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, 2013

¨ 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)

10F, No. 566 Jung Jeng Rd. Sindian City, New Taipei City 231, Taiwan, R.O.C.

(Address of principal executive offices)

(951) 279-6300

(Registrant’s telephone number, including area code)

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):

Check whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x 

As of September 30, 2013, there were 67,448,890 shares of common stock, par value $0.001, issued and outstanding.

COLORSTARS GROUP

FORM 10-Q

INDEX

PART I---FINANCIAL INFORMATION

Item 1. Financial Statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 (IN US$)

The accompanying notes are an integral part of the financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATION AND COMPREHENSIVE LOSS

(UNAUDITED)

(IN US$)

The accompanying notes are an integral part of the financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATION AND COMPREHENSIVE LOSS

(UNAUDITED)

(IN US$)

The accompanying notes are an integral part of the financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of the financial statements.

COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of the financial statements.

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”, “the Subsidiary”) 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 financial statements of ColorStars Group and Color Stars Inc. (“the Company”) 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 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 statement of the financial position, results of operations and cash flows for the nine months ended September 30, 2013 and 2012 have been included. 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, 2012. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2013.

Basis of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Note 2 - Recent Adopted Accounting Pronouncements

Income tax - In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 is a new accounting standard on the financial statement presentation of unrecognized tax benefits. The new standard provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new standard becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company is currently assessing the impacts of this new standard.

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Concentration of 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 2013, 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, 2013, such losses have been within management’s expectations.

For the nine months ended September 30, 2013, products sold to the Company’s largest customer, accounted for approximately 31.55%. Products purchased from the Company’s first two largest suppliers were accounted for approximately 83.50% of the total purchases.

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:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Accumulated Other Comprehensive loss

The following table includes the changes in accumulated other comprehensive (loss) by component under the ASC on “Comprehensive Income” for the three months and nine months ended September 30, 2013: 

Note 6 - Long Term Investments

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Long Term Investments (continued)

Anteya Technology Corp (Anteya) is a private company incorporated in Taiwan.  The equity interest held by the Company is 20%. 

Fin-Core Corporation (FCC) is a private company incorporated in Taiwan.  The number of shares of Fin-Core held by the Company is 57,143 shares, 5.19% at September 30, 2013 and December 31, 2012.  The Company recorded the investment in Fin-Core Corporation at cost, less accumulated impairments.

Phocos AG is a private company incorporated in Germany. On May 27, 2013, the Company sold all of its shares to third party. The total proceeds were EURO84,000 or USD105,840. The sale of the investment resulted in a USD52,159 gain.

The unaudited financial information of Anteya Technology Corp. as of September 30, 2013 and December 31, 2012 and for nine months ended September 30, 2013 and 2012 (in US dollars) are as follows:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Inventory

Inventories stated at the lower of cost or market value are as follows:

Note 8 - 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 2013 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 Company is no longer subject to income tax audits for the year 2013 (inclusive).

The income tax provision information is provided as follows:

Note 9 - Accrued Expenses

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Bank Short Term Debt

The Company signed revolving credit agreements with a lending institution. The interest rate on short-term borrowings outstanding as of September 30, 2013 is from 3.146% to 3.3% per annum, as of December 31, 2012, interest rate ranges from 3.15% to 3.166% per annum.  The short term debt is secured by:

1. personal guarantee from directors
2. the realty property of spouse of directors

Note 11 - Geographic Information

Product revenues for the nine months ended September 30, 2013 and 2012 are as follows:

Note 12 - Related Party Transactions

The Company has recorded expenses for the following related party transactions for nine months ended September 30, 2013 and 2012:

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Related Party Transactions (continued)

As of the balance sheet date indicated, the Company had the following liabilities recorded with respect to related party transactions:

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 a related party company Anteya Technology Corp. The Company owns 20% of the outstanding common stock of Anteya Technology Corp as of September 30, 2013.  All transactions were at market-based prices.

Note 13 - Commitments

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, 2013 are as follows:

Note 14 - Subsequent Events

The Company evaluated all events subsequent to September 30, 2013 through the date of the issuance of the financial statements and there are no other significant or material transactions to be reported except as set forth below:

The Company filed a Form S-1 with the SEC on October 21, 2013.  As of the date of the issuance of the financial statements, the Form S-1 is not effective and the Company is awaiting comments from the SEC.

The Company borrowed a short-term loan in sum of NTD12,000,000 (equivalent to USD405,000) from Bank SinoPac (located in Taiwan) on October 25, 2013, which is charged at 1.94% per annum and due to repay on April 24, 2014.  This short-term loan was used to repay the short term loan which was carried at $405,913 on the consolidated balance sheet as at September 30, 2013.

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.

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 5, 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.

On Aug. 16, 2012, Anteya increased share capital from 5,000,000 shares to 6,500,000 shares.  The Company subscribed the shares of 300,000 with nil value.  The holding shares of the securities is 1,300,000 with invested cost NTD $27,304,000 (USD $910,492) and percentage of the stock of the investee is 20%.  The percentage of shareholding is unchanged.

On Dec. 20, 2012, Fin-Core Corporation decreased its total shares from 7,000,000 to 500,000.  The Company’s invested cost and percentage of shareholding are unchanged after shares consolidation.  The number of shares of Fin-Core held by the Company is 57,143 shares.  On December 28, 2012, Fin-Core increased its total shares to 1,100,000 shares with new capital injection.  The Company decided to not participate new share subscription and kept the total shares of 57,143.  As a result, on December 31, 2012, the Company's equity interest in Fin-Core decreased to 5.19%.  As a result of the consolidation and subsequent increase in outstanding shares, Fin-Core is no longer our subsidiary.

(c)          Material Transactions During the Reporting Period. 

None.

Results of Operations

Comparison of Three Months Ended September 30, 2013 to Three Months Ended September 30, 2012

Net Sales.  Net  sales decreased to $345,430 for the three months ended September 30, 2013, from $753,672 for the three months ended September 30, 2012. The decrease in sales was caused primarily by decreased demand from European and U.S. markets and increased competition in the global market.

Cost of Goods Sold.  Cost of goods sold decreased to $233,208 for the three months ended September 30, 2013 from $477,779 for the three months ended September 30, 2012.  The decrease in cost of goods sold was primarily due to the decrease in overall sales.

Gross Profit.  Gross profit decreased to $112,222 for the three months ended September 30, 2013 from $275,893 for the three months ended September 30, 2012. The decrease in gross profit was primarily due to the decrease in overall sales.

Gross Profit Percentage.  Gross profit percentage decreased to 32.49% for the three months ended September 30, 2013 from 36.61% for the three months ended September 30, 2012.  The decrease in gross profit percentage was primarily due to price erosion in the global market due to increased competition.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses decreased to $177,146 for the three months ended September 30, 2013 from $281,915 for the three months ended September 30, 2012.   The decrease in selling, general and administrative expenses is primarily related to decrease in trade show and advertising activity.

Research and Development Expenses.  Research and development (R&D) expenses decreased to $17,021 for the three months ended September 30, 2013 from $21,625 for the three months ended September 30, 2012.  The decrease in R&D expenses is primarily due to completing the development and certification of the R5 and AMBY series of lamps in 2012.

Depreciation and Amortization.  Depreciation and amortization increased to $14,445 for the three months ended September 30, 2013 from $11,279 for the three months ended September 30, 2012.  The increase in depreciation and amortization expenses was primarily a result of depreciating equipment purchased in the interim period.

Interest Expense.  Interest expense increased to $3,492 for the three months ended September 30, 2013 from $2,708 for the three months ended September 30, 2012.  The increase in interest expense was primarily due to higher interest rates on short term loans.

Net Income (loss).  For the three months ended September 30, 2013, we incurred a net loss of $(133,275) as compared to a net loss of $(261,787) for the three months ended September 30, 2012.  The net loss was primarily a result of low overall sales.

Comparison of Nine Months Ended September 30, 2013 to Nine Months Ended September 30, 2012

Net Sales.  Net  sales decreased to $1,281,480 for the nine months ended September 30, 2013 from $2,166,012 for the nine months ended September 30, 2012.  The decrease in sales was caused primarily by decreased demand from European and U.S. markets and increased competition in the global market.

Cost of Goods Sold.  Cost of goods sold decreased to $850,494 for the nine months ended September 30, 2013 from $1,400,199 for the nine months ended September 30, 2012.  The decrease in cost of goods sold was primarily due to the decrease in overall sales.

Gross Profit.  Gross profit decreased to $430,986 for the nine months ended September 30, 2013 from $765,813 for the nine months ended September 30, 2012.  The decrease in gross profit was primarily due to decrease in overall sales.

Gross Profit Percentage.  Gross profit percentage decreased to 33.63% for the nine months ended September 30, 2013 from 35.36% for the nine months ended September 30, 2012.  The decrease in gross profit percentage was primarily due to price erosion in the global market due to increased competition.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses decreased to $645,237 for the nine months ended September 30, 2013 from $916,660 for the nine months ended September 30, 2012.  The decrease in selling, general and administrative expenses is primarily related to decrease in trade show and advertising activity.

Research and Development Expenses.  Research and development (R&D) expenses decreased to $48,182 for the nine months ended September 30, 2013 from $73,773 for the nine months ended September 30, 2012.  The decrease in R&D expenses was primarily due to completing the development and certification of the R5 and AMBY series of lamps in 2012.

Depreciation and Amortization.  Depreciation and amortization increased to $36,297 for the nine months ended September 30, 2013 from $34,118 for the nine months ended September 30, 2012.  The increase in depreciation and amortization expenses was primarily a result of depreciating equipment purchased in the interim period.

Interest Expense.  Interest expense increased to $9,574 for the nine months ended September 30, 2013 from $8,596 for the nine months ended September 30, 2012.  The increase in interest expense was primarily due to higher interest rates on short term loans.

Net Income (loss).  For the nine months ended September 30, 2013, we incurred a net loss of $(327,496) as compared to a net loss of $(472,491) for the nine months ended September 30, 2012.  The net loss was primarily a result of low overall sales.

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 recent 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, 2013, net cash used in operating activities was $(159,751) compared with $(56,186) used in operating activities for the three months ended September 30, 2012.  The cash flow used in operating activities in the three months ended September 30, 2013 was primarily the result of operating losses, inventories, and accounts payable.  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.

Net cash provided by (used in) investing activities.  During the three months ended September 30, 2013, net cash used in investing activities was $-0- compared with $(942) used in investing activities for the three months ended September 30, 2012.  The cash flow used in investing activities in the three months ended September 30, 2012 was primarily the result of added tooling for production.

Net cash provided by (used in) financing activities.  During the three months ended September 30, 2013, net cash provided by financing activities was $-0- compared with $(100,000) used in financing activities for the three months ended September 30, 2012.   The cash flow used in financing activities in the three months ended September 30, 2012 was primarily the result of repayment of a stockholder loan to the Company.

Net cash provided by (used in) operating activities.  During the nine months ended September 30, 2013, net cash used in operating activities was $(326,110) compared with $(359,770) used in operating activities for the nine months ended September 30, 2012.  The cash flow used in operating activities in the nine months ended September 30, 2013 was primarily the result of operating losses and accounts payable.  The cash flow used in operating activities in the nine months ended September 30, 2012 was primarily the result operating losses and accounts payable.

Net cash provided by (used in) investing activities.  During the nine months ended September 30, 2013, net cash provided by investing activities was $105,840 compared with $(56,608) used in investing activities for the nine months ended September 30, 2012.  The cash flow provided by investing activities in the nine months ended September 30, 2013 was primarily the result of proceeds from the sale of an investment.  The cash flow used in investing activities in the nine months ended September 30, 2012 was primarily the result of added tooling for production.

Net cash provided by (used in) financing activities.  During the nine months ended September 30, 2013, net cash provided by financing activities was $-0- compared with $(100,000) used in financing activities for the nine months ended September 30, 2012.   The cash flow used in financing activities in the nine months ended September 30, 2012 was primarily the result of repayment of a stockholder loan to the Company.

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.

As of September 30, 2013, we had outstanding short-term loans with Hua Nan Commercial Bank of Taiwan. We entered into three written, short-term loan agreements with this bank on June 25, 2013, July 29, 2013, and August 8, 2013, respectively.  The loans were secured by real property of Tsui-Ling Lee, spouse of Wei-Rur Chen, our president and CEO.  The terms of the loan agreements were as described in further detail in the chart below:

(1) NTD $3,000,000 is approximately USD $101,478 as of September 30, 2013.

(2) NTD $6,000,000 is approximately USD $202,957 as of September 30, 2013.

(3) The loan term stated herein initially expired on July 29, 2013 but was extended to January 29, 2014 with the interest rate remaining at 3.146% per annum.

(4) The loan term stated herein initially expired on August 8, 2013 but was extended to February 8, 2014 with the interest rate remaining at 3.146% per annum.

(5) The loan term stated herein initially expired on June 24, 2013 but was extended to December 24, 2013 and the interest rate decreased to 3.146% per annum.

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.

Recent Developments

On October 25, 2013, we closed on a short-term loan with Bank SinoPac with a maximum credit line of Seventeen Million New Taiwan Dollars (NTD $17,000,000).  The term of this loan is October 25, 2013 to April 24, 2014 and the interest rate is fixed at 1.94% per annum, with interest payments due on the 25th of each month.

Currently, we have a principal balance of Twelve Million New Taiwan Dollars (NTD $12,000,000).  This amount was used to pay in full the three short-term loans from Hua Nan Commercial Bank of Taiwan on October 25, 2013, and those credit lines were then closed without further cost to the Company.

As of September 30, 2013, NTD $17,000,000 is approximately USD $575,042 and NTD $12,000,000 is approximately USD $405,912.

Inflation

At this time, we do not believe that inflation and changes in price will have a material effect on operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Related Party Transactions

The Company leases office space from Mr. Wei-Rur Chen. The term for the lease agreement is from November 2010 to November 2015.  During the nine months ended September 30, 2013, the Company paid USD $36,327 in rent pursuant to this lease agreement.  Mr. Wei-Rur Chen owns one hundred percent (100%) interest in the lease agreement.  Mr. Wei-Rur Chen is the President, Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of the Company, as well as beneficial owner of more than five percent (5%) of the Company’s common stock.

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.

(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

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.