SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDING MAY 31, 2007
AMERICHIP INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) | 000-33127 (Commission File Number) | 98-0339467 (I.R.S. Employer Identification) |
24700 Capital , Clinton Township MI | 48036 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (586-783-4598)
(Former name or former address, if changed since last report)
Copies of all communications, including all communications sent to the agent for service, should be sent to:
Joseph I. Emas, Attorney at Law
1224 Washington Avenue
Miami Beach, Florida 33139
Telephone: 305.531.1174
Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 x No o
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
As of July 16, 2007, 938,383,750 shares of $.001 par value common stock were outstanding.
Transitional Small Business Disclosure Format (check one) Yes o No x
Indicate if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
FORM 10-QSB
PART I. FINANCIAL INFORMATION | |
F-1 | |
F-1 | |
F-2 | |
F-3 | |
F-5 | |
2 | |
20 | |
PART II OTHER INFORMATION | |
20 | |
20 | |
20 | |
21 | |
22 | |
22 | |
23 |
PART I - FINANCIAL INFORMATION
The financial statements of the company are set forth beginning on page F-1.
CONSOLIDATED BALANCE SHEETS |
May 31 | November 30, | |||||||
2007 | 2006 | |||||||
(Unaudited) | ||||||||
(Restated) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 4,375 | $ | 1,716 | ||||
Accounts receivable - trade | 484,777 | 27,015 | ||||||
Prepaid expenses | 405,130 | 31,898 | ||||||
Inventory | 204,495 | 212,517 | ||||||
TOTAL CURRENT ASSETS | 1,098,777 | 273,146 | ||||||
FIXED ASSETS | ||||||||
Leasehold improvements | 416,791 | - | ||||||
Furniture & fixtures | 96,274 | 18,252 | ||||||
Machinery & equipment | 3,761,863 | 622,472 | ||||||
Less accumulated depreciation | (367,174 | ) | (89,928 | ) | ||||
TOTAL FIXED ASSETS | 3,907,754 | 550,796 | ||||||
OTHER ASSETS | ||||||||
Deposits | 3,200 | 203,200 | ||||||
Technology rights and patents, net of amortization | 14,198 | 16,302 | ||||||
Goodwill | 2,577,673 | - | ||||||
TOTAL OTHER ASSETS | 2,595,071 | 219,502 | ||||||
TOTAL ASSETS | $ | 7,601,602 | $ | 1,043,444 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Bank overdraft | $ | 74,192 | $ | 15 | ||||
Accounts payable and accrued expenses | 939,836 | 1,022,250 | ||||||
Related party payable | 605,086 | 545,086 | ||||||
Related party notes payable, current portion | 22,461 | 20,203 | ||||||
Notes payable - bank, current portion | 1,442,077 | - | ||||||
Notes payable - other, current portion | 446,414 | - | ||||||
Convertible debentures, net of discounts | 337,579 | 244,579 | ||||||
Accrued interest - related party | 211,248 | 186,248 | ||||||
Accrued interest - other | 59,798 | 43,742 | ||||||
Deposits - private placements | 362,542 | 388,838 | ||||||
TOTAL CURRENT LIABILITIES | 4,501,233 | 2,450,961 | ||||||
LONG - TERM LIABILITIES | ||||||||
Related party notes payable, net of current portion | 174,703 | 187,901 | ||||||
Notes payable - bank, net of current portion | 1,410,165 | - | ||||||
Notes payable - other, net of current portion | 2,300,791 | - | ||||||
TOTAL LONG - TERM LIABILITIES | 3,885,659 | 187,901 | ||||||
MINORITY INTEREST | 3,413 | 3,413 | ||||||
STOCKHOLDERS' DEFICIT | ||||||||
Common stock, $0.001 par value; 1,000,000,000 shares authorized, | ||||||||
909,572,728 and 458,767,265 shares issued and outstanding, resepectively | 909,573 | 458,767 | ||||||
Additional paid-in capital | 29,675,133 | 19,444,471 | ||||||
Accumulated deficit | (31,373,409 | ) | (21,502,069 | ) | ||||
TOTAL STOCKHOLDERS' DEFICIT | (788,703 | ) | (1,598,831 | ) | ||||
TOTAL LIABILITIES AND | ||||||||
STOCKHOLDERS' DEFICIT | $ | 7,601,602 | $ | 1,043,444 |
The accompanying condensed notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS |
Three Months Ended | Six Months Ended | |||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
REVENUES | $ | 628,198 | $ | 33,611 | $ | 808,633 | $ | 81,750 | ||||||||
COST OF SALES | 246,859 | 27,611 | 300,385 | 54,407 | ||||||||||||
Gross Profit | 381,339 | 6,000 | 508,248 | 27,343 | ||||||||||||
EXPENSES | ||||||||||||||||
Administrative service | 283,340 | 119,972 | 500,507 | 235,508 | ||||||||||||
Director fees | - | - | 5,850,000 | - | ||||||||||||
Consulting expense | 1,331,156 | 3,388,877 | 3,088,153 | 5,235,390 | ||||||||||||
Depreciation and amortization | 112,496 | 17,775 | 161,415 | 29,347 | ||||||||||||
Legal and accounting | 71,989 | 16,852 | 286,734 | 65,489 | ||||||||||||
License expense | 30,000 | 30,000 | 60,000 | 1,380,000 | ||||||||||||
Office expense | 22,400 | 11,558 | 44,926 | 17,528 | ||||||||||||
Wages - officers and directors | 36,000 | 67,192 | 36,000 | 120,210 | ||||||||||||
Wages - other | 29,645 | 51,647 | 93,187 | 112,036 | ||||||||||||
Total Expenses | 1,917,026 | 3,703,873 | 10,120,922 | 7,195,508 | ||||||||||||
LOSS FROM OPERATIONS | (1,535,687 | ) | (3,697,873 | ) | (9,612,674 | ) | (7,168,165 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Forgiveness of debt | - | - | - | 43,904 | ||||||||||||
Financing expense | (4,665 | ) | (26,250 | ) | (6,665 | ) | (52,500 | ) | ||||||||
Interest | (200,208 | ) | (15,825 | ) | (252,001 | ) | (38,666 | ) | ||||||||
Total Other Income (Expense) | (204,873 | ) | (42,075 | ) | (258,666 | ) | (47,262 | ) | ||||||||
LOSS BEFORE TAXES | (1,740,560 | ) | (3,739,948 | ) | (9,871,340 | ) | (7,215,427 | ) | ||||||||
INCOME TAX EXPENSE | - | - | - | - | ||||||||||||
NET LOSS | $ | (1,740,560 | ) | $ | (3,739,948 | ) | $ | (9,871,340 | ) | $ | (7,215,427 | ) | ||||
BASIC AND DILUTED NET LOSS PER SHARE | $ | - | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | |||||
WEIGHTED AVERAGE NUMBER OF | ||||||||||||||||
COMMON SHARES OUTSTANDING, | ||||||||||||||||
BASIC AND DILUTED | 493,641,012 | 354,809,773 | 508,282,039 | 314,849,506 |
The accompanying condensed notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOW |
Six Months Ended May 31, 2007 | Six Months Ended May 31, 2007 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss for the period | $ | (9,871,340 | ) | $ | (7,215,427 | ) | ||
Adjustments to reconcile net loss to net cash provided by | ||||||||
(used in) operating activities: | ||||||||
Forgiveness of debt | - | (43,904 | ) | |||||
Depreciation and amortization | 161,415 | 31,451 | ||||||
Amortization of finance charges | 5,000 | 52,500 | ||||||
License expense | 60,000 | 1,380,000 | ||||||
Warrants issued for services | 5,919,400 | 388,838 | ||||||
Common stock options issued for consulting services | 2,871,870 | 3,633,031 | ||||||
Common stock issued for consulting services | 156,000 | 1,075,375 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable - trade | (74,620 | ) | (621 | ) | ||||
Prepaid expenses | 128,047 | 4,409 | ||||||
Inventories | 8,022 | (985 | ) | |||||
Bank overdraft | 74,177 | (3,966 | ) | |||||
Accounts payable and accrued liabilities | (245,273 | ) | 25,947 | |||||
Accrued interest payable | 11,068 | 31,970 | ||||||
Deposits - private placement | 362,542 | - | ||||||
Net cash used by operating activities | (433,692 | ) | (641,382 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisition of fixed assets | (32,820 | ) | - | |||||
Payments made for acquisition of subsidiary | (150,000 | ) | - | |||||
Cash received from acquisition of subsidiary | 19,787 | - | ||||||
Net cash used by investing activities | (163,033 | ) | - | |||||
Cash Flows from Financing Activities: | ||||||||
Payments made to refinance equipment of acquired subsidiary | (320,000 | ) | - | |||||
Payments on related party payable | - | (6,287 | ) | |||||
Payments made on related party notes payable | (10,940 | ) | (14,004 | ) | ||||
Payments made on notes payable - bank | (27,758 | ) | - | |||||
Payments made on notes payable - other | (44,838 | ) | - | |||||
Proceeds received on convertible debentures | 100,000 | - | ||||||
Proceeds from the issuance of common stock | 902,920 | 669,407 | ||||||
Net cash provided by financing activities | 599,384 | 649,116 | ||||||
Net increase in cash | 2,659 | 7,734 | ||||||
Cash, beginning of period | 1,716 | 218 | ||||||
Cash, end of period | $ | 4,375 | $ | 7,952 |
The accompanying condensed notes are an integral part of these financial statements.
AMERICHIP INTERNATIONAL INC. | |||||||
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOW |
Six Months Ended May 31, 2007 | Six Months Ended May 31, 2007 | |||||||
(Unaudited) | (Unaudited) | |||||||
Supplemental Information: | ||||||||
Interest paid | $ | 240,933 | $ | 5,333 | ||||
Taxes paid | $ | - | $ | - | ||||
Supplemental Non-Cash Activities: | ||||||||
Common stock for exercise of options for consulting services | $ | - | $ | 3,633,031 | ||||
Common stock issued for consulting services | $ | 430,440 | $ | 1,075,375 | ||||
Common stock issued for deposits for consulting services | $ | - | $ | 325,386 | ||||
Common stock issued for private placement deposits received | ||||||||
in prior year | $ | 388,838 | $ | - | ||||
Common stock issued for license expense, related party | ||||||||
payable and accrued interest | $ | - | $ | 2,040,000 | ||||
Contribution of capital - related party | $ | - | $ | 244,584 | ||||
Warrants issued for services | $ | - | $ | 388,838 | ||||
Common stock issued for discount on convertible debentures | $ | 12,000 | $ | - | ||||
Conversion of accounts payable to notes payable | $ | 154,000 | $ | - | ||||
Assets and liabilities received for acquisition of subsidiary: | ||||||||
Accounts receivable - trade | $ | (383,142 | ) | $ | - | |||
Prepaid expenses | $ | (70,839 | ) | $ | - | |||
Fixed assets | $ | (3,477,136 | ) | $ | - | |||
Deposits | $ | 200,000 | $ | - | ||||
Goodwill | $ | (2,577,673 | ) | $ | - | |||
Note payable - bank | $ | (3,204,292 | ) | $ | - | |||
Note payable - other | $ | 2,638,043 | $ | - | ||||
Accounts payable and accrued expenses | $ | 316,859 | $ | - | ||||
Accrued interest - other | $ | 19,383 | $ | - | ||||
Exchange of liabilities for refinancing equipment of acquired | ||||||||
subsidiaries: | ||||||||
Note payable - bank | $ | 3,204,292 | $ | - | ||||
Note payable - bank | $ | 2,880,000 | $ | - | ||||
Accrued interest - other | $ | 4,292 | $ | - |
The accompanying condensed notes are an integral part of these financial statements.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
The foregoing unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements for the period ended November 30, 2006. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company's financial position and results of operations.
Certain amounts from prior periods have been reclassified to conform to the current period presentation. This reclassification has resulted in no changes to the Company’s accumulated deficit or net losses presented.
During the six months ending May 31, 2007, no allocation of losses was made to the minority interest, because the Company’s 80% owned subsidiary, AmeriChip, Inc., is considered dormant and is not expected to conduct business in the future.
Operating results for the six-month period ended May 31, 2007 are not necessarily indicative of the results that may be expected for the year ending November 30, 2007.
NOTE 2 – GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred material recurring losses from operations. At May 31, 2007, the Company had an accumulated deficit of $31,373,409. For the six months ended May 31, 2007, the Company sustained a net loss of $9,871,340. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
The Company’s continuation as a going concern is contingent upon its ability to obtain additional financing and to generate revenue and cash flow to meet its obligations on a timely basis. The Company’s management is currently putting sales strategies in place which will, if successful, mitigate these factors which raise substantial doubt about the Company’s ability to continue as a going concern.
NOTE 3 – ACQUISITION OF SUBSIDIARY
On February 15, 2007, AmeriChip International, Inc. acquired 100% of the common stock of KSI Machine & Engineering, Inc. (hereinafter “KSI”). The acquisition price of KSI’s common stock was $2,988,043, subject to a post closing due diligence analysis by Company management and its professional representatives. Deposits related to this acquisition in the amount of $200,000, which had been previously paid by AmeriChip and reflected as deposits on the Company’s historical balance sheet, were used to offset the purchase price. In addition, the Company paid the seller $150,000 on the closing date, resulting in a net obligation to due by the Company to the seller in the amount of $2,638,043. (See Note 10).
The following is a list of assets acquired and liabilities assumed as a result of AmeriChip’s acquisition of 100% of KSI’s common stock, along with an allocation of the purchase price among the assets acquired and liabilities assumed:
Cash | $ | 19,787 | ||
Accounts receivable – trade | 383,142 | |||
Prepaid expenses | 70,839 | |||
Fixed assets | 3,477,136 | |||
Goodwill | 2,577,673 | |||
Note payable – bank | (3,204,292 | ) | ||
Accounts payable and accrued expenses | (316,859 | ) | ||
Accrued interest | (19,383 | ) | ||
$ | 2,988,043 |
Terms of the obligation due to the seller require monthly payments of $50,000, inclusive of interest accruing at a rate of 7% per annum, over a period of 24 months. At the end of the 24 month period, any remaining unpaid balance is due to the seller. Additional principal payments are required over the term of the loan if the average closing price of AmeriChip’s common stock reaches certain minimum levels over a consecutive ten day period. If the average closing price of AmeriChip’s common stock reaches $0.30 per share over a consecutive ten day period, one-third of the unpaid balance is due within 60 days. After this first period, if the average closing price of AmeriChip’s common stock reaches $0.40 per share over a consecutive ten day period, one-half of the unpaid balance is due within 60 days. After this second period, if the average closing price of AmeriChip’s common stock reaches $0.50 per share over a consecutive 10 day period, the
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
entire unpaid balance is due. As of the date of this report, none of the minimum closing price levels have been achieved.
The final purchase price may be increased or decreased, depending upon the results of the Company’s post closing due diligence analysis related to the value of the assets and liabilities of KSI as of the acquisition date. In addition, the seller has an option to engage his own professionals to either agree or disagree with the Company’s due diligence findings within a period of 30 days after AmeriChip’s due diligence analysis is complete. As of the balance sheet date, management’s due diligence process has been completed, but the Company has received a written list of objections regarding certain proposed adjustments arising from the due diligence process from the attorney for the seller. Management is currently in negotiations with the seller in order to resolve the disputed adjustments.
In addition to these terms, the Corporation was required to obtain outside financing for KSI’s fixed assets acquired as a result of this transaction. The outside financing was provided by a Detroit area bank and the United States Small Business Administration (hereinafter “SBA”). As a result of this requirement, AmeriChip established Excellence 3, Inc., a new fully owned subsidiary. Excellence 3, Inc. was established in order to acquire the fixed assets of KSI and to subsequently lease the equipment back to KSI. Immediately after AmeriChip acquired the common stock of KSI, it assigned its ownership in Excellence 3, Inc. to KSI. As of the balance sheet date, Excellence 3, Inc. is a fully owned subsidiary of KSI.
Immediately after AmeriChip completed its acquisition of KSI’s common stock, Excellence 3, Inc. acquired all of the fixed assets of KSI, except for the leasehold improvements owned by KSI. The purchase price of these fixed assets was $3,200,000. Outside financing representing a total of 90% of the purchase price of the fixed assets was provided by a Detroit area bank ($1,600,000) and the United States Small Business Administration ($1,280,000). The SBA portion of the financing is temporarily provided by the same Detroit area bank that provided the $1,600,000 portion of the financing. The remaining 10% of the purchase price ($320,000) was paid directly by Excellence 3, Inc. Loan costs in the amount of $46,612 were incurred in order to complete the outside financing of the fixed asset acquisition. These loan costs will be amortized over the term of the loan.
Terms of the bank obligation amounting to $1,600,000 require monthly payments in the amount of $26,298, inclusive of interest accruing at a rate of 9.68% per annum, over a period of 7 years. This obligation is secured by the net assets of Excellence 3, Inc., the primary obligor, while being supported by the guarantees of AmeriChip International, Inc., KSI, the Chief Executive Officer of AmeriChip and the Chief Financial Officer of AmeriChip. As a result of this obligation, the bank has a first security interest in the assets acquired by Excellence 3, Inc. (See Note 10).
Terms of the short-term bank obligation amounting to $1,280,000 require interest only payments, accruing at a rate of 9.68% per annum, for the period of March 15, 2007 through July 15, 2007. During this period of time, the SBA is obligated to sell bonds through a local area taxing authority in order to provide the permanent financing related to this portion of the loan. Management expects the SBA portion of the financing will be provided no later than July 15,
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
2007. Terms of the SBA portion of the financing will require payments over a ten year period, with interest accruing at a rate dependent upon the rate at which the supporting bonds are sold at. In addition, upon permanent funding by the SBA, finance charges of approximately $37,000 will be due to the SBA. These finance charges will be added to the obligation due to the SBA, resulting in a total obligation due in the amount of $1,317,000 upon funding by the SBA. (See Note 10).
In addition the terms previously described, KSI entered into a lease agreement with the former owner of KSI related to the building utilized by KSI. As a result of this agreement, monthly payments in the amount of $28,000 are due on a monthly basis over a 5 year period. In conjunction with this agreement, AmeriChip International, Inc. entered into a sublease agreement with its KSI subsidiary for the portion of the building facility deemed to be used by AmeriChip administrative personnel. This sublease agreement requires monthly payments in the amount of $3,500 by AmeriChip to KSI over a five year period. Due to the consolidated nature of these financial statements, the sublease payments between AmeriChip International, Inc. and KSI have been eliminated. The primary lease agreement requires AmeriChip International, Inc. to acquire the leased building for $3,500,000 on or before the expiration of the lease agreement.
In conjunction with its acquisition of the fixed assets of KSI, Excellence 3, Inc. entered into a lease agreement with KSI, whereby KSI agreed to lease the fixed assets from Excellence 3, Inc. Monthly equipment lease payments in the amount of $42,000 are required to be paid by KSI to Excellence 3, Inc. beginning March 1, 2007. Due to the consolidated nature of these financial statements, the lease payments between KSI and Excellence 3, Inc. have been eliminated.
Other than goodwill, no other identifiable intangible assets were acquired as a result of AmeriChip’s acquisition of 100% of KSI’s common stock. The customer list has a negligible value to AmeriChip due to the fact that AmeriChip has established relationships with all of KSI’s customers during the two year period prior to the closing date. A non-compete agreement between Jim Kotsonis and Americhip was not entered into. Accordingly, the excess amount of KSI’s acquisition cost over the fair market value of its net assets is reflected as goodwill on the consolidated financial statements.
There are three primary reasons that AmeriChip acquired KSI. First, KSI has a tier one automotive supplier status, which AmeriChip inherits upon its acquisition of 100% of KSI’s common stock. Second, KSI has a strong credit history, which KSI also benefits from subsequent to KSI’s acquisition. Third, KSI provides a platform by which AmeriChip will be able to utilize its patented Laser Assisted Chip Control technology. Because of all of these factors, AmeriChip acquired KSI at a price which was higher than the book value of its underlying assets. As a result, goodwill in the amount of $2,577,673 is reflected in the consolidated balance sheet as a result of this stock acquisition.
The consolidated financial statements of the Company for the six months ending May 31, 2007 includes the results of operations related to KSI for the period of February 15, 2007 (date of acquisition) through May 31, 2007.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of AmeriChip International, Inc. include the accounts of the following companies: AmeriChip International, Inc., AmeriChip Tool and Abrasives, LLC, AmeriChip Canada, Inc., AmeriChip Ventures, Inc., AmeriChip, Inc., KSI Machine & Engineering, Inc. and Excellence 3, Inc. All material intercompany transactions have been eliminated.
Accounting for Convertible Notes and Securities with Beneficial Conversion Features
Following guidance by EITF 00-27, the Company allocates proceeds received from convertible notes and/or securities first to warrants granted to the note holders. The value of the warrants and the beneficial conversion feature are recorded on the balance sheet as a debt discount and as an increase to shareholders’ equity, respectively. The discounts are amortized over the life of the loans.
Inventories
Inventories, consisting of products available for sale, are recorded using the weighted average method. As of May 31, 2007, the inventory of the Company’s subsidiary AmeriChip Tool and Abrasives, LLC amounted to $204,495, consisting of grinding and abrasive products.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years.
The following is a summary of property and equipment at May 31, 2007:
Leasehold improvements | $ | 416,791 | ||
Furniture and fixtures | 96,274 | |||
Plant assets | 3,761,863 | |||
4,274,928 | ||||
Less accumulated depreciation | (367,174 | ) | ||
$ | 3,907,754 |
The Company recognized $159,312 and $29,347 in depreciation expense for the six months ended May 31, 2007 and 2006. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts and any resulting gain or loss is reflected in results of operations. The Company begins depreciating an asset when it has been placed in service.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
Goodwill
As of May 31, 2007, goodwill in the amount of $2,577,673 is reflected on the Company’s balance sheet related to the acquisition of 100% of the common stock of KSI Machine & Engineering, Inc. (See Note 3). In accordance with SFAS No. 141, the acquisition of the common stock of KSI is reflected utilizing the purchase method of accounting for business combinations. Goodwill represents the excess of the acquisition cost of KSI’s common stock over the book value of the net assets included in KSI. In accordance with SFAS No. 142, goodwill has an indefinite useful life and, accordingly, is not amortizable. SFAS No. 142 requires that goodwill be tested at least annually in order to determine the impairment of the value of the goodwill. The first step is a screening process to determine if impairment of goodwill has occurred. The second step is to measure the amount of any impairment that has occurred. If goodwill is found to be impaired as a result of this testing process, the carrying value of goodwill would be reduced by the amount of this impairment.
As a result of applying the first step in this testing process, management has determined that no impairment of goodwill exists as of May 31, 2007. As a result, goodwill is reflected in the Company’s balance sheet at its acquired cost as determined at the date of acquisition. The intangible benefits of the acquisition of KSI’s common stock that created the goodwill are discussed in Note 3. These benefits still exist as of May 31, 2007. Impairment will again be evaluated at the end of the Company’s fiscal year.
Provision for Taxes
Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109 (hereinafter “SFAS No. 109”), “Accounting for Income Taxes.” Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by SFAS No. 109 to allow recognition of such an asset.
At May 31, 2007 and November 30, 2006, the Company had deferred tax assets of approximately $10,600,000 and $7,200,000, respectively, principally arising from net operating loss carryforwards for income tax purposes multiplied by an expected tax rate of 34%. As management of the Company cannot determine that it is more likely than not that the Company will realize its benefit of the deferred tax assets, a valuation allowance equal to the deferred tax assets was present at May 31, 2007 and November 30, 2006.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
The significant components of the deferred tax assets at February 28, 2007 and November 30, 2006 were as follows:
February 28, 2007 | November 30, 2006 | |||||||
Net operating loss carryforward | $ | 31,373,000 | $ | 21,502,000 | ||||
Warrants issued: | $ | 88,000 | $ | 465,400 | ||||
Deferred tax asset | $ | 10,600,000 | $ | 7,200,000 | ||||
Deferred tax asset valuation allowance | $ | (10,600,000 | ) | $ | (7,200,000 | ) |
At May 31, 2007 and November 30, 2006, the Company has net operating loss carryforwards of approximately $31,373,000 and $21,502,000, respectively, which expire in the years 2021 through 2027. The Company recognized $88,000 and $465,400 of losses from issuance of warrants for services as of May 31, 2007 and November 30, 2006, respectively, which are not deductible for tax purposes and are not included in the above calculation of deferred tax assets. The change in the allowance account from November 30, 2006 to May 31, 2007 was $3,400,000.
The Tax Reform Act of 1986 substantially changed the rules relative to the use of net operating losses and general business credit carryforwards in the event of an “ownership change” of a corporation. The Company has issued additional shares of common stock, which may have resulted in restrictions on the future use of net operating losses and tax credit carryforwards generated before an ownership change. The effect of such change has not been determined.
Revenue and Cost Recognition Policies
The Company recognizes revenue from product sales when products are shipped and title passes to customers. The Company has not provided an allowance for sales returns because the Company’s historical sales experience indicates that a very immaterial amount of sales are subsequently returned. Returns of a product, if permitted by the manufacturer, are charged a 15% restock fee. Specialized machined products created to the customer’s blueprint specifications are also being produced. These product costs are market driven and the Company warrants the finished product to the extent they meet the specifications.
As an agent, the Company recognizes its commissions when the earnings process is completed (delivery taken and title passed to customer). And collection is probable.
Cost of sales consists of the purchase price of products sold, inbound and outbound shipping charges, and packaging supplies.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
NOTE 5 – STOCK OPTIONS AND WARRANTS
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as revised by Statement of Financial Accounting Standards No. 123(R), defines a fair value-based method of accounting for stock options and other equity instruments. The Company has adopted this method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period.
In December, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (R) (revised 2004), “Share-Based Payments” (hereinafter “SFAS No. 123 (R)). This statement replaces FASB Statement No. 123 “Accounting for Stock-Based Compensation”, and supersedes APB Statement Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123 (R) establishes standards for the accounting of share-based payment transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based award, share appreciation rights and employee share purchase plans. SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date (with limited exceptions). The cost will be recognized in the entity’s financial statements over the period during which the employee is required to provide services in exchange for the award. The Company was previously reporting in compliance with SFAS 123.
Stock Options
On October 22, 2003, the Company’s board of directors approved the AmeriChip International Inc. 2003 Non-Qualified Incentive Stock Option Plan (hereinafter “the Plan”), which as amended through November 30, 2005, allowed the Company to issue up to 88,000,000 shares of the Company’s common stock to officers, directors, employees and consultants. All 88,000,000 shares issuable in accordance with the Plan have been registered with the Securities and Exchange Commission on Form S-8. In the year ended November 30, 2005 and 2004, the Company issued 59,250,000 and 20,000,000 stock options, respectively, to consultants for marketing and advisory services under this plan. As of November 30, 2005, there were 8,750,000 options remaining under this plan. All other registered shares under this plan were issued in periods prior to the fiscal year ending November 30, 2005. There were no options issued to officers, directors or employees during the year ended November 30, 2005.
During the year ended November 30, 2005, options totaling 59,250,000 were granted and exercised at a weighted average price of $0.05 per share for $2,724,980 of consulting fees provided to the Company. When applicable, these options were valued pursuant the terms of the related consulting agreements. The remaining options were valued at the market price on the date of grant. All options were exercised immediately upon grant, and therefore the Company has deemed that no additional value should be assigned to the options. The value of the services provided as a result of these share based payments was determined in accordance with SFAS 123 and SFAS 123 (R).
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
During the year ended November 30, 2006, the Company registered an additional 150,000,000 shares of common stock under this plan. During the same fiscal year, 125,526,640 options were exercised under this plan at an average price of $0.04 per share for $5,702,084 of consulting and advisory services. These options were valued at the market price on the date of grant. All options were exercised immediately upon grant, and therefore, the Company has deemed that no additional value should be assigned to the options. As of November 30, 2006, there were 33,223,360 options available to be issued under this plan.
During the six month period ending May 31, 2007, the Company registered an additional 120,000,000 shares of common stock under this plan. During this same three month period, 130,029,576 options were exercised under this plan at an average price of $0.025 per share for $3,282,310 of consulting and advisory services. The options were valued at the market price on the date of grant. These options were exercised immediately upon grant, and therefore the Company deemed that no additional value should be assigned to the options. As of May 31, 2007, there were 23,193,784 options available to be issued under the plan.
The following is a summary of stock option activity:
Number of Shares | ||||||||
Under the Option | Weighted Average | |||||||
Plan | Exercise Price | |||||||
Outstanding December 1, 2005 | - | - | ||||||
Granted | 125,526,640 | $ | 0.04 | |||||
Exercised or expired | (125,526,640 | ) | (0.04 | ) | ||||
Outstanding November 30, 2005 | - | $ | - | |||||
Weighted average fair value of | ||||||||
options granted during the | ||||||||
period ended November 30, 2005 | $ | - | ||||||
Outstanding December 1, 2006 | - | $ | - | |||||
Granted | 130,029,576 | 0.025 | ||||||
Exercised or expired | (130,029,576 | ) | (0.025 | ) | ||||
Outstanding May 31, 2007 | - | $ | - | |||||
Weighted average fair value of | ||||||||
options granted during the | ||||||||
period ended May 31, 2007 | $ | - |
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
Warrants
The fair value of common stock and warrants issued in the six months ending May 31, 2007 was estimated on the grant date using the Black-Scholes Option Price Calculation with the following assumptions: risk-free interest rate is 4%, volatility is 148%, expected life is .5 to 3 years, and there is no dividend yield.
During the six months ended May 31, 2007, warrants were issued pursuant to an agreement with a key employee to acquire 1,600,000 shares of common stock at no exercise price. The minimum holding period for 500,000 shares is six months from the grant date, the minimum holding period of another 500,000 shares is one year from the grant date, and the minimum holding period of the final 600,000 shares is one and one-half years from the grant date. The maturity of these warrants is five years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.026 per share. As a result, the fair value of these warrants on the date of grant was determined to be $36,400. During the six months ended May 31, 2007, these warrants were exercised at a price of $0.02 per share, for a total exercise price of $32,000.
During the six months ended May 31, 2007, warrants were issued pursuant to an agreement with an officer and director to acquire 100,000,000 shares of common stock at no exercise price. The maturity of these warrants is 5 years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.026 per share. As a result, the fair value of these warrants on the date of grant was determined to be $2,600,000. During the six months ended May 31, 2007, these warrants were exercised at a price of $0.02 per share, for a total exercise price of $2,000,000.
During the six months ended May 31, 2007, warrants were issued pursuant to an agreement with another officer and director to acquire 100,000,000 shares of common stock at no exercise price. The maturity of these warrants is 5 years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.026 per share. As a result, the fair value of these warrants on the date of grant was determined to be $2,600,000. During the six months ended May 31, 2007, these warrants were exercised at a price of $0.02 per share, for a total exercise price of $2,000,000.
During the six months ended May 31, warrants were issued pursuant to an agreement with another officer and director to acquire 20,000,000 shares of common stock at no exercise price. The maturity of these warrants is 5 years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.026 per share. As a result, the fair value of these warrants on the date of grant was determined to be $520,000. During the six months ended May 31, 2007, these warrants were exercised at a price of $0.02 per share, for a total exercise price of $400,000. In addition to exercising the aforementioned warrants, this same officer and director also exercised warrants for 10,000,000 shares of common stock which were issued during the fiscal year ended November 30, 2007. These warrants were exercised at a price of $0.02 per share, for a total exercise price of $200,000.
During the six months ended May 31, 2007, warrants were issued pursuant to an agreement with another officer and director to acquire 5,000,000 shares of common stock at no exercise price. The maturity of these warrants is 5 years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.026 per share. As a result, the fair value of these warrants on the date of grant was determined to be $130,000. These warrants were exercised at a price of $0.02 per share, for a total exercise price of $100,000.
During the six months ended May 31, 2007, warrants were issued pursuant to an agreement with a key employee to acquire 500,000 shares of common stock at no exercise price. The maturity of these warrants is 5 years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.026 per share. As a result, the fair value of these warrants on the date of grant was determined to be $13,000. These warrants were exercised at a price of $0.02 per share, for a total exercise price of $10,000.
During the six months ended May 31, 2007, warrants were issued pursuant to an agreement with a key employee to acquire 1,000,000 shares of common stock at no exercise price. The maturity of these warrants is 5 years from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the average fair market value for the 15 day period prior to the grant date of the corresponding stock of $0.02 per share. As a result, the fair value of these warrants on the date of grant was determined to be $20,000. These warrants were exercised at a price of $0.02 per share, for a total exercise price of $20,000.
Accordingly, the fair value of all warrants issued by the Company during the six months ended May 31, 2007 was $5,919,400, while the fair value of all warrants exercised during the year was $4,762,000. The fair value as of the issue date of the warrants exercized during the six months ended May 31, 2007 was 6,219,400. As a result, warrants with a fair value of $88,838 were outstanding as of November 30, 2006.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
The fair value of common stock and warrants issued in the fiscal year ending November 30, 2006 was estimated on the grant date using the Black-Scholes Option Price Calculation with the following assumptions: risk-free interest rate is 4%, volatility is 148%, expected life is .5 to 3 years, and there is no dividend yield.
During the year ended November 30, 2006, warrants were issued pursuant to a consulting agreement to acquire 1,000,000 shares of common stock at an exercise price of $0.08. The fair value of the warrants, which was determined on the date of grant, was $24,300. Also, during the year ended November 30, 2006, warrants were issued pursuant a consulting agreement to acquire 1,250,000 shares of common stock at an exercise price of $0.12. The fair value of the warrants, which was determined on the date of grant, was $27,000. Additionally, during the year ended November 30, 2006, warrants were issued pursuant a consulting agreement to acquire 1,375,000 shares of common stock at an exercise price of $0.05. The fair value of the warrants, which was determined on the date of grant, was $37,538.
During the year ended November 30, 2006, warrants were issued pursuant to an agreement with an officer and director to acquire 10,000,000 shares of common stock at no exercise price. The maturity of these warrants was six months from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value of these warrants was estimated to be the fair market value of the corresponding stock as of the grant date of $0.03 per share. As a result, the fair value of these warrants on the date of grant was determined to be $300,000.
Additionally, during the year ended November 30, 2006, these warrants expired before being exercised by the holder. In accordance with SFAS 123(R), this modification of the terms of the warrant was treated as an exchange of the original warrant for a new warrant. This exchange resulted in additional consulting expense in the amount of $76,548, based upon the weighted average fair market value of the stock between the maturity date of the expired warrants and the exercise date of the new warrants that resulted from this exchange. Due to fact that these warrants expired before they were exercised, they were reflected as cancelled warrants, replaced by new warrants deemed to be exchanged for these expired warrants.
During the year ended November 30, 2006, these warrants were exercised by the warrant holder. As a result, 10,000,000 shares of the Company’s common stock were issued to the warrant holder for no cash in full exercise of these warrants. The fair market value of the common stock issued for the exercise of these warrants was $0.03 per share, for a cumulative value of $300,000 related to the shares issued. The excess value of the warrants over their exercise price in the amount of $76,548 was included in additional paid in capital.
During the year ended November 30, 2006, a second set of warrants was issued pursuant an agreement with the same officer and director that exercised the aforementioned warrants to acquire 10,000,000 shares of the Company’s common stock. These warrants were issued with no exercise price. The maturity of these warrants is six months from the grant date. Due to the lack of a specific exercise price, the Black-Scholes Option Price Calculation could not be used in order to determine the fair value of the warrants on the date of grant. Accordingly, the fair value
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
of these warrants was estimated to be the fair market value of the corresponding stock as of the grant date of $0.03 per share. As a result, the value of these warrants on the grant date was determined to be $300,000.
Accordingly, the fair value of all warrants issued by the Company during the year ended November 30, 2006 was $765,386, while the fair value of all warrants exercised during the year was $376,548. As a result, warrants with a fair value of $388,838 were outstanding as of November 30, 2006.
Summarized information about stock warrants outstanding and exercisable at May 31, 2007 and the fiscal year ended November 30, 2006 are as follows:
Number of warrants | Weighted Average Remaining Life | Average exercise price | ||||||||||
During the year ended November 30, 2006: | ||||||||||||
Issued | 33,625,000 | .69 | $ | 0.034 | ||||||||
Cancelled | (10,000,000 | ) | - | - | ||||||||
Exercised | (10,000,000 | ) | .50 | $ | 0.030 | |||||||
Total warrants outstanding at November 30, 2006 | 13,625,000 | .60 | $ | 0.037 | ||||||||
Total unexercised warrants at November 30, 2006 | 13,625,000 | .60 | $ | 0.037 | ||||||||
During the six months ended May 31, 2007: | ||||||||||||
Issued | 228,100,000 | 4.99 | $ | 0.026 | ||||||||
Cancelled | - | - | - | |||||||||
Exercised | (238,100,000 | ) | (4.42 | ) | $ | 0.026 | ||||||
Total warrants outstanding at May 31, 2007 | 3,625,000 | .65 | $ | 0.063 | ||||||||
Total unexercised warrants at May 31, 2007 | 3,625,000 | .65 | $ | 0.063 |
NOTE 6 – COMMON STOCK
In May 2004, the Company’s board of directors elected to increase the authorized capital of the Company from 100,000,000 shares of common stock to 500,000,000 shares of $0.001 par value common stock, and again on December 8, 2006, the board elected to increase the authorized capital from 500,000,000 shares to 900,000,000 shares. On April 25, 2007, the Company’s Board of Directors again elected to increase the authorized capital of the Company from 900,000,000 shares to 1,000,000 shares. All shares have equal voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
During the six months ended May 31, 2007, 74,625,887 shares of common stock were issued at an average price of $0.017 per share in a private placement for $1,291,758 in cash; 50,000 shares of common stock were issued to one of the Company’s officers and directors for consulting services at an average price of $0.04 per share for $2,000; 400,000 shares of common stock were issued for discount fees related to a convertible debenture at an average price of $0.03 per share for $12,000; 130,029,576 shares of common stock were issued for stock options at an average price of $0.025 per share for consulting services with a fair value of $3,282,310; and 7,600,000 shares of common stock were issued at an average price of $0.023 per share for consulting services with a fair value of $174,000.
During the six months ended May 31, 2007, contributed capital was recorded in the amount of $5,919,400, which resulted from warrants issued pursuant various consulting agreements and for director fees.
During the year ended November 30, 2006, 28,046,590 shares of common stock were issued at an average price of $0.048 per share in private placements for $1,360,219 in cash and expenses paid by investors on behalf of the Company; 24,000,000 shares of common stock were issued to two of the Company’s officers and directors in exchange for unpaid license fees and interest at an average price of $0.085 per share with a fair value of $2,040,000; 23,762,500 shares of common stock were issued to four of the Company’s officers and directors for consulting services at an average price of $0.039 per share with a fair value of $917,875; 125,526,640 shares of common stock options were exercised at an average price of $0.04 per share for consulting services with a fair value of $5,702,084; 10,000,000 shares of common stock were issued to an officer and director at an average price of $0.03 per share for the exercise of warrants held by the officer and director with a fair value of $300,000; and 5,400,000 shares of common stock were issued at an average price of $0.04 per share for consulting and services with a fair value of $216,000.
During the year ended November 30, 2006, contributed capital was recorded in the amount of $244,584, which resulted from the conversion of unpaid license fees due to two shareholders into 24,000,000 shares of the Company’s restricted common stock. This debt was converted to common stock at a price of $0.085 per share, for a total conversion price of $2,040,000, while the total amount due to these shareholders for the unpaid license fees was $2,284,584, resulting in contributed capital from these shareholders in the amount of $244,584.
During the year ended November 30, 2006, contributed capital was recorded in the amount of $88,838, which resulted from warrants issued pursuant various consulting agreements. During the year ended November 30, 2006, contributed capital was also recorded in the amount of $676,548, which resulted from warrants issued to an officer and director of the Company. During the year ended November 30, 2006, contributed capital was reduced in the amount of $300,000, which resulted from the exercise of previously outstanding warrants by an officer and director of the Company (See Note 5).
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Cornell Capital Partners, LLP
The Company entered into a standby equity distribution agreement and various security and debenture agreements with Cornell Capital. (See Note 6). The Company agreed to reserve 81,119,403 shares of common shares under these agreements and to pursue a registration of these shares with Securities and Exchange Commission. As of May 31, 2007, 31,429,368 common shares have been distributed to Cornell Capital in accordance with these agreements. As of May 31, 2007, the Company is in a lawsuit with Cornell Capital regarding Cornell’s claim of shares issued under Section 144 of restricted stock. This legal dispute has not been resolved. Cornell has made demands for the conversion of 1,288,401 shares of the Company’s common stock which have not been delivered. Management has decided to fully resolve its legal dispute with Cornell prior to any further issuance of common stock under the conversion clauses of their agreements. Management expects that the outcome of this lawsuit will be that the Company will be obligated to Cornell for a maximum amount of $244,579 which has been accrued by the Company, and that Cornell will be required to provide a complete accounting of its stock conversions, as well as return any shares converted in excess of the number of shares escrowed. Accordingly, an obligation in the amount of $244,579 is reflected in the Company’s balance sheet. As of May 31, 2007, this obligation is in default. Payment of this obligation is being withheld pending the outcome of the lawsuit with Cornell.
Acquisition of Building
During the six months ended May 31, 2007, the Company entered into a lease agreement with the former sole shareholder of KSI Machine & Engineering, Inc. for the building that KSI uses for its operations. This lease agreement requires AmeriChip to purchase this building from the former sole shareholder of KSI for $3,500,000 prior to the expiration of the five year lease on February 15, 2012 (See Note 3).
Acquisition of Machining Center
In December, 2006, the Company took delivery of and installed a Toyota machining center in order to complement the lasers and robotic equipment that the Company currently owns for performing production runs. Terms of this acquisition allow the Company to utilize the machine for a period of seven months. At the end of the seven month period, the Company has an option to acquire the equipment for a predetermined purchase price of $417,000, or pay a fee of $75,000 for the use of the machine for the seven month period, in which case the machine would then be returned to the seller. As of the issue date of these financial statements, management has not made a decision regarding which option it intends to exercise.
KSI Machine & Engineering, Inc. 401(k) Profit Sharing Plan
Prior to the acquisition of KSI’s common stock by the Company, KSI maintained a 401(k) profit sharing plan for the benefit of its employees. This plan provides that elective contributions can be made by KSI’s eligible employees as defined in the plan document. The plan also provides that no matching contributions be made by the Company. As a result of its acquisition of KSI, AmeriChip assumed all of the obligations of this plan as well as the responsibility for the administration of this plan. As of May 31, 2007, AmeriChip management is in the process of evaluating the establishment of a similar plan for all of its employees, including employees of the
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
various subsidiaries included in these consolidated financial statements. This is being done in order to eliminate the possibility of discriminating against employees that would result if AmeriChip offered the plan to employees of its KSI subsidiary, but did not offer the same plan to its other employees.
NOTE 8 – TECHNOLOGY RIGHTS AND PATENTS
In the year ended November 30, 2003, the Company acquired rights to the patents held by AmeriChip Ventures, Inc., a wholly owned subsidiary of AmeriChip International Inc. These patents are for a process known as Laser Assisted Chip Control technology (“LACC”) which can be used in manufacturing.
Technology licenses and patents are stated at cost. Amortization is provided using the straight-line method over the remaining estimated useful lives of the assets, which is ten years.
The following is a summary of technology licenses and patents and accumulated amortization:
May 31, 2007 | November 30, 2006 | |||||||
Technology licenses and patents | $ | 42,069 | $ | 42,069 | ||||
Less accumulated amortization | (28,871 | ) | (25,767 | ) | ||||
$ | 14,198 | $ | 16,302 |
Amortization expense was $2,104 in the six months ended May 31, 2007 and $4,207 in the year ended November 30, 2006.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company has a related party payable for advances from a shareholder totaling $85,086 as of May 31, 2007 and November 30, 2006, respectively. These advances are not interest bearing and are payable upon demand.
In addition, as of May 31, 2007, the Company was obligated to one shareholder in the principal amount of $520,000, plus accrued interest in the amount of $211,247, related to a cancelable licensing agreement that the Company entered into in January, 2003 with this shareholder. This licensing agreement was for the patented laser assisted chip technology, which required aggregate payments to this shareholder in the amount of $1,000,000, payable in monthly installments of $10,000. Interest on the unpaid principal is accrued at prime plus 1% or 5%, whichever is greater.
See Note 10 regarding long-term debt due to a related entity, Note 6 regarding common stock issued to officers and directors, and Note 5 regarding warrants issued to officers and directors.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
NOTE 10 – LONG -TERM DEBT
AmeriChip Tool and Abrasives, LLC
In August 2004, the Company through its wholly owned subsidiary, AmeriChip Tool & Abrasives LLC, entered into an agreement to acquire certain assets of National Abrasive Systems, Co. (hereinafter “NASCO”), a Michigan corporation. NASCO is considered to be a related party because its president is also the president of the AmeriChip International Inc.
Assets acquired included inventory, equipment, and intangible assets. The transaction was funded by the Company’s execution of a $250,000 promissory note and a UCC-1 security interest in the assets acquired. In recording the transaction, the Company assigned fair values to the equipment and inventory, and no additional value to intangible assets acquired. The purchase was recorded as follows:
Furniture and fixtures | $ | 6,000 | ||
Machinery and equipment | 14,000 | |||
Inventory | 230,000 | |||
Total purchase price | $ | 250,000 |
Terms of the ten-year promissory note include 3.5% interest per annum, payments of interest only of $729 for the first six months, and monthly payments thereafter of $2,417.
Payments of principal and interest are due on this note as follows for the next five years:
2007 | $ | 14,502 | ||
2008 | $ | 29,004 | ||
2009 | $ | 29,004 | ||
2010 | $ | 29,004 | ||
2011 | $ | 29,004 |
The balance of the note at May 31, 2007 was as follows:
Related party note | $ | 197,164 | ||
Less: Current portion | (22,461 | ) | ||
Long-term portion | $ | 174,703 |
As part of the transaction, the Company also issued 150,000 shares of its common stock valued at $9,000 to two NASCO shareholders for their execution of one-year non-competition agreements in favor of the Company. These non-competition agreements are included in other assets on the balance sheet as intangible assets. The cost is being amortized on the straight-line method over the term of the arrangements. No amortization has been charged to expense as of May 31, 2007 and November 30, 2006, respectively.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
Note Payable – KSI Seller
On February 15, 2007, the Corporation acquired 100% of the outstanding common stock of KSI Machine & Engineering, Inc. (See Note 3). Pursuant the terms of the stock purchase agreement, the Corporation is obligated to the former sole shareholder of KSI in the amount of $2,638,043, subject to certain adjustments based upon a post closing due diligence review conducted by Company management.
Terms of the 2 year promissory note includes a 7% interest rate per annum, with minimum payments of $50,000 being required on a monthly basis, inclusive of interest, beginning March 15, 2007. Additional payments may be required, depending upon the closing price of the Company’s common stock in excess of certain minimum levels. (See Note 3). As of May 31, 2007, the Corporation was in default under this obligation due to paying the required monthly payments after their due date. In accordance with the terms of this promissory note, interest is being amortized by utilizing the default interest rate of 9% per annum.
Payments of principal and interest are due on this note as follows for the next five years:
2007 | $ | 300,000 | ||
2008 | $ | 600,000 | ||
2009 | $ | 1,899,186 |
The balance of the note at May 31, 2007 was as follows:
Note payable - other | $ | 2,594,167 | ||
Less: Current portion | (366,525 | ) | ||
Long-term portion | $ | 2,227,642 |
Note Payable – Vendors
As of May 31, 2007, the Corporation entered into loan agreements with four of its vendors, whereby the Corporation is obligated to repay the amounts to these vendors that are included in trade accounts payable over an extended period of time. These obligations bear no interest and are repayable over various periods of time.
The balance of these notes at May 31, 2007 was as follows:
Note payable - other | $ | 153,037 | ||
Less: Current portion | (79,888 | ) | ||
Long-term portion | $ | 73,149 |
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
Note Payable – Bank
On February 15, 2007, Excellence 3, Inc., a subsidiary of KSI Machine & Engineering, Inc. acquired a majority of the fixed assets of KSI, subsequent to the acquisition of KSI’s common stock by AmeriChip. (See Note 3). In order to finance this equipment acquisition, the Corporation is obligated to two local area banks as of May 31, 2007.
Terms of one 7 year promissory note in the amount of $1,600,000 includes a 9.68% interest rate per annum, with payments in the amount of $26,298 being made on a monthly basis, inclusive of interest, beginning March 15, 2007.
Payments of principal and interest are due on this note as follows for the next five years:
2007 | $ | 157,788 | ||
2008 | $ | 315,577 | ||
2009 | $ | 315,577 | ||
2010 | $ | 315,577 | ||
2011 | $ | 315,577 |
Terms of a 5 month promissory note in the amount of $1,280,000 includes a 9.68% interest rate per annum, with interest only payments being made on a monthly basis, beginning March 15, 2007.
Payments of principal and interest are due on this note as follows for the next five years:
2007 | $ | 10,325 |
Convertible Debenture
During the six months ended May 31, 2007, the Corporation entered into a convertible debenture agreement with an unrelated investor in the amount of $100,000. This obligation is due December 7, 2007. The principal amount due to the holder of this obligation is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share. The debenture is convertible, at the holder’s option, any time prior to the maturity date of this obligation. At the inception of this obligation, the Corporation issued 400,000 shares of its common stock as a loan discount fee related to the obligation. This common stock was issued at a fair market value of $0.03 per share, resulting in a loan discount fee in the amount of $12,000. This discount is being amortized over the 1 year term of this obligation. During the six months ended May 31, 2007, amortization in the amount of $5,000 was reflected as an expense on the Company’s financial statements. As of May 31, 2007, the principal amount of the obligation is shown net of the unamortized portion of the loan discount fee. As a result, the Company’s balance sheet reflects $93,000 due on this obligation.
AMERICHIP INTERNATIONAL INC. | |||||||
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 31, 2007 |
Terms of a 1 year promissory note in the amount of $100,000 includes an 18% interest rate per annum, with interest only payments being made on a monthly basis, beginning January 7, 2007.
Payments of principal and interest are due on this note as follows for the next five years:
2007 | $ | - | ||
2008 | $ | 100,000 |
NOTE 11 – SUBSEQUENT EVENTS
On January 2, 2007, the Corporation’s Board of Directors filed Form DEF 14C with the Securities and Exchange Commission (SEC), whereby Company management notified the public of the following actions taken by the shareholders of the Corporation:
The Corporation’s shareholders ratified its current Board of Directors for another one year term.
The Corporation’s shareholders ratified the appointment of Jewett, Schwartz , Wolfe and Associates as its independent Certified Public Accountants
The Corporation’s shareholders ratified the Company’s 2003 Non-Qualified Incentive Stock Option Plan
The Corporation’s shareholders ratified an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares to 1,000,000,000 shares
The Corporation’s shareholders enacted a 1 for 7 reverse stock split effective upon the filing of an amendment to the company’s Articles of Incorporation with the State of Nevada.
The following discussion should be read in conjunction with our unaudited consolidated interim financial statements and related notes thereto included in this quarterly report and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in our Form 10-QSB for the three months ended May 31, 2007. Certain statements in the following MD&A are forward looking statements. Words such as "expects", "anticipates", "estimates" and similar expressions are intended to identify forward looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. See “Special Note Regarding Forward Looking Information” below.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Report and in the Company's periodic filings with the Securities and Exchange Commission constitute forward-looking statements. These statements involve known and unknown risks, significant uncertainties and other factors what may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "intends," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology.
The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will obtain or have access to adequate financing for each successive phase of its growth, that there will be no material adverse competitive or technological change in condition of the Company's business, that the Company's President and other significant employees will remain employed as such by the Company, and that there will be no material adverse change in the Company's operations, business or governmental regulation affecting the Company. The foregoing assumptions are based on judgments with respect to, among other things, further economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company's control.
Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither management nor any other persons assumes responsibility for the accuracy and completeness of such statements.
General Development of Business.
GENERAL
The Company
We were incorporated in the State of Nevada on October 17, 2000 as Southborrough Technology Corporation. On March 9, 2001 we changed our name to Southborrough Ventures, Inc. We were in the business of mineral exploration but initially relied upon the mineral exploration of others and never conducted any mineral exploration ourselves.
On February 27, 2003, our board of directors approved the termination of our exploration activity and the acquisition of the AmeriChip Laser Assisted Chip Control (“LACC”) technology.
On February 27, 2003 our Board of Directors signed an Agreement and Plan of Reorganization with AmeriChip Ventures, Inc. (“AVI”), of Detroit, Michigan to acquire 100% of the outstanding common stock of AVI, in exchange for 60 million shares of our common stock.
On March 22, 2003 the terms of the Agreement and Plan of Reorganization dated February 27, 2003 were consummated pursuant to which we, AVI and AVI shareholders agreed to effect a reorganization under Section 368 (a) (1) (B) of the Internal Revenue Code of 1986, as amended. Pursuant to the Agreement and Plan of Reorganization, we acquired all of the issued and outstanding shares of AVI’s common stock with the result that AVI is now our wholly owned subsidiary corporation. In exchange, for the shares of AVI, we issued 60 million shares common stock to David Howard, the former Chairman of our Board of Directors, Marc Walther, our Chief Executive Officer, and Ed Rutkowski, a member of our Board of Directors. Each of the foregoing individuals received 20 million shares of common stock and were the sole shareholders of AVI.
On January 21, 2003, Ed Rutkowski, transferred his patent, which covers the technology discussed below, to AVI. In consideration of the transfer of the patent, we were obligated to pay the following: Messrs Howard, Walther and Rutkowski, each
received US $1 million payable at the rate of $10,000 on or before the first day of each calendar month beginning September 1, 2003 with interest accruing on any unpaid balance at the greater of (i) five percent (5%) and (ii) the prime rate plus 1% as reported in the Wall Street Journal on the first business day following each July and January 1, of each year until paid in full. The company may repay any or all of this amount without penalty. Messrs Howard, Walther and Rutkowski have agreed to a suspension in payments until we begin generating revenues from operations. The amounts owed to them, however, would continue to accrue.
On October 16, 2003, we executed a definitive Asset Purchase Agreement with American Production Machining LLC, a Michigan limited liability company (“APM”) to acquire certain of its assets, pay APM’s outstanding balance to Comerica Bank and, assume $1,900,000 in liabilities owed by APM to Comerica Bank. The agreement expired on January 24, 2004. We were unable to obtain the necessary funding to conclude the transaction. Currently, we have secured the financing resources to pursue this acquisition with our agreement with Cornell Capital. In August 2004, we tendered a bid to the United States Bankruptcy Court to pursue our acquisition of APM. On April 13th, 2005, the Company on advice of counsel withdrew its offer to purchase the assets of APM.
In December 2003, we changed our name to AmeriChip International Inc. and we now trade on the Bulletin Board operated by the National Association of Securities Dealers, Inc. under the symbol (OTC-BB) under the symbol “ACHI”.
Our principal offices are located at 24700 Capital, Clinton Township, MI. 48036-1350 USA.
Summary
As of September 8, 2004, we had two patents covering the technology described below. To support these patents, we have ordered and put a deposit on equipment sufficient to manufacture production and trial orders. The deposit was in the amount of $50,000 and paid to GSI Lumonics, Inc. The total cost of the robot and laser is $229,845. In April 2005, the Company paid the balance owing on the robot and laser and took delivery of the equipment.
Overview
Our core patented technology includes the use of lasers to effect a controlled breaking of the metal chip. Our technology focuses on increasing the machining efficiencies to effect faster feed rates and less down time. The process is designed to work with technologies of existing machines and operations. We expect to continue to develop additional proprietary technology to enhance the patent and its benefits.
Our technology, when implemented, will eliminate dangerous ribbon-like steel chips that tangle around moving tool parts, automation devices and other components
essential to the machine processing of low to medium grade carbon steels and non-ferrous metal parts. We believe that the result of this process is a superior product manufactured in a safer working environment, avoiding many of the health and safety issues associated with traditional metal processing methodologies, while offering potential cost savings.
We have completed the design and testing of the patented LACC technology. We are currently working with automakers and vendors with a view to supplying processed parts.
Alliances
The Company has the following alliances:
GSI Lumonics - A leading provider of laser equipment. GSI Lumonics has been used as the exclusive supplier of laser equipment to the Company. This is being done, in part, as a result of GSI’s participation and support of the Company during our research and development stage.
Creative Automation - A leading integrator of palletized automation and integration with laser, robots and part quality.
Seco-Carboloy - Carboloy, a Seco Tools company, is a leader in metalworking technology.
The Company does not have written agreements with the three named strategic alliance companies. The Company’s arrangement with GSI Lumonics is that the Company will exclusively purchase lasers and robots from them in exchange for being able to run trials in their laboratory in their Canton, MI testing facility. Should an order require palletization, then the Company is committed to giving Creative Automation Company the right to fill the requirement on a first come, first serve basis. All of the Company arrangements are sales driven.
Subsidiaries
AmeriChip Tool and Abrasives, LLC
On May 5, 2004, the Company created a wholly-owned subsidiary, AmeriChip Tool and Abrasives, LLC. (“ATA”). The new subsidiary will be responsible for providing all the tools necessary for metal removal in the machining process.
On July 19, 2004, ATA secured the right to represent Seco-Carboloy, in addition to Kinik, Superior Abrasive and Val-U-Max. ATA has entered into distribution agreements/arrangements with: Kinik - Grinding Wheels , Superior Abrasive - abrasive
products, Valu-U-Max,(Special cutting tools) - ACE Drill Corporation, (High Speed Drills) Sidley Diamond Tool Company, ( Diamond Drills ) Bates Abrasives, Inc. (Abrasive products) The Desmond-Stephan Mfg. Co., Production Tool Supply, (Dressers and Cutters) Michigan Drill Corporation, (Drills) Carboloy, (Carbide Tools) Oil Screen-Reven, (filters) Keo Cutters, (Drills) Morse Cutting Tools (Cutting Tools), Marxman Tools (Cutting Tools) Gemtex (Abrasive products) Indasa (Coated Abrasives) Howell Tool Service (Tooling and Abrasives) Felton Brush ( Brushes) and Mitutoyo Gauges (Gauges) Magafor Precision (Drills), Sandusky CO. (Abrasives), Cumi (Grinding Wheels), and Kinik (Grinding Wheels). These relationships give the Company the right to make sales calls and or sell the products of these companies directly to ATA’s customer base. The right to represent is defined by “being appointed to act as a distributor on behalf of a specific company and given the right to represent their product line on behalf of the subject company.” The products are sold to ATA, which acts as a distributor, at a discount from market price. ATA then sells the product at the market price. The companies provide the Company with all their marketing tools, samples and other selling material, which assists the Company in selling their product line. The Company is also able to offer their products via our on-line marketing section of the Company’s website at www.americhiplacc.com. The Company derives the Company’s income from selling the various companies products to their customers. The primary motivation for having distributors is to eliminate the need for a sales staff. All of the companies, with which ATA has chosen to become associated, make products that are in the metal removal industry, which is consistent with our business model.
On August 3, 2004, ATA announced its purchase of the Nasco Brand name of abrasive products. This line of abrasive products has been sold throughout the United States and Canada for many years. The Company believes that the acquisition of this brand and its inventory will allow its subsidiary, AmeriChip Tool and Abrasives, to immediately generate sales by offering a wider breadth of products for all its current and future customers who require abrasive products in their manufacturing processes. Abrasives are typically used in the process after machining. The purchase of this brand name is consistent with the implementation of the Company’s business model.
KSI Machine & Engineering Inc.
On September 14, 2004, the Company executed a letter of intent with KSI Machine and Engineering, Inc. (hereinafter “KSI”) to acquire all of KSI’s outstanding stock. KSI is a manufacturer of automotive die and mold castings which use horizontal spindle 5 axis computer numerical controlled machines. During the year ended November 30, the Company paid a deposit of $50,000 for this agreement. On December 7, 2004 the Company paid an additional $100,000 and signed a stock purchase agreement with KSI. On June 24, 2005 the Company announced that it was entering in to a license agreement with KSI Machine and Engineering Inc. for the use of AmeriChip’s Laser Assisted Chip Control technology. On October 26, 2005 the Company paid an additional deposit of $30,000 and on November 7, 2005, the Company paid another $20,000 deposit for a total of $200,000. KSI and AmeriChip are also negotiating a joint venture relationship from
which AmeriChip will generate revenues from the application of its proprietary technology in a Tier One environment.
In September 2006, the Company was approved by Peoples Bank for a $1,600,000 loan to complete the purchase of KSI Machine, subject to approval of an additional loan in the amount of $1,280,000 to be provided by the Small Business Administration (SBA).
On February 15, 2007, AmeriChip completed the acquisition of the common stock of KSI. The acquisition price of KSI's common stock is $3,200,000, subject to certain adjustments related to the amount of retained earnings reflected on the closing date, the amount of accounts receivable reflected on the closing date, and the amount of accounts payable reflected on the closing date. The adjusted acquisition price of KSI was $2,988,043, subject to post closing due diligence by the Company’s internal accounting firm. Deposits preciously paid to the seller in the amount of $200,000 were applied against the purchase price as of the closing date.
The Company paid an additional $150,000 to the seller at closing, resulting in an obligation by the Company to the seller in the amount of $2,638,043. This obligation is payable in monthly installments of $50,000 over a period of 18 months, inclusive of interest accruing at a rate of 7% per annum. After the expiration of the 18 month period, the unpaid balance is due to the seller. Additional principal payments may be required, depending upon the value of the Company’s stock price.
Excellence 3, Inc.
In conjunction with the KSI acquisition, ownership Excellence 3, Inc, a fully owned subsidiary of AmeriChip International, Inc., was assigned to KSI, another fully owned subsidiary of AmeriChip International, Inc. Immediately subsequent to the acquisition of KSI, Excellence 3, Inc. acquired all of the fixed assets of KSI in the amount of $3,200,000. $1,600,000 of the funding for this acquisition was provided by Peoples State Bank, a local area banking institution. $1,280,000 of the funding for this acquisition was provided by the United States Small Business Administration (SBA). These funds are scheduled to be provided within six months of the closing date. Peoples State Bank agreed to provide temporary funding for this six month period. In addition to the funding previously described, AmeriChip International, Inc. provided the remaining $320,000 in order to complete the acquisition of fixed assets.
Payment of the $1,600,000 obligation requires monthly payments in the amount of $26,298, over a period of 7 years, inclusive of interest accruing at a rate of $9.68% per annum. The temporary funding for the SBA portion of the loan provided by Peoples State Bank requires interest only payments, accruing at a rate of 9.68% per annum until the funding is provided by the SBA. Payment of the permanent portion of the SBA obligation will be made over a period of 10 years. The interest rate and monthly payment amount is dependant upon the terms of a debenture to be issued by a local taxing authority.
The acquisition of KSI allows AmeriChip International, Inc. to become an operating company, with tier one status recognized by many actual and potential customers of AmeriChip.
AmeriChip International Holdings, LLC
On September 10, 2004, we established AmeriChip International Holdings, LLC, as a wholly owned subsidiary of AmeriChip International, Inc. This entity was created in order to acquire American Production and Machining, LLC, an unrelated entity, out of bankruptcy. This transaction has not occurred as of the date of this report. Accordingly, AmeriChip International Holdings, LLC is at present a non-operating entity.
The Process
Traditional methods of handling the residue of machining metal parts has necessitated the manufacture of specially designed chip control inserts and or the use of coolants to assist in the separation and flushing of contaminated metal chips, a problem that has plagued the metal parts manufacturing industry for more than 60 years. The problem, however, has become even more prevalent with the development of highly automated machine tools during the last two decades. Automated machinery was developed to satisfy the demand for the increased production of machined metal components by the automotive sector as well as other industries. Certain operations resulted in such serious chip control problems that some companies were unable to effectively capitalize on the benefits of automation.
The metal machining industry seeks to increase production and automate the machining process. The automotive industry has been particularly hard pressed to effect lower costs both within its own internal operations as well as components manufactured on its behalf by outside suppliers who must remain competitive. Preventing the forfeiting of contracts to foreign parts providers where labor and other costs are considered lower than in the United States is of key importance. Stringy metal chips wrap around automatic gauging and interfere with robotics to cause an interruption or discontinuance of the automation to manual operations. The AmeriChip LACC process allows this problem to be eliminated.
Currently coolant is deployed to flush the long stringy chips out of the machine components and remove them from the machine base itself. If the base becomes clogged it can cause many hours of non-productive down time and added costs while the machinery is cleaned. Coolant represents a major component of the entire manufacturing processes, representing as much as 15% of the total machining production cost. Coolant also has to be disposed of in accordance with environmental regulations, adding even more cost. Additional, coolant fumes may pose potentially serious health risks and the cause of long term problems when inhaled. The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) has established standards for coolant exposure in the five (5ml) per cubic meter and has requested that
even stricter regulations be adopted at ten times more stringent. The multiple cost factor associated with the use of coolant as well as related health and environmental factors represent a challenge for metal machining manufacturing companies to significantly reduce the consumption of coolant or to eliminate its use altogether. By eliminating the use of coolant, incidence of workman’s compensation claims will be dramatically reduced. Additionally, the ribbons of metal chips that remain following the machining of metal components without the contamination of bacteria laden coolant will provide an additional revenue source for the company as the “chips” can be salvaged and recycled.
We have targeted the automotive sector initially, but our process can be applied to any industry where the machining of metal is a major process of manufacturing of component parts. This includes, but is not limited to oil production and refining, off-road construction, farm implements, aerospace and defense contractors.
Although our main goal is to acquire automotive parts manufacturers such as KSI, we could apply our process to auto parts such as axle shafts, axle tubes, spindles, and connecting rods, in our own facility.
In this scenario, the customer would deliver raw goods (un-machined auto parts) to our facility where we would apply the LACC process and the customer would retrieve the “treated” part for machining at their location. Such a plan would require the purchase of several specialized lasers and robotics and the leasing of approximately 40,000 sq ft. This would allow for space three (3) separate lasers and a holding area of approximately 10,000 sq ft for the raw goods/treated parts.
Our customers are expected to find a variety of compelling benefits. We believe that many of these benefits result in operational efficiencies and significant cost savings in the overall machining of metal parts. We believe that the benefits of using our process would include the following:
* | Less Machine Down-Time |
1. | Chip Clearing by operators of tools and parts | |
2. | Reduced tool breakage resulting from wrapping of chips, re-cutting of chips | |
3. | Eliminate down time required for chip pullers to clear machines and under floor conveyers of clogged chip bundles | |
4. | Increased machine efficiency by eliminating chip bundles from tangling around tool slides, posts, holders and interfering with adjacent moving parts, such as robotics, automation, chucking and in-line process gauging | |
5. | Predictable tool change management program linked to consistency in tool life | |
6. | Reduced incidents of on-the-job injury from exposure to sharp, long continuous stringy chips, which requires medical down time. Jobs are handled more quickly and efficiently leading to less frustration and constant worry about |
dealing with dangerous chips. |
* | Reduced Costs |
1. | Increased throughput as a result of less downtime | |
2. | Reduction of direct labor - chip pullers are no longer required |
3. | Elimination of maintenance and outside special services to clean and repair chip evacuation systems, thus increasing productivity through reduced machine down time | |
4. | Reduction of overtime because of increased through-put per machine | |
5. | Reduced use of Hi-Lo driver’s time to removed containers filled quickly because of the chip bundles. Few containers are necessary due to chip compaction. | |
6. | Improved tool life due to less breakage because of chip bundles | |
7. | Less machine maintenance required | |
8. | Reduced scrap | |
9. | Elimination of coolant. The LACC process does not require the use of coolant whatsoever. The working environment is therefore less toxic, cleaner and safer. |
10. | Reduction in coolant filter cost | |
11. | Reduction in coolant disposal cost | |
12. | Reduced costs of gloves and aprons as fewer are needed | |
13. | Better railcar utilization due to chip compaction | |
14. | Lower insurance rates as a result in the reduction of injuries related to the handling of long, sharp, stringy chips, cleaner and safer work area, which is less toxic | |
15. | Uncontaminated chips can now be sold for profit as compared to the cost of removal of contaminated chips. |
* | Tooling and Process Efficiencies |
1. | Elimination of the need for light/semi finish and finish depths of cuts in low to medium carbon materials and non-ferrous metals | |
2. | Reduced welding and packing of chips, which reduces the wear and tear on cutting tools | |
3. | Improved chip disposal and handling costs through better management of chip lengths | |
4. | Reduced capital equipment expenditures since high-pressure coolant systems are no longer necessary | |
5. | The need for specially designed chip control inserts and the use of coolants to manage the “chip” are no longer required with the LACC process. |
The Company believes that as a result of implementing our LACC process on certain automobile parts prior to machining that we well be able to pass on many benefits
that will result in operational efficiencies and significant cost savings in the overall machining of metal parts.
With the lasering of parts prior to machining our process reduces machine down time which is traditionally caused because chips have to be cleared by the operators away from tools and parts and the replacement of tools which have been broken as a result of the wrapping of chips around them. Down time is also created when time is taken by chip pullers to clear machines and under floor conveyers of clogged chip bundles. Since we can eliminate chip bundles from tangling around tool slides, posts, holders and interfering with adjacent moving parts, such as robotics, automation, chucking and in-line process gauging we increase machine efficiencies. Tools are not damaged from chips and there we can offer predictable tool change management program linked to consistency in tool life. We believe that there will be reduced incidents of on-the-job injury from exposure to sharp, long continuous stringy chips keeping workers working instead of seeking medical treatment. With a continuous job run, projects will be handled more quickly and efficiently leading to less frustration and constant worry about dealing with dangerous chips.
With the implementation of the LACC prior to machining metal parts our client will enjoy reduced costs due to increased throughput as a result of less downtime and the reduction of direct labor since chip pullers will no longer be required. Our process eliminates the need for maintenance and outside special services to clean and repair chip evacuation systems, thus increasing productivity through reduced machine down time. The LACC process provides for increased through-put for each machine and therefore more work can be accomplished per shift, allowing for the reduction of overtime costs required to ensure that jobs are completed on schedule. With no chip bundles being produced, a client would no longer need to use a Hi-Lo driver’s time to removed containers filled with chip bundles. In addition, fewer containers are necessary due to chip compaction adding to reduced costs. Other benefits included improved tool life due to less breakage because of chip bundles, less machine maintenance, reduced scrap and the scrap that remains can be recycled and sold for cash. Uncontaminated chips can now be sold for profit as compared to the cost of removal of contaminated chips.
The LACC process does not require the use of coolant whatsoever and therefore the working environment is therefore less toxic, cleaner and safer. The benefits to the client include a reduction in coolant filter cost, reduction in coolant disposal cost, reduced costs of gloves and aprons as fewer are needed and better railcar utilization due to chip compaction. The reduction of injuries related to the handling of long, sharp, stringy chips in a cleaner and safer work area, in which there are fewer toxins can lead to reduced insurance costs for the client.
One of the key benefits to applying the LACC process prior to machining is that it results in tooling and process efficiencies .This is accomplished due to the elimination of the need for light/semi finish and finish depths of cuts in low to medium carbon materials and non-ferrous metals. In addition, the welding and packing of chips is reduced which
normally affects the wear and tear on cutting tools, shortening their life span. Improved chip disposal and handling costs through better management of chip lengths makes the machining process run much more smoothly. Since high-pressure coolant systems are no longer necessary, the client will enjoy reduced capital equipment expenditures. The need for specially designed chip control inserts and the use of coolants to manage the “chip” are no longer required with the LACC process.
Osborn International
On December 2, 2004, we issued a press release to announce the appointment of AmeriChip International as a distributor for Osborn International, the world's largest industrial brush maker and a manufacturer of tools for surface finishes.
RM Communications
In October 2003, we executed a six-month agreement with RM Communications (hereinafter “RMC”), to provide services and website development for AmeriChip. RMC was entitled to receive $2,000 per month for six months, 100,000 shares of common stock upon signing the agreement, 100,000 shares of common stock upon completion of services, and 300,000 three-year warrants, which will expire in January 22, 2007. The warrants are exercisable per the following terms: 100,000 warrants at $0.30, 100,000 warrants at $0.40, and 100,000 warrants at $0.50. We were to also pay additional costs incurred by RMC in performance of the contract.
In April 2004, we executed a continuation of the aforementioned agreement for an additional year. RMC is entitled to receive $3,500 per month, 200,000 shares of common stock upon signing the agreement, and 3-year warrants exercisable at $0.25, payable in increments of 150,000 to be issued at the beginning of each quarter. During the year ended November 30, 2004, 100,000 shares of common stock, 300,000 warrants, and $9,000 in cash were paid to RMC. During the three months ended August 31, 20055, the Company entered into a new agreement with RMC and cancelled all 1,050,000 existing warrants issued to RMC. The Company issued 3,200,000 new three-year warrants to acquire 3,200,000 shares of common stock at an exercise price of $0.035 per share. Additional fair value of the warrants determined on the new grant date of $19,524 was expensed to consulting and 150,000 warrants of the aforementioned new issuance were exercised for common stock for cash of $5,250. In June 2005, the Company cancelled all remaining warrants issued to RM Communications. In June 2005, the Company issued 6,065,000 shares of its capital stock pursuant to Rule 144. These shares replaced all outstanding warrants and completed the Company’s contract with RM Communications. The Company did not renew its contract in January 2006.
AmeriChip Automotive Inc. and Richard H. Rossmann
On April 17, 2006, we established AmeriChip Automotive Inc., as a wholly owned subsidiary of AmeriChip International, Inc. On April 18, 2006 Mr. Richard H.
Rossmann was appointed President of AmeriChip Automotive Inc. and Executive Director of Manufacturing of AmeriChip International Inc. Mr. Rossmann’s main focus will be new business development and manufacturing implementation.
Quality Control System
On April 20, 2006, AmeriChip International Inc. announced that it had established a quality control system ISO0001:2000/TS16949. The implementation of this system affords the Company an opportunity to introduce its patented processes, to all metal finishing industries in the United States and worldwide. The Company has set the last quarter of 2006 to be certified to the ISO9001:2000/TS16949 Quality Standard.
General Motors
On April 25, 2006 the Company received its official supplier status from General Motors. On June 28, 2006 the Company received its first two purchase orders for a large volume transmission component.. The Company is waiting for delivery of special chucks and gages for completion of preproduction quality verifications. The chucks were significantly delayed due to an error in the supplier blue prints. These corrections have been made and pre production product has been delivered under customers’ instructions for validation prior to production. The company has billed for parts and special chucks.
Doosan Turning Center
On April 27, 2006, the Company took delivery of a Doosan 670LM turning center at its KSI location in Clinton Township, MI. The turning center will enable the Company to significantly reduce the time required for the trial to purchase order process and will allow for onsite demonstration of superior production capabilities. The turning center capital represented an expenditure of $262,000.
Customized Laser Heads
On May 2, 2006, the Company took delivery of one of three custom laser heads which were built according to the Company’s specifications for continuous improvement and development of its applications. The first of the three heads represented a capital expenditure of $262,235.
Metallurgical Centre
In July 2006, the Company took delivery of metallurgical analysis equipment manufactured by LECO. The equipment will be used to help measure, analyze and document data for verification of process parameters for implementation of the LACC parts. The center is also a quality department for the Laser Assisted Chip Control laboratory to meet with ISO and TS certification requirements established by the Company.
Frankfurt Exchange Listing
On July 31, 2006 the Company reported that the Company had been listed on the Frankfurt Exchange with the trading symbol SZS.f.
ISO9001:2000 Certification
On August 8, 2006 the Company reported that it had received certification of registration for ISO:9001;2000, a quality management system. This worldwide certification for a quality management system was assessed and approved by American Institute of Quality Registrars (AIQR). The Quality Management System is applicable to “Design, Process and Manufacturing, Integrating the Company’s Patented Laser Assisted Chip Control Technology into Industrial Metal Machining Applications”. This Certification is an absolute requirement by all markets worldwide.
The Ford Motor Company
On August 29, 2006, the Company announced that it had received a purchase order from The Ford Motor Company for application of the Company’s Laser Assisted Chip Control technology for the manufacturing of transmission drum assembly components. Special laser head is on order and processing will begin when delivery is made from supplier. Due to the long delivery on the transmission assembly components, Ford shifted the research dollars over to transmission shafts. We have lasered and delivered the shafts and have billed accordingly. Since then we have now received all of the transmission assembly components and still await delivery of the special head which will be delivered in 30 days.
CMM
The Company took delivery of a Co-ordinate Measuring Machine (“CMM”) which is in an integral piece of equipment that does fine measurement for machined parts in September 2006. Coordinate Measuring Machines (CMM) are mechanical systems designed to move a measuring probe to determine coordinates of points on a work piece surface. CMM’s are comprised of four main components: the machine itself, the measuring probe, the control or computing system, and the measuring software. Machines are available in a wide range of sizes and designs with a variety of different
probe technologies. This equipment is a key component in the validation and evaluation of processed parts.
License Agreement For Patented Metal Polishing Technology
The Company entered into a licensing agreement with its President and Chief Operating Officer for the use of his patented metal polishing technology. The Company believes that this patent will significantly increase its sales potential by expanding its product line and revenue producing ability. The license agreement allows the Company to have exclusive use of the patented technology, except for prior arrangements by the Chief Executive Officer with Ford, Visteon and Global Technologies.
This process augments the existing Laser Assisted Chip Control Technology platform from which the Company currently operates, offering a broader scope of products to its customers, thereby increasing its revenue potential.
This patent is a “process” patent that uses a combination of high speed machining and abrasive brushes that reduce labor and capital required to manufacture dies and molds. This process allows for a method to automatically finish free-form contoured metal or hard die surfaces. As a result, the cost to machine and polish a mold or die can be reduced by 50%.
The Chief Executive Officer of the Company will receive a royalty on any revenues generated by the Company and its subsidiaries through license opportunities and implementation of the process. As of the date of this filing, no revenue has been generated by the Company as a result of this process and no royalties have been paid by the Company.
Current Products and Services
Our patented laser assisted chip control process is readily applicable to any metal component that requires precision finishing. We believe that our process will provide significant value to our customers by decreasing the costs and increasing the efficiency of their operations. We are targeting our service to businesses in the following markets:
* | Automobiles |
* | Oil Production and Refining |
* | Aerospace |
* | Off-Road Construction |
* | Farm Implements Manufacturing |
* | Defense Contractors |
Sales & Marketing
We intend to transition from being a company focusing almost solely on product development and testing, to focusing on sales and marketing. We expect to sell a service and a product. The service will be the manufacturing of a finished product using equipment with the LACC technology. We further anticipate that customers will purchase equipment using LACC technology from one of our strategic alliances and also pay AmeriChip a royalty for use of the LACC technology. Initially we will focus on customers in the automobile industry.
Management has identified what is believed to be large markets that remain underserved but would be logical, potentially strong candidates given an appropriate product and service offering at the right price. Just for automotive products, management has identified particular market segments that would be likely to benefit from our LACC technology: axle shafts, axle tubes, torque converters, spindles, pinions, input/output shafts, side gears and connecting rods.
Insurance
We do not maintain any keyman insurance but are securing quotes from various insurance underwriters to select the best plan for the Company. Since we are not manufacturers of product, we are not required to carry product liability insurance.
Government Regulations
In addition to regulations applicable to businesses in general, our plant operations will be subject to other regulations that are common in industrial manufacturing.
Competition
We compete with other parts machining companies. We have generated some revenues from our wholly owned subsidiary, AmeriChip Tool and Abrasives, and are a minuscule participant in the parts manufacturing business.
Intellectual Property
We rely on our patents to protect our technology. We also have unpatented proprietary technology. We rely on nondisclosure and other contractual provisions to protect our proprietary technology. Currently, we have two patents granted and we intend to file other patent applications for enhancements to the existing patents. As part of our confidentiality procedures, we generally enter into nondisclosure agreements with our employees, consultants, distributors and partners and limit the dissemination and access to our technical documentation and other proprietary information. There is no assurance our patents will provide us with adequate protection. If a third party infringes on our patents, we do not have adequate funds available for protracted litigation and consequently may not be able to enforce our rights under applicable patent laws.
As of September 8, 2004, we had filed a total of two patent applications with the U.S. Patent and Trademark Office (PTO) covering our technology, both of which have been approved. The approved patents are as follows:
1. | “UNITED STATES PATENT RUTKOWSKI” with PTO Patent Number 5,200,593, issued April 6, 1993. | |
2. | “UNITED STATES PATENT RUTKOWSKI” with PTO Patent Number 5,384,446, issued January 24, 1995. |
RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF SIX MONTH AND THREE MONTH PERIOD ENDED MAY 31, 2006 AND MAY 31, 2007.
Revenue Recognition. We have generated revenues from our operations during the last two years. We recognize revenue when the earnings process is complete of which there is no assurance of such recognition as described below, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility is reasonably assured.
Revenues and Sales. Revenues for the six months ended May 31, 2007 increased from $81,750 for the six months ended May 31,2006 to $808,633. Gross profit for the six months May 31, 2007 increased from $27,343for the six months ended May 31, 2006 to $508,248. The increases were primarily from the sales of product less $300,385 in cost of sales. The increased gross margin for the six months ending May 31, 2007 is due to the operating results provided by KSI Machine & Engineering, Inc., a subsidiary of AmeriChip, for the period of February 15, 2007 through May 31, 2007. The gross margins historically reflected in KSI’s financial statements are substantially larger than the gross margins historically generated by AmeriChip International, Inc.
Operating Expenses Operating expenses, which include administrative expenses, legal and accounting expenses, consulting expenses and license expense increased from $7,195,508 for the six months ended May 31, 2006 to $10,120,922 for the six months ending May 31, 2007, an increase of $2,925,414 This increase is due to an increase in director fees as a result of the issuance of restricted common stock to each of the Company’s directors in the amount of $5,850,000. This is partially reduced in the amount of $1,320,000 by a decrease in license expense for the six months ended May 31, 2007, resulting from the conversion of the unpaid license fees owed to two officers during the six months ending May 31, 2006. The operating expenses are also partially reduced in the amount of $2,147,237 by a decrease in consulting expenses during the six months ending May 31, 2007.
Net Loss. Net loss increased from a net loss of ($7,215,427) for the six months ended May 31, 2007 to a net loss of ($9,871,340) for the six months ended May 31, 2007, primarily due to the larger operating expenses during the six months ending May 31, 2007, as described previously.
PLAN OF OPERATION
As a result of the acquisition of KSI Machine and Engineering, we are now in a position to implement our technology. We anticipate that the operations of KSI Machine and Engineering will bring to the consolidated statement of operations of AmeriChip annual revenues of approximately $2,500,000 based on revenues generated in 2006, as well as additional revenues currently being generated within the KSI subsidiary by AmeriChip management personnel.
The facilities of KSI Machine and Engineering are large enough to permit allocation of space for our new laser and robotic equipment which is now in operation at the KSI location,. This equipment is required in the implementation of the LACC process and we are currently conducting pilot projects for various Tier One suppliers.
KSI Machine and Engineering is a manufacturer of automotive die and mold castings which use horizontal spindle 5 axis computer numerical controlled machines.
We believe that the patented technology, Laser Assisted Chip Control process ("LACC") for companies engaged in the machining of automobile parts can produce significant revenues for us. While we are optimistic about our initial customer experiences, there can be no assurances that the savings realized will be experience by all customers or that we will achieve significant revenues.
LIQUIDITY AND CAPITAL RESOURCES
We have not attained profitable operations since inception and we have not progressed significantly in our operations. We have incurred recurring losses and at November 30, 2006 had an accumulated deficit of ($21,502,069) and at May 31, 2007, we had an accumulated deficit of ($31,373,409) For the year ended November 30, 2006, we sustained a net loss of ($10,986,583) and for the six months ended May 31, 2007, we had a net loss of ($9,871,340).
On April 23, 2003, the Company executed a letter of intent with American Production Machining, LLC (hereinafter “APM”) to acquire certain assets of APM subject to the execution of a definitive agreement. APM is manufacturer of automotive, truck and aircraft parts. They use computer numerical controlled machines and state of the art inspection equipment. On October 16, 2003, the Company executed a definitive Asset Purchase Agreement which required the payment of cash and the assumption of $1,900,000 in liabilities owed by APM to Comerica Bank. The original closing date for this transaction was November 15, 2003. We were, at the time, unable to obtain the
necessary funding to conclude the transaction. Currently, the Company has secured the financing resources to pursue this acquisition with its agreement with Cornell Capital. In August 2004, the Company tendered a bid to the United States Bankruptcy Court to pursue its acquisition of APM. In April 2005, the Company withdrew its bid with the court.
As a result of our new relationship with KSI Machine and Engineering, we no longer need to access the Line of Credit arranged with Cornell Capital Partners, LLC. Accordingly, on June 20, 2005, we notified Cornell Capital Partners, LLC in writing that we would no longer draw down any funds against the existing SEDA. We also requested that Cornell Capital Partners, LLC provide a full accounting of all transactions from inception with respect to our account with Cornell Capital Partners, LLC. We believe a full accounting will show that we have overpaid Cornell Capital Partners, LLC, although we can have no assurances of such an overpayment until a full accounting is provided.
As of the date of this filing, the Company is involved in a lawsuit with Cornell Capital Partners, LLC related to shares of the Company’s stock issued in escrow on behalf of Cornell pursuant a standby equity agreement and various security and debenture agreements. AmeriChip has demanded that Cornell return shares that have been overdrawn from the escrow account by Cornell, while Cornell has demanded the conversion of 1,288,401 shares of the Company’s stock which they claim have not been delivered. Management cannot currently estimate what the outcome of the lawsuit will be.
Even though we have secured adequate funding, no assurances can be provided that our business activities will generate sufficient revenues which may result in net profits for the Company.
Our auditors have raised substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
We intend to continue to explore potential business combinations with other parties which may enhance or supplement the operation of our business or which may generate new or additional sources of revenues related to the patented Laser Assisted Chip process. For example, we are exploring whether it may be feasible to acquire the assets of an existing manufacturing firm engaged in manufacturing automobile parts which we could subsequently enhance and benefit through the use of the patented process. Any additional acquisition or other business combination will be dependent on our ability to obtain financing from traditional sources or from seller carryback financing, or a combination thereof. There is no assurance that we will be able to obtain any financing to pursue any future acquisitions or combinations. Even if adequate financing is obtained, no assurance can be provided that any additional acquisition or combination will generate sufficient revenues which may result in net profits for us.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the Securities and Exchange Commission under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting.
During the Quarter ended May 31, 2007, there were no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
We are subject to various claims and legal actions in the ordinary course of business. We are not aware of any pending or threatened litigation, except for our lawsuit with Cornell Capital Partners, LLC, that we believe is reasonably likely to have a material adverse affect on our results of operations, financial position or liquidity. None of these matters, in the opinion of management, is likely to result in a material effect on us based upon information available at this time.
There were no changes in securities or purchase or sales of securities during the period ended May 31, 2007.
There were no defaults upon senior securities during the period ended May 31, 2007.
On April 24, 2007 the Board of Directors and a majority of its stockholders voted to approve the following resolutions:
1) | Four members were elected to the Company's Board of Directors to hold office until the Company's Annual Meeting of Stockholders in 2006 or until his successor is duly elected and qualified; and |
2) | The appointment of Jewett, Schwartz, Wolfe & Associates as the Company's independent certified public accountants was ratified; and; |
3) | The Company’s 2003 Non-Qualified Incentive Stock Option Plan was ratified; and |
4) | The amendment to the Articles of Incorporation to increase the authorized shares of common stock to 1,000,000,000, par value $.00001 and establish a class of preferred shares, totaling 1,000,000,000, par value $.00001, was ratified; and; |
5) | Enacted a one for seven reverse stock split, to be effective as of the filing of an amendment to the Company's Articles of Incorporation with the Nevada Secretary of State. |
Item 4.01. Changes in Registrant's Certifying Accountant.
On June 18, 2007, AmeriChip International, Inc. (the “Company”) dismissed Williams & Webster, P.S. as its independent registered public accounting firm. Effective June 18, 2007, we engaged Jewett, Schwartz, Wolfe & Associates as our new independent registered public accounting firm. Our board of directors has approved the dismissal of Williams & Webster, P.S. and the appointment of Jewett, Schwartz, Wolfe & Associates as our new independent registered public accounting firm.
From the date of Williams & Webster, P.S.'s appointment on February 10, 2004, through the date of their dismissal, there were no disagreements between our Company and Williams & Webster, P.S. on any matter listed under Item 304 Section (a)(1)(iv) A to E of Regulation S-B, including accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Williams & Webster, P.S. would have caused Williams & Webster, P.S. to make reference to the matter in its reports on our financial statements. The reports prepared by Williams & Webster, P.S. on the company’s financial statements for the years ended November 30, 2006, 2005 and 2004, contained neither an adverse opinion nor a disclaimer of opinion; however, such reports contained a qualifying paragraph setting forth that there was substantial doubt as to our ability to continue as a going concern.
Prior to engaging Jewett, Schwartz, Wolfe & Associates, we did not consult Jewett, Schwartz, Wolfe & Associates regarding either:
1) | the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to our company nor oral advice was provided by Tanner LC that was an important factor considered by our company in reaching a decision as to the accounting, auditing or financial reporting issue; or |
2) | any matter that was either the subject of disagreement or event, as defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction to Item 304 of Regulation S-B, or a reportable event, as that term is explained in Item 304(a)(1)(iv)(A) of Regulation S-B. |
Prior to engaging Jewett, Schwartz, Wolfe & Associates, Jewett, Schwartz, Wolfe & Associates has not provided our company with either written or oral advice that was an important factor considered by our company in reaching a decision to change our independent registered public accounting firm from Williams & Webster, P.S. to Jewett, Schwartz, Wolfe & Associates.
On June 18, 2007 the Company announced that the Board of Directors and the majority of its stockholders approved a consolidation of the capital stock of the company,
A. Exhibits:
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. | |
31.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. | |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. | |
32.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 16, 2007 | By: | /s/ Marc Walther | |
Marc Walther, CEO, Director and Authorized Signatory | |||
By: | /s/ Thomas P Schwanitz | ||
Thomas P Schwanitz, Principal Financial and Accounting Officer | |||
23