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, 2016

 

[  ] 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		06-1766282
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

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

(Address of principal executive offices)

 

(949) 336-6161

(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 [  ] No [X]

 

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 [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ]	Smaller reporting company	[X]
		Emerging growth	[  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

As of June 22, 2018, there were 102,274,515 shares of common stock, par value $0.001, issued and outstanding.

 

 

 

COLORSTARS GROUP

FORM 10-Q

INDEX

 

	Page
PART I – FINANCIAL INFORMATION
Item 1 Financial Statements	4
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3 Quantitative and Qualitative Disclosures About Market Risk	19
Item 4 Controls and Procedures	19
PART II – OTHER INFORMATION
Item 1 Legal Proceedings	20
Item 1A Risk Factors	20
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3 Defaults Upon Senior Securities	20
Item 4 Mine Safety Disclosures	20
Item 5 Other Information	20
Item 6 Exhibits	20
SIGNATURES	21

 

 

COLORSTARS GROUP

CONSOLIDATED BALANCE SHEETS

September 30, 2016(Unaudited) and December 31, 2015(Audited)

 

 

		September 30, 2016				December 31, 2015
Assets
Current assets:
Cash and equivalents		$	68,468			$	24,129
Accounts receivable, net of allowance for doubtful accounts of $159,880 at September 30, 2016 and $228,134 at December 31, 2015.			3,240				21,856
Prepaid expenses and other current assets			60,999				37,349
Total current assets			132,707				83,334
Equipment, net of accumulated depreciation			50,118				62,864
Other assets			10,659				15,005
Total assets		$	193,484			$	161,203
Liabilities and stockholders’ equity
Current liabilities:
Short term loan		$	542,751			$	517,600
Accounts payable			59,594				152,142
Advance from shareholder			70,604				20,000
Accrued expenses			12,900				12,997
Other current liabilities			8,680				9,060
Current portion of long term loan			72,410				-
Total current liabilities			766,939				711,799
Long term loan			98,972				-
Total liabilities		$	865,911			$	711,799
Commitments and contingencies
Stockholders’ equity
Common Stock –Par Value $0.001 67,448,890 shares issued and outstanding, 450,000,000 shares are authorized at September 30, 2016 and December 31, 2015			67,449				67,449
Additional paid in capital			3,112,230				3,112,230
Accumulated other comprehensive income			191,448				171,537
Accumulated deficit			(4,043,554	)			(3,901,812	)
Total stockholders’ equity			(672,427	)			(550,596	)
Total liabilities and stockholders’ equity		$	193,484			$	161,203

 

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

 

 

COLORSTARS GROUP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

		Three months ended September 30,
		2016				2015
Net sales		$	83,216			$	407,092
Cost of goods sold			60,509				279,763
Gross profit			22,707				127,329
Operating expenses
Selling, general and administrative			48,696				80,480
Bad debt Selling			-				4,194
Rent			11,279				11,264
Depreciation & Amortization			5,180				8,811
Research and development			1,417				2,638
Total operating expenses			66,572				107,387
Income (Loss) from operations			(43,865	)			19,942
Other expenses
Interest expense (net)			(4,712	)			(2,572	)
Income (Loss) on foreign exchange, net			(20,962	)			58,697
Income (Loss) before income tax			(69,539	)			76,067
Income tax provision			-				(8,085	)
Net Income (loss)			(69,539	)			67,982
Other comprehensive loss:
Foreign currency translation gain (loss)			8,762				(99,825	)
Comprehensive loss		$	(60,777	)		$	(31,843	)
Earnings per share attributable to common stockholders:
Basic and diluted per share		$	0.00			$	0.00
Weighted average shares outstanding:
Basic and diluted			67,448,890				67,448,890

 

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

 

 

COLORSTARS GROUP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

		Nine months ended September 30,
		2016				2015
Net sales		$	288,874			$	979,739
Cost of goods sold			201,435				779,607
Gross profit			87,439				200,132
Operating expenses
Selling, general and administrative			194,874				280,251
Bad debt Selling			-				6,761
Rent			33,250				48,315
Depreciation & Amortization			21,054				26,601
Research and development			1,392				3,379
Total operating expenses			250,570				365,307
Loss from operations			(163,131	)			(165,175	)
Other income (expenses)
Interest expense (net)			(9,224	)			(8,458	)
Income (Loss) on foreign exchange			(34,098	)			41,006
Bad debt recovery			64,711				-
Other, net			-				528
Loss before income tax			(141,742	)			(132,099	)
Income tax provision			-				799
Net loss			(141,742	)			(131,300	)
Other comprehensive loss:
Foreign currency translation gain (loss)			19,911				(46,276	)
Comprehensive loss		$	(121,831	)		$	(177,576	)
Earnings per share attributable to common stockholders:
Basic and diluted per share		$	0.00			$	0.00
Weighted average shares outstanding:
Basic and diluted			67,448,890				67,448,890

 

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

 

 

COLORSTARS GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

		For nine months ended September 30,
		2016				2015
Cash flows from operating activities
Net (loss)		$	(141,742	)		$	(131,300	)
Depreciation and amortization			21,054				26,601
Provision for doubtful accounts			-				6,761
Bad debt recovery			(64,711	)			-
Changes in operating assets and liabilities:
Accounts receivable			83,327				195,041
Inventories			-				84,951
Prepaid expenses and other current assets			(25,122	)			4,698
Accounts payable			(92,548	)			(185,784	)
Accrued expenses			(97	)			(8,046	)
Receipts in advance and other current liabilities			(380	)			75,388
Cash flows provided by (used for) operating activities			(220,219	)			68,310
Cash flows from investing activities
Addition to fixed assets			-				(10,093	)
Cash flows used for investing activities			-				(10,093	)
Cash flows from financing activities
Advance from shareholder			50,604				20,000
Increase (decrease) in long-term loans			171,382				-
Cash flows provided by financing activities			221,986				20,000
Effect of exchange rate changes on cash and cash equivalents			42,572				(54,111	)
Net increase in cash and cash equivalents			44,339				24,106
Beginning cash and cash equivalents			24,129				75,397
Ending cash and cash equivalents		$	68,468			$	99,503
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest		$	9,243			$	8,487
Tax paid		$	-			$	(3	)

 

The accompanying notes are an integral part of the consolidated 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 Company through its wholly owned Subsidiary was primarily engaged in manufacturing, designing and selling light-emitting diode and lighting equipment until 2018. The Company intends to change its business model into a holding company due to environmental changes at 2018 adversely affecting the LED lighting market. The Company’s business model commencing in 2018 is to acquire various operating companies. There is no assurance that the Company will be able to acquire any operating companies.

 

Basis of Presentation - The accompanying unaudited consolidated 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 statement of the financial position, results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015 have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2016. The balance sheet at December 31, 2015 included herein was derived from the consolidated financial statements included in the Company’s Annual Report on Form 10-K as of that date. Accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission (“SEC”) on April 14, 2016. Some reported amounts have been reclassified to conform to current-period presentation, although no net effect on the previously-reported financial information

 

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 - Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has negative working capital of $634,232 and an accumulated deficit of $4,043,554 as of September 30, 2016, and it reported net losses for past two years. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

The Company need to raise additional capital from external sources or from shareholder loans to support its operation. There is no assurance that the Company will be able to obtain funding with acceptable terms.

 

 

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 3 - Concentration of Risk

 

For the nine months ended September 30, 2016, products sold to largest customers accounted for approximately 61% of total revenue. Products purchased from three suppliers accounted for approximately 52%, 22% and 17% of the total purchases during the nine months ended September 30, 2016.

 

For the nine months ended September 30, 2015, products sold to largest customers accounted for approximately 57% of total revenue. Products purchased from two suppliers accounted for approximately 24% and 15% of the total purchases during the nine months ended September 30, 2015.

 

Note 4 - Long Term Investments

 

		September 30, 2016				December 31, 2015
Cost-method investment – Anteya Technology Corp
Carrying value of investment at the beginning		$	-			$	137,767
Exchange difference			-				(24,590	)
Loss on impairment of investments							(113,177	)
Carrying value at the end			-				-
Net value		$	-			$	-

 

The Company adopted the provisions of ASC 820, which require us to determine the fair value of financial assets and liabilities using a specified fair-value hierarchy. The objective of the fair-value measurement of our financial instruments is to reflect the hypothetical amounts at which we could sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 describes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1 value is based on observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 value is based on inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly.

 

Level 3 values are driven by models with one or more significant inputs or significant value drivers that are unobservable.

 

Anteya Technology Corp (Anteya) is a private company incorporated in Taiwan. The equity interest held by the Company is 13.68% on September 30, 2016.

 

The unaudited financial information of Anteya Technology Corp. as of September 30, 2016 and December 31, 2015 and for the nine months ended September 30, 2016 and 2015 (in US dollars) are as follows:

 

 

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4 - Long Term Investments (continued)

 

Anteya Technology ceased operations in April 2017 and, as a result, no future economic benefit was considered realizable by the Company and, as a result, the investment was fully impaired in the year ended December 31, 2015.

 

Fin-Core (holding roughly 57,000 shares) had no actual operating behavior and had deducted by full impairment.

 

Balance sheet		September 30, 2016				December 31, 2015
Current assets		$	3,268,396			$	3,849,571
Non-current assets			840,439				723,833
Total assets			4,108,835				4,573,404
Current liabilities			1,391,538				1,361,178
Non-current liabilities			1,562,978				1,590,979
Stockholders’ equity			1,154,319				1,621,247
Total stockholders’ equity and liabilities			4,108,835			$	4,573,404

 

		nine months ended September 30,
Statement of operation		2016				2015
Net sale		$	1,634,180			$	1,697,522
Cost of goods sold			(1,516,803	)			(1,512,362	)
Gross profit			117,377				185,160
Operating and non-operating expenses			(691,872	)			(788,668	)
Net profit (loss)		$	(574,495	)		$	(603,508	)

 

Note 5- Inventory

 

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

		September 30, 2016				December 31, 2015
Finished goods		$	768,595			$	742,003
Allowance for Inventory Valuation and Obsolescence Losses			(768,595	)			(742,003	)
Total		$	-			$	-

 

 

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 5- Inventory (continued)

 

The Company decided to shift in operational focus and that it was determined remaining inventory had little-to-no value, thus fully impaired at December 31, 2015.

 

Note 6 - 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(Taiwan), the tax years 2013 through 2015 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 2015 (inclusive). The income tax provision information is provided as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Component of income (loss) before income taxes:
United States		$	(2,128	)		$	13,068			$	(49,015	)		$	(249,344	)
Foreign			(67,411	)			(89,135	)			(92,727	)			117,245
Net loss		$	(69,539	)		$	(76,067	)		$	(141,742	)		$	(132,099	)
Provision for income taxes
Current
U.S. federal			-				-				-				-
State and local			-				-				-				-
Foreign		$	-			$	(8,085	)		$	-			$	(799	)
Income tax benefit(loss)		$	-			$	(8,085	)		$	-			$	(799	)

 

Note 7 - Bank Short Term Debt

 

		September 30, 2016				December 31, 2015
Short term loan		$	542,751			$	517,600

 

The Company signed revolving credit agreements with a lending institution. The interest rate on short-term borrowings outstanding as of September 30, 2016 is 1.66% per annum, as of December 31, 2015, 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 8 - Long Term Loan

 

The Company signed sales with buyback agreement of 5 million New Taiwan Dollars (US$154,750.85) with Chailease Finance Co., Ltd. in July 2016. The loan is amortized to 36 months and the monthly repayment amount is based on the remaining principal at the beginning of each 12 months. The interest rate is fixed at 6.37% per annum over the term of the agreement. For the first 12 months of the term the monthly repayment was $196,000 NTD (US$6,066.23) beginning in July 2016, and fixed for the next 12 months until June 2017. The monthly repayment was reduced to $168,000 NTD (US$5,199.63) beginning in July 2017, and fixed for the next 12 months until June 2018. However, the Company made an overall repayment of the remaining amounts due of $2,283,954 NTD (US$70,688.77) on Feb. 13, 2018 and terminated this loan agreement.

 

 

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 9 - Geographic Information

 

Product revenues for the nine months ended September 30, 2016 and 2015 are as follows:

 

		Three months ended September 30,								nine months ended September 30,
		2016				2015				2016				2015
Customers based in:
Europe		$	18,492			$	142,831			$	88,640			$	335,815
Asia			7,808				5,529				15,587				22,348
United States			56,916				255,457				180,838				618,248
Others			-				3,275				3,809				3,328
		$	83,216			$	407,092			$	288,874			$	979,739

 

Note 10 - Related Party Transactions

 

The Company has recorded expenses for the following related party transactions for nine months ended September 30, 2016 and 2015:

 

		Nine months ended September 30,
		2016				2015
Purchase from Anteya Technology Corp		$	60,947			$	80,533
Rent paid to Mr. Wei-Rur Chen			33,250				34,334

 

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

 

		September 30, 2016				December 31, 2015
Anteya Technology Corp
Due (to) from affiliate		$	4,937			$	712
Mr. Wei-Rur Chen
Payable to Shareholder		$	(70,604	)		$	(20,000	)

 

The Company leases office space from Mr. Wei-Rur Chen which the term for the agreement is from November 2015 to November 2020 with amount rent of $45,000. Rent payments were $33,250 and $34,334 for the nine months ended September 30, 2016 and 2015 respectively.

 

The Company conducted business with a related party company Anteya Technology Corp. The Company owns 13.68% of the outstanding common stock of Anteya Technology Corp as of September 30, 2016. All transactions were at market-based prices.

 

Mr. Wei-Rur Chen made various advances to the Company. The balance of advance was $70,604 as of September 30, 2016. The advances are non-interest bearing and due on demand.

 

 

COLORSTARS GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 11 - Commitments

 

The company leases offices in Taiwan under operating leases. Minimum future rental payments due under non-cancelable operating leases with remaining terms at September 30, 2016 are as follows:

 

		For the year ended December 31,
2016		$	11,494
2017			45,974
2018			45,974
		$	103,442

 

		Nine months ended September 30,
		2016				2015
Rent expenses		$	33,250			$	48,315

 

Note 12 - Subsequent Events

 

The Company evaluated all events subsequent to Sep 30, 2016 through the date of the issuance of the financial statements, there are no other significant or material transactions to be reported except as follows:

 

On June 14, 2016, the Public Company Accounting Oversight Board (“PCAOB”) issued an order, which among other things, revoked the PCAOB registration of Michael F. Albanese, CPA (“Albanese”), who had been the independent registered public accounting firm of the Company since December 29, 2005. As a result of that revocation, the Company could longer include the audit report and consent of Albanese in its filings and other reports with the Securities and Exchange Commission. In light of the foregoing actions by the PCAOB, the Company deemed that Albanese would no longer be engaged as the Company’s independent registered public accounting firm. On July 11, 2016, the Company engaged Partiz & Company, P.A. (“Paritz”) as the Company’s independent registered public accounting firm.

 

Effective as of June 15, 2017, the Board of Directors of the Company determined to dismiss Partiz as the Company’s independent registered public accounting firm. On June 15, 2017, the Company engaged Anton & Chia, LLP (“Anton & Chia”) as the Company’s independent registered public accounting firm.

 

On October 5, 2017, the Company completed the sale of a total of 12,825,625 shares of Company common stock to 13 investors at a price per share of US $0.0264 for a total of US $337,961.13 in proceeds to the Company.

 

On November 13, 2017, the Company completed the sale of a total of 10,000,000 shares of Company common stock to 11 investors at a price per share of US $0.033 for a total of US $330,000 in proceeds to the Company.

 

Effective as of January 2, 2018, the Company dismissed Anton & Chia, LLP (“Anton & Chia”) as the Company’s independent registered public accounting firm. Anton & Chia did not issue any reports on the audited financial statements of the Company. On January 2, 2018, the Company engaged Fruci & Associates II, PLLC (“Fruci”) as the Company’s independent registered public accounting firm.

 

On February 5, 2018, the Company completed the sale of a total of 12,000,000 shares of Company common stock to 23 investors at a price per share of US $0.034188 for a total of US $410,256.38 in proceeds to the Company.

 

On February 14, 2018, Ms. Chiu Mei-Ying resigned as a Director and the Secretary of the Company. Her resignations were not the result of any disagreements with the Company. Effective February 21, 2018, the remaining two directors on the Board of Directors of the Company appointed Mr. Wilson Chen to the Board of Directors to fill the vacancy created by the resignation of Ms. Chiu Mei-Ying.

 

 

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. The Company intends to change its business model into a holding company due to environmental changes in 2018 adversely affecting the LED lighting market. The Company’s business model commencing in 2018 is to acquire various operating companies. There is no assurance that the Company will be able to acquire any operating companies.

 

(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 $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 9,500,000 shares. As a result, the Company’s equity position in Anteya decreased from 20% to 13.68% as of June 30, 2016.

 

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.

 

(c) Material Transactions During the Reporting Period.

 

None.

 

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2016 to Three Months Ended September 30, 2015

 

Net Sales. Net sales decreased to $83,216 for the three months ended September 30, 2016, from $407,092 for the three months ended September 30, 2015. The decrease in sales was due to global competition and lack of new products launching this period.

 

Cost of Goods Sold. Cost of goods sold decreased to $60,509 for the three months ended September 30, 2016 from $279,763 for the three months ended September 30, 2015. The decrease in cost of goods sold was primarily due to the decrease in overall sales.

 

Gross Profit. Gross profit decreased to $22,707 for the three months ended September 30, 2016 from $127,329 for the three months ended September 30, 2015. The decrease in gross profit was primarily due to the decrease in overall sales.

 

Gross Profit Percentage. Gross profit percentage decreased to 27.28% for the three months ended September 30, 2016 from 31.27% for the three months ended September 30, 2015. The decrease in gross profit percentage was primarily due to decrease in profit margin due to global competition.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $48,696 for the three months ended September 30, 2016 from $80,480 for the three months ended September 30, 2015. The decrease in selling, general and administrative expenses is primarily related to closing the California sales office.

 

Research and Development Expenses. Research and development (R&D) expenses decreased to $1,417 for the three months ended September 30, 2016 as compared to $2,638 for the three months ended September 30, 2015. The decrease of research and development expenditure was due to overall lack of profitability.

 

Depreciation and Amortization. Depreciation and amortization decreased to $5,180 for the three months ended September 30, 2016 from $8,811 for the three months ended September 30, 2015. The decrease in depreciation and amortization was mainly due to many assets were already depreciated to their residual value and no more depreciattion would be taken after that.

 

Interest Expense. Interest expense increased to ($4,712) for the three months ended September 30, 2016 from ($2,572) for the three months ended September 30, 2015. The increase in interest expense was due to increase from the sale/buy-back loan agreement with Chailease Finance Co., Ltd. in July 2016 and foreign exchange fluctuation for the period.

 

Net Income (loss). For the three months ended September 30, 2016, we incurred a net loss of $(69,539) as compared to net income of $67,982 for the three months ended September 30, 2015. The net loss was primarily a result of decrease of total sales and reduction of overall operational expenses.

 

Comparison of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2015

 

Net Sales. Net sales decreased to $288,874 for the nine months ended September 30, 2016, from $979,739 for the nine months ended September 30, 2015. The decrease in sales was due to global competition and lack of new products launching this period.

 

Cost of Goods Sold. Cost of goods sold decreased to $201,435 for the nine months ended September 30, 2016 from $779,607 for the nine months ended September 30, 2015. The decrease in cost of goods sold was primarily due to the decrease in overall sales.

 

Gross Profit. Gross profit decreased to $87,439 for the nine months ended September 30, 2016 from $200,132 for the nine months ended September 30, 2015. The decrease in gross profit was primarily due to the decrease in overall sales.

 

 

Gross Profit Percentage. Gross profit percentage increased to 30.26% for the nine months ended September 30, 2016 from 20.42% for the nine months ended September 30, 2015. The increase in gross profit percentage was primarily due to high profit items movement during the period.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $194,874 for the nine months ended September 30, 2016 from $280,251 for the nine months ended September 30, 2015. The decrease in selling, general and administrative expenses is primarily related to closing the California sales office.

 

Research and Development Expenses. Research and development (R&D) expenses decreased to $1,392 for the nine months ended September 30, 2016 as compared to $3,379 for the nine months ended September 30, 2015. The lack of research and development expenditure was due to overall lack of profitability.

 

Depreciation and Amortization. Depreciation and amortization decreased to $21,054 for the nine months ended September 30, 2016 from $26,601 for the nine months ended September 30, 2015. The decrease in depreciation and amortization was mainly due to many assets were already depreciated to their residual value and no more depreciattion would be taken after that.

 

Interest Expense. Interest expense increased to ($9,224) for the nine months ended September 30, 2016 from ($8,458) for the nine months ended September 30, 2015. The increase in interest expense was due to increase in short-term loan and foreign exchange fluctuation for the period.

 

Net Income (loss). For the nine months ended September 30, 2016, we incurred a net loss of $(141,742) as compared to a net loss of $(131,300) for the nine months ended September 30, 2015.

 

Financial Condition, Liquidity and Capital Resources

 

Our revenues during the period ended September 30, 2016 were primarily derived from the sale of LED devices and systems. Although our financial results for the period ended September 30, 2016 were mainly dependent on sales, general and administrative, compensation and other operating expenses, our financial results as of such date were also 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, as of September 30, 2016, we intended 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 believed 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 nine months ended September 30, 2016, net cash used for operating activities was ($220,219) compared with $68,310 provided in operating activities for the nine months ended September 30, 2015. The cash flow used in operating activities in the nine months ended September 30, 2016 was primarily the result of decrease in bad debt recovery and prepaid expenses and other current asset. The cash flow provided in operating activities in the nine months ended September 30, 2015 was primarily the result of higher overall sales during that period.

 

 

Net cash provided by (used in) investing activities. During the nine months ended September 30, 2016, net cash used in investing activities was $0 compared with ($10,093) used in investing activities for the nine months ended September 30, 2015.

 

Net cash provided by (used in) financing activities. During the nine months ended September 30, 2016, net cash provided in financing activities was $221,986 compared with $20,000 provided in investing activities for the nine months ended September 30, 2015.

 

As of the quarter ending September 30, 2016, we anticipated that our available cash 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 the quarter ending September 30, 2016, we had an outstanding short-term loan with Bank SinoPac of Taiwan. We entered into one written, short-term loan agreements with this bank on February 24, 2016. The loan is secured by real property of Tsui-Ling Lee, spouse of Wei-Rur Chen, our president and CEO. The terms of the loan agreement is described in further detail in the chart below:

 

Lender		Borrower		Loan Amount		Term		Interest Rate
Bank SinoPac of Taiwan		ColorStars, Inc.		Seventeen Million New Taiwan Dollars (NTD $17,000,000)(1)		February 24, 2016 to August 23, 2016		Fixed at 1.80% per annum

 

(1) NTD $17,000,000 is approximately USD $542,751.

 

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

 

There are no recent developments to report.

 

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 Company leases office space from Mr. Wei-Rur Chen which the term for the agreement is from November 2015 to November 2020 with amount rent of $45,000. Rent payments were $33,250 and $48,315 for the nine months ended September 30, 2016 and 2015 respectively. 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 13.68% of the outstanding common stock of Anteya Technology Corp as of September 30, 2016. All transactions were at market-based prices.

 

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 not 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.

 

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 Bank SinoPac on October 25, 2013
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
**101.INS		XBRL Instance Document
**101.SCH		XBRL Taxonomy Extension Schema Document
**101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB		XBRL Taxonomy Extension Label Linkbase Document
**101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Included in previously filed reporting documents.

 

**

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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: June 26, 2018	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