31, 2010 Form 10Q will be filed shortly.
2. We note your response to comment two of our letter dated May 27,
2010. We reviewed the copy of the independent appraisal report
with regard to your acquired technology licenses. Please address
the following:
- The report was completed for an as of date of March 31, 2009
based on the projected revenues derived from your licenses
beginning 2010. Please reconcile for us the 2010 valuation
report revenues assumption to actual 2010 results to date.
Explain to us why the valuation as of March 31, 2009 was still
applicable in your current impairment testing if the actual
results differ significantly from your projected results for
FY 2010. In this regard, indefinite-lived intangible assets
must be tested annually or more frequently if events or
changes in circumstances indicate that the asset might be
impaired. Please advise us if you will be evaluating these
licenses for impairment on an interim basis before your next
annual impairment test. If not, explain to us in detail why
not. See FASB ASC 350-30-35-18.
Response: The annual impairment test was due on March 31,
2010 and it was conducted in accordance the
requirement. Management recorded 50% impairment for
both licenses as a result of the analyses. Further,
management will evaluate these licenses on a
quarterly basis.
Reconciliation of the revenue assumptions was simple:
No new cash flows were realized during the first
three quarters of this fiscal year (i.e., between
July 1, 2009 to March 31, 2010) compared to the
$500,080 and $48,000 projected for the full fiscal
year shown in the appraisal report. Management did
not and still does not have adequate capital to
implement the license marketing plans. Management
believes that revenue generated from other product
lines can be used to implement the license marketing
plans later this year.
- Your MD&A disclosures should be significantly enhanced to
provide information on when you anticipate generating revenue
from these licenses and the ongoing status of your operating
plans to develop these licenses. In this regard, if you are
not going to meet your marketing and sales objectives in the
timeframe you originally anticipate, then you should disclose
the ongoing status of your development and marketing plans for
these licenses and their impact on the impairment testing for
the licenses.
Response: As mentioned above, the licenses have been
impaired by 50% as of March 31, 2010. We will
conduct quarterly impairment of the licenses until a
revenue stream is realized. As of June 30, 2010
It is very difficult to predict when revenue from the
licenses will be generated until implementation of
the marketing plans has begun. In large part it
depends on the efficacy of the person hired to
implement the plan which in turn is dependent on
acquiring adequate working capital to hire the
person. The ongoing status is discussed in the March 13.
2010 filing and will be contained in all
subsequent filings.
3. We note your response to comment four of our letter dated May 27,
2010. We await the filing of your amended Form 10-K for the
fiscal year ended June 30, 2009.
Response: There are three amended sections: 1)
clarification of amount paid for technology license
in the Note #9 language, 2) addition of revenue per
geographical region in segment reporting language,
and 3) addition of Management's Report on Internal
Control over Financial Reporting to Section 9A. The
proposed language for each of these sections in the
amended fiscal year ended June 30, 2009 10K filing is
presented below.
1) Correction Made in Note #9
A total of 1,750,000 shares (valued at $1.00 per
share) and $130,000 cash were issued to acquire
the exclusive North American rights to intelligent
traffic systems technology.
2) Addition of Revenue by Geographical Region
Revenues are from the following sources:
United States China Japan Other Total Revenue
$ 744 $ -- $ 18,309,693 $ -- $ 18,310,437
3) 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 had one material weakness as
of June 30, 2009; inadequate review of all temporary reporting
requirements as this report was omitted from the originally
filing of this document. Management has instructed it's
independent auditors and attorney better apprise management
of changing reporting requirements.
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.
4. We note your response to comment five of our letter dated May 27, 2010.
We remain unclear how you could reasonably conclude you disclosure
controls and procedures ("DCP") were effective considering the omission of
your report on internal controls over financial reporting. Please explain.
Response: Again, we were informed by our SEC auditor and SEC attorney that
we did not have to address the internal controls requirements
because we are a small business. In fact, I understand that the
requirement for small businesses to prepare the report and have
an auditor attest to its effectiveness is still being debated in
Congress. At any rate, both our SEC auditor and attorney
reviewed our 10K before it was filed in accordance with our
procedure. As a small business, we do not have compliance
professionals on staff and must rely on outside professional
advice. Our disclosure procedures require that we consult with
our outside professionals. However, neither professional
discovered that the report on internal controls had been omitted.
Further, our independent auditor recently underwent a PCAOB
audit review which included a review of our files and the
missing report was not caught there either. That being said, we
are well aware that it is management responsibility to be aware
the requirement to include the report and have made the
appropriate changes to our procedure which requires both the
CEO and CFO to review any new disclosure requirements. Moreover,
we have modified our report in the amended June 30, 2009 10K to
reflect this deficiency and correction.
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