Attached files
file | filename |
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EX-10 - ColorStars Group | exhibit101-10qseptember30201.htm |
EX-32 - ColorStars Group | exhibit321-quarterlyreportse.htm |
EX-32 - ColorStars Group | exhibit322-quarterlyreportse.htm |
EX-31 - ColorStars Group | exhibit311-quarterlyreportse.htm |
EX-31 - ColorStars Group | exhibit312-quarterlyreportse.htm |
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 000-54107
COLORSTARS GROUP
(Exact name of registrant as specified in its charter)
Nevada |
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06-1766282 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
10F, No. 566 Jung Jeng Rd. Sindian District, New Taipei City 231 Taiwan, R.O.C.
(Address of principal executive offices)
(949) 336-6161
(Registrant’s telephone number, including area code)
10F, No. 566 Jung Jeng Rd. Sindian City, Taipei County 231 Taiwan, R.O.C.
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No ¨
Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ |
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Accelerated Filer ¨ |
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Non-accelerated Filer ¨ |
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Smaller Reporting Company x |
Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 12, 2012, there were 67,448,890 shares of common stock, par value $0.001, issued and outstanding.
COLORSTARS GROUP
FORM 10-Q
INDEX
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Page |
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PART I – FINANCIAL INFORMATION |
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Item 1 Financial Statements |
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3 |
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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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15 |
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Item 3 Quantitative and Qualitative Disclosures About Market Risk |
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20 |
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Item 4 Controls and Procedures |
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20 |
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PART II – OTHER INFORMATION |
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Item 1 Legal Proceedings |
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20 |
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Item 1A Risk Factors |
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20 |
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds |
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20 |
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Item 3 Defaults Upon Senior Securities |
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21 |
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Item 4 Mine Safety Disclosures |
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21 |
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Item 5 Other Information |
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21 |
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Item 6 Exhibits |
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21 |
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SIGNATURES |
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22 |
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2
PART I---FINANCIAL INFORMATION
Item 1. Financial Statements.
COLORSTARS GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN US$)
Assets |
September 30, 2012 |
December 31, 2011 |
Current assets: |
|
|
Cash and equivalents |
$449,096 |
$989,078 |
Accounts receivable, net of allowance for doubtful accounts of $54,620 at September 30, 2012 and $11,624 at December 31, 2011 |
191,553 |
299,050 |
Inventory |
877,686 |
821,100 |
Prepaid expenses and other current assets |
161,090 |
166,581 |
Total current assets |
1,679,425 |
2,275,809 |
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Equipment, net of accumulated depreciation |
181,436 |
152,069 |
Investments |
956,128 |
1,137,256 |
Guarantee deposits paid |
34,106 |
- |
Deferred income tax assets |
89,000 |
89,000 |
Intangible assets |
1,892 |
4,374 |
Total assets |
$2,941,987 |
$3,658,508 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Short term loan |
$409,277 |
$396,223 |
Accounts payable |
276,700 |
464,654 |
Accrued expenses |
28,105 |
49,075 |
Loan from stockholder |
- |
100,000 |
Receipts in advance and other current liabilities |
49,318 |
13,414 |
Total current liabilities |
763,400 |
1,023,366 |
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Stockholders’ equity |
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Common Stock –Par Value $0.001 67,448,890 shares issued and outstanding at September 30, 2012 and December 31, 2011 |
67,449 |
67,449 |
Additional paid in capital |
3,112,230 |
3,112,230 |
Accumulated other comprehensive income |
242,463 |
226,527 |
Accumulated deficit |
(1,243,555) |
(771,064) |
Total stockholders’ equity |
2,178,587 |
2,635,142 |
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Total liabilities and stockholders’ equity |
$2,941,987 |
$3,658,508 |
The accompanying notes are an integral part of the financial statements.
3
COLORSTARS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN US$)
|
Three months ended September 30, |
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2012 |
2011 |
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Net sales |
$753,672 |
$958,162 |
Cost of goods sold |
477,779 |
693,937 |
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Gross profit |
275,893 |
264,225 |
Operating expenses |
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Selling, general and administrative |
281,915 |
313,715 |
Research and development |
21,625 |
(5,708) |
Total operating expenses |
303,540 |
308,007 |
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Loss from operations |
(27,647) |
(43,782) |
Other income (expenses) |
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Interest expense (net) |
(2,708) |
(3,127) |
Share of investee’s operating results (net) |
(22,778) |
(18,203) |
Impairment of investment |
(201,698) |
- |
Gain (loss) on foreign exchange, net |
(9,377) |
57,078 |
Other, net |
969 |
1,236 |
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Loss income before income tax |
(263,239) |
(6,798) |
Income tax benefit (expense) |
1,452 |
(18,675) |
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Net loss |
(261,787) |
(25,473) |
Other comprehensive income (loss), net |
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Translation adjustment |
(24,302) |
(159,970) |
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Comprehensive (loss) |
$(286,089) |
$(185,443) |
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Net (loss) attributable to common stockholders |
$(261,787) |
$(25,473) |
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Comprehensive (loss ) attributable to common stockholders |
$(286,089) |
$(185,443) |
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Earnings per share attributable to common stockholders: |
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Basic and diluted per share |
$0.00 |
$0.00 |
Weighted average shares outstanding: |
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Basic and diluted |
67,448,890 |
67,448,890 |
The accompanying notes are an integral part of the financial statements.
4
COLORSTARS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN US$)
|
For nine months ended September 30, |
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2012 |
2011 |
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Net sales |
$2,166,012 |
$2,997,182 |
Cost of goods sold |
1,400,199 |
2,180,320 |
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Gross profit |
765,813 |
816,862 |
Operating expenses |
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Selling, general and administrative |
916,660 |
821,461 |
Research and development |
73,773 |
86,631 |
Total operating expenses |
990,433 |
908,092 |
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(Loss) from operations |
(224,620) |
(91,230) |
Other income (expenses) |
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Interest expense (net) |
(8,596) |
(8,882) |
Share of investee’s operating results (net) |
(18,643) |
- |
Impairment of investment |
(203,242) |
- |
Gain on disposal of investment |
- |
(62,744) |
Gain (loss) on foreign exchange, net |
(28,787) |
47,557 |
Other, net |
5,367 |
1,240 |
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(Loss) before income tax |
(478,521) |
(114,059) |
Income tax benefit (expense) |
6,030 |
(18,656) |
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Net (loss) |
(472,491) |
(132,715) |
Other comprehensive income (loss), net |
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Translation adjustment |
15,936 |
(137,987) |
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Comprehensive income (loss) |
$(456,555) |
$(270,702) |
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Net (loss) attributable to common stockholders |
$(472,491) |
(132,715) |
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Comprehensive (loss) attributable to common stockholders |
$(456,555) |
(270,702) |
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Earnings per share attributable to common stockholders: |
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Basic and diluted per share |
$0.00 |
$0.00 |
Weighted average shares outstanding: |
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Basic and diluted |
67,448,890 |
67,448,890 |
The accompanying notes are an integral part of the financial statements.
5
COLORSTARS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN US$)
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For three months ended September 30, |
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Cash flows from operating activities |
2012 |
2011 |
Net (loss) |
$(261,787) |
$(25,473) |
Depreciation and amortization |
11,279 |
8,644 |
Provision for doubtful accounts |
35,931 |
7,096 |
Share of investment loss |
22,778 |
18,203 |
Impairment of investment |
201,698 |
- |
Changes in operating assets and liabilities: |
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Other assets |
(567) |
- |
Accounts receivable |
55,401 |
(139,761) |
Inventories |
50,702 |
60,770 |
Prepaid expenses and other current assets |
(26,263) |
(2,412) |
Accounts payable |
(143,529) |
(58,153) |
Accrued expenses |
(2,418) |
(17,802) |
Receipts in advance and other current liabilities |
589 |
(24,239) |
Cash flows (used in) operating activities |
(56,186) |
(173,127) |
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Cash flows from investing activities |
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Addition to fixed assets |
(942) |
(64,593) |
Cash flow (used in) investing activities |
(942) |
(64,593) |
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Cash flows from financing activities |
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Loan from/ (repayment to) stockholder |
(100,000) |
100,000 |
Cash flow (used in) provided from financing activities |
(100,000) |
100,000 |
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Effect of exchange rate changes on cash and cash equivalents |
(8,190) |
(58,280) |
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Net (decrease) in cash and cash equivalents |
(165,318) |
(196,000) |
Beginning cash and cash equivalents |
614,414 |
1,374,520 |
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Ending cash and cash equivalents |
$449,096 |
$1,178,520 |
Supplemental disclosure of cash flow information |
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Cash paid during the period for: |
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Interest |
$2,974 |
$3,127 |
Tax paid |
23,484 |
18,676 |
The accompanying notes are an integral part of the financial statements.
6
COLORSTARS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN US$)
|
For nine months ended September 30, |
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Cash flows from operating activities |
2012 |
2011 |
Net (loss) |
$(472,491) |
$(132,715) |
Depreciation and amortization |
34,118 |
20,867 |
Provision for doubtful accounts |
42,057 |
9,970 |
Share of investment loss |
18,643 |
62,744 |
Impairment of investment |
203,242 |
- |
Changes in operating assets and liabilities: |
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Other assets |
(34,106) |
- |
Accounts receivable |
65,442 |
(149,040) |
Inventories |
(56,586) |
(55,819) |
Prepaid expenses and other current assets |
12,931 |
193,726 |
Accounts payable |
(187,954) |
(6,365) |
Accrued expenses |
(20,970) |
(43,059) |
Receipts in advance and other current liabilities |
35,904 |
(7,721) |
Cash flows (used in) operating activities |
(359,770) |
(107,412) |
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Cash flows from investing activities |
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Addition to fixed assets |
(56,608) |
(124,200) |
Cash flow (used in) investing activities |
(56,608) |
(124,200) |
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Cash flows from financing activities |
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Loan from/ (repayment to) stockholder |
(100,000) |
100,000 |
Cash flow provided from (used in) financing activities |
(100,000) |
100,000 |
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Effect of exchange rate changes on cash and cash equivalents |
(23,604) |
(86,102) |
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Net (decrease) in cash and cash equivalents |
(539,982) |
(217,714) |
Beginning cash and cash equivalents |
989,078 |
1,396,234 |
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Ending cash and cash equivalents |
$449,096 |
$1,178,520 |
Supplemental disclosure of cash flow information |
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Cash paid during the period for: |
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Interest |
$8,893 |
$6,106 |
Tax paid |
23,484 |
23,146 |
The accompanying notes are an integral part of the financial statements.
7
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business and Basis of Presentation
Nature of Business – Circletronics Inc., now ColorStars Group (“the Company”), was incorporated in Canada on January 21, 2005. Circletronics Inc. was redomiciled to Nevada and its name changed to ColorStars Group on November 3, 2005. ColorStars Group owns 100% of the shares of ColorStars Inc.
Color Stars Inc. (Color Stars TW) was incorporated as a limited liability company in Taiwan, Republic of China in April 2003 and commenced its operations in May 2003. The Subsidiary is mainly engaged in manufacturing, designing and selling light-emitting diode and lighting equipment.
Basis of Presentation – The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete presentation of the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included in the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Note 2 - Recently Issued Accounting Pronouncements
Balance Sheet the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11 in December 2011, Balance sheet – Disclosures about Offsetting Assets and Liabilities. The new requirements state that entities must disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of the requirements includes derivatives, sales and repurchases agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The requirements are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not expect that the adoption will have a material effect on the consolidated financial statements.
Intangibles—Goodwill and Other in July 2012, the FASB issued ASU 2012-02 which intends to simplify how entities test indefinite-lived intangible assets other than goodwill for impairment. After an assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test. Otherwise, the quantitative test is optional. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial results.
8
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 –Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of accounts receivable, cash and cash equivalents. The Company’s cash and cash equivalents are maintained with high quality institutions, the compositions and maturities of which are regularly monitored by management. Through September 30, 2012, the Company had not experienced any losses on such deposits.
Accounts receivable include amounts due from customers primarily in the manufactory industry. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. The Company also maintains allowances for potential credit losses. In estimating the required allowances, the Company takes into consideration the overall quality and aging of the receivable portfolio, the existence of a limited amount of credit insurance and specifically identified customer risks. Through September 30, 2012, such losses have been within management’s expectations.
For the nine months ended September 30, 2012, products sold to the Company’s largest customer, accounted for approximately 8.11%. Products purchased from the Company’s first two largest suppliers were accounted for approximately 31.15% of the total purchases.
As of September 30, 2012, the largest three customers exceeded 54.40% of the total consolidated accounts receivable balance.
Note 4 – Earnings per share
Basic net loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding during the period.
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
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Three months ended September 30, |
Nine months ended September 30, |
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2012 |
2011 |
2012 |
2011 |
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Comprehensive (loss) |
$(286,089) |
$(185,443) |
$(456,555) |
$(270,702) |
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Weighted average common stock outstanding – Basic and diluted |
67,448,890 |
67,448,890 |
67,448,890 |
67,448,890 |
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Earnings per share attributable to common stockholder Basic and diluted |
$.00 |
$.00 |
$.00 |
$.00 |
9
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Long term investment
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September 30, 2012 |
December 31, 2011 |
Equity method investment – Anteya Technology Corp |
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Carrying value of investment at the beginning |
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$799,131 |
$797,363 |
Interest in Anteya’s net (loss) income |
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(18,890) |
40,835 |
Exchange difference |
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34,895 |
(39,067) |
Carrying value at the end |
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815,136 |
799,131 |
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Equity method investment – Fin-Core Corporation |
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Carrying value of investment at the beginning |
|
196,087 |
481,891 |
Interest in Fin-Core’s net loss |
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- |
(135,200) |
Impairment for the year |
|
(114,884) |
(132,799) |
Exchange difference |
|
6,108 |
(17,805) |
Carrying value at the end |
|
87,311 |
196,087 |
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Cost-method investments – Phocos |
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At cost |
|
142,038 |
142,038 |
Impairment for the year |
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(88,357) |
- |
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53,681 |
142,038 |
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$956,128 |
$1,137,256 |
Anteya Technology Corp is a private company incorporated in Taiwan. The equity interest held by the Company is 20%. Accordingly, the Company adopted the equity method of accounting with respect to the investment in Anteya. There were 200,000 bonus shares issued in 2011 to the Company. The equity interest held by the Company remains unchanged.
On July 5, 2010, the Company’s board of directors approved the sale of 30.4% equity (or 456,000 shares) in Fin-Core Corporation (FCC) to a third party at the consideration of NTD13,680,000 (equivalent to USD429,000). After the disposal, the equity interest of the Company in FCC decreased from 50.4% to 20%.
On July 5, 2010, the Company’s boards of directors approved subscribing to FCC’s newly issued shares and maintaining the overall equity interest of 20%. The Company subscribed 500,000 shares at consideration of NTD$10,000,000 (equivalent of USD320,000). The Company adopted the equity method of accounting to the investment in FCC.
In October 2011, the associated company, Fin-Core Corporation, decided to increase its capital by issuing 3,000,000 new shares at par value of NTD10 per share. The Company was entitled to subscribe for up to 600,000 shares for NTD6,000,000. However the Company chose not to participate in the subscription of any newly issued shares of Fin-Core. As a result, on November 4, 2011 the Company’s equity interest in Fin-Core decreased to 11.43% from 20% after issuance of 3,000,000 new shares. The Company recorded the investment in Fin-Core Corporation at cost on the date when the Company ceased to have significant influence over the investee.
Phocos AG is a private company incorporated in Germany. The equity interest held by the Company is 2.38%.
10
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Long term investment (continued)
The unaudited financial information of Anteya Technology Corp. as of September 30, 2012 and December 31, 2011 and for nine months ended September 30, 2012 and 2011 (in US dollars) are as follows:
Balance sheet |
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September 30, 2012 |
December 31, 2011 |
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Current assets |
|
$4,267,667 |
$4,671,187 |
Non-current assets |
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1,071,424 |
1,101,058 |
Total assets |
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5,339,091 |
5,772,245 |
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Current liabilities |
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2,269,569 |
2,437,814 |
Non-current liabilities |
|
853,258 |
1,097,420 |
Stockholders’ equity |
|
2,216,264 |
2,237,011 |
Total stockholders’ equity and liabilities |
|
$5,339,091 |
$5,772,245 |
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Nine months ended September 30, |
|
Statement of operation |
|
2012 |
2011 |
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Net sale |
|
$3,756,783 |
$4,570,963 |
Cost of goods sold |
|
(2,912,419) |
(3,479,777) |
Gross profit |
|
844,364 |
1,091,186 |
Operating and non-operating expenses |
|
(934,520) |
(862,060) |
Net profit (loss) |
|
$(90,156) |
$229,126 |
Note 6 – Inventory
Inventories stated at the lower of cost or market value are as follows:
|
|
September 30, 2012 |
December 31, 2011 |
|
|
|
|
Finished goods |
|
$877,686 |
$821,100 |
11
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Income taxes
The Company is subject to U.S. federal income tax as well as income tax in states and foreign jurisdictions. For the major taxing jurisdictions, the tax years 2006 through 2011 remain open for state and federal examination. The Company believes assessments, if any, would be immaterial to its consolidated financial statements. With respect to the foreign jurisdiction, the local tax authority has assessed the Company’s business income tax return for the year 2011 (inclusive).
The income tax provision information is provided as follows:
|
Three months ended September 30, |
Nine months ended September 30, |
||
|
2012 |
2011 |
2012 |
2011 |
Component of income (loss) before income taxes: |
|
|
|
|
United States |
$(143,185) |
$(95,896) |
$(255,984) |
$(201,746) |
Foreign |
(120,054) |
89,098 |
(222,537) |
87,687 |
(Loss) before income taxes |
$(263,239) |
$(6,798) |
$(478,521) |
$(114,059) |
|
|
|
|
|
Provision for income taxes |
|
|
|
|
Current |
|
|
|
|
U.S. federal |
- |
- |
- |
- |
State and local |
- |
- |
- |
- |
Foreign |
$1,452 |
$(18,675) |
$6,030 |
$(18,656) |
Income tax benefit (provision) |
$1,452 |
$(18,675) |
$6,030 |
$(18,656) |
Note 8 – Accrued expenses
|
September 30, 2012 |
December 31, 2011 |
|
|
|
Salaries and allowance |
$19,081 |
$19,987 |
Insurance |
7,610 |
8,150 |
Tax payable |
- |
11,040 |
Others |
1,414 |
9,898 |
|
$28,105 |
$49,075 |
12
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Bank short term debt
|
September 30, 2012 |
December 31, 2011 |
|
|
|
Bank loan payable to Taiwan banks |
$409,277 |
$396,223 |
The Company signed revolving credit agreements with a lending institution. The interest rate on short-term borrowings outstanding as of September 2012 ranges from 3.15% to 3.16% per annum, as of December 31, 2011, interest rate ranges from 2.946% to 3.175% per annum. The short term debt is secured by:
- personal guarantee from directors
- the realty property of spouse of a director
Note 10- Geographic Information
Product revenues for the three and nine months ended September 30, 2012 and 2011 are as follows:
|
Three months ended September 30, |
Nine months ended September 30, |
||
|
2012 |
2011 |
2012 |
2011 |
Customers based in: |
|
|
|
|
Europe |
$416,516 |
$406,109 |
$1,172,745 |
$1,615,628 |
Asia |
158,180 |
4,248 |
307,586 |
87,258 |
United States |
100,797 |
206,563 |
467,671 |
678,047 |
Others |
78,179 |
341,242 |
218,010 |
616,249 |
|
|
|
|
|
|
$753,672 |
$958,162 |
$2,166,012 |
$2,997,182 |
Note 11 – Related Party Transactions
The Company has recorded expenses for the following related party transactions for nine months ended September 30, 2012 and 2011:
|
Nine months ended September 30, |
|
|
2012 |
2011 |
|
|
|
Purchase from Anteya Technology Corp |
$916,532 |
$1,274,608 |
Purchase from Fin-Core Corporation |
- |
139,875 |
Rent paid to Mr. Wei-Rur Chen |
36,354 |
37,095 |
Sale to Anteya Technology Corp |
- |
1,072 |
Sale to Fin-Core Corporation |
- |
12,647 |
13
COLORSTARS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Related Party Transactions (continued)
As of the balance sheet date indicated, the Company had the following liabilities recorded with respect to related party transactions:
|
|
September 30, 2012 |
December 31, 2011 |
Liabilities: |
|
|
|
Anteya Technology Corp |
|
$188,425 |
$298,887 |
The Company leases office space from Mr. Wei-Rur Chen which the term for the agreement is from November 2010 to November 2015.
The Company conducted business with related party companies, Anteya Technology Corp and Fin-Core Corporation. The Company owns 20% and 11.43% of the outstanding common stock of Anteya Technology Corp and Fin-Core Corporation as of September 30, 2012. All transactions were at market-based prices.
The stockholder, Mr. Wei-Rur Chen, provided a personal loan of USD$100,000 to the company. The personal loan is unsecured, repayable on demand and interest bearing at applicable federal short-term rate in effect for each day on outstanding loan principal and unpaid accrued interest. The effective interest rate is 0.19% and the interest paid to Mr. Chen is $35 for three months ended September 30, 2012. On August 2012, the personal loan was paid in full.
Note 12 – Commitments
|
Nine months ended September 30, |
|
|
2012 |
2011 |
|
|
|
Rent expenses |
$92,709 |
$95,510 |
The company leases offices in Taiwan and in California, US under operating leases. Minimum future rental payments due under non-cancelable operating leases with remaining terms at September 30, 2012 are as follows:
|
2012 remaining 3 months |
26,995 |
|
|
2013 |
82,638 |
|
|
2014 |
49,113 |
|
|
2015 |
41,746 |
|
|
|
$200,492 |
|
Note 13– Subsequent Events
The Company evaluated all events subsequent to September 30, 2012 through the date of the issuance of the financial statements and there are no other significant or material transactions to be reported.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Forward Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes”, “project”, “expects”, “anticipates”, “estimates”, “intends”, “strategy”, “plan”, “may”, “will”, “would”, “will be”, “will continue”, “will likely result”, and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Overview
(a) Business Overview.
ColorStars Group (“we”, “us”, “our”, the “Company”) was initially incorporated in the Province of Ontario, Canada on January 21, 2005. On November 3, 2005, we converted to a Nevada corporation. We are a vertically integrated lighting company that develops light emitting diodes (“LED”) based lighting products for general consumer applications as well as LED lighting products for professional lighting installations. Our LED lighting application development activity ranges from LED packaging to optical lens and heat management, from retrofit LED lamps and bulbs to lighting fixtures designed for general and special lighting applications.
(b) Significant Business Transactions Overview.
On July 24, 2005, we entered into an acquisition agreement with ColorStars, Inc., a Taiwanese corporation (“ColorStars Taiwan”), pursuant to which, on February 14, 2006, the shareholders of ColorStars Taiwan were issued shares of our Company in exchange for their shares of ColorStars Taiwan. This resulted in ColorStars Taiwan becoming a wholly owned subsidiary of the Company. Specifically, for each share of common stock outstanding of ColorStars Taiwan (1,500,000 shares of ColorStars Taiwan were issued and outstanding at such time), 20 shares of our common stock were issued in exchange for each such share (the aggregate of 30,000,000 shares of our common stock).
On March 20, 2009, ColorStars Taiwan acquired 50.4% of the outstanding common shares of Fin-Core Corporation, a Taiwanese corporation (“Fin-Core”) for a cash consideration of US $468,262. This resulted in Fin-Core becoming a subsidiary of ours. The purchase price for the common shares of Fin-Core was determined through private negotiations between the parties and was not based upon any specific criteria of value. Fin-Core is principally engaged in the design and manufacturing of thermal management devices, the design and manufacturing of electrical and lighting devices and trade, and the import and export of electrical and lighting devices.
15
On July 7, 2010, ColorStars Taiwan sold 30.4% of its common shares of Fin-Core to Meiloon Industrial Co., Ltd., a publicly traded company on the Taiwan Stock Exchange, for a cash offering of US $434,000. As a result of this transaction, ColorStars Taiwan now owns only 20% of the outstanding common shares of Fin-Core.
On August 10, 2009, ColorStars Taiwan acquired a 51% equity interest in Jun Yee Industrial Co., Ltd., a Taiwanese corporation (“Jun Yee”) for a cash consideration of US $536,000. The purchase price for the equity interest in Jun Yee was determined through private negotiations between the parties and was not based upon any specific criteria of value. Upon acquiring the equity interest, Jun Yee became a subsidiary of ours. The principal activity of Jun Yee is the manufacturing of LED light.
On November 26, 2010, ColorStars Taiwan entered into two related stock purchase agreements whereby ColorStars Taiwan sold all of its shares of Jun Yee common stock to Mr. Ming-Chun Tung and Ms. Ming-Fong Tung. Pursuant to the stock purchase agreement entered into with Mr. Ming-Chun Tung, ColorStars Taiwan sold 265,000 shares of its Jun Yee common stock to Mr. Ming-Chun Tung at a price per share of NTD $23 (USD $0.76) for a total purchase price of NTD $6,095,000 (USD $200,427). Furthermore, pursuant to the stock purchase agreement entered into with Ms. Ming-Fong Tung, ColorStars Taiwan sold 500,000 shares of its Jun Yee common stock to Ms. Ming-Fong Tung at a price per share of NTD $23 (USD $0.76) for a total purchase price of NTD $11,500,000 (USD $378,165). As a result of the transactions consummated above, Jun Yee is no longer our subsidiary.
In October 2011, Fin-Core decided to increase its capital by issuing 3,000,000 new common shares at par value of NTD $10 per share. The Company was entitled to subscribe for up to 600,000 common shares for NTD $6,000,000. However, the Company chose not to participate in the subscription of any newly issued common shares of Fin-Core. As a result, on November 4, 2011, the Company’s equity interest in Fin-Core decreased to 11.43% from 20% after the issuance of 3,000,000 new common shares.
Results of Operations
Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2011
Net Sales. Net sales decreased to $753,672 for the three months ended September 30, 2012 from $958,162 for the three months ended September 30, 2011. The decrease in sales was caused primarily by a decrease in demand from the European market and more competition in the global market.
Cost of Goods Sold. Cost of goods sold decreased to $477,779 for the three months ended September 30, 2012 from $693,937 for the three months ended September 30, 2011. The decrease in cost of goods sold was due to a decrease in overall sales.
Gross Profit. Gross profit increased to $275,893 (36.61%) for the three months ended September 30, 2012 from $264,225 (27.58%) for the three months ended September 30, 2011. The increase in gross profit was due to the Company’s introduction of new product lines with higher gross profit.
Gross Profit Percentage. Gross profit percentage increased to 36.61% for the three months ended September 30, 2012 from 27.58% for the three months ended September 30, 2011. The increase in gross profit percentage was due to the Company launching new product lines with higher gross margin percentage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $281,915 for the three months ended September 30, 2012 from $313,715 for the three months ended September 30, 2011. The decrease in selling, general and administrative expenses is primarily related to a decrease in travel and advertisement expenses.
Research and Development Expenses. Research and development (R&D) expenses increased to $21,625 for the three months ended September 30, 2012 from $(5,708) for the three months ended September 30, 2011. The increase in R&D expenses is due to development and certification of new product lines.
16
Depreciation and Amortization. Depreciation and amortization increased to $11,279 for the three months ended September 30, 2012 from $8,644 for the three months ended September 30, 2011 as a result of an increase in tooling as fixed assets.
Interest Expense. Interest expense decreased to $2,708 for the three months ended September 30, 2012 compared with $3,127 for the three months ended September 30, 2011. The decrease in interest expense was due to the US dollar appreciating against Taiwan currency where most of the interest paid was in local Taiwan currency.
Net Income (loss). For the three months ended September 30, 2012, we incurred a net loss of $(286,089) as compared to a net loss of $(185,443) for the three months ended September 30, 2011. The net loss was primarily a result of an impairment of investment in Fin-Core and the operating results of Anteya.
Comparison of Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2011
Net Sales. Net sales decreased to $2,166,012 for the nine months ended September 30, 2012 from $2,997,182 for the nine months ended September 30, 2011. The decrease in net sales was caused primarily by a decrease of sales in the European market due to less demand and more competitors.
Cost of Goods Sold. Cost of goods sold decreased to $1,400,199 for the nine months ended September 30, 2012 from $2,180,320 for the nine months ended September 30, 2011. The decrease in cost of goods sold was due to a decrease of overall sales.
Gross Profit. Gross profit decreased to $765,813 (35.36%) for the nine months ended September 30, 2012 from $816,862 (27.25%) for the nine months ended September 30, 2011. The decrease in gross profit was due to a decrease of overall sales.
Gross Profit Percentage. Gross profit percentage increased to 35.36% for the nine months ended September 30, 2012 from 27.25% for the nine months ended September 30, 2011. The increase in gross profit percentage was due to the Company launching new product lines with higher gross profit percentage and a reduction of production costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $916,660 for the nine months ended September 30, 2012 from $816,862 for the nine months ended September 30, 2011. The increase in selling, general and administrative expenses is primarily related to increased expenses in international trade shows and exhibitions.
Research and Development Expenses. Research and development (R&D) expenses decreased to $73,773 for the nine months ended September 30, 2012 from $86,631 for the nine months ended September 30, 2011. The decrease in R&D expenses is due to a decrease of R&D personnel expenses.
Depreciation and Amortization. Depreciation and amortization increased to $34,118 for the nine months ended September 30, 2012 from $20,867 for the nine months ended September 30, 2011 as a result of an increase of tooling for production as fixed assets.
Interest Expense. Interest expense decreased to $8,596 for the nine months ended September 30, 2012 compared with $8,882 for the nine months ended September 30, 2011. The decrease in interest expense was due to the US dollar appreciating against Taiwan currency where most of the interest paid was in local Taiwan currency.
Net Income (loss). For the nine months ended September 30, 2012, we incurred a net loss of $(456,555) as compared to a net loss of $(270,702) for the nine months ended September 30, 2011. The net loss was primarily a result of operating losses and impairment of investments.
17
Financial Condition, Liquidity and Capital Resources
Our revenues are primarily derived from the sale of LED devices and systems. Although our financial results are mainly dependent on sales, general and administrative, compensation and other operating expenses, our financial results have also been dependent on the level of market adoption of LED technology as well as general economic conditions.
Lighting products remained relatively static for 50 years until recently, when lighting became one of the last major markets to be transformed substantially by new technology. Because LED technology remains an emerging and expensive technology that has only recently become more economically viable, market adoption has been slow. Given the current economic downturn, liquidity has been constrained forcing institutions and individuals to substantially reduce capital spending to focus only on critical path expenditures. LED lighting products have been a discretionary rather than mandatory investment, and as a result, sales of our devices and systems have been negatively impacted. We believe that as the global economy grows and provides institutions and individuals with greater liquidity, sales of our devices and systems will increase.
Increased market awareness of the benefits of LED lighting, increasing energy prices and the social movement influencing individuals and institutions towards greater investment in energy-efficient products and services will have, we believe, an increasingly positive impact on our sales in the future. Additionally, we intend to utilize our strategic partnerships to help us reduce the component and production costs of our devices and systems in order to offer them at competitive prices. Further, we believe our ability to provide attractive financing options to our clients with respect to the purchase of our devices and systems will positively affect our sales.
Net cash provided by (used in) operating activities. During the three months ended September 30, 2012, net cash used in operating activities was $(56,186) compared with $(173,127) used in operating activities for the three months ended September 30, 2011. The cash flow used in operating activities in the three months ended September 30, 2012 was primarily the result of operating losses and accounts payable. The cash flow used in operating activities in the three months ended September 30, 2011 was primarily the result of account receivables, taxes payable, and receipt in advance and other current liabilities.
Net cash provided by (used in) investing activities. During the three months ended September 30, 2012, net cash used in investing activities was $(942) compared with $(64,593) used in investing activities for the three months ended September 30, 2011. The cash flow used in investing activities in the three months ended September 30, 2012 was primarily the result of added tooling for production. The cash flow used in investing activities in the three months ended September 30, 2011 was primarily the result of added tooling for production.
Net cash provided by (used in) financing activities. During the three months ended September 30, 2012, net cash used in financing activities was $(100,000) compared with $100,000 provided by financing activities for the three months ended September 30, 2011. The cash flow used in financing activities in the three months ended September 30, 2012 was primarily the result of a repayment to a stockholder loan. The cash flow provided by financing activities in the three months ended September 30, 2011 was primarily the result of a loan from a stockholder.
Net cash provided by (used in) operating activities. During the nine months ended September 30, 2012, net cash used in operating activities was $(359,770) compared with $(107,412) used in operating activities for the nine months ended September 30, 2011. The cash flow used in operating activities in the nine months ended September 30, 2012 was primarily the result of operating losses and accounts payable. The cash flow used in operating activities in the nine months ended September 30, 2011 was primarily the result of operating losses, accounts receivable, and accrued expenses.
Net cash provided by (used in) investing activities. During the nine months ended September 30, 2012, net cash used in investing activities was $(56,608) compared with $(124,200) used in investing activities for the nine months ended September 30, 2011. The cash flow used in investing activities in the nine months ended September 30, 2012 was primarily the result of added tooling for production. The cash flow used in investing activities in the nine months ended September 30, 2011 was primarily the result of the addition of fixed assets pertaining to manufacturing tooling.
18
Net cash provided by (used in) financing activities. During the nine months ended September 30, 2012, net cash used in financing activities was $(100,000) compared with $100,000 net cash provided by financing activities for the nine months ended September 30, 2011. The cash flow used in financing activities in the nine months ended September 30, 2012 was primarily the result of the repayment of a stockholder's loan to the Company. The cash flow provided by financing activities in the nine months ended September 30, 2011 was primarily the result of a personal loan granted to the Company from a stockholder.
We currently anticipate that our available cash in hand and cash resources from expected revenues will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months.
We currently have outstanding short-term loans with Hua Nan Commercial Bank of Taiwan. We entered into three written, short-term loan agreements with this bank on August 22, 2012, June 29, 2012, and July 30, 2012, respectively. The terms of the loan agreements are described in further detail in the chart below:
Lender |
Borrower |
Loan Amount |
Term |
Interest Rate |
Hua Nan Commercial Bank of Taiwan |
ColorStars, Inc. |
Three Million New Taiwan Dollars (NTD $3,000,000)(1) |
August 22, 2012 to February 22, 2013 (4) |
Fixed at 3.16% per annum |
Hua Nan Commercial Bank of Taiwan |
ColorStars, Inc. |
Six Million New Taiwan Dollars (NTD $6,000,000) (2) |
June 29, 2012 to December 24, 2012 (5) |
Fixed at 3.16% per annum |
Hua Nan Commercial Bank of Taiwan |
ColorStars, Inc. |
Three Million New Taiwan Dollars (NTD $3,000,000) (1) |
July 30, 2012 to January 29, 2013 (3) |
Fixed at 3.15% per annum. |
(1) NTD $3,000,000 is approximately USD $102,401
(2) NTD $6,000,000 is approximately USD $204,805
(3) The loan term stated herein initially expired on July 29, 2012 but was extended to January 29, 2013 and the interest rate increased to 3.15% per annum.
(4) The loan term stated herein initially expired on August 22, 2012 but was extended to February 22, 2013 and the interest rate increased to 3.16% per annum.
(5) The loan term stated herein initially expired on June 24, 2012 but was extended to December 24, 2012 and the interest rate decreased to 3.16% per annum.
Additionally, on July 20, 2011, our Chairman, Mr. Wei-Rur Chen, provided a personal loan to the Company in an amount equal to One Hundred Thousand and No/100 Dollars (US $100,000). We did not enter into a loan agreement with Mr. Chen. The personal loan is unsecured, repayable on demand and interest bearing at Applicable Federal Short-Term rates in effect from time to time.
Our continued existence is dependent upon several factors, including increased sales volumes, collection of existing receivables and the ability to achieve profitability from the sale of our products. In order to increase our cash flow, we are continuing our efforts to stimulate sales.
Inflation
At this time, we do not believe that inflation and changes in price will have a material effect on operations.
19
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As we are a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date.
Changes in internal control over financial reporting.
There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II---OTHER INFORMATION
Item 1. Legal Proceedings.
There are no legal proceedings that have occurred within the past five years concerning our directors or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one’s participation in the securities or banking industries, or a finding of securities or commodities law violations.
Item 1A. Risk Factors.
As we are a smaller reporting company, we are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
20
(c) Purchases by the Issuer and Affiliated Purchasers of Equity Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
INDEX TO EXHIBITS
Exhibit |
|
Description |
|
|
|
*2.1 |
|
Stock Purchase Agreement entered into between ColorStars, Inc. and Hsien-Chang Lu on March 20, 2009 |
|
|
|
*2.2 |
|
Stock Purchase Agreement entered into between ColorStars, Inc. and Tsui-Ling Lee on March 20, 2009 |
|
|
|
*2.3 |
|
Stock Purchase Agreement entered into between ColorStars, Inc. and Ya-Yun Cheng on March 20, 2009 |
|
|
|
*2.4 |
|
Stock Purchase Agreement entered into between ColorStars, Inc. and Wei-Rur Chen on March 20, 2009 |
|
|
|
*2.5 |
|
Stock Purchase Agreement entered into between ColorStars, Inc. and Ming-Chun Tung on August 5, 2009 |
|
|
|
*2.6 |
|
Stock Purchase Agreement entered into between ColorStars, Inc. and Ming-Fong Tung on August 5, 2009 |
|
|
|
*3.1 |
|
Articles of Incorporation |
|
|
|
*3.2 |
|
By-laws |
|
|
|
10.1 |
|
English Summary of Loan Agreement entered into between ColorStars, Inc. and Hua Nan Commercial Bank of Taiwan on August 22, 2012 |
|
|
|
*10.2 |
|
English Summary of Loan Agreement entered into between ColorStars, Inc. and Hua Nan Commercial Bank of Taiwan on June 29, 2012 |
|
|
|
*10.3 |
|
English Summary Loan Agreement entered into between ColorStars, Inc. and Hua Nan Commercial Bank of Taiwan on July 30, 2012 |
|
|
|
31.1 |
|
Certification of our Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended |
|
|
|
31.2 |
|
Certification of our Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended |
|
|
|
32.1 |
|
Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
|
|
|
21
* |
Included in previously filed reporting documents. |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
Dated: November 19, 2012 |
By: |
/s/ Wei-Rur Chen |
|
|
Wei-Rur Chen |
|
|
President, Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer), Chairman of the Board of Directors |