10-Q 1 obn10q091231.txt OBN 10Q DECEMBER 31, 2009 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2009 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to _________ Commission File Number 333-108300 OBN Holdings, Inc. (Exact name of registrant as specified in its Charter) Nevada 81-0592921 (State of incorporation) (IRS Employer Identification No.) 8275 South Eastern Ave., Suite 200; Las Vegas, Nevada 89123 (Address of principal executive offices) (702) 938-0467 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the past 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 ( ) No ( X ) Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company, See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer( ) Accelerated filer ( ) Non-accelerated filer ( ) Smaller reporting company ( X ) 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 January 31, 2010 the Company had 21,524,489 shares of its $.001 par value common stock issued and outstanding. TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets at December 31, 2009 (Unaudited) and June 30, 2009 1 Consolidated Statement of Operations (Unaudited) for the three Month Periods Ended December 31, 2009 and 2008 2 Consolidated Statement of Cash Flows (Unaudited) for the three Month Periods Ended December 31, 2009 and 2008 3 Notes to Unaudited Consolidated Financial Statements 4 ITEM 2. Management's Discussion and Analysis or Plan of Operation 16 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22 ITEM 4. Controls and Procedures 22 PART II OTHER INFORMATION ITEM 1. Legal Proceedings 23 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 ITEM 3. Default upon Senior Securities 23 ITEM 4. Submission of Matters to Vote of Securities Holders 23 ITEM 5. Other Information 23 Item 6. Exhibits 23 PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements OBN Holdings, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, June 30, 2009 2009 (unaudited) ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 1,004,479 $ 616,581 Accounts receivables, net of $150,000 and $150,000 allowance for doubtful accounts, respectively 254,398 882,872 Inventory 245,753 948,080 ---------- ---------- Total current assets 1,504,630 2,447,533 Fixed assets, net of accumulated depreciation of $60,892 and $60,692, respectively - - Programming rights, net of accumulated amortization of $100,529 and $100,192, respectively 65,275 65,613 Film library, net of accumulated amortization of $436,621 and $390,373, respectively 140,879 187,127 Other intellectual properties, net of accumulated Depreciation of $33,575 and $19,387, respectively 180,925 195,113 Other tangible assets 4,846,031 4,846,031 ---------- ---------- Total assets $ 6,737,740 $ 7,741,417 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 401,453 $ 472,344 Commissions payable 327,944 786,792 Accrued payroll and related 850,715 691,142 Deferred revenue 381,226 790,650 Capital lease obligations 49,396 49,396 Programming rights payable 80,030 80,030 Notes and accrued interest payable 270,083 277,709 Notes and accrued interest payable related parties 439,910 547,870 ---------- ---------- Total current liabilities 2,800,756 3,695,933 ---------- ---------- Stockholders' Equity: Undesignated preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued and outstanding --- --- Common stock; $0.001 par value; 500,000,000 shares authorized; 20,999,489 and 19,930,930 shares issued and outstanding 20,999 19,931 Additional paid-in capital 16,455,785 16,330,449 Accumulated deficit (12,529,345) (12,317,038) Common stock subscriptions receivable -- (7,500) Accumulated comprehensive income (loss), net (10,456) 19,642 ---------- ---------- Total stockholders' equity 3,936,983 4,045,484 ---------- ---------- Total liabilities and stockholders' equity $ 6,737,740 $ 7,741,417 =========== =========== See accompanying notes to consolidated financial statements. OBN Holdings, Inc. CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED DECEMBER 31, ENDED NDECEMBER 31, ------------------------ ----------------------- 2009 2008 2009 2008 ------------ ---------- ----------- ---------- Unaudited Unaudited Unaudited Unaudited Revenue, net of affiliate costs $ 2,645,606 $ 5,812,055 $ 5,381,914 $12,244,615 Cost of sales 2,185,075 4,489,998 4,380,830 9,193,398 ------------ ---------- ---------- ----------- Gross profit 460,531 1,322,057 1,001,084 3,051,217 Operating expenses: General and administrative 868,280 3,005,210 1,361,074 4,135,703 ------------ ---------- ---------- ----------- Loss from operations (407,749) (1,683,153) (359,990) (1,084,486) ------------ ---------- ---------- ----------- Other income (expense): Other income (2,037) 205,682 36,660 223,182 Gain on debt extinguishment -- 57,500 98,659 57,500 Interest expense (332) (5,711) (7,277) (11,423) ------------ ---------- ----------- ----------- Total other income (expense), net (2,369) 257,471 128,042 269,259 ------------ ---------- ----------- ----------- Net income before income taxes (410,118) (1,425,682) (231,948) (815,227) Income taxes -- -- -- -- ------------ ---------- ---------- ---------- Net income ($410,118) ($1,425,682) ($231,948) ($815,277) ============ ============ ========== =========== Foreign currency transaction adjustment (17,674) (24,256) (10,456) (76,100) Comprehensive income, net of 0 taxes ($427,792) ($1,449,938) ($242,404) ($891,327) Net loss available to common stockholders per common share: Basic and diluted net income (loss) per common share ($0.02) ($0.12) ($0.01) ($0.07) ============ ========== =========== =========== Basic and diluted weighted average shares outstanding 20,529,501 11,886,583 20,228,268 11,605,632 ============ =========== =========== ===========
See accompanying notes to consolidated financial statements. OBN Holdings, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED December 31, ------------------------- 2009 2008 ---------- ---------- Unaudited Unaudited Cash flows from operating activities: Net income ($ 231,948) ($ 815,227) Adjustments to reconcile net loss to net cash used in operating activities: Gain on settlement of debt (98,659) 57,500 Depreciation and amortization 60,774 58,682 Shares issued for services 25,500 10,200 Changes in operating assets and liabilities: Accounts receivable, net 628,474 (415,014) Purchased inventory 702,327 (811,122) Deferred recognize revenue (409,424) (13,181) Accounts payable and accrued expenses (365,880) 1,819,202 ----------- ---------- Net cash used in operating activities 311,164 (108,960) ----------- ---------- Cash flows from investing activities: Purchase of fixed assets -- -- ---------- ---------- Net cash used in investing activities -- -- ---------- ---------- Cash flows from financing activities: Proceeds from notes payable, net of issuance costs 1,358 250 Proceeds from notes payable to related parties (15,372) 12,672 Proceeds from stock subscriptons receivable 5,000 -- Repayments on notes payable to related parties 24,204 -- Proceeds from issuance of common stock 72,000 122,283 ----------- ---------- Net cash provided by financing activities 87,190 135,205 ----------- ---------- Effect of foreign currency rate changes (10,456) 76,100 ----------- ---------- Net change in cash and cash equivalents 387,898 102,345 Cash, and cash equivalents, beginning of period 616,581 986,482 ----------- ---------- Cash, and cash equivalents, end of period $1,004,479 $1,088,827 =========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest -- -- =========== ========== Income taxes -- -- =========== ========== Supplemental disclosure of noncash investing and financing activities: Common stock issued to retire debt 36,055 -- =========== ========== Common stock issued for stock subscription 5,000 -- =========== ========== Common stock issued for services 25,500 -- =========== ========== Conversion of accrued salary to stock -- 200,000 =========== ========== Shares issued as payment of executive bonuses -- 1,680,000 =========== ========== Shares issued as payment for accounts payables -- 1,303 =========== ========== See accompanying notes to consolidated financial statements. OBN HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2009 and 2008 NOTE 1 - MANAGEMENT'S REPRESENTATION The consolidated financial statements included herein have been prepared by OBN Holdings, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending June 30, 2010. It is suggested that the consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2009. Going Concern At June 30, 2009 the report of our independent registered public accounting firm included a "going concern" statement. Several factors influenced the their decision to include this statement as because the criteria for inclusion of a "going concern" statement was have changed since out last annual filing. The auditor considers factors such as the state of the economy, trends in earnings, current profitability, aging of liabilities and aging of receivables, whereas in the past the criteria was a measure of the Company's ability to meet obligations and operating expenses for upcoming twelve month period. The Company recognizes that it must adequately address each of the above factors to have the "going concern" statement removed. Management's plans and progress toward achieving that end includes the following. 1) Economy. By all indications, except employment figures, the economy has begun to improve since the balance sheet of this report. This is evidence by increases in financial activity around the world. Management immediately initiated an educational and marketing plan upon learning that swine flu was not caused by eating pork products. News and scientific reports have helped our cause to educate customers and increase sales. We have seen positive results as customer sales have begun to increase. Sales for the quarter ending September 30, 2009 were more than twice those for the quarter ending June 30, 2009. Moreover, we have noted increased activity in our entertainment segment with several projects planned in China and Japan during this current fiscal year. Additionally, our continuing development of OBN's operations outside of the United States further insulates us from the economic problems one would experience when operating in a single region. 2) Profitability. The loss reported for the year ending June 30, 2009 is attributable to three major reasons. First, the Company made one time special stock bonus to executives in the amount of $1,680,000. The stock is being held in a non-qualified deferred compensation plan until May 2011. Secondly, the Company incurred $980,000 of pork product spoilage associated with the swine flu concerns. Thirdly, sales of pork products took precipitously decrease as result of the swine flu. Management believes that each of these is special one time events that are unlikely to occur in the future. 3) Trends. As indicated above, the Company reported a loss in four of last five year annual filings. The first year with positive earnings was last year and Management had every reason to believe that a profit would be posted for this year end at June 30, 2009 until the swine flu pandemic was announced. Management is still mindful of its increasing positive trend of sales and expects to see positive net income trends in future periods. 4) Aging of Liabilities. At June 30, 2009 the outstanding receivables liabilities totaled $3,695,933. Since that date Management has retired $111,252 of the debt by successfully negotiating agreements to convert the debt to stock equity. A significant portion of the debt was deferred revenue that has been recognized as revenue. A total of $404,000 was reduced from Commissions payable as the sales broker purchased the receivables. A total of $295,822 of accounts payable was paid during the six month period December 31, 2009. A total of $214,000 of debt has been on the books past the statute of limitations for collection and will be written off prior to June 30, 2010. The remaining debt represents accrued salaries, commission payables and related party loans. All of these parties have indicated that they will wait until the Company is more profitable before requesting payment. 5) Aging of Receivables. Currently there is $404,000 of receivables related to pork sales made in October 2008. This amount is the total of four shipments to a new customer that was referred to Management by one of our commissioned sales brokers. Management has finalized negotiations for the broker to purchase the receivable at the face amount in exchange for not having to return the paid commission. Thus, these receivables have been as of December 31, 2009. All remaining receivables are less than thiry (30) days old. In addition, to the above plans and actions that address the "going concern" issues, Management is expanding its product line and marketing activities. Plans to sale an established cosmetics line and additional food products are being implemented currently. Details of upcoming entertainment projects, plastics recycling projects and intelligent traffic system projects are discussed in the marketing section of this document. NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Background and Organization OBN Holdings, Inc. ("OBNI" or the "Company") is a holding company with operations in several industries, including the internet broadcasting, television/film production, plastics recycling, intelligent traffic systems the commodity import/export industries. The Company is internationally diversified with subsidiaries in China, Japan and the United States. As a holding company our primary objective is to identify and acquire profitable small to medium sized companies as subsidiaries, then manage the subsidiaries' growth and development. In addition, the OBN corporate office provides consulting services to firms seeking to become listed on an American stock market and import/export services. The Company was incorporated in Nevada on January 21, 2003 as the holding company for three wholly owned entertainment operating subsidiaries: Omni Broadcasting Network ("OMNI"), Eclectic Entertainment ("Eclectic") and Products On Demand Channel ("POD"). In August 2003, the Company acquired KSSY television, which is located in San Luis Obispo County, California. On May 21, 2004 the SEC/NASD granted formal approval for public trading by existing shareholders of OBN shares. On June 25, 2004 OBN was approved by the NASD for trading on the Over-The-Counter Bulletin Board and the Company began its effort to raise the funds necessary to implement its business plan. However, in October 2004 management decided to cancel the public offering in order to protect the stock price from "naked shorting" activity by third parties that had driven the stock price down. As a result, management never received the funds it required to fully implement its entertainment-based business plan. The Company continued on with modest growth without the IPO funding. Using funds from its founders and friends, the Company continued to broadcast its programming and operate its television station. In July 2005, the Company acquired the All Sports Television Network and its film library in exchange for forgiveness of debt owed to the Company. That same year, the Company produced a major television special entitled the "50th Anniversary of the Four Tops" that was broadcast on the Omni Broadcast Network and syndicated to several other competing broadcast networks reaching 80 million viewers. In January 2006, the Company agreed to sell 60% ownership to a Sheikh from Saudi Arabia in exchange for the long term funding it sought. Unfortunately, personal circumstances prevented the Sheikh from performing on the agreement. As a result the agreement was canceled and the funding never materialized. Without funding, the Company was forced to suspend its satellite broadcasting operations and began to explore alternative methods to broadcast its programming content. In June 2007, the KSSY television station was fully impaired and ceased to be an asset. In February 2008, the Company signed an agreement to broadcast its film and television properties over the internet via a broadband network. Thus, internet broadcasting replaced the U.S. television broadcasting operations and eliminated the need for satellite uplink and television station operational expenditures. In March 2007 the Company revised its business plan to focus on diversifying into non-entertainment related industries, and to expand globally through acquisition. The Company began working with an investment banking firm that was responsible for raising funds and identifying targets for acquisition. Unfortunately, the Company never received funds under this arrangement and was forced to seek alternative acquisition strategies. The Company was introduced to two potential acquisition targets in the China. After intensive negotiations the acquistion agreements were complete. Unfortunately, attempts to complete the SEC required acquisition audits dragged on for months and eventually abandoned so the acquisitions were never consummated. Under SEC regulations the Company could not file its quarterly or annual filing until the acquisiton audits were complete. As a result the Company was delisted from the trading exhange. The company began the arduous task of getting current with its filings and reapplying to be traded on the exchanges while using a combination of Company stock and cash to consummate other successful acquisitions. In October 2007, the Company established OBN Holdings (HK) Ltd, a wholly owned subsidiary based in Hong Kong to handle its China operations. In February 2008, the Company entered the intelligent traffic system industry by purchasing the North American rights to proprietary technology that captures traffic violation information on video and still media. In February 2008 the Company entered the plastics recycling industry by purchasing the exclusive North American rights to Chinese proprietary "green" technology that allows "unrecyclable plastics" to be recycled. In June 2008, the Company acquired a trading company that currently sells pork to Japan from Mexico. In October 2008, the Company established OBN Holdings Japan Co, Ltd, a wholly owned subsidiary based in Tokyo, Japan to handle its Japan operations. As a result of its activities, the Company has been successful in partially implementing its acquisition and diversification plan. With this filing the company is current with its SEC filings and is currently applying to be reinstated for trading on the OTCBB trading exchange. Further, the company will immediately file an S-1 to register 25 million free trading shares that will be sold into the marketplace to raise the funds necessary to more fully implement its business plan. With the stricter "naked shorting" regulations and our more robust financials, the Company does not expect to encounter the problem it had with its initial public offering. The Company is continually seeking and negotiating the acquisition of companies in several other geographical areas. Segment Information Reporting As of December 31, 2009 Management measures the Company's performance in three distinct segments: (1) Broadcasting Operations for which performance is measured by the types of advertisers attracted; (2) Production Operations, for which performance is measured by distribution sales resulting from creative talent; and (3) commodity sales, for which performance is measured by the volume of product sold. A summary of the segments for the six months ended December 31, 2009 and 2008 is presented in the tables below: As of and for the six months ended December 31, 2009
Broadcasting Production Commodity Corporate Reconciling Total Operations Operations Items Assets $ 25,272 $194,753 $1,517,808 $5,150,664 ($150,757) $6,737,740 Liabilities (438,876) (416,448) (935,801) (1,160,389) 150,757 (2,280,756) Revenues, net of affiliate costs - - 5,381,521 - - 5,381,914 Costs & expenses* (17,868) (19,999) (5,407,856) (303,458) - (5,749,181) Other income (exp) - 23,833 36,660 74,826 - 135,319 Net income (loss) ($17,868) $ 3,834 $ 10,325 ($ 228,240) - (231,948) As of and for the six months ended December 31, 2008 Broadcasting Production Commodity Corporate Reconciling Total Operations Operations Trading Items Assets $ 61,461 $ 65,284 $4,250,226 $5,032,310 ($19,000) $9.390,281 Liabilities (435,062) (256,915) (1,449,098) (986,292) 19,000 (3,108,367) Revenues, net of affiliate costs 237 - 12,244,363 15 - 12,244,615 Costs & expenses* (28,613) (33,998) (11,313,467) (1,964,446) - (13,340,524) Other income (exp) - - 221,865 58,817 - 280,682 Net income (loss) ($28,376) ($33,998) $1,152,761 ($1,905,614) - (815,227) *Expenses include operating expenses and cost of sales.
Reconciling items consist of intercompany balances. Balance sheet reconciling amounts consist primarily of corporate-level loans to subsidiaries and the elimination of intercompany receivables/payables. All revenues are from customers in the United States and all long-lived assets are located in the United States. There was $254,398 of outstanding receivables as of December 31, 2009. For the six month periods ended December 31, 2009 there were $5,381,914 of sales recognized as compared to $12,244,615 of sales during the same period ending December 31, 2008. Fixed Assets Depreciation and amortization of fixed assets are provided using the straight-line method over the following useful lives: Furniture and fixtures 5 years Machinery and equipment 3-5 years Leasehold improvements Life of lease Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and betterments to fixed assets are capitalized. When assets are disposed of, the related costs and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in operations. Other Long-Lived Assets The internet portal assets are discussed in Note 4. The portals are indefinite life intellectual properties. The properties are subject annual impairment analysis. The programming rights assets are discussed in Note 5. Programming rights are recorded for the purchase of the right to air programming on the Company's networks. An asset is recorded for the programming rights when the license period begins. These rights are amortized to expense over the expected useful life of the programming, as the Company has the right to unlimited broadcasting of the programming. The film library is discussed in Note 6. These assets are being amortized over their estimated useful life of 10 years. Intangible Assets The Company has adopted Statement of Financial Accounting Standards ASC 350-10, "Goodwill and Other Intangible Assets." ASC 350-10 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather be tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. In addition, AS 350-10 expands the disclosure requirements about goodwill and other intangible assets in the years subsequent to their acquisition. ASC 35-10 provides specific guidance for testing goodwill and intangible assets that will not be amortized (i.e., the Company's technology licenses and internet portals) for impairment. The intangible assets are subject to impairment reviews by applying a fair-value-based test at the reporting unit level, which generally represents operations one level below the segments reported by the Company. An impairment loss will be recorded for any portion of the technology licenses and internet portal that is determined to be impaired. The Company performs impairment testing on its intangible assets at least annually. Based on its analysis, the Company's management believes that no impairment of the carrying value of its technology licenses or internet portal existed at December 31, 2009. There can be no assurance however, that market conditions will not change or demand for the Company's products and services will continue which could result in impairment of its intangible assets in the future. Impairment of Long-Lived Assets The Company's management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment is measured based on fair value and is charged to operations in the period in which long- lived asset impairment is determined by management. During the quarter ended September 30, 2005 the Company recorded an impairment change of $18,092. During the quarter ending June 30, 2007 the Company recorded impairment of $130,000. During the quarter ended June 30, 2008 the Company recorded an impairment expense of $165,000. In August 2009 the Company engaged the services of an independent appraisal firm to determine the value of its technology licenses which are being carried on the books at $4,774,781. The appraiser is a member of the National Association of Certified Valuation Analysts. Based on the appraiser's valuation analyses, no additional impairment of the carrying value of the Company's long lived assets existed. There can be no assurance, however, that market conditions will not change which could result in additional impairment of its long-lived assets in the future. Revenue Recognition Revenue From Licensing TV Programs and Feature Films The Company has completed several projects that can be licensed, and additional projects are underway. As projects are completed, the Company will have the option of airing the TV programs on its own network and/or licensing the programs to be aired on other networks. Likewise, feature films can be licensed to foreign markets for distribution. Thus, among the revenue sources are other networks in the case of TV projects or foreign markets for feature films. A licensing agreement that specifies the license fee, availability dates and/or agreement duration is required for all projects licensed. Licensing fees are typically paid in advance of providing the project to the customer. Upon receipt of payment, deferred revenue is recorded. Revenue is recognized as the project is aired over the life of the agreement. The Company does not recognize revenue for projects that are not completed, even if the licensing agreement for the project is signed. The revenue is recognized only after both the production of the product is completed and is aired in accordance with the signed agreement. Revenue Sharing With Program Licensors Some programs will be obtained by paying a licensing fee. Additionally, some licenses will be obtained via a cash-plus-barter arrangement, where the Company airs the program for a contracted number of times and grants the licensor a negotiated number of unsold advertising slots. AS 920-10, "Financial Reporting by Broadcasters," sets forth accounting and reporting standards for the broadcast industry. Under a cash-plus-barter arrangement, the Company recognizes a licensing asset at the estimated fair value of the programming received. The difference between the cash paid (obligation incurred) for the license and its fair value is recorded as a liability (deferred barter revenue), as the license is received before the broadcast of the licensor-provided commercials. As the licensor-provided commercials are aired, barter revenue is recognized ratably based on the recorded fair value of the barter transaction in relation to the total granted licensor-provided commercials. For cash purchases and revenue sharing, as rights are acquired, the programs are recorded as assets and are amortized as the programs are aired over the network. For agreements with unlimited airing of a program the asset is amortized over the license period (see above). Revenue from Advertising (and Paid Programming) Advertising and paid programming revenue are recognized as the commercials/programs are aired. For small advertisers that must pay for services in advance, upon receipt of the payment, the signed contract and the tapes, deferred revenue is recorded. Deferred revenue is recognized as revenue when the commercial is aired. Revenue Recognition for Meat Exports Revenue is recognized from meat export operations after the order is received, the customer invoice is issued and the customer receives the product. Invoices issued prior to the customer receiving the product are recorded as deferred revenue. Deferred revenue is then recognized as revenue when the customer takes ownership of the product. Inventories Inventories are valued at the lower of cost or market. Inventory includes direct material costs, whereby product is typically in inventory for periods less than three weeks due to spoilage concerns. Morover, the majority of inventory is in-transit to customers. Shipping costs are considered general and administrative expense and are not included in cost of goods sold. During the six months ending December 31, 2009 a total of $613,452 was expensed for shipping related services. Accounting for Filmed Entertainment and Television Programming Costs In accordance with ASC 926-10, "Accounting by Producers or Distributors of Films", filmed entertainment costs will include capitalizable production costs, overhead and interest costs expected to benefit future periods. These costs, as well as participations and talent residuals, will be recognized as operating expenses on an individual film basis in the ratio that the current year's gross revenues bear to management's estimate of total ultimate gross revenues from all sources. Marketing and development costs under term deals will be expensed as incurred. Filmed entertainment costs are stated at the lower of unamortized cost or estimated fair value on an individual film or television series basis. Revenue forecasts for both motion pictures and television products are continually reviewed by management and revised when warranted by changing conditions. When estimates of total revenues and other events or changes in circumstances indicate that a television production has a fair value that is less than its unamortized cost, a loss will be recognized for the amount by which the unamortized cost exceeds television production's fair value. Advertising Costs Advertising costs are expensed as incurred. For the six months ending December 31, 2009 and 2008, the Company's had no advertising costs. Stock-Based Compensation Through December 31, 2009, the Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 718-10, Accounting for Stock-Based Compensation, and ASC 505-50, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur. ASC 718-10 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Under APB 25, compensation cost, if any, is recognized over the respective vesting period based on the difference, on the date of grant, between the fair value of the Company's common stock and the grant price. Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in ASC 718-10 had been applied. The Company has a stock-based employee compensation plan. The Company will account for employee options granted under this plan under the recognition and measurement principles of APB 25, and related interpretations. No stock- based employee compensation cost is reflected in the consolidated statements of operations, as all employee warrants previously granted had no intrinsic value, and no new employee options or warrants were granted for the quarter ended December 31, 2009. There is also no pro forma impact of warrants as they have no fair value under ASC 718-10. Effective July 1, 2006, on the first day of the Company's fiscal year 2007, the Company adopted the fair value recognition provisions of ASC 718-10, "Share-Based Payment", using the modified-prospective transition method. Under this transition method, compensation cost includes: (a) compensation cost for all share-based payments granted and not yet vested prior to July 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of ASC 718-10, and (b) compensation cost for all share- based payments granted subsequent to June 30, 2006 based on the grant-date fair value estimated in accordance with the provisions of ASC 718-10. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. As of December 31, 2009, the Company had no options outstanding and therefore believes the adoption of ASC 718-10 to have an immaterial effect on the accompanying financial statements. The Company calculates stock-based compensation by estimating the fair value of each option using the Black-Scholes option pricing model. The Company's determination of the fair value of share-based payment awards are made as of their respective dates of grant using the option pricing model and that determination is affected by the Company's stock price as well as assumptions regarding the number of subjective variables. These variables include, but are not limited to, the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behavior. The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company's employee stock options have certain characteristics that are significantly different from traded options, the existing valuation models may not provide an accurate measure of the fair value of the Company's employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718-10 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of the option. Income Taxes The Company accounts for income taxes in accordance with ASC 740-10, "Accounting for Income Taxes." Under the asset and liability method of ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A reconciliation of income taxes computed at the federal statutory rate of 34% to the provision for income taxes is as follows for the six months ended December 31, 2009: December 31, June 30, 2009 2009 ------------ ----------- Tax benefit at statutory rates (34.00%) (34.00%) Difference resulting from: State taxes (5.83%) (5.83%) Changes in valuation allowance 39.83% 39.83% ============ =========== Total 0% 0% The valuation allowance increased by $477,300 during the six months ended December 31, 2009. No current provision for income taxes, other than California minimum taxes, is expected for the year ending June 30, 2010. No operating profits are expected to be generated in California, during the year ended June 30, 2010. Net deferred income taxes are as follows as of the following dates: December 31, June 30, 2009 2009 ----------- ----------- Deferred tax liabilities $ -- $ -- Deferred tax assets: Net operating losses $ 4,266,656 $ 4,187,793 Reserves and accruals 129,617 (268,821) ---------- ---------- Total deferred tax assets 4,396,272 3,918,972 Less valuation allowance (4,396,272) (3,918,972) ------------- ------------- $ --- $ --- ============= ============= The Company has approximately $12,500,000 in Federal and California State net operating loss carryforwards as of December 31, 2009, which, if not utilized, expires through 2029. The utilization of the net operating loss carryforwards might be limited due to restrictions imposed under federal and state laws upon a change in ownership. The amount of the limitation, if any, has not been determined at this time. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of the Company's continued losses and uncertainties surrounding the realization of the net operating loss carryforwards, management has determined that the realization of the deferred tax assets is questionable. Accordingly, the Company has recorded a valuation allowance equal to the net deferred tax asset balance as of December 31, 2009. Basic and Diluted Loss Per Share The Company has adopted ASC 260-10, "Earnings Per Share" (see Note 9). Basic loss per common share is computed based on the weighted average number of shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. Basic and diluted loss per share are the same as the effect of stock options and warrants on loss per share are anti-dilutive and thus not included in the diluted loss per share calculation. The impact of dilutive convertible debt and stock options and warrants would not have resulted in an increase in incremental shares for the six months ended December 31, 2009 and 2008. Recent Accounting Pronouncements In June 2009, the Financial Accounting Standards Board ("FASB") issued a "The FASB Accounting Standards Codification" and the Hierarchy of Generally Accepted Accounting Principles to establish the FASB Accounting Standards Codification" (also referred to as Codification or ASC) as the single source of authoritative nongovernmental U.S. generally accepted accounting principles ("GAAP"). The ASC is effective for interim and annual periods ending after September 15, 2009. The ASC did not change GAAP but reorganized existing US accounting and reporting standards issued by the FASB and other related private sector standard setters. The Company began to reference the ASC when referring to GAAP in its financial statements starting with the third quarter of 2009. Additionally, because the ASC does not change GAAP, the Company references the applicable ASC section for all periods presented (including periods before the authoritative release of ASC), except for the grandfathered guidance not included in the Codification. The change to ASC did not have an impact on the Company's financial position, results of operations, or cash flows. In December 2007, the FASB issued accounting guidance regarding business combinations. This accounting guidance, found under the Business Combinations Topic of the Codification, ASC 805, retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. ASC 805 expands the disclosures previously required, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. ASC 805 changes the accounting for acquisition related costs from being included as part of the purchase price of a business acquired to being expensed as incurred and will require the acquiring company to recognize contingent consideration arrangements at their acquisition date fair values, with subsequent changes in fair value generally to be reflected in earnings, as opposed to additional purchase price of the acquired business. As the Company has a history of growing its business through acquisitions, the Company anticipates that the adoption of FASB guidance included in the Business Combinations Topic of the Codification will have an impact on its results of operations in future periods, which impact depends on the size and the number of acquisitions it consummates in the future. According to the Transition and Open Effective Date Information of the ASC Business Combinations Topic, ASC 805-10-65, the acquirer shall record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to the acquired businesses. Certain of the Company's acquisitions consummated in prior years would be subject to changes in accounting for the changes in valuation allowances on deferred tax assets. After December 31, 2008, reductions of valuation allowances would reduce the income tax provision as opposed to goodwill. ASC 805, effective for all business combinations with an acquisition date in the first annual period following December 15, 2008, was adopted by the Company as of January 1, 2009. In December 2007, the FASB issued accounting guidance regarding non-controlling interests in consolidated financial statements. This guidance, found under the Consolidations Topic of the Codification, ASC 810-10-45, and effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, requires the recognition of a non-controlling interest as equity in the consolidated financial statements and separate from the parent's equity. The amount of net earnings attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. This guidance also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The Company adopted ASC 810-10-45 as of January 1, 2009. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. In April 2008, the FASB issued guidance on determining the useful life of intangible assets. The Implementation Guidance and Illustrations for Intangibles Other than Goodwill, ASC 350-30-55, discussed in the Intangibles - Goodwill and Other Topic of the Codification, amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value by allowing an entity to consider its own historical experience in renewing or extending the useful life of a recognized intangible asset. The new guidance became effective for fiscal years beginning after December 15, 2008 and was adopted by the Company as of January 1, 2009. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. In May 2009, the FASB issued accounting guidance regarding subsequent events. This guidance, found under the Subsequent Events Topic of the Codification, ASC 855, and effective for interim or annual periods ending after June 15, 2009, establishes general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The Company adopted this guidance as of June 30, 2009. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements In April 2009, the FASB issued new guidance regarding the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This new guidance, found under the Identifiable Assets and Liabilities, and Any Noncontrolling Interest Subtopic within the Business Combinations Topic of the Codification, ASC 805-20, - Requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with the Contingencies Topic of the Codification, ASC 450; - Eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB decided to require that entities include only the disclosures required by the Contingencies Topic of the Codification, ASC 450, and that those disclosures be included in the business combination footnote; - Requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with ASC 805-20. ASC 805-20 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted ASC 805-20 effective January 1, 2009 and it did not have any material impact on the Company's financial condition, results of operations, or cash flows. Note 3 - Comprehensive Income The Company reports certain changes in equity during a period in accordance with ASC 220-10 "Reporting Comprehensive Income". Accumulated Comprehensive Income, net includes foreign currency cumulative translation adjustments, net of tax. The components of comprehensive income for the six month periods ended December 31, 2009 and 2008 are as follows: Six Months Ended December 31, --------------------- 2009 2008 Net income ($231,948) ($815,227) Foreign currency cumulative translation adjustments (10,456) (76,100) ---------- ---------- Comprehensive income (loss) ($242,404) ($891,327) ========== =========== NOTE 4 - INTERNET PORTALS In October 2006 the Company has entered into an agreement to have an internet portal constructed and operated. Construction of the portal was completed in June 2007. The agreement specifies that the Company owns the site and will provide the content for the media portal. Revenues generated from the site will be shared on a 50/50 basis between the Company and the contractor. As of June 30, 2008 the Company has not paid the $71,250 construction fee and the contractor has not granted the Company access to the media portal. The Company expects to pay the outstanding debt and begin operations by March 2010. In April 2009 the Company began construction of its "Music on Demand" internet portal. This interactive portal supports the Company's program in promote music groups via contests and concerts. The program will work injunction with the Filmhook internet portal. In June 2009 the Company began construction on its "Blues in China" internet portal. This interactive portal supports the Company's program to introduce blues music throughout China via concerts, contests and blues cafes. An Chinese promoter has been engaged to assist with this project. Website development costs for new websites and internet portals is capitalized and amortized over the site's useful life (i.e., 36 months). Maintenance costs for existing websites is expensed in the period that the cost is incurred. NOTE 5 - PROGRAMMING RIGHTS Eclectic continues to produce its own programming. During the six-month periods ended December 31, 2009 and 2008, there were no production costs, respectively. At December 31, 2009 cumulative production costs totaled $82,775. OMNI has purchased various programming rights assets totaling $105,130 as of September 30, 2008. Accumulated amortization for these asset totaled $105,130 leaving a carry value of zero at December 31, 2009. For the six months ended December 31, 2009 and 2008, the Company recorded amortization expense of $337 and $1,000, respectively, related to its programming rights. NOTE 6 - FILM LIBRARY In January 2004, the Company acquired the name and film library of All Sports Television Network ("ASTN") in exchange for ASTN's outstanding payable to the Company of $79,200. The Company began amortizing this library over its estimated useful life of 10 years in April 2004. In February 2005, the Company purchased 200 film titles from Crawford Communications. The Company recorded a $3,900 increase in film library and a corresponding increase in programming rights payable. In September 2005, the Company acquired 550 film titles from Indie Vision Films, Inc. as payment for purchased advertising time. The Company recorded a $275,000 increase in film library and a corresponding increase in deferred revenues, as the advertisements will be broadcast over future months. The Company amortizes the film library titles over its estimated useful life of 10 years. In April 2007, the Company acquired an additional 15% interest in the Four Tops program for 300,000 shares of stock with average per share value of $0.70. The program is being amortized over its estimate useful life of 10 years. In June 2007, the Company acquired 460 film titles for 138,000 shares of stock valued at $0.90 per share. The titles are being amortized over its estimate useful life of 10 years. In January 2008, the Company acquired film titles from Liang Films for 50,000 shares at $0.51 per share. The Company recorded a $25,500 increase in film library and credit to common stock. The films are being amortized over the estimate useful life of 10 years. In February 2008, the Company acquired film titles from Indie Vision Films for 48,125 shares at $0.513 per share. The Company recorded a $24,700 increase in film library and credit to common stock. The films are being amortized over the estimate useful life of 10 years During the six-month periods ended December 31, 2009 and 2008, the Company recorded amortization expense of $46,248 and $54,168, respectively, related to its film library. NOTE 7 - COMMITMENTS AND CONTINGENCIES Lease Obligations As of December 31, 2009, the Company accrued $84,032 in arrears relating to an office lease. The Company has vacated the Wilshire Boulevard office and is currently utilizes an executive suite located in Westwood California when . the need arises. The Company expects to negotiate a payment settlement for the debt by March 31, 2010. As of December 31, 2009, the Company had capital lease obligations totaling $49,396 in arrears relating to its General Electric master equipment lease. The lease has been canceled. The Company expects to negotiate a payment settlement for the debt by March 31, 2010. Litigation In April 2006 OBN filed suit in California against Firestone Communications, its satellite uplink provider claiming the "force majeure" clause in the contract. Firestone filed suit against the Company in Texas for $141,000 claiming non-payment lease amount. The Company agreed to a stipulated judgment to repay the debt by December 31, 2007. Monthly cash payments of $15,000, $10,000 and $10,000 were made in accordance with the agreement in June, July and August of 2007, respectively. The $10,000 payments for September, October and November were not made. In September 2008 the Company agreed to a $62,500 payoff amount when a $50,000 payment was made followed by the $12,500 final payment. Thus, this debt has been fully paid. Indemnities and Guarantees The Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. The Company indemnifies its directors, officers, employees and agents to the maximum extent permitted under the laws of the State of Nevada. In connection with a certain facility lease and a transponder agreement, the Company has indemnified its lessor for certain claims arising from the use of the facilities and transponder capacity. The duration of the guarantees and indemnities varies, and in many cases is indefinite. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheet. NOTE 8 - NOTES PAYABLE At December 31, 2009, the Company had a $439,000 balance of notes payable to a third party. During the quarter ending September 30, 2009 the loan was converted to a no interest loan with no set maturity date, and is payable upon demand. A total of $98,659 of accrued interest was forgiven. An additional $8,500 of interest was paid with 50,000 shares of company stock valued at $0.17 per share. Duing the period the Company repaid the loan balance that was outstanding under a 10% promissory note from family members of the Company's officers totaling $3,500 by issuing 37,576 shares of its stock. The note had no set maturity date, and was payable upon demand. At the time of retirement the accrued interest on the note had totaled $2,888. Related party interest expense under these notes for the six months ended December 31, 2009 and 2008 was $5,586 and $11,174, respectively. During the period the Company repaid the loan balance that was outstanding under a $5,000 10% promissory note from a third party. The note by issuing 49,511 Shares of its stock. The note had no set maturity date and was payable upon demand. At the time of retirement the accrued interest on the note totaled $3,417. At December 31, 2009, the Company had a $266,530 balance of notes payable to a third party that bears interest at 0.5%. The note has no set maturity date, and is payable upon demand. As of December 31, 2009, the accrued interest on the note totaled $3,553. During the period the Company repaid the loan balance that was outstanding under a $30,000 loan a third party that had a 18% interest rate by issuing 525,000 shares of its stock. The principal and interest was due on October 2, 2009. At the time of retirement the accrued interest on the note totaled $900. Non-related party interest expense under these notes for the six months ended December 31, 2009 and 2008 was $1,566 and $250, respectively. NOTE 9 - STOCKHOLDERS' EQUITY Preferred Stock --------------- The Company has authorized 20,000,000 shares of preferred stock. As of December 31, 2009, the Company has not designated any series of preferred stock or entered into any agreements. Common Stock ------------ During the six month period ending December 31, 2009 the Company issued a total of 212,087 shares of stock (valued at $0.17 per share) to retire $36,055 of outstanding debt. During the six month period ending December 31, 2009 the Company issued a total of 677,087 shares of stock (valued at various rates per share) to raise $72,000 cash. During the six month period ending December 31, 2009 the Company issued a total of 150,000 shares of stock (valued at $0.17 per share) to pay $25,500 of consulting and broker services. During the six month period ending December 31, 2009 the Company issued a total of 29,412 shares of stock (valued at $0.17 per share) for $5,000 of subscription receivables. NOTE 10 - LOSS PER SHARE Basic and diluted loss per common share is computed as follows for the three months ended December 31, 2009 and 2008: Basic and diluted loss per common share is computed as follows: For the Six Months Ended ------------------------------- December 31, December 31, 2009 2008 ------------- ------------- Numerator for basic and diluted loss per common share: Net loss ($ 213,948) ($ 815,227) Denominator for basic and diluted loss per common share Weighted average common shares outstanding 20,228,268 11,603,632 Net loss available to common stockholders per common share ($0.01) ($0.07) NOTE 10 - SUBSEQUENT EVENTS This section contains subsequent events that have been evaluated from the December 31, 2009 balance sheet date through February 15, 2009 which is the date that this document was available to be filed. In Janaury 2010 the Company signed an agreement with 4G Holding, Ltd. for referral consulting and product representation services. The performance based agreement wherein the Company compensates 4G Holdings with a portion of the revenues generated from referrals. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OPERATIONS After years of losses, the Company reported its first profitable year with its fiscal year ending June 30, 2008 filing. Unfortunately, this milestone was reached at time when the Company was not trading on the OTCBB, having been delisted a year early because SEC regulations prevented it from submitting any filings until the acquisition audits related to two attempted Chinese acquisitions were completed. By the time the Company concluded that impediments in Chinese operations precluded the acquisition audits from ever being completed the Company was several periods behind its filings. Thus, the Company canceled the acquisition agreements and began the arduous task of catching up on its filings. With its September 30, 2009 filing the Company was once again current with it SEC filing. Shortly thereafter it began trading on the OTCBB again. Having reached the profitability milestone, the Board rewarded executives with a one time special stock bonus valued at $1,680,000. The shares are being held in a Non-Qualified Deferred Compensation Plan and will not be available to executives until May 2011. The award was expensed during the fiscal year ending June 30, 2009 and accounts for much of the loss reported that year. In addition, market conditions in its pork exporting operations were negatively affected by the news of the swine flu. Sales in this segment of the business dropped significantly. As a result the company was forced to launch a customer educational campaign and reduce it gross profit margin to under 20% during the quarter ending March 31, 2009 and June 30, 2009 in order to spur sales. Further, the Company expensed $981,458 as soilage charges as customer reduced orders. It took several months for customers to renew orders after learning that pork consumption was not the cause of the swine flu. Customers are beginning to place new orders and sales are increasing again. Currently the Company is seeking to increase its customer base and re-establish a higher gross profit margin. Thus, management believes that the reported loss for the fiscal year ending June 30, 2009 is not indicative of future profitability. During the fiscal year ending June 30, 2009, sales in the Company's commodity export segment were strong in the first two quarters with $6,432,560 and $5,811,803, respectively. However, with the swine flu out break sales declined to $4,458,993 and $1,606,336 for the third and forth quarters. Sales increased to $2,736,308 in the quarter ending September 30, 2009 and remained steady at $2,645,606 for the quarter ending December 31, 2009. Commodity export segment sales increases are expected to be significant in the coming quarters as the Company is expanding its product lines and services. For example, the exporting food products will be expanded to include beef and chicken. Further, we have acquired the rights to export an established Japanese cosmetics line. These and other products will be sold in Asian countries, such as China, Korea and Thailand, and in South American Countries, such as Columbia, Brazil and Argentina. Thus, the Company anticipates the most significant growth in its commodities export segment. During the fiscal year ending June 30, 2009 sales in the entertainment segment were only $437 as there was inadequate working capital to complete projects. However, growth in this segment is also expected to be significant during coming quarters. Several projects that were in the developmental stages in past years will come to fruition during the upcoming fiscal year. Among them is the Micheal Jackson impersonation China tour that is now scheduled for the summer of 2010. Several dates are scheduled in major cities. Another project is the "Blues in China" project where numerous "Blues" artists will tour China and Japan. The tour is scheduled to begin in the autumn of 2010 and an interactive Internet portal will solicit participation in "Blues" contests throughout China. Utimately, the project will lead to the opening of Blues cafes in selected cities. In addition, the Company has booked talent to participate in the 2010 World Exposition that will be held in Shanghai from May through October. Over 70,000,000 people are expected to attend the Expo. Further, the Company has scheduled a tour for professional basketball players to play games and conduct clinics in mid-sized cities in China during the Summer of 2010. These projects are being staged with our Chinese promotional partner who is sanctioned by Chinese government to stage the events under cultural expansion and exchange programs. With adequate working capital an advertising sales program will be implemented to suport our internet broadcasting operations and we will add another sports channel. Further, the Company's "Music on Demand" and "Filmhook" Internet portals will be online within the next few months. The Company's broadband broadcasting channels and internet portals provide very cost effective outlets for promoting any products and services that it will offer in the future. During the six month period ending December 31, 2009 there were no sales generated from the Company's "green" technology licences which were acquired last year. The intelligent Traffic System license provides for exclusive North American and nonexclusive rights elsewhere outside China for a period of seventy years. The proprietary plastics recycling gives exclusive North American and nonexclusive rights elsewhere outside China for a period of seventy years. Both licenses were appraised by an independent firm as part of the impairment analysis and were valued at $4,640,000 and $3,793,000, respectively. The Company has developed marketing plans for both licenses and will begin implementation during the coming quarters. Use of the intelligent traffic system technology will lead to reductions pollutants in the atmosphere. Use of the proprietary plastics recycling technology will allow certain types of plastics that were deemed "unrecyclable" to be diverted from landfills. The Company will establish a "green" technologies segment of operations once these programs are underway. In an effort to increase shareholder value, management continues to implement the Company's plan to grow through a combination of horizontal integration and geographic expansion. Management is actively seeking to acquire profitable businesses. We believe that our management team is well suited to enhance operations of acquired entities. Prior to creating OBN, the top executives were business consultants to well over 300 companies in numerous industries and countries, ranging from small private firms to Fortune 500 conglomerates, in the areas of operations management, productivity improvement, accounting, marketing and finance. The Company is an "incubator" that nutures and expands the operations of its acquired subsidaries. Management's goal is to increase shareholder value. The Company's efforts to fully implement its business plan of acquisition and subsidiary development. Financial risks will be minimized by geographical and industry diversification. In order to fund the remaining elements of its business plan, management will file an S-1 to register 25 million free trading shares that will be sold into the markets for cash. However, the revenues generated from the expanded operations may make the sale of all registered shares unnecessary. Going Concern At June 30, 2009 the report of our independent registered public accounting firm included a "going concern" statement. Several factors influenced the their decision to include this statement as because the criteria for inclusion of a "going concern" statement was have changed since out last annual filing. The auditor considers factors such as the state of the economy, trends in earnings, current profitability, aging of liabilities and aging of receivables, whereas in the past the criteria was a measure of the Company's ability to meet obligations and operating expenses for upcoming twelve month period. The Company recognizes that it must adequately address each of the above factors to have the "going concern" statement removed. Management's plans and progress toward achieving that end includes the following. 1) Economy. By all indications, except employment figures, the economy has begun to improve since the balance sheet of this report. This is evidence by increases in financial activity around the world. Management immediately initiated an educational and marketing plan upon learning that swine flu was not caused by eating pork products. News and scientific reports have helped our cause to educate customers and increase sales. We have seen positive results as customer sales have begun to increase. Sales for the quarter ending September 30, 2009 were more than twice those for the quarter ending June 30, 2009. Moreover, we have noted increased activity in our entertainment segment with several projects planned in China and Japan during this current fiscal year. Additionally, our continuing development of OBN's operations outside of the United States further insulates us from the economic problems one would experience when operating in a single region. 2) Profitability. The loss reported for the year ending June 30, 2009 is attributable to three major reasons. First, the Company made one time special stock bonus to executives in the amount of $1,680,000. The stock is being held in a non-qualified deferred compensation plan until May 2011. Secondly, the Company incurred $980,000 of pork product spoilage associated with the swine flu concerns. Thirdly, sales of pork products took precipitously decrease as result of the swine flu. Management believes that each of these is special one time events that are unlikely to occur in the future. 3) Trends. As indicated above, the Company reported a loss in four of last five year annual filings. The first year with positive earnings was last year and Management had every reason to believe that a profit would be posted for this year end at June 30, 2009 until the swine flu pandemic was announced. Management is still mindful of its increasing positive trend of sales and expects to see positive net income trends in future periods. 4) Aging of Liabilities. At June 30, 2009 the outstanding receivables liabilities totaled $3,695,933. Since that date Management has retired $111,252 of the debt by successfully negotiating agreements to convert the debt to stock equity. A significant portion of the debt was deferred revenue that has been recognized as revenue. A total of $404,000 was reduced from Commissions payable as the sales broker purchased the receivables. A total of $295,822 of accounts payable was paid during the six month period December 31, 2009. A total of $214,000 of debt has been on the books past the statute of limitations for collection and will be written off prior to June 30, 2010. The remaining debt represents accrued salaries, commission payables and related party loans. All of these parties have indicated that they will wait until the Company is more profitable before requesting payment. 5) Aging of Receivables. Currently there is $404,000 of receivables related to pork sales made in October 2008. This amount is the total of four shipments to a new customer that was referred to Management by one of our commissioned sales brokers. Management has finalized negotiations for the broker to purchase the receivable at the face amount in exchange for not having to return the paid commission. Thus, these receivables have been as of December 31, 2009. All remaining receivables are less than thiry (30) days old. In addition, to the above plans and actions that address the "going concern" issues, Management is expanding its product line and marketing activities. Plans to sale an established cosmetics line and additional food products are being implemented currently. Details of upcoming entertainment projects, plastics recycling projects and intelligent traffic system projects are discussed in the marketing section of this document. GENERAL OVERVIEW The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited statements of operations and cash flows for the six months ended December 31, 2009 and 2008, and the related notes thereto as well as the audited financial statements of the Company for the year ended June 30, 2009. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. The Company cautions readers that important facts and factors described in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document sometimes have affected, and in the future could affect, the Company's actual results, and could cause the Company's actual results during 2009-10 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. CRITICAL ACCOUNTING POLICIES Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. We evaluate the collectability of our receivables at least quarterly. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact our operating results. At December 31, 2009 the allowance for doubtful accounts was $150,000. Intangible Assets The Company has adopted Statement of Financial Accounting Standards ASC 350-10, "Goodwill and Other Intangible Assets." ASC 350-10 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather be tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. In addition, ASC 350-10 expands the disclosure requirements about goodwill and other intangible assets in the years subsequent to their acquisition. ASC 350-10 provides specific guidance for testing goodwill and intangible assets that will not be amortized (i.e., the Company's technology licenses) for impairment. The leased licenses are subject to impairment reviews by applying a fair-value-based test at the reporting unit level, which generally represents operations one level below the segments reported by the Company. An impairment loss will be recorded for any portion of the technology licenses and internet portal that is determined to be impaired. The Company performs impairment testing on its intangible assets at least annually. Based on its analysis, the Company's management believes that no impairment of the carrying value of its technology licenses or internet portal existed at December 31, 2009. There can be no assurance however, that market conditions will not change or demand for the Company's products and services will continue which could result in impairment of its intangible assets in the future. Impairment of Long-Lived Assets The Company's management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management. Based on uncertainties in the realizability of its "Four Tops Television Special" production and "One Last Ride" film, the Company wrote down the value of these assets, recording an impairment of $123,092 for the year ended June 30, 2006. In 2007, the Company wrote off the value of the KSSY broadcast license, recording an impairment of $130,000 for the fiscal year ended June 30, 2007. In June 2008, the Company wrote down the value of its Film Libraries, by recording a impairment of $165,000 for the year ending June 30, 2008. Based on its analysis, the Company believes that no additional impairment of the carrying value of its long-lived assets is required. There can be no assurance, however, that market conditions will not change which could result in additional impairment of its long-lived assets in the future. Revenue Recognition 1) Revenue from licensing TV programs and feature films can come from several sources. As projects are completed, we will have the option of airing the TV programs on our own Internet broadcasting channels and/or licensing the programs to be aired on other networks. Likewise, feature films can be licensed to foreign markets for distribution. Thus, among the revenue sources are other networks in the case of short form programming or foreign markets for feature films. A licensing agreement that specifies the license fee, availability dates and/or agreement duration is required for all projects licensed. Licensing fees are typically paid in advance of providing the project to the customer. Upon receipt of payment, deferred revenue is recorded. Revenue is recognized as the project is aired over the life of the agreement. We do not recognize revenue for projects that are not been completed, even if the licensing agreement for the project is signed. The revenue is recognized only after both the production product is completed and in accordance with the product availability dates in a signed agreement. 2) Revenue can also result from "revenue sharing" with program licensors. Some programs will be obtained by paying a licensing fee. Additionally, some licenses will be obtained via a cash-plus-barter arrangement, where we air the program for a contracted number of times and, in consideration for the programming, the licensor receives a specified number of advertising minutes. ASC 920-10, Financial Reporting by Broadcasters, sets forth accounting and reporting standards for the broadcast industry. Under a cash-plus-barter arrangement, we recognize a licensing asset at the estimated fair value of the programming received. The difference between the cash paid (obligation incurred) for the license and its fair value is recorded as a liability (deferred barter revenue), as the license is received before the broadcast of the licensor-provided commercials. As the licensor-provided commercials are aired, barter revenue is recognized ratably based on the recorded fair value of the barter transaction in relation to the total granted licensor-provided commercials. For cash purchases and revenue sharing, as rights are acquired, the Programs are recorded as assets and are amortized as the programs are aired over the network. For agreements with unlimited airing of a program the asset is amortized over the license period. 3) Revenue can be generated from advertising and paid programming. Advertising and paid programming revenue are recognized as the commercials/programs are aired. For small advertisers that must pay for services in advance, upon receipt of the payment, the signed contract and the tapes, deferred revenue is recorded. Deferred revenue is recognized as sales when the commercial is aired. Revenue From Meat Trading Operatons Revenue is recognized from meat trading operations after the order is received, the customer invoice is issued and the customer receives the product. Invoices issued prior to the customer receiving the product are recorded as deferred revenue. Deferred revenue is then recognized as revenue when the customer takes ownerhip of the product. Deferred Taxes We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. If actual results differ favorably from those estimates used, we may be able to realize a larger portion or all of our net deferred tax assets. Such realization could positively impact our operating results and cash flows from operating activities. RESULTS OF OPERATIONS Total revenues for the Company were $5,381,914 and $12,244,615 for the six-month periods ended December 31, 2009 and 2008, respectively. Revenues were generated from the Company's commodity trading subsidiary. Expenses incurred during the six-month period ended December 31, 2009 totaled $5,749,181 as compared to $13,340,524 for the six-month period ended December 31, 2008. Expenses decreased primarily due to less purchases of pork products as result of the swine flu. Other income for six-month period ended December 31, 2009 was $135,319, as compared to $280,682 of for the same period in 2008. Changes in interest expense and tax expense are insignificant. The net loss for the six-month period ended December 31, 2009 was $231,948 as compared to a net loss of $815,227 for the six month period ended December 31, 2008. Results of operations for the six-month periods ended December 31, 2009 and 2008 are detailed in the charts below. Included are the revenues, expenses, other income and net income for the three segments and corporate office. In addition, the results from accounting consolidation are presented as reconciling items. As of and for the six months ended December 31, 2009
Broadcasting Production Commodity Corporate Reconciling Total Operations Operations Items Assets $ 25,272 $194,753 $1,517,808 $5,150,664 ($150,757) $6,737,740 Liabilities (438,876) (416,448) (935,801) (1,160,389) 150,757 (2,280,756) Revenues, net of affiliate costs - - 5,381,521 - - 5,381,914 Costs & expenses* (17,868) (19,999) (5,407,856) (303,458) - (5,749,181) Other income (exp) - 23,833 36,660 74,826 - 135,319 Net income (loss) ($17,868) $ 3,834 $ 10,325 ($ 228,240) - (231,948) As of and for the six months ended December 31, 2008 Broadcasting Production Commodity Corporate Reconciling Total Operations Operations Trading Items Assets $ 61,461 $ 65,284 $4,250,226 $5,032,310 ($19,000) $9.390,281 Liabilities (435,062) (256,915) (1,449,098) (986,292) 19,000 (3,108,367) Revenues, net of affiliate costs 237 - 12,244,363 15 - 12,244,615 Costs & expenses* (28,613) (33,998) (11,313,467) (1,964,446) - (13,340,524) Other income (exp) - - 221,865 58,817 - 280,682 Net income (loss) ($28,376) ($33,998) $1,152,761 ($1,905,614) - (815,227)
*Expenses include operating expenses and cost of sales. Broadcasting Operations (Omni, ASTN and POD) Revenues generated in this segment of operations totaled $0 for the three months ended December 31, 2009 and 2008. Expenses were $17,868 for the six months ended December 31, 2009 as compared to $28,613 for the same period in 2008. The net loss for this segment of operations was $17,868 for the six months ended December 31, 2009 as compared to a net loss of $28,376 for the same period in 2008. Production Operations (Eclectic) Revenues generated in this segment of operations totaled $0 for the six months ended December 31, 2009 as compared to $0 during the same period in 2008. This segment incurred $19,999 of expense during the six month period ending December 31, 2009 as compared to $33,998 for the six months ending December 31, 2008. Expenses included $3,000 of accrued salaries during the 2009 period and $15,624 during the 2008 period. Other income was $23,833 as compared to $0 for the same period in 2008. The net income for this segment was $3,834 for the six months ended December 31, 2009, as compared to a loss of $33,998 for the period in 2008. Commodity Trading Operations Revenues generated in this segment of operations totaled $5,381,521 for the six months ended December 31, 2009 as compared to $12,244,363 during the same period in 2008. This segment incurred $5,407,856 of expense during the six months ending December 31, 2009 as compared to $11,313,467 for the same period in 2008. Expenses included $4,380,830 of pork product purchases, and $613,452 of shipping costs. Other income during the six month period ending December 31, 2009 and 2008 was $36,660 and $221,865, respectively. The net income for this segment was $10,325 for the six months ended December 31, 2009, as compared to $1,152,761 for the period in 2008. OBN Corporate Revenues generated from OBN corporate operations totaled $392 during the six months ended December 31, 2009 and $15 for the same period in 2008. The expenses incurred by OBN corporate were $303,458 for the six months ended December 31, 2009 as compared with $1,964,446 in 2008. Expenses for the six month period ending December 31, 2009 included $150,000 of accrued salary expenses. The other income for this period was $74,826 as compared to $58,817for the same period in 2008. The net loss for OBN corporate was $228,240 during the period ended December 31, 2009 as compared to a net loss of $1,905,614 for the same period in 2008. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2009 the Company's current liabilities of $2,800,756 exceeded current assets of $1,504,630 by $1,296,126. Approximately 30% of current liabilities represent accrued payroll for executives who have opted to defer taking salaries until additional funding is received. At the board of directors meeting held January 10, 2006, the outside directors approved a resolution allowing executives who have deferred their salaries to convert any or all amounts due that exceed $50,000. The conversion price was $1.00 per share, or market value of the common stock, whichever was greater. As a result, $200,000 of accrued salaries was converted into 200,000 shares in January 2006. In December 2006 another $727,369 of accrued salaries were converted into 1,091,051 shares. In March 2007 another $125,655 of accrued salaries were converted into 158,988 shares. In April 2007, a total of 675,000 shares valued at $1.20 each was issued to executives as special hardship for working without salaries for the past four years. In December 2008 a total of 5,600,000 shares valued at $0.30 each were issued to executives as bonus compensation These amounts are being held in Company's Non Qualified Deferred Compensation Plan. Management's believes that the acquisition of Kyodo USA in June 2008 could address any future liquidity issues because of its strong cash flow and cash balances in its bank accounts. In addition, the Company continues to raise additional capital through equity financing sources. However, no assurance can be given that additional capital will be available when required or upon terms acceptable to the Company. The Company intends to raise additional funds through a S-1 filing and anticipates implementing its business plan to expand its acquisition and development plans. The liquidity issues for each segment are addressed below. Entertainment Operations ------------------------ The liquidity issues that have plagued our broadcasting operations have been resolved by terminating our television broadcasts and satellite uplink. Thus, the Company no longer has expenses for television affiliate stations and satellite uplink. Instead, the Company has entered the Internet broadband broadcasting industry by signing an agreement with an established Internet network in February 2008. Under this agreement, the Company provides the programming content and channel scheduling while the Internet Network covers all related broadcasting costs, including costs for advertising sales and technical support. The Company receives 60% of all generated revenues. As a result our broadcast costs have been substantially reduced while our programs now reach a worldwide market. Liquidity for the television and film production operations remains essentially unchanged. There are several television production projects underway at various stages of development. These projects will be completed with funds from OBN operations. The Company will seek project investors for all future projects. Adopting this project funding practice will allow the Company to realize revenues from licensing agreements, syndication agreements and advertising without using much of its own funds. Again, the Company anticipates investing very little of OBN funds into new television and film projects, instead investor funds will be obtained. Plastics Recycling Operations ----------------------------- Liquidity is not a major concern for the plastic recycling operations that began as a result of acquiring the proprietary technology license in February 2008. The Company will not require cash until it begins its own plastic recycling operation using the exclusive technology license. In order to generate cash, the Company will sell raw materials to the Chinese facility from which the exclusive license agreement was acquired. Intelligent Traffic Systems Operations -------------------------------------- Liquidity is not a major concern for the intelligent traffic systems operations that began as a result of acquiring the proprietary technology license in February 2008. The Company is bidding on traffic system installation projects at municipalities throughout North American. As contracts are awarded, the Company will engage the Chinese company that owns the proprietary technology to supervise the installation. Little cash is required during the bidding process. In addition, some traffic systems units will be sold without installation responsibility, thus requiring no cash other than sales expenses. Commodity Trading Operations ----------------------------- There are no liquidity issues related to the commodity trading operations that were acquired in June 2008 as Kyodo USA has adequate cash flow. In fact, the Company anticipates that some of the excess cash from these operations will support other OBN operations via intercompany transfers. FORWARD LOOKING STATEMENTS Certain statements in this report are forward-looking statements within the meaning of the federal securities laws. Although the Company believes that the expectations reflected in its forward-looking statements are based on reasonable assumptions, there are risks and uncertainties that may cause actual results to differ materially from expectations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable Item 4. CONTROLS AND PROCEDURES An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as define in Rule 131-15(e) and 15d-15(c) under the Securities Exchange Act of 1934 is routinely conducted. (a) Evaluation of Disclosure Controls and Procedures. The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO) of the effectiveness of the Company's disclosure" controls and procedures. Based upon that evaluation, the CEO and CFO concluded that the design and operations of these disclosure controls and procedures were effective. Our disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company's (or the Company's consolidated subsidiaries) required to be included in the Company's periodic filing with the SEC, subject to the various limitations on the effectiveness set forth below. Information relating to the Company, required to be disclosed in SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to the Company's management, including our CEO and CFO, as appropriated to allow timely decisions regarding required disclosure. (b) Changes in Internal Control over Financial Reporting. There has been no change in the Company's internal control over financial reporting that occurred during the six month period ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information. None Item 6. Exhibits (31.1) Certification of Chief Executive Officer pursuant to Rule-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OBN HOLDINGS, INC (Registrant) Dated: March 24, 2010 By: /s/ Roger Neal Smith -------------------------- Roger Neal Smith Chief Executive Officer