UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2007
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-29429
API NANOTRONICS CORP.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 98-0200798 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
505 University Avenue, Suite 1400
Toronto Ontario
Canada M5G 1X3
(Address of Principal Executive Offices)
(416) 593-6543
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 and 15(d) of the Exchange Act during the past 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 is a large accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer’s class of common equity as of the latest practicable date:
72,010,322 shares of common stock with a par value of $0.001 per share at October 4, 2007
PART 1 – FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
Consolidated Balance Sheets
Aug 31, 2007 (Unaudited) | May 31, 2007 | |||||||
Assets | ||||||||
Current | ||||||||
Cash and cash equivalents | $ | 3,020,239 | $ | 3,277,468 | ||||
Marketable securities, at fair value | 476,607 | 605,011 | ||||||
Accounts receivable, less allowance for doubtful accounts of $63,571 and $73,249 at August 31, 2007 and May 31, 2007, respectively | 3,359,472 | 3,466,028 | ||||||
Inventories | 10,311,346 | 10,360,869 | ||||||
Deferred income taxes | 63,000 | 63,000 | ||||||
Prepaid expenses and other current assets | 499,626 | 495,152 | ||||||
| 17,730,290 | 18,267,528 | |||||||
Fixed assets, net | 9,543,568 | 6,522,012 | ||||||
Deferred income taxes | 468,014 | 803,141 | ||||||
Goodwill | 1,130,906 | 1,130,906 | ||||||
Intangible assets, net | 1,433,917 | 623,173 | ||||||
| $ | 30,306,695 | $ | 27,346,760 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Current | ||||||||
Short term borrowings | $ | 440,752 | $ | 635,276 | ||||
Accounts payable and accrued expenses | 2,807,401 | 3,178,987 | ||||||
Deferred income taxes | — | 242,000 | ||||||
Current portion of long-term debt | 389,587 | 404,711 | ||||||
Current portion of capital leases | 8,220 | 10,388 | ||||||
| 3,645,960 | 4,471,362 | |||||||
Deferred income taxes | 892,405 | 805,712 | ||||||
Long term debt, net of current portion | 67,197 | 67,197 | ||||||
Long term debt, related party | 4,057,863 | — | ||||||
Capital leases payable, net of current portion | 23,022 | 23,022 | ||||||
| 8,686,447 | 5,367,293 | |||||||
Shareholders’ equity | ||||||||
Common stock, ($0.001 par value, 200,000,000 authorized shares 64,994,772 and 64,994,772 shares issued and outstanding at August 31, 2007 and May 31, 2007, respectively) | 64,994 | 64,994 | ||||||
Special voting stock ($0.001 par value, 1 share authorized, issued and outstanding at August 31, 2007 and May 31, 2007) | — | — | ||||||
Additional paid-in capital | 24,550,327 | 24,196,980 | ||||||
Accumulated deficit | (4,164,152 | ) | (3,451,767 | ) | ||||
Accumulated other comprehensive income: | ||||||||
Currency translation adjustment | 775,737 | 784,982 | ||||||
Unrealized gain on marketable securities, net of tax | 393,342 | 384,278 | ||||||
Total accumulated other comprehensive income | 1,169,079 | 1,169,260 | ||||||
| 21,620,248 | 21,979,467 | |||||||
| $ | 30,306,695 | $ | 27,346,760 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Consolidated Statements of Operations
For the Three Months Ended Aug 31, 2007 (Unaudited) | For the Three Months Ended Aug 31, 2006 (Unaudited) | |||||||
Revenue, net | $ | 7,099,642 | $ | 3,982,343 | ||||
Cost of revenues | 5,106,103 | 3,072,708 | ||||||
Gross profit | 1,993,539 | 909,635 | ||||||
Operating expenses | ||||||||
General and administrative | 1,384,598 | 611,482 | ||||||
Research and development | 284,269 | — | ||||||
Business development | 42,776 | — | ||||||
Selling expenses | 595,007 | 253,875 | ||||||
| 2,306,650 | 865,357 | |||||||
Operating (loss) income | (313,111 | ) | 44,278 | |||||
Other (income) expenses | ||||||||
Interest expense, net | 44,242 | 16,301 | ||||||
(Gain) loss on foreign currency transactions | 53,443 | (5,001 | ) | |||||
| 97,685 | 11,300 | |||||||
Income (loss) before income taxes | (410,796 | ) | 32,978 | |||||
Provision for income taxes | 301,589 | 34,634 | ||||||
Net loss | $ | (712,385 | ) | $ | (1,656 | ) | ||
Loss per share – Basic | $ | (0.01 | ) | $ | (0.00 | ) | ||
Loss per share – Diluted | $ | (0.01 | ) | $ | (0.00 | ) | ||
Weighted average shares outstanding | ||||||||
Basic | 72,511,002 | 2,825,406 | ||||||
Diluted | 72,511,002 | 2,825,406 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Consolidated Statements of Changes in Shareholders’ Equity
Common stock-number of shares | Common stock amount | Additional paid-in capital | Accumulated Deficit | Accumulated other comprehensive income (loss) | Total shareholders’ equity | |||||||||||||||
Balance at May 31, 2007 (audited) | 64,994,772 | $ | 64,994 | $ | 24,196,980 | $ | (3,451,767 | ) | $ | 1,169,260 | $ | 21,979,467 | ||||||||
Stock based compensation expense | — | — | 353,347 | — | — | 353,347 | ||||||||||||||
Net loss for the period | — | — | — | (712,385 | ) | — | (712,385 | ) | ||||||||||||
Foreign currency translation adjustment | — | — | — | — | (9,245 | ) | (9,245 | ) | ||||||||||||
Unrealized gain(loss) on marketable securities- net of taxes | — | — | — | — | 9,064 | 9,064 | ||||||||||||||
Total comprehensive loss | (712,566 | ) | ||||||||||||||||||
Balance at August 31, 2007 (unaudited) | 64,994,772 | $ | 64,994 | $ | 24,550,327 | $ | (4,164,152 | ) | $ | 1,169,079 | $ | 21,620,248 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Consolidated Statements of Cash Flows
For the Three Months Ended Aug 31, | ||||||||
2007 (Unaudited) | 2006 (Unaudited) | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (712,385 | ) | $ | (1,656 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 201,653 | 188,744 | ||||||
Stock based compensation | 353,347 | — | ||||||
Deferred income taxes | 301,589 | — | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 134,406 | 160,221 | ||||||
Inventories | 63,907 | (457,057 | ) | |||||
Prepaid expenses and other current assets | (4,625 | ) | 53,239 | |||||
Accounts payable and accrued expenses | (386,165 | ) | (84,791 | ) | ||||
Deferred revenue | — | 108,624 | ||||||
Net cash (used) by operating activities | (48,273 | ) | (32,676 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of fixed assets | (33,839 | ) | (39,490 | ) | ||||
Asset acquisitions | (4,045,671 | ) | — | |||||
Net cash (used) by investing activities | (4,079,510 | ) | (39,490 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of common shares and share application | — | 60,000 | ||||||
Repurchase and retirement of common shares | — | (57,000 | ) | |||||
Short term borrowings advances (repayments), net | (196,389 | ) | 108,863 | |||||
Repayment of obligations – capital lease | (2,168 | ) | (11,014 | ) | ||||
Repayment of long term debt | (15,124 | ) | (28,093 | ) | ||||
Long-term debt, related party | 4,057,863 | — | ||||||
Net cash (used) provided by financing activities | 3,844,182 | 72,756 | ||||||
Effect of exchange rate on cash and cash equivalents | 26,372 | (725 | ) | |||||
Net decrease in cash and cash equivalents | (257,229 | ) | (135 | ) | ||||
Cash and cash equivalents, beginning of period | 3,277,468 | 946,680 | ||||||
Cash and cash equivalents, end of period | $ | 3,020,239 | $ | 946,545 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Notes to Consolidated Financial Statements
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the Commission) and include the results of API Nanotronics Corp. (“API Nanotronics”), formerly known as Rubincon Ventures, Inc., and API Electronics Group Corp., API Electronics, Inc., the National Hybrid Group (consisting of National Hybrid, Inc. and Pace Technology, Inc.), the Filtran Group (consisting of Filtran Limited and Filtran Inc.), TM Sytems II, Keytronics, Inc., and API Nanofabrication & Research Company, its wholly-owned subsidiaries (the “Subsidiaries”), which are collectively referred to as “the Company.” Accordingly, certain information and footnote disclosures required in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Statements are subject to possible adjustments in connection with the annual audit of the Company’s accounts for the year ended May 31, 2008. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s consolidated financial position as of August 31, 2007 and the results of its operations and cash flows for the three month period ended August 31, 2007. Results for the three months ended August 31, 2007 are not necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended May 31, 2007 included in the Company’s Form 10-KSB filed with the Commission on August 22, 2007.
The Company’s focus is the manufacture and design of high reliability semiconductor and microelectronics circuits for military, aerospace and commercial applications. The Company through acquisitions has expanded its manufacturing and design of electronic components to include filters, transformers, inductors, high-performance microcircuits, custom hybrid microcircuits and custom power supplies for land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation.
The creation of API Nanofabrication and Research Corp. (“API NRC”), and the subsequent acquisition of the assets of NanoOpto Corp., offers the Company with a unique opportunity to design and manufacture next generation products. API NRC’s material processing and fabrication capabilities span the full gamut of silicon wafer processing to the very latest electronic and optical fabrication technologies based in nanoscience and MEMS. This expands the Company’s abilities to better serve its current customers and to develop new electronic products. It also opens up possibilities for new business based on hybrid optics. These assets and facilities will also be the centerpiece of the Company’s research and development program.
On May 8, 2006, Rubincon Ventures Inc., as API Nanotronics was formerly known (“Rubincon”), entered into a combination agreement contemplating a Plan of Arrangement with API Electronics Group Corp. (“API”). Rubincon is a Delaware corporation and API is an Ontario corporation. Rubincon formed an Ontario subsidiary, RVI Sub, Inc., now known as API Nanotronics Sub, Inc., to facilitate the Plan of Arrangement. On November 6, 2006 Rubincon and API completed the transaction contemplated by the Plan of Arrangement. The combined companies now operate under the name “API Nanotronics Corp.”
For accounting purposes, the acquisition of API by Rubincon was considered a reverse acquisition, an acquisition transaction where the acquired company, API, is considered the acquirer for accounting purposes, notwithstanding the form of the transaction. The primary reason the transaction was treated as a recapitalization by API rather than a purchase of API by Rubincon was because Rubincon was a shell company. As reported in its Form 10-QSB for the quarter ended October 31, 2006, (the final quarterly filing requirement for Rubincon under its prior year end of January 31, 2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.
6
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
In conjunction with this reverse acquisition, Rubincon changed its year-end from January 31 to May 31, the year-end of API. Assets, liabilities and equity of the Company continue to be that of the operating company, API, as adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the transaction. The capital structure, including the number and type of shares issued, appearing in the consolidated balance sheet for the period reflects that of the legal parent, Rubincon, now known as API Nanotronics, including the shares issued to affect the reverse acquisition for the period after the consummation of the Plan of Arrangement and the capital structure of API modified by the 10-for-1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the Plan of Arrangement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of API Nanotronics, together with its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, bank balances and investments in money market instruments with original maturities of three months or less.
Marketable Securities
The Company’s investments in marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value, with any unrealized holding gains and losses, net of income taxes, reported as a component of accumulated other comprehensive income (loss). Marketable equity and debt securities available for sale are classified in the balance sheet as current assets.
The cost of each specific security sold is used to compute realized gains or losses on the sale of securities available for sale.
Inventory
Raw materials are recorded at the lower of cost or net realizable value. Finished goods and work in process are stated at the lower of cost, which includes material, labor and overhead, or net realizable value. Cost is generally determined on a first-in, first-out basis.
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation and are depreciated using the following methods over the following periods:
Straight line basis | ||
Buildings and leasehold improvements | 20 years | |
Computer equipment | 3 years | |
Furniture and fixtures | 5 years | |
Machinery and equipment | 5 to 10 years | |
Vehicles | 3 years | |
Declining balance basis | ||
Electronic manufacturing equipment | 5 to 10 years | |
7
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred. As of August 31, 2007, approximately $2,700,000 of fixed assets acquired in conjunction with the National Hybrid Group acquisition (See Note 4) have not been placed in service as the Company had not finalized their nanofabrication and research plan and accordingly depreciation expense has not been recorded on such assets. The Company plans to place these assets in service during the year ended May 31, 2008 and will begin recording depreciation expense at that time.
Computer Software Developed or Obtained For Internal Use
All direct internal and external costs incurred in connection with the development stage of software for internal use are capitalized. All other costs associated with internal use software are expensed when incurred. Amounts capitalized are included in property, equipment and leasehold improvements and are amortized on a straight-line basis over three years beginning with when such assets are placed in service.
Goodwill and Intangible Assets
Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test.
Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of the reporting unit to the underlying carrying value of the reporting unit’s net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. The entire balance of the Company’s goodwill is contained in the Filtran reporting unit. Management has determined there is no impairment in goodwill as of August 31, and May 31, 2007.
Intangible assets that have a finite life are amortized using the following basis over the following period:
| Non-compete agreements | Straight line over 5 years | |
| Customer contracts | Based on revenue earned on the contract | |
| Computer software | 3-5 years |
As of August 31, 2007, approximately $732,000 of patents are included in intangible assets, which were acquired in conjunction with the asset acquisition of assets from NanoOpto Corp. (Note 3).
Long Lived Assets
The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the carrying value of the related assets would be reduced to their estimated fair value. Management has determined there is no impairment of long lived assets as of August 31, and May 31, 2007.
Income taxes
Income taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available net operating loss carry forwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized.
8
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Revenue Recognition
Contract Revenue
Revenue from contracts is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of progress to completion, as a percentage of total costs anticipated for each contract. Provision is made for losses on contracts in progress when such losses first become known. Revisions in cost and profit estimates, which can be significant, are reflected in the accounting period in which the relevant facts become known.
Non-Contract Revenue
The Company recognizes non-contract revenue when it is realized or realizable and earned. The Company considers non-contract revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until products have been shipped and risk of loss and ownership has transferred to the client.
Deferred Revenue
The Company defers revenue should payment be received in advance of the service or product being shipped or delivered.
Warranty
The Company provides up to a one-year product defect warranty on various products from the date of sale. Historically, warranty costs have been nominal and have been within management’s expectations. The Company has accrued $126,762, in warranty liability as of August 31, and May 31, 2007, respectively, which has been included in accounts payable and accrued expenses.
Research and Development
Research and development expenses are recorded when incurred.
Stock-Based Compensation
Effective June 1, 2006 the Company adopted SFAS 123R which revises SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes Accounting Principles Board Opinion 25 “Accounting for Stock Issued to Employees.” Under APB 25, the Company used the “intrinsic value” method for employee stock options and did not record any expense because option exercise prices equaled the market value at the date of grant. SFAS 123R required that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes pricing model and restricted stock based on the quoted market price. The Company adopted SFAS 123R using the modified prospective method and, accordingly, prior period financial statements were not revised. The Company also follows the guidance in EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” for equity instruments issued to consultants.
9
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Financial Instruments
The fair values of financial instruments including cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and short-tem borrowings approximate their carrying values due to the short-term nature of these instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest rate, currency or credit risks arising from its financial instruments. Marketable securities are included at fair value. The recorded value of long-term debt approximates the fair value of the debt as the terms and rates are close to market rates.
The Company carries out a portion of transactions in foreign currencies included in the Company’s cash, marketable securities, accounts receivable, accounts payable and bank indebtedness with balances denominated in US dollars.
Foreign Currency Translation and Transactions
Foreign denominated assets and liabilities of the Company are translated into U.S. dollars at the prevailing exchange rates in effect at the end of the reporting period. Income statement accounts are translated at a weighted average of exchange rates which were in effect during the period. Translation adjustments that arise from translating the foreign subsidiary’s financial statements from local currency to U.S. currency are recorded in the other comprehensive income (loss) component of shareholders’ equity. Gains and losses from foreign currency transactions are recognized in the consolidated statement of operations.
Accounting Estimates
The preparation of these consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.
Receivables and Credit Policies
Accounts receivable are non-interest bearing, uncollateralized customer obligations. Accounts receivable are stated at the amounts billed to the customer. Customer account balances with invoices over 90 days old are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s estimate of the amounts that will not be collected.
Earnings (Loss) per Common Share
Basic earnings (loss) per common share is computed by dividing income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings (loss) per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings (loss) per share.
3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which will permit entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect that the adoption of SFAS No. 159 will have a significant impact on the consolidated results of operations or financial position of the Company.
10
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS No. 157 retains the exchange price notion in earlier definitions of fair value, but clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or liability in the principal or most advantageous market for the asset or liability. Moreover, the SFAS states that the transaction is hypothetical at the measurement date, considered from the perspective of the market participant who holds the asset or liability. Consequently, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price), as opposed to the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities in and annual periods subsequent to initial recognition. Entities are encouraged to combine the fair value information disclosed under SFAS No. 157 with the fair value information disclosed under other accounting pronouncements, including SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where practicable. The guidance in this Statement applies for derivatives and other financial instruments measured at fair value under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” at initial recognition and in all subsequent periods.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and periods within those fiscal years, although earlier application is encouraged. Additionally, prospective application of the provisions of SFAS No. 157 is required as of the beginning of the fiscal year in which it is initially applied, except when certain circumstances require retrospective application. The Company is currently evaluating the impact of this statement on its results of operations or financial position of the Company.
In June 2006, the FASB published FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes, to address the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The adoption of FIN 48 did not have a material effect on the Company’s financial condition or results of operations.
4. Asset Acquisitions
On July 17, 2007, API Nanofabrication and Research Corporation (“API NRC”), a wholly-owned subsidiary of the Company, incorporated on July 3, 2007, entered into an Asset Purchase Agreement with NanoOpto Corporation (“NoC”) for the purchase of substantially all of NoC’s assets (the “Purchase”), including equipment and intellectual property relating to the design and high volume nano-fabrication of nano-optic devices for optical components. The purchase price was $4,000,000, and the Purchase was completed on July 19, 2007. The Company has allocated the purchase price to machinery and equipment and intellectual property.
The purchase price of NoC’s assets was satisfied through payment of cash in the amount of $3,970,000 ($30,000 credit received for piece of equipment in need of repair). The Company also incurred legal costs and professional fees in connection with the acquisition in the amount of $45,671, giving a total acquisition cost of $4,045,671.
11
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
The fair value assigned to tangible assets acquired are as follows:
Fixed assets in use and to be placed in service | 3,314,050 | ||
Patents & intellectual property | 731,621 | ||
Fair value of assets acquired | $ | 4,045,671 | |
API NRC financed the Purchase with $4,000,000 received from the Company. The Company borrowed the $4,000,000 pursuant to a promissory note (the “Note”) from a member of the Board of Directors who is also the Secretary of the Company (See Note 10). The Note has a five year one month term and bears interest at the rate of 12%. The Note is payable unless sooner repaid on August 18, 2012. Interest payments are payable on the last day of December and June, beginning December 31, 2007. In the event a default under the Note occurs and is continuing, all amounts due thereunder, including accrued unpaid interest may be declared immediately due and payable.
The Company considered the acquisition of the assets of NoC on July 17, 2007 as an asset acquisition and not as the acquisition of an operating business because: (1) on July 2, 2007 NoC had filled articles of dissolution with the Delaware Secretary of State pursuant to the resolutions of the board of directors of NoC to liquidate the business, (2) at the time of the purchase of the NoC acquisition, NoC’s limited number of employees were engaged in the shutdown of the business and not in the active conduct of the business and NoC had effectively ceased operations and (3) the Company negotiated the purchase of the assets of NoC from an outside liquidator who had been engaged by the board of directors of NoC to liquidate the saleable assets of NoC.
5. Business Acquisitions
On January 25, 2007, the Company acquired all the stock of National Hybrid, Inc. and Pace Technology, Inc. (“National Hybrid Group”). The purchase price was $9,750,000 payable in cash.
The National Hybrid acquisition added new product lines and strengthens the Company’s research and manufacturing capabilities as the Company embarks on the next phase of growth in Nanotechnology. The acquisition also significantly increased revenues and further solidified the Company as a key supplier of critical electronic components to the U.S. Department of Defense and leading defense contractors.
The National Hybrid Group’s expertise includes analog and digital designs as well as application specific integrated circuits and gate-array implementations. Extensive in-house simulation, prototype testing and analysis facilities allow the National Hybrid Group to develop products for both standard and custom applications with heightened reliability.
On January 24, 2007, the Company borrowed $6,000,000 from Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. (the “Lender”) (a related party) in order to fund its purchase of the stock of the National Hybrid Group from the Estate of Benedict Pace, and to provide the Company with additional working capital. This loan was evidenced by a promissory note (the “Note”) in favor of the Lender. The Note bears interest at 12% per annum and with interest payable semi-annually. The principal amount of the Note is due five years and one month from the date on which it was made and may be prepaid at any time at the option of the Company without penalty. The loan and interest was repaid as of May 31, 2007.
The purchase price of the National Hybrid Group was satisfied through payment of cash in the amount of $9,750,000. The Company also incurred legal costs and professional fees in connection with the acquisition in the amount of $191,310, giving a total acquisition cost of $9,966,766. The Company has accounted for the acquisition using the purchase method of accounting. The results of operations of the National Hybrid Group have been included in the Company’s results of operations beginning on January 24, 2007. In accordance with SFAS No. 141, “Business Combinations” the total purchase price was allocated to the National Hybrid Group’s net assets based on their estimated fair values as of January 24, 2007. The fair values assigned to tangible assets acquired and liabilities assumed are as follows:
12
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Cash | $ | 1,177,214 | ||
Current assets | 7,518,857 | |||
Fixed assets in use and to be placed in service | 2,729,311 | |||
Current liabilities | (1,249,060 | ) | ||
Deferred income taxes | (209,556 | ) | ||
Fair value of assets acquired | $ | 9,966,766 | ||
The following unaudited pro forma summary presents the combined results of operations as if the National Hybrid Group acquisition described above had occurred at the beginning of the period for the three months ended August 31, 2006.
Three months ended August 31, 2007 (Actual) | Three months ended August 31, 2006 (Pro forma) | ||||||
Revenues | $ | 7,099,642 | $ | 7,140,040 | |||
Net Income (loss) | $ | (712,385 | ) | $ | 187,812 | ||
Net Income (loss) per share – basic | $ | (0.01 | ) | $ | 0.00 | ||
Net Income (loss) per share – diluted | $ | (0.01 | ) | $ | 0.00 | ||
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
August 31, 2007 | May 31, 2007 | |||||
Accounts payable and accrued expenses | $ | 1,986,152 | $ | 2,660,739 | ||
Wage and vacation accrual | 685,065 | 399,064 | ||||
Audit and accounting fees | 136,184 | 119,184 | ||||
Total | $ | 2,807,401 | $ | 3,178,987 | ||
7. Shareholders’ Equity
Pursuant to the court-approved Plan of Arrangement API Nanotronics Sub, Inc., formerly known as RVI Sub, Inc., became the sole shareholder of API, and each holder of the outstanding API common shares was granted the right to receive for each API common share 10 shares of API Nanotronics Corp. common stock, or if an eligible Canadian shareholder elected, 10 API Nanotronics Sub, Inc. exchangeable shares. Each API Nanotronics Sub, Inc. exchangeable share is exchangeable into one share of API Nanotronics common stock at the option of the holder. All references in the financial statements to the number of shares outstanding, per share amounts, and stock option data of the Company’s common stock have been restated to reflect the effect of the Plan of Arrangement for all the periods presented. Stockholders’ equity reflects the Plan of Arrangement by reclassifying from “Common stock” to “Additional paid-in capital” an amount equal to the par value of the shares arising from the Plan of Arrangement. Immediately prior to the closing of the Plan of Arrangement, Rubincon. had 40,006,672 shares of common stock outstanding.
In connection with the Plan of Arrangement that occurred on November 6, 2006, the Company was obligated to issue 28,254,060 shares of either API Nanotronics common stock or exchangeable shares of API Nanotronics Sub, Inc. in exchange for the API common shares previously outstanding. As of August 31, 2007, (i) API Nanotronics had issued 20,737,830 shares of its common stock for API common shares or upon the exchange of previously issued exchangeable shares, (ii) API Nanotronics Sub, Inc. had issued 7,015,550 shares of its exchangeable shares for API common shares (excluding exchangeable shares held by the Company and its affiliates and exchangeable shares subsequently exchanged for our common stock) which exchangeable shares are the substantially equivalent to our common stock and (iii) API
13
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Nanotronics’ transfer agent was awaiting shareholder elections on 500,680 shares of API Nanotronics common stock or exchangeable shares of API Nanotronics Sub, Inc. issueable with respect to the remaining API common shares. Consequently, API Nanotronics has not issued but is obligated to issue 7,516,230 shares of its common stock under the Plan of Arrangement either directly for API common shares or in exchange for API Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics Corp. or its affiliates.
The API Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics or its affiliates are substantially economically equivalent to common stock of API Nanotronics Corp.
On November 6, 2006, API Nanotronics amended its certificate of incorporation to allow it to issue one special voting share. This special voting share was issued to a trustee in connection with the Plan of Arrangement and allows the trustee to have at meetings of shareholders of API Nanotronics the number of votes equal to the number of exchangeable shares not held by API Nanotronics or subsidiaries of API Nanotronics (The trustee is charged with obtaining the direction of the holders of exchangeable shares on how to vote at meetings of API Nanotronics stockholders.) The API Nanotronics Sub, Inc. exchangeable shares are convertible into shares of API Nanotronics common stock at any time at the option of the holder. API Nanotronics may force the conversion of API Nanotronics Sub., Inc. exchangeable shares into shares of API Nanotronics common stock on the tenth anniversary of the date of the Plan of Arrangement or sooner upon the happening of certain events.
On July 2, 2007, the Compensation Committee of the Board of Directors of the Company acted to reprice certain options that the Company had previously granted to certain employees, directors and consultants of the Company. The options, all of which had been previously issued pursuant to the API Nanotronics Corp. 2006 Equity Incentive Plan (the “Plan”), were repriced to be the average of the closing bid and ask price on the date of the action by the Compensation Committee. The new option exercise price was $1.345 per share. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing.
On June 20, 2007, the Company granted stock options to purchase 25,000 shares of common stock to each of two of its newly elected directors for an exercise price of $1.615 per share. Under each Stock Option Agreement, the option vests and becomes exercisable with respect to 8,333 option shares on June 21, 2008, 8,333 option shares on June 21, 2009 and 8,334 option shares on June 21, 2010. The term of such options is ten years.
Warrants
There are no warrants outstanding or exercisable as at August 31, 2007 and May 31, 2007.
8. Stock Based Compensation
On October 26, 2006, the Company adopted its 2006 Equity Incentive Plan (the “Equity Incentive Plan”). All the prior options issued by API were carried over to this plan under the provisions of the Plan of Arrangement. There are 8,400,000 shares available under the Equity Incentive Plan as of August 31, 2007. Options issued by Rubincon prior to the effective date of the Plan of Arrangement were not carried over to this plan. Under the Company’s Equity Incentive Plan, options may have a term of up to ten years from the date of grant. The stock option exercise prices are at 100 percent of the fair market value of the underlying shares on the date the options are granted.
As of August 31, 2007, there was $926,340 of total unrecognized compensation related to non-vested stock options, which are not contingent upon attainment of certain milestones. For options with certain milestones necessary for vesting, the fair value is not calculated until the conditions become probable. The cost is expected to be recognized over a weighted-average period of five years. During the three months ended August 31, 2007 and 2006, $353,347 and $0, respectively has been recognized as stock based compensation expense in general and administrative expense.
Included in total stock based compensation for the three months ended August 31, 2007 is $52,358 of stock based compensation expense related to repricing of certain options that had been previously granted to employees, directors and consultants of the Company. The options were repriced to the average closing bid and
14
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
ask price on the date of action on July 2, 2007. The new option exercise price is $1.345 per share. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing. As of August 31, 2007 and May 31, 2007, $926,340 and $385,000, respectively, of total unrecognized compensation related to non-vested stock options, which are not contingent upon attainment of certain milestones.
On July 19, 2007, a total of 200,000 options vested upon the achievement of certain milestones as defined in the grant agreement. These options are exercisable at $1.345 per share. The Company recognized approximately $130,000 of stock based compensation expense which is included in the $353,347 total stock based compensation recognized during the three months ended August 31, 2007.
In accordance with the combination agreement, as of November 6, 2006, 5,800,000 API stock options (on a post-exchange basis) were exchanged for 5,800,000 stock options of API Nanotronics. The fair value of the API Nanotronics options exceeded the fair value of the API options by $888,360 at November 6, 2006 under the Black-Scholes option pricing model with the following assumptions: Risk Free Rate - 2.50%, Volatility - 80%, Expected Life - 4.17 years to 4.58 years, Dividend Yield - 0%. The excess was expensed as stock based compensation in general and administrative expense for the year ended May 31, 2007 and a corresponding amount was added to the additional paid-in capital as part of stockholders’ equity.
The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model based on the assumptions detailed below:
| 2008 | 2007 | |||||
Expected volatility | 56 | % | 60-80 | % | ||
Expected dividends | 0 | % | 0 | % | ||
Expected term | 10 years | 5 -10 years | ||||
Risk-free rate | 4.74 | % | 2.50% - 4.44 | % |
The summary of the common stock options granted, cancelled, exchanged or exercised under the Equity Incentive Plan:
| Shares | Weighted Average Exercise Price | ||||||
Stock Options outstanding – May 31, 2006 | 5,100,000 | $ | 0.464 | ||||
Exercised | (100,000 | ) | $ | (0.600 | ) | ||
Issued | 1,600,000 | $ | 1.811 | ||||
Outstanding options of Rubincon (A) | 125,000 | $ | 1.000 | ||||
Stock Options outstanding - May 31, 2007 | 6,725,000 | $ | 0.792 | ||||
Issued | 50,000 | $ | 1.345 | ||||
Exercised | — | $ | — | ||||
Stock Options outstanding - August 31, 2007 | 6,775,000 | $ | 0.685 | ||||
Stock Options exercisable - August 31, 2007 | 5,558,330 | $ | 0.541 | ||||
| (A) | Stock options entitling the holder to purchase 125,000 common shares of the Company at an option exercise price of $1.00 per common share were issued prior to the Plan of Arrangement and were not issued under the Equity Incentive Plan. All of these options have vested. |
15
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
The weighted-average grant date fair value of options granted during the three months and year ended August 31 and May 31, 2007 was $1.345 and $1.81, respectively.
| Options Outstanding | Options Exercisable | ||||||||||||||||||
| Range of Exercise Price | Number of Outstanding at August 31, 2007 | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Aggregate Intrinsic Value | Number Exercisable at August 31, 2007 | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||||
| $ | 0.46 –1.00 | 5,125,000 | $ | 0.47 | 3.51 | $ | 2,350,000 | 5,125,000 | $ | 0.82 | $ | 2,350,000 | |||||||
| $ | 1.00 –2.00 | 1,650,000 | $ | 1.35 | 6.60 | — | 433,330 | $ | 1.35 | — | |||||||||
| 6,775,000 | 5.27 | $ | 2,350,000 | 5,558,330 | $ | 2,350,000 | |||||||||||||
The intrinsic value is calculated as the difference between the market value as of August 31, 2007 and the exercise price of the shares. The market value as of August 31, 2007 was $0.93 as reported by the Nasdaq Stock Market.
9. Supplemental Cash Flow Information
For the three 2007 | For the three months ended August 31, 2006 | |||||
(a) Supplemental Cash Flow Information | ||||||
Cash paid for income taxes | $ | 18,638 | $ | 41,481 | ||
Cash paid for interest | $ | 10,193 | $ | 16,301 | ||
10. Related Party Transactions
| (a) | Included in general and administrative expenses for the three months ended August 31, 2007 are consulting fees of $22,678 (2006 - $17,850) paid to an individual who is a director and officer of the Company, and rent, management fees, and office administration fees of $46,590 (2006 - $46,129) paid to a corporation in which two of the directors are also directors of the Company. The balance due as of August 31, 2007 and May 31, 2007 is $87,106 and $64,382, respectively. |
| (b) | The bank debt of API Electronics Inc. is guaranteed by the President and Chief Operating Officer of the Company. The fair value of this guarantee is not significant to these financial statements. |
| (c) | Included in interest expenses for the three months ended August 31, 2007 are interest charges of $57,863 from the $4,000,000 borrowed from Jason DeZwirek, Secretary and a director of the Company, which was used to fund the acquisition of the assets of NoC (Note 3). The balance due including accrued interest as of August 31, 2007 is $4,057,863. |
16
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
11. Earnings (Loss) Per Common Share
The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share (EPS) for the three months ended August 31:
| 2007 | 2006 | |||
Weighted-average shares-basic | 72,511,002 | 28,254,060 | ||
Effect of dilutive securities | * | |||
Weighted-average shares - diluted | 72,511,002 | 28,254,060 | ||
Basic EPS and diluted EPS for the three months ended August 31, 2007 and 2006 have been computed by dividing the net income (loss) by the weighted average shares outstanding. The weighted average numbers of shares of common stock outstanding includes exchangeable shares and shares to be issued under the Plan of Arrangement for the three months ended August 31, 2007. As of August 31, 2007 a total of 7,015,550 exchangable shares remain outstanding and 500,680 shares may still be issued under the Plan of Arrangement.
| * | All outstanding options aggregating 6,775,000 incremental shares, have been excluded from the August 31, 2007 (5,800,000 incremental shares from the August 31, 2006) computation of diluted EPS as they are anti-dilutive due to the losses generated in 2008 and 2007. |
12. Commitments
| (a) | On January 1, 2005, the Company entered into a renewal of an oral agreement for management services with Can-Med Technology, doing business as Green Diamond Corp. Under the terms of the agreement, Green Diamond Corp. provides office space, office equipment and supplies, telecommunications, personnel, and management services. This obligations were assumed by the Company in connection with the consummation of the Plan of Arrangement. |
| (b) | On February 14, 2007, the Company entered into an employment agreement (the “Agreement”) defining the terms and conditions of employment for the Chief Technology Officer of the Corporation. The employment commenced on May 1, 2007. Under the terms of the Agreement, the Chief Technology Officer of the Corporation will receive an annual base salary of $375,000 and an annual discretionary bonus that will be based upon certain performance milestones as established by the Board of Directors or the Compensation Committee of the Corporation. With respect to the termination provisions under the Agreement, for termination without cause, the Corporation shall have the right to terminate employment on 30 days written notice. In such case, that employment has been terminated prior to the second anniversary of the effective date of the Agreement, the Corporation shall provide the Chief Technology Officer with severance pay equal to his base salary from the date of termination until the second anniversary of the effective date of the Agreement. Upon any termination without cause, the Chief Technology Officer shall also receive 12 months base salary and the continuation of certain benefits for a 12 month period. The same severance arrangement applies in the case of constructive termination. |
| (c) | On July 19, 2007, the Company entered into a lease agreement for the facility in Somerset, New Jersey. The term of the lease is for 5 years, 2 months, beginning August 1, 2007. The Company has 2, 5 year options to renew the lease. There is no rent due for the first two months. Starting October 1, 2007 the monthly lease payments will be $22,402 with nominal increases each following year. |
17
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
13. Segment Information
The Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 uses a management approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company’s operations are conducted in two reportable segments, which are distinguished by geographic location in Canada and United States. Within the US reporting segment, the Company has aggregated two operating segments. These segments have been aggregated as they share similar economic characteristics including similar product lines and shared manufacturing processes and equipment. Both segments design and manufacture electronic components. Inter-segment sales are presented at their market value for disclosure purposes.
Three months ended August 31, 2007 | Canada | United States | Corporate (Canada) | Inter Segment Eliminations | Total | |||||||||||||||
Sales to external customers | $ | 1,992,061 | $ | 5,107,581 | $ | — | $ | — | $ | 7,099,642 | ||||||||||
Inter-segment sales | 4,935 | 63,707 | (68,642 | ) | — | |||||||||||||||
Total revenue | 1,996,996 | 5,171,288 | — | (68,642 | ) | 7,099,642 | ||||||||||||||
Income before expenses below: | 116,184 | (32,383 | ) | — | — | 83,801 | ||||||||||||||
Corporate head office expenses | — | — | 195,259 | — | 195,259 | |||||||||||||||
Depreciation and amortization | 28,978 | 170,238 | 2,437 | — | 201,653 | |||||||||||||||
Other expense (income) | 2,429 | 7,764 | 87,492 | — | 97,685 | |||||||||||||||
Income tax expense (benefit) | 1,790 | (60,330 | ) | 360,129 | — | 301,589 | ||||||||||||||
Net income (loss) | $ | 82,987 | $ | (150,055 | ) | $ | (645,317 | ) | $ | — | $ | (712,385 | ) | |||||||
Segment assets | $ | 4,824,160 | $ | 23,365,146 | $ | 2,117,389 | $ | — | $ | 30,306,695 | ||||||||||
Goodwill included in assets | $ | 1,130,906 | $ | — | $ | — | $ | — | $ | 1,130,906 | ||||||||||
Capital expenditures | $ | 9,414 | $ | 24,425 | $ | — | $ | — | $ | 33,839 | ||||||||||
Asset acquisition | $ | — | $ | 4,045,671 | $ | — | $ | — | $ | 4,045,671 | ||||||||||
Three months ended August 31, 2006 | Canada | United States | Corporate (Canada) | Inter Segment Eliminations | Total | |||||||||||||||
Sales to external customers | $ | 2,099,077 | $ | 1,883,266 | $ | — | $ | — | $ | 3,982,343 | ||||||||||
Inter-segment sales | — | 94,130 | — | (94,130 | ) | — | ||||||||||||||
Total revenue | 2,099,077 | 1,977,396 | — | (94,130 | ) | 3,982,343 | ||||||||||||||
Income before expenses below: | 101,021 | 235,477 | — | — | 336,498 | |||||||||||||||
Corporate head office expenses | — | — | 119,339 | — | 119,339 | |||||||||||||||
Depreciation and amortization | 26,109 | 105,912 | 56,723 | — | 188,744 | |||||||||||||||
Other expense (income) | (2,855 | ) | (336 | ) | (1,372 | ) | — | (4,563 | ) | |||||||||||
Income tax expense (benefit) | — | 34,634 | — | 34,634 | ||||||||||||||||
Net income (loss) | $ | 77,767 | $ | 95,267 | $ | (174,690 | ) | $ | — | $ | (1,656 | ) | ||||||||
Segment assets | $ | 3,581,437 | $ | 8,448,746 | $ | 2,122,233 | $ | — | $ | 14,152,416 | ||||||||||
Goodwill included in assets | $ | 1,130,906 | $ | — | $ | — | $ | — | $ | 1,130,906 | ||||||||||
Capital expenditures | $ | 16,580 | $ | 22,910 | $ | — | $ | — | $ | 39,490 | ||||||||||
18
API Nanotronics Corp.
Notes to Consolidated Financial Statements
(Unaudited)
| Three months ended August 31, | ||||||||||||
| 2007 | 2006 | |||||||||||
Geographical Information | Revenue | Capital Assets, Intangible Assets, Goodwill and Other | Revenue | Capital Assets, Intangible Assets, Goodwill and Other | ||||||||
United States | $ | 6,082,818 | $ | 10,004,779 | $ | 3,178,308 | $ | 3,396,421 | ||||
Canada | 368,535 | 2,103,612 | 209,422 | 2,448,231 | ||||||||
United Kingdom | 274,116 | — | 533,889 | — | ||||||||
All Other | 374,173 | �� | — | 60,724 | — | |||||||
| $ | 7,099,642 | $ | 12,108,391 | $ | 3,982,343 | $ | 5,844,652 | |||||
Three months ended August 31, | ||||||
| 2007 | 2006 | |||||
Major Customer Revenue: | ||||||
U.S. Department of Defense | 7 | % | 11 | % | ||
U.S. Department of Defense subcontractors | 75 | % | 54 | % | ||
Concentration of Credit Risk
At August 31, 2007, one customer accounted for approximately 14.0% of outstanding receivables, no customers represented over 10% of accounts receivable as at May 31, 2007.
14. Subsequent Events
On September 5, 2007, the Company proposed amending its articles of incorporation to increase the authorized shares of its common stock to 1 Billion (1,000,000,000 shares). There would be no increase in the number of shares outstanding as a result of this change. The proposal is subject to shareholder approval.
19
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The Company is a North American based company focused on the manufacture of specialized electronic components and microelectronic circuits. The corporate office of the Company is located in Toronto, Canada. Overviews of its subsidiaries are discussed below:
| • | API Electronics, Inc. of Hauppauge, New York (“API Electronics”) is a leading designer and manufacturer of power transistors, small signal transistors, tuning diodes, hybrid circuits, resistor/capacitor networks, diodes, and other critical elements with precisely defined functional capabilities for advanced military, industrial, commercial, automotive and medical applications. API Electronics is a leading supplier of defense electronic components to the U.S. Department of Defense and its subcontractors as well as having a strong commercial user base. During 2004, API Electronics purchased certain assets of Islip Transformer & Metal Co. Inc., and Sensonics, Inc., to further augment the Company’s capacity to produce in-demand components and systems for both government and corporate clients. |
| • | The National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. is a developer and manufacturer of 1553 data bus products, solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuit of the military/aerospace market and the industrial process control market. |
| • | The Filtran Group (“Filtran Group”) comprised of Filtran Inc. of Ogdensburg, New York and Filtran Limited of Nepean, Ontario, Canada, is a leading global supplier of superior quality electronic components to major producers of communications equipment, military hardware, computer peripherals, process control equipment and instrumentation. In business since 1969, Filtran Group is ISO 9001:2000 registered and offers off-the-shelf and custom designed products and regularly ships components to clients in more than 34 countries. |
| • | TM Systems II Inc. of Hauppauge, New York (“TM Systems”), in business for over 30 years, supplies the defense sector with naval landing and launching equipment, flight control and signaling systems, radar systems alteration, data communication and test equipment as well as aircraft ground support equipment. |
| • | Keytronics Inc (“Keytronics”) of Endicott, New York, in business since 1971 is a manufacturer of a wide variety of power transformers, reactors, magnetic amplifiers, power supplies and converters and numerous special purpose electronic assemblies, including capacitor modules and medical electronics. |
| • | API Nanofabrication and Research Corporation, (“API NRC”), a wholly-owned subsidiary of the Company, incorporated on July 3, 2007 acquired all the assets of NanoOpto Corporation (“NoC”), effective July 19, 2007. With the acquisition, API NRC now possesses a broad range of instruments essential in nanofabrication and materials synthesis and fabrication. Its facility, located in Somerset, New Jersey was leased in connection with this acquisition will be the used to facilitate next generation product introductions based on nanotechnology and micro-electromechanical (MEMS) systems. |
Reorganization
On May 8, 2006 Rubincon Ventures Inc. as the Company was formerly known (“Rubincon”), entered into a combination agreement contemplating a Plan of Arrangement with API Electronics Group Corp., an Ontario Corporatoin (“API”). Rubincon formed an Ontario subsidiary, RVI Sub, Inc. now known as API Nanotronics Sub, Inc., to facilitate the Plan of Arrangement. On November 6, 2006 Rubincon and API completed the transaction contemplated by the Plan of Arrangement. The combined companies now operate under the name “API Nanotronics Corp.”
Pursuant to the Canadian court approved Plan of Arrangement API Nanotronics Sub, Inc. became the sole shareholder of API, and each holder of the 2,825,406 outstanding API common shares was granted the right to receive for each API common share, 10 shares of API Nanotronics common stock, or if a Canadian shareholder elects, 10 API Nanotronics Sub, Inc. exchangeable shares. Each API Nanotronics Sub, Inc. exchangeable share is exchangeable into one share of API Nanotronics common stock at the option of the holder. The API Nanotronics Sub, Inc. exchangeable shares may be converted into API Nanotronics common stock at the option of API Nanotronics ten years from the date of the combination of Rubincon and API or sooner under certain circumstances. In addition, pursuant to the Plan of Arrangement, outstanding options of API were converted into options of API Nanotronics adjusted to reflect the aforementioned ten-for-one exchange ratio.
For accounting purposes the acquisition of API by Rubincon was considered a reverse acquisition, an acquisition transaction where the acquired company, API, is considered the acquirer for accounting purposes, notwithstanding the form
20
of the transaction. The primary reason the transaction was treated as a recapitalization by API rather than a purchase of API by Rubincon was because Rubincon was a shell company. As reported in its Form 10-QSB for the quarter ended October 31, 2006, (the final quarterly filing requirement for Rubincon under its prior year end of January 31, 2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.
In conjunction with this reverse acquisition, Rubincon changed its year-end from January 31 to May 31, the year-end of API. Assets, liabilities and equity of the Company continue to be that of the operating company, API, as adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the transaction. The capital structure, including the number and type of shares issued, appearing in the consolidated balance sheet reflects that of the legal parent, Rubincon, now known as API Nanotronics Corp., including the shares issued to affect the reverse acquisition for the period after the consummation of the Plan of Arrangement and the capital structure of API modified by the 10 for 1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the Plan of Arrangement.
The Company’s business strategy has been to strengthen its leadership position for its components through continued emphasis on technological advances, operational efficiencies, cost reductions, competitiveness and acquisitions.
The Company’s objectives are to seek long-term stable growth for all of its operating segments (API Electronics, National Hybrid Group, Filtran Group, TM Systems, Keytronics and API Nanofabrication and Research Company) through continuous capital investment, employing today’s production methods and technologies and by demanding uncompromising quality control.
Trends in Our Industry and Business
API is optimistic about market growth from various U.S. Department of Defense (DoD) agencies, including the US Army Communications and Electronics Command (CECOM) and the Tank Automotive Command (TACOM) as part of the continuing increases in U.S. DoD military budgetary spending. Additionally, subcontract work continues with a major U.S. defense contractor, supplying radar threat indication subsystems utilized in many military helicopter programs. API has also continued to add to its DoD Qualified Manufacturer List (QML) product line of MIL-PRF-19500 Qualified power transistor semiconductors, which are utilized on many U.S Armed Forces legacy weapons programs. API has also recently begun shipments on a newly designed programmable hybrid timing circuit used by many Military and Aerospace relay manufacturers. The new design will provide both a cost savings for the customer, and a more profitable build for API due to the improved design, manufacturing efficiencies, and material costs.
National Hybrid Group’s core business of military electronics continues to grow along with the U.S. and international defense budgets. The Mil-Std-1553 business has been strong and the trend is for continued growth as the service life of existing military platforms such as the US A-10, B-52, F-15, F-16 and other legacy aircraft is extended. The addition of modern electronics to these aging aircraft has increased the need for National Hybrid Group products such as the new low cost plastic ball grid array terminal that National Hybrid Group has just introduced. The refurbishment of US Army vehicles from the conflict in Iraq has resulted in additional business in the SSPC and Hybrid product lines. Spare parts required for this refurbishment effort have resulted in new orders for programs such as the Bradley Fighting Vehicle and the M1A2 Tank. The Company expects to continue to invest in capital improvements at the National Hybrid Group’s Ronkonkoma, NY and Largo, FL facilities to allow the Company to react more quickly and efficiently to the increased demand.
Filtran Group’s main market is military subcontractors with a strong demand for filters, power supplies, transformers and inductors. Filtran Group has outsourced the manufacturing of certain products to China and is working closely with its Chinese manufacturers to maintain quality control and decrease the cost of production. Filtran Group is aggressively pursuing growth strategies with the hiring of additional sales persons in the United States and setting up a nationwide sales representative network. Filtran Group has focused on increasing their power supply capabilities by hiring a power supply project manager and purchasing additional power supply equipment and software to aid in the design and development of state of the art power supplies for the aerospace, satellite military and hirel commercial custom power supplies. Filtran Group has also developed a synergistic partnership with API Electronics targeting the military relay market.
TM Systems’ customer base consists primarily of various U.S. government departments, including the U.S. Navy, as well as numerous domestic and foreign corporations. The U.S. government has approved significant funds for ongoing defense and homeland security. TM Systems believes that new domestic orders should increase as a result of this development. Furthermore, foreign country demand may also increase in response to global terror concerns. TM Systems’ Stabilized Glide Slope Indicator (SGSI) is an electro-hydraulic-optical landing system and designed for use on air capable
21
and amphibious assault ships. Increasing operational readiness will require the Navy to be independent of land-based command centers. Furthermore, political conflicts have led to a reduction of land-bases available in certain foreign countries.
Keytronics continues to supply the major military OEM’s and various Department of Defense agencies with products including a wide variety of power transformers, reactors, magnetic amplifiers, power supplies and converters, and numerous special purpose electronic assemblies including capacitor modules and medical electronics.
The Company is pursuing market opportunities and growth for innovative products based on nanotechnology and MEMS. API NRC owns a number of proprietary technologies which address urgent market needs in imaging, digital cinema camera technologies, optical communications, as well as in conformal optical coating using proprietary atomic layer deposition (ALD) technologies. These approaches can also be applied to the nanofabrication of novel semiconductor devices and systems by using ALD, for example, to create a new generation of super-thin-film electronics. API NRC also plans to develop a series of plasmonics-based sensors which use the special optical responses of nano-structured metals to laser light.
Operating Revenues
Operating revenues of the Company are derived from the sales of electronic components and systems, specifically semiconductors, 1553 data bus products, power controllers, transformers, inductors, filters and mission critical systems. The Company expects to derive revenues in future quarters from sales generated by API NRC’s optical product line. The principal markets for these products are the government and military, commercial equipment, and other replacement parts. Our customers are located primarily in the U.S., Canada and the United Kingdom but we also sell products to customers located throughout the world.
Semiconductor Revenues
The Company currently serves a broad group of customers with the following category of semiconductor products: Varactor tuning diodes, specialty suppressor diodes for the relay market, 1553 data bus products, power controllers, custom microelectronic hybrid circuits, small-signal transistors, silicon rectifiers, zener diodes, high-voltage diodes, and resistor/capacitor networks. These products facilitate the power supply in end-products such as missiles, the space shuttle, F-15 and F-16 fighter planes and B-1 bombers.
Magnetic & Power Supply Revenues
Revenues are derived from the manufacturing of electronic transformers, inductors, filters and power supplies. The main demand today for these products comes from the military, aerospace, telecom, audio, video, voice, voice/data, and transportation OEM’s.
Mission Critical System Revenues
The principal market for these products is the military/defense industry. These highly engineered products and systems include, naval aircraft landing and launching equipment, Visual Landing Aids (VLA) and Stabilized Glide Slope Indicators (SGSI), flight control and signaling systems, radar systems alteration, data communication and test equipment, aircraft ground support equipment, Aircraft Radar Indication Systems using Liquid Crystal Display (LCD) technology and other mission critical systems and components.
Operating Expenses
Operating Expenses consist of business development, selling, general and administrative expenses.
Cost of Goods Sold
Cost of Goods Sold primarily consists of costs that we incur to design, manufacturer, test and ship products. These costs include:
| • | The cost of raw materials, including freight, direct labor and tooling required to design and build products. |
| • | The cost of testing (labor & equipment) products throughout the manufacturing process and final testing before the products are shipped to customers. |
| • | The cost of shipping and handling the products shipped to the customer. |
22
Selling, General and Administrative Expense
Selling, general and administrative expenses include:
| • | Compensation and benefit costs for all employees, including sales and customers service, sales commissions, executive, finance and human resource personnel. |
| • | Compensation related to stock-based awards to employees and directors. |
| • | Professional services, for accounting, legal, tax, information technology and public relations fees. |
| • | Rent and related expenses. |
Other Income (Expense)
Other income and (expense) consists of:
| • | Interest income on cash, cash equivalents and marketable securities. |
| • | Interest expense on notes payable, operating loans and capital leases. |
| • | Gain or loss on disposal of property and equipment. |
| • | Gain or loss on foreign currency transactions. |
Key Operating Data
Our management uses a number of data to measure the growth of the business and operating performance. The key measure for growth is sales backlog:
| As of August 31 | ||||||
| 2007 | 2006 | |||||
Backlog by Segment Company | ||||||
API Electronics | $ | 2,193,080 | $ | 2,948,865 | ||
National Hybrid Group | 5,857,962 | N/A | ||||
Filtran Group | 4,361,228 | 4,050,165 | ||||
TM Systems | 3,283,632 | 1,335,195 | ||||
Keytronics | 712,793 | 949,495 | ||||
API NRC | 0 | N/A | ||||
Overall | $ | 16,408,695 | $ | 9,283,720 | ||
The Company’s backlog figures represent confirmed customer purchase orders that the Company has not shipped at the time the figures were calculated, which have a delivery date within a 12 month period. Filtran Group’s backlog figures will also be affected by the US/Canadian exchange rate.
The key measure for performance is Gross Margin by Segment.
| As of August 31 | |||||||||
| 2007 | 2006 | 2007 vs. 2006 % Change | |||||||
Gross Profit by Segment Company | |||||||||
API Electronics | 30.9 | % | 27.4 | % | 3.5 | % | |||
National Hybrid Group | 35.2 | % | N/A | % | N/A | % | |||
Filtran Group | 21.5 | % | 18.2 | % | 3.3 | % | |||
TM Systems | 27.7 | % | 20.6 | % | 7.1 | % | |||
Keytronics | 8.4 | % | 31.5 | % | -23.1 | % | |||
API NRC | N/A | % | N/A | % | N/A | % | |||
Overall | 28.1 | % | 22.9 | % | 5.2 | % | |||
The Company’s gross profit represents the excess of operating revenues less cost of goods sold. Cost of goods sold contains direct material, labor and manufacturing overhead costs. Gross margins are further discussed under results of operations.
23
Asset Acquisition of API Nanofabrication
On July 19, 2007, API NRC, a wholly-owned subsidiary of the Company, incorporated on July 3, 2007, entered into an Asset Purchase Agreement as part of an auction with NanoOpto Corporation (“NoC”) for the purchase of substantially all of NoC’s assets (the “Purchase”), including equipment and intellectual property relating to the design and high volume nano-fabrication of nano-optic devices for optical components.
The acquisition of these assets offered the Company with an unique and powerful material processing and fabrication capabilities. These capabilities span the full gamut of silicon wafer processing to the latest electronic and optical fabrication technologies based in nanoscience and MEMS. This expands the Company’s abilities to better serve its current customers and to develop new electronic products. It also opens possibilities for new business based on hybrid optics. These assets and facilities will also be the centerpiece of the Company's Research and Development program.
Business Acquisition of National Hybrid Group
On January 24, 2007, the Company acquired all of the common shares of the National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. The National Hybrid Group is a developer and manufacturer of 1553 data bus products, solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuit for the military/aerospace market and the industrial process control market.
Results of Operations for the Three Months Ended August 31, 2007 and 2006
The following discussion of results of operations is a comparison of the Company’s three month periods ending August 31, 2007 and August 31, 2006.
Operating Revenue
| Three months ended August 31, | |||||||||
| 2007 | 2006 | % Change | |||||||
Sales by Subsidiary | |||||||||
API Electronics | $ | 964,003 | $ | 1,025,002 | -6.0 | % | |||
National Hybrid Group | 2,858,744 | N/A | N/A | ||||||
Filtran Group | 2,538,437 | 2,099,077 | +20.9 | % | |||||
TM Systems | 314,031 | 300,108 | +4.6 | % | |||||
Keytronics | 424,427 | 558,156 | -24.0 | % | |||||
API NRC | N/A | N/A | N/A | ||||||
| $ | 7,099,642 | $ | 3,982,343 | +78.3 | % | ||||
Overall, the Company recorded an increase in sales for the three months ended August 31, 2007 as total sales revenue increased by 78.3% over the same period in 2006. This increase resulted from the inclusion of National Hybrid’s operations for three months, a 20.9% increase in sales from the Filtran Group and a 4.6% increase in sales from TM Systems offset by decreased sales at API Electronics and Keytronics.
API Electronics sales revenues decreased by 6.0% in the three months ended August 31, 2007 over the same period in 2006. This decrease was attributed primarily to a decrease for mission critical systems, primarily radar indicators and counter measure control electronics for U.S. military helicopters.
National Hybrid Group was acquired on January 24, 2007. Sales of $2,858,744 reflect strong demand for National Hybrid Group’s databus 1553 product line, multi chip modules, power controllers and custom hybrids, utilized in military and industrial applications.
Filtran Group’s sales revenue increased by $439,360 or 20.9% in the three months ended August 31, 2007 over the corresponding period in 2006. The increase in sales revenue and growing backlog reflects continued strong demand for Filtran’s electronic filter, transformer and inductor product lines.
24
TM Systems recorded sales revenue levels in the three months ended August 31, 2007 that were 4.6% greater than 2006. The increase was attributed primarily to an increase in revenue recognized on visual landing aide equipment sold to US military sub contractor, Avondale Shipyards, a division of Northrop Grumman.
Keytronics’ revenues decreased by 24.0%, as a result of decreased demand from two customers that represented a decrease in approximately $140,000 in sales.
API NRC started design and manufacturing operations after the acquisition of all the assets of NoC on July 19, 2007. API NRC’s initial focus will be in the design and manufacturing of the optical business as it tries to take advantage of the terrific branding NoC did on its products and processes. The Company has initially garnered a lot of interest from customers interested in API NRC’s products. API NRC expects that interest to translate into sales orders in the second quarter.
The Company’s electronic products are sold through operations in Canada and the US to several countries around the world.
Geographical Information
| Three months ended August 31, | ||||||||||||
| 2007 | 2006 | |||||||||||
| Revenue | Capital Assets, Intangible Assets, Goodwill and Other | Revenue | Capital Assets, Intangible Assets, Goodwill and Other | |||||||||
United States | $ | 6,082,818 | $ | 10,004,779 | $ | 3,178,308 | $ | 3,396,421 | ||||
Canada | 368,535 | 2,103,612 | 209,422 | 2,448,231 | ||||||||
United Kingdom | 274,116 | — | 533,889 | — | ||||||||
All Other | 374,173 | — | 60,724 | — | ||||||||
| $ | 7,099,642 | $ | 12,108,391 | $ | 3,982,343 | $ | 5,844,652 | |||||
The Company saw United States sales increase by 91.4% from $3,178,308 for the three months ended August 31, 2006 to $6,082,818 for the three months ended August 31, 2007. The increase was largely a result of the inclusion of a full quarter of National Hybrid Group results following its acquisition. Canadian sales also increased by 75.4% from $209,442 for the three months ended August 31, 2006 to $368,535 for the three months ended August 31, 2007 as the Filtran Group experienced a significant increase in sales to their Canadian customer base. UK sales decreased by 48.81% from $533,889 for the three months ended August 31, 2006 to $274,116 for the three months ended August 31, 2007, while sales to the rest of the world increased by over 500% for the three months ended August 31, 2007.
The US Department of Defense and its subcontractors accounts for a significant amount of the Company’s sales revenue as follows:
Three months ended August 31, | ||||||
| 2007 | 2006 | |||||
Revenue | ||||||
U.S. Department of Defense | 7 | % | 11 | % | ||
U.S. Department of Defense subcontractors | 75 | % | 54 | % | ||
25
Operating Expenses
Cost of Revenue and Gross Profit
Three months ended August 31, | |||||||||
| 2007 | 2006 | % Change | |||||||
Gross Profit by Segment Company | |||||||||
API Electronics | 30.9 | % | 27.4 | % | 3.5 | % | |||
National Hybrid Group | 35.2 | % | N/A | % | N/A | % | |||
Filtran Group | 21.5 | % | 18.2 | % | 3.3 | % | |||
TM Systems | 27.7 | % | 20.6 | % | 7.1 | % | |||
Keytronics | 8.4 | % | 31.5 | % | (23.1 | %) | |||
API NRC | N/A | % | N/A | % | N/A | % | |||
Overall | 28.1 | % | 22.9 | % | 5.2 | % | |||
The Company’s overall gross profit was 28.1% for the three months ended August 31, 2007, an increase from 22.9% for the three months ended August 31, 2006. Accordingly, the overall cost of revenue was 71.9% for the three months ended August 31, 2007 compared to 77.1% for the three months ended August 31, 2006.
API Electronics posted a gross profit increase of 3.1% for the three months ended August 31, 2007 to 30.5% from 27.4% for the three months ended August 31, 2006. This increase is attributed to continued improvements in operations, specifically related to decrease in manufacturing overhead staff.
Filtran Group saw their gross profit increase to 21.5% for the three months ended August 31, 2007 from 18.2% for the three months ended August 31, 2006. The increase in gross profit was related to product mix related to sales to a military subcontractor that produced higher gross margins and to a one time sale of electronic “ADSL” filters that were written off several years previously.
TM Systems’ gross profit increased by 7.1% to 27.7% for the three months ended August 31, 2007 from the prior period in 2006. The result was largely due to higher profit revenues due to revenues derived from the US Navy Stabilized Glide Scope Indicators (SGSI) and revenues from visual landing aide equipment sold to U.S. Military sub contractor Avondale Shipyards, a division of Northrop Grumman.
The major components of cost of sales for the three months ended May 31, are as follows:
| 2007 | % of sales | 2006 | % of sales | |||||||||
Materials Used | $ | 1,652,561 | 23.3 | % | $ | 1,075,748 | 27.0 | % | ||||
Manufacturing Labor | $ | 1,139,186 | 16.0 | % | $ | 731,308 | 18.4 | % | ||||
Manufacturing Overhead | $ | 2,314,356 | 32.6 | % | $ | 1,265,652 | 31.8 | % | ||||
| $ | 5,106,103 | 71.9 | % | $ | 3,072,708 | 77.2 | % | |||||
As a percentage of sales, for the three months ended August 31, 2007, cost of sales decreased by 5.3% compared to the three months ended August 31, 2006. The decrease in cost of sales is due to the inclusion of National Hybrid Group operations, whose product mix enjoys high gross margins, the decrease is also due to improvements in gross margins at API Electronics, Filtran Group and TM Systems offset by lower margins at Keytronics.
Selling Expenses
Selling expenses increased to $595,007 for the three months ended August 31, 2007 from $253,875 for the three months ended August 31, 2006, mainly as a result of the inclusion of National Hybrid Group’s operations for the three month period ending August 31, 2007 compared to $0 in 2006. As a percentage of sales, selling expenses were 8.4% for the three months ended August 31, 2007, a modest increase of 0.3% compared to the three months ended August 31, 2006.
26
The major components of selling expenses are as follows:
| Three months ended August 31, | ||||||||||||
| 2007 | % of sales | 2006 | % of sales | |||||||||
Payroll Expense – Sales | $ | 226,650 | 3.2 | % | $ | 112,303 | 2.8 | % | ||||
Commissions Expense | $ | 160,489 | 2.3 | % | $ | 83,260 | 2.1 | % | ||||
The overall increase in selling expenses was attributed to payroll and commission expenses related to the inclusion of National Hybrid Group expenses for the three months ended August 31, 2007.
Business Development
The Company’s business and development expenses increased to $42,776 for the three months ended August 31, 2007 from $0 incurred during the three months ended August 31, 2006. The increase is due to the continued advancement of the Company’s strategic vision of incorporating next generation nanotechnology based-technology into the design and manufacturing of existing and future product lines in our new state of the art facility under the oversight of top nanotechnology scientists and engineers.
General and Administrative Expenses
General and administrative expenses increased to $1,384,598 for the three months ended August 31, 2007 from $611,482 for the three months ended August 31, 2006. The increase is largely a result of non-cash stock based compensation expense of $353,347 and $303,350 due to the addition of the National Hybrid Group operations in the three months ended August 31, 2007.
The major components of general and administrative expenses are as follows:
| Year ended August 31, | ||||||||||
| 2007 | 2006 | $ Change | ||||||||
Senior Management Salary | $ | 452,002 | $ | 67,635 | $ | 384,367 | ||||
Rent and Management Fees | $ | 46,951 | $ | 46,129 | $ | 822 | ||||
Professional Services | $ | 242,780 | $ | 67,036 | $ | 175,744 | ||||
Office Salary | $ | 214,799 | $ | 72,659 | $ | 142,140 | ||||
Depreciation and Amortization | $ | 65,119 | $ | 82,692 | $ | (17,573 | ) | |||
Senior management salaries increased to $452,002 for the three months ended August 31, 2007 from $67,635 an increase of $384,367 due to non-cash stock based compensation of $353,347 and the inclusion of NHI Group expenses for the full three months of approximately $31,000.
Office salaries increased to $214,799 for the three months ended August 31, 2007 from $72,659 an increase of $142,140 due largely to the inclusion of National Hybrid Group results for the three months ended August 31, 2007.
Professional services include legal, accounting, audit and taxation services increased for the three months ended August 31, 2007 to $242,780 from $67,036 for the three months ended August 31, 2006, an increase of $175,744 largely as a result of increased legal fees pertaining to public filings, and due to the inclusion of professional accounting and information technology fees incurred at National Hybrid Group for the three months ended August 31, 2007.
Research and Development Expenses
Research and development increased to $284,269 for the three months ended August 31, 2007 from $0, for the three months ended August 31, 2006. The increase is centered around the creation of API NRC, whose Somerset, New Jersey’s facility provides the Company with unique and powerful material processing and fabrication capabilities. These capabilities span the full gamut of silicon wafer processing to the very latest electronic and optical fabrication technologies based in nanoscience and MEMS. This expands the Company's abilities to better serve its current customers and to develop new electronic products. It also opens possibilities for new business based on hybrid optics. This facility will also be the centerpiece of the Company's research and development program.
27
Research and development expenses also increased due to National Hybrid Group’s continuous and significant investment in research and development to design and produce next generation products for their entire product line including but not limited to the 1553 data bus, solid state power controller and high density multi-chip modules.
The Company is committed to increasing research and development investment on a going forward basis in anticipation that it will deliver next generation products using research conducted at the API Nanofabrication & Research Company facility, impacting the wide range of current products the Company sells and for new product possibilities.
Operating Income (Loss)
The Company posted an operating loss for the three months ended August 31, 2007 of $313,111 compared to operating income of $44,278 for the three months ended August 31, 2006. The decrease in operating income is attributed to non-cash stock-based compensation expense of $353,347 and to the Company’s investment in research and development of $284,269 for the three months ended August 31, 2007. The increased investment in research and development is centered around the Company’s new strategic vision of incorporating next generation nanotechnology based technology into the design and manufacturing of existing and future product lines in the new state of the art facility in Sommerset, New Jersey under the oversight of top nanotechnology scientist and engineers.
Other Income And Expense
Other expense was $97,685 for the three months ended August 31, 2007 compared to $11,300 for the three months ended August 31, 2006.
The increase is attributable to interest accrued on the related party note payable of $4,000,000, funds used to acquired the assets of NoC. Total accrued interest charges related to the note was $57,863 for the three months ended August 31, 2007 compared to $0 in 2006.
The Company also incurred foreign currency translation losses of $53,443 from a gain $5,001 in the three months ended August 31, 2006. The increase is due to the rapid decrease of the U.S. dollar versus Canadian dollar, which negatively affected Canadian operations.
Income Taxes
The provision for income taxes amounted to $301,589 for the three months ended August 31, 2007 compared to an expense of $34,634 for the three months ended August 31, 2006. Company and its subsidiaries have non-capital losses of approximately $138,492 to apply against future taxable income. These losses will expire as follows: $14,000, $55,600 and $67,814 in 2010, 2012 and 2017, respectively.
Net Income (Loss)
The Company incurred a net loss for the three months ended August 31, 2007 of $712,385 compared to a net loss of $1,656 for the three months ended August 31, 2006. The Company has recorded a tax provision even though the Company has a net loss before taxes due to an increase in the deferred tax asset valuation allowance related to stock based compensation expense incurred in the current period and a change in estimate related to the valuation allowance related to stock based compensation expense. The increase in net loss is attributed to non-cash stock-based compensation of $353,347, estimated deferred taxes of $301,589, and an increase in research and development of $284,269 for the three months ended August 31, 2007.
Liquidity and Capital Resources
Three months ended August 31, 2007 compared to the year ended May 31, 2007
Liquidity
At August 31, 2007, the Company held cash of $3,020,239 compared to $3,277,468 at May 31, 2007. The decrease is largely due to the repayment of operating credit lines of $196,389.
At August 31, 2007, the Company’s working capital was sufficient to meet the Company’s current requirements.
Inventory decreased marginally from $10,360,869 at May 31, 2007 to $10,311,346 at August 31, 2007. Accounts receivable decreased 3.1% from $3,466,028 at May 31, 2007 to $3,359,472 at August 31, 2007. Accounts payable decreased by $371,586 to $2,807,401 at August 31, 2007 from $3,178,987 at May 31, 2007.
28
Long-term debt (current and long-term portion) increased to $4,514,647 at August 31, 2007 from $471,908 at May 31, 2007. The increase is a result of the $4,000,000 loan, which the proceeds were used to acquire the assets of NoC.
Total assets increased to $30,306,695 at August 31, 2007 from $27,346,760 at May 31, 2007. The increase resulted primarily from the asset acquisition of NoC.
Operating, Investing and Financing Activities
Cash used by operating activities increased to $48,273 for the three months ended August 31, 2007 compared to cash used by operations of $32,676 for the three months ended August 31, 2006, a marginal increase of $15,597.
Investing activities for the three months ended August 31, 2007 consisted of the purchase of capital assets of $33,839, and the use of net cash proceeds of $4,045,671 for the acquisition of all the assets of NoC (2006 -$39,490).
Financing activities included net proceeds from long-term debt of $4,000,000 plus accrued interest of $57,863 (2006—$0), and repayments of long term debt $15,124 (2006—$28,093), and bank indebtedness advances, net of repayments, of $196,389 compared to an increase in bank indebtedness of $108,863 for three months ended August 31, 2006 .
Capital Resources
The Company’s subsidiary API Electronics has a working capital line of credit of $500,000. At August 31, 2007, API Electronics had borrowed $310,147 (May 31, 2007—$395,147) against this line. The credit is secured by all of its assets pursuant to a general security agreement and is guaranteed by Chief Operating Officer of the Company. The bank indebtedness is due on demand and bears interest at US prime plus 1%. The line is subject to annual renewal on April 14, 2008.
The Company’s subsidiary Filtran Limited has a line of credit of $943,000 (Cdn$1,000,000). At August 31, 2007, Filtran Limited had borrowed $18,852 (May 31, 2007—$158,375). The interest rate on any borrowed funds is charged at Canadian prime. The agreement also allows Filtran to lease capital purchases at Canadian prime plus 1% up to $33,000. The lender has a general security agreement and a first collateral mortgage on Filtran’s assets and building. The line is subject to annual renewal on August 31, 2008.
The Company’s subsidiary Keytronics has a working capital line of credit of $125,000. At August 31, 2007, Keytronics borrowed $111,753 (May 31, 2007—$81,753) against this line. This credit is secured by all Keytronics’ assets pursuant to a general security agreement. This line charges prime plus 1 % for borrowings.
The Company is not committed to any significant capital expenditures at present.
The Company believes that cash flows from operations, funds available under its credit facilities and other sources of cash will be sufficient to meet its anticipated cash requirements.
Summary of Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgements is contained in Item 6, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Summary of Critical Accounting Policies and Estimates, of our Annual Report on Form 10-KSB for the fiscal year ended May 31, 2007.
Contractual Obligations and Commercial Commitments:
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||
Building leases | $ | 1,634,379 | $ | 379,873 | $ | 851,272 | $ | 301,679 | $ | 101,555 | |||||
Equipment leases | 31,242 | 8,220 | 17,817 | 5,205 | — | ||||||||||
Promissory note, related party | 4,057,863 | — | — | 4,057,863 | — | ||||||||||
Other long term liabilities | 456,784 | 389,587 | 67,197 | — | — | ||||||||||
Total | $ | 6,180,268 | $ | 777,680 | $ | 936,286 | $ | 4,364,747 | $ | 101,555 | |||||
29
Effects of Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” which will permit entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect that the adoption of SFAS No. 159 will have a significant impact on the consolidated results of operations or financial position of the Company.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS No. 157 retains the exchange price notion in earlier definitions of fair value, but clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or liability in the principal or most advantageous market for the asset or liability. Moreover, the SFAS states that the transaction is hypothetical at the measurement date, considered from the perspective of the market participant who holds the asset or liability. Consequently, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price), as opposed to the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Entities are encouraged to combine the fair value information disclosed under SFAS No. 157 with the fair value information disclosed under other accounting pronouncements, including SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where practicable. The guidance in this Statement applies for derivatives and other financial instruments measured at fair value under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” at initial recognition and in all subsequent periods.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning after February 15, 2007, and interim periods within those fiscal years, although earlier application is encouraged. Additionally, prospective application of the provisions of SFAS No. 157 is required as of the beginning of the fiscal year in which it is initially applied, except when certain circumstances require retrospective application. The Company is currently evaluating the impact of this statement on its results of operations or financial position of the Company.
In June 2006, the FASB has published FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes, to address the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprise’s financial statements. FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The adoption of FIN 48 did not have a material effect on the Company’s financial condition or results of operations.
Off-Balance Sheet Arrangements
During the three months ended August 31, 2007 and the year ended May 31, 2007, the Company did not use off-balance sheet arrangements.
30
Shareholders’ Equity
As of August 31, 2007 there were 64,994,772, common shares of API Nanotronics Corp. issued and outstanding, no warrants outstanding and exercisable, and 6,725,000 stock options outstanding at exercise prices ranging from $.464 to $1.345 with remaining average contractual lives of 5.27 years. Additionally, at August 31, 2007, 7,015,550 exchangeable shares were issued and outstanding and not held by the Company. Therefore, because exchangeable shares, which were issued in connection with the Plan of Arrangement with API Electronics Group Corp. are the economic equivalent to shares of the Company’s common stock, the Company had the economic equivalent of 72,010,322 shares of common stock outstanding at that date. This total does not include the 500,680 shares of common stock or exchangeable shares that still could be issued as a result of the Plan of Arrangement for API Electronics Group Corp. common shares that have not been converted into our common stock or exchangeable shares.
During the 2007 fiscal year ended May 31, 2007, the Company accepted subscriptions for 4,250,270 shares of its common stock, which were sold in a Regulation S private placement to investors not located in the United States for $1.85 per share. The Company received gross proceeds of $7,858,750 for such shares. As of May 31, 2007, the Regulation S private placement was closed.
During the 2007 fiscal year ended May 31, 2007, API acquired and retired 30,000 common shares at a total cost of $57,000.
During the 2006 fiscal year ended May 31, 2007, 4,000,000 common shares of API were issued upon the exercise of stock options for proceeds of $1,000,000 plus $996,000 of additional paid in capital.
All the above share numbers reflect the effect of the 10 for 1 conversion ratio of the Plan of Arrangement.
31
This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.
The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” “expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.
The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.
We wish to caution investors that any forward-looking statements made by or on our behalf are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to: changing economic and political conditions in the United States and in other countries, war, changes in governmental spending and budgetary policies, governmental laws and regulations surrounding various matters such as environmental remediation, contract pricing, and international trading restrictions, customer product acceptance, continued access to capital markets, and foreign currency risks.
We wish to caution investors that other factors might, in the future, prove to be important in affecting our results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.
32
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks related to changes in foreign currency and interest rates as discussed below. All amounts are in US dollars unless otherwise indicated.
Foreign Currency Risk
A substantial amount of our revenues and receivables are denominated in Canadian dollars. We translate revenue and the related receivable at the prevailing exchange rate at the time of the sale. Also, a substantial amount of our expenses and payables/bank operating loans are denominated in Canadian dollars. We translate expenses and the related payables at the prevailing exchange rate at the time of the purchase. Funds denominated in Canadian dollars are translated into US dollars at the rate in effect on the balance sheet date. Translation gains and losses resulting from variations in exchange rates, upon translation into US dollars, are included in results of operations for integrated operations. Our Canadian subsidiary, Filtran Limited, is a self-sustaining operation and it is translated at the current rates of exchange whereby all exchange gains and losses are accumulated in the foreign translation account on the balance sheet.
Any increase in the relative value of the Canadian dollar to the U.S. dollar results in increased revenue and increased expenses. A decrease in the relative value of the Canadian dollar to the US dollar would decrease sales revenue and decreased expenses.
Other (income) loss for the three months ended August 31, 2007 included $53,443 of foreign exchange losses (2006 – ($5,001)).
We do not use financial instruments for trading purposes and are not a party to any leverage derivatives. We do not engage in hedging transactions to manage our foreign currency risk.
Interest Rate Risk
We believe that we have limited exposure to changes in interest rates.
Long-term Debt Risk
At August 31, 2007, we had long-term debt of $4,514,647 compared to $471,908 for the year ended May 31, 2007. Substantially all of the debt is fixed rate debt and accordingly there is currently no significant impact on cash flows associated with its long-term debt.
Capital Leases Payable Risk
At August 31, 2007, we had capital leases payable of $31,242 compared to $33,410 for the year ended May 31, 2007. The debt underlying capital lease payable is fixed rate debt and accordingly there is currently no significant interest rate risk associated with its capital leases payable.
Short-Term Borrowings Risk
At August 31, 2007, we had a line of credit facilities in place for three of its subsidiaries (API Electronics Inc. $500,000; Filtran Limited $907,000 ($1,000,000 CDN) and Keytronics, Inc. ($125,000). The total bank indebtedness at August 31, 2007 was $440,752 compared to $635,276 at May 31, 2007. The line of credit facilities are variable rate debt tied to the prime rates in the US and Canada respectively. Accordingly, we are subject to risk of prime rate increases that would increase its interest expense. A hypothetical 1% increase in interest rates would result in an annual change in net income (loss) of approximately ($4,400) based on the August 31, 2007 bank indebtedness of $440,752.
Marketable Securities and Cash and Cash Equivalents Risk
We periodically hold cash equivalents consisting of investments in money market instruments. At August 31, 2007, the Company held cash equivalent investments of $2,262,115 (2006—$0). This helps mitigate the risk of interest rate increases in its lines of credit. These cash equivalent investments are subject to interest changes and interest income will fluctuate directly with changes in interest rates. A hypothetical 1% increase in interest rates would result in an annual change in net income (loss) before income taxes of approximately $30,202 based on the August 31, 2007 cash and cash equivalent balance of $3,020,239. The Company held marketable securities of $476,607 as of August 31, 2007, compared to $605,011 at May 31, 2007. A hypothetical 10% market price increase would result in an annual change in other comprehensive income (loss) before taxes of approximately $47,660 based on the August 31, 2007 marketable securities balance of $476,607. A hypothetical 10% decrease in the market price of our marketable equity securities at August 31, 2007 would cause a corresponding 10% decrease in the carrying amounts of these securities or a loss of $(47,660).
We do not enter into derivative instruments to manage interest rate exposure.
| ITEM 4T. | CONTROLS AND PROCEDURES |
| (a) | Evaluation of Disclosure Controls and Procedures. |
We maintain “disclosure controls and procedures,” as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”)), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information we are required to disclose in reports that are filed and submitted under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time period specified in SEC rules and forms, including during the period in which this quarterly report on Form 10-Q was being prepared.
| (b) | Changes in Internal Controls over Financial Reporting |
During the first three months of the fiscal year ending May 31, 2008, which three month period ended August 31, 2007, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
| ITEM 1. | LEGAL PROCEEDINGS |
We are not a party to any legal significant proceedings nor is our property the subject of any legal proceedings. Our management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our property. No director, officer or affiliate of ours is (i) a party adverse to us in any legal proceedings, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our property.
| ITEM 1A. | RISK FACTORS |
Not applicable.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
No further disclose required. During the quarter ended August 31, 2007, the Company issued options on 50,000 shares of common stock with an option exercise price of $1.615 per share to two new directors as previously reported on Form 8-K filed June 22, 2007. On July 2, 2007, the Company repriced 1,650,000 options at an option exercise price of $1.345 per share for options previously issued to directors, employees and a consultant to the Company as previously reported on a Form 8-K filed July 3, 2007. All such option issuances were exempt pursuant to Section 4(2) of the Securities Act.
33
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBIT AND REPORTS ON FORM 8-K |
| 3.1 | Certificate of Incorporation (incorporated by reference from the Company’s Registration Statement on Form 10-SB filed on February 10, 2000). | |
| 3.2 | Amendment to Certificate of Incorporation dated May 20, 1999 (incorporated by reference from the Company’s Form 10-KSB filed on April 27, 2006). | |
| 3.3 | Amendment to Certificate of Incorporation dated September 21, 2005 (incorporated by reference from the Company’s Form 10-KSB filed on April 27, 2006). | |
| 3.4 | Amendment to Certificate of Incorporation dated November 6, 2006 (incorporated by reference from Amendment No. 2 to Registration Statement on Form S-1 filed on November 6, 2006). | |
| 3.5 | Amended and Restricted By-laws (incorporated by reference from the Company’s Amendment No. 1 to Registration Statement on Form S-1 filed on October 27, 2006). | |
| 3.6 | Audit Committee Charter (incorporated by reference from Exhibit A of the Company’s definitive proxy statement filed on September 18, 2007). | |
| 10.1 | Subscription Agreement with Investors in $5,000,000 Private Placement (incorporated by reference to the Company’s Form 8-K filed on February 28, 2006) | |
| 10.2 | Consulting Agreement with Martin Moskovits (incorporated by reference to the Company’s Form 8-K filed on March 24, 2006). | |
| 10.3 | Amendment to Consulting Agreement, dated June 29, 2006, among the Company, Martin Moskovits, Steven Bulwa and API Electronics Group Corp. (incorporated by reference to the Company’s Form S-1 filed on August 14, 2006). | |
| 10.4 | Compensation Arrangement between the Company and Donald A. Wright (incorporated by reference from the Company’s Form 8-K filed on March 29, 2006). | |
| 10.5 | Option Agreement between the Company and Donald A. Wright (incorporated by reference from the Company’s Form 8-K filed on March 29, 2006). | |
| 10.6 | Support Agreement dated February 6, 2006 among API Nanotronics Corp. and RVI Sub, Inc. (incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006) | |
| 10.7 | Voting and Exchange Agreement dated February 6, 2006 among API Nanotronics Corp., RVI Sub, Inc. and Equity Transfer & Trust Company. (incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006) | |
| 10.8 | Share Capital and Other Provisions included in the Articles of Incorporation of API Nanotronics Sub, Inc. f/k/a RVI Sub, Inc. (incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006) | |
34
| 10.9 | API Nanotronics Corp. 2006 Equity Incentive Plan (incorporated by reference from Amendment No. 1 to the Company’s Form S-1 filed on October 26, 2006). | |
| 10.11 | Stock Purchase Agreement, dated January 24, 2007, among the Company, the Estate of Benedict Pace, National Hybrid, Inc. and Pace Technologies, Inc. (incorporated by reference from the Company’s Form 8-K filed on January 30, 2007) | |
| 10.12 | Executive Employment Agreement between the Company and Martin Moskovits dated as of February 14, 2007 (incorporated by reference from Current Report on Form 8-K filed on February 15, 2007) | |
| 10.13 | Non Statutory Stock Option Agreement dated July 2, 2007 between the Company and Jonathan Pollack (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.14 | Non Statutory Stock Option Agreement dated July 2, 2007 between the Company and Arthur Cape (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.15 | Incentive Stock Option Agreement dated July 2, 2007 between the Company and Thomas W. Mills, Sr. (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.16 | Incentive Stock Option Agreement dated July 2, 2007 between the Company and Claudio Mannarino (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.17 | Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Phillip DeZwirek (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.18 | Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Jason DeZwirek (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.19 | Non-Statutory Stock Option Agreement, dated March 15, 2006, between the Company and Martin Moskovits (incorporated by reference from the Company’s Form 8-K filed on March 24, 2006). | |
| 10.20 | Notice and Agreement of Grant of Stock Option, dated July 2, 2007, between the Company and Martin Moskovits (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.21 | Notice and Agreement of Grant of Stock Option, dated July 2, 2007, between the Company and Martin Moskovits (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.22 | The compensation arrangement with respect to the service of Arthur Cape, Jonathan Pollack and Donald Wright on the Board of Directors of the Company and its committees as set forth in Form 8-K filed on June 22, 2007 (incorporated by reference from the Company’s Form 8-K filed on June 22, 2007). | |
| 10.23 | Asset Purchase Agreement dated July 17, 2007 between API Nanofabrication and Research Corporation and NanoOpto Corporation (incorporated by reference from the Company’s Form 8-K filed on July 23, 2007). | |
| 10.24 | Promissory Note of API Nanotronics Corp. in the principal amount of $4,000,000, dated as of July 18, 2007, in favor of Jason DeZwirek (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
| 10.25 | Lease, dated July 19, 2007, between Franklin Cottontail LLC and API Nanofabrication and Research Corporation and Guaranty of Lease by API Nanotronics Corp. (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007). | |
35
| 14.1 | Code of Ethics for the Company Directors, Officers, Employees and Agents including Principal Executive, Senior Financial Officers and Other Designated Officers (incorporated by reference from the Company’s Form 8-K filed on June 22, 2007). | |
| 16.1 | Letter on Change in Certifying Accountant (incorporated by reference from the Company’s Form 8-K filed on February 13, 2004). | |
| 16.2 | Letter on Change in Certifying Accountant (incorporated by reference from the Company’s Form 8-K filed on February 8, 2006). | |
| 16.3 | Letter on Change in Certifying Accountants (incorporated by reference from the Company’s Form 8-K filed on December 1, 2006). | |
| 16.4 | Letter on Change in Certifying Accountants (incorporated by reference from the Company’s Form 8-K filed on December 22, 2006). | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer (filed herewith). | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith). | |
| 32.1 | Certification of the Chief Executive Officer, President and Secretary Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith). | |
| 32.2 | Certification of the Chief Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith). | |
36
Pursuant to the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| API NANOTRONICS CORP. | ||||||||
| Date: October 12, 2007 | By: | /s/ Phillip DeZwirek | ||||||
| Phillip DeZwirek | ||||||||
Chief Executive Officer Chairman and Treasurer | ||||||||
| By: | /s/ Claudio Mannarino | |||||||
| Claudio Mannarino | ||||||||
Chief Financial Officer and Vice President | ||||||||
37
