10-Q 1 c54684_10q.txt 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 -------------------------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to --------------------- --------------------- Commission file number 000-50177 --------- NANO SUPERLATTICE TECHNOLOGY, INC. ---------------------------------- (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 -------------------------------------------------------------------------- (Address of principal executive offices) 011-886-3-349-8677 ----------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------------------------- (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 ------------ ------------ Total Current Assets 6,565,794 5,608,560 ------------ ------------ Fixed Assets, net 8,675,494 8,146,440 ------------ ------------ Other Assets Deposits 26,357 24,679 ------------ ------------ 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 ------------ ------------ 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 ----------- ----------- 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 ----------- ----------- 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 ----------- ----------- 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 ----------- ----------- 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