OMPHALOS, CORP - Quarter Report: 2015 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, 2015

[  ] 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 Boulevard, Suite 101
Irvine, California 92618
Phone: (949) 660-9700 ext. 124
Fax: (949) 660-9010

         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 November 6, 2015 was 30,063,759.

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

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OMPHALOS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(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, 2015 AND 2014
(UNAUDITED)

See accompanying Notes to Condensed Consolidated Financial Statements

F-3

OMPHALOS CORP.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015

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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 2015; (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.

Accounts Receivable — Accounts receivables are carried at original invoice amount less estimates made for doubtful receivables. Management determines the allowance for doubtful accounts on a quarterly basis based on a review of the current status of existing receivables, account aging, historical collection experience, subsequent collections, management's evaluation of the effect of existing economic conditions, and other known factors. The provision is provided for the above estimates made for all doubtful receivables. Account balances are charged off against the allowance only when the Company considers it is probable that a receivable will not be recovered. Recoveries of trade receivables previously written off are recorded when received.

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 $471,737 and $499,624 at September 30, 2015 and December 31, 2014, respectively.

Property and Equipment — Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets as follows:

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Expenditures for major renewals and betterment that extend the useful lives of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and the resulting profit or loss is reflected in the statement of income for the period. The accumulated depreciation is $100,802 and $101,704 at September 30, 2015 and December 31, 2014, respectively. Depreciation expense was $3,531 and $8,067 for the nine months ended September 30, 2015 and 2014, respectively. Depreciation expense was $1,156 and $2,245 for the three months ended September 30, 2015 and 2014, respectively.

Intangible Assets —Include cost of patent applications that are deferred and charged to operations over their useful lives. The accumulated amortization is $28,929 and $27,825 at September 30, 2015 and December 31, 2014, respectively. Amortization of intangible assets was approximately $2,382 and $2,875 for the nine months ended September 30, 2015 and 2014, respectively. Amortization of intangible assets was approximately $780 and $963 for the three months ended September 30, 2015 and 2014, respectively.

Revenue Recognition — The Company derives revenues from the sale of equipment and parts to customers. The Company’s standard shipping term is Free on Board (FOB) shipping point. The Company recognizes revenue upon shipment for the sales under the term FOB shipping point. For the sales under other shipping term arrangements, such as FOB destination, the Company recognizes revenue when title passes to and the risks and rewards of ownership have transferred to the customer based on the terms of the sales. Usually no returns, discounts or other allowances are provided to customers. Shipping and handling charges to customers are included in net sales. Shipping and handling charges incurred by the Company are included in cost of goods sold.

Research and Development Expenses — Research and development costs are generally expensed as incurred.

Income Taxes — The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized.

Stock Based Compensation — The Company applies the fair value provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options. ASC 718 requires companies to estimate the fair value of share-based payment awards on the grant date using an option pricing model. The Company does not have any awards of stock-based compensation issued and outstanding at September 30, 2015 and December 31, 2014.

Loss Per Share — The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) which specifies the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share have been calculated based upon the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of the diluted loss per share if their effect would be anti-dilutive. For the nine months ended September 30, 2015 and 2014, the Company did not have any common equivalent shares.

F-6

Impairment of Long-Lived Assets — The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. Management has determined that no impairments of long-lived assets currently exist.

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 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU No. 2014-09 requires an entity to recognize revenue for the amount of consideration to which it expects to be entitled for the transfer of promised goods or services to customers. Additionally, ASU No. 2014-09 requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU No. 2014-09 is effective for financial statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years. In August 2015 the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which deferred the effective date of ASU No. 2014-09 by one year, making the guidance effective for fiscal years beginning after December 15, 2017. Early adoption will be permitted, but not earlier than the original effective date for annual and interim periods. The impact from adoption of the new requirements of ASU No. 2014-09 on our consolidated financial position or results of operations has not yet been determined.

F-7

In August 2014, FASB issued ASU No. 2014-15, “Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern”. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Accounting Standards Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU, however, at the current period, management does not believe that it has met conditions which would subject these condensed consolidated financial statements for additional disclosure.

In February 18, 2015, FASB issued ASU No. 2015-02, “Consolidation (Topic 810)”. The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In July 2015, FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. ASU 2015-11 affects reporting entities that measure inventory using first-in, first-out or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

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F-10

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, 2013.

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, 2015 Compared to the Three Months Ended September 30, 2014

Net sales for the three months ended September 30, 2015 were $6,302, as compared to $242,682 for the three months ended September 30, 2014. This represents a decrease of $236,380 or approximately 97.0% compared to the prior year period. The decrease in net sales is primarily the result of a decrease in demand for the new models due to the economic downturn.

Cost of sales decreased by $126,533 or approximately 97% to $3,258 for the three months ended September 30, 2015, as compared to $129,791 for the three months ended September 30, 2014. Gross profit for the three months ended September 30, 2015 was $3,044, compared to $112,891 for the same period in 2014. Gross profit as a percentage of net sales was approximately 48.3% for the three months ended September 30, 2015, compared to approximately 46.5% in the same period in 2014. The change in gross profit percentage is not significant.

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For the three months ended September 30, 2015, selling, general and administrative expenses totaled $144,138. This was a decrease of $14,176, or approximately 9%, as compared to the same period in 2014. The decrease of selling, general and administrative expenses for the three months ended September 30, 2015 is primarily the result of the decrease in salary and travel expenses.

For the three months ended September 30, 2015, loss from operations was $(141,094) as compared to $(45,423) for the three months ended September 30, 2014. This represents an increased loss of $95,671, or approximately 210.62% comparing the two periods. The increase of loss from operations for the three months ended September 30, 2015, is primarily the result of a decrease in net sales.

Other income (expenses) was $(4,833) and $1,673 for the three months ended September 30, 2015 and 2014, respectively. This represents decreased income of $6,506 or approximately 388.88% . The main reason for this decreased other income was an increase in interest expense and a loss on foreign currency exchange, as compared to the three months ended September 30, 2014.

Our net loss was $(145,927) for the three months ended September 30, 2015 compared to a net loss of $(43,750) for the three months ended September 30, 2014. The increased loss for the three months ended September 30, 2015 was due to the reasons described above.

Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

Net sales for the nine months ended September 30, 2015 were $10,334, as compared to $435,091 for the nine months ended September 30, 2014. This represents a decrease of $424,757 or approximately 97.62% compared to the prior year period. The decrease in net sales is primarily the result of a decrease in demand for the new models due to the economic downturn.

Cost of sales decreased by $258,617 or approximately 99.27% to $1,914 for the nine months ended September 30, 2015, as compared to $260,531 for the nine months ended September 30, 2014. Gross profit for the nine months ended September 30, 2015 was $8,420, compared to $174,560 for the same period in 2014. Gross profit as a percentage of net sales was approximately 81.5% for the nine months ended September 30, 2015, compared to approximately 40.0 % in the same period in 2014. The higher gross profit rate for the nine months ended September 30, 2015 was primarily due to the sales consisting of parts only, compared to the sales of new models and parts in the same period in 2014.

For the nine months ended September 30, 2015, selling, general and administrative expenses totaled $462,856, compared to $536,785 for the nine months ended September 30, 2014. This was a decrease of $73,929, or approximately 13.8%, as compared to the same period in 2014. The decrease in selling, general and administrative expenses is primarily the result of the decrease in salary, and travel expenses.

For the nine months ended September 30, 2015, loss from operations increased to ($454,436) as compared to $(362,225) for the nine months ended September 30, 2014. This represents an increased loss of $92,211 or approximately 25.5% comparing the two periods. The increase of loss from operations for the nine months ended September 30, 2015 is primarily the result of a decrease in net sales which is partially offset by a decrease in selling, general and administrative expenses .

Other income (expenses) was $(7,334) and $(4,210) for the nine months ended September 30, 2015 and 2014, respectively. This represents increased expenses of $3,124, or approximately 74.2% . The main reason for this increase of other expenses was an increase in interest expense, and the decrease in gain on foreign currency exchange and interest income, as compared to the nine months ended September 30, 2014.

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Our net loss was $(461,770) for the nine months ended September 30, 2015 compared to a net loss of $(366,435) for the nine months ended September 30, 2014. The decreased loss for the nine months ended September 30, 2014 was due to the reasons described above.

Liquidity and Capital Resources

Cash and cash equivalents were $35,925 at September 30, 2015 and $107,028 at December 31, 2014. Our total current assets were $176,888 at September 30, 2015, as compared to $277,300 at December 31, 2014. Our total current liabilities were $465,835 at September 30, 2015 as compared to $600,262 at December 31, 2014.

We had a negative working capital at September 30, 2015 of $(288,947) compared with a negative working capital of $(322,962) at December 31, 2014. This increase in working capital was primarily due to an increase in inventory and decreases in short-term bank loans, accrued expenses, and loan from shareholders, which is partial offset by decreases in cash and cash equivalents, accounts receivable, prepaid and other current assets and increases in accounts payable and due to related parties.

Net cash flow used in operating activities during the nine months ended September 30, 2015 was ($262,797), an increase of ($159,362) compared to ($103,435) net cash used in operating activities during the nine months ended September 30, 2014. The increase in the cash used in operating activities was primarily due to increased net loss, decreases in amortization and depreciation, foreign currency exchange gain, accounts receivable, inventory, prepaid expenses and accrued expenses, and increases in allowance for inventory value decline, due to related parties, and accounts payable.

Net cash provided by financing activities for the nine months ended September 30, 2015 was $190,726, which was primarily due to proceeds from advances from related parties which partially offset by repayment of short term bank loan.

Net change in cash and cash equivalents was a decrease of $71,103 during the nine months ended September 31, 2015.

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.

As a smaller reporting company, we are not required to provide this information.

Item 4. Controls and Procedures.

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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.

PART II

Item 1. Legal Proceedings.

On January 24, 2013, Artic Automation Co., Ltd. (the “Plaintiff”) filed a complaint against All Fine Technology Co. (TWN), (the “Company”), at Taiwan Taoyuan District Court in Taiwan, for not paying accounts payable of NT$ 990,875, equivalent to approximately $ 32,540. The Plaintiff claimed that the Company had the obligation to pay for certain products. However, the Company disputed Plaintiff’s claim, as those products were defective and not able to be sold. The case went to trial on March 20, 2013, and the court pronounced its judgment that the Company had to pay the requested amount. An appeal was filed on December 27, 2013, by the Company. The hearing for the appeal was held on January 2, 2014, at Taiwan High Court in Taipei City, Taiwan. On April 23, 2014, the Company and the Plaintiff reached a settlement that the Company will repay NT$820,000, equivalent to approximately $26,930 to the Plaintiff on May 7, 2014. As such, the case was closed. The liability has been paid off as of September 30, 2014.

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to provide this information; provided, however:

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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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.

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