OMPHALOS, CORP - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2012

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 000-32341

OMPHALOS, CORP.
(Exact name of registrant as specified in its charter)

Unit 2, 15 Fl., 83, Nankan Rd. Sec. 1,
Luchu Taoyuan County
Taiwan
(Address of principal executive offices, Zip Code)

011-8863-322-9658
(Registrant’s telephone number, including area code)

________________________
(Former name, former address and former fiscal year, if changed since last report)

Copies to:
Thomas E. Stepp, Jr.
Stepp Law Corporation
15707 Rockfield Blvd, Suite 101
Irvine, California 92618
Phone: (949) 660-9700
FAX: (949) 660-9010
Email: tes@stepplawgroup.com

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [X]     No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]     No [   ]

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

The number of shares of registrant’s common stock outstanding, as of October 31, 2012 was 30,063,759.

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TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements.

CONTENTS

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OMPHALOS, CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Condensed Consolidated Financial Statements

F-1

OMPHALOS, CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)

See accompanying Notes to Condensed Consolidated Financial Statements

F-2

OMPHALOS, CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)

See accompanying Notes to Condensed Consolidated Financial Statements

F-3

OMPHALOS, CORP.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2012

F-4

Basis of Consolidation— The consolidated financial statements include the accounts of Omphalos Corp. and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated.

Going Concern— The Company has incurred a significant net loss during the past two years. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. This presentation presumes funds will be available to finance ongoing research and development, operations and capital expenditures and permit the realization of assets and the payment of liabilities in the normal course of operations for the foreseeable future.

There can be no assurances that there will be adequate financing available to the Company and the consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

The Company has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: (1) Tightly budgeting and controlling all expenses; (2) Expanding product lines and recruiting a strong sales team to significantly increase sales revenue and profit in 2012; (3) The Company plans to continue actively seeing additional funding opportunities to improve and expand upon its product lines.

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

Cash and Cash Equivalents— Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Inventory — Inventory is carried at the lower of cost or market. Cost is determined by using the specific identification method. The Company periodically reviews the age and turnover of its inventory to determine whether any inventory has become obsolete or has declined in value, and charges to operations for known and anticipated inventory obsolescence. Inventory consists substantially of finished goods and is net of an allowance for slow-moving inventory of $441,815 and $625,359 at September 30, 2012 and December 31, 2011, respectively.

Intangible Assets —Include cost of patent applications that are deferred and charged to operations over their useful lives. The accumulated amortization is $5,690 and $4,665 at September 30, 2012 and December 31, 2011, respectively. Annual amortization expense of such intangible assets is expected to be $1,145 per year for the next five years.

F-5

Foreign-currency Transactions — Foreign-currency transactions are recorded in New Taiwan dollar (“NTD”) at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollar, or when foreign-currency receivables or payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheet dates, the balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates and the resulting differences are charged to current income except for those foreign currencies denominated investments in shares of stock where such differences are accounted for as translation adjustments under stockholders’ equity.

Translation Adjustment —The Company financial statements are presented in the U.S. dollar ($), which is the Company’s reporting currency, while its functional currency is New Taiwan dollar (“NTD”). Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange ruling at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of income.

In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into U.S. dollar ($) using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD into U.S. dollar are recorded in stockholders’ equity as part of accumulated other comprehensive income.

Recently Issued Accounting Pronouncements — In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The Company adopted the provisions of this ASU in the first quarter of 2012 and does not believe the adoption will have a material impact on its condensed consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, "Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment”, which modifies the impairment test for goodwill. Under the new guidance, an entity is permitted to make a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than the carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. The Company adopted the provisions of this ASU in the first quarter of 2012 and does not believe the adoption will have a material impact on its condensed consolidated financial statements.

******

F-6

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Cautionary Note Regarding Forward-Looking Statements

          This Quarterly Report on Form 10-Q, including this discussion and analysis by management, contains or incorporates forward-looking statements. All statements other than statements of historical fact made in report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations. The potential risks and uncertainties that could cause our actual results to differ materially from those expressed or implied herein are set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

          The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Net sales for the three months ended September 30, 2012 were $180,666, as compared to $29,365 for the three months ended September 30, 2011. This represents an increase of $151,301 or approximately 515% compared to the prior year period. The increase in net sales is primarily the result of increased demand for new products due to enhanced sales efforts.

Cost of sales increased by $78,600 or approximately 345% to $101,368 for the three months ended September 30, 2012, as compared to $22,768 for the three months ended September 30, 2011. Gross profit (loss) for the three months ended September 30, 2012 was $79,298, compared to $6,597 for the same period in 2011. Gross profit (loss) as a percentage of net sales was approximately 44% in the third quarter of 2012, compared to approximately 22% in the same period in 2011. The higher gross profit rate in the third quarter of 2012 was primarily due to increased unit price and decreased costs of sales as compared to the prior period.

For the three months ended September 30, 2012, selling, general and administrative expenses totaled $182,812. This was a decrease of $51,900 or approximately 22.1% as compared to the same period in 2011. The decrease in selling, general and administrative expenses is primarily the result of the decrease in commission, and professional fee.

For the three months ended September 30, 2012, income (loss) from operations decreased to ($103,514) as compared to ($228,115) for the three months ended September 30, 2011. This represents a decreased loss of $124,601 or approximately 54.6% comparing the two periods. The decreased loss from operations for the three months ended September 30, 2012 is primarily the result of increased in gross profit due to increased sales volume and decreased cost of sales, and a decrease in selling, general and administrative expenses.

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Other income (expenses) was $(6,966) and $53,608 for the three months ended September 30, 2012 and 2011, respectively. This represents decreased income of $60,574, or a decrease of approximately 113%. The main reason for this decreased income was a loss on foreign currency exchange of ($6,967), as compared to gain of $51,529 for the prior year period, and a decreased interest income of $2,078.

Our net loss was ($110,480) for the three months ended September 30, 2012 compared to net loss of ($174,507) for the three months ended September 30, 2011. The decreased loss for the three months ended September 30, 2012 was due to the reasons described above.

Nine Months Ended September 30, 2012 compared to the Nine Months Ended September 30, 2011

Net sales for the nine months ended September 30, 2012 were $401,708 as compared to $435,004 for the nine months ended September 30, 2011. This represents a decrease of $33,296 or approximately 7.7% comparing the two periods. The decrease in net sales is primarily the result of a decrease in demand for end products due to poor economic conditions and materially less demand in the first quarter of 2012 as compared to the first quarter of 2011.

Cost of sales decreased by $97,655 or approximately 30.1%, to $226,775 for the nine months ended September 30, 2012 as compared to $324,430 for the nine months ended September 30, 2011. Gross profit for the nine months ended September 30, 2012 was $174,933, compared to $110,574 for the same period in 2011. Gross profit as a percentage of net sales was 43.5% in the first three quarters of 2012, compared to 25.4% in the same period in 2011. The higher gross profit rate in the first three quarters of 2012 was primarily due to the increase in sales of new models and parts which is partially offset by the discounted sales of old models, and lower cost of sales as a percentage of net sales.

For the nine months ended September 30, 2012, selling, general and administrative expenses totaled $609,501. This was a decrease of $58,583 or approximately 8.8% as compared to $668,084 the same period in 2011. The decrease in selling, general and administrative expenses is primarily the result of the decrease in commission, employee benefit, entertainment, professional fee, and rent.

For the nine months ended September 30, 2012, loss from operations decreased to ($443,568) as compared to ($557,510) for the nine months ended September 30, 2011. This represents a decreased loss of ($122,942) or approximately 22% comparing the two periods. The decrease of loss from operations for the nine months ended September 30, 2012 is primarily the result of increased gross profit and reduced selling, general and administrative expenses.

Other income (expenses) was ($12,482) and $48,810 for the nine months ended September 30, 2012 and 2011, respectively. This represents increased other expenses of $61,293. The main reason for this decreased income was a loss on foreign currency exchange of ($12,963), as compared to gain of $46,448 for the prior year period, and a decreased interest income of $1,881.

Our net loss was ($447,050) for the nine months ended September 30, 2012 compared to net loss of ($508,700) for the nine months ended September 30, 2011. The decreased loss for the nine months ended September 30, 2012 was due to the reasons described above.

Liquidity and Capital Resources

Cash and cash equivalents were $494,345 at September 30, 2012 and $826,955 at December 31, 2011. Our total current assets were $1,752,038 at September 30, 2012, as compared to $2,075,759 at December 31, 2011. Our total current liabilities were $215,483 at September 30, 2012 as compared to $149,913 at December 31, 2011.

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We had working capital at September 30, 2012 of $1,536,555 compared with working capital of $1,925,846 at December 31, 2011. This decrease in working capital was primarily due to a decrease in cash and cash equivalents, account receivable, and an increase in inventory, prepaid expenses, accounts payable, and accrued expenses,.

Net cash flow used in operating activities during the nine months ended September 30, 2012 was $333,360, a decrease of $690,789 compared to $1,024,149 net cash used in operating activities during the nine months ended September 30, 2011. The decrease in the cash used in operating activities was primarily due to reduced net loss, increases in foreign currency exchange loss, receivable, inventory, prepaid expenses, accounts payable and accrued expenses, a decrease in allowance for inventory value decline, accounts receivable.

Net cash used in investing activities for the nine months ended September 30, 2012 was $9,637, which was primarily due to the payment of patent registration.

Net change in cash and cash equivalents was a decrease of $332,610 during the nine months ended September 30. 2012.

Inflation

Our opinion is that inflation has not had a material effect on our operations and is not expected to have any material effect on our operations.

Climate Change

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

N/A.

Item 4.    Controls and Procedures.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1.     Legal Proceedings.

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

Item 1A.   Risk Factors.

The risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2011, filed on March 29, 2012 have not changed except that we disclosed in our quarterly report on Form 10-Q for the quarter ended September 30, 2012, a new risk factor related to our securities as follows:

The market price of our common stock may limit its eligibility for clearing house deposit.

We are advised that if the market price for shares of our common stock is less than $0.10 per share, Depository Trust Company and other securities clearing firms may decline to accept our shares for deposit and refuse to clear trades in our securities. This would materially and adversely affect the marketability and liquidity of our shares and, accordingly may materially and adversely affect the value of an investment in our common stock.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

Item 3.    Defaults Upon Senior Securities.

Not Applicable.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

Not applicable.

Item 6.    Exhibits.

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*filed herewith
+submitted herewith

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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.

OMPHALOS, CORP.

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