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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.

 

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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.

 

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COLORSTARS GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(IN US$)

 

 

 

 

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

 

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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 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 statement of the financial position, results of operations and cash flows for the three months ended March 31, 2014 and 2013 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, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2014.

 

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

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income - In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-02, which requires disclosure of significant amounts reclassified out of accumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance is effective for the Company beginning in the first quarter of 2013. The adoption of ASU 2013-02 only impacted disclosure requirements and did not have any effect on the operating results or the financial condition.

 

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COLORSTARS GROUP AND SUBSIDIARIES

 

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 6 - Accumulated Other Comprehensive loss

 

The components of accumulated other comprehensive loss were as follows:

 

 

Note 7 - Long Term Investment

 

 

 

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COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 7 - Long Term Investment (continued)

Anteya Technology Corp (Anteya) is a private company incorporated in Taiwan.  The equity interest held by the Company is 20%.  See also Note 15.

 

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 March 31, 2014 and December 31, 2013.  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 EURO $84,000 or USD $105,840. The sale of the investment resulted in a USD $52,159 gain.

 

The unaudited financial information of Anteya Technology Corp. as of March 31, 2014 and December 31, 2013 and for three months ended March 31, 2014 and 2013 (in US dollars) are as follows:

 

 

 

 

 

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COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 8 - Inventory

 

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

 

 

Note 9 - 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 2014 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 2014 (inclusive).

 

The income tax provision information is provided as follows:

 

 

Note 10 - Accrued Expenses

 

 

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COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 11 - Bank Short Term Debt

 

 

The Company signed revolving credit agreements with a lending institution. The interest rate on short-term borrowings outstanding as of March 31, 2014 is 1.94% per annum, as of December 31, 2013, interest rate is 1.94% per annum.  The short term debt is secured by:

 

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

 

Note 12 - Geographic Information

 

Product revenues for the three months ended March 31, 2014 and 2013 are as follows:

                

 

Note 13 - Related Party Transactions

 

The Company has recorded expenses for the following related party transactions for three months ended March 31, 2014 and 2013:

 

 

 

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COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 13 - 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 March 31, 2014.  All transactions were at market-based prices.

 

Note 14 - 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 March 31, 2014 are as follows:

 

 

Note 15 - Subsequent Events

 

The Company evaluated all events subsequent to March 31, 2014 through the date of the issuance of the financial statements, there are no other significant or material transactions to be reported, except below:

 

On April 11, 2014, Anteya Corporation issued an additional of 1,000,000 shares which increased its total outstanding shares from 6,500,000 shares to 7,500,000 shares.  The Company decided not to subscribe any of these newly issued shares.  As a result, the Company's equity in Anteya decreased to 17.33% from 20%, after the issuance of 1,000,000 new shares.

 

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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.

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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 $429,000.  As a result of this transaction, ColorStars Taiwan owned 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 shares at par value of NTD10 per share.  The Company was entitled to subscribe for up to 600,000 shares for NTD 6,000,000.  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. 

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 were unchanged after the share consolidation. The Company held 57,143 shares in Fin-Core after the consolidation. 

On December 28, 2012, Fin-Core increased its total shares to 1,100,000 shares with a new capital injection.  The Company decided to not participate in the new share subscription and kept its total shares at 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 deemed our subsidiary.

In 2004, ColorStars, Inc. based in Taiwan acquired 20% of the outstanding common shares of Anteya Technology Corporation.  Anteya provides the OEM service to us for the TRISTAR, EZSTAR, R4, LUXMAN, and HB series of product lines.  On August 16, 2012, Anteya increased its share capital from 5,000,000 shares to 6,500,000 shares, and we subscribed for 300,000 additional shares at par value. The Company now holds a total of 1,300,000 shares in Anteya representing a total investment of NTD $27,304,000 (USD $910,492).  The Company did not subscribe additional shares in Anteya when Anteya increased its outstanding shares from 6,500,000 shares to 7,500,000 shares. As a result, the Company’s equity position in Anteya decreased from 20% to 17.33%.

On October 13, 2008 we acquired 2,800 shares in a German company, Phocos AG. On May 27, 2013, the Company sold its 2,800 shares of Phocos AG to MUUS Horizen Fund 1, LP for $30 EU per share ($84,000 EU in total). The Company has no remaining stake in Phocos AG.

 

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(c)          Material Transactions During the Reporting Period.  

 

None.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2014to Three Months Ended March 31, 2013

 

Net Sales.  Net sales decreased to $212,331for the three months ended March 31, 2014, from $456,867 for the three months ended March 31, 2013. The decrease in sales was due to difficulty competing with lower priced products from Chinese manufacturers.

 

Cost of Goods Sold.  Cost of goods sold decreased to $157,677 for the three months ended March 31, 2014 from $283,725 for the three months ended March 31, 2013.  The decrease in cost of goods sold was primarily due to the decrease in overall sales.

 

Gross Profit.  Gross profit decreased to $54,654for the three months ended March 31, 2014 from $173,142 for the three months ended March 31, 2013. The decrease in gross profit was primarily due to the decrease in overall sales.

 

Gross Profit Percentage.  Gross profit percentage decreased to 25.74% for the three months ended March 31, 2014 from 37.90% for the three months ended March 31, 2013.  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 $153,548 for the three months ended March 31, 2014 from $215,514 for the three months ended March 31, 2013.   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 $0 for the three months ended March 31, 2014from $15,704 for the three months ended March 31, 2013.  The decrease in R&D expenses is primarily due to completing the development and certification of the R5 and AMBY series of lamps in 2013.

 

Depreciation and Amortization.  Depreciation and amortization decreased to $9,436 for the three months ended March 31, 2014from $11,303for the three months ended March 31, 2013.  The decrease in depreciation and amortization was mainly due to decreased depreciation from fixed assets from construction of the new show room and conference room in Taipei bead office established in 2012.

 

Interest Expense.  Interest expense decreased to $1,894 for the three months ended March 31, 2014 from $3,263 for the three months ended March 31, 2013.  The decrease in interest expense was due to a slight decrease in the interest rate for borrowing.

 

Net Income (loss).  For the three months ended March 31, 2014, we incurred a net loss of $(137,274) as compared to a net loss of $(136,490) for the three months ended March 31, 2013.  The net loss was primarily a result of challenges faced from Chinese competitors offering similar products at lower price points.

 

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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 March 31, 2014, net cash used in operating activities was $(80,817) compared with $(71,212) used in operating activities for the three months ended March 31, 2013.  The cash flow used in operating activities in the three months ended March 31, 2014 was primarily the result of the Company incurring a net loss, an increase of accounts receivables and a decrease in account payables.  The cash flow used in operating activities in the three months ended March 31, 2013 was primarily the result of the Company incurring a net loss, an increase of accounts receivables and a decrease in account payables.

 

Net cash provided by (used in) investing activities.  During the three months ended March 31, 2014, net cash used in investing activities was $-0- compared with $-0- used in investing activities for the three months ended March 31, 2013. 

 

Net cash provided by (used in) financing activities.  During the three months ended March 31, 2014, net cash provided by financing activities was $90,415 compared with $0 used in financing activities for the three months ended March 31, 2013.   The cash flow provided by financing activities in the three months ended March 31, 2014 was primarily the result of an increase of a short term loan of 3 million New Taiwan Dollars from Bank Sinopac of Taiwan.

 

                  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.

 

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We currently have outstanding short-term loans with Bank SinoPac of Taiwan. We entered into two written, short-term loan agreements with this bank on Oct. 25, 2013, and March 3, 2014, respectively. The loans are secured by real property of Tsui-Ling Lee, spouse of Wei-Rur Chen, our president and CEO. The terms of the loan agreements are described in further detail in the chart below:

 

 

(1)  NTD $12,000,000 is approximately USD $400,000.00. This loan was due on April 24, 2014 and was then extended to October 22, 2014.

(2)  NTD $3,000,000 is approximately USD $100,000.00

 

 

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 25^th of each month. This credit line was extended to October 22, 2014 on April 24, 2014.

 

               Currently, we have a total principal balance of Fifteen Million New Taiwan Dollars (NTD $15,000,000). 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 funding for operations.

 

               As of March 31, 2014, NTD $17,000,000 is approximately USD $566,666 and NTD $15,000,000 is approximately USD $500,000.

 

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 three months ended March 31, 2014, the Company paid USD $11,886 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.
 

The Company also 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 December 31, 2013.  All transactions were at market-based prices.

 

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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 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

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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

 

 

                                                                                      

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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.

 

 

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