OMPHALOS, CORP - Quarter Report: 2017 September (Form 10-Q)

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

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

[   ] 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 District, Taoyuan City 338, 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)

     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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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]

As of November 2, 2017, 30,063,760 shares of the Company’s common stock, $0.0001 par value, were issued and outstanding.

TABLE OF CONTENTS

1

PART I - FINANCIAL INFORMATION

2

See accompanying Notes to Condensed Consolidated Financial Statements

F-1

See accompanying Notes to Condensed Consolidated Financial Statements

F-2

See accompanying Notes to Condensed Consolidated Financial Statements

F-3

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contained in this report reflect all adjustments that are normal and recurring in nature and considered necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the interim period are not necessarily indicative of the results expected for the full year. These unaudited, condensed consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Organization — Omphalos Corp. was incorporated as Soyodo Group Holdings, Inc. (the “Soyodo”) under the laws of Delaware in March 2003. On February 5, 2008, Soyodo acquired the outstanding shares of Omphalos Corp. Omphalos Corp. (the “Omphalos BVI) was incorporated on October 30, 2001 under the laws of the British Virgin Islands. For accounting purposes, the acquisition was treated as a recapitalization of Omphalos BVI. Omphalos BVI owns 100% of Omphalos Corp. (Taiwan), All Fine Technology Co., Ltd. (Taiwan), and All Fine Technology Co., Ltd. (B.V.I.). Omphalos Corp. (Taiwan) and was incorporated on February 13, 1991 under the laws of Republic of China. All Fine Technology Co., Ltd. (Taiwan) was incorporated on March 23, 2004 under the laws of Republic of China. All Fine Technology Co., Ltd. (B.V.I.) was incorporated on February 2, 2005 under the laws of the British Virgin Islands. Omphalos Corp. (B.V.I.) and its subsidiaries supplies a wide range of equipment and parts including reflow soldering ovens and automated optical inspection machines for printed circuit board (PCB) manufacturers in Taiwan and China.

Effective April 18, 2008 Soyodo entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Omphalos, Corp., a Nevada corporation. Pursuant to the Merger Agreement, Soyodo was merged with and into the surviving corporation, Omphalos Corp. The certificate of incorporation and bylaws of the surviving corporation became the certificate of incorporation and bylaws of the Company, and the directors and officers of Soyodo became the members of the board of directors and officers of the Company. Following the execution of the Merger Agreement, the Company filed with the Secretary of State of Delaware and Nevada, a Certificate of Merger. Omphalos, Corp is incorporated on April 15, 2008 under the laws of the state of Nevada. The main purpose of the merger is to change the company’s name to Omphalos, Corp.

Basis of Consolidation — The condensed 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 and had an accumulated deficit of $1,953,255 and $1,766,139 as of September 30, 2017 and December 31, 2016, respectively. 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.

F-4

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 2017; (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 and net realizable value. Net realizable value (NRV) is defined as estimated selling prices less costs of completion, disposal, and transportation. 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 $444,849 and $416,428 at September 30, 2017 and December 31, 2016, 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:

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 was $118,115 and $108,058 at September 30, 2017 and December 31, 2016, respectively. Depreciation expense was $2,666 and $3,475 for the nine months ended September 30, 2017 and 2016, respectively. Depreciation expense was $896 and $1,213 for the three months ended September 30, 2017 and 2016, respectively.

F-5

Intangible Assets — Include cost of patent applications that are deferred and charged to operations over their useful lives. The accumulated amortization is $33,001 and $28,580 at September 30, 2017 and December 31, 2016, respectively. Amortization of intangible assets was $2,457 and $2,315 for the nine months ended September 30, 2017 and 2016, respectively. Amortization of intangible assets was $826 and $788 for the three months ended September 30, 2017 and 2016, 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.

Leases — Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) Transfer of ownership; (b) Bargain purchase option; (c) The lease term is equal to 75 percent or more of the estimated economic life of the leased property; (d) The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.

If at its inception a lease meets any of the four lease criteria above, the lease is classified by the lessee as a capital lease; and if none of the four criteria are met, the lease is classified by the lessee as an operating lease.

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

Statement of cash flows — In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies, and translated to the reporting currency using an average foreign exchange rate for the reporting period. As a result, amounts related to changes in assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

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, 2017 and December 31, 2016.

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, 2017 and 2016, 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.

Reclassifications — Certain classifications have been made to the prior year financial statements to conform to the current year presentation. The reclassification had no impact on previously reported net loss or accumulated deficit.

Recently Issued Accounting Pronouncements — In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice by providing guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. ASU 2016-15 is effective on a retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.

F-7

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (“ASU 2016-08”)”, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing (“ASU 2016-10”), which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. The Company must adopt ASU 2016-08 and ASU 2016-10 with ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Lease (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the lease assets and liabilities that arise from leases in the statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of the adoption of this update on its consolidated financial statements.

Operating Leases

The Company leases its facility from a shareholder under an operating lease agreement which expires on January 31, 2019. The monthly base rent is approximately $1,800. Rent expense under this lease agreement amounted to approximately $16,525 and $15,570 for the nine months ended September 30, 2017 and 2016, respectively and approximately $5,555 and $5,300 for the three months ended September 30, 2017 and 2016, respectively..

Loan from related party

On July 26, 2013, the Company entered a loan agreement bearing interest at a fixed rate at 3% per annum with its shareholder to advance NT$5,000,000, equivalent approximately $164,853 for working capital purpose. The term of the loan started from July 30, 2013 with maturity date on July 29, 2015. On July 31, 2015, the loan with the same amount of NT$5,000,000, equivalent approximately $164,853, and the same fixed interest rate of 3% per annum was extended for another two years starting from August 1, 2015 with maturity date on July 31, 2017. On August 1, 2017, the loan with the same amount of NT$5,000,000, equivalent approximately $164,853, and the same fixed interest rate of 3% per annum was extended for another three years starting from August 1, 2017 with maturity date on July 31, 2020.

On December 31, 2013, the Company entered another loan agreement bearing interest at a fixed rate at 3% per annum with its officer and shareholder to advance NT$5,000,000, equivalent approximately $164,853 for working capital purpose. The term of the loan started from January 1, 2014 with maturity date on December 31, 2015. On December 31, 2015, the loan with the same amount of NT$5,000,000, equivalent approximately $164,853, and the same fixed interest rate of 3% per annum was extended for another two years starting from January 1, 2016 with maturity date on December 31, 2018.

On July 5, 2015, the Company entered another loan agreement bearing interest at a fixed rate at 3% per annum with its shareholder to advance NT$10,000,000, equivalent approximately $329,707, for working capital purpose. The term of the loan started from July 1, 2015 with maturity date on September 30, 2018.

On July 1, 2016, the Company entered another loan agreement bearing interest at a fixed rate at 3% per annum with its shareholder to advance NT$10,000,000, equivalent approximately $329,707, for working capital purpose. The term of the loan started from July 1, 2016 with maturity date on September 30, 2019.

As of September 30, 2017 and December 31, 2016, there were $989,120 and $925,928 advances outstanding, of which $164,853 and $154,321 were presented under current liabilities, respectively. Interest expense was $22,131 and $16,219 for the nine months ended September 30, 2017 and 2016, respectively. Interest expense was $7,437 and $7,049 for the three months ended September 30, 2017 and 2016, respectively.

F-8

Advances from related party - The Company also has advanced funds from its officer and shareholder for working capital purposes. The Company has not entered into any agreement on the repayment terms for these advances. The advances bear no interest rate and are due upon demand by shareholders. As of September 30, 2017 and December 31, 2016, there were $629,719 and $335,322 advances outstanding, respectively.

The Company is incorporated in the State of Nevada in the United States of America and is subject to the U.S. federal and state taxation. Income before income taxes for the nine months ended September 30, 2017 and 2016 includes the results of operations of Taiwan and British Virgin Islands. Omphalos Corp. (B.V.I.) and All Fine Technology Co., Ltd. (B.V.I.) are incorporated in British Virgin Islands and are not required to pay income tax. Omphalos Corp. and All Fine Technology Co., Ltd. are incorporated in Taiwan and are subject to Taiwan tax law. The statutory tax rate under Taiwan tax law is 17%. Omphalos Corp. has incurred losses for the nine months ended September 30, 2017, but had net income of $65,438 for the nine months ended September 30, 2016. All Fine Technology Co., Ltd. has incurred losses for the nine months ended September 30, 2017 and 2016. As a result, no additional tax liability was accrued for the nine months ended September 30, 2017.

The provision for income taxes calculated at the statutory rates in the combined statements of income is as follows:

The following is a reconciliation of the statutory tax rate to the effective tax rate for the nine months ended September 30, 2017 and 2016:

(a) Other represents expenses incurred by the Company that are not deductible for Taiwan income taxes and changes in valuation allowance for Taiwanese entities for the nine months ended September 30, 2017 and 2016, respectively.

F-9

The Company has evaluated subsequent events through the date which the financial statements were available to be issued. All subsequent events requiring recognition as of September 30, 2017 have been incorporated into these consolidated financial statements and there are no subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”

F-10

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, 2016.

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.

Results of operations for the three months ended September 30, 2017 and 2016

Net sales for the three months ended September 30, 2017 were $66,867, as compared to $107,486 for the three months ended September 30, 2016. This represents a decrease of $40,619 or approximately 38% compared to the prior year period. The decrease in net sales is primarily attributable to lower margin of laser marking machine sold during the three months ended September 30, 2017.

Cost of sales decreased by $19,976 to $42,119 for the three months ended September 30, 2017, as compared to $62,095 for the three months ended September 30, 2016. Gross profit for the three months ended September 30, 2017 was $24,748, compared to $45,391 for the same period in 2016. Gross profit as a percentage of net sales was approximately 37% in the third quarter of 2017, compared to approximately 42% in the same period in 2016. The change in gross profit margin for the three months ended September 30, 2017 were primarily due to the lower margin on the products sold.

For the three months ended September 30, 2017, selling, general and administrative expenses totaled $115,616. This was a decrease of $22,524 or approximately 16% as compared to $138,140 for the same period in 2016. The decrease of selling, general and administrative expenses is primarily due to the decrease in salary and traveling expenses.

For the three months ended September 30, 2017, loss from operations decreased to $90,868 as compared to $92,749 for the three months ended September 30, 2016. This represents a decreased loss of $1,881 or approximately 2% comparing the two periods. The decrease of loss from operations for the three months ended September 30, 2017 is primarily the result of the decrease in selling, general and administrative expenses.

3

Other income (expenses) was $(4,543) and $(7,612) for the three months ended September 30, 2017 and 2016, respectively. This represents decreased expense of $3,069 or approximately 40%. The main reason for this decreased other expense was an increase in interest expense, partially offset by the increase in gain on foreign currency exchange, as compared to the quarter ended September 30, 2016.

Our net loss was $95,411 for the three months ended September 30, 2017 compared to a net loss of $90,432 for the three months ended September 30, 2016. The decreased loss for the three months ended September 30, 2017 was primarily due to the reasons described above.

Results of operations for the nine months ended September 30, 2017 and 2016

Net sales for the nine months ended September 30, 2017 were $550,886, as compared to $719,763 for the nine months ended September 30, 2016. This represents a decrease of $168,877 or approximately 23% compared to the prior year period. The decrease in net sales is primarily the result of a decrease in sales of the new model of laser marking machine in both sales quantities and selling price per unit during the nine months ended September 30, 2017 as compared to the prior year period.

Cost of sales decreased by $65,818 or approximately 18% to $309,819 for the nine months ended September 30, 2017, as compared to $375,637 for the nine months ended September 30, 2016. Gross profit for the nine months ended September 30, 2017 was $241,067, compared to $344,126 for the same period in 2016. Gross profit as a percentage of net sales was approximately 44% for the nine months ended September 30, 2017, compared to approximately 48% in the same period in 2016. The decrease in gross profit percentage was mainly attributable to lower margin on products sold.

For the nine months ended September 30, 2017, selling, general and administrative expenses totaled $407,584. This was a decrease of $75,734 or approximately 16% as compared to $483,318 for the same period in 2016. 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, 2017, loss from operations decreased to $166,517 as compared to $139,192 for the nine months ended September 30, 2016. This represents an increased loss of $27,325 or approximately 20% comparing the two periods. The increase of loss from operations for the nine months ended September 30, 2017 is primarily the result of a decrease in gross profit which is partially offset by decrease in selling, general and administrative expenses.

Other income (expenses) was $(20,599) and $(14,042) for the nine months ended September 30, 2017 and 2016, respectively. This represents increased expense of $6,557 or approximately 47%. The main reason for this increased other expenses was an increase in interest expense and a decrease in gain on foreign currency exchange, as compared to the period ended September 30, 2016.

Our net loss was $(187,116) for the nine months ended September 30, 2017 compared to a net loss of $(164,360) for the nine months ended September 30, 2016. The increased loss for the nine months ended September 30, 2017 was due to the reasons described above.

Liquidity and Capital Resources

Cash and cash equivalents were $105,090 at September 30, 2017 and $37,643 at December 31, 2016. Our total current assets were $316,810 at September 30, 2017, as compared to $244,862 at December 31, 2016. Our total current liabilities were $918,279 at September 30, 2017 as compared to $636,549 at December 31, 2016.

We had working capital deficit of $601,469 at September 30, 2017 compared to $391,687 at December 31, 2016. This decrease in working capital was primarily due to a decrease in cash and inventory, and increase in accounts payable, accrued expenses, and due to related parties, which is partial offset by increases in accounts receivable and decreases in accrued salaries.

4

Net cash flow provided by (used in) operating activities was $63,062 during the nine months ended September 30, 2017, an increase of $421,257 as compared to net cash used in operating activities of $(358,195) during the nine months ended September 30, 2016. The increase in the cash provided by operating activities was primarily due to the decreased inventory and prepaid expenses, the increased accounts payable and due to related parties, which in partially offset by the increased net loss, the increased accounts receivable and the deceased accrued expenses and advance from customers.

Net cash used in investing activities was $0 for the nine months ended September 30, 2017, as compared to $1,324 for the nine months ended September 30, 2016. The Company did not purchase any fixed assets during the nine months ended September 30, 2017.

Net cash provided by financing activities was $0 for the nine months ended September 30, 2017, as compared to $308,938 for the nine months ended September 30, 2016. The Company did not enter into any new loan agreements from shareholders during the nine months ended September 30, 2017.

Net change in cash and cash equivalents was an increase of $67,447 during the nine months ended September 30, 2017, and a decrease of $46,535 for the nine months ended September 30, 2016.

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.

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

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

None.

5

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.

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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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