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 March 31, 2006
Commission
file number 0-4846-3
MEMS
USA, INC.
(Name
of small business issuer in its charter)
|
Nevada
(State
or other jurisdiction of
incorporation
or organization)
5701
Lindero Canyon Road, Suite 2-100
Westlake
Village, California
(Address
of principal executive offices)
|
82-0288840
(I.R.S.
employer
identification
no.)
91362
(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 May 1, 2006 was
19,395,330.
Documents
incorporated by reference:
The
amended 10-QSB includes reviewed Financial Statements as of March 31, 2006
and
2005 by the independently registered accounting firm. The 10-QSB filed on
May
15, 2006 included the financial statements which were not completely reviewed
by
the independent registered accounting firm.
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
For
The Quarterly Period Ended March 31, 2006
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- 26
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26
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27
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28
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30
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30
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30
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30
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31
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A
S
S E T S
|
|
|
|
|
|
| |
|
(Unaudited)
|
|
(audited)
|
|
|
|
|
March
31,2006
|
|
September
30, 2005
|
|
| Current
Assets: |
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$
|
408,501
|
|
$
|
828,153
|
|
|
Accounts
receivable, net allowance for uncollectible of $83,340 and $46,196
respectively
|
|
|
1,749,705
|
|
|
756,840
|
|
|
Inventories,
net of provision for slow moving items of $25,000 and $25,000
respectively
|
|
|
836,340
|
|
|
880,370
|
|
|
Other
current assets
|
|
|
222,294
|
|
|
170,197
|
|
|
Total
current assets
|
|
|
3,216,840
|
|
|
2,635,560
|
|
|
Plant,
property and equipment, net
|
|
|
2,264,526
|
|
|
2,316,836
|
|
|
Other
assets
|
|
|
364,907
|
|
|
388,906
|
|
|
Investment
in Can Am Ethanol One, Inc.
|
|
|
71,765
|
|
|
71,765
|
|
|
Goodwill
|
|
|
915,373
|
|
|
915,373
|
|
|
Total
assets
|
|
$
|
6,833,411
|
|
$
|
6,328,440
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,145,959
|
|
$
|
1,395,264
|
|
|
Lines
of credits
|
|
|
351,239
|
|
|
750,744
|
|
|
Notes
payable
|
|
|
352,281
|
|
|
—
|
|
|
Current
portion of long-term debt
|
|
|
34,974
|
|
|
29,292
|
|
|
Other
liabilities
|
|
|
56,216
|
|
|
|
|
|
Loans
from shareholders
|
|
|
222,330
|
|
|
|
|
|
Convertible
loan payable
|
|
|
150,000
|
|
|
|
|
|
Liability
to be satisfied through the issuance of shares
|
|
|
1,740,540
|
|
|
1,111,000
|
|
|
Total
current liabilities
|
|
|
5,053,539
|
|
|
3,286,300
|
|
|
Long-term
liabilities
|
|
|
57,260
|
|
|
211,942
|
|
|
Loans
from shareholders
|
|
|
|
|
|
191,600
|
|
|
Liability
due to a legal settlement
|
|
|
307,000
|
|
|
|
|
|
Common
shares with mandatory redemption
|
|
|
1,400,000
|
|
|
1,400,000
|
|
|
Common
shares payable under terms of acquisition agreement
|
|
|
|
|
|
809,966
|
|
|
Total
Liabilities
|
|
|
6,817,799
|
|
|
5,899,808
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized;
19,395,330
and 17,404,197 shares respectively
issued and outstanding
|
|
|
22,015
|
|
|
17,404
|
|
|
Stock
subscriptions receivable
|
|
|
(2,512,850
|
)
|
|
(250
|
)
|
|
Additional
paid in capital
|
|
|
9,977,304
|
|
|
5,956,931
|
|
|
Shares
to be redeemed (165,054 shares)
|
|
|
(
231,076
|
)
|
|
|
|
|
Accumulated
deficit
|
|
|
(3,440,223
|
)
|
|
(5,545,453
|
)
|
|
Treasury
stock (2,699,684 shares)
|
|
|
(3,799,558
|
)
|
|
|
|
|
Total
stockholders' equity
|
|
|
15,612
|
|
|
428,632
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
6,833,411
|
|
$
|
6,328,440
|
|
The
accompanying notes are an integral part of these financial
statements.
|
MEMS
USA, INC
|
|
|
|
Three
and six months ended March 31
|
|
(Unaudited)
|
| |
|
Three
months ended March 31,
|
|
Six
months ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Revenues
|
|
$
|
2,515,412
|
|
$
|
1,864,543
|
|
$
|
5,141,931
|
|
$
|
4,879,240
|
|
|
Cost
of revenues
|
|
|
1,958,351
|
|
|
1,362,702
|
|
|
4,030,095
|
|
|
3,517,192
|
|
|
Gross
profit
|
|
|
557,061
|
|
|
501,841
|
|
|
1,111,836
|
|
|
1,362,048
|
|
|
Selling,
general and administrative expenses
|
|
|
1,354,190
|
|
|
1,207,609
|
|
|
2,675,737
|
|
|
2,305,114
|
|
|
Loss
from operations
|
|
|
(797,129
|
)
|
|
(705,768
|
)
|
|
(1,563,901
|
)
|
|
(943,066
|
)
|
|
Other
income (expense)
|
|
|
(11,222
|
)
|
|
6,481
|
|
|
(34,503
|
)
|
|
9,343
|
|
|
Income
due to legal settlement
|
|
|
|
|
|
|
|
|
3,703,634
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(808,351
|
)
|
$
|
(699,287
|
)
|
$
|
2,105,230
|
|
$
|
(933,723
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic
|
|
|
15,406,228
|
|
|
15,035,895
|
|
|
|
|
|
15,035,895
|
|
|
Net
income (loss) per share, basic
|
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
$
|
0.13
|
|
$
|
(0.06
|
)
|
|
Weighted
average number of shares outstanding, diluted
|
|
|
15,406,228
|
|
|
16,950,966
|
|
|
19,319,827
|
|
|
16,410,871
|
|
|
Net
income (loss) per share, diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
$
|
0.11
|
|
$
|
(0.06
|
)
|
The
accompanying notes are an integral part of these financial
statements.
|
MEMS
USA, INC.
|
|
|
|
Six
Months ended March 31
|
|
(Unaudited)
|
| |
|
2006
|
|
2005
|
|
|
Cash
flows provided by (used for) operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,105,230
|
|
$
|
(933,723
|
)
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
115,648
|
|
|
61,622
|
|
|
Common
stock issued for services
|
|
|
235,280
|
|
|
25,000
|
|
|
Income
due to legal settlement
|
|
|
(3,703,634
|
)
|
|
|
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(992,865
|
)
|
|
(118,994
|
)
|
|
Inventories
|
|
|
44,030
|
|
|
26,026
|
|
|
Other
current assets
|
|
|
(52,097
|
)
|
|
12,349
|
|
|
Accounts
payable and accrued expenses
|
|
|
750,694
|
|
|
(63,411
|
)
|
|
Other
current liabilities
|
|
|
56,216
|
|
|
|
|
|
Deferred
revenue
|
|
|
|
|
|
10,550
|
|
|
Total
adjustments
|
|
|
(3,546,728
|
)
|
|
(46,858
|
)
|
|
Net
cash provided by (used for) operating activities
|
|
|
(1,441,498
|
)
|
|
(980,581
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(63,338
|
)
|
|
(6,873
|
)
|
|
Cash
balance net of payments for purchase of Bott and Gulfgate
|
|
|
|
|
|
5,073
|
|
|
Common
stock issued for cash
|
|
|
|
|
|
1,347
|
|
|
Other
assets
|
|
|
24,000
|
|
|
|
|
|
Net
cash used for investing activities
|
|
|
(39,338
|
)
|
|
(453
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Lines
of credit
|
|
|
(399,505
|
)
|
|
9,323
|
|
|
Notes
payable
|
|
|
352,281
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
5,682
|
|
|
(4,099
|
)
|
|
Liability
to be satisfied through the issuance of shares
|
|
|
735,540
|
|
|
1,088,108
|
|
|
Loan
from shareholders
|
|
|
30,730
|
|
|
5,000
|
|
|
Payment
on long term liabilities
|
|
|
(4,682
|
)
|
|
(51,297
|
)
|
|
Purchase
of shares pursuant to acquisition of subsidiaries
|
|
|
(20,000
|
)
|
|
|
|
|
Underwriting
related to issuance of shares
|
|
|
(68,362
|
)
|
|
90,149
|
|
|
Common
stock issued for cash
|
|
|
429,500
|
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
|
1,061,184
|
|
|
1,137,184
|
|
|
Net
increase in cash and cash equivalents
|
|
|
(419,652
|
)
|
|
156,150
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
828,153
|
|
|
26,439
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
408,501
|
|
$
|
182,589
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
|
|
$
|
|
|
|
Interest
paid
|
|
$
|
63,233
|
|
$
|
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
|
|
$
|
235,280
|
|
$
|
25,000
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
Common
stock
|
|
Subscrip-tions
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
|
|
|
189
|
|
|
|
|
|
235,090
|
|
|
|
|
|
|
|
|
235,279
|
|
|
Common
stock issued for cash received in prior year
|
|
|
129
|
|
|
|
|
|
105,871
|
|
|
|
|
|
|
|
|
106,000
|
|
|
Common
stock issued for cash received
|
|
|
522
|
|
|
|
|
|
428,978
|
|
|
|
|
|
|
|
|
429,500
|
|
|
Shares
to be redeemed due
to legal settlement
|
|
|
|
|
|
|
|
|
(231,076
|
)
|
|
|
|
|
|
|
|
(231,076
|
)
|
|
Common
stock issued for subscriptions receivable
|
|
|
3,400
|
|
|
(2,512,600
|
)
|
|
2,509,200
|
|
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued pursuant to terms of acquisition
|
|
|
371
|
|
|
|
|
|
809,595
|
|
|
|
|
|
|
|
|
809,966
|
|
|
Treasury
stock from legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
(3,799,558
|
)
|
|
|
|
|
(3,799,558
|
)
|
|
Underwriting
fees
|
|
|
|
|
|
|
|
|
(68,362
|
)
|
|
|
|
|
1
|
|
|
(68,361
|
)
|
|
Net
income for the six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,105,230
|
|
|
2,105,230
|
|
|
Balance
as of March
31, 2006
|
|
$
|
22,015
|
|
$
|
(2,512,850
|
)
|
$
|
9,746,228
|
|
$
|
(3,799,558
|
)
|
$
|
(3,440,223
|
)
|
$
|
15,612
|
|
The
accompanying notes are an integral part of these 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 is
comprised of three wholly owned subsidiaries, California MEMS USA, Inc., (“CA
MEMS”) fka, MEMS USA, Inc., a California Corporation, Bott Equipment Company,
Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”). In December 2005, the
Company incorporated Hearst Ethanol One, Inc., a Federal Canadian Corporation
(“HEO”), for the purpose of developing, owning and operating a wood waste to
ethanol production facility in Canada. As of March 31, 2006 the Company owns
ninety-three point three percent (93.3%) of HEO. Dr. James A. Latty and Mr.
Daniel Moscaritolo are directors and officers of HEO. (See subsequent events
for
more details.)
In
November 2004, the Company formed a joint venture, Can Am Ethanol One,
Inc. (“Can Am”). We presently own forty-nine point three percent (49.3%)
of Can Am and maintain 50% of Can Am’s voting rights.
CA
MEMS
is a California based professional engineered systems, products, services,
and
ethanol project development company (see Subsequent event), serving the
alternative fuels, oil, petro-chemical, natural gas and electric utility
industries.
Gulfgate
produces particulate filtration equipment for the oil and power
industries. Gulfgate also produces vacuum dehydration and coalescing
systems that remove water from hydrocarbon oils. These same systems are
used by electric power generation facilities to remove water from transformer
oils. To help meet its customers’ diverse needs, Gulfgate maintains and
operates a rental fleet of filtration and dehydration systems.
Bott
is a
stocking distributor for 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 also
constructs refueling systems for commercial marine vessels. Bott’s
customers include chemical manufacturers, refineries, power plants and other
industrial customers.
CA
MEMS,
Bott and Gulfgate have a combined direct sales force as well as commissioned
sales representatives that sell their products.
Hearst
Ethanol One, Inc. (HEO) was created to develop, own and operate one ethanol
production facility in Ontario, Canada. The plant will utilize a synthetic
biomass conversion process to convert wood waste materials into ethanol.
Subject to receipt of the required funding, other biomass-to-ethanol plants
are
planned for Canada that will also use a synthetic biomass conversion
process. HEO recently completed the purchase of 720 acres and
approximately two million tons of wood waste biomass for its planned plant.
(see
Subsequent Event)
We
are
continuing the process of vertically integrating our subsidiaries, which we
believe will promote efficiency and lower operating costs. Each of our
subsidiaries will remain a separate
operating entity.
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 six months ended
March 31, 2006 and 2005 are as follows:
|
|
|
2006
|
|
2005
|
|
|
Net
income (loss), as reported
|
|
$
|
2,105,230
|
|
$
|
(933,723
|
)
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation expenses determined under the fair
value
Black-Scholes method with a 161% and 80% volatility at March 31,
2006 and
2005 respectively and a 6% and 3% respectively risk free rate of
return
assumption
|
|
|
(468,527
|
)
|
|
(66,672
|
)
|
|
Pro
forma net income (loss)
|
|
$
|
1,636,703
|
|
$
|
(1,000,395
|
)
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
Weighted
average shares, basic
|
|
|
16,192,280
|
|
|
15,035,895
|
|
|
Basic,
pro forma, per share
|
|
$
|
0.10
|
|
$
|
(0.07
|
)
|
|
Weighted
average shares, diluted
|
|
|
19,319,827
|
|
|
15,035,895
|
|
|
Diluted,
pro forma, per share
|
|
$
|
0.08
|
|
$
|
(0.07
|
)
|
Interim
Financial Statements:
The
accompanying unaudited consolidated financial statements for the six months
ended March 31, 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 Form 10-KSB/A.
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 ($1,563,901) 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 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”), effective October 1, 2004, the Company
purchased 100% of the outstanding shares of two Texas corporations, Bott
Equipment Company, Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”) 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 newly issued common stock.
752,688
shares of the shares issued to Trumble are subject to a one time put. On or
about October 26, 2005, Mr. Trumble exercised this put. Under the terms of
the
put, Trumble has 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 shall have sixty (60) days from the date of exercise to
pay
off any sums due thereby. An extension
for
payment of the put has been 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 Form S-8 Registration Statement under The
Security 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 will 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 note 6 and 7) 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 Mr. 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.
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 has recognized that Trumble shall 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 are 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 is 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. See Subsequent events for details of First
Amended Stock Purchase Agreement.
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
|
|
Inventories
consist of finished goods of $488,995 and $502,430 at March 31, 2006 and
September 30, 2005 respectively; and work in process in the amount of $372,345
and $402,940 respectively.
| (4) |
Plant,
Property and Equipment:
|
A
summary
at March 31, 2006 and September
30, 2005 are
as
follows:
| |
|
2006
|
|
2005
|
|
|
Land
|
|
$
|
502,000
|
|
$
|
502,000
|
|
|
Buildings
and improvements
|
|
|
1,073,000
|
|
|
1,073,000
|
|
|
Furniture,
Machinery and equipment
|
|
|
822,009
|
|
|
769,590
|
|
|
Automobiles
and trucks
|
|
|
180,652
|
|
|
180,652
|
|
|
Leasehold
improvement
|
|
|
82,879
|
|
|
79,105
|
|
| |
|
|
2,660,540
|
|
|
2,604,347
|
|
|
Less
accumulated depreciation
|
|
|
(396,014
|
)
|
|
(287,511
|
)
|
| |
|
$
|
2,264,526
|
|
$
|
2,316,836
|
|
Depreciation
expense charged to operations for six months and three months ended March 31,
2006 and 2005 were $115,648 and $61,622; and $53,955 and $30,811
respectively.
| (5) |
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.
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 $352,281 and $555,028 on March
31,
2006 and September
30, 2005 respectively.
| (6) |
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 March
31,
2006 and September
30, 2005 totaled $181,276 and $195,716 respectively.
| (7) |
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 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 897,000 shares of its common stock for $735,540 via another private
placement offering from February through April 2006. The Company anticipates
satisfying its obligations through issuance of common stock to shareholders
in
the next fiscal quarter.
| (8) |
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 March
31,
2006 and September
30, 2005 were $12,643 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 March
31,
2006 and September
30, 2005 were $28,732 and $58,934 respectively.
Loans
from shareholders:
Mr.
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.
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 6.90 percent per annum. Balance outstanding at March
31,
2006 and September
30, 2005 were $9,155 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 the two year period the loan has not been converted into common stock,
the principal amount becomes due and payable.
| (9) |
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 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.
| (10) |
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).
| (11) |
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 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
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 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 payment was not received by the Company 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. Mems 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 results in a cleaner burning, more environmentally friendly
fuel
for motor vehicles.
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.
MEMS
USA, INC. changed its name to CONVERGENCE
ETHANOL:
To
better
reflect the Company’s emphasis in the alternative energy sector, on April 15,
2006, the Company 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.
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 720 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-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 2 full years of production or 240,000,000 gallons
of
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. Villeneuve shall also be entitled to the right to
manage, blast, or otherwise remove the stone aggregate material located on
the
Property. All blasting ceases prior to plant construction.
The
closing of the transaction contemplated by the Agreement was contingent upon
HEO
obtaining an easement through and on that parcel of real property owned by
Villeneuve described as parcel 711 Centre Cochrane for rail access to the
Property, and another easement through and on the same parcel of real property
for a two way road for truck access to the Property, and otherwise satisfying
HEO’s and Registrant’s due diligence. As of the date of this report HEO has
incurred $86,000 for environmental certificates and legal expenses.
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 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 newly issued 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.
Unless
otherwise indicated, all references to our company include our wholly-owned
subsidiaries, MEMS USA, Inc. a California corporation, Bott Equipment Company,
Inc., a Texas corporation, Gulfgate Equipment, Inc., a Texas corporation, our
joint venture Can Am Ethanol One, Inc., a British Columbia corporation and
Hearst Ethanol One, Inc., an Ontario corporation (“HEO”).
Plan
of Operations:
We
are
engaged in the business of developing and manufacturing advanced engineered
products, systems and plants, mostly for the energy, oil and natural gas
industries. Our business is divided into three operating divisions, including
(i) the design, development and operation of ethanol facilities, (ii) the
provision of systems and components to the energy sector, and (iii) the
engineering applications and sale of micro electro mechanical systems (MEMS)
for
scientific and engineering companies. As related in our annual report, in
October 2005, the Company acquired two Texas corporations, Bott Equipment
Company, Inc. (“Bott”) and Gulfgate Equipment, Inc. (“Gulfgate”).
In
November 2004, the Company formed a joint venture, Can Am Ethanol One, Inc.
(“Can Am”). As of the date of this report, the Company owns 49.3% of the
outstanding shares of Can Am and has voting rights equal to 50%. Two of MEMS
directors sit on the Can Am board. The purpose of this joint venture is to
design, build and operate an ethanol production facility. In June 2005, the
Company and its Canadian counterpart each made a CN$25,000 at risk deposit
to
open escrow toward purchase of 2,150 acres of land intended to serve as a plant
site in British Columbia, Canada (“Purchase Agreement”).
Subsequently,
the Company paid an additional at-risk deposit of CN$50,000 for an extension
of
the Closing Date of the Purchase Agreement. As of the date of this report,
the
Purchase Agreement remains active, but has not closed. Due to the length of
time
that Purchase Agreement has remained pending, as well as other factors, the
Company is contemplating selling its’ interest to Accelon Energy System, Inc.,
the other owner of Can Am Ethanol One, Inc. We will continue to explore other
potential plant sites in Canada.
In
December 2005, the Company incorporated Hearst Ethanol One, Inc., an Ontario
corporation (“HEO”) for the purpose of building, owning and operating an ethanol
production facility in Canada. As of March 31, 2006 the Company owns ninety-nine
point three percent (99.3%) of HEO. Dr. James A. Latty and Mr. Daniel
Moscaritolo are directors and officers of HEO.
On
December 21, 2005, HEO entered into a land purchase agreement with C. Villeneuve
Construction Company, Ltd. Upon successful completion of due diligence
concerning 600 acres of land to be acquired near Hearst, Ontario, Canada and
at
the discretion of the Company to accept the results, the transaction is
anticipated to close on or before May 1st,
2006.
On
April
21, 2006, Hearst Ethanol One, Inc., a Federal Canadian Corporation (“HEO”), a
majority-owned subsidiary of Registrant, completed the acquisition of
approximately 720 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-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 2 full years of production or 240,000,000 gallons
of
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. Villeneuve shall also be entitled to the right to
manage, blast, or otherwise remove the stone aggregate material located on
the
Property. All blasting ceases prior to plant construction.
The
closing of the transaction contemplated by the Agreement was contingent upon
HEO
obtaining an easement through and on that parcel of real property owned by
Villeneuve described as parcel 711 Centre Cochrane for rail access to the
Property, and another easement through and on the same parcel of real property
for a two way road for truck access to the Property, and otherwise satisfying
HEO’s and Registrant’s due diligence.
We
believe that these strategic acquisitions and alliances will allow us to grow
our businesses. In January, 2006 the Company was approved for ISO 9001:2000
certification. This certification will provide the Company with worldwide
recognition that we have high quality products and standards and will allow
us a
greater ability to compete on a national and International basis.
CA
MEMS
was incorporated in November 2000. CA MEMS is an engineering and design firm.
CA
MEMS has been engaged in the engineering and sale of instrumentation, blending
skids and Intelligent Filtration Systems (IFS). During 2004, CA MEMS’s engineers
designed and constructed an acoustic viscometer. This instrument utilizes sound
waves traveling through a fluid stream to determine the fluid’s viscosity. To
date, the Company has determined that the instrument may be utilized to measure
the viscosity of a range of aqueous and organic fluids, including refined and
crude oils. In May 2005 the Company filed a utility patent application
respecting this device which replaces the previously filed provisional patent.
CA MEMS is presently designing a multi-variant pressure, temperature and flow
meter for use in industrial applications.
During
2004, CA MEMS’s engineers also built a hydrocarbon blending system technology.
One system we produced mixes three organic fluids, in differing percentages
with
accuracy. One of the Company’s long term goals is to be able to build blending
systems to mix ethanol with motor gasoline. When properly mixed, ethanol and
gasoline provide a higher octane, cleaner burning fuel for automobiles.
CA
MEMS’s
engineers have also been charged by the Company to oversee the Company’s IFS
business. These systems are utilized to filter wastes from amine, oil or water
streams. Unlike a typical canister filter system, such as the oil filter in
an
automobile, which needs to be periodically replaced and disposed of, the filters
utilized in intelligent filtration systems can last for decades. Furthermore,
the filter system is self cleaning. Once the system recognizes that its filter
is becoming clogged by debris filtered from the fluid flow, it turns the fluid
flow through the filter off and “back flushes” the debris caked on the filter
into a collection vessel. The system then turns the fluid flow through the
system back on through the freshly cleaned filter. The filter cleaning process
takes only seconds to complete and repeats as necessary to assure optimum
filtration. A facility utilizing IFS technology needn’t dispose of contaminated
filters, but only need dispose of the contaminate itself. Thus, while a
filtration system based upon IFS technology typically requires a greater capital
investment on the part of the purchaser, these costs are offset in the long
run
by savings in filter replacement and disposal costs. The Company anticipates
that it may be able to utilize its intelligent filtration systems as an integral
part of any ethanol production facility that it may design. The Company is
presently aware of three competitors offering similar technologies to MEMS
IFS
technology. 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. (See subsequent events for more
details.)
Presently,
CA MEMS utilizes a combination direct sales force as well as commissioned sales
representatives to market and distribute its products. CA MEMS targets niche
business segments and is not dependent upon any one or a few major customers.
A
typical contract requires CA MEMS to engineer a product that previously did
not
exist or improve upon an existing technology using MEMS (Micro Electro
Mechanical Systems) devices. The vast majority of the monies raised since the
Company’s acquisition of CA MEMS have been utilized to fund CA MEMS’s
acquisition and development of new technologies.
Gulfgate
produces particulate filtration equipment utilized in the oil and power
industries. Gulfgate also produces vacuum dehydration and coalescing systems
that are utilized to remove water from ground based turbine engine oil. These
same systems are used by electric power generation facilities to remove water
from transformer oils. To help meet its customer’s diverse needs, Gulfgate
maintains and operates a rental fleet of filtration and dehydration systems.
Presently, Gulfgate utilizes a combination direct sales force as well as
commissioned sales representatives to market and distribute its
products.
Bott
is a
stocking distributor for various lines of industrial pumps, valves and
instrumentation such as those utilized in CA MEMS’s IFS and blending skid
systems. Bott specializes in the construction of aviation and refueling systems,
including, but not limited to, helicopter refueling systems on oil rigs
throughout the world. Bott also constructs refueling systems for commercial
marine vessels. Bott’s customers include chemical plants, refineries, power
plants and other industrial applications. Bott utilizes a combination direct
sales force as well as commissioned sales representatives to market and
distribute its products.
On
April
25, 2005 the Company and Accelon Energy System, Inc. (“Accelon”) entered into a
contract with Can Am whereby the Company and Accelon agreed to provide certain
services to Can Am on the condition that Can Am receives project funding on
or
before June 1st,
2005.
Please refer to the Company’s Form 8-K filing dated April 29, 2005 for details
relating to this contract. The contract was amended on May 24, 2005 by the
parties to extend the termination date from June 1, 2005 to October 31, 2005.
Please see Exhibit 10.2 for details relating to this amendment.
Can
Am
was created to manufacture, own and operate one ethanol production facility
in
British Columbia Canada. The plant was to utilize a synthetic biomass
conversion process to convert wood waste materials into ethanol. In June 2005,
the Company and its Canadian counterpart each made a CN$25,000 at risk deposit
to open escrow toward purchase of 2,150 acres of land intended to serve as
a
plant site in British Columbia, Canada (“Purchase Agreement”).
Subsequently,
the Company paid an additional at-risk deposit of CN$50,000 for an extension
of
the Closing Date of the Purchase Agreement. As of the date of this report,
the
Purchase Agreement remains active, but has not closed. Due to the length of
time
that Purchase Agreement has remained pending, as well as other factors, the
Company is contemplating selling its’ interest to Accelon Energy System, Inc.,
the other owner of Can Am Ethanol One, Inc.
HEO
is a
private Canadian corporation organized for the purpose of developing and
operating a synthetic wood waste biomass-to-ethanol plant in Hearst, Ontario
Canada. Subject to receipt of the required funding several
biomass-to-ethanol plants are planned for Canada that will also use a synthetic
biomass-to-ethanol conversion process. It is anticipated that the ethanol
manufactured by these facilities will be sold to companies which blend ethanol
with motor fuel. The blending of ethanol with motor fuel reduces emissions
and
will help countries such as Canada meet the Kyoto Accords for reduced greenhouse
gas emissions. We estimate that each ethanol plant will require approximately
$310 million in capital. MEMS USA’s engineering group, headquartered in Westlake
Village, CA, will be entering into contract negotiations with HEO to develop
the
engineering data and direct the plant engineering and construction projects.
It
is anticipated that the Company’s Texas subsidiaries will be called upon to
supply instrumentation for the project and assist in its modular construction,
subject to receipt of funding.
On
December 21, 2005, HEO entered into a land purchase agreement with C. Villeneuve
Construction Company, Ltd. Upon successful completion of due diligence
concerning 600 acres of land to be acquired near Hearst, Ontario, Canada and at
the discretion of the Company to accept the results, the transaction is
anticipated to close on or before May 1st,
2006.
Additional details concerning this transaction may be found in the Company’s
Form 8K report filed December 27, 2005 which is hereby incorporated by
reference.
We
are
presently in the process of integrating and improving our subsidiaries, which
we
believe will promote efficiency and lower operating costs. While each of our
subsidiaries will remain a separate operating entity, we intend to optimize
the
resources of each. CA MEMS’ primary responsibility will be to design and
engineer new products and systems for the energy sector. It is anticipated
that
Bott will supply component parts for these systems, which will be assembled
in
Texas under CA MEMS’ supervision. We have already transferred our IFS and other
technology to Texas in order to establish lines of communication and a working
relationship. We also anticipate that once we obtain the necessary funding,
the
symbiotic relationship between our subsidiaries will allow us to engineer,
design, and partially construct ethanol plants for our current and future
Canadian joint ventures.
Comparison
of Operations
Net
sales
were $2,515,414 and $1,864,543 for the three months ended March 31, 2006 and
2005, respectively. Net sales for the six-month periods ended March 31, 2006
and
2005 were $5,141,931 and $4,879,240, respectively. The sales increases for
the
three months (34.9%) and for the six months (5.4%) ended March 31, 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. Sales
for the second quarter of fiscal 2006 were at expected levels. Customer bookings
this past quarter continued to push orders in sales backlog to record levels
and
finished the quarter at $4.6 million. In March, 2006 the Company booked a
$1,500,000 order from CDI for an automatic back flushable filtration system.
CDI
is under contract with a major oil refinery in Southern California to supply
our
"Intelligent Filtration System” equipment. (Reference Form 8-K dated March 30,
2006 Re. CDI - IFS/MEMS USA, Inc.)
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 22.1% and 21.6% in the second quarter of fiscal 2006
and
2005, respectively. Gross profit margin for the six-month periods ended March
31, 2006 and 2005 were 21.6% and 27.9% respectively. This decrease of 6.3%
was
primarily due to lower margins on commercial aviation refueling systems
shipments. Margins for this segment of the business for the quarter ended March
31, 2006 reflect the significant competitive pressures encountered on bidding
and winning several key customer jobs.
Selling,
general and administrative (SG&A) expenses were $1,354,190 and $1,207,609
for the three months ended March 31, 2006 and 2005, respectively. SG&A for
the six-month periods ended March 31, 2006 and 2005 were $2,675,737 and
$2,305,114, respectively. The increase in SG&A spending for the three months
and for the six months ended March 31, 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 March 31, 2006, shareholder’s equity was $15,612 as compared to
equity of $428,632 for the prior year period ended September 30, 2005. The
decrease in shareholder equity
is
primarily attributable to net operating losses incurred over the past six months
but, partially offset by the issuance of common stock net of an accrual to
record an obligation to purchase shares of MEMS common stock related to a legal
settlement ($307,000; See note 10 & Subsequent Events).
Upon
the
issuance of 670,000 shares of MEMS common stock sold in a private placement
offering in September, 2005 for $1.0 million (See Part II, Item 2, Unregistered
Sales of Equity Securities and Use of Proceeds) less the obligations due to
Mr.
Trumble which were renegotiated effective May 8, 2006 and among other things,
eliminated the $1,400,000 “Put Option” (See Subsequent Events), equity would
increase $2.7 million and represent a $2.2 million increase over the prior
year
ended September 30, 2005.
Interest
expense (income), net was $11,222 and $(6,481) for the fiscal quarters ended
March 31, 2006 and 2005, respectively. Interest expense for the six-month
periods ended March 31, 2006 and 2005 were $34,503 and $(9,343), respectively.
The increase in interest 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 13) with Mr. Trumble.
In
summary, net losses were $808,351 and $699,287 for the fiscal quarters ended
March 31, 2006 and 2005, respectively. Net income (loss) for the six-month
periods ended March 31, 2006 and 2005 were $2,105,230 and $(933,723),
respectively. The increased net loss for the fiscal quarter ended March 31,
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 net income for the six months ended March 31, 2006 as compared to
the
prior year was due to the favorable settlement of a legal dispute ($3,703,634;
See note 10). Excluding the income from the settlement agreement the Company
would have reported a year-to-date net loss of $1,598,404.
The
increased net loss for the six months ended March 31, 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 also intend to continue to develop our sensor technology.
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 $408,501 as of March 31, 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 for the second half of 2006 in order to fund our continued
development of our sensor technology and devices 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
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 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 newly issued 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.
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 720 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-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 2 full years of production or 240,000,000 gallons
of
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. Villeneuve shall also be entitled to the right to
manage, blast, or otherwise remove the stone aggregate material located on
the
Property. All blasting ceases prior to plant construction.
The
closing of the transaction contemplated by the Agreement was contingent upon
HEO
obtaining an easement through and on that parcel of real property owned by
Villeneuve described as parcel 711 Centre Cochrane for rail access to the
Property, and another easement through and on the same parcel of real property
for a two way road for truck access to the Property, and otherwise satisfying
HEO’s and Registrant’s due diligence.
MEMS
USA, INC. changed its name to CONVERGENCE
ETHANOL:
To
better
reflect the Company’s emphasis in the alternative energy sector, on April 15,
2006, the Company 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.
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
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.
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.
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.
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 897,000 shares of its common stock for $735,540 via another private
placement offering from February through April 2006. The Company anticipates
satisfying its obligations through issuance of common stock to shareholders
in
the next fiscal quarter.
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.
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.
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31.1 |
Certification
of President Pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed
electronically herewith)
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31.2 |
Certification
of Chief Financial Officer Pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed
electronically herewith)
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32.2 |
Certification
of President and Chief Financial Officer Pursuant to 18
U.S.C Section 1350 (Furnished electronically
herewith).
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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.
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MEMS
USA,
INC.
(Registrant)
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| Date:
May
31, 2006 |
By: |
/s/ James
A.
Latty |
| |
Name:
James
A. Latty |
| |
Title:
Chief Executive Officer
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