U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR
15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2006
Commission
file number 0-4846-3
MEMS
USA, INC.
(Name
of small business issuer in its charter)
Nevada
|
|
82-0288840
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
employer
identification
no.)
|
|
|
|
|
|
|
5701
Lindero Canyon Road, Suite 2-100
|
|
|
Westlake
Village, California
|
|
91362
|
|
|
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
Issuer’s
telephone number, including area code (818)
735-4750
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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
No X
The
number of shares of the common stock outstanding as of August 11, 2006 was
20,852,327.
Documents
incorporated by reference:
The
amended 10-QSB includes reviewed Financial Statements as of June 30, 2006 and
2005 by the independently registered accounting firm. The 10-QSB filed on
August 14, 2006 included the financial statements which did not reflect the
final revisions in Notes to Consolidated Financial Statements.
Form
8-K
Dated April 29, 2005 Re. Can Am Ethanol One, Inc.
Form
8-K
Dated December 21, 2005 Re. Hearst Ethanol One, Inc.
Form
10-KSB Dated February 2, 2006 Re. MEMS USA, Inc. Annual Report.
Form
8-K
Dated March 30, 2006 Re. MEMS USA, Inc. - CDI Customer Order
Form
8-K
Dated April 21, 2006 Re. Hearst Ethanol One, Inc.
FORM
10-QSB/A
For
The Quarterly Period Ended June 30, 2006
INDEX
Page
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1.
|
Financial
Statements |
|
|
•
Consolidated
Balance Sheets (unaudited) as of June 30, 2006 and September 30,
2005
|
3
|
|
•
Consolidated
Statements of Operations (unaudited) for the three and nine months
ended
June 30, 2006 and 2005 |
4
|
|
•
Consolidated
Statements of Cash Flows (unaudited) for the nine months ended June
30,
2006 and 2005 |
5
|
|
•
Consolidated
Statement of Equity (unaudited) as of June 30, 2006
|
6
|
|
|
|
|
•
Notes to Consolidated Financial Statements (unaudited)
|
7
-
18
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation |
18 -
24
|
|
|
|
Item
3.
|
Controls
and
Procedures |
24
|
|
|
|
PART
II -
OTHER INFORMATION
|
|
|
|
Item
1.
|
Legal
Proceedings |
24
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds |
25
|
|
|
|
Item
3.
|
Defaults
upon
Senior Securities |
27
|
|
|
|
Item
4.
|
Submission
of
Matters to a Vote of Security Holders |
27
|
|
|
|
Item
5.
|
Other
Information |
27
|
|
|
|
Item
6.
|
Exhibits |
28
|
|
|
|
Signatures
|
29
|
ITEM
1 --
FINANCIAL STATEMENTS
MEMS
USA, INC.
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Audited
|
|
A
S S E T S
|
|
June
30, 2006
|
|
September
30,
2005
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$
|
788,676
|
|
$
|
828,153
|
|
Accounts
receivable, net allowance for uncollectible of $58,490 and $46,196
respectively
|
|
|
1,162,173
|
|
|
756,840
|
|
Inventories,
net of provision for slow moving items of $25,000
and $25,000 respectively
|
|
|
12,733,677
|
|
|
880,370
|
|
Other
current assets
|
|
|
701,725
|
|
|
170,197
|
|
Total
current assets
|
|
|
15,386,251
|
|
|
2,635,560
|
|
Plant,
property and equipment, net
|
|
|
2,668,267
|
|
|
2,316,836
|
|
Other
assets
|
|
|
471,785
|
|
|
388,906
|
|
Investment
in Can Am Ethanol One, Inc.
|
|
|
71,765
|
|
|
71,765
|
|
Goodwill
|
|
|
915,373
|
|
|
915,373
|
|
Total
Assets
|
|
$
|
19,513,441
|
|
$
|
6,328,440
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,143,227
|
|
$
|
1,395,264
|
|
Lines
of credits
|
|
|
341,905
|
|
|
750,744
|
|
Notes
payable
|
|
|
347,660
|
|
|
-
|
|
Current
portion of long-term debt
|
|
|
92,871
|
|
|
29,292
|
|
Other
liabilities
|
|
|
159,389
|
|
|
-
|
|
Loans
from shareholders
|
|
|
151,073
|
|
|
-
|
|
Convertible
loan payable
|
|
|
150,000
|
|
|
-
|
|
Liability
to be satisfied through the issuance of shares
|
|
|
1,007,776
|
|
|
1,111,000
|
|
Total
current liabilities
|
|
|
5,393,901
|
|
|
3,286,300
|
|
Long-term
liabilities
|
|
|
41,778
|
|
|
211,942
|
|
Loans
from shareholders
|
|
|
-
|
|
|
191,600
|
|
Liability
due to a legal settlement
|
|
|
307,000
|
|
|
-
|
|
Common
shares with mandatory redemption
|
|
|
-
|
|
|
1,400,000
|
|
Common
shares payable under terms of acquisition agreement
|
|
|
-
|
|
|
809,966
|
|
Total
Liabilities
|
|
|
5,742,679
|
|
|
5,899,808
|
|
Minority
interests
|
|
|
1,494,269
|
|
|
-
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized;
20,852,327 and 17,404,197
shares
respectively
issued and outstanding
|
|
|
23,547
|
|
|
17,404
|
|
Stock
subscriptions receivable
|
|
|
(2,512,850
|
)
|
|
(250
|
)
|
Additional
paid in capital
|
|
|
22,939,030
|
|
|
5,956,931
|
|
Shares
to be redeemed
|
|
|
(231,076
|
)
|
|
-
|
|
Accumulated
deficit
|
|
|
(4,142,600
|
)
|
|
(5,545,453
|
)
|
Treasury
stock (2,699,684 shares)
|
|
|
(3,799,558
|
)
|
|
-
|
|
Total
stockholders' equity
|
|
|
12,276,493
|
|
|
428,632
|
|
Total
liabilities and stockholders' equity
|
|
$
|
19,513,441
|
|
$
|
6,328,440
|
|
The
accompanying notes are an integral part of these financial
statements.
MEMS
USA, INC
|
|
Consolidated
Statement of Operations
|
|
Three
and nine months ended June 30
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30,
|
|
Nine
months ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,029,431
|
|
$
|
1,878,580
|
|
$
|
7,171,362
|
|
$
|
6,757,819
|
|
Cost
of revenues
|
|
|
1,554,914
|
|
|
1,558,758
|
|
|
5,585,009
|
|
|
5,018,238
|
|
Gross
profit
|
|
|
474,517
|
|
|
319,822
|
|
|
1,586,353
|
|
|
1,739,581
|
|
Selling,
general and administrative expenses
|
|
|
1,161,641
|
|
|
1,090,010
|
|
|
3,837,378
|
|
|
3,446,593
|
|
Loss
from operations
|
|
|
(687,124
|
)
|
|
(770,188
|
)
|
|
(2,251,025
|
)
|
|
(1,707,012
|
)
|
Other
income (expense)
|
|
|
(18,385
|
)
|
|
3,121
|
|
|
(52,888
|
)
|
|
6,222
|
|
Income
due to legal settlement
|
|
|
-
|
|
|
-
|
|
|
3,703,634
|
|
|
-
|
|
Loss
attributable to minority interest
|
|
|
3,133
|
|
|
-
|
|
|
3,133
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
(702,376
|
)
|
$
|
(767,067
|
)
|
$
|
1,402,854
|
|
$
|
(1,700,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic
|
|
|
19,849,572
|
|
|
17,240,840
|
|
|
19,026,161
|
|
|
16,102,581
|
|
Net
income (loss) per share, basic
|
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
|
0.07
|
|
$
|
(0.11
|
)
|
Weighted
average number of shares outstanding, diluted
|
|
|
19,849,572
|
|
|
17,240,840
|
|
|
20,700,202
|
|
|
16,102,581
|
|
Net
income (loss) per share, diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
$
|
0.07
|
|
$
|
(0.11
|
)
|
The
accompanying notes are an integral part of these financial
statements.
MEMS
USA, INC.
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
Nine
months ended June 30
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,402,854
|
|
$
|
(1,700,790
|
)
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
173,855
|
|
|
109,157
|
|
Common
stock issued for services
|
|
|
319,677
|
|
|
25,000
|
|
Income
due to legal settlement
|
|
|
(3,703,634
|
)
|
|
-
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(405,333
|
)
|
|
164,779
|
|
Inventories
|
|
|
(11,853,307
|
)
|
|
(63,484
|
)
|
Other
current assets
|
|
|
(531,528
|
)
|
|
(105,306
|
)
|
Accounts
payable and accrued expenses
|
|
|
1,747,962
|
|
|
297,196
|
|
Lines
of credit
|
|
|
-
|
|
|
(100,612
|
)
|
Current
portion of long-term debt
|
|
|
-
|
|
|
(21,439
|
)
|
Other
current liabilities
|
|
|
159,390
|
|
|
-
|
|
Total
adjustments
|
|
|
(14,092,918
|
)
|
|
305,291
|
|
Net
cash used in operating activities
|
|
|
(12,690,064
|
)
|
|
(1,395,499
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(525,287
|
)
|
|
(39,428
|
)
|
Cash
balance net of payments for purchase of Bott and Gulfgate
|
|
|
-
|
|
|
5,073
|
|
Common
stock issued for cash
|
|
|
|
|
|
2,643,631
|
|
Other
assets
|
|
|
(82,878
|
)
|
|
-
|
|
Net
cash (used in) provided by investing activities
|
|
|
(608,165
|
)
|
|
2,609,276
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,494,269
|
|
|
-
|
|
Lines
of credit
|
|
|
(35,506
|
)
|
|
-
|
|
Notes
payable
|
|
|
(25,673
|
)
|
|
-
|
|
Current
portion of long-term debt
|
|
|
63,579
|
|
|
-
|
|
Liability
to be satisfied through the issuance of shares
|
|
|
2,776
|
|
|
-
|
|
Loan
from shareholders
|
|
|
(40,527
|
)
|
|
5,000
|
|
Payment
on long term liabilities
|
|
|
(20,163
|
)
|
|
(47,119
|
)
|
Purchase
of shares pursuant to acquisition of subsidiaries
|
|
|
(20,000
|
)
|
|
-
|
|
Underwriting
related to issuance of shares
|
|
|
(97,316
|
)
|
|
-
|
|
Investment
in HEO
|
|
|
10,284,435
|
|
|
-
|
|
Common
stock issued for cash
|
|
|
1,652,878
|
|
|
-
|
|
Common
stock payable under terms of acquisition agreement
|
|
|
-
|
|
|
(809,966
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
13,258,752
|
|
|
(852,085
|
)
|
Net
increase in cash and cash equivalents
|
|
|
(39,477
|
)
|
|
361,692
|
|
Cash
and cash equivalents, beginning of period
|
|
|
828,153
|
|
|
26,439
|
|
Cash
and cash equivalents, end of period
|
|
$
|
788,676
|
|
$
|
388,131
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
29,354
|
|
$
|
-
|
|
Interest
paid
|
|
$
|
137,332
|
|
$
|
27,882
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
Common
stock (including $1,400,000 of shares subject to mandatory redemption
factor) issued for acquisition of Bott and Gulfgate
|
|
$
|
809,966
|
|
$
|
3,059,966
|
|
Common
stock issued for services
|
|
$
|
319,677
|
|
$
|
12,500
|
|
The
accompanying notes are an integral part of these financial
statements.
MEMS
USA, INC.
|
|
Consolidated
Statement of Equity
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
Subscriptions
receivable
|
|
Additional
paid in capital
|
|
Treasury
Stock
|
|
Accumulated
deficit
|
|
Stockholders'
equity
|
|
Balance
as of September 30, 2005
|
|
$
|
17,404
|
|
$
|
(250
|
)
|
$
|
5,956,932
|
|
$
|
-
|
|
$
|
(5,545,454
|
)
|
$
|
428,632
|
|
Common
stock issued for service
|
|
|
229
|
|
|
|
|
|
319,448
|
|
|
|
|
|
|
|
|
319,677
|
|
Common
stock issued for cash received in prior year
|
|
|
129
|
|
|
|
|
|
105,871
|
|
|
|
|
|
|
|
|
106,000
|
|
Common
stock issued for cash received
|
|
|
2,014
|
|
|
|
|
|
1,650,864
|
|
|
|
|
|
|
|
|
1,652,878
|
|
Shares
to be redeemed due to legal settlement
|
|
|
|
|
|
|
|
|
(231,076
|
)
|
|
|
|
|
|
|
|
(231,076
|
)
|
Common
stock issued pursuant to terms of acquisition
|
|
|
371
|
|
|
|
|
|
809,595
|
|
|
|
|
|
|
|
|
809,966
|
|
Common
stock issued for subscriptions receivable
|
|
|
3,400
|
|
|
(2,512,600
|
)
|
|
2,509,200
|
|
|
|
|
|
|
|
|
-
|
|
Canceled
put option related to acquisition of Texas subsidiaries
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
|
|
|
|
|
1,400,000
|
|
Investment
in HEO
|
|
|
|
|
|
|
|
|
10,284,436
|
|
|
|
|
|
|
|
|
10,284,436
|
|
Treasury
stock from legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
(3,799,558
|
)
|
|
|
|
|
(3,799,558
|
)
|
Underwriting
fees
|
|
|
|
|
|
|
|
|
(97,316
|
)
|
|
|
|
|
|
|
|
(97,316
|
)
|
Net
income for the nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,402,854
|
|
|
1,402,854
|
|
Balance
as of June 30, 2006
|
|
$
|
23,547
|
|
$
|
(2,512,850
|
)
|
$
|
22,707,954
|
|
$
|
(3,799,558
|
)
|
$
|
(4,142,600
|
)
|
$
|
12,276,493
|
|
The
accompanying notes are an integral part of these financial
statements.
Notes
to consolidated financial statements:
(1) Company
and Summary of Significant Accounting Policies:
Nature
of Business:
MEMS
USA,
Inc., (the “Company”) was incorporated in Nevada in 2002.
The
Company’s mission is to support the energy industry in producing cleaner burning
fuels. Each Subsidiary has a specific eco-energy focus: (1) development of
a
woodwaste to bio-renewable fuel-grade alcohol/ethanol project (HEO); (2) selling
engineered products (Bott); and (3) engineering, fabrication and sale of
eco-focused energy systems (Gulfgate); ISO 9001:2000-certified, and have served
customers throughout the energy sector since 1952.
Subsidiaries:
The
Company
has
three wholly-owned subsidiaries: California MEMS USA, Inc., (“CA MEMS”) a
California corporation, Bott Equipment Company, Inc. (“Bott”), Gulfgate
Equipment, Inc. (“Gulfgate”), and the Company hold majority interest (87.3%) of
Hearst Ethanol One, Inc., a Federal Canadian corporation (“HEO”). The business
of the subsidiaries is listed below.
CA
Mems
The
Board
of Directors of CA MEMS voted in 2006 to amend CA MEMS' Articles of
Incorporation changing its name to "Convergence Ethanol(TM) Corp."
CA MEMS is a California-based developer of bio-renewable energy projects
and provider of professional engineered systems to the energy
industry.
Bott
Bott
is a
stocking distributor for premier lines of industrial pumps, valves and
instrumentation. Bott specializes in the construction of aviation refueling
systems for helicopter refueling on oil rigs throughout the world. Bott
and Gulfgate have a combined direct sales force as well as commissioned sales
representatives that sell their products. Both Bott and Gulfgate earned ISO
9001:2000 certification and are qualified international vendors to the oil
and
gas industries.
Gulfgate
Gulfgate
engineers, designs, fabricates and commissions eco-focused energy systems
including particulate filtration equipment for the oil and power
industries. Gulfgate also makes and sells vacuum dehydration and
coalescing systems that remove water from hydrocarbon oils. Gulfgate
maintains and operates a rental fleet of filtration and dehydration
systems.
Hearst
Ethanol One - A Project to Produce Bio-renewable Fuel-Grade Alcohol/Ethanol
from
Woodwaste
The
Company is currently developing a project that is expected to produce 120
million gallons a year of bio-renewable fuel-grade alcohol/ethanol. In December
2005, the Company incorporated Hearst Ethanol One, Inc., a Federal Canadian
Corporation (“HEO”). HEO, which owns 850 acres in Hearst, Ontario, Canada and
nearly 2 million metric tons of woodwaste, is the Company's first bio-renewable
energy project.
HEO
is
building an ecologically sound woodwaste refinery to produce bio-renewable,
fuel-grade alcohol or ethanol. Organic woodwaste (organic chips or fiber),
the
raw material for fuel-grade alcohol/ethanol, is an overabundant waste stream
of
the Canadian forest products industries. The refinery will use modern catalytic
processing, as used in oil refineries, to synthetically convert organic
woodwaste into fuel-grade alcohol or ethanol. This convergence of technologies
will enable the continuous production of bio renewable fuel-grade alcohol in
high volume, at low cost. Currently, HEO is 87.3% owned by MEMS USA,
Inc.
Fuel-grade
alcohol/ethanol is the world's most used alternative liquid fuel. Worldwide
demand is more than double production capacity and grows at over 25% per year.
Next years market for fuel-grade alcohol/ethanol in Canada is eight times
greater than last year’s production capability.
The
Province of Ontario has mandated that all motor gasoline sold in Ontario must
contain at least 5% ethanol by 2007, with the goal of 10% by 2010, providing
an
assured market for fuel-grade alcohol/ethanol. HEO has invested over 17 million
to date to develop HEO, including expenses for the purchase of 850 acres in
Hearst, Ontario, obtaining construction permits, acquiring a quarry for
construction aggregate and the purchase of a woodwaste repository containing
nearly 2 million tons of woodwaste. Woodwaste on site is sufficient supply
to be
able to run the plant for two years or for production of 240 million gallons
of
fuel-grade alcohol/ethanol.
Accounts
Receivable:
In
the
normal course of business, the Company provides credit to customers. We monitor
our customers’ payment history, and perform credit evaluation of their financial
condition. We maintain adequate reserves for potential credit losses based
on
the age of the receivable and specific customer circumstance.
Inventories:
Inventories
are valued at the lower of cost (first-in, first-out) or market value and have
been reduced by an allowance for excess, slow-moving and obsolete inventories.
The estimated allowance is based on Management's review of inventories on hand
compared to historical usage and estimated future usage and sales. Inventories
under long-term contracts reflect accumulated production costs, factory
overhead, initial tooling and other related costs less the portion of such
costs
charged to cost of sales and any un-liquidated progress payments. In accordance
with industry practice, costs incurred on contracts in progress include amounts
relating to programs having production cycles longer than one year, and a
portion thereof may not be realized within one year.
Revenue
Recognition
The
majority of the Company’s revenues are recognized when products are shipped to
or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: revenue on
production contracts is recorded when specific contract terms are fulfilled,
which is when the product or service is delivered; revenue from cost
reimbursement contracts is recorded as costs are incurred.
Stock
Based Compensation:
Pro
forma
information regarding net loss and loss per share, pursuant to the requirements
of SFAS 123, as amended by FAS 148 Accounting For Stock-Base Compensation
Transaction and Disclosure - An Amendment to FAS-123, for the nine months ended
June 30, 2006 and 2005 are as follows:
|
|
|
2006
|
|
2005
|
|
|
Net
income (loss), as reported
|
|
$
|
1,402,854
|
|
$
|
(1,700,790
|
)
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation expenses determined under the fair
value
Black-Scholes method with a 129% and 80% volatility at June 30, 2006
and
2005 respectively and a 6% and 3% respectively risk free rate of
return
assumption
|
|
|
(29,911
|
)
|
|
(97,826
|
)
|
|
Pro
forma net income (loss)
|
|
$
|
1,372,943
|
|
$
|
(1,798,616
|
)
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
Weighted
average shares, basic
|
|
|
19,026,161
|
|
|
16,102,581
|
|
|
Basic,
pro forma, per share
|
|
$
|
0.07
|
|
$
|
(0.11
|
)
|
|
Weighted
average shares, diluted
|
|
|
20,700,202
|
|
|
16,102,581
|
|
|
Diluted,
pro forma, per share
|
|
$
|
0.07
|
|
$
|
(0.11
|
)
|
Employee
Stock Options:
In
connection with the employment agreements, the Company has granted options
to
certain key executives to acquire common stock of the Company
(“Options”).
The
number of weighted average exercise prices of all options granted for the nine
months ended June 30, 2006 are as follows:
|
|
|
Number
|
|
Average
Exercise
Price
|
|
|
Outstanding
at September 30, 2005
|
|
|
5,338,227
|
|
$
|
3.00
|
|
|
Granted
during the period
|
|
|
827,499
|
|
|
2.39
|
|
|
Exercised
|
|
|
10,000
|
|
|
1.00
|
|
|
Cancelled
|
|
|
870,000
|
|
|
3.25
|
|
|
Outstanding
at June 30, 2006
|
|
|
5,285,726
|
|
$
|
1.98
|
|
Interim
Financial Statements:
The
accompanying unaudited consolidated financial statements for the nine months
ended June 30, 2006 and 2005 include all adjustments (consisting of only normal
recurring accruals), which, in the opinion of management, are necessary for
a
fair presentation of the results of operations for the periods presented.
Interim results are not necessarily indicative of the results to be expected
for
a full year. These unaudited consolidated financial statements should be read
in
conjunction with the audited consolidated financial statements for the year
ended September 30, 2005 included in the Company’s 2005 Annual
Report.
Going
Concern:
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates the Company as a going concern. However, the Company has sustained
substantial operating losses in recent years ($4,142,600) and has used
substantial amounts of working capital in its operations. Realization of a
major
portion of the assets reflected on the accompanying balance sheet is dependent
upon continued operations of the Company which, in turn, is dependent upon
the
Company's ability to meet its financing requirements and succeed in its future
operations. Management believes that actions presently being taken to revise
the
Company's operating and financial requirements provide them with the opportunity
for the Company to continue as a going concern. We will continue our attempts
to
raise additional cash through debt or equity financings in 2006 in order to
meet
our working capital requirements.
(2) Business
Acquisition:
On
October 26, 2004 (“Closing Date”), the Company consummated the purchase of 100%
of the outstanding shares of each two Texas corporations, Bott Equipment
Company, Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”), each effective
October 1, 2004, from their president and sole shareholder, Mr. Mark Trumble.
Under
the
terms of the stock purchase agreement, the Company acquired 100% of the shares
of Bott and Gulfgate from Mr. Trumble for $50,000 in cash and 1,309,677 shares
of the Company’s common stock.
752,688
shares of the shares issued to Trumble were subject to a one time put. On or
about October 26, 2005, Mr. Trumble exercised this put. Under the terms of
the
put, Trumble elected to exchange all of the 752,688 shares for an amount equal
to $1.86 per share (which is the average price of the Company’s stock on the OTC
BBC for the thirty trading days comprising September 13, 2004 through October
22, 2004) times the number of shares exchanged by Trumble pursuant to the put.
The Company had sixty (60) days from the date of exercise to pay off any sums
due thereby. An extension
for
payment of the put was negotiated between Mr. Trumble and the Company.
The
Company’s performance
under
the
terms
of
the
put is secured by second
deeds of
trust with vendors’ liens in favor of Trumble
on
certain parcels of the Companies’ Texas real estate.
The
752,688 shares subject to the put, have been properly treated as a $1.4 million
liability, pursuant to Statement of Financial Accounting Standards no. 150
(SFAS
150) Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity until the terms of the put expire.
The
Company agreed to create an employee stock option plan for its employees and
those of its affiliates, including Bott and Gulfgate. In connection with said
plan, the Company agreed to file Registration Statement Form S-8 under The
Securities Act of 1933 (securities to be offered to employees in employee
benefit plans) within 30 days of the Closing Date. The Company had also agreed
that it would issue Trumble an additional 123,659 shares of the Company’s
restricted stock if it failed to achieve this milestone. The Company filed
the
Form S-8 Registration Statement within 30 days of the Closing Date thereby
achieving this milestone and avoiding the issuance of penalty shares to Mr.
Trumble.
The
Agreement also provided that Trumble would personally introduce the Company’s
officers and representatives to five (5) qualified Texas bankers and that the
Company will utilize its best efforts to remove Trumble’s name as guarantor from
the Bott and Gulfgate lines of credit (See notes 7 and 8) within 90 days of
the
fifth introduction. The Company agreed that it will issue Trumble an additional
370,977 shares of restricted stock should it fail to achieve this milestone.
Mr.
Lawrence Weisdorn, Mr. Daniel Moscaritolo and Dr. James Latty have also agreed
to join Trumble as guarantors on the Bott and Gulfgate credit lines. Mr.
Weisdorn joined Trumble as guarantor on the Bott and Gulfgate credit lines
in or
around mid-November 2004. Mr. Moscaritolo and Dr. Latty have agreed to join
as
guarantors should the Company fail to recognize the milestone of removing
Trumble’s name as guarantor from the existing credit lines within the specified
time period. As of the date of this report, only four qualified personal
introductions have occurred. Thus, the 90 day milestone has not been triggered.
The Company is committed to removing Mark Trumble as guarantor from the existing
lines of credit and has submitted applications for credit lines with a number
of
financial institutions.
In
October 2004, the Company agreed to secure a best efforts underwriting
commitment letter from a qualified investment banker within 45 days of the
Closing Date to raise a minimum of $2 million in equity capital. An additional
123,659 shares of the Company’s restricted stock were to be issued to Trumble
should the Company fail to achieve this milestone. The Company obtained a
commitment letter within 45 days of the Closing Date thereby achieving this
milestone and avoiding the issuance of penalty shares to Mr. Trumble. The
Company also agreed, in connection with the $2 million equity raise, that the
Company would receive $2 million in gross equity funding within 120 days of
the
Closing Date. The Company has agreed that it will issue Trumble an additional
123,659 shares of its restricted stock should it fail to achieve this milestone.
The Company did not achieve this milestone and is obligated to issue 123,659
penalty shares to Mark Trumble. During January 2006 the Company issued and
delivered 123,659 penalty shares in satisfaction of its obligation to Mr.
Trumble.
Finally,
the
Company agreed to allow Trumble to sell 326,344 shares of his stock at a
purchase price of approximately $607,000 to private parties, including a related
party, Lawrence Weisdorn, Sr., the former CEO’s father and a shareholder and/or
Weisdorn Sr.’s assignees pursuant to a written agreement between Trumble and
Weisdorn Sr.
Should
Trumble fail to recognize $607,000, through no fault of Trumble, the Company
agreed to issue up to 494,636 shares of restricted stock to Trumble. The
percentage of the Penalty Shares the Company shall issue, if any, shall be
prorated in accordance with any monies received by Trumble during the 60-day
period. It is further understood that the penalties were subject to the
following schedule: (1) Trumble shall have recognized at least $75,000 within
15
days of the Closing Date or he shall receive up to 61,829 Penalty Shares; (2)
Trumble shall recognize an additional $75,000 within 30 days of the Closing
Date
or he shall receive up to an additional 61,829 Penalty Shares; (3) Trumble
shall
recognize an additional $150,000 within 45 days of the Closing Date or he shall
receive up to an additional 123,659 Penalty Shares; and (4) Trumble shall
recognize an additional $307,000 within 60 days of Closing Date or he shall
receive up to an additional 247,318 Penalty Shares. Each milestone is to be
calculated as a stand-alone event. The obligations of items 1, 2, and 3 were
met
which avoided the associated penalty shares. All of the above Penalty
Share calculations shall be subject to a pro-rata offset for monies received
that fall short of the indicated milestones.
On
December 15, 2005, the Company assumed Weisdorn Sr.’s obligation to purchase
165,054 shares from Mr. Trumble at $1.86 per share, which constituted the
remainder of Weisdorn, Sr.’s obligation to purchase such shares pursuant to the
written agreement referenced in the paragraph above. During the first quarter
of
fiscal year 2005, the Company, in order to avoid the issuance of 61,829 penalty
shares, paid $75,000 directly to Mr. Trumble. The Company has received
approximately $39,000 of the $75,000 from Mr. Weisdorn Sr. The Company has
recorded this payment as a reduction to additional paid-in capital.
Mr.
Trumble did not recognize $307,000 within 60 days of the closing date. As a
result, the Company was obligated to issue 247,318 penalty shares to Mr.
Trumble. During January 2006 the Company issued and delivered 247,318 penalty
shares in satisfaction of its obligation to Mr. Trumble. Additionally, the
covenant to remove Mr. Trumble from the lines of credit remains and may require
us to issue up to 370,977 additional penalty shares in the event that we fail
to
satisfy that remaining covenant. Effective May 8, 2006, the Company and Mr.
Trumble amended the original Stock Purchase Agreement dated October 26, 2004
(the “SPA”) and agreed, among other things, to issue 60,000 shares to Mr.
Trumble in full and final satisfaction of all claims that Trumble has or may
have to additional shares of the Company’s common stock as a result of any
breach of, or failure to meet a milestone under the SPA.
First
amended stock purchase agreement with Mark Trumble
Effective
May 8, 2006, the Company and its officers entered into a First Amended Stock
Purchase Agreement and Release (“Agreement”) with Mark Trumble, amending that
certain Stock Purchase Agreement dated September 1, 2004 (the “SPA”), pursuant
to which the parties agreed to, among other things, Trumble agreed to release
the Company from its obligations under the put, including any obligation to
make
the Interest Payment or to pay interest on any sum whatsoever, and shall release
any security interest he claims in the real estate owned by Gulfgate and/or
Bott, and the Company, within 60 days, shall secure a funding commitment in
which Trumble shall be paid the sum of $307,000 at the time of the closing
of
the funding. This sum shall be used to purchase 165,053 shares of the common
stock of the Company from Trumble at the price of $1.86 per share. The Company
shall also pay from the funding all amounts of bank or other indebtedness owed
by the Company, Bott or Gulfgate, which is personally guaranteed by Trumble.
The
Company shall issue Trumble, upon closing of the funding, 60,000 shares of
the
Company’s common stock. This additional issuance of shares of the common stock
of the Company shall be in full and final satisfaction of all claims that
Trumble has or may have to additional shares of the Company’s common stock as a
result of any breach of, or failure to meet a milestone under, the SPA. As
of
the date of this report the Company has not secured a funding commitment and
has
negotiated an extension of the Agreement to December 2006.
Non-Competition
Agreement:
The
agreement also provides that Trumble shall not for a period of eighteen (18)
months following his separation from the Company, unless permitted to do so
by
the Company, engage, directly or indirectly as an individual, representative
or
employee of others, in the business of designing, manufacturing or selling
products in competition with the Company or any of its subsidiaries in any
geographic area where the Company or its subsidiaries are doing business.
Management
believes that the acquisition of Bott and Gulfgate will provide the Company
with
cost effective means to engineer, manufacture and distribute products for its
customers in the energy sector. Bott and Gulfgate may also provide or construct
products used in ethanol production facilities. The acquisition has been
accounted for as a purchase transaction pursuant to Statement of Financial
Accounting Standards No. 141 Business Combinations (SFAS 141) and accordingly,
the acquired assets and liabilities assumed are recorded at their book values
at
the effective date of acquisition except for the real property which approximate
the most current appraised value. Excess cost of $915,373 over the appraised
real property and book value of the other acquired assets and liabilities
assumed was assigned to goodwill. Goodwill included 370,977 of penalty common
shares valued at $809,966.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of acquisition.
|
Current
assets
|
|
$
|
1,826,720
|
|
|
Plant,
property, and equipment, net
|
|
|
2,237,749
|
|
|
Total
assets acquired
|
|
|
4,064,469
|
|
|
Total
liabilities assumed
|
|
|
(1,827,942
|
)
|
|
Net
assets acquired
|
|
|
2,236,527
|
|
|
Excess
costs over fair value
|
|
|
915,373
|
|
|
Total
purchase price
|
|
$
|
3,151,900
|
|
The
$3,151,900 purchase price was comprised of the following:
|
Cash
|
|
$
|
50,000
|
|
|
Common
Stock (370,977 penalty shares)
|
|
|
809,965
|
|
|
Common
Stock (1,309,677 shares)
|
|
|
2,291,935
|
|
|
Total
purchase price
|
|
$
|
3,151,900
|
|
(3) Inventories:
Inventories
consist of finished goods of $590,290 and $502,430 at June 30, 2006 and
September 30, 2005 respectively; raw material of $11,394,500 and $0 at June
30,
2006 and September 30, 2005 respectively and work in process in the amount
of
$773,887 and $402,940 respectively.
(4) Plant,
Property and Equipment:
A
summary
at June 30, 2006 and September
30, 2005 are
as
follows:
|
|
|
2006
|
|
2005
|
|
|
Land
|
|
$
|
816,022
|
|
$
|
502,000
|
|
|
Buildings
and improvements
|
|
|
1,161,574
|
|
|
1,073,000
|
|
|
Furniture,
machinery and equipment
|
|
|
1,014,505
|
|
|
769,590
|
|
|
Automobiles
and trucks
|
|
|
47,508
|
|
|
180,652
|
|
|
Leasehold
improvement
|
|
|
82,879
|
|
|
79,105
|
|
|
|
|
|
3,122,488
|
|
|
2,604,347
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(454,221
|
)
|
|
(287,511
|
)
|
|
|
|
$
|
2,668,267
|
|
$
|
2,316,836
|
|
Depreciation
expense charged to operations for nine months and three months ended June 30,
2006 and 2005 were $173,855 and $58,207; and $109,157 and $47,535
respectively.
(5) Investments
in Hearst Ethanol One, Inc.:
Hearst
Ethanol One Inc. Agreement:
On
April
21, 2006, Hearst Ethanol One, Inc., a Federal Canadian corporation (“HEO”), a
majority-owned subsidiary of Registrant, completed the acquisition of
approximately 850 acres of real property, together with all biomass material
located thereon (approximately two million tons of woodwaste), located in the
Township of Kendall, District of Cochrane, Canada (cumulatively, the
“Property”), from C. Villeneuve Construction Co. LTD., a Canadian Corporation
(“Villeneuve”), as provided under that agreement to purchase these assets
earlier reported in Registrant’s 8-K dated December 27, 2005 (the “Agreement”).
The Property was purchased to provide the site and the biomass material for
the
construction and operation of a 120,000,000 gallon per year bio-renewable
woodwaste-to-fuel-grade alcohol/ethanol refinery to be owned by HEO and
designed, built and managed by Convergence
Ethanol, Inc. aka, CA MEMS, a subsidiary of Registrant. The on-site inventory
of
biomass is sufficient for 1.5 years of production or 180,000,000 gallons of
fuel-grade alcohol/ethanol.
Pursuant
to the provisions of the Agreement, HEO issued ten point five percent (10.5%)
of
HEO’s common shares to Villeneuve as consideration for the transfer of the
Property. At the close of the transaction, Registrant owned 87.3% of the common
stock of HEO.
Pursuant
to a Memorandum of Understanding entered into on April 20, 2006 between HEO
and
Villeneuve to clarify the Agreement, Villeneuve shall be entitled to one member
of HEO’s board of directors for so long as Villeneuve is at least a ten percent
(10%) shareholder of HEO. As of the date of this report HEO has incurred
$129,000 for environmental certificates and legal expenses.
Hearst
Ethanol One Inc. Valuation:
The
Company engaged an independent market and investment research firm, based in
Toronto, Canada, to appraise the assets owned by HEO. The research firm
specializes in the forest products industry including timber utilization, fiber
processing, and market research.
The
market research firm carried out two separate preliminary valuations of HEO:
a
residual property and biomass/woodwaste replacement valuation and a separate
valuation of the biomass/woodwaste using a “fuel oil avoided cost” method. The
residual valuation provides a value of the woodwaste on a disposal basis with
no
future ethanol refinery planned. The “fuel oil avoided cost” valuation provides
a value of the biomass to a future ethanol refinery. The Company has included
the most conservative of the two appraisal methods and that value is included
in
the consolidated financials statement for June 30, 2006. The preliminary
valuation based on the residual property valuation and the replacement value
of
the biomass on the HEO site is US $11,797,096 which includes land $314,022,
building $88,574 and raw material $11,394,500
A
number
of assets of HEO that have not been included in this initial preliminary
valuation including but not limited to: standing timber value, gross
merchantable mature timber on site, the non-merchantable slash residual from
the
mature timber, and the immature and undersize wood biomass. The other tangible
and intangible assets owned by HEO include: a small rock quarry (and associated
mineral rights) on the property, as well as a landfill license and permits
as
issued by the Government of Ontario Ministry of the Environment (“MOE”). These
assets will be included in the final appraisal due September 2006. In addition
to the previously mentioned HEO assets, the Company has identified three
additional wood waste sites in the Hearst area. These sites have not been
included in this preliminary assessment and will be included in the final
appraisal due September 2006.
(6) Investments
in Can Am Ethanol One, Inc.:
In
November 2004, the Company formed a joint venture, Can Am Ethanol One,
Inc. (“Can Am One”). We presently own forty-nine point three percent
(49.3%) of Can Am and maintain 50% of Can Am’s voting rights.
(7) Business
Lines of Credits - Bott
Bott
previously maintained three lines of credits with a bank in Houston, Texas.
The
credit lines were evidenced by three promissory notes, a Business Loan Agreement
and certain commercial guarantees issued in favor of the bank. The material
terms of these agreements follow:
In
May
2004, Bott entered into a promissory note with a bank whereby Bott could borrow
up to $250,000 over a three-year term. Bott could obtain credit line advances
based upon its asset base. The note required monthly payments of one
thirty-sixth (1/36) of the outstanding principal balance plus accrued interest
at the Bank's prime rate plus 1.0 percent.
In
June
2004, Bott executed a promissory note ("Note") with a bank whereby Bott could
borrow up to $600,000, at an interest rate equal to the bank's prime rate.
The
Note provided for monthly payments of all accrued unpaid interest due as of
the
date of each payment. The Note further provided for a balloon payment of all
principal and interest outstanding on the Note's one year anniversary. The
Company informed the bank that it would not renew the line of credit and
negotiated a long-term promissory note.
This
promissory note was finalized in December 2005, for $372,012 at a variable
interest rate equal to the bank's prime rate. The note provides for five monthly
principal payments of $3,092 and a final payment of the remaining principal
and
interest in June 2006.
In
June
2006 the Company negotiated an extension of the final payment to July 2006.
The
Company is currently renegotiating an extension of the final payment to
September 2006.
All
of
the foregoing promissory notes contained the following common terms: The notes
specified that no advances under the notes may be used for personal, family
or
household purposes and that all advances shall be used solely for business,
commercial, agricultural or similar purposes. Bott could draw down on the lines
of credit provided that: it was not in default under the note evidencing the
particular line of credit or any other agreement that it might have with the
bank; it was not insolvent; no guarantor had revoked or limited the terms of
his
or her guarantee respecting the note; Bott used the funds available under the
particular note for an unauthorized purpose; and/or the bank believed that
its
interests under the note are not secured. The notes provided the following
limitations on the use of methods and advancements respecting the credit line,
and the bank may not honor requests for additional advances if: the requested
advance would cause the amounts requested under the particular note to exceed
its initial limit; Bott's checks or bank cards relating to the credit line
are
reported lost or stolen; the note is in default; or the amount requested is
less
than allowed under the note. The notes permit prepayment of all or part of
the
outstanding balances without penalty.
The
Agreements and Notes are secured by the inventory, chattel paper, accounts
receivable and general intangibles. The Agreements and Notes are also secured
by
the personal performance guarantees of Mr. Mark Trumble and Mr. Lawrence
Weisdorn (Commercial Guarantees). The Commercial Guarantees require the
guarantors to assure that all payments due under the Notes are timely made
or to
make such payments. All amounts related to Bott’s outstanding promissory notes
totaled $347,660 and $555,028 on June
30,
2006 and September
30, 2005 respectively.
(8) Business
Line of Credit - Gulfgate:
In
June
2002, Gulfgate executed a promissory note (“Note”) with a bank that allowed
Gulfgate to borrow up to $200,000 at an interest rate equal to the bank’s prime
rate, or a minimum interest rate of 5.00% per annum, whichever was greater.
Gulfgate could draw down on the line of credit provided: that it was not in
default on this Note or any other agreement that it might have with the bank;
it
was not insolvent; no guarantor revoked or limited the terms of his guarantee;
the Borrower used the funds available under the Note for an unauthorized purpose
(i.e., other than for a business purpose without first obtaining the bank’s
written consent); and /or the bank believed that its interests are not secured.
The Note provided the following limitations on the use of methods and
advancements respecting the credit line, and the bank may not honor requests
for
advances if: the requested advance would cause the amounts requested under
the
Note to exceed $200,000; Gulfgate’s checks or bank cards relating to the credit
line are reported lost or stolen; the Note was in default; or the amount
requested is less than allowed under the Note. The Note provided for monthly
payments of all accrued unpaid interest due as of the date of each payment.
The
Note remains in force and effect until the bank provides notice to Gulfgate
that
no additional withdrawals are permitted (Final Availability Date). Thereafter,
payments equal to either $250 or the outstanding interest plus one percent
of
the outstanding principal as of the Final Availability Date are due monthly
until the Note is repaid in full. The Note allows for prepayment of all or
part
of the outstanding principal or interest without penalty. The Note is secured
by
Gulfgate’s accounts with the bank, and by Gulfgate’s inventory, chattel paper,
accounts receivable, and general intangibles. The Agreement is also secured
by
the performance guarantees of Mr. Mark Trumble, Mr. Lawrence Weisdorn and the
Company. The personal guarantees require the guarantors to assure that all
payments due under the Note are timely made or to make such payments. Amounts
outstanding at June
30,
2006 and September
30, 2005 totaled $178,719 and $195,716 respectively.
(9) Liability
to be satisfied through the issuance of shares
The
Company sold 670,000 shares of its common stock for $1,005,000 via a private
placement offering through SW Bach & Company, a New York securities
dealer. The Company anticipates satisfying its private placement
obligations through issuance of common stock to shareholders as soon as the
Company completes its SB-2 registration with the Securities & Exchange
Commission.
Additional
details concerning this transaction may be found in the Company’s Form 10-KSB
report filed February 2, 2006 (Sales Agency Agreement) which is hereby
incorporated by reference.
The
Company sold 1,552,900 shares of its common stock for $1,273,378 via another
private placement offering from February through May 2006. The Company satisfied
its obligations through issuance of common stock to shareholders in June
2006.
(10) |
Long-Term
Debts and other
liabilities:
|
Promissory
Notes:
In
May
2003, Bott executed a promissory note with a bank in the amount of $26,398
at an
interest rate equal to four point fifty five percent (4.55%) for a vehicle
purchase. The term of the note is for fifty-nine (59) months at $494 per month.
Balance outstanding at June
30,
2006 and September
30, 2005 were $11,385 and $15,004 respectively.
Mortgage:
On
May
31, 2002, Gulfgate entered into a $140,000 promissory note (“Note”) with a bank
in connection with the refinancing of Gulfgate’s real estate. The
Note bears a fixed interest rate of seven percent (7.00%) per annum.
The Loan provided for fifty-nine monthly payments of $1,267 due beginning July
2002 and ending June 2007. The Note may be prepaid without fee or penalty
and is secured by a deed of trust on Gulfgate’s realty. Gulfgate is required
under the terms of a separate agreement to provide replacement value fire and
extended coverage insurance having a $2,500 deductible. Balance outstanding
at
June
30,
2006 and September
30, 2005 were $17,883 and $58,934 respectively.
Loans
from shareholders:
Daniel
K.
Moscaritolo, COO and Director, and James A. Latty, CEO and Chairman, (“Lenders”)
each loaned the Company $105,800; $95,800 of which were received in September
2005, and $10,000 received in October 2005 (collectively $211,600). The
transactions are evidenced by two notes dated November 1, 2005 (hereinafter,
“Notes”). The terms of the Notes require repayment of the principal and
interest, which accrues at a rate of ten percent (10%) per annum on May 1,
2006.
Currently, the Notes are still outstanding. The Notes are accompanied by
Securities Agreements that grant the Lenders a security interest in all personal
property belonging to the Company, as well as granting an undivided ½ security
interest in all of the Company’s right title and interest to any trademarks,
trade names, contract rights, and leasehold interests.
Financing
Lease Agreements:
In
September 2002, Gulfgate entered into a non-cancelable debt financing agreement
(“Agreement”) with the bank’s leasing corporation for the financing of certain
equipment and a paint booth. The Agreement calls for the payment of forty-eight
(48) monthly installment payments of $1,556 beginning September 2002 at the
interest rate of 6.9% per annum. Balance outstanding at June
30,
2006 and September
30, 2005 were $4,624 and $17,988 respectively.
Convertible
Loan Payable:
In
September 2004, the Company entered into a convertible loan with an investor.
The principal amount of the convertible loan payable is $150,000 at an interest
rate of 8% per annum paid quarterly. The loan is convertible into common stock
at any time within two (2) years (24 months) starting September 3, 2004 at
the
conversion price of $2.20 or 68,182 shares. Each share converted entitles the
holder to purchase one additional share of stock at an exercise price of $3.30
within the ensuing 12 months.
If
at the
end of September 2006 the loan has not been converted into common stock, the
principal amount becomes due and payable. To date, the loan has not been
converted.
(11) |
Resignation
of Executive Officer and Board
Member:
|
On
October 17, 2005, the Company and its officers filed a complaint against
Lawrence Weisdorn, Jr. (“Weisdorn), the Company’s former Chief Executive Officer
and Chairman of the Board of Directors, Lawrence Weisdorn, Sr. (“Weisdorn Sr.”
and together with Weisdorn, the “Weisdorn Parties”), Nathan Drage (“Drage”) and
Drage related parties in the Superior Court of the State of California for
Los
Angeles County, alleging claims for, among other things, breaches of Nevada
and
federal law and breach of fiduciary duty (the “Action”). The Company’s claims
were based in substantial part on allegations of the unauthorized issuance
of
shares of the Company’s predecessor’s common stock in December 2003, prior to
the reverse acquisition and merger with CA MEMS, which was finalized in February
2004. The Company sought an injunction preventing the Weisdorn Parties and
Drage
and his related parties from selling or transferring any of the shares of the
Company’s common stock issued in December 2003, the return of the shares to the
Company for cancellation and monetary damages.
On
November 3, 2005, the Weisdorn Parties filed a cross-complaint against the
Company and its officers, alleging claims for, among other things, breach of
employment agreement, libel and indemnification (the “Weisdorn Counterclaim”).
The Weisdorn Parties’ claims were based in part on assertions by Weisdorn that
he was improperly terminated without cause from his positions with the Company
in June 2005, and that he was entitled to indemnification pursuant to Nevada
corporations law in connection with the Action. The Weisdorn Parties sought
monetary damages.
On
December 15, 2005, the Company and its officers entered into a Settlement
Agreement and Release with the Weisdorn Parties and other Weisdorn related
parties, effective as of July 1, 2005 (the “Settlement Agreement”), pursuant to
which the parties agreed to, among other things, dismiss the Action as it
related to the Weisdorn Parties, dismiss the Weisdorn Counterclaim, mutually
release all claims and mutually indemnify the other parties from certain claims.
Weisdorn also agreed to deliver a letter of resignation to the Company,
confirming his resignation as Chief Executive Officer and Chairman of the Board
of Directors of the Company as of June 25, 2005 and clarifying and confirming
the terms of his separation from the Company. The Weisdorn Parties and other
Weisdorn related parties further agreed to deliver to the Company all shares
or
rights to shares of the Company’s common stock owned by such parties. The net
stock returned to the Company by the Weisdorn parties was 2,699,684 shares,
not
including 670,000 shares of the Company’s common stock to be held by the Company
in an account for the benefit of the Weisdorn Parties (the “Retained Stock”),
which Retained Stock will be sold for the benefit of the Weisdorn Parties
pursuant to the terms set forth in the Settlement Agreement. The Company has
the
option to purchase any portion of the Retained Stock at a price determined
according to the terms of the Settlement Agreement. The Company also agreed
to
assume the obligations of the Weisdorn Parties to purchase certain shares of
the
Company’s common stock from Mark Trumble, and the Weisdorn Parties assigned to
the Company their interests in their rights, if any, purchase such shares (the
Trumble Claims).
The
Settlement Agreement did not in any way affect claims brought in the Action
by the Company and its officers against Drage and the
Drage-related entities. However, on January 13, 2006, Drage and
Adrian Wilson verbally agreed to a settlement in principle with the Company,
which the parties have memorialized. In connection with the verbal
agreement to a settlement, the Company and its officers filed a Request for
Dismissal without prejudice of all claims against Drage and the
Drage-related entities on January 13, 2006.
(12) |
Income
from legal settlement:
|
On
December 15, 2005, the Company and its officers entered into a Settlement
Agreement and Release with the Weisdorn Parties and other Weisdorn related
parties, effective as of July 1, 2005 (the “Settlement Agreement”), pursuant to
which the Weisdorn Parties and other Weisdorn related Parties agreed to deliver
to the Company all shares or rights to shares of the Company’s common stock
owned by such parties. The net common stock returned to the Company by the
Weisdorn parties and other Weisdorn related parties was 2,699,684 shares. See
note 11 for additional details.
The
fair
value of 2,669,684 shares of the Company’s common stock at December 15, 2005 was
$3,779,558. The per share closing price of the Company’s stock at December 15,
2005 was $1.40.
Assignment
of the Trumble Claims:
The
Company and the Weisdorn Parties further agreed the Weisdorn Parties, and each
of them; assigned to the Company any and all rights or interest they, or any
of
them, have in or to the Trumble Claims. On December 15, 2005, the Company
assumed Weisdorn Sr.’s obligation to purchase 165,054 shares from Mr. Trumble at
$1.86 per share for a total liability of $307,000. The fair value of this
obligation at December 15, 2005 is $231,076 (165,054 shares at $1.40 per share)
with the difference charged to other income ($75,924).
(13) |
Private
placement of securities:
|
On
November 10, 2005, the Company entered into a stock purchase agreement with
Mercatus & Partners, Limited, a private limited company of the United
Kingdom (“Mercatus Limited”), for the sale of 1,530,000 shares of the Company’s
common stock for a minimum purchase price of $0.73 per share (the “SICAV One
Agreement), and another stock purchase agreement with Mercatus Limited also
for
the sale of 1,530,000 shares of the Company’s common stock for a minimum
purchase price of $0.73 per share (the “SICAV Two Agreement” and together with
the SICAV One Agreement, the “SICAV Agreements”). The shares offered and sold
under the SICAV Agreements were offered and sold pursuant to a private placement
that is exempt from the registration provisions of the Securities Act. Pursuant
to the terms of the SICAV Agreements, the Company issued and delivered an
aggregate number of 3,060,000 shares of the Company’s common stock within five
days of the execution of the respective SICAV Agreements to a custodial lock
box
on behalf of Mercatus Limited for placement into two European SICAV funds.
The
SICAV Agreements provided Mercatus Limited with up to 30 days after the delivery
of the shares of the Company’s common stock to issue payment to the Company. If
the Company did not receive payment for the shares within 30 days of the
delivery of the shares the Company had the right to demand the issued shares
be
returned. The Company has not yet received payment for the shares issued
pursuant to the SICAV Agreements.
On
November 12, 2005, the Company also entered into another private stock purchase
agreement with Mercatus Limited for the sale of 170,000 shares of the Company’s
common stock for a minimum purchase price of $0.82 per share (the “Private SICAV
One Agreement”) and another private stock purchase agreement with Mercatus
Limited also for the sale 170,000 shares of the Company’s common stock for a
minimum purchase price of $0.82 per share (the “Private SICAV Two Agreement” and
with the Private SICAV One Agreement, the “Private SICAV Agreements”). The
shares offered and sold under the SICAV Agreements were offered and sold
pursuant to a private placement that is exempt from the registration provisions
of the Securities Act. Pursuant to the terms of the Private SICAV Agreements,
the Company issued and delivered an aggregate amount of 340,000 shares of the
Company’s common stock within five days of the execution of the respective
Private SICAV Agreements to a custodial lock box on behalf of Mercatus Limited
for placement into a European bank SICAV fund. Subject to a valuation of the
shares, Mercatus Limited had up to 30 days after the delivery of the shares
of
the Company’s common stock to issue payment to the Company. If the Company did
not receive payment within 45 days of the issuance of the shares to Mercatus
LP,
the Company had the right to demand the issued shares be returned. The Company
has not yet received payment for the shares issued pursuant to the Private
SICAV
Agreements.
In
a
letter to Mercatus dated April 13, 2006 the Company declared Mercatus to be
in
material breach of the above Private Purchase Agreements due to non-payment,
terminated the Agreements in their entirety and exercised its right to demand
the return of all the shares. Mercatus has informed the Company of its intent
to
return all of the shares but as of the date of this report the Company has
not
received them. The Company is currently exploring all available options in
recovering its shares.
$1.5
million contract to build an Intelligent Filtration System
In
February 2006, the Company won a $1.5 million order from CDI, who is under
contract with a major oil refinery in Southern California to supply filtration
equipment. CDI is an engineering, procurement and construction company, based
in
Houston with headquarters in Philadelphia. The Company will supply an integrated
“Intelligent Filtration System” consisting of a Smart Backflush Filtration
System with an integral electronic decanting system, a carbon bed filter and
an
ion-exchange resin bed system. This equipment will purify the amine fluid by
removing particulate, chemical contaminants, and heat stable salts to allow
the
amine to more effectively remove carbon dioxide and sulfur compounds during
refining.
This
unique technology includes permanent filtration elements that are back-flushed
clean, thereby eliminating the need to dispose of conventional filter elements.
The system dramatically reduces hazardous waste disposal costs. These systems
will provide years of effective utilization of the amine fluids and extend
the
useful life of the refinery’s amine process equipment.
This
contract is cancelable subject to costs reimbursement and liquidated
damages.
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
Unless
otherwise indicated, all references to our company include our wholly-owned
subsidiaries, MEMS USA, Inc., a California corporation currently being renamed
Convergence Ethanol, Bott Equipment Company, Inc., a Texas corporation and
Gulfgate Equipment, Inc., a Texas corporation as well as an equity interest
in
an inactive Canadian corporation, Can Am Ethanol One, Inc., a British Columbia
corporation and an 87.3% equity interest in Hearst Ethanol One, Inc., a Canadian
Federal corporation (“HEO”).
Overview:
We
are
engaged in the business of developing bio-renewable energy projects and
providing professional engineered systems to the energy industry. The Company’s
mission is to support the energy industry in producing cleaner burning fuels.
Each of three company-operating divisions has a specific eco-energy focus:
(1)
development of a woodwaste to bio-renewable fuel-grade alcohol/ethanol project,
(2) selling engineered products; and (3) engineering, fabrication and sale
of
eco-focused energy systems. ISO 9001:2000-certified, operating divisions have
served customers throughout the energy sector since 1952.
In
October 2004, the Company acquired the two Texas corporations, Bott Equipment
Company, Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”). In December
2005, the Company incorporated Hearst Ethanol One, Inc., a Canadian Federal
corporation (“HEO”) for the purpose of building, owning and operating a
fuel-grade alcohol/ethanol production facility in Canada.
The
intersection of political pressure, environmental concern and technological
advancement has created a unique opportunity for rapid advancement in the
alternative fuels industry. Under the leadership of James A. Latty, PhD, PE
(President, CEO) and Daniel K. Moscaritolo (COO, CTO), Convergence Ethanol
is
currently developing a project that will enable the industry to achieve its
energy goals.
Hearst
Ethanol One is the Company's woodwaste to bio-renewable fuel-grade
alcohol/ethanol project. It is located in Hearst, Ontario Canada at the center
of a well-established forestry products industry. This project has four
objectives:
|
· |
Create
a viable alternative energy enterprise;
|
|
· |
Displace
consumption of fossil fuels with non-greenhouse gas bio-renewables;
|
|
· |
Improve
the environment; and
|
|
· |
Produce
bio-renewable fuel-grade alcohol/ethanol at a substantial
profit.
|
As
of
June 30, 2006 the Company owns eighty-seven point three percent (87.3%) of
HEO.
Dr. James A. Latty and Mr. Daniel Moscaritolo are directors and officers of
HEO.
We
believe that technologically sound projects addressing the shortage of
fuel-grade alcohol/ethanol offers a significant business opportunity in the
energy sector. Throughout the world, governments, organizations and individuals
are facing a shortage of fuel-grade alcohol/ethanol, the world’s second largest
source of liquid transportation fuels. Worldwide demand for fuel-grade
alcohol/ethanol is growing at over 25% per year. In fact, current demand is
more
than double worldwide production capacity. One important solution for producing
fuel-grade alcohol/ethanol is the conversion of abundant, low cost,
non-food-grade bio-renewable materials such as woodwaste and residue. The use
of
these raw materials is essential to meeting worldwide demand.
We
believe the market opportunity in Canada is unique. The demand for fuel-grade
alcohol in Canada in 2007 will be eight times greater than the production
capacity last year. In addition, the Province of Ontario has mandated that
all
motor gasoline sold there must contain at least 5% fuel-grade alcohol by 2007
with a 10% target by 2010.
We
are
developing the fuel-grade alcohol/ethanol refinery to use modern catalytic
processing, as used in oil refineries, to convert forestry woodwaste into bio
renewable fuel-grade alcohol/ethanol. Our management team has many years
combined experience in modern catalytic processing and we are using our
expertise in proven oil refinery technologies to synthetically convert this
woodwaste to fuel-grade alcohol/ethanol. This convergence of technologies will
enable the continuous production of fuel-grade alcohol/ethanol in high volume,
at low cost. The HEO refinery will only represent a fraction of the production
capacity needed in Ontario to meet the government mandate. Woodwaste, a
pre-existing, concentrated, abundant waste stream of local forest industries,
is
a non-food raw material for making fuel-grade alcohol/ethanol -- an advantage
helping to ensure consistent supply and reliable cost.
On
December 21, 2005, HEO entered into a land purchase agreement with C. Villeneuve
Construction Company, Ltd. C. Villenueve Construction (“Villeneuve”) is a leader
in the civil and general construction industries and forestry services including
tree harvesting and woodwaste transport in Northern Ontario. Villeneuve has
received an extensive list of awards of recognition and has built a wide variety
of construction projects across Northern Ontario.
On
April
21, 2006, HEO completed the acquisition of approximately 850 acres of real
property, together with all biomass material located thereon (approximately
one
point five million metric tons of woodwaste), located in the Township of
Kendall, District of Cochrane, Canada (cumulatively, the “Property”), from C.
Villeneuve Construction Co. LTD., a Canadian Corporation (“Villeneuve”), as
provided under that agreement to purchase these assets earlier reported in
Registrant’s 8-K dated December 27, 2005 (the “Agreement”).
The
Property was purchased to provide the site and the initial biomass material
for
the development of a 120,000,000-gallon per year bio-renewable
woodwaste-to-fuel-grade alcohol/ethanol refinery to be owned by HEO and with
development leadership provided by Convergence Ethanol, Inc. The HEO site in
Ontario, Canada was selected for its excellent access to transportation and
utilities as well as its abundant woodwaste reserves. Currently, HEO has
exclusive access to or ownership of ten million metric tons of woodwaste enough
to produce approximately 1.2 billion gallons of fuel-grade alcohol/ethanol.
Pursuant to the provisions of the Agreement, HEO issued ten point five percent
(10.5%) of HEO’s common shares to Villeneuve as consideration for the transfer
of the Property.
We
estimate that the fuel-grade alcohol/ethanol plant will require approximately
$320 million in capital. The Company’s development team, headquartered in
Westlake Village, CA, will be entering into contracts with HEO for development
and supervision of the project.
History
and Operations
CA
MEMS
USA/Convergence Ethanol was incorporated in November 2000. We are engaged in
the
development of energy projects and providing professional engineered systems
to
the energy industry. We have been supporting the energy sector with engineered
equipment and systems for several years. During 2004, our engineers designed
and
constructed an acoustic viscometer. This instrument utilizes sound waves
traveling through a fluid stream to determine the fluid’s viscosity. In May
2005, the Company filed a utility patent application respecting this device,
which replaces the previously filed provisional patent.
During
2004, the Company’s engineers built a hydrocarbon-blending unit. The unit we
produced mixes three organic fluids, in differing percentages with a high degree
of accuracy. Another goal identified in 2004 was to assess the opportunity
for
developing fuel-grade alcohol/ethanol production capacity. When properly
blended, fuel-grade alcohol/ethanol and gasoline provide a higher octane,
cleaner burning fuel for automobiles.
Our
engineers have also been charged to oversee the Company’s IFS business. These
Intelligent Filtration Systems filter oil refinery liquids such as amine, oil
or
water. In February 2006, MEMS received a purchase order for $1.5 million for
the
engineering, manufacturing and installation of an automatic back flushable
filtration system (ABF/IFS). This is the largest sale in the Company’s history.
The customer is a Fortune 50 energy company serving the major integrated oil
and
gas industry.
Presently,
CA MEMS USA/Convergence Ethanol uses a combined direct sales force as well
as
commissioned sales representatives to sell its products. Our Company has a
diversified client base and is not dependent upon any one or a few major
customers.
In
January 2006, the Company was approved for ISO 9001:2000 certification. We
believe this certification will enhance the Company’s worldwide recognition as a
high quality provider and will enhance our ability to compete nationally and
internationally.
On
April
15, 2006 CA MEMS USA, Inc., to better reflect the Company’s emphasis in the
alternative energy sector, announced its decision to change its name to
Convergence Ethanol, Inc., and to conduct its businesses, whether directly
by
the Company or through its wholly owned subsidiary, CA MEMS.
Subsidiaries
Gulfgate
Gulfgate
produces particulate filtration equipment used in the oil and power industries.
Gulfgate also produces vacuum dehydration and coalescing systems that are used
to remove water from ground based turbine engine oil. These same types of
systems are used by electric power distribution companies to remove water from
electrical transformer oils. To help meet its customer’s diverse needs, Gulfgate
maintains and operates a rental fleet of filtration and dehydration systems.
Presently, Gulfgate has a combined direct sales force as well as commissioned
sales representatives selling its products.
Bott
Bott
is a
stocking distributor for high value lines of industrial pumps, valves and
meters. Bott also sells refueling systems made by Gulf Gate that are used for
helicopter refueling systems on offshore drilling and production platforms
throughout the world. Bott also sells refueling systems for commercial marine
vessels. Bott’s customers include chemical plants, refineries, power plants and
other industrial customers. Bott has a combined direct sales force as well
as
commissioned sales representatives.
Hearst
Ethanol One, Inc.
HEO
is a
private Canadian corporation incorporated through the Canadian federal
government, organized for the purpose of developing and operating a synthetic
woodwaste biomass-to-fuel-grade alcohol (ethanol) plant in Hearst, Ontario
Canada. It is anticipated that the fuel-grade alcohol/ethanol produced by HEO
will be sold and consumed as a motor fuel additive in the Province of Ontario.
The blending of fuel-grade alcohol/ethanol with motor fuel improves the octane
number, displaces the use of crude oil and reduces tailpipe emissions,
particularly greenhouse gas emissions believed to cause global warming. This
will help Canada meet the Kyoto Protocol for reduced greenhouse gas emissions.
We believe HEO will require approximately $320 million in capital. MEMS
USA/Convergence Ethanol’s development team, headquartered in Westlake Village,
C.A., will contract with HEO to provide development supervisory
services.
We
are
presently in the process of integrating and improving our Texas subsidiaries,
which we believe will promote efficiency and lower operating costs. CA MEMS
USA/Convergence Ethanol’s primary responsibility will be to direct the
development of HEO. The window provided by HEO to the corporation will enhance
the competitive position of Bott and Gulfgate to sell products and services
to
the rapidly expanding alternative fuels industry.
Comparison
of Operations
Net
sales
were $2,029,431 and $1,878,580 for the three months ended June 30, 2006 and
2005, respectively. Net sales for the nine-month periods ended June 30, 2006
and
2005 were $7,171,362 and $6,757,819, respectively. The sales increases for
the
three months (6.1%) and for the nine months (5.9%) ended June 30, 2006 as
compared to the prior year were due primarily to strong “Oil Patch” customer
demand for our industrial pumps, equipment rentals and repairs
services.
The
Company computes gross profit as net sales less cost of sales. The gross profit
margin is the gross profit divided by net sales, expressed as a percentage.
The
gross profit margin was 23.4% and 17.0% in the third quarter of fiscal 2006
and
2005, respectively. Gross profit margin for the nine-month periods ended June
30, 2006 and 2005 were 22.1% and 25.7% respectively. This decrease of 3.6%
was
primarily due to lower margins on commercial aviation refueling systems
shipments. Margins for this segment of the business for the quarter ended June
30, 2006 reflect the significant competitive pressures encountered on bidding
and winning several key customer jobs.
Selling,
general and administrative (SG&A) expenses were $1,161,641 and $1,090,010
for the three months ended June 30, 2006 and 2005, respectively. SG&A for
the nine-month periods ended June 30, 2006 and 2005 were $3,837,378 and
$3,446,593, respectively. The increase in SG&A spending for the three months
and for the nine months ended June 30, 2006 as compared to the prior year were
due primarily to auditing fees associated with the acquisition of Gulfgate
and
Bott, legal costs (See Part II, Item 1, Legal Proceedings) and consulting
fees.
We
expect
that over the near term, our selling, general and administration expenses will
increase as a result of, among other things, increased legal and accounting
fees
associated with increased corporate governance activities in response to the
Sarbanes-Oxley Act of 2002, recently adopted rules and regulations of the
Securities and Exchange Commission, the filing of a registration statement
with
the Securities and Exchange Commission to register for resale the shares of
common stock and shares of common stock underlying warrants issued in various
private offerings, increased employee costs associated with planned staffing
increases, increased sales and marketing expenses, increased activities related
to the design, engineering and construction of the Hearst Ethanol One, Inc.
ethanol production facility and increased activity in searching for and
analyzing potential acquisitions.
For
the
quarter ended June 30, 2006, shareholder’s equity was $12,276,493 as compared to
equity of $428,632 for the prior year period ended September 30, 2005. The
increase in shareholder equity
is
primarily attributable to the acquisition of approximately 850 acres of real
property, together with all biomass material by HEO. (See note 5)
Other
expense (income), net was $18,385 and $(3,121) for the fiscal quarters ended
June 30, 2006 and 2005, respectively. Other expense (income), net for the
nine-month periods ended June 30, 2006 and 2005 were $52,888 and $(6,222),
respectively. The increase in other expense is attributable to the interest
payments made pursuant to the terms of the credit lines of Bott and Gulfgate
and
the “Put Option” (See note 2) with Mr. Trumble.
In
summary, net losses were $702,376 and $767,067 for the fiscal quarters ended
June 30, 2006 and 2005, respectively. Net income (loss) for the nine-month
periods ended June 30, 2006 and 2005 were $1,402,854 and $(1,700,790),
respectively. The decreased net loss for the fiscal quarter ended June 30,
2006
as compared to the prior year was primarily due to higher MEMS general and
administrative expenses resulting from the initial start-up efforts associated
with the Canadian Ethanol projects, legal fees and consulting expenses. The
increased in net income for the nine months ended June 30, 2006 as compared
to
the prior year was due to the favorable settlement of a legal dispute
($3,703,634; see note 12).
Excluding the income from the settlement agreement the Company would have
reported a year-to-date net loss of $2,300,780.
The
increased net loss for the nine months ended June 30, 2006 as compared to the
prior year was mainly due to lower margins on commercial aviation refueling
systems shipments and higher general and administrative expenses (See Selling,
general and administrative expenses).
Liquidity
and Capital Resources
Our
plan
of operations over the next 12 months includes the continued pursuit of our
goal
to design, engineer, build and operate one or more ethanol plants. In that
regard we are dependent upon Hearst Ethanol One, Inc.’s efforts to raise the
necessary capital. We believe that our working capital as of the date of this
report will not be sufficient to satisfy our estimated working capital
requirements at our current level of operations for the next twelve months.
Our
cash and cash equivalents were $788,676 as of June 30, 2006, compared to cash
and cash equivalents of $828,153 as of September 30, 2005.
At
our
current cash “burn rate”, we will need to raise additional cash through debt or
equity financings during the fourth quarter of 2006 and the first quarter of
2007 in order to fund our continued HEO project development activities and
to
finance possible future losses from operations as we expand our business lines
and reach a profitable level of operations. Before considering Hearst Ethanol
One, Inc., we believe that we require a minimum of $2,500,000 in order to fund
our planned operations over the next 12 months, in addition to the capital
required for the establishment of any ethanol production facilities. We plan
to
obtain the additional working capital through private placement sales of our
equity securities and debt financing. As of the date of this report the Company
has not received any firm commitments for funding and there is no assurance
that
such funds will be available on commercially reasonable terms, if at all. Should
we be unable to raise the required funds, our ability to finance our continued
operations will be materially adversely affected.
Subsequent
Event - None to report.
Cautionary
Statement Regarding Future Results, Forward-Looking Information and Certain
Important Factors
We
make
written and oral statements from time to time regarding our business and
prospects, such as projections of future performance, statements of management’s
plans and objectives, forecasts of market trends, and other matters that are
forward-looking statements. Statements containing the words or phrases “will
likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,”
“target,” “goal,” “plans,” “objective,” “should” or similar expressions identify
forward-looking statements, which may appear in documents, reports, filings
with
the Securities and Exchange Commission, news releases, written or oral
presentations made by officers or other representatives made by us to analysts,
stockholders, investors, news organizations and others, and discussions with
management and other representatives of us.
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement made by or on behalf of us speaks only as of the
date
on which such statement is made. Our forward-looking statements are based upon
assumptions that are sometimes based upon estimates, data, communications and
other information from suppliers, government agencies and other sources that
may
be subject to revision. Except as required by law, we do not undertake any
obligation to update or keep current either (i) any forward-looking
statement to reflect events or circumstances arising after the date of such
statement, or (ii) the important factors that could cause our future
results to differ materially from historical results or trends, results
anticipated or planned by us, or which are reflected from time to time in any
forward-looking statement which may be made by or on behalf of us.
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause
our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time
in
any forward-looking statement that may be made by or on behalf of us. Some
of
these important factors, but not necessarily all important factors, include
those risk factors set forth in our 2005 Annual Report on Form 10-KSB/A filed
with the SEC on February 2, 2006
ITEM
3 --
CONTROLS AND PROCEDURES
Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the
time periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to our
management, as appropriate, to allow timely decisions regarding required
disclosure. Our President and Chief Financial Officer have reviewed the
effectiveness of our disclosure controls and procedures and have concluded
that
the disclosure controls and procedures, overall, are effective as of the end
of
the period covered by this report. There has been no change in the Company’s
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the period covered by this report that have materially
affected, or are reasonably likely to materially affected, the Company’s
internal control over financial reporting.
PART
II -
OTHER INFORMATION
Item1.
Legal Proceedings
On
October 17, 2005, the Company and its officers filed a complaint against
Lawrence Weisdorn, Jr. (“Weisdorn), the Company’s former Chief Executive Officer
and Chairman of the Board of Directors, Lawrence Weisdorn, Sr. (“Weisdorn Sr.”
and together with Weisdorn, the “Weisdorn Parties”), Nathan Drage (“Drage”) and
Drage related parties in the Superior Court of the State of California for
Los
Angeles County, alleging claims for, among other things, breaches of Nevada
and
federal law and breach of fiduciary duty (the “Action”). The Company’s claims
were based in substantial part on allegations of the unauthorized issuance
of
shares of the Company’s predecessor’s common stock in December 2003, prior to
the reverse acquisition and merger with MEMS-CA which was finalized in February,
2004. The Company sought an injunction preventing the Weisdorn Parties and
Drage
and his related parties from selling or transferring any of the shares of the
Company’s common stock issued in December 2003, the return of the shares to the
Company for cancellation and monetary damages. (see note 11)
On
November 3, 2005, the Weisdorn Parties filed a cross-complaint against the
Company and its officers, alleging claims for, among other things, breach of
employment agreement, libel and indemnification (the “Weisdorn Counterclaim”).
The Weisdorn Parties’ claims were based in part on assertions by Weisdorn that
he was improperly terminated without cause from his positions with the Company
in June 2005, and that he was entitled to indemnification pursuant to Nevada
corporations law in connection with the Action. The Weisdorn Parties sought
monetary damages.
On
December 15, 2005, the Company and its officers entered into a Settlement
Agreement and Release with the Weisdorn Parties and other Weisdorn related
parties, effective as of July 1, 2005 (the “Settlement Agreement”), pursuant to
which the parties agreed to, among other things, dismiss the Action as it
related to the Weisdorn Parties, dismiss the Weisdorn Counterclaim, mutually
release all claims and mutually indemnify the other parties from certain claims.
Weisdorn also agreed to deliver a letter of resignation to the Company,
confirming his resignation as Chief Executive Officer and Chairman of the Board
of Directors of the Company as of June 25, 2005 and clarifying and confirming
the terms of his separation from the Company. The Weisdorn Parties and other
Weisdorn related parties further agreed to deliver to the Company all shares
or
rights to shares of the Company’s common stock owned by such parties. The net
stock returned to the Company by the Weisdorn parties was 2,699,684 shares,
not
including 670,000 shares of the Company’s common stock to be held by the Company
in an account for the benefit of the Weisdorn Parties (the “Retained Stock”),
which Retained Stock will be sold for the benefit of the Weisdorn Parties
pursuant to the terms set forth in the Settlement Agreement. The Company has
the
option to purchase any portion of the Retained Stock at a price determined
according to the terms of the Settlement Agreement. The Company also agreed
to
assume the obligations of the Weisdorn Parties and other Weisdorn related
parties to purchase certain shares of the Company’s common stock from a third
party, and the Weisdorn Parties assigned to the Company their interests in
certain claims against a third party.
The
Settlement Agreement did not in any way affect claims brought in the Action
by the Company and its officers against Drage and the
Drage-related entities. However, on January 13, 2006, Drage and
Adrian Wilson verbally agreed to a settlement in principle with the Company,
which the parties intend to memorialize shortly. In connection with the
verbal agreement to a settlement, the Company and its officers filed a Request
for Dismissal without prejudice of all claims against Drage and the
Drage-related entities on January 13, 2006.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds:
On
October 26, 2004 the Company issued 1,309,667 shares of its common stock to
Mr.
Mark Trumble in consideration for the purchase of 100% of the shares of Bott
Equipment Company, Inc. and Gulfgate Equipment, Inc. in accordance with the
Stock Purchase Agreement (“Agreement”) entered into by the Company and Mr.
Trumble. (A copy of the Agreement was filed as an Exhibit to our form 10KSB/A
filed with the SEC on February 3, 2005.) The Agreement contains covenants in
favor of Mr. Trumble that are secured with our promise to issue up to a total
of
1,236,591 additional shares of our stock to Mr. Trumble in the event we fail
to
satisfy those covenants. Effective
May 8, 2006 the Company and Mr. Trumble amended the original Stock Purchase
Agreement dated October 26, 2004 and agreed to, among other things, to issue
60,000 shares to Mr. Trumble in full and final satisfaction of all claims that
Trumble has or may have to additional shares of the Company’s common stock as a
result of any breach of, or failure to meet a milestone under the SPA. See
Subsequent events for details of First Amended Stock Purchase
Agreement.
As
of the
date of this report, the Company is obligated to issue 60,000 additional shares
to Mr. Trumble. Additionally, certain outstanding covenants may require us
to
issue up to 370,977 additional penalty shares in the event that we fail to
satisfy those covenants.
In
its
stock purchase agreement with Mr. Trumble, respecting the purchase of Gulfgate
and Bott, the Company recognized that Trumble would sell 326,344 shares of
its
stock at a purchase price of approximately $607,000 to private parties,
including a related party Lawrence Weisdorn, Sr., the CEO’s father and a
shareholder and/or Weisdorn Sr.’s assignees pursuant to a written agreement
between Trumble and Weisdorn Sr.. As part of the Company’s agreement with Mr.
Trumble, the Company agreed that if Mr. Trumble failed to recognize $607,000,
portions of which were due on specific dates following the closing date of
the
transaction, the Company agreed to issue up to 494,636 shares of restricted
stock to Trumble.
In
December 2004 the Company paid $75,000 to Mr. Mark Trumble in order to avoid
the
issuance of 61,829 Penalty Shares to Mr. Trumble. In January 2005, the Company
paid Mr. Trumble $158,000 to avoid the issuance of 123,659 Penalty Shares to
Mr.
Trumble. Although the Company had no obligation to make these payments under
its
agreement with Mr. Trumble, it did have an obligation to issue penalty shares
to
Mr. Trumble if Mr. Trumble did not recognize these monies through the sale
of
stock. When the Company learned that the primary obligor, Mr. Lawrence Weisdorn
Sr., was then unable to fulfill his contractual obligations to Mr. Trumble,
the
Company believed that it was in the shareholder’s best interests to avoid
dilution by making these payments and seeking to recoup the monies paid by
the
Company from Mr. Weisdorn Sr. at a later date. As of this date the company
has
received $185,000 from Lawrence Weisdorn Sr. The Company believes that it will
recover some or all of the remaining balance, $48,000, before the close of
the
next quarter. The Company is obligated to issue to Mr. Trumble 247,318 Penalty
Shares because Mr. Trumble did not recognize $307,000 within 60 days of the
close of the acquisition. Finally, the Company is obligated to issue to Mr.
Trumble an additional 123,659 Penalty Shares since the Company did not receive
$2,000,000 in gross equity funding within 120 days of the Closing Date. In
summary, the Company’s obligation to issue penalty shares totaling 370,977
valued at $810,000 to Mr. Trumble has significantly increased
goodwill.
On
November 10, 2005, the Company entered into a stock purchase agreement with
Mercatus & Partners, Limited, a private limited company of the United
Kingdom (“Mercatus Limited”), for the sale of 1,530,000 shares of the Company’s
common stock for a minimum purchase price of $0.73 per share (the “SICAV One
Agreement), and another stock purchase agreement with Mercatus Limited also
for
the sale of 1,530,000 shares of the Company’s common stock for a minimum
purchase price of $0.73 per share (the “SICAV Two Agreement” and together with
the SICAV One Agreement, the “SICAV Agreements”). The shares offered and sold
under the SICAV Agreements were offered and sold pursuant to a private placement
that is exempt from the registration provisions of the Securities Act under
Section 4(2) of the Securities Act pursuant to Mercatus Limited’s exemption from
registration afforded by Regulation S. Pursuant to the terms of the SICAV
Agreements, the Company issued and delivered an aggregate number of 3,060,000
shares of the Company’s common stock within five days of the execution of the
respective SICAV Agreements to a
custodial lock box on behalf of
Mercatus
Limited for placement into two European SICAV funds. The SICAV Agreements
provided Mercatus Limited with up to 30 days after the delivery of the shares
of
the Company’s common stock to issue payment to the Company. If payment for the
shares was not received by the Company within 30 days of the delivery of the
shares, the Company had the right to demand the issued shares be returned.
The
Company has not yet received payment for the shares issued pursuant to the
Private SICAV Agreements.
On
November 12, 2005, the Company also entered into another private stock purchase
agreement with Mercatus & Partners, Limited, a private limited company of
the United Kingdom (“Mercatus Limited”) for the sale of 170,000 shares of the
Company’s common stock for a minimum purchase price of $0.82 per share (the
“Private SICAV One Agreement”) and another private stock purchase agreement with
Mercatus LP also for the sale 170,000 shares of the Company’s common stock for a
minimum purchase price of $0.82 per share (the “Private SICAV Two Agreement” and
with the Private SICAV One Agreement, the “Private SICAV Agreements”). The
shares offered and sold under the SICAV Agreements were offered and sold
pursuant to a private placement that is exempt from the registration provisions
of the Securities Act under Section 4(2) of the Securities Act pursuant to
Mercatus Limited’s exemption from registration afforded by Regulation S.
Pursuant to the terms of the Private SICAV Agreements, the Company issued and
delivered an aggregate amount of 340,000 shares of the Company’s common stock
within five days of the execution of the respective Private SICAV Agreements
to
a custodial lock box on behalf of Mercatus Limited for placement into a European
bank SICAV fund. Subject to a valuation of the shares, Mercatus LP had up to
30
days after the delivery of the shares of the Company’s common stock to issue
payment to the Company. If payment was not received by the Company within 45
days of the issuance of the shares to Mercatus Limited, the Company had the
right to demand the issued shares be returned. The Company has not yet received
payment for the shares issued pursuant to the Private SICAV
Agreements.
In
a
letter to Mercatus dated April 13, 2006 the Company declared Mercatus to be
in
material breach of the above Private Purchase Agreements due to non-payment,
terminated the Agreements in their entirety and exercised its right to demand
the return of all the shares. Mercatus has informed the Company of its intent
to
return all of the shares but, as of the date of this report the Company has
not
received them. The Company is currently exploring all available options in
recovering its shares.
On
December 13, 2005 the Company issued and delivered 125,000 shares of the
Company’s common stock for $100,000.
During
the month of December 2005, the Company issued and delivered an aggregate amount
of 8,254 shares of the Company’s common stock to three consultants for services
valued at approximately $16,000.
The
Company sold 1,552,900 shares of its common stock for $1,273,378 via another
private placement offering from February through May 2006. The Company satisfied
its obligations through issuance of common stock to shareholders in June
2006.
Exemption
from the registration provisions of the Securities Act of 1933 for the
transactions described above is claimed under Section 4(2) of the Securities
Act
of 1933, among others, on the basis that such transactions did not involve
any
public offering and the purchasers were sophisticated or accredited with access
to the kind of information registration would provide.
Item
3.
Defaults upon Senior Securities - None
Item
4.
Submission of Matters to a Vote of Security Holders - None
Item
5.
Other Information
Principal
Accountant Fees and Services
Our
board
of directors has selected Kabani & Company, Inc. as our independent
accountants to audit our consolidated financial statements for the fiscal year
2005. Stonefield Josephson, Inc. previously audited our consolidated financial
statements for the two fiscal years ended September 30, 2004 and
2003.
Rider
A
Items
not reported on Form 8-K.
Effective
May 8, 2006, the Company and its officers entered into a First Amended Stock
Purchase Agreement and Release (“Agreement”) with Mark Trumble, amending that
certain Stock Purchase Agreement dated September 1, 2004. For more information
on the Agreement, please refer to Note 2.
The
Company sold 1,552,900 shares of its common stock for $1,273,378 via a private
placement offering from February through May 2006. For more information on
this
private placement, please refer to Part II, Item 2 (Unregistered Sales of Equity
Securities and Use of Proceeds) of this Report.
Item
6.
Exhibits
|
31.1 |
Certification
of President Pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed
electronically herewith)
|
|
31.2 |
Certification
of Chief Financial Officer Pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed
electronically herewith)
|
|
32.2 |
Certification
of President and Chief Financial Officer Pursuant to 18
U.S.C Section 1350 (Furnished electronically
herewith).
|
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.
|
|
|
|
MEMS
USA, Inc.
(Registrant)
|
|
|
|
Date:
August 14, 2006 |
|
/s/ James
A.
Latty |
|
|
|
James
A. Latty
Chief
Executive Officer
|
-
29