U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-4846-3
MEMS USA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Nevada 82-0288840
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5701 Lindero Canyon Road, Suite 2
110 Westlake Village, California 91362
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (818) 735-4750
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SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED CLASS IS TO BE REGISTERED
None N/A
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SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
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(TITLE OF CLASS)
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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year were: $83,825
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of January 11, 2005 was approximately
$21,860,500.
The number of shares of the common stock outstanding as of January 11, 2005 was
16,431,077.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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, and Gulfgate Equipment, Inc., a
Texas corporation. In addition, unless otherwise indicated, all common share
amounts give effect to a one for 200 reverse split of our outstanding common
shares conducted in December 2003.
General
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
design, development and sale of micro electro mechanical systems (MEMS) for
major scientific and engineering companies.
Prior to the reverse acquisition described below, our corporate name was
Lumalite Holdings, Inc. and we had not generated significant revenues and were
considered a development stage company as defined in Statement of Financial
Accounting Standards No. 7. Pursuant to a Merger Agreement and Plan of
Reorganization dated January 28, 2004 between us and MEMS USA, Inc., a
California corporation ("MEMS-CA"), we acquired all of the outstanding capital
shares of MEMS-CA in exchange for 10 million shares of our common stock. Since
the stockholders of MEMS-CA acquired approximately 75% of our issued and
outstanding shares and the MEMS-CA management team and board of directors became
our management team and board of directors, according to FASB Statement No. 141
- "Business Combinations," this acquisition has been treated as a
recapitalization for accounting purposes, in a manner similar to reverse
acquisition accounting. In accounting for this transaction:
o MEMS-CA is deemed to be the purchaser and surviving company for
accounting purposes. Accordingly, its net assets are included in our
consolidated balance sheet at their historical book values and the
results of operations of MEMS-CA have been presented for all prior
periods; and
o Control of the net assets and business of our company were acquired
effective February 18, 2004. This transaction has been accounted for
as a purchase of our assets and liabilities by MEMS-CA. The
historical cost of the net liabilities assumed was $-0-.
Pursuant to the transaction described above, we changed our name from Lumalite
Holdings, Inc to MEMS USA, Inc.
In October 2004, we acquired all of the capital shares of Bott Equipment
Company, Inc., a Texas corporation, ("Bott") and Gulfgate Equipment, Inc., a
Texas corporation ("Gulfgate"), in exchange for our issuance of 1,309,677 shares
of common stock and our payment of $50,000. Bott Equipment and Gulfgate
Equipment were owned by the same shareholder group and were engaged in the
businesses of providing systems and components to the energy sector. We agreed
that the sellers of Bott and Gulfgate shall have the right to put up to 752,688
common shares back to us during the ten (10) business days commencing on October
26, 2005. Under the terms of the put, the sellers may require that we buy from
them up to 752,688 shares at a purchase price of $1.86 per share. Should the
sellers exercise their put, we will have sixty (60) days from the date of
exercise to deliver the purchase price. Our performance obligations under the
put are secured by second deeds of trust with vendors' liens on certain parcels
of our real estate. Under the terms of the stock purchase agreement with the
sellers, we have made certain covenants in favor of the sellers and secured our
satisfaction of those covenants with our promise to issue up to 618,295
additional shares of our common stock to the sellers in the event we fail to
satisfy those covenants.
-1-
Between February and June 2004, we conducted a private placement of units
consisting of common shares and warrants. Each unit consisted of one share of
common stock and one warrant to purchase an additional share of common stock.
The unit purchase price was seventy percent (70%) of the last sale price of our
common stock, as quoted on the OTC Bulletin Board, on the day we received the
subscription agreement from the investor. The warrant entitles the holder to
purchase one share of our common stock at an exercise price of 150% of the unit
purchase price for a period ending January 27, 2005. In the private placement,
we sold a total of 1,335,781 units to 64 accredited investors for the gross
proceeds of $1,882,880. We applied the proceeds from the sale of the units
towards working capital. As of the date of this report, 210,294 unit warrants
have been exercised, pursuant to which we have issued 210,294 shares of our
common stock in return for the payment of an aggregate of $263,133.
Business of the Issuer
Our business and operations have changed substantially since our last annual
report. On February 18, 2004, the Company acquired all of the outstanding shares
of MEMS USA, Inc., a California corporation ("MEMS CA"). In May 2004, the
Company acquired from PTI Technologies certain technologies relating to
Intelligent Filtration Systems ("IFS"). These systems are used in refineries to
filter chemicals used to process oil and chemicals. IFS systems are also
utilized in nuclear power plants. In October 2004, 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"). We believe that these strategic
acquisitions and alliances will allow us to grow our businesses.
MEMS CA was incorporated in November 2000. MEMS CA is an engineering and design
firm. MEMS CA has been engaged in the development and sale of instrumentation,
blending skids and Intelligent Filtration Systems. 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. The Company has filed a provisional patent
application respecting this device and anticipates filing one or more utility
patents respecting this device in the near future. MEMS CA is presently
developing a multi-variant pressure, temperature and flow meter use in
industrial applications.
-2-
During 2004, MEMS CA's engineers also developed blending skid technology. One
skid we produced could mix three organic fluids, in differing percentages with
extreme accuracy. One of the Company's long term goals is to be able to utilize
its blending skid technology to mix ethanol with motor gasoline. When properly
mixed, ethanol and gasoline provide a higher octane, cleaner burning fuel for
automobiles.
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 oil or
water streams. Unlike a typical canister 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 decanter. 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.
Presently, MEMS CA's 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 create 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 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.
-3-
Can Am was created to manufacture, own and operate ethanol production
facilities. The joint venture will utilize a synthetic biomass conversion
process to convert waste materials into ethanol. We are aware of several
commercially available conversion processes which we believe will meet our
requirements and are presently evaluating the processes in relation to their
required capital investment, operating costs, conversion yield and product
quality as a prerequisite to licensing or acquiring the process technology. It
is anticipated that the ethanol manufactured by the joint venture 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 intend to develop several
ethanol plants in Canada that will use a synthetic biomass conversion process,
subject to receipt of required funding. We estimate that each ethanol plant will
require approximately $150 million in capital. MEMS USA's engineering group,
headquartered in Westlake Village, CA, will 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.
We are presently in the process of integrating 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 Canadian joint venture.
ITEM 1 A. 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 within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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.
-4-
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 the
following:
WE ARE AN EMERGING GROWTH COMPANY WITH LIMITED OPERATING HISTORY, ACCORDINGLY
THERE IS LIMITED HISTORICAL INFORMATION AVAILABLE UPON WHICH YOU CAN JUDGE THE
MERITS OF AN INVESTMENT IN OUR COMPANY. We commenced operations as a new
business engaged in designing and selling micro electro mechanical systems
(MEMS) for major scientific and engineering companies in February 2004. To date,
we have generated only $83,825 in revenue from our MEMS CA operations. While we
intend to remain involved in the MEMS industry, our board of directors recently
approved a redirection of our focus towards designing, building and operating
ethanol production facilities. We have not commenced meaningful activity in the
area of ethanol production and only one member of our management team has any
meaningful prior experience in the ethanol industry. In October 2004 we acquired
Bott Equipment Company, Inc. ("Bott") and Gulfgate Equipment, Inc.,
("Gulfgate"). These companies were and are engaged in the businesses of
providing systems and equipment to various industries, including, but not
limited to, petrochemical plants, refineries, pulp and paper mills, steel mills,
and electrical utilities. Although Bott and Gulfgate are operating companies and
together generated a net loss of $85,974 on $7,504,409 of revenue for the 12
months ended September 30, 2004, we only recently acquired control of Bott and
Gulfgate, and have limited experience in running the two companies.
WE HAVE GENERATED NET LOSSES SINCE INCEPTION, WHICH MAY CONTINUE FOR THE
FORESEEABLE FUTURE AS WE TRY TO GROW OUR BUSINESS, WHICH MEANS THAT YOU MAY BE
UNABLE TO REALIZE A RETURN ON YOUR INVESTMENT FOR A LONG PERIOD OF TIME, IF
EVER. Our present business operations commenced in February 2004. From inception
through September 30, 2004, we generated revenues of $83,825 and incurred a
cumulative net loss of $3,120,655. We expect to continue incurring operating
losses until we are able to derive meaningful revenues from our proposed
business relating to ethanol production, energy generation and supply or MEMS.
WE HAVE LIMITED AVAILABLE WORKING CAPITAL AND REQUIRE SIGNIFICANT ADDITIONAL
CAPITAL IN ORDER TO SUSTAIN OUR OPERATIONS, AND IF WE CANNOT OBTAIN ADDITIONAL
FINANCING WE MIGHT CEASE TO CONTINUE. As of September 30, 2004, we had total
current assets of $148,600 and a working capital deficit of $211,800. We believe
that we require a minimum of $1,800,000 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. However, as of the date of this report, we have no commitments for
the sale of our securities nor can there be any 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.
-5-
OUR INDEPENDENT AUDITORS' REPORT RAISES SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN. Our independent auditors have prepared their report
on our 2004 financial statements assuming that we will continue as a going
concern. Their report has an explanatory paragraph stating that our recurring
losses from operations since inception, limited operating revenue and limited
capital resources raise substantial doubt about our ability to continue as a
going concern.
BECAUSE WE HAVE FEW PROPRIETARY RIGHTS, OTHERS CAN PROVIDE PRODUCTS AND SERVICES
SUBSTANTIALLY EQUIVALENT TO ours. We hold a provisional patent application
relating to our MEMS operations, however we hold no patents or patents
applications relating to our energy generation and supply business or our
proposed ethanol production business. We believe that most of the technology
used in the design and building of ethanol production facilities and in the area
of the energy generation and supply business is generally known and available to
others. Consequently, others will be able to compete with us in these areas. We
rely on a combination of confidentiality agreements and trade secret law to
protect our confidential information. In addition, we restrict access to
confidential information on a "need to know" basis. However, there can be no
assurance that we will be able to maintain the confidentiality of our
proprietary information. If our proprietary rights are violated, or if a third
party claims that we violate their trademark or other proprietary rights, we may
be required to engage in litigation. Proprietary rights litigation tends to be
costly and time consuming. Bringing or defending claims related to our
proprietary rights may require us to redirect our human and monetary resources
to address those claims.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY OR COMPETITIVE PRESSURES FACED BY US
MAY MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS
OF OPERATIONS. We expect to face significant competition in our ethanol
production, energy generation and supply and MEMS operations. Virtually all of
our competitors have greater marketing and financial resources than us and,
accordingly, there can be no assurance that we will be able to compete
effectively or that competitive pressures faced by us will not materially
adversely affect our business, financial condition, and results of operations.
WE ARE DEPENDENT UPON OUR KEY PERSONNEL. Our performance is substantially
dependent on the continued services and on the performance of our senior
management and other key personnel. We plan to obtain "key person" life
insurance for our key personnel, however, at this time, no such policies are in
effect. Our performance will also depend upon our ability to retain and motivate
other officers and key employees. The loss of the services of any of our
executive officers or other key employees could have a material adverse effect
on our business, prospects, financial condition and results of operations. Our
future success also depends on our ability to identify, attract, hire, train,
retain and motivate other highly skilled technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that we
will be able to successfully attract, assimilate or retain sufficiently
qualified personnel. The failure to retain and attract the necessary technical,
and managerial personnel could have a material adverse effect on our business,
prospects, financial condition and results of operations
-6-
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices are located in Westlake Village, California and consist of
approximately 9,100 square feet. The lease has an initial term of five years
ending on December 31, 2008, subject to one five year renewal option.
We also maintain two separate facilities in Houston, Texas from which we conduct
the operations of our subsidiaries, Bott and Gulfgate. We own both facilities in
fee simple. The Bott facility consists of approximately 91,000 square feet of
real estate and 61,000 square feet of buildings. The Gulfgate facility consists
of approximately 67,500 square feet of real estate and 34,000 square feet of
buildings.
ITEM 3. LEGAL PROCEEDINGS.
Neither our company nor our property are subject to any pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to our security holders during the fourth
quarter of the fiscal year ended September 30, 2004.
-7-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Market Information
Our common stock is listed on the OTC Bulletin Board under the symbol "MEMS."
Set forth below are high and low closing prices for our common stock for each
quarter during the two fiscal years ended September 30, 2004. We consider our
common stock to be thinly traded and that any reported bid or sale prices may
not be a true market-based valuation of the common stock. In reviewing the table
below, please note that in December 2003 we conducted a one for 200 reverse
split of our common stock and in February 2004 consummated our acquisition of
MEMS-California.
QUARTER ENDED HIGH LOW
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December 31, 2002 $0.11 $0.05
March 31, 2003 $0.11 $0.02
June 30, 2003 $0.03 $0.01
September 30, 2003 $0.03 $0.01
December 31, 2003 $1.75 $0.01
March 31, 2004 $2.75 $1.45
June 30, 2004 $2.50 $1.09
September 30, 2004 $2.29 $1.74
Holders
As of January 11, 2005, there were 3,366 record holders of our common stock.
Dividends
We have not declared or paid any cash dividends on our common stock since our
inception and do not contemplate paying dividends in the foreseeable future. It
is anticipated that earnings, if any, will be retained for the operation of our
business.
Sales of Unregistered Securities
During the fiscal year ended September 30, 2004, we sold unregistered shares of
our securities in the following transactions:
In December 2003, we issued 3,230,000 shares of our common stock to six (6)
parties, upon conversion of indebtedness in the aggregate principal amount of
$358,530. The shares were issued pursuant to Section 4(2) of the Securities Act
of 1933 (the "Securities Act") and Rule 506 there under. There was no
underwriter involved in this issuance.
-8-
In February 2004, we issued an aggregate of 10,000,000 shares of our common
stock to 65 parties in consideration of our acquisition of MEMS CA. The shares
were issued pursuant to Section 4(2) of the Securities Act and Rule 506 there
under. There was no underwriter involved in this issuance.
Between January and June 2004, we conducted a private placement of units
consisting of common shares and warrants pursuant to Section 4(2) of the
Securities Act and Rule 506 there under. Each unit consisted of one share of
common stock and one warrant to purchase an additional share of common stock.
The unit purchase price was seventy percent (70%) of the last sale price of our
common stock, as quoted on the OTC Bulletin Board, on the day we received the
subscription agreement from the investor. The warrant entitles the holder to
purchase one share of our common stock at an exercise price of 150% of the unit
purchase price for a period ending January 27, 2005. In the private placement,
we sold a total of 1,335,781 units to 64 accredited investors for the gross
proceeds of $1,882,880. As of the date of this report, 210,294 unit warrants
have been exercised, pursuant to which we have issued 210,294 shares of our
common stock in return for the payment of an aggregate of $263,133. Westcap
Securities, Inc. acted as placement agent for the unit offering. We paid Westcap
Securities sales commissions of ten percent (10%) of the gross proceeds, plus a
non-accountable expense allowance and due diligence fees of three percent (3%)
and two percent (2%), respectively, of the gross proceeds. We also granted
Westcap Securities 106,465 common shares, equal to ten percent (10%) of the
common shares made part off the units sold in the offering.
-9-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
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
design, development and sale of micro electro mechanical systems (MEMS) for
major scientific and engineering companies.
To date, our historical revenues have been derived from our MEMS operations.
However, in October 2004, we acquired all of the capital shares of Bott
Equipment Company, Inc., a Texas corporation ("Bott"), and Gulfgate Equipment,
Inc., a Texas Corporation ("Gulfgate"), in exchange for our issuance of
1,309,677 shares of common stock and our payment of $50,000. Bott and Gulfgate
were owned by the same shareholder group and were engaged in the businesses of
providing systems and components to the energy sector. Bott and Gulfgate are
operating companies and together generated a net loss of $85,974 on $7,504,409
(unaudited) of revenue for the 12 months ended September 30, 2004. We have not
commenced revenue producing operations in connection with our ethanol production
operations.
CORPORATE REORGANIZATION
Prior to the reverse acquisition described below, our corporate name was
Lumalite Holdings, Inc. and we had not generated significant revenues and were
considered a development stage company as defined in Statement of Financial
Accounting Standards No. 7. Pursuant to a Merger Agreement and Plan of
Reorganization dated January 28, 2004 between us and MEMS USA, Inc., a
California corporation ("MEMS-CA"), we acquired all of the outstanding capital
shares of MEMS-CA in exchange for 10 million shares of our common stock. Since
the stockholders of MEMS-CA acquired approximately 75% of our issued and
outstanding shares and the MEMS-CA management team and board of directors became
our management team and board of directors, according to FASB Statement No. 141
- "Business Combinations," this acquisition has been treated as a
recapitalization for accounting purposes, in a manner similar to reverse
acquisition accounting. In accounting for this transaction:
o MEMS CA is deemed to be the purchaser and surviving company for
accounting purposes. Accordingly, its net assets are included in our
consolidated balance sheet at their historical book values and the
results of operations of MEMS CA have been presented for all prior
periods; and
o Control of the net assets and business of our company were acquired
effective February 18, 2004. This transaction has been accounted for
as a purchase of our assets and liabilities by MEMS-CA. The
historical cost of the net liabilities assumed was $-0-.
As a result of the transaction described above, we changed our name from
Lumalite Holdings, Inc to MEMS USA, Inc.
-10-
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements, included elsewhere
in this Annual Report on Form 10-KSB, have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation as a going concern. From inception through September
30, 2004, we generated revenues of $83,825 and incurred a cumulative net loss of
$3,120,655. We expect to continue incurring operating losses until we are able
to derive meaningful revenues from our proposed business relating to ethanol
production, energy generation and supply or MEMS. These conditions raise
substantial doubt as to our ability to continue as a going concern. The
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
PLAN OF OPERATIONS
Our plan of operations over the next fiscal year is to design and begin
procurement of the major components of a synthetic ethanol plant. Can Am Ethanol
One, Inc. ("Can Am") is actively scouting sites in Canada. Once a site is found,
Can Am intends to raise capital to procure the land through the sale of its
equity securities. As of the date of this report, Can Am has no firm commitments
for the purchase of its securities; however, a United States broker-dealer has
entered into a "best-efforts" agreement with Can Am to attempt to fund the
purchase of the property. Of course, there is no guarantee that Can Am will be
successful in its attempts to raise the money or procure the property.
If Can Am is able to locate and procure a suitable site, the Company, and its
engineering staff, will begin to design the ethanol production facility. It is
presently anticipated that approximately $150,000,000 in funding will be
required to complete construction of the plant. As of the date of this report,
Can Am has no firm commitments from any entity to raise this money, and there is
no guarantee that Can Am will be successful in its attempts to raise the money
or finance the project.
If Can Am obtains funding commitments to provide all of the capital required to
build the ethanol plant, the Company, through its California affiliate, is
expected to be charged with the primary design and construction of the project.
MEMS CA anticipates that it will have to hire between five and seven experienced
engineers to assist with the design and engineering of the ethanol plant. Even
with the extra manpower, the Company may subcontract some or all of its design
and construction responsibilities to third parties, including, but not limited
to, the Company's Texas subsidiaries. In the event that the Company subcontracts
some or all of its design and construction responsibilities to third persons, it
is anticipated that the Company would provide oversight of these third party
entities.
It is anticipated that the design and construction of an ethanol plant will take
at least 30 months to complete. Since the Company lacks substantial experience
in the area of designing and construction of synthetic ethanol plants, there are
no guarantees when, or if, construction of the plant would be completed.
-11-
If the plant is completed, it is anticipated that it will produce approximately
60,000,000 gallons of ethanol per annum utilizing bio-mass. Can Am is presently
negotiating bio-mass procurement contracts in an attempt to assure future access
to raw materials. As of the date of this report, Can Am has not entered into any
bio-mass procurement contracts. If Can Am is unable to assure future access to
raw materials, it would be unable to produce ethanol.
The Company anticipates that the majority of its efforts respecting the ethanol
plant within the next twelve months will involve only design and procurement
activities. In light of this fact, the Company also intends to utilize the next
twelve months to develop new or improve existing products, integrate its
subsidiaries and expand their sales.
MEMS CA is presently working toward optimizing its acoustic viscometer. It is
anticipated that additional patent applications will be filed respecting that
device within the next fiscal year. MEMS CA has also transferred the Company's
Intelligent Filtration System ("IFS") and blending skid technologies to the
Company's Texas subsidiaries so that the Companies may jointly manufacture and
market the technologies. As of the date of this report, the Company has no firm
commitments for the purchase of its IFS systems.
LIQUIDITY AND CASH RESOURCES
As of September 30, 2004, we had total current assets of $148,600 and a working
capital deficit of $211,800. We believe that we require a minimum of $1,800,000
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. However, as of the date of this report, we have no
commitments for the sale of our securities nor can there be any 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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
-12-
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.............................................F-1
Consolidated Balance Sheet at September 30, 2004...............................................F-2
Consolidated Statements of Operations for the years ended September 30, 2004 and 2003
and cumulative from inception (November 17, 2000) to September 30, 2004......................F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
September 30, 2004 and 2003 and cumulative from inception (November 17, 2000)
to September 30, 2004........................................................................F-4
Consolidated Statements of Cash Flows for the years ended September 30, 2004 and 2003
and cumulative from inception (November 17, 2000) to September 30, 2004......................F-6
Notes to Consolidated Financial Statements.....................................................F-7
-13-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
MEMS USA, Inc.
Westlake Village, California
We have audited the accompanying consolidated balance sheets of MEMS USA, Inc.
and Subsidiary as of September 30, 2004 and 2003 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended September 30, 2004 and 2003, and from November 17, 2000 (inception) to
September 30, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MEMS USA, Inc. as of September
30, 2004 and 2003 and the results of their operations and cash flows for the
years ended September 30, 2004 and 2003, and from November 17, 2000 (inception)
to September 30, 2004, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a net working capital deficiency and has not yet established a stable source
of revenues, that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
January 7, 2005
-14-
MEMS USA
(A Development Stage Company)
Balance Sheet
September 30, 2004 and 2003
ASSETS Sept.30, 2004 Sept.30, 2003
Current Assets:
Cash and cash equivalents $ 26,439 $ 23,613
Contract in progess 35,000 70,000
Prepaid expenses 87,196 0
----------- -----------
Total current assets 148,635 93,613
Property and equipment, net 332,496 153,896
Construction in progress 289,740 0
Deposits 54,826 49,140
----------- -----------
Total assets $ 825,697 $ 296,649
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses, including
delinquent payroll taxes of $117,495 $ 360,399 $ 313,971
Accrued salaries to be paid by the issuance of common stock 0 228,250
Dividend payable 0 6,100
Deferred revenue 0 28,333
----------- -----------
360,399 576,654
----------- -----------
Convertible loan payable 150,000 0
----------- -----------
Total Liabilities 510,399 576,654
----------- -----------
Stockholders' equity (deficit):
Convertible preferred stock, series A, $0.001 par value, 1,200,000 shares
authorized, 86,000 shares issued and outstanding as of
September 30, 2003, all shares converted to common stock as
of September 30, 2004 0 86
Common stock, $0.001 par value; 100,000,000 shares authorized,
15,091,676 shares and 8,589,533 shares issued and
outstanding in 2004 and 2003 respectively 15,092 8,590
Stock subscriptions receivable (2,050) (50,300)
Additional paid in capital 3,422,911 612,824
Deficit accumulated during development stage (3,120,655) (851,205)
----------- -----------
Total stockholders' equity (deficit) 315,298 (280,005)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 825,697 $ 296,649
=========== ===========
-15-
MEMS USA
(A Development Stage Company)
STATEMENT OF OPERATIONS
From November 17,
For the year ended 2000 (inception)
Sept. 30, 2004 Sept. 30, 2003 To Sept. 30, 2004
------------ ------------ ------------
Revenues $ 83,825 $ 0 $ 83,825
------------ ------------ ------------
Costs
Contract costs 498,435 18,057 516,492
General & Administrative 1,497,750 614,021 2,330,898
Merger Related Expense 357,090 0 357,090
------------ ------------ ------------
2,353,275 632,078 3,204,480
------------ ------------ ------------
Net (Loss) ($ 2,269,450) ($ 632,078) ($ 3,120,655)
============ ============ ============
Net loss per share, basic and diluted ($ 0.19) ($ 0.08)
============ ============
Weighted average number of shares
outstanding, basic and diluted 12,145,448 8,178,472
============ ============
-16-
MEMS USA, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM NOVEMBER 17, 2000 (INCEPTION)
TO SEPTEMBER 30, 2004
Additional
Common Stock Preferred Stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Balance at November 17, 2000 $ $ $
Issuance of common stock;
founders shares - November 2000 2,140,704 2,141 -- -- (891)
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2001 2,140,704 2,141 -- -- (891)
Issuance of common stock;
founders shares - July 2002 5,565,831 5,566 (2,316)
Issuance of common stock: for
services - July 2002 301,411 301 175,699
Net loss for the year ended
September 30, 2002 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2002 8,007,946 8,008 172,492
Issuance of common stock: for
cash - October 2002 8,563 9 4,991
Issuance of common stock: for
cash - January 2003 44,527 45 25,955
Issuance of common stock: for
cash - February 2003 97,616 98 56,902
Issuance of common stock: for
cash - March 2003 17,126 17 9,983
Issuance of common stock: for
cash - April 2003 8,563 9 4,991
Issuance of common stock: for
cash - May 2003 25,688 26 14,974
Deficit
during Total
Subscriptions development stockholders'
receivable stage deficit
----------- ----------- -----------
Balance at November 17, 2000 $ $ $
Issuance of common stock;
founders shares - November 2000 -- -- 1,250
Net loss -- -- --
----------- ----------- -----------
Balance at September 30, 2001 -- -- 1,250
Issuance of common stock;
founders shares - July 2002 (2,050) 1,200
Issuance of common stock: for
services - July 2002 176,000
Net loss for the year ended
September 30, 2002 -- (219,127) (219,127)
----------- ----------- -----------
Balance at September 30, 2002 (2,050) (219,127) (40,677)
Issuance of common stock: for
cash - October 2002 5,000
Issuance of common stock: for
cash - January 2003 (10,000) 16,000
Issuance of common stock: for
cash - February 2003 (2,000) 55,000
Issuance of common stock: for
cash - March 2003 10,000
Issuance of common stock: for
cash - April 2003 (5,000) (0)
Issuance of common stock: for
cash - May 2003 15,000
-17-
MEMS USA, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM NOVEMBER 17, 2000 (INCEPTION)
TO SEPTEMBER 30, 2004
Additional
Common Stock Preferred Stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Issuance of common stock: for
cash - June 2003 34,251 34 19,966
Issuance of common stock: for
service - August 2003 3,425 3 1,997
Issuance of common stock: for
cash - September 2003 325,387 325 189,675
Issuance of common stock: for
service - September 2003 16,441 16 9,584
Issuance of Series "A" preferred
stock for cash - June 2003 10,000 10 12,490
Issuance of Series "A" preferred
stock for cash - July 2003 12,000 12 14,988
Issuance of Series "A" preferred
stock for cash - August 2003 34,000 34 42,466
Issuance of Series "A" preferred
stock for cash - September 2003 30,000 30 37,470
Preferred stock dividends (6,100)
Net loss for the year ended
September 30, 2003 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2003 8,589,533 8,590 86,000 86 612,824
Cash received for stock subscription
October 2003
Issuance of common stock upon
exercise of option - October 2003 5,138 5 2,995
Deficit
during Total
Subscriptions development stockholders'
receivable stage deficit
----------- ----------- -----------
Issuance of common stock: for
cash - June 2003 20,000
Issuance of common stock: for
service - August 2003 2,000
Issuance of common stock: for
cash - September 2003 190,000
Issuance of common stock: for
service - September 2003 9,600
Issuance of Series "A" preferred
stock for cash - June 2003 (6,250) 6,250
Issuance of Series "A" preferred
stock for cash - July 2003 (12,500) 2,500
Issuance of Series "A" preferred
stock for cash - August 2003 42,500
Issuance of Series "A" preferred
stock for cash - September 2003 37,470 (12,500) 25,000
Preferred stock dividends (6,100)
Net loss for the year ended
September 30, 2003 -- (632,078) (632,078)
----------- ----------- -----------
Balance at September 30, 2003 (50,300) (851,205) (280,005)
Cash received for stock subscription
October 2003 48,250 48,250
Issuance of common stock upon
exercise of option - October 2003 3,000
-18-
MEMS USA, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM NOVEMBER 17, 2000 (INCEPTION)
TO SEPTEMBER 30, 2004
Additional
Common Stock Preferred Stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Issuance of Series "A" preferred
stock for salaries - October 2003 182,600 183 228,067
Issuance of Series "A" preferred
stock for cash - October 2003 40,000 40 49,960
Issuance of common stock: for
services - October 2003 600,014 600 349,760
Issuance of Series "A" preferred
stock for cash - November 2003 29,000 29 36,221
Issuance of common stock: for cash
October 2003 and November 2003 137,005 137 79,863
Issuance of common stock: for
cash - November 2003 5,138 5 2,995
stock for cash - December 2003 40,000 40 37,460
Issuance of Series "A" preferred
stock for cash - December 2003 10,000 10 12,490
Cash received for stock subscription-
January 2004
Issuance of common stock in connection
with Lumalite reverse merger 3,341,456 3,341 (3,341)
Series "A" preferred stock conversion (387,600) (388) (276)
issuance of common stock 663,753 664
Issuance of common stock: for
services - July 2004 47,500 48 122,028
Issuance of common stock for cash Private
Investment Public Entity - July 2004 1,441,846 1,442 1,531,494
Issuance of common stock: for
Warrants Exercised 210,294 210 262,923
Deficit
during Total
Subscriptions development stockholders'
receivable stage deficit
----------- ----------- -----------
Issuance of Series "A" preferred
stock for salaries - October 2003 228,250
Issuance of Series "A" preferred
stock for cash - October 2003 50,000
Issuance of common stock: for
services - October 2003 350,360
Issuance of Series "A" preferred
stock for cash - November 2003 36,250
Issuance of common stock: for cash
October 2003 and November 2003 80,000
Issuance of common stock: for
cash - November 2003 3,000
stock for cash - December 2003 37,500
Issuance of Series "A" preferred
stock for cash - December 2003 (12,500) 0
Cash received for stock subscription-
January 2004 12,500 12,500
Issuance of common stock in connection
with Lumalite reverse merger 0
Series "A" preferred stock conversion (664)
issuance of common stock 664
Issuance of common stock: for
services - July 2004 122,075
Issuance of common stock for cash Private
Investment Public Entity - July 2004 1,532,936
Issuance of common stock: for
Warrants Exercised 263,132
-19-
MEMS USA, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM NOVEMBER 17, 2000 (INCEPTION)
TO SEPTEMBER 30, 2004
Additional
Common Stock Preferred Stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Issuance of common stock: for
services - Redwood consultants 50,000 50 97,450
Net loss for the year ended
September 30, 2004 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004 15,091,676 15,092 0 (0) 3,422,911
=========== =========== =========== =========== ===========
Deficit
during Total
Subscriptions development stockholders'
receivable stage deficit
----------- ----------- -----------
Issuance of common stock: for
services - Redwood consultants 97,500
Net loss for the year ended
September 30, 2004 -- (2,269,450) (2,269,450)
----------- ----------- -----------
Balance at September 30, 2004 (2,050) (3,120,655) 315,298
=========== =========== ===========
-20-
MEMS USA, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
From November 17,
For the year ended 2000 (inception)
Sept. 30, 2004 Sept. 30, 2003 to Sept. 30, 2004
-------------- -------------- -----------------
Cash flows provided by (used for)
operating activities:
Net loss (2,269,450) (632,078) (3,120,655)
---------- ---------- ----------
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation 33,023 13,186 46,923
Common stock issued for services 798,290 11,600 985,890
(Increase) decrease in assets:
Contract in progress 35,000 (70,000) (35,000)
Prepaid expenses (87,196) 0 (87,196)
Deposits (5,686) (49,140) (54,826)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 40,329 271,238 355,280
Accrued salaries to be paid by issuance of
common stock (228,250) 228,250 0
Deferred revenue (28,333) 0 (28,333)
---------- ---------- ----------
Total adjustments 557,177 405,134 1,182,738
---------- ---------- ----------
Net cash provided by (used for) operating (1,712,273) (226,944) (1,937,917)
activities
---------- ---------- ----------
Cash flows used for investing activities -
Purchase of property and equipment (211,623) (147,796) (359,419)
Construction in progress (289,740) 0 (289,740)
Total cash used for investing activities (501,363) (147,796) (649,159)
---------- ---------- ----------
Cash flows provided by financing activities:
Convertible loan 150,000 0 150,000
Common stock issued for cash 2,066,462 307,189 2,374,851
Series 'A' preferred stock issued for cash 0 88,664 88,664
---------- ---------- ----------
Net cash provided by financing activities 2,216,462 395,853 2,613,515
---------- ---------- ----------
Net increase in cash and cash equivalents 2,826 21,113 26,439
Cash and cash equivalents, beginning of period 23,613 2,500 0
---------- ---------- ----------
Cash and cash equivalents, end of period 26,439 23,613 26,439
========== ========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid 800 0 800
========== ========== ==========
Interest paid 0 0 0
========== ========== ==========
Common stock issued for services 798,290 11,600 985,890
========== ========== ==========
Dividends accrued 0 6,100 6,100
========== ========== ==========
Stock issued in exchange for subscriptions receivable 140,000 48,250 190,300
========== ========== ==========
-21-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
MEMS USA, Inc. (the "Company") is currently a development stage company
under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 7 and changed its domicile to the State of Nevada on April
12, 2002. The business and operations have changed substantially since the
last annual report. On February 18, 2004, the Company acquired all of the
outstanding shares of MEMS USA, Inc., a California Corporation ("MEMS CA")
incorporated in November 2000. In May 2004, the Company acquired from PTI
Technologies certain technologies relating to Intelligent Filtration
Systems ("IFS"). These systems are used in refineries to filter chemicals
used to process oil and chemicals. IFS systems are also utilized in
nuclear power plants. On October 1, 2004, 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. Management believes that these strategic
acquisitions and alliances will allow the Company to grow the businesses.
MEMS CA is an engineering and design firm engaged in the development and
sale of instrumentation, blending skids and Intelligent Filtration
Systems. 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. The Company has filed a provisional patent application
respecting this device and anticipates filing one or more utility patents
respecting this device in the near future. MEMS CA is presently developing
a multi-variant pressure, temperature and flow meter to be used in
industrial applications.
During 2004, MEMS CA's engineers also developed blending skid technology.
One skid can mix three organic fluids, in differing percentages with
extreme accuracy. One of the Company's long term goals is to be able to
utilize its blending skid technology to mix ethanol with motor gasoline.
When properly mixed, ethanol and gasoline provide a higher octane, cleaner
burning fuel for automobiles.
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
oil or water streams. Unlike a typical canister 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
decanter. 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 to dispose of the
-22-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
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.
Presently, MEMS CA's 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 create 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 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.
Can Am was created to manufacture, own and operate ethanol production
facilities. The joint venture will utilize a synthetic biomass conversion
process to convert waste materials into ethanol. The Company is aware of
several commercially available conversion processes which management
believes will meet the requirements and are presently evaluating the
processes with relation to their required capital investment, operating
costs, conversion yield and product quality as a prerequisite to licensing
or acquiring the process technology. It is anticipated that the ethanol
manufactured by the joint venture 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. The Company intend to develop
several ethanol plants in Canada that will use a synthetic biomass
conversion process, subject to receipt of required funding. The Company
estimates that each ethanol plant will require approximately $150 million
in capital.
-23-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
group, headquartered in Westlake Village, California, will 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.
The Company is presently in the process of integrating the subsidiaries,
which management believes will promote efficiency and lower operating
costs. While each of these subsidiaries will remain a separate operating
entity, management intends 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. The Company has already transferred the IFS and
other technologies to Texas in order to establish lines of communication
and a working relationship. The Company also anticipates that once the
necessary funding is obtained, the symbiotic relationship between its
subsidiaries will allow it to engineer, design, and partially construct
ethanol plants for the Canadian joint venture.
BASIS OF PRESENTATION AND GOING CONCERN CONSIDERATION:
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has no substantial established source of revenue.
This matter raises substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might be necessary, should the
Company be unable to continue as a going concern.
We have limited available working capital and require significant
additional capital in order to sustain our operations. As of September 30,
2004, we had total current assets of $148,600 and a working capital
deficit of $211,800. We believe that we require a minimum of $1,800,000 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. However, as of the date
of this report, we have no commitments for the sale of our securities nor
can there be any 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.
-24-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company measures its financial assets and liabilities in accordance
with accounting principles generally accepted in the United States of
America. For certain of the Company's financial instruments, including
accounts receivable (trade and related party), notes receivable and
accounts payable (trade and related party), and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
maintains cash with various major financial institutions and performs
evaluations of the relative credit standing of these financial
institutions in order to limit the amount of credit exposure with any
institution. The Company extends credit to customers based upon an
evaluation of the customer's financial condition and credit history and
generally requires no collateral. The Company's customers are principally
located throughout North America, and their ability to pay amounts due to
the Company may be dependent on the prevailing economic conditions of
their geographic region. Management performs regular evaluations
concerning the ability of its customers to satisfy their obligations and
records a provision for doubtful accounts based on these evaluations. The
Company's credit losses for the periods presented are insignificant and
have not significantly exceeded management's estimates.
CASH AND CASH EQUIVALENTS:
All highly liquid investments maturing in three months or less when
purchased are considered as cash equivalents.
CONTRACTS IN PROCESS:
Costs incurred on contracts in process consists of development costs,
engineering, materials and labor related to the development of prototype
products for specific contracts with customers net of reserves for any
anticipated contract losses. At September 30, 2004 such costs related to
one contract for which no reserves have been provided.
-25-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation of equipment is
provided for by the straight-line method over their estimated useful
lives. Construction-in-progress includes a commitment to purchase a
general aviation aircraft. Total cost of this four seat single engine
aircraft is estimated at $400,000 of which $289,740 has been incurred. It
is estimated that the aircraft will be put into service in fourth quarter
2005. The aircraft has been funded with operating capital. This aircraft
will provide MEMS USA management with a cost effective and efficient means
of supporting our subsidiaries in Houston, the joint venture in Canada as
well as various other on-going projects.
REVENUE RECOGNITION:
The Company plans to follow the percentage of completion method of
accounting for future contracts. However, because the Company has not yet
established a history on which determinable estimates of revenues and
costs can be made, the completed contract method of accounting is applied
for the one contract outstanding as of September 30, 2004.
SHIPPING AND HANDLING COSTS:
The Company expenses shipping and handling costs as incurred and includes
the expense in selling, general and administrative expenses.
ADVERTISING COSTS:
The Company will expense the cost of advertising as incurred. There was no
advertising charged to operations for the period ended September 30, 2004.
INCOME TAXES:
Provisions for federal and state income taxes are calculated on reported
financial statement income based on the current tax law. Such provisions
differ from the amounts currently payable because certain items of income
and expense, known as temporary differences, are recognized in different
tax periods for financial reporting purposes than for income tax purposes.
Deferred income taxes are the result of the recognition of tax benefits
that management expects to realize from the utilization of net operating
loss carry-forwards. The amounts recorded are net of valuation allowances
and represent management's estimate of the amount that is more likely than
not to be realized.
-26-
1. COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COMPREHENSIVE LOSS:
As comprehensive loss consists only of net losses, a Schedule of
Comprehensive Loss has not been included in these financial statements.
Basic loss per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares
outstanding. Diluted loss per share is computed similar to basic loss per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were
dilutive. There were 4,882,819 shares and 4,136,263 shares of common stock
equivalents for the year ended September 30, 2004 and 2003, respectively,
which were excluded because of their antidilutive effect.
RECENT ACCOUNTING PRONOUNCEMENTS:
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" which provides guidance on the accounting for the
acquisition of a financial institution. SFAS No. 147 removes acquisitions
of financial institutions from the scope of both FASB Statement No. 72 and
FASB Interpretation No. 9 and requires that those transactions be account
for in accordance with FASB Statements No. 141 and 142. Additionally, SFAS
No. 147 amends FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", to include in its scope long-term
customer- relationship intangible assets of financial institutions. The
adoption of this pronouncement did not have a material impact on the
Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". Among other
things, the Interpretation requires guarantors to recognize, at fair
value, their obligations to stand ready to perform under certain
guarantees. FIN 45 is effective for guarantees issued or modified on or
after January 1, 2003. The adoption of this pronouncement did not have a
material impact on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends SFAS No.
123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123,
regardless of which method of accounting is chosen, to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The statement was effective for
fiscal years beginning after December 15, 2002, with earlier application
permitted in certain circumstances. The interim
-27-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15,
2002. The adoption of this statement did have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". FIN 46's consolidation criteria are based on analysis
of risks and reward, not control, and represent a significant and complex
modification of previous accounting principles. FIN 46 represents an
accounting change, not a change in the underlying economics of asset
sales. The adoption of this pronouncement did not have a material impact
on the Company's financial position or results of operations.
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133
on Derivative Instruments and Hedging Activities", effective for contracts
entered into or modified after June 30, 2003, except as stated below and
for hedging relationships designated after June 30, 2003. In addition,
except as stated below, all provisions of this Statement should be applied
prospectively. The provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in
accordance with their respective effective dates. In addition, paragraphs
7(a) and 23(a), which relate to forward purchases or sales of when-issued
securities or other securities that not yet exist, should be applied to
both existing contracts and new contracts entered into after June 30,
2003. The adoption of this pronouncement did not have a material impact on
the Company's financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". The amendments made by Statement 151
clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years beginning after
November 23, 2004. The Company has evaluated the impact of the adoption of
SFAS 151, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time- Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152). This Statement amends FASB Statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time- Sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate
Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate
Projects, to state that the guidance for (a) incidental operations and (b)
costs incurred to sell real estate projects does not apply to real estate
time-sharing transactions. The accounting for those operations and costs
is subject to the guidance in SOP 04-2.
-28-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005 with earlier application encouraged. The
Company has evaluated the impact of the adoption of SFAS 152, and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions." The amendments made by Statement 153 are based on the
principle that exchanges of non-monetary assets should be measured based
on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for non-monetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
non-monetary assets that do not have commercial substance. Previously,
Opinion 29 required that the accounting for an exchange of a productive
asset for a similar productive asset or an equivalent interest in the same
or similar productive asset should be based on the recorded amount of the
asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive
assets. The Board believes that exception required that some non-monetary
exchanges, although commercially substantive, be recorded on a carryover
basis.
By focusing the exception on exchanges that lack commercial substance, the
Board believes this Statement produces financial reporting that more
faithfully represents the economics of the transactions. The Statement is
effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is permitted for
non-monetary asset exchanges occurring in fiscal periods beginning after
the date of issuance. The provisions of this Statement shall be applied
prospectively. The Company has evaluated the impact of the adoption of
SFAS 152, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of
financial statements with more complete and neutral financial information
by requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments
issued. Statement 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance
based awards, share appreciation rights, and employee share purchase
plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting
for share-based payment transactions with employees. However, that
Statement permitted entities the option of continuing to apply the
guidance in APB Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value- based method been used. Public entities
-29-
(1) COMPANY & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
(other than those filing as small business issuers) will be required to
apply Statement 123(R) as of the first interim or annual reporting period
that begins after June 15, 2005. The Company has evaluated the impact of
the adoption of SFAS 123(R), and believes the impact will not be
significant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", APB 25 and related
interpretations in accounting for its employee stock options because the
alternatives fair value accounting provided for under SFAS Statement No.
123, "Accounting for Stock-Based Compensation", ("SFAS 123") requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Options granted to key consultants under the Plan
are accounted for under SFAS 123 as interpreted by FIN 44. Under APB 25,
because the exercise price of the Company's employee stock options equal
or exceed the fair market value of the underlying stock on the date of
grant, no compensation expenses is recognized.
Pro forma information regarding net loss and loss per share, pursuant to
the requirements of SFAS 123, for the years ended September 30, 2004 and
2003, are as follows:
2004 2003
----------- -----------
Net loss, as reported $(2,269,450) $ (632,078)
Deduct: Total stock-based employee compensation
expense determined under the fair value
Black-Scholes method with a 3% volatility and a
6% risk free rate of return assumption (267,893) (424,930)
Pro forma net loss $(2,537,343) $(1,057,008)
----------- -----------
Loss per share:
Basic and diluted - as reported $ (0.19) $ (0.08)
=========== ===========
Basic and diluted - pro forma $ (0.21) $ (0.13)
=========== ===========
(2) PROPERTY AND EQUIPMENT:
A summary at September 30, 2004 and 2003 is as follows:
2004 2003
-------- --------
Furniture and Equipment $ 36,050 $ 71,741
Computer equipment 76,076 45,447
Lab equipment 195,552 27,497
Leasehold improvements 71,741 23,111
-------- --------
379,419 167,796
Less accumulated Depreciation 46,923 13,900
-------- --------
$332,496 $153,896
======== ========
-30-
(2) PROPERTY AND EQUIPMENT, CONTINUED:
Depreciation expense charged to operations totaled $33,023 and $13,186 for
the year ended September 30, 2004 and 2003, respectively.
(3) INCOME TAXES:
There is no provision for income taxes for the periods presented. Net
operating loss carry forwards have been offset in their entirety by a
valuation allowance. The reconciliation of the effective income tax rate
to the Federal statutory rate is as follows:
2004 2003
------ ------
Federal Income Tax Rate 35.0% 35.0%
Current year losses: loss for which no
current benefit is provided (35.0) (35.0)
------ ------
Effective Income Tax Rate 0 % 0%
====== ======
The deferred tax asset results from net operating loss carry forwards of
approximately $3.1 million of which $200,000 expires in 2017, $600,000
expires in 2018 and $2.3 million expires in 2019. The resulting asset of
approximately $1.1 million is completely offset by a valuation allowance
because of uncertainties as to its realization.
(4) CONVERTIBLE LOAN PAYABLE:
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 by May 2005) 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. Because the exercise
price of the warrant significantly exceeded the market value of the stock
on the date of grant, a Black Scholes valuation did not give rise to any
significant value for the warrants.
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.
(5) STOCKHOLDERS' EQUITY:
In November 2000, MEMS CA issued 2,140,706 shares of its $0.001 par value
common stock in consideration for organizational costs incurred by one of
the founding members.
In July 2002, MEMS CA issued 5,565,831 shares of its $0.001 par value
common stock as Founders' shares.
In July 2002, MEMS CA issued 301,411 shares of its $0.001 par value common
stock for cash and services.
In October 2002, MEMS CA issued 8,563 shares of its $0.001 par value
common stock for cash.
In January 2003, MEMS CA issued 44,527 shares of its $0.001 par value
common stock for cash.
In February 2003, MEMS CA issued 97,616 shares of its $0.001 par value
common stock for cash.
-31-
(5) STOCKHOLDERS' EQUITY, CONTINUED:
In March 2003, MEMS CA issued 17,126 shares of its $0.001 par value common
stock for cash.
In April 2003, MEMS CA issued 8,563 shares of its $0.001 par value common
stock for cash.
In May 2003, MEMS CA issued 25,688 shares of its $0.001 par value common
stock for cash.
In June 2003, MEMS CA issued 34,251 shares of its $0.001 par value common
stock for cash.
In June 2003, MEMS CA issued 10,000 shares of its $0.001 Series `A'
Preferred stock for cash.
In July 2003, MEMS CA issued 12,000 shares of its $0.001 Series `A'
Preferred stock for cash.
In August 2003, MEMS CA issued 3,425 shares of its $0.001 par value common
stock for cash.
In August 2003, MEMS CA issued 34,000 shares of its $0.001 Series `A'
Preferred stock for cash.
In September 2003, MEMS CA issued 30,000 shares of its $0.001 Series `A'
Preferred stock for cash.
In September 2003, MEMS CA issued 325,387 shares of its $0.001 par value
common stock for cash.
In September 2003, MEMS CA issued 16,441 shares of its $0.001 par value
common stock in-exchange for services.
In October 2003, MEMS CA issued 5,138 shares of its $0.001 par value
common stock upon exercise of option.
In October 2003, MEMS CA issued 182,600 shares of its $0.001 par value
Series "A" preferred stock in-exchange for services.
In October 2003, MEMS CA issued 40,000 shares of its $0.001 par value
Series "A" preferred stock for cash.
In October 2003, MEMS CA issued 600,014 shares of its $0.001 par value
common stock in-exchange for services.
In November 2003, MEMS CA issued 29,000 shares of its $0.001 par value
Series "A" preferred stock for cash.
In October and November 2003, MEMS CA issued 137,005 shares of its $0.001
par value common stock for cash.
In November 2003, MEMS CA issued 5,138 shares of its $0.001 par value
common stock for cash.
In December 2003, MEMS CA issued 50,000 shares of its $0.001 par value
Series "A" preferred stock for cash.
-32-
(5) STOCKHOLDERS' EQUITY, CONTINUED:
In December 2003, the Company issued 3,230,000 shares of its $0.001 par
value common stock in connection of reverse merger with Lumalite and
forgiveness of debts. In addition 111,456 shares of its $0.001 par value
common stock were issued to its shareholders in reverse stock split of 200
shares of Lumalite to 1 share of MEMS USA.
In February 2004, the Company issued 663,753 shares of its $0.001 par
value common stock in exchange for all outstanding Series "A" MEMS CA
preferred stock (387,600 shares) in a reverse merger and reorganization.
The preferred shares receive a dividend of 8% of the Liquidation
Preference Amount (i.e. face amount of shares plus unpaid dividends, if
any). Dividends will accrue from the issue date with the first payment due
on September 20, 2003 for the period ending September 30, 2003 and are
payable each quarter thereafter, on December 20th, March 20th, June 20th
and September 20th. The preferred shares are convertible at any time into
one share of the Common Stock of Mems USA, Inc. at a price of $1.25 per
share. The preferred shares are also redeemable by the Company for cash at
any time 24 months after the Series A 8% Convertible Preferred Stock is
issued by making a cash payment equal to $1.50 per share plus all accrued
but unpaid dividends. As of February 18, 2004 all outstanding Series "A"
preferred stock (387,600 shares) were exchanged for 663,753 shares of
$0.001 par value common stock in a reverse merger and reorganization.
In June 2004, the Company issued 106,065 shares of its $0.001 par value
common stock in-exchange for services.
In July 2004, the Company issued 47,500 shares of its $0.001 par value
common stock in-exchange for services.
In June and July 2004, the Company issued 1,335,781 shares of its $0.001
par value common stock through private placement of securities for cash.
In connection with a private placement of securities, the Company received
$1,882,880 for the sale of its shares in private offering transactions.
The transaction originally provided for the sale of up to $1,500,000
(subsequently increased by consent of MEMS' board) in shares of the
Company's unregistered common stock, $.001 par value per share, in minimum
investment amounts of $10,000, sold to accredited investors within the
meaning of Rule 501(a) of regulation D of the Securities Act of 1933. The
shares were priced at a 30% discount from the closing price posted on the
OTCBB on the day that the investment amount was received by the Company.
In July and August 2004, the Company issued 210,294 shares of its $0.001
par value common stock for warrants exercised.
In August 2004, the Company issued 50,000 shares of its $0.001 par value
common stock in-exchange for services.
In connection with the employment agreements referred to in Note (6) the
Company has the option to repurchase the 4,500,000 founders shares for a
three-year period of time until the Company becomes profitable, for $0.001
per share. These options expire July 2006. In the event of a merger or
change in control this option expires.
-33-
(6) EMPLOYEE STOCK OPTIONS:
In connection with employment agreements, the Company has granted options
to certain key executives to acquire common stock of the Company
("Options"). The number and the weighted average exercise prices of all
options granted for the years ended September 30, 2004 and 2003 are as
follows:
2004 2003
-------------------------- ------------------------
Average Average
Exercise Exercise
Number Price Number Price
------------ ----------- ---------- ----------
Outstanding at beginning of the year 3,950,640 $ 1.03 3,853,030 $ 1.00
Granted during the year 152,748 $ 2.07 297,610 1.33
Outstanding at end of the year 4,100,388 $ 1.55 3,950,640 1.03
Exercisable at end of the year 54,537 $ 1.08 0 1.03
Exercised during the year 3,000 $ 1.00 200,000 1.25
Cancelled during the year 0 0
(7) EXCHANGE TRANSACTION:
On February 18, 2004 the Company entered into an Agreement and Plan of
Reorganization to acquire all of the issued and outstanding common stock
of MEMS USA, Inc. (a California Corporation and private company "MEMS CA"
in exchange for up to 10,000,000 shares (post split) of the registrant's
common stock. Each of MEMS CA's outstanding common shares were converted
into 1.7125634 shares of MEMS NV (formerly known as Lumalite Holdings,
Inc., a public company with 3,385,779 shares outstanding prior to the
transaction), subject to adjustment for the elimination of fractional
shares. No fractional shares were issued. Instead, cash equal to $2.50 per
share of eliminated fractional shares was paid to the stockholders. At the
closing, MEMS CA became a wholly-owned subsidiary and the MEMS CA
stockholders were issued 10,000,000 shares, owning approximately 80% of
the outstanding common stock. Since the former stockholders of MEMS CA
became the controlling stockholders of the Company after the transaction,
it was accounted for as an acquisition of MEMS NV by MEMS CA, using
reverse merger accounting.
(8) COMMITMENTS:
The Company leases the facility used for its operations under a lease
agreement expiring December 31, 2008. The following is a schedule by years
of future minimum base rental payments, excluding operating expenses,
required under the operating lease, which represents non-cancelable lease
terms in excess of one year as of September 30, 2004:
Facility Lease:
2005 $123,600
2006 123,600
2007 123,600
2008 123,600
--------
$494,400
========
Rent expense amounted to $121,981 and $94,810 for the years ended
September 30, 2004 and 2003, respectively.
-34-
(8) COMMITMENTS, CONTINUED:
The Company has employment agreements with certain key executives through
2006 providing aggregate annual compensation of approximately $1,059,000.
In May 2004, the Company acquired from PTI Technologies certain
technologies relating to Intelligent Filtration Systems ("IFS"). These
systems are used in refineries to filter chemicals used to process oil and
chemicals. IFS systems are also utilized in nuclear power plants. A
percentage of the purchase price is contingent upon the sales of
Intelligent Filtration Systems (IFS) during the first five years. On May
21, 2005 or upon sale of the first IFS system, the Company is required to
pay PTI Technologies, Inc. the sum of $40,000.
(9) SUBSEQUENT EVENTS:
In October 2004, MEMS USA entered into a stock purchase agreement with
Bott Equipment Company, Inc. ("BEC") and Gulfgate Equipment, Inc. ("GEI")
(collectively, the "Companies") to purchase 100% of the outstanding shares
of the two corporations from the Companies' president and sole
shareholder, Mr. Mark Trumble ("Trumble").
On November 15, 2004, Can Am Ethanol One, Inc. was created to manufacture,
own and operate ethanol production facilities. The joint venture will
utilize a synthetic biomass conversion process to convert waste materials
into ethanol. We are aware of several commercially available conversion
processes which we believe will meet our requirements and are presently
evaluating the processes with relation to their required capital
investment, operating costs, conversion yield and product quality as a
prerequisite to licensing or acquiring the process technology. It is
anticipated that the ethanol manufactured by the joint venture 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
intend to develop several ethanol plants in Canada that will use a
synthetic biomass conversion process, subject to receipt of required
funding. We estimate that each ethanol plant will require approximately
$150 million in capital. MEMS USA's engineering group, headquartered in
Westlake Village, CA, will 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.
On November 24, 2004 the Company implemented a stock incentive plan. The
name of this plan is the MEMS USA, Inc. 2004 Stock Incentive Plan (the
"PLAN"). The purpose of the Plan is to enable MEMS USA, Inc., a Nevada
Corporation (the "COMPANY") and any Parent or Subsidiary to obtain and
retain the services of high caliber employees, consultants, officers and
Directors who will contribute to the Company's long range success and to
provide incentives which are linked directly to increases in share value
which will insure to the benefit of all stockholders of the Company.
-35-
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. 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 Chief Executive
Officer 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. The Company did record a significant number
of adjustments during the fourth quarter to properly state the account
balances at September 30, 2004. The Company has subsequently remedied this
problem by hiring a Chief Financial Officer who will implement
comprehensive closing procedures, including an analysis of all balance
sheet accounts and significant income statement accounts. Except for the
aforementioned changes there were no significant changes in our internal
controls or in other factors that could significantly affect these
controls subsequent to the last day they were evaluated.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Set forth below are our directors and officers.
NAME AGE POSITION
-------------------- --- --------------------------------------------------
Lawrence Weisdorn 46 Chief Executive Officer and Chairman of the Board
of Directors
Dr. James A. Latty 58 President and Director
Daniel K. Moscaritolo 52 Chief Technology Officer, Chief
Operating Officer and Director
Richard W. York 56 Chief Financial Officer
-36-
Mr. Weisdorn has served as our chief executive officer and chairman of our
board of directors from the time of our acquisition of MEMS CA in February
2004. Mr. Weisdorn also served as our president from February 2004 to
September 2004 and our chief financial officer from February 2004 to
November 2004.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT, CONTINUED.
Mr. Weisdorn is a founder of MEMS CA and has served as chief executive
officer and chairman of the board of directors of that company since its
inception in July 2002. From October 2000 through May 2002, Mr. Weisdorn
served as chief financial officer and a director of LitFunding Corp.,
which was engaged in the business of providing litigation financing. Mr.
Weisdorn also served as chief executive officer and a director of
3Dshopping.com, which was engaged in the business of developing and
operating Internet web portals through which merchandisers would sell
their goods and services online.
Dr. Latty assumed the presidency of our company on September 9, 2004. Dr.
Latty is also member of our board of directors. Since 1992, Dr. Latty has
been president of JAL Engineering, an engineering services provider
wholly-owned by Dr. Latty specializing in power and petro-chemical process
technologies. From April 2000 to June 2004, Dr. Latty was a director of
business development for Rockwell Scientific , Inc.
Mr. Moscaritolo has served as our chief technology officer, chief
operating officer and a member of our board of directors since February
2004. Mr. Moscaritolo is a founder of MEMS-California and has served as
chief technology officer, chief operating officer and a director of that
company since its inception in July 2002.
Mr. York has served as our chief financial officer since November 2004.
Mr. York served as controller of PTI technologies, Inc. from 2000 through
October 2004 and Rantec Microwave & Electronics, Inc. from 1992 through
2000. PTI and Rantec are both subsidiaries of ESCO Technologies, Inc., a
NYSE-listed producer of engineered products and systems for industrial and
commercial applications.
All directors serve for a three-year term and until their successors are
duly elected and qualified. All officers serve at the discretion of the
Board of Directors.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have an audit committee nor do we have a financial expert.
CODE OF ETHICS
We have adopted a code of ethics that applies to the principal executive
officer and principal financial and accounting officer. We will provide to
any person without charge, upon request, a copy of our code of ethics.
Requests may be directed to our principal executive offices at 5701
Lindero Canyon Road, Suite 2-100, Westlake Village, California 91362.
-37-
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers, directors and persons who beneficially own more than 10% of
a registered class of our equity securities to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10%
beneficial owners are also required by rules promulgated by the SEC to
furnish us with copies of all Section 16(a) forms they file.
None of our officers, directors or 10% shareholders, namely Lawrence
Weisdorn, James A. Latty, Daniel Moscaritolo, Richard W. York or Mark
Trumble, have filed the reports required by Section 16(a). We have
requested that all officers, directors and 10% stockholders file all
required reports at their earliest opportunity.
ITEM 10. EXECUTIVE COMPENSATION.
Cash Compensation of Executive Officers. The following table sets forth
the cash compensation paid by us to our executive officers for services
rendered during the fiscal years ended September 30, 2004, 2003 and 2002.
The amounts for fiscal years 2003 and 2002 and part of 2004 represent
compensation paid to Messrs. Weisdorn and Moscaritolo by MEMS-California,
our wholly-owned subsidiary acquired by us in February 2004.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ------------------------------
NAME AND POSITION YEAR SALARY BONUS OTHER ANNUAL RESTRICTED COMMON SHARES ALL OTHER
COMPENSATION STOCK UNDERLYING COMPENSATION
AWARDS ($) OPTIONS GRANTED
(# SHARES)
-------------------------- ---------------------------------------- ----------- ------------------ --------------------
Lawrence Weisdorn, CEO 2004 $354,000 -- -- 1,284,343(1)
2003 $-0- -- $188,750 --
2002 $-0- -- -- --
Daniel K. Moscaritolo, $94,770
COO & CTO 2004 $240,000 1,284,343(1)
2003 -- $15,256 --
2002 -- --
OPTION/SAR GRANTS IN 2004 FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF % OF TOTAL OPTIONS/SARS EXERCISE OR EXPIRATION DATE
SECURITIES GRANTED TO EMPLOYEES IN BASE PRICE
UNDERLYING FISCAL YEAR ($/SH)
OPTIONS/SARS
GRANTED (#)
-------------------------------------------------------------------------------------------------------------------
Lawrence Weisdorn 1,284,343(1) 31.7% $1.00 07/01/06
Daniel K. Moscaritolo 1,284,343(1) 31.7% $1.00 07/01/06
(1) Represents options originally granted by MEMS-California in 2002 and
assumed by us in connection with our acquisition of MEMS-California
in February 2004.
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AGGREGATED OPTION/SAR EXERCISES IN 2004 FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
NAME ON EXERCISE (#) VALUE REALIZED FY-END FY-END ($)
($) (#)EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
------------------------------- ------------------ ------------------ ----------------- ------------------
Lawrence Weisdorn -- -- 0 / 1,284,343 $-0- / $2,247,600(1)
Daniel K. Moscaritolo -- -- 0 / 1,284,343 $-0- / $2,247,600(1)
(1) Based on a closing price of $1.75 per share for our common stock as
quoted on the OTC Bulletin Board on September 30, 2004.
(2) Compensation of Directors. At the present time, directors receive no
compensation for serving as directors of the company, however, we
may in the future begin to compensate our non-officer directors. All
directors receive reimbursement for out-of-pocket expenses in
attending board of directors meetings. From time to time, we may
engage certain members of our board of directors to perform services
on our behalf and will compensate such persons for the services that
they perform.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the shares of our common stock as of January 10,
2005 by (i) each person who is known by us to be the beneficial owner of
more than five percent (5%) of the issued and outstanding shares of our
common stock, (ii) each of our directors and executive officers and (iii)
all directors and executive officers as a group.
NAME AND ADDRESS (1) NUMBER OF SHARES PERCENTAGE OWNED
-------------------- ---------------- ----------------
Lawrence Weisdorn 2,752,568 16.75%
Dr. James A. Latty 3,580,268(2) 20.54%
Daniel K. Moscaritolo 2,593,969 15.78%
Richard W. York 5,000 (3)
Mark Trumble 2,047,393(4) 12.0%
All officers and directors as a group 8,711,061 49.9%
(four persons)
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(1) Address is 5701 Lindero Canyon Road, Suite 2-100, Westlake Village,
California 91362.
(2) Includes options granted to Dr. Latty to purchase 1,000,000 shares of our
common stock.
(3) Less than one percent.
(4) Includes 618,295 shares of our common stock that may be issued to Mr.
Trumble pursuant to the Stock Purchase Agreement, Exhibit 10.5
Equity Compensation Plans
The following table sets forth certain information as of September 30, 2004
concerning our equity compensation plans:
Number of Common
Number of Common Shares Remaining
Shares to Be Issued Upon Weighted- Average Available for Issuance
Exercise of Outstanding Exercise Price of Under Equity
Plan Category Options Outstanding Options Compensation Plan
-------------------------- -------------------------- ------------------------- ------------------------
Equity compensation plan N/A N/A N/A
approved by shareholders
Equity compensation plan 4,853,029 $1.20 -0-
not approved by
shareholders (1)
-----------------
(1) Represents shares of common stock issuable upon exercise of options granted
to our officers, Lawrence Weisdorn, Dr. James A. Latty and Daniel K.
Moscaritolo, pursuant to written employment agreements. Does not include
1,850,000 shares of common stock reserved for issuance under the MEMS USA, Inc.
2004 Stock Incentive Plan approved by our board of directors in November 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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ITEM 13. EXHIBITS.
(A) INDEX TO EXHIBITS
3.1 Articles of Incorporation of the Registrant, as amended
3.2 Bylaws of the Registrant
10.1 Merger Agreement and Plan of Reorganization dated January 28, 2004 between
Registrant and MEMS USA, Inc., a California corporation
10.2 Employment Agreement dated July, 1, 2002 between Lawrence Weisdorn and
MEMS USA, Inc., a California corporation
10.3 Employment Agreement dated July, 1, 2002 between Daniel K. Moscaritolo and
MEMS USA, Inc., a California corporation
10.4 Employment Agreement dated August 23, 2004 between Dr. James A. Latty and
MEMS USA, Inc., a California corporation
10.5 Stock Purchase Agreement dated September 1, 2004 among Registrant Bott
Equipment Company, Inc., Gulfgate Equipment, Inc. and Mark Trumble
21.1 List of Subsidiaries
23.1 Consent of Independent Certified Public Accountants
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our board of directors has selected Stonefield Josephson, 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.
AUDIT AND NON-AUDIT FEES
Aggregate fees for professional services rendered to us by Stonefield
Josephson, Inc. for the years ended September 30, 2004 and 2003 were as
follows:
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Services Provided 2004 2003
----------------- ---- ----
Audit Fees........................... $19,200 $12,600
Audit Related Fees................... $17,000 $-0-
Tax Fees............................. $ 4,000 $-0-
All Other Fees....................... $-0- $-0-
Total........................ $40,200 $12,600
AUDIT AND NON-AUDIT FEES
Audit Fees. The aggregate fees billed for the years ended September 30, 2004 and
2003 were for the audits of our annual financial statements and reports.
Audit Related Fees. The aggregate fees billed for the year ended September 30,
2004 were for review of our quarterly financial statements.
Tax Fees. The aggregate fees billed for the years ended September 30, 2003 and
2002 for professional services related to tax compliance, tax advice and tax
retuns preparation.
All Other Fees. There were no other fees billed for the years ended September
30, 2004 and 2003 for services other than the services described above.
PRE-APPROVAL POLICIES AND PROCEDURES
We have implemented pre-approval policies and procedures related to the
provision of audit and non-audit services. Under these procedures, our board of
directors pre-approves all services to be provided by Stonefield Josephson, Inc.
and the estimated fees related to these services.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEMS USA, INC.
Date: January , 2005 By: /s/ Lawrence Weisdorn
------------------------------------------
Lawrence Weisdorn, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Lawrence Weisdorn Chief Executive Officer and Director January __, 2005
---------------------------
Lawrence Weisdorn
/s/ Richard W. York Chief Financial Officer January __, 2005
------------------------------------
Richard W. York
/s/ James A. Latty Director January __, 2005
---------------------------
James A. Latty
/s/ Daniel K. Moscaritolo Director January __, 2005
---------------------------
Daniel K. Moscaritolo
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