UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[o] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended JUNE 30, 2008
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 000-50177
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NANO SUPERLATTICE TECHNOLOGY, INC.
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(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 95-4735252
- ----------------------------- --------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
NO. 666, JHENSING ROAD, GUEISHAN TOWNSHIP, TAOYUAN COUNTY 333, TAIWAN, ROC
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(Address of principal executive offices)
011-886-3-349-8677
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(Registrant's telephone number, including area code)
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 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, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] (Do not check if smaller reporting company)
Smaller reporting company |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|
There were 34,508,000 shares of the registrant's common stock outstanding as of
August 15, 2008.
NANO SUPERLATTICE TECHNOLOGY, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4T. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures 21
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NANO SUPERLATTICE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
------------ ------------
2008 2007
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 74,917 $ 184,322
Restricted cash 151,545 183,119
Accounts receivable, net 2,925,116 2,953,859
Inventory 3,324,787 2,181,153
Other receivables 81,128 91,185
Prepaid expenses 8,301 14,922
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Total Current Assets 6,565,794 5,608,560
------------ ------------
Fixed Assets, net 8,675,494 8,146,440
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Other Assets
Deposits 26,357 24,679
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Total Other Assets 26,357 24,679
------------ ------------
Total Assets $ 15,267,645 $ 13,779,679
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 3,320,532 $ 2,896,675
Notes payable 1,372,804 1,554,419
Current portion of capital lease obligations 23,816 200,169
------------ ------------
Total Current Liabilities 4,717,152 4,651,263
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Long Term Liabilities
Due to related party 4,427,459 2,895,622
Long term debt, net of current portion 1,483,642 1,470,838
------------ ------------
Total Long Term Liabilities 5,911,101 4,366,460
------------ ------------
Total Liabilities 10,628,353 9,017,723
------------ ------------
Stockholders' Equity
Common stock, $.0001 par value, 80,000,000 authorized,
34,508,000 issued and outstanding 3,451 3,434
Additional paid-in-capital 6,754,878 6,754,878
Other comprehensive income 560,555 216,607
Accumulated deficit (2,767,011) (2,309,345)
------------ ------------
4,551,873 4,665,574
Non-controlling interest in subsidiary 87,519 96,382
------------ ------------
Total Stockholders' Equity 4,639,392 4,761,956
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,267,645 $ 13,779,679
============ ============
See Accompanying Notes to Financial Statements.
3
NANO SUPERLATTICE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, 2008 JUNE 30, 2007 JUNE 30, 2008 JUNE 30, 2007
--------------- --------------- --------------- ---------------
Sales, net $ 3,979,156 $ 4,117,686 $ 1,841,490 $ 2,113,728
Cost of Sales 4,073,169 3,975,071 1,908,556 2,206,150
--------------- --------------- --------------- ---------------
Gross (loss) profit (94,013) 142,615 (67,066) (92,422)
General and administrative expenses 257,719 293,347 152,536 115,936
--------------- --------------- --------------- ---------------
(Loss) from operations (351,732) (150,732) (219,602) (208,358)
--------------- --------------- --------------- ---------------
Other (income) expense
Interest income (858) (14,581) (187) (7,381)
Other (income) expense (2,389) (6,634) 23,337 (553)
Miscellaneous expense 38,029 13,040 -
Interest expense 71,147 98,571 35,578 44,674
--------------- --------------- --------------- ---------------
Total other expense (income) 105,929 90,396 58,728 36,740
--------------- --------------- --------------- ---------------
Net (loss) before income taxes and (457,661) (241,128) (278,330) (245,098)
minority interest
Income taxes (8,868) (11,674) (278) (11,674)
Minority interests 8,863 2,883 5,293 4,178
--------------- --------------- --------------- ---------------
Net (loss) attributable to
controlling interest $ (457,666) $ (249,919) $ (273,315) $ (252,594)
=============== =============== =============== ===============
Net (loss) income per share
(basic and diluted) $ (0.013) $ (0.008) $ (0.008) $ (0.008)
=============== =============== =============== ===============
Weighted average number of shares
(basic and diluted) 34,508,000 32,343,000 34,489,000 32,343,000
=============== =============== =============== ===============
See Accompanying Notes to Financial Statements.
4
NANO SUPERLATTICE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
June 30,
--------------------------
2008 2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (457,666) $ (249,919)
----------- -----------
Adjustments to reconcile net (loss) to net cash (used) in operating
activities:
Depreciation and amortization 343,012 303,460
Decrease in notes and accounts receivable, net 28,743 29,953
Decrease in other receivables 10,057 5,653
(Increase) in inventories (1,143,634) (600,031)
Decrease in prepaid expenses 6,621 25,290
(Increase) in refundable deposits (1,678) -
(Increase) in other assets - (12,058)
Increase in accounts payable and accrued expenses 423,857 456,295
----------- -----------
Total Adjustments (333,023) 208,562
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Net cash (used) in by operating activities (790,688) (41,357)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in comprehensive income 343,948 -
(Decrease) in exchange rate effecting cash (836,997) (2,598)
Decrease in restricted cash 31,574 35,057
Purchases of property and equipment, net of dispositions (35,069) (351,131)
----------- -----------
Net cash (used) in investng activities (496,544) (318,672)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in capital 17 -
(Decrease) in non-controlling interest of subsidiary (8,863) (2,883)
(Decrease) in notes and loans payable (168,810) (610,760)
(Decrease) in capital lease obligation (176,353) -
Increase in funds provided by related party 1,531,837 803,667
----------- -----------
Net cash provided by financing activities 1,177,828 190,024
----------- -----------
Net (decrease) in cash and equivalents (109,404) (170,005)
Cash and equivalents at beginning of period 184,322 207,920
----------- -----------
Cash and equivalents at end of period $ 74,918 $ 37,915
=========== ===========
Supplemental cash flow disclosures:
Income tax payments; $ 18,867 $ 11,674
=========== ===========
Interest payments $ 71,512 $ 99,588
=========== ===========
See Accompanying Notes to Financial Statements.
5
NANO SUPERLATTICE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
JUNE 30, 2008 AND DECEMBER 31, 2007
June 30, December 31,
----------- -----------
2008 2007
----------- -----------
Common stock, $.0001 par value - number of shares outstanding
Balance at beginning of period - 34,343,000 $ 3,434 $ 3,234
Common stock issued 165,000 17 200
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Balance at end of period -34,508,000 3,451 3,434
----------- -----------
Additional paid in capital
Balance at beginning of period 6,754,878 6,735,078
Common stock issued - in excess of par value - 19,800
----------- -----------
Balance at end of period 6,754,878 6,754,878
----------- -----------
Other comprehensive income
Balance at beginning of period 216,607 220,442
Foreign currency translation 343,948 (3,835)
----------- -----------
Balance at end of period 560,555 216,607
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Accumulated (Deficit)
Balance at beginning of period (2,309,345) (2,189,099)
Prior period non-controlling interest adjustment - 576
Net (loss) (457,666) (120,822)
----------- -----------
Balance at end of period (2,767,011) (2,309,345)
----------- -----------
Total Stockholders' equity at end of period $ 4,551,873 $ 4,665,574
=========== ===========
See Accompanying Notes to Financial Statements.
6
NANO SUPERLATTICE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
NOTE A - ORGANIZATION
Nano Superlattice Technology, Inc., formerly Wigwam Development, Inc. was
incorporated on July 20, 1998 under the laws of the State of Delaware. Nano
Superlattice Technology, Inc.-BVI was incorporated on February 18, 2004 under
the laws of the British Virgin Islands. Nano Superlattice Technology,
Inc.-Taiwan was incorporated under the laws of the Republic of China on
September 6, 1994. Nano Superlattice Technology, Inc. owns 100% of the capital
stock of Nano Superlattice Technology, Inc.-BVI, and Nano Superlattice
Technology, Inc.-BVI owns 98.1% of the capital stock of Nano Superlattice
Technology, Inc.-Taiwan. When used in these notes, the term "Company," means
Nano Superlattice Technology, Inc. and its subsidiaries.
Nano Superlattice Technology, Inc. acquired all of the issued and outstanding
capital stock of Nano Superlattice Technology, Inc.-BVI, pursuant to an Exchange
Agreement, dated as of May 26, 2004, by and among Nano Superlattice Technology,
Inc.-BVI and Nano Superlattice Technology, Inc. (the "Exchange Agreement").
Pursuant to the Exchange Agreement, Nano Superlattice Technology, Inc.-BVI
became a wholly owned subsidiary of Nano Superlattice Technology, Inc. and, in
exchange for the Nano Superlattice Technology, Inc.-BVI shares, Nano
Superlattice Technology, Inc. issued 2,504,000 shares of its common stock to the
shareholders of Nano Superlattice Technology, Inc.-BVI, representing 91.5% of
the issued and outstanding capital stock of Nano Superlattice Technology, Inc.
at that time. On June 2, 2004, Nano Superlattice Technology, Inc.-BVI completed
the purchase of 98.1% of the common stock of Nano Superlattice Technology, Inc.-
Taiwan, a developer and producer of nano-scale coating technology to be applied
to various mechanical tools and metal surfaces for sale to manufacturers mainly,
but not limited to the computer, mechanical, and molding industries.
The Company is currently earning most of its revenues by selling computer
peripherals, consumer electronics and communication cable on a wholesale level
(for resale). However, it believes that its future growth and success will be
based on the development and sale of its nano-scale coating technology.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements have been prepared by Nano Superlattice
Technology, Inc. pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"), Form 10-Q and Regulation S-K and generally
accepted accounting principles for interim financial reporting period. These
financial statements are unaudited and, in the opinion of management, include
all adjustments (consisting of normal recurring adjustments and accruals)
necessary for a fair presentation of the balance sheets, operations, cash flows
and changes in stockholders' equity for the periods presented. Operating results
for the three months ended June 30, 2008 and 2007 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2008, or any
future period, due to seasonal and other factors. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting policies have been omitted in
accordance with the rules and regulations of the SEC. These financial statements
should be read in conjunction with the audited consolidated financial statements
and the accompanying notes included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2007.
7
REVENUE RECOGNITION
Revenue from sales of products to customers is recognized upon shipment or when
title passes to customers based on the terms of the sales, and is recorded net
of returns, discounts and allowances.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nano Superlattice
Technology, Inc., its wholly owned subsidiary Nano Superlattice Technology, Inc.
- - BVI and its majority owned subsidiary, Nano Superlattice Technology, Inc -
Taiwan. All material intercompany accounts, transactions and profits have been
eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
Certain changes to the 2007 financial statements have been made to conform to
the 2008 financial statement format. The changes are in conformity with PCAOB
Standard No. 6, "Evaluating Consistency of Financial Statements", released on
January 29, 2008.
RISKS AND UNCERTAINTIES
The Company is subject to substantial risks from, among other things, rapid
changes in technology, rapidly changing customer requirements, limited operating
history, and the volatility of public markets.
CONTINGENCIES
Certain conditions may exist as of the date the financial statements are issued
that may result in a loss to the Company, but that will only be resolved when
one or more future events occur or fail to occur. The Company's management and
legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought. If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectability of accounts receivable, accounts payable, sales
returns and recoverability of long-term assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for loss on receivables based on a review of
the current status of existing receivables, historical collection experience,
subsequent collections and management's evaluation of the effect of existing
economic conditions.
8
FIXED ASSETS
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for major additions and improvements are capitalized and minor
replacements, maintenance and repairs are charged to expense as incurred.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets, or the remaining term of the lease, as follows:
Furniture and Fixtures 2-5 years
Equipment 5-20 years
Computer Hardware and Software 2-5 years
EXCHANGE GAIN (LOSS)
As of June 30, 2008 and June 30, 2007, the transactions of Nano Superlattice
Technology, Inc.-Taiwan were denominated in a foreign currency and are recorded
in New Taiwan dollars. Exchange gains and losses are recognized for the
different foreign exchange rates applied when the foreign currency assets and
liabilities are settled.
TRANSLATION ADJUSTMENT
As of June 30, 2008 and 2007, the accounts of Nano Superlattice Technology,
Inc-Taiwan were maintained, and its financial statements were expressed, in New
Taiwan Dollars (NTD). Such financial statements were translated into U.S.
Dollars (USD) in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52 "Foreign Currency Translation" with the NTD as the functional
currency. According to the Statement, all assets and liabilities are translated
at the current exchange rate at June 30, stockholder's equity are translated at
the historical rates, and income statement items are translated at the weighted
average exchange rate for the period. The resulting translation adjustments are
reported under other comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income."
As of June 30, 2008 and 2007, the exchange rates between NTD and the USD were
NTD$1=USD$0.0329450 and NTD$1=USD$0.030450, respectively. The weighted-average
rate of exchange between NTD and USD as of June 30, 2008 and June 30, 2007 was
NTD$1=USD$0.032226 and NTD$1=USD$0.030270, respectively. Cumulative translation
Income (loss) adjustment recognized as of June 30, 2008 and December 31, 2007 is
$560,555 and $216,607, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including accounts receivable (trade and related party), notes
receivable and accounts payable (trade and related party), and accrued expenses,
the carrying amounts approximate fair value due to their short maturities. The
amounts owed for other long-term debt and revolving credit facility also
approximate fair value because interest rates and terms offered to the Company
are at current market rates.
STATEMENT OF CASH FLOWS
In accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from the
Company's operations is based upon local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
9
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are accounts receivable and other receivables arising from its
normal business activities. The Company has a diversified customer base. The
Company controls credit risk related to accounts receivable through credit
approvals, credit limits and monitoring procedures. The Company routinely
assesses the financial strength of its customers and, based upon factors
surrounding the credit risk, establishes an allowance, if required, for
uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such an allowance is limited.
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined using the
weighted average method. As of June 30, 2008 and December 31, 2007, inventory
consisted only of finished goods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
ADVERTISING
Advertising costs are expensed in the year incurred.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. The
Company has been operating at a loss and timing differences for income or
deductions are not recorded due to the uncertainty of their realization.
Deferred tax assets and liabilities are not included in the financial
statements. When realization of timing differences is more certain, deferred tax
assets or liabilities will be recorded as prescribed in SFAS No. 109,
"Accounting for Income Taxes".
EARNINGS PER SHARE
The Company uses SFAS No. 128, "Earnings per Share," for calculating the basic
and diluted earnings (loss) per share. Basic earnings (loss) per share are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding.
Diluted earnings per share are computed similar to basic earnings per share
except that the denominator is increased to include common stock equivalents, if
any, as if the potential common shares had been issued.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
The Company adopts SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". The Company periodically evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the estimated future
10
cash flows (undiscounted and without interest charges) from the use of an asset
were less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value.
The assumptions used by management in determining future cash flows are
critical. In the event these expected cash flows are not realized, future
impairment losses may be recorded. Management has determined that carrying value
of long-lived assets reflects future cash flows from the use of the asset and
has not recorded any impairment to the value of these existing long-lived
assets.
The Financial Accounting Standards Board issued Statement No. 154, "Accounting
Changes and Error Corrections," a replacement of Accounting Principles Board
Opinion No. 20, "Accounting Changes," changes the requirements for the
accounting for, and reporting of, a change in accounting principle. Previously,
voluntary changes in accounting principles were generally required to be
recognized by way of a cumulative effect adjustment within net income during the
period of the change. SFAS 154 requires retrospective application to prior
periods' financial statements, unless it is impracticable to determine either
the period of specific effects or the cumulative effect of the change. This
statement does not change the transition provisions of any existing accounting
pronouncements and does not have any material effect on the financial
statements.
The Financial Accounting Standards Board issued SFAS No. 156, "Accounting for
Servicing of Financial Assets, an amendment of Financial Accounting Standards
Board Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable, and permits for subsequent measurement
using either fair value measurement with changes in fair value reflected in
earnings or the amortization and impairment requirements of Statement No.140.
The Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
Company has not provided a provision for Income Taxes or Deferred Taxes due to
this uncertainty in accordance with Financial Accounting Standards Board
Statement No 109.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurement, which provides
guidance for applying the definition of fair value to various accounting
pronouncements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company is currently in compliance
with the provisions of SFAS 157.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108, Considering the Effect of Prior Year Misstatements when
Quantifying Misstatements in the Current Year Financial Statements ("SAB 108"),
that addresses how uncorrected errors in previous years should be considered
when quantifying errors in the current year financial statements. SAB 108 is
effective for fiscal years ending November 15, 2006 and, upon adoption,
companies are allowed to record the effects as a cumulative-effect adjustment to
retained earnings. The Company has recorded any misstatements in prior periods
against accumulated deficits and the results of operations in these financial
statements have not been restated due to the minor impact on operations.
11
NOTE C - CASH
The cash balances in Taiwanese banks are insured by the Central Deposit
Insurance Corporation (CDIC) up to approximately $31,000. As of June 30, 2008,
there was approximately $61,000 of uninsured balances.
NOTE D - FIXED ASSETS
Fixed assets consist of the following:
JUNE 30, 2008 DECEMBER 31, 2007
------------- -----------------
Machinery and equipment $ 9,871,376 $ 9,254,073
Furniture and fixtures 392,814 369,311
Prepayment for machinery and equipment 6,589 6,169
------------ ------------
$ 10,270,779 $ 9,629,553
Accumulated depreciation (1,595,285) (1,483,113)
------------ ------------
$ 8,675,494 $ 8,146,440
============ ============
NOTE E - COMMITMENTS
The Company leases office facilities under an operating lease that terminates on
May 31, 2010. Rental expense for this lease consisted of $26,490 and $24,882 for
June 30, 2008 and June 30, 2007, respectively.
Capital leases -The Company leases certain equipment under agreements that are
classified as capital leases. The cost of equipment under capital leases is
included in the Balance Sheet as fixed assets. The Company has future minimum
payments under capital leases as follows:
YEAR AMOUNT
---- ------
2008 $23,815
=======
NOTE F - INCOME TAXES
For the six months ended June 30, 2008 and June 30, 2007, income tax expense was
$8,867 and $11,674. There is no difference between the federal statutory tax
rate and the effective tax rate because the loss from continuing operations
results in $0 tax and any deferred tax asset may not be realized.
The following is a summary of income tax expense:
6/30/08 U.S. State International Total
Current $ 0 $ 0 $ 8,867 $ 8,867
Deferred 0 0 0 0
-------- ------- -------- --------
Total $ 0 $ 0 $ 8,867 $ 8,867
======== ======= ======== ========
12
6/30/07 U.S. State International Total
Current $ 0 $ 0 $ 11,674 $ 11,674
Deferred 0 0 0 0
------- ------- --------- --------
Total $ 0 $ 0 $ 11,674 $ 11,674
======= ======= ========= ========
NOTE G - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, at June 30, 2008
and December 31, 2007, are as follows:
FOREIGN CURRENCY ACCUMULATED OTHER
TRANSLATION ADJUSTMENT COMPREHENSIVE INCOME
---------------------- --------------------
Balance at 12/31/07 $216,607 $216,607
Currency gain
Six months ended 343,948 343,948
-------- --------
Balance at 6/30/08 $560,555 $560,555
======== ========
NOTE H - DEBT
At June 30, 2008 and December 31, 2007, the Company had notes payable and
capital lease obligations outstanding in the aggregate amount of $2,880,263 and
$3,225,426, respectively. These notes are payable to various banks in Taiwan and
the capital lease liability is payable to "CIT."
NOTE I - RELATED PARTY TRANSACTIONS
Alice Hwang, President and Chairman of the Board, has made periodic non-interest
bearing demand loans to the Company since 2004. At June 30, 2008, the Company
owed Alice Hwang $4,427,459 as compared to $2,895,622 at December 31, 2007. The
$1,531,837 provided by Alice Hwang was used to finance operations, purchase
equipment and repay bank notes.
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, deposits
and accounts payable approximate their fair value because of the short maturity
of those instruments.
The carrying amounts of the Company's long-term debt approximate their fair
value because of the short maturity and/or interest rates, which are comparable
to those currently available to the Company on obligations with similar terms.
NOTE K - GOING CONCERN
As shown in the accompanying financial statements, as of June 30, 2008, the
Company's current assets exceeded its current liabilities by approximately
$1,853,642. The Company has been incurring losses
13
since it began business in 2004. These losses and the fact that the Company has
received financing from its President, which could be discontinued at any time,
leaves doubt about the Company's ability to continue as a going concern.
The Company has positive cash flow from the sale of computer peripheral and
consumer electronics, but this has been offset by the equipment purchases and
direct costs (including depreciation) related to the nano coating technology.
The accompanying financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and the notes to those statements included in this
Form 10-Q. This discussion contains, in addition to historical information,
"forward-looking statements" that involve risks and uncertainties.
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by our
management. Words such as "believes," "anticipates," "expects," "intends,"
"may," and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements.
These forward-looking statements are not guarantees of future performance. There
are a number of factors, risks and uncertainties that could cause actual results
to differ from the expectations reflected in these forward-looking statements,
including risks and uncertainties related to the need for additional funds,
doing business in Asia, political risks in China, unanticipated changes in laws
and regulations, increases in costs of operation, our ability to attract and
retain customers, and the risks described under "Risk Factors" in our Form
10-KSB for the year ended December 31, 2007 or in other documents which we file
with the Securities and Exchange Commission ("SEC"). We assume no obligation to
update or revise any forward-looking statements.
GENERAL
We are in the business of selling computer peripherals, consumer
electronics, and communication cable on a wholesale level (for resale), and
developing and producing nano-scale coating technology to be applied to various
mechanical tools and metal surfaces for sale to manufacturers in the computer
mechanical and molding industries in Taiwan. Nanotechnology, or molecular
manufacturing, is a technological process used in manufacturing products to be
lighter, stronger, smarter, cheaper, cleaner and more precise.
We currently derive most of our revenues from the sale of computer
peripherals/consumer electronics, including motherboards, chips, televisions,
wiring and various accessories and monitors, etc., to wholesalers. In general,
we do not proactively sell such products. Rather, we consolidate purchase orders
we receive from our various customers and seek to have them filled by our
suppliers or from inventory we have amassed in anticipation of such purchase
orders.
We believe that our future growth and success will be based on the
development and sale of our nano-scale coating technology. Since inception, our
nano-technology business has progressed from research and development to
commercial production. We develop and produce nano-scale coating to be applied
to various products of our customers in Taiwan and Mainland China, primarily for
use in industrial drills, milling cutters, cell phone casings and buttons and
heat sinks for computers. Our unique core technology coating system, the
Superlattice ABS system, combines two types of coating technologies -- Arc Bond
and Sputtering -- to improve a product's strength and to decrease the weaknesses
and flaws that may be inherent in the use of just one type of coating
technology. The Superlattice ABS system combines multiple nano-scale layers of
metals, mainly nickel and aluminum, which are known to have excellent hardness
properties and chemical resistance, in consecutive films that give the base
material of the product that is coated a new and improved structure. The
application of the coating on industrial products is designed to change their
physical properties, thus improving an individual product's durability,
resistance, and performance. We also believe that our nano-coating technology is
more environmentally friendly than traditional coating or electroplating
processes.
15
Our business strategy is to increase our market share by first focusing
on providing our nano-coating technology service to manufacturers in the Far
East and expanding into other international markets. Since nanotechnology has a
vast application range, we also intend to conduct further research into the many
additional uses for nanotechnology with the goal of becoming an internationally
recognized nanotechnology design center. In the future, we expect to expand the
number and type of industries we are able to service. We anticipate working with
the developmental needs of Taiwan's semiconductor, precision machinery and
telecommunication industries to establish micro-component production, equipment
and inspection technology, and micro-system assembly and testing technology. We
also plan to integrate the design technologies of mechanical, optical,
electronic, magnetic, and micro systems to be applied in future products.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared under
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could materially differ from those
estimates. We have disclosed all significant accounting policies in Note B to
the consolidated financial statements included in this Form 10-Q
RESULTS OF OPERATIONS
The following table presents our consolidated results for the six
months ended June 30, 2008 and 2007. The discussion following the table compares
the results for the six months ended June 30, 2008 with 2007.
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) (UNAUDITED)
------------------------------ ------------------------------
JUNE 30, 2008 JUNE 30, 2007 JUNE 30, 2008 JUNE 30, 2007
------------- ------------- ------------- -------------
Sales, net $ 1,841,490 $ 2,113,728 $ 3,979,156 $ 4,117,686
Cost of Sales 1,908,556 2,206,150 4,073,169 3,975,071
------------- ------------- ------------- -------------
Gross Profit (Loss) (67,066) (92,422) (94,013) 142,615
General and administrative expenses 152,536 115,936 257,719 293,347
------------- ------------- ------------- -------------
Income (Loss) from operations (219,602) (208,358) (351,732) (150,732)
------------- ------------- ------------- -------------
Other (Income) Expense
Interest income (187) (7,381) (858) (14,581)
Other (income) expense 23,337 (553) 35,640 (6,406)
Interest expense 35,578 44,674 71,147 98,571
------------- ------------- ------------- -------------
Total Other (Income) Expense 58,728 36,740 105,929 77,584
------------- ------------- ------------- -------------
Net loss before income taxes and (278,330) (245,098) (457,661) (228,316)
minority interest
Income taxes (278) (11,674) (8,868) (11,674)
Minority interests 5,293 4,178 8,863 2,883
------------- ------------- ------------- -------------
Net (Loss) attributable to
controlling interest $ (273,315) $ (252,594) $ (457,666) $ (237,107)
============= ============= ============= =============
16
NET SALES. Net sales for the six months ended June 30, 2008 were
$3,979,156 compared to $4,117,686 for the six months ended June 30, 2007. The
decrease in net sales was due to the Company's focus on its nano-coating
business, its reduced focus on the sale of computer accessories, individual
wires and cables as well as sets of mechanical equipment used in the manufacture
of electric cables, and the decrease of sales of old products.
COST OF SALES. Cost of sales for the six months ended June 30, 2008 was
$4,073,169 and resulted in a gross loss of $94,013 or 2.36% of sales for the six
months ended June 30, 2008, as compared to $3,975,071 and a gross profit of
$142,615 or 3.46% of sales for the six months ended June 30, 2007. The increase
in cost of sales was mainly due to the sale of lower gross margin products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the six months ended June 30, 2008 were $257,719 or 6.48% of net
sales, as compared to $293,347 or 7.12% of net sales for the six months ended
June 30, 2007. The decrease in general and administrative expenses was due to
decreases in salary, amortization and professional expenses.
INCOME (LOSS) FROM OPERATIONS. The (loss) from operations for the six
months ended June 30, 2008 was $(351,732) as compared to a (loss) of $(150,732)
for the six months ended June 30, 2007. This change was primarily the result of
the reasons described above during the six months ended June 30, 2008.
OTHER (INCOME) EXPENSE. Other (income) expense for the six months ended
June 30, 2008 was $(2,389) as compared to $(6,634) for the six months ended June
30, 2007. This change is primarily attributable to miscellaneous sales taxes,
VAT adjustments and other expenses.
MISCELLANEOUS EXPENSE. Miscellaneous expense for the six months ended
June 30, 2008 was $38,029 for the six months ended June 30, 2008 as compared to
$13,040 for the six months ended June 30, 2007. The increase was mainly due to
higher loan administration fees.
NET INCOME (LOSS). Net income (loss) for the six months ended June 30,
2008 was $(457,666) as compared to a net loss of $(249,919) for the six months
ended June 30, 2007 primarily for the reasons described above, partially offset
by lower interest expense of $35,578.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $74,917 at June 30, 2008 and $184,322 at
December 31, 2007. Our total current assets were $6,565,794 at June 30, 2008 as
compared to $5,608,560 at December 31, 2007. Our total current liabilities were
$4,717,152 at June 30, 2008 as compared to $4,651,263 at December 31, 2007. On
July 29, 2005, we collateralized a line of credit with the Arc Bond Sputtering
Machine which we later sold to a third party, in violation of the credit
agreement, and immediately leased back the equipment and assumed an obligation
to the lessor in the amount of $1,042,032. As a result of having sold equipment
to the lessor subject to a lien, we are currently in default of both the line of
credit, for having sold the pledged equipment, and the sale-leaseback agreement.
A total amount due under both agreements as a result of the defaults is
$1,208,181. Repayment of such amounts could materially affect our liquidity
position. Neither the bank nor the lessor has taken any action or has indicated
that it will take any action. The line of credit balance has been reduced to
$51,726 and the amount due to the lessor is NTD 35,100,000 ($1,156,355). The
lessor is being repaid at the rate of NTD 300,000 per month.
We had working capital at June 30, 2008 of $1,848,642 compared with
working capital of $957,297 at December 31, 2007. This increase in working
capital was mainly due an increase in inventories and a decrease in current bank
notes payable. During the six months ended June 30, 2008, net
17
cash used in operations was $790,689. Net cash used in investing activities was
$496,544 principally due to the first quarter exchange gains from the valuation
of inventory, machinery and equipment, and net cash provided by financing
activities was $1,177,827, which consisted of repayment of loans, partially
offset by new borrowings from Alice Hwang, our President. Net change in cash and
cash equivalents was $(109,405) for the first six months of 2008 as compared to
a net change in cash and cash equivalents of $(170,005) for the first six months
of 2008.
Given the losses incurred by our company in prior years, we have
undertaken several measures to promote our success:
o Aggressive reduction in our general and administrative costs. By
dismissing nonessential employees and implementing other
aggressive cost cutting measures, we reduced our general and
administrative costs to $466,769 for 2007 as compared to $752,389
for 2006 - a 38% reduction. Reductions in our general and
administrative costs continued during the six month period ended
June 30, 2008 as described above.
o Investment by Related Party. Ms. Hwang, the CEO and the Chairman
of the Board of our company, has made non-interest bearing loans
to our company in the aggregate amount of $4,427,459 as of June
30, 2008. We have been in negotiations with to Ms. Hwang to
convert up to $1,500,000 of her non-interest bearing loans into
equity.
o Negotiations with short term creditors. We currently are
negotiating with several of our short term creditors to lengthen
and/or defer the repayment periods for the monies owed to them.
We expect that our cash from operations will improve over the next 12
months as revenue from our nano-coated products continues to grow (which is
expected as the market for nano-coated products expands and we hire additional
commission-based salespersons).
We believe that, so long as the amounts due under the credit line and
the sale lease back transactions can be deferred, our short-term financial needs
will be met by existing working capital for at least the next twelve months,
after which time we will need to obtain additional financing. We can make no
assurances that we will be able to obtain additional financing, or that if we do
obtain such financing, that the terms of such financing will be commercially
reasonable. If we obtain additional financing, the terms of such financing may
require us to sell our equity securities or enter into convertible debt
arrangements. The sale of additional equity or convertible debt could result in
additional dilution to our stockholders. The outcome of these uncertainties
cannot be assured.
CAPITAL EXPENDITURES
Total capital expenditures during the six months ended June 30, 2008
was $35,069.
CURRENCY EXCHANGE FLUCTUATIONS
As of June 30, 2008, the accounts of Nano Superlattice Technology,
Inc.- Taiwan were maintained, and its financial statements were expressed, in
New Taiwan Dollars (NTD). Such financial statements were translated into U.S.
Dollars (USD) in accordance with Statement of Financial Accounts Standards
("SFAS") No. 52, "Foreign Currency Translation", with the NTD as the functional
currency. According to the Statement, all assets and liabilities were translated
at the current exchange rate, stockholder's equity is translated at the
historical rates and income statement items are translated at the weighted
average exchange rate for the period. The resulting translation adjustments are
reported under other comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income".
18
As of June 30, 2008 and 2007, the exchange rates between NTD and the
USD were NTD$1=USD$0.0329450 and NTD$1=USD$0.030450, respectively. The
weighted-average rate of exchange between NTD and USD as of June 30, 2008 and
June 30, 2007 was NTD$1=USD$0.032226 and NTD$1=USD$0.030270, respectively.
Cumulative translation Income (loss) adjustment recognized as of June 30, 2008
and December 31, 2007 is $560,555 and $216,607, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Principal Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2008. Based
upon that evaluation, our management, including our Chief Executive Officer and
Principal Financial Officer, has concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and is accumulated
and communicated to our management, including our Chief Executive Officer and
Principal Financial Officer, to allow timely decisions regarding required
disclosure.
CHANGES IN INTERNAL CONTROLS
There have been no changes in our internal control over financial
reporting or in other factors identified in connection with this evaluation that
occurred during the three months ended June 30, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Alice Hwang, our President and CEO, has made various loans to us
which, to date, total approximately $4,427,459. The loans are non-interest
bearing, have no set maturity date, and currently are not evidenced by any
written loan agreements or notes.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Nano Superlattice Technology, Inc.
Date: August 19, 2008 By: /S/ ALICE TZU-SHIA HWANG
---------------------------------------------
Name: Alice Tzu-Shia Hwang
Title: President and Chief Executive Officer
(Principal Executive Officer)
Date: August 19, 2008 By: /S/ CHIEN-FANG WANG
-----------------------------------------
Name: Chien-Fang Wang
Title: Vice President
(Principal Financial Officer)
21
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002
32.1 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002