U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
Commission file number 0-4846-3
MEMS USA, INC.
(Name of small business issuer in its charter)
Nevada 82-0288840
---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5701 Lindero Canyon Road, Suite 2-100
Westlake Village, California 91362
---------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code (818) 735-4750
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes |_| No |X|
The number of shares of the common stock outstanding as of February 10, 2006 was
18,768,744.
Documents incorporated by reference:
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.
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FORM 10-QSB
For The Quarterly Period Ended December 31, 2005
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
o Consolidated Balance Sheets as of December 31, 2005 and 2004
(unaudited)................................................... 3
o Consolidated Statements of Operations (unaudited) for the three
months ended December 31, 2005 and 2004........................ 4
o Consolidated Statements of Cash Flows (unaudited) for the three
months ended December 31, 2005 and 2004........................ 5
o Consolidated Statement of Equity (unaudited) as of December 31, 2005 6
o Notes to Consolidated Financial Statements (unaudited)............... 7 - 18
Item 2. Management's Discussion and Analysis or Plan of Operation.............. 18 - 24
Item 3. Controls and Procedures................................................ 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........... 26
Item 3. Defaults upon Senior Securities....................................... 27
Item 4. Submission of Matters to a Vote of Security Holders................... 27
Item 5. Other Information..................................................... 27
Item 6. Exhibits.............................................................. 28
Signatures...................................................................... 29 - 32
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ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets
December 31
(Unaudited)
A S S E T S
Current Assets: 2005 2004
------------ ------------
Cash and cash equivalent $ 106,208 $ 64,269
Accounts receivable, net allowance for uncollectible of
$46,196 and $51,640 respectively 943,012 1,403,804
Inventories, net of provision for slow moving items of $25,000 and
$45,000 respectively 768,194 602,124
Other current assets 98,064 107,810
------------ ------------
Total current assets 1,915,478 2,178,007
------------ ------------
Plant, property and equipment, net 2,275,912 2,136,381
Other assets 364,906 343,746
Investment in Can Am Ethanol One, Inc. 71,765 --
Goodwill 915,373 337,819
------------ ------------
Total assets $ 5,543,434 $ 4,995,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,400,710 $ 1,288,349
Lines of credits 176,424 981,055
Notes payable 556,929 --
Current portion of long-term debt 36,843 65,132
Deferred revenue -- 10,550
Loans from shareholders 211,600 --
Convertible loan payable 150,000 --
Liability to be satisfied through the issuance of shares 1,005,000 --
------------ ------------
Total current liabilities 3,537,506 2,345,086
------------ ------------
Lon-term liabilities 41,384 232,799
Other loans from shareholders -- 50,000
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 6,095,856 4,027,885
Stockholders' equity (deficit):
Common stock, $0.001 par value; 100,000,000 shares authorized; 18,237,767
and 16,431,077 shares respectively issued and outstanding 20,937 16,431
Stock subscriptions receivable (2,512,850) (2,050)
Additional paid in capital 8,581,998 4,309,787
Shares to be redeemed (165,054 shares) (231,076) --
Accumulated deficit (2,631,873) (3,356,100)
Treasury stock (2,699,684 shares) (3,779,558) --
------------ ------------
Total stockholders' equity (deficit) (552,422) 968,068
------------ ------------
Total liabilities and stockholders' equity $ 5,543,434 $ 4,995,953
============ ============
The accompanying notes are an integral part of these financial statements.
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MEMS USA, INC
Consolidated Statement of Operations
Three months ended December 31
(Unaudited)
2005 2004
------------ ------------
Revenues $ 2,626,519 $ 3,014,697
Cost of revenues 2,071,744 2,154,487
------------ ------------
Gross profit 554,775 860,210
Selling, general and administrative expenses 1,321,547 1,097,504
------------ ------------
Loss from operations (766,772) (237,294)
Other income (23,281) 2,862
------------
Income due to legal settlement 3,703,634 --
------------ ------------
Net income (loss) $ 2,913,581 $ (234,432)
============ ============
Net income (loss) per share, basic and diluted:
Weighted average number of shares outstanding, basic 18,439,506 16,410,871
Net income (loss) per share, basic $ 0.16 $ (0.01)
============ ============
Weighted average number of shares, outstanding, diluted 19,131,642 16,410,871
Net income (loss) per share, diluted $ 0.15 $ (0.01)
============ ============
The accompanying notes are an integral part of these financial statements.
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MEMS USA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months ended December 31
(Unaudited)
2005 2004
------------ ------------
Cash flows provided by (used for) operating activities:
Net income (loss) $ 2,913,581 $ (234,432)
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 61,693 30,811
Common stock issued for services 10,000 --
Income due to legal settlement (3,703,634) --
Change in assets and liabilities:
Accounts receivable (186,172) (396,953)
Inventories 112,176 131,803
Other current assets 72,133 28,558
Accounts payable and accrued expenses 5,445 216,824
Deferred revenue -- 10,550
------------ ------------
Total adjustments (3,628,359) 21,593
------------ ------------
Net cash used in operating activities (714,778) (212,839)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (20,769) 820
Other assets 24,000 --
------------ ------------
Net cash used for investing activities 3,231 820
------------ ------------
Cash flows from financing activities:
(Repayment) proceeds from lines of credit and long term debts (30,398) 194,776
Loan from shareholder 20,000 50,000
Cash balance net of payments for purchase of Bott and Gulfgate -- 5,073
------------ ------------
Net cash provided by (used in) financing activities (10,398) 249,849
------------ ------------
Net increase (decrease) in cash and cash equivalents (721,945) 37,830
Cash and cash equivalents, beginning of period 828,153 26,439
------------ ------------
Cash and cash equivalents, end of period $ 106,208 $ 64,269
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ -- $ --
============ ============
Interest paid $ 35,498 $ 19,286
============ ============
Supplemental disclosure of non-cash financing activities:
Common stock (including $1,400,000 of shares subject to mandatory redemption $ 2,250,000
factor) issued for acquisition of Bott and Gulfgate
The accompanying notes are an integral part of these financial statements.
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MEMS USA, INC
Consolidated Statement of Equity
December 31, 2005
(Unaudited)
Additional
Common Subscriptions paid in Accumulated Stockholders'
stock receivable capital Treasury stock deficit equity
------------ ------------ ------------ ------------ ------------ ------------
Balance as of September 30, $ 17,404 $ (250) $ 5,956,932 -- $ (5,545,454) $ 428,632
2005
Common stock issued for
service 4 -- 9,995 -- 9,999
Common stock issued for cash
received in prior year 129 -- 105,871 -- 106,000
Common stock issued for
subscriptions receivable 3,400 (2,512,600) 2,509,200 -- --
Charges due to legal
settlement -- -- (231,076) -- (231,076)
Net income for the quarter 2,913,581 2,913,581
Treasury stock due to legal
settlement -- -- -- (3,779,558) (3,779,558)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 31,
2005 $ 20,937 $ (2,512,850) $ 8,350,922 $ (3,779,558) $ (2,913,581) $ (552,422)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-6-
Notes to consolidated financial statements:
(1) Company and Summary of Significant Accounting Policies:
Nature of Business:
MEMS USA, Inc. (the "Company") was incorporated in Nevada in 2002. The
Company is comprised of three wholly owned subsidiaries, California MEMS
USA, Inc., fka, MEMS USA, Inc., a California Corporation ("MEMS CA"), Bott
Equipment Company, Inc. ("Bott") and Gulfgate Equipment, Inc.
("Gulfgate"). 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. The Company
owns ninety-nine point three percent (99.3%) of HEO. Dr. James A. Latty
and Mr. Daniel Moscaritolo are presently the only directors and officers
of HEO.
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.
MEMS CA is a California based professional engineered systems, products
and services company serving the 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 turbine engine oil. 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.
MEMS CA, Bott and Gulfgate have a combined direct sales force as well as
commissioned sales representatives that sell their products.
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.
Subject to receipt of the required funding several biomass-to-ethanol
plants are planned for Canada that will also use a synthetic biomass
conversion process.
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.
-7-
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 three months ended December 31, 2005 and 2004 are as
follows:
2005 2004
------------ ------------
Net income (loss), as reported $ 2,913,581 $ (234,432)
Deduct:
Total stock-based employee compensation expenses determined
under the fair value Black-Scholes method with a 128% and
80% volatility at December 31, 2005 and 2004 respectively
and a 6% and 1.5% respectively risk free rate of return
assumption (175,664) (1,008,110)
------------ ------------
Pro forma net loss $ 2,737,917 $ (1,242,542)
============ ============
Income (loss) per share:
Weighted average shares, basic 18,439,506 16,410,871
Basic, pro forma, per share $ 0.15 $ (0.08)
============ ============
Weighted average shares, diluted 19,131,642 16,410,871
Diluted, pro forma, per share $ 0.14 $ (0.08)
============ ============
Interim Financial Statements:
The accompanying unaudited consolidated financial statements for the three
months ended December 31, 2005 and 2004 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 and 2004 included in the Company's Form 10-KSB/A.
-8-
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
$2,631,873 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' 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.
-9-
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 has 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 $2,000,000 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.
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.
-10-
On December 15, 2005, the Company assumed Weisdorn Sr.'s obligation to
purchase 165,054 shares from Mr. Trumble at $1.86 per share.
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. 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.
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 asset 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:
-11-
Cash $ 50,000
Common Stock (370,977 penalty shares) 809,965
Common Stock (1,309,677 shares) 2,291,935
----------
Total purchase price $3,151,900
==========
(3) Accounts Receivable:
Accounts receivable has been reduced by an allowance for amounts that may
become uncollectible. This estimated allowance is based primarily on
Management's evaluation of the financial condition of the customer and
historical bad debt experience. The Company has provided reserves for
doubtful accounts as of December 31, 2005 and 2004 in the amount of
$46,196 and $51,640 respectively that the Company believes are adequate.
(4) Inventories:
Inventories consist of finished goods of $449,271 and $323,323 at December
31, 2005 and 2004 respectively; and work in process in the amount of
$343,923 and $278,800 respectively.
(5) Plant, Property and Equipment:
A summary at December 31, 2005 and 2004 are as follows:
2005 2004
----------- -----------
Land $ 502,000 $ 502,000
Buildings and improvements 1,073,000 1,452,419
Furniture, Machinery and equipment 790,360 167,996
Automobiles and trucks 180,651 91,700
Leasehold improvement 79,105 --
----------- -----------
2,625,116 2,214,115
Less accumulated
depreciation (349,204) (77,735)
----------- -----------
$ 2,275,912 $ 2,136,380
=========== ===========
Depreciation expense charged to operations totaled $61,693 and $30,811
respectively, for the three months ended December 31, 2005 and 2004.
(6) 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.
-12-
In June 2004, Bott executed a promissory note ("Note") with a bank whereby
Bott could borrow up to $600,000, at an interest rate equal to the bank's
prime rate. The Note provided for monthly payments of all accrued unpaid
interest due as of the date of each payment. The Note further provided for
a balloon payment of all principal and interest outstanding on the Note's
one year anniversary. The Company informed the bank that it would not
renew the line of credit and negotiated a long-term promissory note.
This promissory note was finalized in December 2005, for $372,012 at a
variable interest rate equal to the bank's prime rate. The note provides
for five monthly principal payments of $3,092 and a final payment of the
remaining principal and interest in June 2006.
In October 2004, Bott executed a promissory note with a bank that allowed
Bott to borrow up to $200,000, at an interest rate equal to the bank's
prime rate plus 1.0 percent. The note provided for monthly payments of all
accrued unpaid interest due. The note also provided for the payment of
$66,666 in the months of December 2004 and January 2005 and payment of the
remaining principal and interest in February 2005. The note was paid off
in the second quarter.
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 $544,311 and $665,255 on
December 31, 2005 and 2004 respectively.
(7) 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
-13-
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 December 31, 2005 and 2004 totaled
$189,042 and $182,466 respectively.
(8) 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 in March 2006. 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.
(9) 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 equals 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 December 31, 2005
and 2004 were $13,786 and $18,660 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 December 31, 2005 and 2004 were $32,138 and $76,091
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 1/2 security interest in all of the Company's right title and
interest to any trademarks, trade names, contract rights, and leasehold
interests.
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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 December 31, 2005 and 2004 were $12,136 and $30,693
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.
(10) Employee Stock Options:
In connection with the employment agreements, the Company has granted
options to certain key executives to acquire common stock of the Company
("Options").
The number of weighted average exercise prices of all options granted for
the three months ended December 31, 2005 and 2004 are as follows:
2005 2004
Average Average
Number of Exercise Number of Exercise
shares Price shares Price
Outstanding at beginning of the quarter 5,338,227 $3.00 4,100,388 1.55
Granted during the quarter -- $ -- 1,535,000 1.97
Outstanding at end of the quarter 4,488,727 $1.95 5,635,388 1.76
Exercisable at end of the quarter 1,380,914 $1.88 1,068,912 1.97
Exercised during the quarter -- $ -- -- --
Cancelled during the quarter 849,500 $5.55 -- --
(11) Resignation of Executive Officer and Board Member:
On October 17, 2005, the Company and its officers filed a complaint
against Lawrence Weisdorn, Jr. ("Weisdorn), the Company's former Chief
Executive Officer and Chairman of the Board of Directors, Lawrence
Weisdorn, Sr. ("Weisdorn Sr." and together with Weisdorn, the "Weisdorn
Parties"), Nathan Drage ("Drage") and Drage related parties in the
Superior Court of the State of California for Los Angeles County, alleging
-15-
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.
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 parties agreed to, among other things,
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.
-16-
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).
(12) 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 but has not exercised its
right to demand return of the shares.)
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
-17-
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 but has not
exercised its right to demand return of the shares.
(13) Subsequent Event:
In February 2006, MEMS USA received a $1.5 million order to construct for
an amine purification system which will be installed at a refinery with a
large oil company. Amine is used in a refinery to remove Carbon Dioxide
and Sulfur products from oil to produce cleaner burning fuels. There are
three major components in the amine purification system. The first
component is MEMS USA's Intelligent Backflushing Filtration System (IFS).
This system removes particulates such as rust which gets dislodged from
pipes and other components in the refinery and other hard particulates.
The filtration system uses permanent filter elements which are backflushed
periodically. The backflush waste material consists of water and the
particulates which have been filtered by the permanent filter elements.
The backflush waste is further concentrated in a decanting vessel. The
second major system is a carbon bed filtration system which is used to
remove chemical contaminants and hydrocarbons which will sometimes mix
with the amine during its use in a refinery. The third major system is an
Ion Exchange filtration system which removes heat stable salts which form
in the amine, causing the amine to be less effective in removing Carbon
Dioxide and Sulfur products. These systems will provide years of effective
utilization of the amine fluids and extend the useful life of the
refinery's amine process equipment.
This contract is cancelable subject to costs reimbursement and liquidated
damages.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Unless otherwise indicated, all references to our company include our
wholly-owned subsidiaries, MEMS USA, Inc. a California corporation, 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").
-18-
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 the date of this report, the Company owns
ninety-nine point three percent (99.3%) of HEO. Dr. James A. Latty and Mr.
Daniel Moscaritolo are presently the only 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. 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 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.
MEMS CA was incorporated in November 2000. MEMS CA is an engineering and design
firm. MEMS CA has been engaged in the engineering and sale of instrumentation,
blending skids and Intelligent Filtration Systems (IFS). During 2004, MEMS CA'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. MEMS CA is presently designing a multi-variant pressure,
temperature and flow meter for use in industrial applications.
During 2004, MEMS CA'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.
-19-
MEMS CA'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, MEMS CA utilizes a combination direct sales force as well as
commissioned sales representatives to market and distribute its products. MEMS
CA targets niche business segments and is not dependent upon any one or a few
major customers. A typical contract requires MEMS CA 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 MEMS CA have been utilized to fund
MEMS CA'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 MEMS CA'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.
-20-
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 $150 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. MEMS CA's 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 MEMS CA's 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.
-21-
Comparison of Operations
Net sales decreased $388,178 (12.9%) to $2,626,519 for the first quarter of
fiscal 2006 from $3,014,697 for the first quarter of fiscal 2005. The sales
decrease during the fiscal quarter ended December 31, 2005 as compared to the
prior year quarter is mainly due to commercial aviation refueling systems
shipments slipping to the second fiscal quarter. With the improving economy the
Company finished the quarter ended December 31, 2005 with a record level of
orders in sales backlog ($3.6 million).
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 21.1% and 28.5% in the first quarter of
fiscal 2006 and 2005, respectively. This decrease of 7.4% was mainly due to
lower margins on commercial aviation refueling systems shipments. Margins for
this segment of the business for the quarter ended December 31, 2005 reflect the
significant competitive pressures encountered on bidding and winning several key
customer jobs.
Selling, general and administrative (SG&A) expenses for the first quarter of
fiscal 2006 were $1,321,547, compared with $1,097,504 for the prior year period.
The increase in SG&A spending in the fiscal quarter ended December 31, 2005 as
compared to the prior year period is mainly due to auditing fees associated with
the acquisition of Gulfgate and Bott and legal costs (See Part II, Item 1, Legal
Proceedings).
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 December 31, 2005, shareholder's deficit was $552,422 as
compared to equity of $968,068 for the prior year period ended December 31,
2004. The decrease in shareholder equity is primarily attributable to net
operating losses incurred over the past twelve months, and accruals to record an
obligation to issue penalty shares of MEMS common stock related to the October,
2004 acquisition of Gulfgate and Bott ($809,966) and a liability arising out of
a legal settlement ($307,000; See note 11).
Upon the anticipated receipt of funds ($2.5 million) from Mercatus & Partners,
Limited for a stock subscription receivable and upon the issuance of $1.0
million for shares of MEMS common stock sold in a private placement offering in
September, 2005 (See Part II, Item 2, Unregistered Sales of Equity Securities
and Use of Proceeds), less the obligations due to Mr. Trumble ($307,000), equity
would increase $4.0 million and represent a $2.5 million increase over the prior
year period ended December 31, 2004.
Interest expense, net was $35,498 and $19,286 for the fiscal quarters ended
December 31, 2005 and 2004, 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.
-22-
In summary, net income was $2,913,581 and a net loss of $234,432 for the fiscal
quarters ended December 31, 2005 and 2004, respectively. The increased net
income for the fiscal quarter ended December 31, 2005 as compared to the prior
year was due to the favorable settlement of a legal dispute ($3,703,634; See
note 11). Excluding the income from the settlement agreement the Company would
have reported a net loss of $790,053. The increased net loss for the fiscal
quarter ended December 31, 2005 as compared to the prior year was mainly due to
lower sales and associated 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 $106,208 as of December 31, 2005, compared to cash and cash
equivalents of $64,269 as of December 31, 2004.
At our current cash "burn rate", we will need to raise additional cash through
debt or equity financings during the first 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. As of the date of this report, we have one commitment for the sale
of $2.5 million of our securities but, as of the date of this report the Company
has not received the funds. In the absence of this commitment 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
During the month of January 2006, the Company issued and delivered an aggregate
amount of 370,977 shares of the Company's common stock pursuant to the stock
purchase agreement dated October 26, 2004 between Mark Trumble and the Company
(See Note 2).
In February 2006, MEMS USA received a $1.5 million order to construct an amine
purification system which will be installed at a refinery with a large oil
company. Amine is used in a refinery to remove Carbon Dioxide and Sulfur
products from oil to produce cleaner burning fuels. There are three major
components in the amine purification system. The first component is MEMS USA's
Intelligent Backflushing Filtration System (IFS). This system removes
particulates such as rust which gets dislodged from pipes and other components
in the refinery and other hard particulates. The filtration system uses
permanent filter elements which are backflushed periodically. The backflush
waste material consists of water and the particulates which have been filtered
by the permanent filter elements. The backflush waste is further concentrated in
a decanting vessel. The second major system is a carbon bed filtration system
which is used to remove chemical contaminants and hydrocarbons which will
sometimes mix with the amine during its use in a refinery. The third major
system is an Ion Exchange filtration system which removes heat stable salts
which form in the amine, causing the amine to be less effective in removing
Carbon Dioxide and Sulfur products. These systems will provide years of
effective utilization of the amine fluids and extend the useful life of the
refinery's amine process equipment.
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Cautionary Statement Regarding Future Results, Forward-Looking Information and
Certain Important Factors
We make written and oral statements from time to time regarding our business and
prospects, such as projections of future performance, statements of management's
plans and objectives, forecasts of market trends, and other matters that are
forward-looking statements. Statements containing the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimates," "projects," "believes," "expects," "anticipates," "intends,"
"target," "goal," "plans," "objective," "should" or similar expressions identify
forward-looking statements, which may appear in documents, reports, filings with
the Securities and Exchange Commission, news releases, written or oral
presentations made by officers or other representatives made by us to analysts,
stockholders, investors, news organizations and others, and discussions with
management and other representatives of us.
Our future results, including results related to forward-looking statements,
involve a number of risks and uncertainties. No assurance can be given that the
results reflected in any forward-looking statements will be achieved. Any
forward-looking statement made by or on behalf of us speaks only as of the date
on which such statement is made. Our forward-looking statements are based upon
assumptions that are sometimes based upon estimates, data, communications and
other information from suppliers, government agencies and other sources that may
be subject to revision. Except as required by law, we do not undertake any
obligation to update or keep current either (i) any forward-looking statement to
reflect events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking statement
which may be made by or on behalf of us.
In addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement that may be made by or on behalf of us. Some of
these important factors, but not necessarily all important factors, include
those risk factors set forth in our 2005 Annual Report on Form 10-KSB/A filed
with the SEC on February 2, 2006
ITEM 3. Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to our
management, as appropriate, to allow timely decisions regarding required
disclosure. Our President and Chief Financial Officer have reviewed the
effectiveness of our disclosure controls and procedures and have concluded that
the disclosure controls and procedures, overall, are effective as of the end of
the period covered by this report. There has been no change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the period covered by this report that have materially
affected, or are reasonably likely to materially affected, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 17, 2005, the Company and its officers filed a complaint against
Lawrence Weisdorn, Jr. ("Weisdorn), the Company's former Chief Executive Officer
and Chairman of the Board of Directors, Lawrence Weisdorn, Sr. ("Weisdorn Sr."
and together with Weisdorn, the "Weisdorn Parties"), Nathan Drage ("Drage") and
Drage related parties in the Superior Court of the State of California for Los
Angeles County, alleging claims for, among other things, breaches of Nevada and
federal law and breach of fiduciary duty (the "Action"). The Company's claims
were based in substantial part on allegations of the unauthorized issuance of
shares of the Company's predecessor's common stock in December 2003, prior to
the reverse acquisition and merger with MEMS-CA which was finalized in February,
2004. The Company sought an injunction preventing the Weisdorn Parties and Drage
and his related parties from selling or transferring any of the shares of the
Company's common stock issued in December 2003, the return of the shares to the
Company for cancellation and monetary damages.
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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
On October 26, 2004 the Company issued 1,309,667 shares of its common stock to
Mr. Mark Trumble in consideration for the purchase of 100% of the shares of Bott
Equipment Company, Inc. and Gulfgate Equipment, Inc. in accordance with the
Stock Purchase Agreement ("Agreement") entered into by the Company and Mr.
Trumble. (A copy of the Agreement was filed as an Exhibit to our form 10KSB/A
filed with the SEC on February 3, 2005.) The Agreement contains covenants in
favor of Mr. Trumble that are secured with our promise to issue up to a total of
1,236,591 additional shares of our stock to Mr. Trumble in the event we fail to
satisfy those covenants. As of the date of this report, the Company is obligated
to issue 370,977 penalty 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
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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 but has not exercised its right to demand return of the shares.)
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 but has
not exercised its right to demand return of the 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.
Exemption from the registration provisions of the Securities Act of 1933 for the
transactions described above is claimed under Section 4(2) of the Securities Act
of 1933, among others, on the basis that such transactions did not involve any
public offering and the purchasers were sophisticated or accredited with access
to the kind of information registration would provide.
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Principal Accountant Fees and Services
Our board of directors has selected Kabani & Company, Inc. as our
independent accountants to audit our consolidated financial statements for
the fiscal year 2005. Stonefield Josephson, Inc. previously audited our
consolidated financial statements for the two fiscal years ended September
30, 2004 and 2003.
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Item 6. Exhibits
(a) Exhibits
31.1 Certification of President Pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934 (Filed
electronically herewith)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934
(Filed electronically herewith)
32.2 Certification of President and Chief Financial Officer
Pursuant to 18 U.S.C Section 1350 (Furnished
electronically herewith).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEMS USA, Inc.
(Registrant)
Date: February 22, 2006 /s/
--------------------------------
James A. Latty
Chief Executive Officer
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