Notes to Consolidated Financial Statements
December 31, 2006
(Restated)
1. ORGANIZATION AND NATURE OF BUSINESS
TRB Systems International Inc. ("the Company") is a holding company incorporated
in Delaware on April 11, 1997. The Company has established a new subsidiary,
Alenax (Tianjing) Bicycle Corp. ("Alenax") to conduct business in China. Alenax
was incorporated on February 22, 2005 under the laws of People's Republic of
China or PROC.
The Company was established to produce and market bicycle, fitness and
motorized two wheel transportation products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant account policies of TRB Systems International, Inc.,
is presented to assist in understanding the Company's financial statements.
The financial statements and the notes are the representation of the Company's
management, who are responsible for their integrity and objectivity. These
accounting policies conform to U.S. generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
Liquidity and Going Concern
As of December 31, 2006, the Company had cash and cash equivalents totaling
$ 9,131 as compared to $ 135,233 at December 31, 2005. As of December 31, 2006,
the Company had working capital of $(479,535) compared to a working capital of
$(258,166) at December 31, 2005.
The Company has suffered recurring losses from operations and has outstanding
judgments in the amount of $381,000, which according to management will not be
able to pay within one-year period due to its financial position. These
conditions indicate that the Company may be unable to continue as a going
concern.
The Company believes its available cash, cash equivalents, in combination with
additional license and distributor payments will be sufficient to meet its
anticipated capital requirements. Prior to the commercialization of its
products, substantial capital resources will be required to fund continuing
operations related to the Company's research, development, manufacturing and
business development activities. The Company believes there may be a number
of alternatives available to meet the continuing capital requirements to its
operations, such as public and private financings. Further, the Company placed
the first order of its products and believes that will generate new license
and distributor agreements. There can be no assurance that any of these
findings will be consummated in the time frames needed for continuing operations
or on terms favorable to the Company. If adequate funds in the future are not
available, the Company will be required to significantly curtail its operating
plans and may have to sell or license out significant portions of the Company's
technology or potential products, and possibly cease operations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of TRB
Systems International Inc., a non-operating holding company and Alenax (Tianjin)
Bicycle Corp., the operating company.
Basis of Presentation
The financial statements of TRB Systems International Inc. are prepared using
the accrual basis of accounting whereas revenues are recognized when earned and
expenses are recognized when incurred. This basis of accounting conforms to
generally accepted accounting principles in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates are used when accounting for certain items, such as
allowances for doubtful accounts, depreciation and amortization, income taxes
and contingencies. Actual results could differ from those estimates.
Cash and Cash equivalents
For the purpose of the statements of cash flows, the Company considers as cash
equivalents: cash on hand, cash in banks, time deposits and all highly liquid
short-term investments with maturity of three months or less.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is established through a charge to an
expense account. The Company reserves based on experience and the risk assessed
to each account.
Inventories
Inventories consist of bicycles and bicycle parts. Inventories are stated at the
lower of cost or market using FIFO (First In, First Out).
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is computed using the straight-line method for financial reporting
purposes at rates based on the following estimated useful lives.
Machinery and equipment 3-10
Furniture and fixtures 3-10
Engineering equipment 3-10
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For federal income tax purposes, depreciation is computed using the Modified
Accelerated Cost Recovery System method (MACRS) therefore temporary differences
exist. Expenditures for major renewals and betterment that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs as charged to expense as incurred.
Impairment of Long-Lived Assets
The Company has adopted FASB Statements No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If the total fair value is less than the carrying value
of the asset, a loss is recognized for the difference. Fair value is determined
based on market quotes, if available, or is based on valuation techniques.
Intangible Assets
Intangible assets subject to amortization include organization costs, loan
closing costs, and in-force leasehold costs. Organization costs and in-force
costs are being amortized using the interest method over the life of the
related loan.
Income Tax
Income taxes are accounted for under the asset and liability method. 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 and operating
loss and tax credits carry-forward. 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. 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 valuation allowance is established to reduce the deferred tax asset if it is
more likely than not the related tax benefits will not be realized in the
future.
Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements.
Revenue Recognition
License and distributor fees are earned and recognized according to the terms
of each agreement.
Research and Development
Research and product development costs are expensed as incurred. The Company
incurred expense of $14,710 for the 3-month period ended December 31, 2006 as
compared to $ -0- for the 3-month period ended December 31, 2005.
Net Operating Loss Carry-forward
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
for operating losses that are available to offset future taxable income.
License and Distributor Agreements
The Company's license and distributor agreements provide for compensation to be
paid during the first year of the agreements and eventual royalties on the sale
of the products. Terms of the agreements typically commence as of the date
executed and continue for a period of three years, renewable every three years.
The Company has license agreements in the following countries: Japan, India,
Nigeria & Benin, Canada, Ivory Coast, Tanzania, Brazil, Vietnam and Korea.
The Company has distributor agreements in the following states in the United
States: California in Orange County and Los Angeles County, Maryland, Delaware
and New York in Long Island County and Queens County.
Future Commitments Per Agreements
1st Yr 2nd Yr 3rd Yr
Countries States/Counties (Bikes) (Bikes) (Bikes) Total
-------------- --------------- ----------- -------------- ---------- ----------
Japan 40,000 80,000 200,000 320,000
India 50,000 90,000 200,000 340,000
Nigeria & Benin 5,000 9,000 10,000 24,000
Tanzania 1,000 2,000 3,000 6,000
Vietnam 4,000 7,000 10,000 21,000
Korea 13,000 31,000 62,000 106,000
Distributors
USA CA-Orange County 1,500 3,000 5,000 9,500
CA-LA County 3,000 5,000 7,000 15,000
Maryland & Delaware 1,000 2,000 2,840 5,840
New York
-Long Island/Queens 1,000 2,000 3,000 6,000
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Reclassification
Certain account reclassifications have been made to the financial statements of
the prior year in order to conform to classifications used in the current year.
These changes had no impact on previously stated financial statements of the
Company.
New Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 155, "Accounting for
Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133
and 140" ("SFAS No. 155"). The provisions of SFAS No. 155 will be effective for
all financial instruments acquired, issued, or subject to a re-measurement (new
basis) event occurring after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The fair value election provided for in
paragraph 4(c) of this Statement may also be applied upon adoption of this
Statement for hybrid financial instruments that had been bifurcated under
paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier
adoption is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued financial statements, including financial
statements for any interim period, for that fiscal year. SFAS No. 155 amends
FASB SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
140"). SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation
Issue No. D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets". This Statement: a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No.133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, and e) amends
SFAS No.140 to eliminate the prohibition on a qualifying special purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. The Company is
currently evaluating the impact of adopting SFAS No. 155.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140" ("SFAS No. 156"). An
entity shall adopt this Statement as of the beginning of its first fiscal year
that begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements, for any period
of that fiscal year. The effective date of this Statement is the date that an
entity adopts the requirements of this Statement. SFAS No. 156 amends SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for separately
recognized servicing assets and servicing liabilities. This Statement: a)
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into
a servicing contract in any of the following situations, b) requires all
separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable, c) permits an entity to
choose between two subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities, d) at its initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities under
SFAS No. 115, provided that the available-for-sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value, and e) requires separate presentation of servicing assets
and servicing liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. The Company is currently evaluating
the impact of adopting SFAS No. 156.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109".
FIN 48 requires that the Company recognize in the consolidated financial
statements the impact of a tax position that is more likely than not to be
sustained upon examination based on the technical merits of the position. The
provisions of FIN No. 48 will be effective for the Company beginning in the
March 2007 quarter, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company is
currently evaluating the impact of adopting FIN No. 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year,
including any financial statements for an interim period within that fiscal
year. The Company is currently evaluating the impact of adopting SFAS No. 157.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"). SFAS
No. 158 provides different effective dates for the recognition and related
disclosure provisions and for the required change to a fiscal year-end
measurement date. Also, the effective date of the recognition and disclosure
provisions differs for an employer that is an issuer of publicly traded equity
securities from one that is not. For purposes of this Statement, an employer
is deemed to have publicly traded equity securities if any of the following
conditions is met: a) the employer has issued equity securities that trade in
a public market, which may be either a stock exchange (domestic or foreign) or
an over-the-counter market, including securities quoted only locally or
regionally, b) the employer has made a filing with a regulatory agency in
preparation for the sale of any class of equity securities in a public market,
or c) the employer is controlled by an entity covered by (a) or (b). An
employer with publicly traded equity securities shall initially apply the
requirement to recognize the funded status of a benefit plan and the disclosure
requirements as of the end of the fiscal year ending after December 15, 2006.
Application as of the end of an earlier fiscal year is encouraged; however,
early application shall be for all of an employer's benefit plans. The
requirement to measure plan assets and benefit obligations as of the date of
the employer's fiscal year-end statement of financial position (paragraphs 5,
6, and 9) shall be effective for fiscal years ending after December 15, 2008,
and shall not be applied retrospectively. Earlier application is encouraged;
however, early application shall be for all of an employer's benefit plans. An
employer with publicly traded equity securities shall initially apply the
requirement to recognize the funded status of a benefit plan (paragraph 4) and
the disclosure requirements (paragraph 7) as of the end of the fiscal year
ending after December 15, 2006. The Company is currently evaluating the impact
of adopting SFAS No. 158.
3. ACCOUNTS RECEIVABLE
Accounts Receivable represents the balance due from the License and Distributor
agreements.
12/31/2006 12/31//2005
--------------- ----------------
Accounts Receivable $ 2,808,183 $ 2,344,369
Less: Allowance for Doubtful Accounts 375,000 375,000
--------------- ----------------
Net Accounts Receivable $ 2,433,183 $ 1,969,369
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4. PROPERTY AND EQUIPMENT
Fixed assets are summarized by classifications as follows:
12/31/2006 12/31/2005
--------------- ------------
Office Equipment $ 94,848 $ 6,725
Tools and Machinery 79,321 79,321
Automobile 34,000 34,000
Moldings 659,916 659,916
Booth for Show 137,470 137,470
Informational tapes and other
promotional materials 50,000 50,000
---------------- ------------
1,055,555 967,432
Less: Accumulated Depreciation (866,030) (852,195)
---------------- ------------
$ 165,943 $ 115,237
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5. RELATED PARTIES
ABL Properties Inc. (Byung Yim, President and CEO of TRB Systems International
Inc., is also the President and CEO of ABL Properties Inc.) wholly owns the
patents. These patents are exclusively licensed to TRB Systems International
Inc. for the worldwide manufacture and sale of the Alenax products. The timing,
methodology and general details of the manufacture and sales are left to TRBI,
as is the design and utilization of the goods employing the technology. The
rights, licensed to TRBI by ABL Properties Company, call for a payment of
$200,000 during the first year of active sales, 1% royalty on annual sales to
$10,000,000, 0.75% on sales over $10,000,000 but under $20,000,000, and 0.5%
on all sales thereafter. And all profits gleaned from international sales to an
aggregate limit of $3,325,000. ABL Properties and the Company agreed to defer
payment of the $200,000 until TRB Systems Inc has suitable cash flow to meet
its current needs.
Any cost incurred by TRB Systems International Inc. to maintain the patents and
that calls for reimbursement by ABL according to the agreement, will be used as
a credit toward the $200,000 license fees due to ABL on the first anniversary
following the commencement of active bicycle sales. As of December 31, 2006,
ABL Properties owes the Company $ 57,659.
During the year Byung Yim, CEO and director of the Company made loans to the
Company as the need for additional capital arose. As of December 31, 2006 the
outstanding amount due was $ 522,466.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable are amounts owed to a supplier. Accrued expenses also included
legal and consulting expenses incurred in the development of standardized
contacts, promotional materials and the filling and registration of patents. As
of December 31, 2006 the accounts payable and accrued expenses were $ 531,638
compared to $ 396,887 as of December 31, 2005.
7. NOTES AND INTEREST PAYABLE
Notes payable are unsecured notes to individuals. During the recent quarter, the
Company borrowed $ 27,126 from individuals. At of December 31, 2006 the Company
had notes and interest payable in the amount of $ 2, 214,650 as compared to
$2,026,001 at December 31, 2005. Interest expense attributable to notes payable
totaled $ 70,333 for the quarter ended at December 311, 2006 as compared to
$71,098 at December 31, 2005.
Interest rate on the notes ranged from 10% to 24% except for a short-term loan
for $12,931 that the Company paid 20% for two months.
8. CONVERTIBLE DEBT
The Company entered into three loan agreements, two for $50,000 on February 29,
2003 and one for $ 42,611 on January 17, 2003. The notes are convertible into
shares of the Company's common stock at a price of $1 per share at the lenders
option on December 31, 2004. The notes may be required to be repaid if the
value per share at the time of conversion falls below $1, at which time the
Company will have to repay the face amount of the notes plus (10%) ten percent.
As of December 31, 2006 the lenders have not exercised their option, management
is negotiating an extension on the notes.
9. PENDING SUITS AND JUDGMENT
As of December 31, 2006, there are outstanding judgments in the amount of
$381,000 against the Company. Management asserts that negotiations have been
initiated to have the amounts reduced but the outcome of such negotiations is
uncertain. Management believes the company is not in the financial position to
pay these amounts within one-year period and therefore classified the legal
judgments payable to long term.
The outstanding judgments consist of:
Creditors / Creditors' Attorneys 2006 2005
------------- -------------
David, Kessler & Associates, LLC $ 44,000 $ 44,000
Sawtooth Marketing Group 56,000 56,000
Cole, Schotz, Meiser,Forman & Leonard 89,000 89,000
Bernard & Koff 192,000 192,000
------------- ------------
Total $ 381,000 $ 381,000
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10. CAPITAL STOCK
The company is authorized to issue 30,000,000 shares at $0.001 par value share.
As of December 31, 2006 the amount of voting common shares issued and
outstanding are 22,783,002 and additional paid in capital of $ 3,106,489.
11. NET LOSS PER SHARE
Net loss per common share for the years ended December 31, 2006 and 2005 is
calculated using the weighted-average number of common shares outstanding and
common shares equivalents during the periods.
12. COMMITMENTS AND CONTINGENCIES
(1) Lease Commitments
The Company's future annual commitments under an operating lease for office
space is $12,000 per year for the year ending December 31, 2006.
Rental expense for the 3-month ended December 31, 2006 and 2005 are $6,396 and
$ 5,137 including other charges, respectively.
(2) Litigation
As per the Company, as of December 31, 2006, there are no material actions,
suits, proceedings or claims pending against or materially affecting the
Company, which if adversely determined, would have a material adverse effect on
the financial condition of TRB International Systems, Inc. other than the
judgments in note 9.