10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2008

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-29429

API NANOTRONICS CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   98-0200798

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

505 University Avenue, Suite 1400

Toronto Ontario

Canada M5G 1X3

(Address of Principal Executive Offices)

(416) 593-6543

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 and 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, 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. (Check one):

 

Large Accelerated Filer  ¨

   Accelerated Filer  ¨    Non-Accelerated Filer  ¨    Smaller reporting company  x
      (Do not check if a smaller reporting company.)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s class of common equity as of the latest practicable date:

372,067,855 shares of common stock with a par value of $0.001 per share at April 7, 2008

 

 

 


Table of Contents

INDEX

 

PART I FINANCIAL INFORMATION   
Item 1.   Financial Statements    2
  Consolidated Balance Sheets as at February 29, 2008 (unaudited) and May 31, 2007    2
  Consolidated Statements of Operations (unaudited) for the nine and three months ended February 29, 2008 and 2007    3
  Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine months ended February 29, 2008    4
  Consolidated Statements of Cash Flows (unaudited) for the nine months ended February 29, 2008 and 2007    5
  Condensed Notes to Consolidated Financial Statements (unaudited)    6
Item 2.   Management Discussion and Analysis of Financial Condition and Results of Operations.    21
  Forward Looking Statements    37
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.    38
Item 4T.   Controls and Procedures.    39
PART II OTHER INFORMATION   
Item 1.   Legal Proceedings.    39
Item 1A.   Risk Factors.    39
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.    39
Item 3.   Defaults Upon Senior Securities.    39
Item 4.   Submission of Matters to a Vote of Security Holders.    39
Item 5.   Other Information.    39
Item 6.   Exhibits.    40
Signatures.    42


Table of Contents

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

API NANOTRONICS CORP.

Consolidated Balance Sheets

 

     Feb 29,
2008
(Unaudited)
    May 31,
2007
(audited)
 

Assets

    

Current

    

Cash and cash equivalents

   $ 1,850,714     $ 3,277,468  

Marketable securities, at fair value

     414,155       605,011  

Accounts receivable, less allowance for doubtful accounts of $51,187 and $73,249 at February 29, 2008 and May 31, 2007, respectively

     4,007,138       3,466,028  

Inventories

     10,964,554       10,360,869  

Deferred income taxes

     182,000       63,000  

Prepaid expenses and other current assets

     262,918       495,152  
                
     17,681,479       18,267,528  
Fixed assets, net      10,295,032       6,522,012  
Deferred income taxes      621,730       803,141  
Goodwill      1,130,906       1,130,906  
Intangible assets, net      1,398,186       623,173  
                
   $ 31,127,333     $ 27,346,760  
                
Liabilities and Stockholders’ Equity     
Current     

Short term borrowings

   $ 317,674     $ 635,276  

Accounts payable and accrued expenses

     4,405,368       3,178,987  

Deferred income taxes

     114,000       242,000  

Current portion of long-term debt

     123,211       404,711  

Current portion of capital leases

     4,547       10,388  
                
     4,964,800       4,471,362  
Deferred income taxes      787,961       805,712  
Long term debt, net of current portion      —         67,197  
Long term debt, related party      4,000,000       —    
Capital leases payable, net of current portion      22,781       23,022  
                
     9,775,542       5,367,293  
                
Stockholders’ equity     

Common stock, ($0.001 par value, 1,000,000,000 authorized shares 336,990,105 and 324,973,860 shares issued and outstanding at February 29, 2008 and May 31, 2007, respectively)

     336,990       324,974  

Special voting stock ($0.001 par value, 1 share authorized, issued and outstanding at February 29, 2008 and May 31, 2007)

     —         —    

Additional paid-in capital

     26,394,243       23,937,000  

Accumulated deficit

     (6,430,204 )     (3,451,767 )

Accumulated other comprehensive income:

    

Currency translation adjustment

     713,849       784,982  

Unrealized gain on marketable securities, net of tax

     336,913       384,278  
                

Total accumulated other comprehensive income

     1,050,762       1,169,260  
                
     21,351,791       21,979,467  
                
   $ 31,127,333     $ 27,346,760  
                

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

 

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API NANOTRONICS CORP.

Consolidated Statements of Operations

 

     For the Nine
Months Ended
Feb 29,
2008
(Unaudited)
    For the Nine
Months Ended
Feb 28,
2007
(Unaudited)
    For the Three
Months Ended
Feb 29,
2008
(Unaudited)
    For the Three
Months Ended
Feb 28,
2007
(Unaudited)
 
Revenue, net    $ 22,147,445     $ 12,676,534     $ 7,408,352     $ 4,643,203  
Cost of revenues      16,233,942       9,660,568       5,509,958       3,542,502  
                                
Gross profit      5,913,503       3,015,966       1,898,394       1,100,701  
                                
Operating expenses         

General and administrative

     4,520,708       3,265,769       1,676,583       1,044,634  

Research and development

     2,330,478       113,174       1,086,170       54,413  

Business development

     78,013       74,970       16,518       —    

Selling expenses

     1,657,655       957,619       486,763       411,962  
                                
     8,586,854       4,411,532       3,266,034       1,511,009  
                                
Operating loss      (2,673,351 )     (1,395,566 )     (1,367,640 )     (410,308 )
Other (income) expenses, net         

Interest expense, net

     236,134       (23,125 )     94,498       (8,119 )

(Gain) loss on foreign currency transactions

     96,362       (293,579 )     5,939       (153,330 )
                                
     332,496       (316,704 )     100,437       (161,449 )
                                
Loss before income taxes      (3,005,847 )     (1,078,861 )     (1,468,077 )     (248,859 )

Benefit from income taxes

     (27,410 )     (272,703 )     (356,480 )     (59,150 )
                                
Net loss    $ (2,978,437 )   $ (806,158 )   $ (1,111,597 )   $ (189,708 )
                                

Loss per share – Basic

   $ (0.01 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                

Loss per share – Diluted

   $ (0.01 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                
Weighted average shares outstanding         

Basic

     367,690,044       224,712,915       374,555,005       341,303,660  

Diluted

     367,690,044       224,712,915       374,555,005       341,303,660  

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

 

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API NANOTRONICS CORP.

Consolidated Statements of Changes in Stockholders’ Equity

 

     Common
stock-number
of shares
   Common
stock
amount
   Additional
paid-in capital
    Accumulated
Deficit
    Accumulated
other
comprehensive
income (loss)
    Total
stockholders’
equity
 

Balance at May 31, 2007 (audited)

   324,973,860    $ 324,974    $ 23,937,000     $ (3,451,767 )   $ 1,169,260     $ 21,979,467  

Stock exchanged for subsidiary exchangeable shares and stock subject to issuance in connection with plan of arrangement (see Note 8)

   16,250      16      (16 )     —         —         —    

Stock based compensation expense

   —        —        669,259       —         —         669,259  

Common stock issued

   11,999,995      12,000      1,788,000       —         —         1,800,000  

Net loss for the period

   —        —        —         (2,978,437 )     —         (2,978,437 )

Foreign currency translation adjustment

   —        —        —         —         (71,132 )     (71,132 )

Unrealized gain(loss) on marketable securities- net of taxes

   —        —        —         —         (47,366 )     (47,366 )
                                

Total comprehensive loss

                 (3,096,935 )
                                            

Balance at February 29, 2008 (unaudited)

   336,990,105    $ 336,990    $ 26,394,243     $ (6,430,204 )   $ 1,050,762     $ 21,351,791  
                                            

 

   

The number of shares of common stock reflects the 5:1 stock split effective November 19, 2007, which has been applied to earlier periods.

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

 

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API NANOTRONICS CORP.

Consolidated Statements of Cash Flows

 

     For the Nine Months Ended
Feb 29,
 
     2008
(Unaudited)
    2007
(Unaudited)
 

Cash flows from operating activities

    

Net loss

   $ (2,978,437 )   $ (806,158 )

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

    

Depreciation and amortization

     775,470       717,102  

Stock based compensation

     669,259       1,225,644  

Gain on sale of marketable securities

     —         11,485  

Deferred income taxes (benefit)

     36,575       (372,296 )

Changes in operating assets and liabilities

    

Accounts receivable

     (330,690 )     646,682  

Inventories

     (561,814 )     (734,354 )

Prepaid expenses and other current assets

     229,670       336,111  

Accounts payable and accrued expenses

     1,223,557       (40,875 )

Deferred revenue

     —         (119,850 )
                

Net cash provided (used) by operating activities

     (936,410 )     863,491  

Cash flows from investing activities

    

Purchase of fixed assets

     (1,374,022 )     (313,360 )

Business acquisition, net of cash acquired

     —         (8,764,096 )

Asset acquisition

     (4,045,671 )     —    

Net proceeds from insurance

     134,164       —    
                

Net cash (used) by investing activities

     (5,285,529 )     (9,077,456 )

Cash flows from financing activities

    

Proceeds from issuance of common shares

     1,800,000       6,637,250  

Repurchase and retirement of common shares

     —         (57,000 )

Plan of Arrangement, cash acquired net of transaction costs

     —         3,281,082  

Short term borrowings advances (repayments), net

     (332,908 )     (57,923 )

Repayment of obligations – capital lease

     (6,081 )     (33,459 )

Repayment of long term debt

     (348,697 )     —    

Proceeds from long-term debt, related party

     4,000,000       6,051,053  
                

Net cash provided by financing activities

     5,112,314       15,821,003  

Effect of exchange rate on cash and cash equivalents

     (317,129 )     (519,305 )
                

Net change in cash and cash equivalents

     (1,426,754 )     7,087,733  

Cash and cash equivalents, beginning of period

     3,277,468       946,680  
                

Cash and cash equivalents, end of period

   $ 1,850,714     $ 8,034,413  
                

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

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission (the “Commission”) and include the results of API Nanotronics Corp. (“API Nanotronics”), formerly known as Rubincon Ventures Inc., and API Electronics Group Corp., API Electronics, Inc., the National Hybrid Group (consisting of National Hybrid, Inc. and Pace Technology, Inc.), the Filtran Group (consisting of Filtran Limited and Filtran Inc.), TM Systems II Inc., Keytronics, Inc., and API Nanofabrication and Research Corporation, its wholly-owned subsidiaries (the “Subsidiaries”), which are collectively referred to as the “Company.” Accordingly, certain information and footnote disclosures required in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Statements are subject to possible adjustments in connection with the annual audit of the Company’s accounts for the year ended May 31, 2008. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s consolidated financial position as of February 29, 2008 and the results of its operations and cash flows for the nine and three month period ended February 29, 2008. Results for the nine months ended February 29, 2008 are not necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended May 31, 2007 included in the Company’s Form 10-KSB filed with the Commission on August 22, 2007.

The Company manufactures and designs high reliability semiconductor and microelectronics circuits for military, aerospace and commercial applications. The Company through acquisitions has expanded its manufacturing and design of electronic components to include filters, transformers, inductors, high-performance microcircuits, custom hybrid microcircuits and custom power supplies for land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation.

The creation of API Nanofabrication and Research Corp. (“API NRC”), and the subsequent acquisition of the assets of NanoOpto Corp., offers the Company a unique opportunity to design and manufacture next generation products. API NRC’s material processing and fabrication capabilities span from silicon wafer processing to the very latest electronic and optical fabrication technologies based on nanoscience and MEMS. These increased capacities expand the Company’s abilities to better serve its customers and to develop new electronic products. These increased capacities also open possibilities for new business based on hybrid optics. These assets and facilities will also be the centerpiece of the Company’s research and development program.

On May 8, 2006, Rubincon Ventures Inc., as API Nanotronics was formerly known (“Rubincon”), entered into a combination agreement contemplating a Plan of Arrangement with API Electronics Group Corp. (“API”). Rubincon is a Delaware corporation and API is an Ontario corporation. Rubincon formed an Ontario subsidiary, RVI Sub, Inc., now known as API Nanotronics Sub, Inc., to facilitate the Plan of Arrangement. On November 6, 2006 Rubincon and API completed the transaction contemplated by the Plan of Arrangement. The combined companies now operate under the name “API Nanotronics Corp.”

For accounting purposes, the acquisition of API by Rubincon was considered a reverse acquisition, an acquisition transaction where the acquired company, API, is considered the acquirer for accounting purposes, notwithstanding the form of the transaction. The primary reason the transaction was treated as a recapitalization by API rather than a purchase of API by Rubincon was because Rubincon was a shell company. As reported in its Form 10-QSB for the quarter ended October 31, 2006, (the final quarterly filing requirement for Rubincon under its prior year end of January 31, 2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.

In conjunction with this reverse acquisition, Rubincon changed its year-end from January 31 to May 31, the year-end of API. Assets, liabilities and equity of the Company continue to be that of the operating company, API, as adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the transaction. The capital structure, including the number and type of shares issued, appearing in the consolidated balance sheet for the period reflects that of the

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

legal parent, Rubincon, now known as API Nanotronics, including the shares issued to affect the reverse acquisition for the period after the consummation of the Plan of Arrangement and the capital structure of API modified by the 10-for-1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the Plan of Arrangement.

On November 19, 2007, API Nanotronics Corp. affected a 5-for-1 stock split of its common stock, through a common stock dividend. Since retained earnings were in a deficit position, the stock’s par value was capitalized from additional paid-in capital. Each stockholder of record at the close of business on November 12, 2007 received four additional shares for every outstanding share held on that date. All the references to number of shares presented in these financial statements have been adjusted to reflect the post split number of shares.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of API Nanotronics, together with its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, bank balances and investments in money market instruments with original maturities of three months or less.

Marketable Securities

The Company’s investments in marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value, with any unrealized holding gains and losses, net of income taxes, reported as a component of accumulated other comprehensive income (loss). Marketable equity and debt securities available for sale are classified in the balance sheet as current assets.

The cost of each specific security sold is used to compute realized gains or losses on the sale of securities available for sale.

Inventory

Raw materials are recorded at the lower of cost or net realizable value. Finished goods and work in process are stated at the lower of cost, which includes material, labor and overhead, or net realizable value. Cost is generally determined on a first-in, first-out basis.

Fixed Assets

Fixed assets are recorded at cost less accumulated depreciation and are depreciated using the following methods over the following periods:

 

Straight line basis

    

Buildings and leasehold improvements

   20 years

Computer equipment

   3 years

Furniture and fixtures

   5 years

Machinery and equipment

   5 to 10 years

Vehicles

   3 years

Declining balance basis

    

Electronic manufacturing equipment

   5 to 10 years

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred. As of February 29, 2008, approximately, $1,050,000 of the $2,566,000 of fixed assets acquired in conjunction with the National Hybrid Group acquisition (See Note 4) have been placed in service. The Company continues to finalize their nanofabrication and research plan and accordingly the equipment will continue to be placed in service.

Computer Software Developed or Obtained For Internal Use

All direct internal and external costs incurred in connection with the development stage of software for internal use are capitalized. All other costs associated with internal use software are expensed when incurred. Amounts capitalized are included in property, equipment and leasehold improvements and are amortized on a straight-line basis over three years beginning with when such assets are placed in service.

Goodwill and Intangible Assets

Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test.

Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of the reporting unit to the underlying carrying value of the reporting unit’s net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. The entire balance of the Company’s goodwill is contained in the Filtran reporting unit. Management has determined there is no impairment in goodwill as of February 29, 2008 and May 31, 2007.

Intangible assets that have a finite life are amortized using the following basis over the following period:

 

Non-compete agreements    Straight line over 5 years
Customer contracts    Based on revenue earned on the contract
Computer software    3-5 years

As of February 29, 2008, $731,621 of patents are included in intangible assets, which were acquired in conjunction with the acquisition of assets from NanoOpto Corp. The Company expects to put the patents to full use during the next fiscal quarter (Note 4).

Long Lived Assets

The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the carrying value of the related assets would be reduced to their estimated fair value. Management has determined there is no impairment of long lived assets as of February 29, 2008 and May 31, 2007, respectively.

Income taxes

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The interpretation requires that the Company determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criterion, FIN 48 requires that the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. This accounting standard became effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of June 1, 2007. The adoption of FIN 48 has not had a material effect on the Company’s financial condition or results of operations.

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Revenue Recognition

Contract Revenue

Revenue from contracts is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of progress to completion, as a percentage of total costs anticipated for each contract. Provision is made for losses on contracts in progress when such losses first become known. Revisions in cost and profit estimates, which can be significant, are reflected in the accounting period in which the relevant facts become known.

Non-Contract Revenue

The Company recognizes non-contract revenue when it is realized or realizable and earned. The Company considers non-contract revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until products have been shipped and risk of loss and ownership has transferred to the client.

Deferred Revenue

The Company defers revenue should payment be received in advance of the service or product being shipped or delivered.

Warranty

The Company provides up to a one-year product defect warranty on various products from the date of sale. Historically, warranty costs have been nominal and have been within management’s expectations. The Company has accrued $126,762, in warranty liability as of February 29, 2008 and May 31, 2007, respectively, which has been included in accounts payable and accrued expenses.

Research and Development

Research and development expenses are recorded when incurred.

Stock-Based Compensation

Effective June 1, 2006 the Company adopted SFAS 123R which revises SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes Accounting Principles Board Opinion 25 “Accounting for Stock Issued to Employees.” Under APB 25, the Company used the “intrinsic value” method for employee stock options and did not record any expense because option exercise prices equaled the market value at the date of grant. SFAS 123R required that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company has also considered the related guidance of the Security and Exchange Commission (“SEC”) included in Staff Accounting Bulletins (“SAB”) No. 107 and No. 110. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes pricing model and restricted stock based on the quoted market price. The Company adopted SFAS 123R using the modified prospective method and, accordingly, prior period financial statements were not revised. The Company also follows the guidance in EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” for equity instruments issued to consultants.

Financial Instruments

The fair values of financial instruments including cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and short-tem borrowings approximate their carrying values due to the short-term nature of these instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest rate, currency or credit risks arising from its financial instruments. Marketable securities are included at fair value. The recorded value of long-term debt approximates the fair value of the debt as the terms and rates approximate market rates.

The Company carries out a portion of transactions in foreign currencies included in the Company’s cash, marketable securities, accounts receivable, accounts payable and bank indebtedness with balances denominated in US dollars.

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Foreign Currency Translation and Transactions

Foreign denominated assets and liabilities of the Company are translated into U.S. dollars at the prevailing exchange rates in effect at the end of the reporting period. Income statement accounts are translated at a weighted average of exchange rates which were in effect during the period. Translation adjustments that arise from translating the foreign subsidiary’s financial statements from local currency to U.S. currency are recorded in the other comprehensive income (loss) component of stockholders’ equity. Gains and losses from foreign currency transactions are recognized in the consolidated statement of operations.

Accounting Estimates

The preparation of these consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.

Receivables and Credit Policies

Accounts receivable are non-interest bearing, uncollateralized customer obligations. Accounts receivable are stated at the amounts billed to the customer. Customer account balances with invoices over 90 days old are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s estimate of the amounts that will not be collected.

Earnings (Loss) per Share of Common Stock

Basic earnings (loss) per share of common stock is computed by dividing income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share of common stock gives effect to all dilutive potential shares of common stock outstanding during the period. The computation of diluted earnings (loss) per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings (loss) per share. (Note 12)

3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. This Statement is intended to enhance the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments. The Company does not expect that the adoption of SFAS No. 161 will have a significant impact on the consolidated results of operations or financial position of the Company.

In December 2007, the FASB revised Statement of Financial Accounting Standard No. 141 (SFAS 141R), “Business Combinations”, which is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted before that date. SFAS 141R requires assets and liabilities recorded in a business combination to be recorded at fair value and replaces the cost-allocation process under the prior standard. In addition, SFAS 141R requires separate recognition of acquisition costs and requires recognition of contractual contingencies at fair value as of the acquisition date. Further, the revised standard requires capitalization of research and development assets and requires fair value recognition of contingent consideration as of the acquisition date. The Company is currently evaluating the potential impact of this pronouncement.

 

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Table of Contents

API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning June 1, 2010. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which will permit entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect that the adoption of SFAS No. 159 will have a significant impact on the consolidated results of operations or financial position of the Company. On February 12, 2008, the FASB delayed the effective date for non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. SFAS 157 is effective in fiscal years beginning after November 15, 2007. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and periods within those fiscal years. On February 12, 2008, the FASB delayed the effective date for non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact. The Company is currently evaluating the potential impact of this pronouncement.

4. Asset Acquisitions

On July 17, 2007, API Nanofabrication and Research Corporation (“API NRC”), a wholly-owned subsidiary of the Company, incorporated on July 3, 2007, entered into an Asset Purchase Agreement with NanoOpto Corporation (“NoC”) for the purchase of substantially all of NoC’s assets (the “Purchase”), including equipment and intellectual property relating to the design and high volume nano-fabrication of nano-optic devices for optical components. The purchase price was $4,000,000, and the Purchase was completed on July 19, 2007. The Company has allocated the purchase price to machinery and equipment and intellectual property.

The purchase price of NoC’s assets was satisfied through the payment of cash in the amount of $3,970,000 ($30,000 credit received for piece of equipment in need of repair). The Company also incurred legal costs and professional fees in connection with the acquisition in the amount of $45,671, giving a total acquisition cost of $4,045,671.

The fair value assigned to tangible assets acquired are as follows:

 

Fixed assets in use and to be placed in service

     3,314,050

Patents & intellectual property

     731,621
      

Fair value of assets acquired

   $ 4,045,671
      

 

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Table of Contents

API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

API NRC financed the Purchase with $4,000,000 received from the Company. The Company borrowed the $4,000,000 pursuant to a promissory note (the “Note”) from a member of the Board of Directors who is also the Secretary of the Company (See Note 11). The Note has a 61 month term, requires payments of interest only until maturity and bears interest at the rate of 12% per annum. Unless sooner repaid, the Note is payable on August 18, 2012. Interest payments are payable on the last day of December and June, beginning December 31, 2007. In the event a default under the Note occurs and is continuing, all amounts due hereunder may be declared immediately due and payable.

The Company considered the acquisition of the assets of NoC on July 17, 2007 as an asset acquisition and not as the acquisition of an operating business because: (1) on July 2, 2007 NoC had filled articles of dissolution with the Delaware Secretary of State pursuant to the resolutions of the board of directors of NoC to liquidate the business, (2) at the time of the purchase of the NoC acquisition, NoC’s limited number of employees were engaged in the shutdown of the business and not in the active conduct of the business and NoC had effectively ceased operations and (3) the Company negotiated the purchase of the assets of NoC from an outside liquidator who had been engaged by the board of directors of NoC to liquidate the saleable assets of NoC.

5. Business Acquisitions

On January 25, 2007, the Company acquired all the stock of National Hybrid, Inc. and Pace Technology, Inc. (“National Hybrid Group”). The purchase price was $9,750,000 payable in cash.

The National Hybrid acquisition added new product lines and strengthens the Company’s research and manufacturing capabilities as the Company embarks on the next phase of growth in nanotechnology. The acquisition also significantly increased revenues and further solidified the Company as a key supplier of critical electronic components to the U.S. Department of Defense and leading defense contractors.

The National Hybrid Group’s expertise includes analog and digital designs as well as application specific integrated circuits and gate-array implementations. Extensive in-house simulation, prototype testing and analysis facilities allow the National Hybrid Group to develop products for both standard and custom applications with heightened reliability.

On January 24, 2007, the Company borrowed $6,000,000 from Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. (the “Lender”) (a related party) in order to fund its purchase of the stock of the National Hybrid Group from the Estate of Benedict Pace, and to provide the Company with additional working capital. This loan was evidenced by a promissory note (the “Note”) in favor of the Lender. The Note accrued interest at 12% per annum and with interest payable semi-annually. The principal amount of the Note was due 61 months from the date on which it was made and could be prepaid at any time at the option of the Company without penalty. The loan and interest were repaid as of May 31, 2007.

The purchase price of the National Hybrid Group was satisfied through payment of cash in the amount of $9,750,000. The Company also incurred legal costs and professional fees in connection with the acquisition of $191,310, giving a total acquisition cost of $9,966,766. The Company has accounted for the acquisition using the purchase method of accounting. The results of operations of the National Hybrid Group have been included in the Company’s results of operations beginning on January 24, 2007. In accordance with SFAS No. 141, “Business Combinations” the total purchase price was allocated to the National Hybrid Group’s net assets based on their estimated fair values as of January 24, 2007. During the nine months ended February 29, 2008 the Company changed the purchase price allocation as a result of an unrecorded account receivable. The fair values assigned to tangible assets acquired and liabilities assumed were as follows:

 

Cash

   $ 1,177,214  

Current assets

     7,653,021  

Fixed assets in use and to be placed in service

     2,595,147  

Current liabilities

     (1,249,060 )

Deferred income taxes

     (209,556 )
        

Fair value of assets acquired

   $ 9,966,766  
        

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The following unaudited pro forma summary presents the combined results of operations as if the National Hybrid Group acquisition described above had occurred at the beginning of the period for the nine and three months ended February 28, 2007, respectively.

 

     Nine months
ended
February 28,
2007
(Pro forma)
    Three months
Ended
February 28,
2007
(Pro forma)
 

Revenues

   $ 21,393,883     $ 6,570,804  

Net loss

   $ (890,255 )   $ (470,537 )

Net loss per share – basic

   $ (0.00 )   $ (0.00 )

Net loss per share – diluted

   $ (0.00 )   $ (0.00 )

6. Inventories

Inventories consisted of the following as of February 29, 2008 and May 31, 2007, respectively:

 

     February 29,
2008
   May 31,
2007

Raw materials

   $ 4,941,047    $ 5,199,245

Work in progress

     2,928,871      2,573,329

Finished goods

     3,094,636      2,588,295
             

Total

   $ 10,964,554    $ 10,360,869
             

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

 

     February 29,
2008
   May 31,
2007

Accounts payable and accrued expenses

   $ 3,711,402    $ 2,660,739

Wage and vacation accrual

     518,100      399,064

Audit and accounting fees

     175,866      119,184
             

Total

   $ 4,405,368    $ 3,178,987
             

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

8. Stockholders’ Equity

On November 19, 2007, API Nanotronics Corp. affected a five-for-one stock split of its common stock. Because retained earnings were in a deficit position, the newly issued stock’s par value was capitalized from additional paid-in capital. Each stockholder of record at the close of business on November 12, 2007 received a stock dividend of four additional shares for each outstanding share held on that date. The additional shares of common stock were distributed on November 19, 2007. All the references to number of shares presented in these financial statements have been adjusted to reflect the post split number of shares.

Pursuant to the court-approved Plan of Arrangement API Nanotronics Sub, Inc., formerly known as RVI Sub, Inc., became the sole stockholder of API, and each holder of API common shares was granted the right to receive for each API common share 50 (10 pre-split) shares of API Nanotronics Corp. common stock, or if an eligible Canadian shareholder elected, 50 (10 pre-split) API Nanotronics Sub, Inc. exchangeable shares. Each API Nanotronics Sub, Inc. exchangeable share is exchangeable into one share of API Nanotronics common stock at the option of the holder. All references in the financial statements to the number of shares outstanding, per share amounts, and stock option data of the Company’s common stock (other than in the calculation of Stockholders’ Equity) have been restated to reflect the effect of the Plan of Arrangement for all the periods presented. Stockholders’ equity reflects the Plan of Arrangement by reclassifying from “Common stock” to “Additional paid-in capital” an amount equal to the par value of the shares arising from the Plan of Arrangement. Immediately prior to the closing of the Plan of Arrangement, Rubincon had 200,033,360 shares of common stock outstanding.

In connection with the Plan of Arrangement that occurred on November 6, 2006, the Company was obligated to issue 141,270,300 shares of either API Nanotronics common stock or exchangeable shares of API Nanotronics Sub, Inc. in exchange for the API common shares previously outstanding. As of February 29, 2008, (i) API Nanotronics had issued 103,691,650 shares of its common stock for API common shares or upon the exchange of previously issued exchangeable shares, (ii) API Nanotronics Sub, Inc. had issued 35,077,750 shares of its exchangeable shares for API common shares (excluding exchangeable shares held by the Company and its affiliates and exchangeable shares subsequently exchanged for our common stock) which exchangeable shares are the substantially equivalent to our common stock and (iii) API Nanotronics’ transfer agent was awaiting stockholder elections on 2,487,150 shares of API Nanotronics common stock or exchangeable shares of API Nanotronics Sub, Inc. issueable with respect to the remaining API common shares. Consequently, API Nanotronics has not issued but is obligated to issue 37,564,900 shares of its common stock under the Plan of Arrangement either directly for API common shares or in exchange for API Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics Corp. or its affiliates.

The API Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics or its affiliates are substantially economically equivalent to common stock of API Nanotronics Corp. The November, 2006 5-for-1 stock split had no effect on this equivalence of exchangeable shares and common stock because simultaneously with the split of the common stock, a 5-for-1 split of the exchangeable shares was effected on each exchangeable share outstanding.

On November 6, 2006, API Nanotronics amended its certificate of incorporation to allow it to issue one special voting share. This special voting share was issued to a trustee in connection with the Plan of Arrangement and allows the trustee to have at meetings of stockholders of API Nanotronics the number of votes equal to the number of exchangeable shares not held by API Nanotronics or subsidiaries of API Nanotronics (The trustee is charged with obtaining the direction of the holders of exchangeable shares on how to vote at meetings of API Nanotronics stockholders.) The API Nanotronics Sub, Inc. exchangeable shares are convertible into shares of API Nanotronics common stock at any time at the option of the holder. API Nanotronics may force the conversion of API Nanotronics Sub., Inc. exchangeable shares into shares of API Nanotronics common stock on the tenth anniversary of the date of the Plan of Arrangement or sooner upon the happening of certain events.

On July 2, 2007, the Compensation Committee of the Board of Directors of the Company acted to reprice certain options that the Company had previously granted to certain employees, directors and consultants of the Company. The options, all of which had been previously issued pursuant to the API Nanotronics Corp. 2006 Equity Incentive Plan (the “Plan”), were repriced to be the average of the closing bid and ask price on the date of the action by the Compensation Committee. The new option exercise price was $0.2690 per share. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing (Note 9).

On June 20, 2007, the Company granted stock options to purchase 125,000 shares of common stock to each of two of its newly elected directors for an exercise price of $0.3230 per share. Under each Stock Option Agreement, the option vests and becomes exercisable with respect to 41,665 option shares on June 21, 2008, 41,665 option shares on June 21, 2009 and 41,670 option shares on June 21, 2010. The term of such options is ten years.

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

On October 19, 2007, at the 2007 Annual Meeting of Stockholders of the Company, the stockholders of the Company approved an amendment to the certificate of incorporation increasing the number of authorized shares of common stock, par value $.001, from 200,000,000 to 1,000,000,000.

During the nine month period ended February 29, 2008, the Company accepted subscriptions for 11,999,995 shares of its common stock, which were sold in a Regulation S, private placement to investors not located in the United States for $.15 per share. The Company received gross proceeds of $1,800,000.

Warrants

There are no warrants outstanding or exercisable as at February 29, 2008 and May 31, 2007.

9. Stock Based Compensation

On October 26, 2006, the Company adopted its 2006 Equity Incentive Plan (the “Equity Incentive Plan”), which was approved at the 2007 Annual Meeting of Stockholders of the Company. All the prior options issued by API were carried over to this plan under the provisions of the Plan of Arrangement. Of the 75,000,000 shares authorized under the Equity Incentive Plan, 41,750,000 shares are available for issuance pursuant to options or as stock as of February 29, 2008. Options issued by Rubincon prior to the effective date of the Plan of Arrangement were not carried over to this plan. Under the Company’s Equity Incentive Plan, options may have a term of up to ten years from the date of grant. The stock option exercise prices are equal to 100 percent of the fair market value of the underlying shares on the date the options are granted.

As of February 29, 2008, there was $629,376 of total unrecognized compensation related to non-vested stock options, which are not contingent upon attainment of certain milestones. For options with certain milestones necessary for vesting, the fair value is not calculated until the conditions become probable. The cost is expected to be recognized over a weighted-average period of five years from the date of grant.

During the nine months ended February 29, 2008 and 2007, $669,259 and $1,225,644, respectively, has been recognized as stock based compensation expense in general and administrative expense.

Included in total stock based compensation for the nine months ended February 29, 2008 is $89,801 of stock based compensation expense related to repricing of certain options that had been previously granted to employees, directors and consultants of the Company. The options were repriced to the average closing bid and ask price on the date of action on July 2, 2007. The new option exercise price is $0.2690 per share. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing.

On July 19, 2007, a total of 1,000,000 options vested upon the achievement of certain milestones as defined in the grant agreements. These options are exercisable at $0.2690 per share. The Company recognized approximately $149,200 of stock based compensation expense which is included in the $669,259 total stock based compensation recognized during the nine months ended February 29, 2008.

In accordance with the combination agreement, as of November 6, 2006, 29,000,000 API stock options (on a post-exchange basis) were exchanged for 29,000,000 stock options of API Nanotronics. The fair value of the API Nanotronics options exceeded the fair value of the API options by $888,360 at November 6, 2006 under the Black-Scholes option pricing model with the following assumptions: Risk free rate - 2.50%, Volatility - 80%, Expected life - 4.17 years to 4.58 years, Dividend yield - 0%. The excess was expensed as stock based compensation in general and administrative expense for the year ended May 31, 2007 and a corresponding amount was added to the additional paid-in capital as part of stockholders’ equity.

The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model based on the assumptions detailed below:

 

     2008     2007  

Expected volatility

   56 %   60-80 %

Expected dividends

   0 %   0 %

Expected term

   10 years     5 -10 years  

Risk-free rate

   4.74 %   2.50% -4.44 %

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The summary of the common stock options granted, cancelled, exchanged or exercised under the Equity Incentive Plan:

 

     Shares     Weighted
Average
Exercise
Price
 

Stock Options outstanding – May 31, 2006

   25,500,000     $ 0.0928  

Exercised

   (500,000 )   $ (0.1200 )

Issued

   8,000,000     $ 0.3622  

Outstanding options of Rubincon (A)

   625,000     $ 0.2000  
        

Stock Options outstanding - May 31, 2007

   33,625,000     $ 0.1584  

Issued

   250,000     $ 0.2690  

Exercised

   —       $ —    
        

Stock Options outstanding - February 29, 2008

   33,875,000     $ 0.1370  
        

Stock Options exercisable - February 29, 2008

   28,375,000     $ 0.1120  
        

 

(A) Stock options entitling the holder to purchase 625,000 shares of common stock of the Company at an option exercise price of $0.20 per common share were issued prior to the Plan of Arrangement and were not issued under the Equity Incentive Plan. All of these options have vested.

The weighted-average grant date fair value of options granted during the nine months and year ended February 29, 2008 and May 31, 2007 was $0.2690 and $0.3622, respectively.

 

Options Outstanding    Options Exercisable
Range of
Exercise
Price
   Number of
Outstanding
at February 29,
2008
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life
(Years)
   Aggregate
Intrinsic
Value
   Number
Exercisable
at February 29,
2008
   Weighted
Average
Exercise
Price
   Aggregate
Intrinsic
Value
$ 0.0928 – 0.20    25,625,000    $ 0.0940    2.916    $ 800,000    25,625,000    $ 0.094    $ 800,000
$ 0.20 – 0.40    8,250,000    $ 0.2700    4.977      —      2,750,000    $ 0.270      —  
                                
   33,875,000       4.770    $ 800,000    28,375,000       $ 800,000
                                

The intrinsic value is calculated as the difference between the market value as of February 29, 2008 and the exercise price of the shares. The market value as of February 29, 2008 was $0.124 as reported by the Nasdaq Stock Market.

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

10. Supplemental Cash Flow Information

 

     For the nine
months ended
February 29,
2008
   For the nine
months ended
February 28,
2007
 

(a) Supplemental Cash Flow Information

     

Cash paid for income taxes

   $ 26,274    $ (5,715 )
               

Cash paid for interest

   $ 208,688    $ 65,539  
               

(b) Non cash transaction

     

Other current assets and long-term debt assumed in conjunction with the Plan of Arrangement

     —      $ 100,000  

Business acquisition NHI—adjustment to purchase price

   $ 134,164      —    

11. Related Party Transactions

 

  (a) Included in general and administrative expenses for the nine months ended February 29, 2008 are consulting fees of $69,693 (2007 - $56,306) paid to an individual who is a director and officer of the Company, and rent, management fees, and office administration fees of $138,265 (2007 - $144,221) paid to a corporation in which two of the directors are also directors of the Company. The balance due as of February 29, 2008 and May 31, 2007 is $27,406 and $64,382, respectively.

Included in general and administrative expenses for the three months ended February 29, 2008 are consulting fees of $23,577 (2007 - $20,606) paid to an individual who is a director and officer of the Company, and rent, management fees, and office administration fees of $44,401 (2007 - $49,050) paid to a corporation in which two of its directors are also directors of the Company.

 

  (b) The bank debt of API Electronics Inc. is guaranteed by the President and Chief Operating Officer of the Company. The fair value of this guarantee is not significant to these financial statements.

 

  (c) Included in interest expenses for the nine months ended February 29, 2008 are interest charges of $297,205 from the $4,000,000 borrowed from Jason DeZwirek, Secretary and a director of the Company, which was used to fund the acquisition of the assets of NoC (Note 4). Accrued interest as of February 29, 2008 was $119,671.

12. Earnings (Loss) Per Common Share

The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share (EPS):

 

     Nine months ended February 29,    Three months ended February 29,
     2008    2007    2008    2007

Weighted-average shares-basic

   367,690,044    224,712,915    374,555,005    341,303,660

Effect of dilutive securities

   *    *    *    *
                   

Weighted-average shares - diluted

   367,690,044    224,712,915    374,555,005    341,303,660
                   

Basic EPS and diluted EPS for the nine months ended February 29, 2008 and February 28, 2007 have been computed by dividing the net loss by the weighted average shares outstanding. The weighted average numbers of shares of common stock outstanding includes exchangeable shares and shares to be issued under the Plan of Arrangement for the nine months ended February 29, 2008. As of February 29, 2008 a total of 35,062,500 exchangeable shares remain outstanding and 2,502,100 shares may still be issued under the Plan of Arrangement.

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

* All outstanding options aggregating 33,875,000 incremental shares, have been excluded from the February 29, 2008 (25,562,500 incremental shares from the February 28, 2007) computation of diluted EPS as they are anti-dilutive due to the losses generated in 2008 and 2007.

13. Commitments

 

  (a) On January 1, 2005, the Company entered into a renewal of an oral agreement for management services with Can-Med Technology, doing business as Green Diamond Oil Corp. Under the terms of the agreement, Green Diamond provides office space, office equipment and supplies, telecommunications, personnel, and management services. These obligations were assumed by the Company in connection with the consummation of the Plan of Arrangement.

 

  (b) On February 14, 2007, the Company entered into an employment agreement (the “Agreement”) defining the terms and conditions of employment for the Chief Technology Officer of the Corporation. The employment commenced on May 1, 2007. Under the terms of the Agreement, the Chief Technology Officer of the Corporation will receive an annual base salary of $375,000 and an annual discretionary bonus that will be based upon certain performance milestones as established by the Board of Directors or the Compensation Committee of the Corporation. With respect to the termination provisions under the Agreement, for termination without cause, the Corporation has the right to terminate employment on 30 days written notice. In such case, that employment has been terminated prior to the second anniversary of the effective date of the Agreement, the Corporation shall provide the Chief Technology Officer with severance pay equal to his base salary from the date of termination until the second anniversary of the effective date of the Agreement. Upon any termination without cause, the Chief Technology Officer will also receive 12 months base salary and the continuation of certain benefits for a 12 month period. The same severance arrangement applies in the case of constructive termination.

 

  (c) On July 19, 2007, the Company entered into a lease agreement for the facility in Somerset, New Jersey. The term of the lease is for 62 months, which began August 1, 2007. The Company has 2, 5-year options to renew the lease. No rent was due for the first two months. Starting October 1, 2007 the monthly lease payments were $22,402 with nominal increases each following year.

14. Income Taxes

The Company has identified several tax jurisdictions since it has operations in the Canada and the United States tax jurisdictions, as defined. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.

There has not been any liability reflected for unrecognized tax benefits, including interest and penalties, during the nine months ended February 29, 2008.

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

15. Segment Information

The Company follows SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers.

SFAS No. 131 uses a management approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. The Company’s operations are conducted in two reportable segments, which are distinguished by geographic location in Canada and United States. Within the US reporting segment, the Company has aggregated two operating segments. These segments have been aggregated as they share similar economic characteristics including similar product lines and shared manufacturing processes and equipment. Both segments design and manufacture electronic components. Inter-segment sales are presented at their market value for disclosure purposes.

 

Nine months ended February 29, 2008

   Canada     United States     Corporate
(Canada)
    Inter Segment
Eliminations
    Total  

Sales to external customers

   $ 6,598,646     $ 15,548,799     $ —       $ —       $ 22,147,445  

Inter-segment sales

     7,800       266,181         (273,981 )     —    
                                        

Total revenue

     6,606,446       15,814,980       —         (273,981 )     22,147,445  
                                        

Income (loss) before expenses below:

     516,236       (1,591,019 )     —         —         (1,074,783 )

Corporate head office expenses

     —         —         823,098       —         823,098  

Depreciation and amortization

     58,740       714,293       2,437       —         775,470  

Other expense

     142,490       —         190,006       —         332,496  

Income tax expense (benefit)

     1,862       (40,272 )     11,000       —         (27,410 )
                                        

Net income (loss)

   $ 313,144     $ (2,265,040 )   $ (1,026,541 )   $ —       $ (2,978,437 )
                                        

Segment assets

   $ 5,001,310     $ 23,888,075     $ 2,237,948     $ —       $ 31,127,333  
                                        

Goodwill included in assets

   $ 848,102     $ 282,804     $ —       $ —       $ 1,130,906  

Capital expenditures

   $ 78,351     $ 1,553,171     $ —       $ —       $ 1,631,522  

Asset acquisition

   $ —       $ 4,045,671     $ —       $ —       $ 4,045,671  

Nine months ended February 28, 2007

   Canada     United States     Corporate
(Canada)
    Inter Segment
Eliminations
    Total  

Sales to external customers

   $ 4,716,021     $ 7,960,513     $ —       $ —       $ 12,676,534  

Inter-segment sales

     8,216       303,017       —         (311,233 )     —    
                                        

Total revenue

     4,724,237       8,263,530       —         (311,233 )     12,676,534  
                                        

Income before expenses below:

     349,324       883,115       —         —         1,232,439  

Corporate head office expenses

     —         —         1,910,902       —         1,910,902  

Depreciation and amortization

     363,268       346,591       7,243       —         717,102  

Other expense (income)

     (46,522 )     30,465       (300,647 )     —         (316,704 )

Income tax expense (benefit)

     —         28,697       (301,400 )     —         (272,703 )
                                        

Net income (loss)

   $ 32,578     $ 477,362     $ (1,316,098 )   $ —       $ (806,158 )
                                        

Segment assets

   $ 3,447,696     $ 17,220,972     $ 11,715,059     $ —       $ 32,383,727  
                                        

Goodwill included in assets

   $ 1,130,906     $ —       $ —       $ —       $ 1,130,906  

Capital expenditures

   $ 29,185     $ 284,175     $ —       $ —       $ 313,360  

 

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API Nanotronics Corp.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

     Nine months ended February 29,
     2008    2007

Geographical Information

   Revenue    Capital Assets,
Intangible
Assets,
Goodwill and
Other
   Revenue    Capital Assets,
Intangible
Assets,
Goodwill and
Other

United States

   $ 17,664,995    $ 10,605,265    $ 9,535,729    $ 6,271,832

Canada

     1,258,700      2,218,859      1,735,526      2,197,840

United Kingdom

     1,694,710      —        1,219,989      —  

All Other

     1,529,040      —        185,290      —  
                           
   $ 22,147,445    $ 12,824,124    $ 12,676,534    $ 8,469,672
                           

 

     Nine months ended
February 29,
 
     2008     2007  

Major Customer Revenue:

    

U.S. Department of Defense

   8 %   16 %

U.S. Department of Defense subcontractors

   71 %   54 %

The loss of these major customers could have a material adverse affect on the Company’s financial position and result of operations.

Concentration of Credit Risk

No customers represented over 10% of accounts receivable as at February 29, 2008, and May 31, 2007.

One customer represented approximately 19% of revenues for the nine months ended February 29, 2008.

16. Subsequent Events

No subsequent events.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Company is a North American based company focused on the manufacture of specialized electronic components and microelectronic circuits. The corporate office of the Company is located in Toronto, Canada. Overviews of its subsidiaries are discussed below:

 

   

API Electronics, Inc. of Hauppauge, New York (“API Electronics”) is a leading designer and manufacturer of power transistors, small signal transistors, tuning diodes, hybrid circuits, resistor/capacitor networks, diodes, and other critical elements with precisely defined functional capabilities for advanced military, industrial, commercial, automotive and medical applications. API Electronics is a leading supplier of defense electronic components to the U.S. Department of Defense and its subcontractors as well as having a strong commercial user base. During 2004, API Electronics purchased certain assets of Islip Transformer & Metal Co. Inc., and Sensonics, Inc., to further augment the Company’s capacity to produce in-demand components and systems for both government and corporate clients.

 

   

The National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. is a developer and manufacturer of 1553 data bus products, solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuit of the military/aerospace market and the industrial process control market.

 

   

The Filtran Group (“Filtran Group”) comprised of Filtran Inc. of Ogdensburg, New York and Filtran Limited of Nepean, Ontario, Canada, is a leading global supplier of superior quality electronic components to major producers of communications equipment, military hardware, computer peripherals, process control equipment and instrumentation. In business since 1969, Filtran Group is ISO 9001:2000 registered and offers off-the-shelf and custom designed products and regularly ships components to clients in more than 34 countries.

 

   

TM Systems II Inc. of Hauppauge, New York (“TM Systems”), in business for over 30 years, supplies the defense sector with naval landing and launching equipment, flight control and signaling systems, radar systems alteration, data communication and test equipment as well as aircraft ground support equipment.

 

   

Keytronics Inc. (“Keytronics”) of Endicott, New York, in business since 1971 is a manufacturer of a wide variety of power transformers, reactors, magnetic amplifiers, power supplies and converters and numerous special purpose electronic assemblies, including capacitor modules and medical electronics.

 

   

API Nanofabrication and Research Corporation, (“API NRC”), a wholly-owned subsidiary of the Company, incorporated on July 3, 2007 acquired all the assets of NanoOpto Corporation (“NoC”), effective July 19, 2007. With the acquisition, API NRC now possesses a broad range of instruments essential in nanofabrication and materials synthesis and fabrication. Its facility, located in Somerset, New Jersey was leased in connection with this acquisition will be the used to facilitate next generation product introductions based on nanotechnology and micro-electromechanical (MEMS) systems.

Reorganization

On May 8, 2006 Rubincon Ventures Inc. as the Company was formerly known (“Rubincon”), entered into a combination agreement contemplating a Plan of Arrangement with API Electronics Group Corp., an Ontario Corporation (“API”). Rubincon formed an Ontario subsidiary, RVI Sub, Inc. now known as API Nanotronics Sub, Inc., to facilitate the Plan of Arrangement. On November 6, 2006 Rubincon and API completed the transaction contemplated by the Plan of Arrangement. The combined companies now operate under the name “API Nanotronics Corp.”

Pursuant to the Canadian court approved Plan of Arrangement API Nanotronics Sub, Inc. became the sole shareholder of API, and each holder of the 2,825,406 outstanding API common shares was granted the right to receive for each API common share, 50 shares of API Nanotronics common stock, or if a Canadian shareholder elects, 50 API Nanotronics Sub, Inc. exchangeable shares. Each API Nanotronics Sub, Inc. exchangeable share is exchangeable into one share of API Nanotronics common stock at the option of the holder. The API Nanotronics Sub, Inc. exchangeable shares may be converted into API Nanotronics common stock at the option of API Nanotronics ten years from the date of the combination of Rubincon and API or sooner under certain circumstances. In addition, pursuant to the Plan of Arrangement, outstanding options of API were converted into options of API Nanotronics adjusted to reflect the aforementioned ten-for-one exchange ratio.

For accounting purposes the acquisition of API by Rubincon was considered a reverse acquisition, an acquisition transaction where the acquired company, API, is considered the acquirer for accounting purposes, notwithstanding the form

 

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of the transaction. The primary reason the transaction was treated as a recapitalization by API rather than a purchase of API by Rubincon was because Rubincon was a shell company. As reported in its Form 10-QSB for the quarter ended October 31, 2006, (the final quarterly filing requirement for Rubincon under its prior year end of January 31, 2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.

In conjunction with this reverse acquisition, Rubincon changed its year-end from January 31 to May 31, the year-end of API. Assets, liabilities and equity of the Company continue to be that of the operating company, API, as adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the transaction. The capital structure, including the number and type of shares issued, appearing in the consolidated balance sheet reflects that of the legal parent, Rubincon, now known as API Nanotronics Corp., including the shares issued to affect the reverse acquisition for the period after the consummation of the Plan of Arrangement and the capital structure of API modified by the 10 for 1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the Plan of Arrangement.

The Company’s business strategy has been to strengthen its leadership position for its components through continued emphasis on technological advances, operational efficiencies, cost reductions, competitiveness and acquisitions.

The Company’s objectives are to seek long-term stable growth for all of its operating segments (API Electronics, National Hybrid Group, Filtran Group, TM Systems, Keytronics and API NRC) through continuous capital investment, employing today’s production methods and technologies and by demanding uncompromising quality control.

Trends in Our Industry and Business

API is optimistic about market growth from various U.S. Department of Defense (DoD) agencies, including the US Army Communications and Electronics Command (CECOM) and the Tank Automotive Command (TACOM) as part of the continuing increases in U.S. DoD military budgetary spending. Additionally, subcontract work continues with a major U.S. defense contractor, supplying radar threat indication subsystems utilized in many military helicopter programs. API has also continued to add to its DoD Qualified Manufacturer List (QML) product line of MIL-PRF-19500 qualified power transistor semiconductors, which are utilized on many U.S Armed Forces legacy weapons programs. API has also recently begun shipments on a newly designed programmable hybrid timing circuit used by many military and aerospace relay manufacturers. The new design will provide both a cost savings for the customer, and a more profitable build for API due to the improved design, manufacturing efficiencies, and material costs.

National Hybrid Group’s core business of military electronics has opportunities for growth as the U.S. and international defense budgets continue to grow. The Mil-Std-1553 business has been strong and the trend is for continued growth as the service life of existing military platforms such as the US A-10, B-52, F-15, F-16 and other legacy aircraft is extended. The addition of modern electronics to these aging aircraft has increased the need for National Hybrid Group products such as the new low cost plastic ball grid array terminal that National Hybrid Group has just introduced. The refurbishment of US Army vehicles from the conflict in Iraq has resulted in additional business in the SSPC and Hybrid product lines. Spare parts required for this refurbishment effort have resulted in new orders for programs such as the Bradley Fighting Vehicle and the M1A2 Tank. The Company expects to continue to invest in capital improvements at the National Hybrid Group’s Ronkonkoma, NY and Largo, FL facilities to allow the Company to react more quickly and efficiently to the increased demand.

Filtran Group’s main market is military subcontractors with a strong demand for filters, power supplies, transformers and inductors. Filtran Group is aggressively pursuing growth strategies with the hiring of additional sales persons in the United States and setting up a nationwide sales representative network. Filtran Group has focused on increasing their power supply capabilities by hiring a power supply project manager and purchasing additional power supply equipment and software to aid in the design and development of state of the art power supplies for the aerospace, satellite military and hirel commercial custom power supplies. Filtran Group has also developed a synergistic partnership with API Electronics targeting the military relay market.

TM Systems’ customer base consists primarily of various U.S. government departments, including the U.S. Navy, as well as numerous domestic and foreign corporations. The U.S. government has approved significant funds for ongoing defense and homeland security. TM Systems believes that new domestic orders should increase as a result of this development. Furthermore, foreign country demand may also increase in response to global terror concerns. TM Systems’ Stabilized Glide Slope Indicator (SGSI) is an electro-hydraulic-optical landing system and designed for use on air capable

 

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and amphibious assault ships. Increasing operational readiness will require the Navy to be independent of land-based command centers. Furthermore, political conflicts have led to a reduction of land-bases available in certain foreign countries.

Keytronics continues to supply the major military OEM’s and various Department of Defense agencies with products including a wide variety of power transformers, reactors, magnetic amplifiers, power supplies and converters, and numerous special purpose electronic assemblies including capacitor modules and medical electronics.

The Company is pursuing market opportunities and growth for innovative products based on nanotechnology and MEMS. API NRC owns a number of proprietary technologies which address urgent market needs in imaging, digital cinema camera technologies, optical communications, as well as in conformal optical coating using proprietary atomic layer deposition (ALD) technologies. These approaches can also be applied to the nanofabrication of novel semiconductor devices and systems by using ALD, for example, to create a new generation of super-thin-film electronics. API NRC also plans to develop a series of plasmonics-based sensors which use the special optical responses of nano-structured metals to laser light.

Operating Revenues

Operating revenues of the Company are derived from the sales of electronic components and systems, specifically semiconductors, 1553 data bus products, power controllers, transformers, inductors, filters and mission critical systems. The Company expects to derive revenues in future quarters from sales generated by API NRC’s optical product line. The principal markets for these products are the government and military, commercial equipment, and other replacement parts. Our customers are located primarily in the U.S., Canada and the United Kingdom but we also sell products to customers located throughout the world.

Semiconductor Revenues

The Company currently serves a broad group of customers with the following category of semiconductor products: Varactor tuning diodes, specialty suppressor diodes for the relay market, 1553 data bus products, power controllers, custom microelectronic hybrid circuits, small-signal transistors, silicon rectifiers, zener diodes, high-voltage diodes, and resistor/capacitor networks. These products facilitate the power supply in end-products such as missiles, the space shuttle, F-15 and F-16 fighter planes and B-1 bombers.

Magnetic & Power Supply Revenues

Revenues are derived from the manufacturing of electronic transformers, inductors, filters and power supplies. The main demand today for these products comes from the military, aerospace, telecom, audio, video, voice, voice/data, and transportation OEM’s.

Mission Critical System Revenues

The principal market for these products is the military/defense industry. These highly engineered products and systems include, naval aircraft landing and launching equipment, Visual Landing Aids (VLA) and Stabilized Glide Slope Indicators (SGSI), flight control and signaling systems, radar systems alteration, data communication and test equipment, aircraft ground support equipment, Aircraft Radar Indication Systems using Liquid Crystal Display (LCD) technology and other mission critical systems and components.

Operating Expenses

Operating expenses consist of business development, selling, general and administrative expenses.

Cost of Goods Sold

Cost of goods sold primarily consists of costs that we incur to design, manufacturer, test and ship products. These costs include:

 

   

The cost of raw materials, including freight, direct labor and tooling required to design and build products.

 

   

The cost of testing (labor & equipment) products throughout the manufacturing process and final testing before the products are shipped to customers.

 

   

The cost of shipping and handling the products shipped to the customer.

 

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Table of Contents

Selling, General and Administrative Expense

Selling, general and administrative expenses include:

 

   

Compensation and benefit costs for all employees, including sales and customers service, sales commissions, executive, finance and human resource personnel.

 

   

Compensation related to stock-based awards to employees and directors.

 

   

Professional services, for accounting, legal, tax, information technology and public relations fees.

 

   

Rent and related expenses.

Other Income (Expense)

Other income and (expense) consists of:

 

   

Interest income on cash, cash equivalents and marketable securities.

 

   

Interest expense on notes payable, operating loans and capital leases.

 

   

Gain or loss on foreign currency transactions.

Key Operating Data

Our management uses a number of data to measure the growth of the business and operating performance. The key measure for growth is sales backlog:

 

     As of February 29,
     2008    2007

Backlog by Segment Company

     

API Electronics

   $ 3,173,218    $ 2,650,171

National Hybrid Group

     6,320,192      7,875,198

Filtran Group

     5,539,685      3,328,784

TM Systems

     1,765,469      1,812,926

Keytronics

     753,827      656,326

API NRC

     35,623      N/A
             

Overall

   $ 17,588,014    $ 16,323,405
             

The Company’s backlog figures represent confirmed customer purchase orders that the Company has not shipped at the time the figures were calculated, which have a delivery date within a 12 month period. Filtran Group’s backlog figures will also be affected by the US/Canadian exchange rate.

 

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Table of Contents

Asset Acquisition of API Nanofabrication

On July 19, 2007, API NRC, a wholly-owned subsidiary of the Company, incorporated on July 3, 2007, entered into an Asset Purchase Agreement as part of an auction with NanoOpto Corporation (“NoC”) for the purchase of substantially all of NoC’s assets (the “Purchase”), including equipment and intellectual property relating to the design and high volume nano-fabrication of nano-optic devices for optical components.

The acquisition of these assets offered the Company a unique and powerful material processing and fabrication capabilities. These capabilities span from silicon wafer processing to the latest electronic and optical fabrication technologies based in nanoscience and MEMS. These capabilities expand the Company’s abilities to better serve its current customers and to develop new electronic products. These capabilities also open possibilities for new business based on hybrid optics. These assets and facilities will also be the centerpiece of the Company’s Research and Development program.

Business Acquisition of National Hybrid Group

On January 24, 2007, the Company acquired all of the stock of the National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. The National Hybrid Group is a developer and manufacturer of 1553 data bus products, solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuit for the military/aerospace market and the industrial process control market.

Results of Operations for the Nine Months Ended February 29, 2008 and February 28, 2007

The following discussion of results of operations is a comparison of the Company’s nine month period ending February 29, 2008 and February 28, 2007.

Operating Revenue

 

     Nine months ended February 29,  
     2008    2007    %
Change
 

Sales by Subsidiary

        

API Electronics

   $ 2,946,142    $ 3,003,362    -1.9 %

National Hybrid Group

     7,873,566      939,498    738.1 %

Filtran Group

     8,194,924      5,860,090    39.8 %

TM Systems

     1,804,368      1,577,378    14.4 %

Keytronics

     1,251,838      1,296,206    -3.4 %

API NRC

     76,607      N/A    N/A  
                
   $ 22,147,445    $ 12,676,534    +74.7 %
                

Overall, the Company recorded an increase in sales for the nine months ended February 29, 2008 as total sales revenue increased by 74.7% over the same period in 2007. This increase resulted from the inclusion of National Hybrid and API NRC’s operations plus organic sales growth for the nine months ended February 29, 2008.

API Electronics sales revenues decreased by 1.9% in the nine months ended February 29, 2008 over the same period in 2007.

National Hybrid Group was acquired on January 24, 2007. Sales of $7,873,566 reflects strong demand for National Hybrid Group’s databus 1553 product line, multi-chip modules, power controllers and custom hybrids, utilized in military and industrial applications.

Filtran Group’s sales revenue increased by approximately $2,335,000 or 39.8% in the nine months ended February 29, 2008 over the corresponding period in 2007. The increase in revenues reflects continued strong demand for Filtran’s electronic filter, transformer and inductor product lines from its military subcontractor customer base.

 

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TM Systems recorded sales revenue levels in the nine months ended February 29, 2008 that were 14.4% more than the same period in 2007. The increase is attributed to an increase in revenues recognized on glide slope indicator equipment sold to a US military sub contractor during the nine months ended February 29, 2008.

Keytronics’ revenues decreased by 3.4% for the nine months ended February 29, 2008 compared to the nine months ended February 28, 2007.

API NRC started design and manufacturing operations after the acquisition of all the assets of NoC on July 19, 2007. API NRC’s initial focus will be in the design and manufacturing of the optical business as it tries to take advantage of the extraordinary branding NoC did on its products and processes. The Company has initially garnered significant interest from customers interested in API NRC’s products. This interest translated into initial orders and shipment in the nine months ended February 29, 2008. The initial order consisted of specialized optical filters to a leading global digital imaging component manufacturer. The Company expects to capitalize on these initial orders and interest in other products as API NRC continues to develop its product line and manufacturing process.

The Company’s electronic products are sold through operations in Canada and the US to several countries around the world.

Geographical Information

 

     Nine months ended February 29,
     2008    2007

Geographical Information

   Revenue    Capital Assets,
Intangible
Assets,
Goodwill and
Other
   Revenue    Capital Assets,
Intangible
Assets,
Goodwill and
Other

United States

   $ 17,664,995    $ 10,605,265    $ 9,535,729    $ 6,271,832

Canada

     1,258,700      2,218,859      1,735,526      2,197,840

United Kingdom

     1,694,710      —        1,219,989      —  

All Other

     1,529,040      —        185,290      —  
                           
   $ 22,147,445    $ 12,824,124    $ 12,676,534    $ 8,469,672
                           

The Company saw United States sales increase by 85.31% for the nine months ended February 29, 2008 compared to the same period last year. The increase was largely a result of the inclusion of a full nine months of National Hybrid Group results following its acquisition and increased sales from the Filtran Group and TM Systems. Canadian sales decreased by 27.57% as the Filtran Group experienced a decrease in sales to their Canadian customer base. UK sales increased by 38.9% due to the sales to the UK by the National Hybrid Group, while sales to the rest of the world increased significantly by over $1,000,000 for the nine months ended February 29, 2008, due largely to the National Hybrid Group and Filtran Group.

The US Department of Defense and its subcontractors accounts for a significant amount of the Company’s sales revenue as follows:

 

     Nine months ended
February 29,
 
     2008     2007  

Revenue

    

U.S. Department of Defense

   8 %   16 %

U.S. Department of Defense subcontractors

   71 %   54 %

 

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Operating Expenses

Cost of Revenue and Gross Profit

 

     Nine months ended February 29,  
     2008     2007     2008 vs.
2007
% Change
 

Gross Profit by Segment Company

      

API Electronics

   28.4 %   30.0 %   -1.6 %

National Hybrid Group

   32.2 %   35.9 %   -3.7 %

Filtran Group

   20.5 %   17.9 %   2.6 %

TM Systems

   32.0 %   26.2 %   5.8 %

Keytronics

   13.4 %   14.6 %   -1.2 %

API NRC

   45.4 %   N/A %   N/A %

Overall

   26.7 %   23.8 %   2.9 %

The Company’s overall gross profit was 26.7% for the nine months ended February 29, 2008, an increase from 23.8% for the nine months ended February 28, 2007. Accordingly, the overall cost of revenue was 73.3% for the nine months ended February 29, 2008 compared to 76.2% for the nine months ended February 28, 2007.

API Electronics posted a gross profit of 28.4% for the nine months ended February 29, 2008 compared to 30.0% for the nine months ended February 28, 2007. This decrease is attributed to higher labor cost on product mix and an increase in manufacturing overhead cost as a percentage of revenues due to decreased revenues on a year to date basis.

Filtran Group saw their gross profit increase to 20.5% for the nine months ended February 29, 2008 from 17.9% for the nine months ended February 28, 2007. The increase in gross profit was related to product mix related to sales to a military subcontractor that produced higher gross margins and to a one time sale of electronic “ADSL” filters that were written off several years previously.

TM Systems’ posted a gross profit of 32% for the nine months ended February 29, 2008 from 26.2% for the nine months ended February 28, 2007. The result was largely due to higher profit on revenues derived from the US Navy Stabilized Glide Scope Indicators (SGSI) and revenues from visual landing aide equipment sold to U.S. Military sub contractor Avondale Shipyards, a division of Northrop Grumman.

The major components of cost of sales for the nine months ended February 29, are as follows:

 

     2008    % of
sales
    2007    % of
sales
 

Materials Used

   $ 5,584,079    25.2 %   $ 3,593,245    28.3 %

Manufacturing Labor

   $ 3,891,138    17.6 %   $ 2,129,273    16.8 %

Manufacturing Overhead

   $ 6,758,725    30.5 %   $ 3,938,050    31.1 %
                          
   $ 16,233,942    73.3 %   $ 9,660,568    76.2 %
                          

As a percentage of sales, for the nine months ended February 29, 2008, cost of sales decreased by 2.9% compared to the nine months ended February 28, 2007. The decrease in cost of sales is due to the inclusion of National Hybrid Group operations, which have a higher profit margin. The decrease is also due to improvements in gross margins at Filtran Group and TM Systems, offset by lower margins at API Electronics Inc. and Keytronics, Inc.

Selling Expenses

Selling expenses increased to $1,657,655 for the nine months ended February 29, 2008 from $957,619 for the nine months ended February 28, 2007, mainly as a result of the inclusion of National Hybrid Group’s operations for the nine month period ending February 29, 2008. Selling expenses for the nine months ended February 29, 2008 and February 28, 2007 was 7.5% as a percentage of sales.

 

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The major components of selling expenses are as follows:

 

     Nine months ended February 29,  
     2008    % of
sales
    2007    % of
sales
 

Payroll Expense – Sales

   $ 617,141    2.8 %   $ 405,299    3.2 %

Commissions Expense

   $ 584,519    2.6 %   $ 295,378    2.3 %

The overall increase in selling expenses was attributed to payroll and commission expenses related to the inclusion of National Hybrid Group and API Nanofabrication expenses for the nine months ended February 29, 2008.

Business Development

The Company’s business development expenses increased marginally to $78,013 for the nine months ended February 29, 2008 from $74,970 incurred during the nine months ended February 28, 2007.

General and Administrative Expenses

General and administrative expenses increased to $4,520,708 for the nine months ended February 29, 2008 from $3,265,769 for the nine months ended February 28, 2007. The increase is largely a result of the addition of the National Hybrid Group operations for the nine months ended February 29, 2008, whose general and administrative expenses totaled approximately $1,443,897 for the nine months ended February 29, 2008.

The major components of general and administrative expenses are as follows:

 

     Nine Months ended February 29,  
     2008    2007    $ Change  

Senior Management Salary

   $ 979,607    $ 1,128,385    $ (148,778 )

Professional Services

   $ 1,061,534    $ 353,934    $ 707,600  

Office Salary

   $ 902,727    $ 336,599    $ 566,128  

Senior management salaries decreased by $148,778 for the nine months ended February 29, 2008 compared to the nine months ended February 28, 2007 due to a decrease in stock based compensation expense related to senior management salaries of approximately $219,000 and the inclusion of NHI Group expenses for the full nine months of approximately $103,000.

Office salaries increased to $902,727 for the nine months ended February 29, 2008 from $336,599, an increase of $566,128 from the same period in the prior fiscal year, due largely to the inclusion of National Hybrid Group and API NRC results for the full nine months ended February 29, 2008 of approximately $443,000 and $82,000 respectively.

Professional services include legal, accounting, audit and taxation services increased by approximately $707,600 for the nine months ended February 29, 2008, a result of increased legal fees pertaining to public filings, and due to the inclusion of professional accounting and information technology fees incurred at National Hybrid Group implementing an ERP software package, legal fees related to patent filings at API NRC and the continued implementation of internal controls to comply with Section 404 of the Sarbanes-Oxley Act for the nine months ended February 29, 2008.

Research and Development Expenses

Research and development increased to $2,330,478 for the nine months ended February 29, 2008 from $113,174, for the nine months ended February 28, 2007. The increase is centered around the creation of API NRC, whose Somerset, New Jersey facility provides the Company with unique and powerful material processing and fabrication capabilities. These capabilities span from silicon wafer processing to the very latest electronic and optical fabrication technologies based in nanoscience and MEMS. These capabilities expand the Company’s abilities to better serve its current customers and to develop new electronic products. They also open possibilities for new business based on hybrid optics. This facility will also be the centerpiece of the Company’s research and development program.

 

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Research and development expenses also increased due to National Hybrid Group’s continuous and significant focus on research and development to design and produce next generation products for their entire product line including but not limited to the 1553 data bus, solid state power controller and high density multi-chip modules.

The Company is committed to increasing research and development investment on a going forward basis in anticipation that it will deliver next generation products using research conducted at the API NRC facility, impacting the wide range of current products the Company sells and for new product possibilities

Operating Income (Loss)

The Company posted an operating loss for the nine months ended February 29, 2008 of $2,673,351 compared to operating loss of $1,395,566 for the nine months ended February 28, 2007. Excluding the Company’s significant increase in research and development expenses of $2,217,304 compared to the same period last year, operating income increased by approximately $825,000 compared to the nine months ended February 28, 2007. The increased focus on research and development is centered around the Company’s new strategic vision of incorporating next generation nanotechnology based technology into the design and manufacturing of existing and future product lines in the new state of the art facility in Somerset, New Jersey under the oversight of top nanotechnology scientist and engineers.

Other Income And Expense

Other expense was $332,496 for the nine months ended February 29, 2008 compared to other income of $316,704 for the nine months ended February 28, 2007.

The increase is largely attributable to interest paid on the related party note payable of $4,000,000, funds used to acquired the assets of API NRC. Total interest expense related to the note was approximately $300,000 for the nine months ended February 29, 2008 compared to interest income of $125,000 in 2007.

The Company also incurred foreign currency translation losses of $96,362 at February 29, 2008 versus a gain of $293,579 in the nine months ended February 28, 2007. The loss is due to the rapid decrease in value of the U.S. dollar versus the Canadian dollar, which negatively affected Canadian operations.

Income Taxes

The provision for income taxes amounted to a benefit of $27,410 for the nine months ended February 29, 2008 compared to a income tax benefit of $272,703 for the nine months ended February 28, 2007. The Company increased its valuation allowance by approximately $1,156,000 during the nine months ended February 29, 2008.

Net Income (Loss)

The Company incurred a net loss for the nine months ended February 29, 2008 of $2,978,437 compared to a net loss of $806,158 for the nine months ended February 28, 2007. The increase in net loss compared to the same period in 2007 is largely attributed to an increase in research and development investment of approximately $2,217,000.

 

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Results of Operations for the Three Months Ended February 29, 2008 and February 28, 2007

The following discussion of results of operations is a comparison of the Company’s three month period ending February 29, 2008 and February 28, 2007.

Operating Revenue

 

     Three months ended February 29,  
     2008    2007    %
Change
 

Sales by Subsidiary

        

API Electronics

   $ 903,856    $ 787,679    14.7 %

National Hybrid Group

     2,417,708      939,498    157.3 %

Filtran Group

     2,823,467      2,052,440    37.6 %

TM Systems

     850,012      489,719    73.6 %

Keytronics

     354,282      373,867    -5.2 %

API NRC

     59,027      N/A    N/A  
                
   $ 7,408,352    $ 4,643,203    59.6 %
                

Overall, the Company recorded an increase in sales for the three months ended February 29, 2008 as total sales revenue increased by 59.6% over the same period in 2007. This increase resulted from the inclusion of National Hybrid and API NRC’s operations for three months, and increases in sales from API Electronics, the Filtran Group and TM Systems II respectively, offset by decreased sales at Keytronics, Inc.

API Electronics sales revenues increased by 14.7% in the three months ended February 29, 2008 over the same period in 2007. This increase was attributed primarily to an increase in demand for mission critical systems, primarily radar indicators and counter measure control electronics for U.S. military helicopters.

National Hybrid Group was acquired on January 24, 2007. Sales of $2,417,708 reflects strong demand for National Hybrid Group’s databus 1553 product line, multi chip modules, power controllers and custom hybrids, utilized in military and industrial applications.

Filtran Group’s sales revenue increased by approximately $770,000 or 37.6% in the three months ended February 29, 2008 over the corresponding period in 2007. The increase in sales revenue and growing backlog reflects continued strong demand for Filtran’s electronic filter, transformer and inductor product lines.

TM Systems recorded sales revenue levels in the three months ended February 29, 2008 that were 73.6% more than the same period in 2007. The increase was attributed primarily to an increase in revenues recognized on glide slope indicator equipment sold to a US military sub contractor.

Keytronics’ revenues decreased slightly by 5.2% for the three months ended February 29, 2008 compared to the three months ended February 28, 2007.

API NRC started design and manufacturing operations after the acquisition of all the assets of NoC on July 19, 2007. API NRC’s initial focus will be in designing and manufacturing for the optical business as API NRC attempts to take advantage of the resources it acquired from NoC. The Company has initially generated substantial interest from customers interested in API NRC’s products. The interest translated into orders from customers for the three months ended February 29, 2008.

The Company’s electronic products are sold through operations in Canada and the US to several countries around the world.

 

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Operating Expenses

Cost of Revenue and Gross Profit

 

     Three months ended February 29,  
     2008     2007     2008 vs.
2007
% Change
 

Gross Profit by Segment Company

      

API Electronics

   21.5 %   20.9 %   0.6 %

National Hybrid Group

   34.4 %   41.7 %   -7.3 %

Filtran Group

   19.7 %   17.0 %   2.7 %

TM Systems

   27.7 %   24.0 %   3.7 %

Keytronics

   7.8 %   9.7 %   -1.9 %

API NRC

   71.7 %   N/A %   N/A %

Overall

   25.6 %   23.7 %   1.9 %

The Company’s overall gross profit was 25.6% for the three months ended February 29, 2008, a 1.9% increase from 23.7% for the three months ended February 28, 2007. Accordingly, the overall cost of revenue was 74.4% for the three months ended February 29, 2008 compared to 76.3% for the three months ended February 28, 2007.

API Electronics posted a gross profit of 21.5% for the three months ended February 29, 2008 compared to 20.9% for the three months ended February 28, 2007, a marginal increase of 0.6%.

The Filtran Group saw its gross profit increase to 19.7% for the three months ended February 29, 2008 from 17.0% for the three months ended February 28, 2007. The increase in gross profit was related to increased revenues and improvements in manufacturing processes.

TM Systems’ gross profit increased by 3.7% for the three months ended February 29, 2008 from the prior period in 2007. The result was largely due to higher profit revenues due to revenues derived from the US Navy Stabilized Glide Scope Indicators (SGSI) and revenues from visual landing aide equipment sold to U.S. Military sub contractor Avondale Shipyards, a division of Northrop Grumman. Furthermore, TM Systems has reduced labor costs associated with part of their product line and has been successful in reducing manufacturing overhead expenses, specifically related to the reduction of head count.

The major components of cost of sales for the three months ended February 29 are as follows:

 

     2008    % of
sales
    2007    % of
sales
 

Materials Used

   $ 1,882,756    25.4 %   $ 1,238,936    29.0 %

Manufacturing Labor

   $ 1,422,187    18.0 %   $ 925,767    18.1 %

Manufacturing Overhead

   $ 2,205,015    30.9 %   $ 1,377,799    29.7 %
                          
   $ 5,509,958    74.3 %   $ 3,542,502    76.8 %
                          

As a percentage of sales, for the three months ended February 29, 2008, cost of sales decreased by 2.5% compared to the three months ended February 28, 2007. The decrease is due to improvements in gross margins at API Electronics, Filtran Group and TM Systems.

Selling Expenses

Selling expenses for the three months ended February 29, 2008 were $486,763 compared to $411,962 for the three months ended February 28, 2007, mainly as a result of an increase of approximately $90,000 from the National Hybrid Group’s operations for the full three month period ending February 29, 2008 compared to one month for the three months ended February 28, 2007.

 

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The major components of selling expenses are as follows:

 

     Three months ended February 29,  
     2008    % of
sales
    2007    % of
sales
 

Payroll Expense – Sales

   $ 203,345    2.7 %   $ 148,145    3.2 %

Commissions Expense

   $ 233,611    3.2 %   $ 136,970    3.0 %

The overall increase in selling expenses was attributed to payroll and commission expenses related to the inclusion of National Hybrid Group expenses for the three months ended February 29, 2008 offset by decreases in general selling expenses of approximately $67,000.

Business Development

The Company’s business and development expenses were $16,518 for the three months ended February 29, 2008 compared to $0 during the three months ended February 28, 2007.

General and Administrative Expenses

General and administrative expenses for the three months ended February 29, 2008 were $1,676,583 compared to $1,044,634 for the three months ended February 28, 2007. The increase is largely a result of the decrease in stock based compensation offset by the addition of the National Hybrid Group operations for the three months ended February 29, 2008, whose general and administrative expenses totaled approximately $553,000 for the three months ended February 29, 2008.

The major components of general and administrative expenses are as follows:

 

     Three months ended February 29,
     2008    2007    $ Change

Senior Management Salary

   $ 262,814    $ 104,404    $ 158,410

Professional Services

   $ 457,663    $ 207,089    $ 250,574

Office Salary

   $ 376,614    $ 138,590    $ 238,024

Senior management salaries increased by $158,410 for the three months ended February 29, 2008 compared to the three months ended February 28, 2007 primarily as a result of stock based compensation expense.

Office salaries increased to $457,663 for the three months ended February 29, 2008 from $207,089, an increase of $250,574 due largely to the inclusion of National Hybrid Group and API NRC results for the full three months ended February 29, 2008 of approximately $155,000 and $51,000 respectively.

Professional services include legal, accounting, audit and taxation services increased for the three months ended February 29, 2008 to $376,614 from $138,590 for the three months ended February 28, 2007, an increase of $238,034 largely as a result of increased legal fees pertaining to public filings, and due to the inclusion of professional accounting and information technology fees incurred at National Hybrid Group and API NRC for the three months ended February 29, 2008.

Research and Development Expenses

Research and development increased to $1,086,170 for the three months ended February 29, 2008 from $54,413, for the three months ended February 28, 2007. The increase is centered around the creation of API NRC, whose Somerset, New Jersey’s facility provides the Company with unique and powerful material processing and fabrication capabilities. These capabilities span from silicon wafer processing to the very latest electronic and optical fabrication technologies based in nanoscience and MEMS. These increased capabilities expand the Company’s abilities to better serve its current customers and to develop new electronic products. These increased capabilities also open possibilities for new business based on hybrid optics. This facility will also be the centerpiece of the Company’s research and development program.

Research and development expenses also increased due to National Hybrid Group’s continuous and significant focus on research and development to design and produce next generation products for their entire product line including but not limited to the 1553 data bus, solid state power controller and high density multi-chip modules.

The Company is committed to increasing its research and development focus on a going forward basis in anticipation that it will deliver next generation products using research conducted at the API NRC facility, impacting the wide range of current products the Company sells and for new product possibilities.

 

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Operating Income (Loss)

The Company posted an operating loss for the three months ended February 29, 2008 of $1,367,640 compared to operating loss of $410,308 for the three months ended February 28, 2007. The increase in operating loss is attributed to the Company’s increased investment in research and development, which amounted to an increase of approximately $1,030,000. The increased investment in research and development is centered around the Company’s new strategic vision of incorporating next generation nanotechnology into the design and manufacture of existing and future product lines in the new state of the art facility in Sommerset, New Jersey under the oversight of top nanotechnology scientists and engineers.

Other Income And Expense

Other expense was $100,437 for the three months ended February 29, 2008 compared to income of $161,449 for the three months ended February 28, 2007.

This increased expense is largely attributable to interest paid on the related party note payable of $4,000,000, resulting from funds borrowed to acquired the assets of API NRC. Total interest expense related to the note was approximately $120,000 for the three months ended February 29, 2008.

The Company also incurred foreign currency translation losses of $5,939 from a gain $153,330 in the three months ended February 29, 2008. The increased loss is due to the rapid decrease of the U.S. dollar versus the Canadian dollar, which negatively affected Canadian operations.

Income Taxes

The provision for income taxes amounted to a tax benefit of $356,480 for the three months ended February 29, 2008 compared to a income tax benefit of $59,150 for the three months ended February 28, 2007. The Company and its subsidiaries have non-capital losses of approximately $138,492 to apply against future taxable income. These losses will expire as follows: $14,000, $55,600 and $67,814 in 2010, 2012 and 2017, respectively.

Net Income (Loss)

The Company incurred a net loss for the three months ended February 29, 2008 of $1,111,597 compared to a net loss of $189,708 for the three months ended February 28, 2007. The increase in net loss compared to the same period in 2007 is largely attributed to an increase in research and development investment of approximately $1,030,000.

Liquidity and Capital Resources

Nine months ended February 29, 2008 compared to the year ended May 31, 2007

Liquidity

At February 29, 2008, the Company held cash of $1,850,714 compared to $3,277,468 at May 31, 2007. The decrease is largely centered around the investment in research and development at API NRC.

At February 29, 2008, the Company’s working capital was sufficient to meet the Company’s current requirements.

Inventory increased marginally from $10,360,869 at May 31, 2007 to $10,964,554 at February 29, 2008. The increase is mainly attributed to the Filtran Group as it builds inventory to meet increased demand for its products as witnessed by a 40% increase in revenues and a significant increase in its 12 month order backlog.

Accounts receivable increased by $541,110, which reflects increased quarterly revenues. Accounts payable and accrued expenses increased by $1,230,544. The increase is largely attributed to increases at Filtran Group to help support increased revenues, the opening of the API NRC research facility in July 2007, accrued expenses related to Sarbanes Oxley Section 404 compliance costs and interest on the $4,000,000 long-term related loan, used to acquire the assets of NoC.

Long-term debt increased by $4,000,000 at February 29, 2008 from $67,197 at May 31, 2007. The increase is a result of the $4,000,000 loan, the proceeds of which were used to acquire the assets of NoC.

Total assets increased to $31,127,333 at February 29, 2008 from $27,346,760 at May 31, 2007. The increase resulted primarily from the acquisition of the assets of NoC.

 

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Operating, Investing and Financing Activities

Cash used by operating activities was $936,410 for the nine months ended February 29, 2008 compared to net cash derived from operations of $863,491 for the nine months ended February 28, 2007, a decrease of approximately $1,800,000. The change is a result of an increase in cash used in operating activities, due to the Company’s increase focus on research and development, which increased by approximately $2,200,000.

Investing activities for the nine months ended February 29, 2008 consisted of the purchase of capital assets of $1,374,022 (2007—$313,360), and the use of cash of $4,045,671 for the acquisition of all the assets of NoC (2007—$0) net of proceeds from an insurance policy of $134,164.

Financing activities included net proceeds from long-term debt of $4,000,000 (2007—$6,051,053), and $1,800,000 of proceeds from the issuance of common shares. These amounts are offset by repayments of long term debt $348,697 (2007—$0), repayment of bank indebtedness of $332,908 (2007—$57,923) and repayment of capital lease obligations of $6,081 (2007—$33,459).

Capital Resources

The Company’s subsidiary API Electronics has a working capital line of credit of $500,000. At February 29, 2008, API Electronics had borrowed $317,674 against this line. The credit is secured by all of its assets pursuant to a general security agreement and is guaranteed by the Chief Operating Officer of the Company. The bank indebtedness is due on demand and bears interest at US prime plus 1%. The line is subject to annual renewal on April 14, 2008.

The Company’s subsidiary Filtran Limited has a line of credit of $990,000 (Cdn$1,000,000). At February 29, 2008, the Filtran Group had borrowed $0. The interest rate on any borrowed funds is charged at Canadian prime. The agreement also allows Filtran to lease capital purchases at Canadian prime plus 1% up to $33,000. The lender has a general security agreement and a first collateral mortgage on Filtran’s assets and building. The line is subject to annual renewal on August 31, 2008.

The Company is not committed to any significant capital expenditures at present.

The Company believes that cash flows from operations, funds available under its credit facilities and other sources of cash will be sufficient to meet its anticipated cash requirements.

Summary of Critical Accounting Policies and Estimates

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgements is contained in Item 6, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Summary of Critical Accounting Policies and Estimates, of our Annual Report on Form 10-KSB for the fiscal year ended May 31, 2007.

 

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Contractual Obligations and Commercial Commitments:

 

     Total    Less Than
1 Year
   1-3 Years    3-5 Years    More Than
5 Years

Building leases

   $ 1,410,466    $ 120,203    $ 887,029    $ 301,679    $ 101,555

Equipment leases

     27,329      3,139      18,985      5,205      —  

Promissory note, related party

     4,000,000      —        —        4,000,000      —  

Other long term liabilities

     127,114      127,114      —        —        —  
                                  

Total

   $ 5,564,909    $ 250,456    $ 906,014    $ 4,306,884    $ 101,555
                                  

Effects of Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. This Statement is intended to enhance the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments. The Company does not expect that the adoption of SFAS No. 161 will have a significant impact on the consolidated results of operations or financial position of the Company.

In December 2007, the FASB revised Statement of Financial Accounting Standard No. 141 (SFAS 141R), “Business Combinations”, which is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted before that date. SFAS 141R requires assets and liabilities recorded in a business combination to be recorded at fair value and replaces the cost-allocation process under the prior standard. In addition, SFAS 141R requires separate recognition of acquisition costs and requires recognition of contractual contingencies at fair value as of the acquisition date. Further, the revised standard requires capitalization of research and development assets and requires fair value recognition of contingent consideration as of the acquisition date. The Company is currently evaluating the potential impact of this pronouncement.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning June 1, 2010. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” which will permit entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect that the adoption of SFAS No. 159 will have a significant impact on the consolidated results of operations or financial position of the Company. On February 12, 2008, the FASB delayed the effective date for non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value

 

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measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. SFAS 157 is effective in fiscal years beginning after November 15, 2007. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and periods within those fiscal years. The Company is currently evaluating the potential impact of this pronouncement.

Off-Balance Sheet Arrangements

During the nine months ended February 29, 2008 and the year ended May 31, 2007, the Company did not use off-balance sheet arrangements.

Stockholders’ Equity

As of February 29, 2008 there were 336,990,105, common shares of API Nanotronics Corp. issued and outstanding, no warrants outstanding and exercisable, and 33,875,000 stock options outstanding at exercise prices ranging from $.0928 to $0.40 with remaining average contractual lives of 4.770 years. Additionally, at February 29, 2008, 35,077,750 exchangeable shares were issued and outstanding and not held by the Company. Therefore, because exchangeable shares, which were issued in connection with the Plan of Arrangement with API Electronics Group Corp. are the economic equivalent to shares of the Company’s common stock, the Company had the economic equivalent of 372,067,855 shares of common stock outstanding at that date. This total does not include the 2,487,150 shares of common stock or exchangeable shares that still could be issued as a result of the Plan of Arrangement for API Electronics Group Corp. common shares that have not been converted into our common stock or exchangeable shares.

During the nine months ended February 29, 2008, the Company accepted subscriptions for 11,999,995 shares of its common stock, which were sold in a Regulation S private placement to investors not located in the United States for $.15 per share. The Company received gross proceeds of $1,800,000 for such shares.

All the above share numbers reflect the effect of the 10-for-1 conversion ratio for API Electronics Group Corp. common shares in the Plan of Arrangement and the 5-for-1 stock split on the Company’s common stock, which was effective for each stockholder of record at the close of business on November 12, 2007.

 

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FORWARD LOOKING STATEMENTS

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” “expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.

We wish to caution investors that any forward-looking statements made by or on our behalf are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to: changing economic and political conditions in the United States and in other countries, war, changes in governmental spending and budgetary policies, governmental laws and regulations surrounding various matters such as environmental remediation, contract pricing, and international trading restrictions, customer product acceptance, continued access to capital markets, and foreign currency risks.

We wish to caution investors that other factors might, in the future, prove to be important in affecting our results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks related to changes in foreign currency and interest rates as discussed below. All amounts are in US dollars unless otherwise indicated.

Foreign Currency Risk

A substantial amount of our revenues and receivables are denominated in Canadian dollars. We translate revenue and the related receivable at the prevailing exchange rate at the time of the sale. Also, a substantial amount of our expenses and payables/bank operating loans are denominated in Canadian dollars. We translate expenses and the related payables at the prevailing exchange rate at the time of the purchase. Funds denominated in Canadian dollars are translated into US dollars at the rate in effect on the balance sheet date. Translation gains and losses resulting from variations in exchange rates, upon translation into US dollars, are included in results of operations for integrated operations. Our Canadian subsidiary, Filtran Limited, is a self-sustaining operation and it is translated at the current rates of exchange whereby all exchange gains and losses are accumulated in the foreign translation account on the balance sheet.

Any increase in the relative value of the Canadian dollar to the U.S. dollar results in increased revenue and increased expenses. A decrease in the relative value of the Canadian dollar to the US dollar would decrease sales revenue and decreased expenses.

Other (income) loss for the nine months ended February 29, 2008 included $96,362 of foreign exchange losses (2007 – ($293,579)).

We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We do not engage in hedging transactions to manage our foreign currency risk.

Interest Rate Risk

We believe that we have limited exposure to changes in interest rates.

Long-term Debt Risk

At February 29, 2008, we had long-term debt of $4,123,211 compared to $67,197 for the year ended May 31, 2007. Substantially all of the debt is fixed rate debt and accordingly there is currently no significant impact on cash flows associated with its long-term debt.

Capital Leases Payable Risk

At February 29, 2008, we had capital leases payable of $27,328 compared to $33,410 for the year ended May 31, 2007. The debt underlying capital lease payable is fixed rate debt and accordingly there is currently no significant interest rate risk associated with its capital leases payable.

Short-Term Borrowings Risk

At February 29, 2008, we had a line of credit facilities in place for three of its subsidiaries (API Electronics Inc. $500,000; Filtran Limited $990,000 ($1,000,000 CDN) and Keytronics, Inc. ($125,000). The total bank indebtedness at February 29, 2008 was $317,674 compared to $635,276 at May 31, 2007. The line of credit facilities are variable rate debt tied to the prime rates in the US and Canada respectively. Accordingly, we are subject to risk of prime rate increases that would increase its interest expense. A hypothetical 1% increase in interest rates would result in an annual change in net income (loss) of approximately ($3,177) based on the February 29, 2008 bank indebtedness of $317,674.

Marketable Securities and Cash and Cash Equivalents Risk

We periodically hold cash equivalents consisting of investments in money market instruments. At February 29, 2008, the Company held cash equivalent investments of $1,520,244 (2007—$0). This helps mitigate the risk of interest rate increases in its lines of credit. These cash equivalent investments are subject to interest rate changes and interest income will fluctuate directly with changes in interest rates. A hypothetical 1% increase in interest rates would result in an annual change in net income (loss) before income taxes of approximately $15,202 based on the February 29, 2008 cash and cash equivalent balance of $1,520,244. The Company held marketable securities of $414,155 as of February 29, 2008, compared to $605,011 at May 31, 2007. A hypothetical 10% market price increase would result in an annual change in other comprehensive income (loss) before taxes of approximately $41,416 based on the February 29, 2008 marketable securities balance of $414,155. A hypothetical 10% decrease in the market price of our marketable equity securities at February 29, 2008 would cause a corresponding 10% decrease in the carrying amounts of these securities or a loss of $(41,416).

We do not enter into derivative instruments to manage interest rate exposure.

 

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ITEM 4T. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”)), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information we are required to disclose in reports that are filed and submitted under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time period specified in SEC rules and forms, including during the period in which this quarterly report on Form 10-Q was being prepared.

 

(b) Changes in Internal Controls over Financial Reporting

During the first nine months of the fiscal year ending May 31, 2008, which nine month period ended February 29, 2008, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II-OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any legal significant proceedings nor is our property the subject of any legal proceedings. Our management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our property. No director, officer or affiliate of ours is (i) a party adverse to us in any legal proceedings, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our property.

 

ITEM 1A. RISK FACTORS

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

  3.1    Certificate of Incorporation (incorporated by reference from the Company’s Registration Statement on Form 10-SB filed on February 10, 2000).
  3.2    Amendment to Certificate of Incorporation dated May 20, 1999 (incorporated by reference from the Company’s Form 10-KSB filed on April 27, 2006).
  3.3    Amendment to Certificate of Incorporation dated September 21, 2005 (incorporated by reference from the Company’s Form 10-KSB filed on April 27, 2006).
  3.4    Amendment to Certificate of Incorporation dated November 6, 2006 (incorporated by reference from Amendment No. 2 to Registration Statement on Form S-1 filed on November 6, 2006).
  3.5    Amended and Restated By-laws (incorporated by reference from the Company’s Amendment No. 1 to Registration Statement on Form S-1 filed on October 27, 2006).
  3.6    Audit Committee Charter (incorporated by reference from Exhibit A of the Company’s definitive proxy statement filed on September 18, 2007).
10.1    Subscription Agreement with Investors in $5,000,000 Private Placement (incorporated by reference to the Company’s Form 8-K filed on February 28, 2006)
10.2    Consulting Agreement with Martin Moskovits (incorporated by reference to the Company’s Form 8-K filed on March 24, 2006).
10.3    Amendment to Consulting Agreement, dated June 29, 2006, among the Company, Martin Moskovits, Steven Bulwa and API Electronics Group Corp. (incorporated by reference to the Company’s Form S-1 filed on August 14, 2006).
10.4    Compensation Arrangement between the Company and Donald A. Wright (incorporated by reference from the Company’s Form 8-K filed on March 29, 2006).
10.5    Option Agreement between the Company and Donald A. Wright (incorporated by reference from the Company’s Form 8-K filed on March 29, 2006).
10.6    Support Agreement dated February 6, 2006 among API Nanotronics Corp. and RVI Sub, Inc. (incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006)
10.7    Voting and Exchange Agreement dated February 6, 2006 among API Nanotronics Corp., RVI Sub, Inc. and Equity Transfer & Trust Company. (incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006)
10.8    Share Capital and Other Provisions included in the Articles of Incorporation of API Nanotronics Sub, Inc. f/k/a RVI Sub, Inc. (incorporated by reference from the Company’s Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006)
10.9    API Nanotronics Corp. 2006 Equity Incentive Plan (incorporated by reference from Amendment No. 1 to the Company’s Form S-1 filed on October 26, 2006).
  10.11    Stock Purchase Agreement, dated January 24, 2007, among the Company, the Estate of Benedict Pace, National Hybrid, Inc. and Pace Technologies, Inc. (incorporated by reference from the Company’s Form 8-K filed on January 30, 2007)
  10.12    Executive Employment Agreement between the Company and Martin Moskovits dated as of February 14, 2007 (incorporated by reference from Current Report on Form 8-K filed on February 15, 2007)
  10.13    Non Statutory Stock Option Agreement dated July 2, 2007 between the Company and Jonathan Pollack (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).

 

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  10.14    Non Statutory Stock Option Agreement dated July 2, 2007 between the Company and Arthur Cape (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.15    Incentive Stock Option Agreement dated July 2, 2007 between the Company and Thomas W. Mills, Sr. (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.16    Incentive Stock Option Agreement dated July 2, 2007 between the Company and Claudio Mannarino (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.17    Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Phillip DeZwirek (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.18    Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Jason DeZwirek (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.19    Non-Statutory Stock Option Agreement, dated March 15, 2006, between the Company and Martin Moskovits (incorporated by reference from the Company’s Form 8-K filed on March 24, 2006).
  10.20    Notice and Agreement of Grant of Stock Option, dated July 2, 2007, between the Company and Martin Moskovits (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.21    Notice and Agreement of Grant of Stock Option, dated July 2, 2007, between the Company and Martin Moskovits (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.22    The compensation arrangement with respect to the service of Arthur Cape, Jonathan Pollack and Donald Wright on the Board of Directors of the Company and its committees as set forth in Form 8-K filed on June 22, 2007 (incorporated by reference from the Company’s Form 8-K filed on June 22, 2007).
  10.23    Asset Purchase Agreement dated July 17, 2007 between API Nanofabrication and Research Corporation and NanoOpto Corporation (incorporated by reference from the Company’s Form 8-K filed on July 23, 2007).
  10.24    Promissory Note of API Nanotronics Corp. in the principal amount of $4,000,000, dated as of July 18, 2007, in favor of Jason DeZwirek (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
  10.25    Lease, dated July 19, 2007, between Franklin Cottontail LLC and API Nanofabrication and Research Corporation and Guaranty of Lease by API Nanotronics Corp. (incorporated by reference from the Company’s Form 10-KSB filed on August 22, 2007).
14.1    Code of Ethics for the Company Directors, Officers, Employees and Agents including Principal Executive, Senior Financial Officers and Other Designated Officers (incorporated by reference from the Company’s Form 8-K filed on June 22, 2007).
16.1    Letter on Change in Certifying Accountant (incorporated by reference from the Company’s Form 8-K filed on February 13, 2004).
16.2    Letter on Change in Certifying Accountant (incorporated by reference from the Company’s Form 8-K filed on February 8, 2006).
16.3    Letter on Change in Certifying Accountants (incorporated by reference from the Company’s Form 8-K filed on December 1, 2006).
16.4    Letter on Change in Certifying Accountants (incorporated by reference from the Company’s Form 8-K filed on December 22, 2006).
31.1    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer (filed herewith).
31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).
32.1    Certification of the Chief Executive Officer, President and Secretary Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).
32.2    Certification of the Chief Financial Officer and Treasurer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    API NANOTRONICS CORP.
Date:   April 10, 2008     By:   /s/ Phillip DeZwirek
        Phillip DeZwirek
       

Chief Executive Officer,

Chairman and Treasurer

      By:   /s/ Claudio Mannarino
        Claudio Mannarino
       

Chief Financial Officer

and Vice President

 

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