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 August 31, 2008
AMERICHIP INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Nevada | 000-33127 | 98-0339467 |
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification) |
24700 Capital Blvd. 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:
Ryan West
40 West Cache Valley Blvd.
Ste 8A
Logan UT 84541
Telephone: 435-755-0022
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 October 21, 2008, 596,445,073 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
AMERICHIP INTERNATIONAL INC.
FORM 10-QSB
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements (unaudited) | 1 | |
Condensed consolidated balance sheets at August 31, 2008 and November 30, 2007 | F-2 | |
Condensed consolidated statements of operations for the Nine Months ended August 31, 2008 | F-3 | |
Condensed consolidated statements of cash flows for the Nine Months ended August 31, 2008 | F-4 | |
Notes to condensed consolidated financial statements | F-5 | |
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations | 2 | |
Item 3. Controls and Procedures | 20 | |
PART II OTHER INFORMATION | ||
Item 1. Legal Proceedings | 21 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 23 | |
Item 3. Defaults Upon Senior Securities | 23 | |
Item 4. Submission of Matters to a Vote of Security Holders | 23 | |
Item 5. Other Information | 23 | |
Item 6. Exhibits | 24 | |
Signatures | 25 |
PART I FINANCIAL INFORMATION
General
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flow, and stockholders’ deficit in conformity with generally accepted accounting principles in the United States of America. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s annual report on Form 10-KSB for the year ended November 30, 2007. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the quarter ended August 31, 2008 are not necessarily indicative of the results that can be expected for the year ended November 30, 2008.
1
AMERICHIP INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2008
Table of Contents
Consolidated Balance Sheets | F – 2 |
Consolidated Statements of Operations | F – 3 |
Consolidated Statements of Changes in Cash Flows | F – 4 |
Notes to the Consolidated Financial Statements | F – 5-14 |
F-1
AMERICHIP INTERNATIONAL, INC. | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
August 31, | November 30, | |||||||
2008 | 2007 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 2,153 | $ | 131 | ||||
Accounts receivable - trade | 123,749 | 685,303 | ||||||
Accounts receivable - other | 31,100 | 1,600 | ||||||
Related party receivabe | 402,010 | 174,010 | ||||||
Prepaid expenses | 198,769 | 403,849 | ||||||
Inventory | 85,000 | 135,047 | ||||||
TOTAL CURRENT ASSETS | 842,781 | 1,399,940 | ||||||
FIXED ASSETS, NET | 3,274,432 | 3,586,140 | ||||||
OTHER ASSETS | ||||||||
Deposits | 46,288 | 39,488 | ||||||
Technology rights and patents, net of amortization | 8,940 | 12,095 | ||||||
Goodwill | 2,577,673 | 2,577,673 | ||||||
TOTAL OTHER ASSETS | 2,632,901 | 2,629,256 | ||||||
TOTAL ASSETS | $ | 6,750,114 | $ | 7,615,336 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Bank overdraft | $ | 19,958 | $ | 39,153 | ||||
Accounts payable and accrued expenses | 1,050,574 | 618,100 | ||||||
Related party payable | 69,171 | 85,086 | ||||||
Related party notes payable, current portion | 25,383 | 22,857 | ||||||
Notes payable - bank, current portion | 422,980 | 257,979 | ||||||
Notes payable - other, current portion | 2,566,767 | 187,527 | ||||||
Convertible debentures, net of discounts | 30,000 | 244,579 | ||||||
Accrued interest - related party | - | 228,573 | ||||||
Accrued interest - other | 34,358 | 73,821 | ||||||
Deferred revenue | - | 22,000 | ||||||
Deposits - private placements | 342,825 | 261,774 | ||||||
TOTAL CURRENT LIABILITIES | 4,562,016 | 2,041,449 | ||||||
LONG - TERM LIABILITIES | ||||||||
Related party notes payable, net of current portion | 145,499 | 163,174 | ||||||
Notes payable - bank, net of current portion | 2,230,689 | 2,515,368 | ||||||
Notes payable - other, net of current portion | 7,078 | 2,515,549 | ||||||
TOTAL LONG - TERM LIABILITIES | 2,383,266 | 5,194,091 | ||||||
TOTAL LIABILITIES | 6,945,282 | 7,235,540 | ||||||
MINORITY INTEREST | 3,413 | 3,413 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock-Series A, no par value, 255,000 and 0 shares issued and | ||||||||
outstanding, respectively | - | - | ||||||
Preferred stock-Series B, no par value, 15,000,000 and 0 shares issued and | ||||||||
outstanding, respectively | - | - | ||||||
Common stock, $0.001 par value; 1,000,000,000 shares authorized, | ||||||||
354,291,961 and 184,234,723 shares issued and outstanding, | ||||||||
at August 31, 2008 and November 30, 2007, respectively | 354,291 | 184,235 | ||||||
Additional paid-in capital | 34,382,927 | 32,352,115 | ||||||
Accumulated deficit | (34,935,799 | ) | (32,159,967 | ) | ||||
TOTAL STOCKHOLDERS' EQUITY | (198,581 | ) | 376,383 | |||||
TOTAL LIABILITIES AND | ||||||||
STOCKHOLDERS' EQUITY | $ | 6,750,114 | $ | 7,615,336 |
The accompanying consolidated notes are an integral part of these consolidated financial statements.
F-2
AMERICHIP INTERNATIONAL, INC. | ||||||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(UNAUDITED) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
August 31, | August 31, | August 31, | August 31, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
REVENUES | $ | 572,376 | $ | 863,826 | $ | 1,933,945 | $ | 1,672,459 | ||||||||
COST OF SALES | 441,702 | 186,750 | 1,101,935 | 487,135 | ||||||||||||
Gross Profit | 130,674 | 677,076 | 832,010 | 1,185,324 | ||||||||||||
EXPENSES | ||||||||||||||||
Administrative service | 306,193 | 327,485 | 1,194,814 | 827,992 | ||||||||||||
Director fees | - | - | 22,275 | 5,850,000 | ||||||||||||
Consulting expense | 417,128 | 62,611 | 1,058,043 | 3,150,764 | ||||||||||||
Depreciation and amortization | 101,648 | 114,260 | 332,495 | 275,675 | ||||||||||||
Legal and accounting | 143,750 | 61,240 | 326,395 | 347,974 | ||||||||||||
License expense | - | 30,000 | 31,220 | 90,000 | ||||||||||||
Office expense | 24,137 | 9,456 | 49,765 | 54,382 | ||||||||||||
Wages - officers and directors | 52,210 | 52,000 | 163,853 | 88,000 | ||||||||||||
Wages - other | 113,501 | 12,457 | 215,803 | 105,644 | ||||||||||||
Bad debts | 18,097 | - | 29,970 | - | ||||||||||||
Total Expenses | 1,176,664 | 669,509 | 3,424,633 | 10,790,431 | ||||||||||||
LOSS FROM OPERATIONS | (1,045,990 | ) | 7,567 | (2,592,623 | ) | (9,605,107 | ) | |||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest expense | (109,559 | ) | (105,501 | ) | (346,053 | ) | (357,502 | ) | ||||||||
Financing expense | (2,483 | ) | (4,664 | ) | (6,358 | ) | (11,329 | ) | ||||||||
Income (loss) from convertible debenture settlement | (30,000 | ) | - | 168,912 | - | |||||||||||
Gain on sale of fixed assets | - | - | 290 | - | ||||||||||||
Total Other Expense | (142,042 | ) | (110,165 | ) | (183,209 | ) | (368,831 | ) | ||||||||
NET LOSS | $ | (1,188,032 | ) | $ | (102,598 | ) | $ | (2,775,832 | ) | $ | (9,973,938 | ) | ||||
WEIGHTED AVERAGE NUMBER OF | ||||||||||||||||
COMMON SHARES OUTSTANDING, | ||||||||||||||||
BASIC AND DILUTED | 302,433,443 | 136,100,172 | 247,170,662 | 93,929,010 | ||||||||||||
BASIC AND DILUTED NET LOSS PER SHARE | $ | nil | $ | nil | $ | (0.01 | ) | $ | (0.11 | ) |
The accompanying consolidated notes are an integral part of these consolidated financial statements.
F-3
Americhip International, Inc. | ||||||||
Consolidated Statements of Changes in Cash Flow | ||||||||
(UNAUDITED) | ||||||||
Nine Months Ended August 31, 2008 | Nine Months Ended August 31, 2007 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss for the period | $ | (2,775,832 | ) | $ | (9,973,938 | ) | ||
Adjustments to reconcile net loss to net cash provided by | ||||||||
(used in) operating activities: | ||||||||
Depreciation that did not require the use of cash | 329,340 | 275,675 | ||||||
Amortization of finance charges | 6,358 | 8,000 | ||||||
Amortization of technology rights and patents | 3,155 | - | ||||||
Bad debt expense | 29,970 | - | ||||||
License expense which did not require the use of cash | 30,000 | 90,000 | ||||||
Income from convertible debenture settlement | (168,912 | ) | - | |||||
Warrants issued for services | - | 5,919,400 | ||||||
Common stock options issued for consulting services | - | 3,102,342 | ||||||
Common stock issued for consulting services | 820,890 | 181,000 | ||||||
Common stock issued for director fees | 8,000 | - | ||||||
Common stock issued for wages | 26,500 | - | ||||||
Preferred stock issued for director fee | 12,750 | - | ||||||
Gain on sale of fixed assets | (290 | ) | - | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable - trade | 531,584 | (170,479 | ) | |||||
Accounts receivable - other | (29,500 | ) | - | |||||
Related party receivable | (228,000 | ) | - | |||||
Prepaid expenses | 198,722 | 194,729 | ||||||
Inventories | 50,047 | (71,319 | ) | |||||
Bank overdraft | (19,195 | ) | (15 | ) | ||||
Accounts payable and accrued liabilities | 432,474 | (388,240 | ) | |||||
Accrued interest payable | (268,036 | ) | 45,318 | |||||
Deferred revenue | (22,000 | ) | - | |||||
Deposits | (6,800 | ) | 172,352 | |||||
Net cash used by operating activities | (1,038,775 | ) | (615,175 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisition of fixed assets | (24,054 | ) | (92,785 | ) | ||||
Payments made for acquisition of subsidiary | - | (150,000 | ) | |||||
Cash received from acquisition of subsidiary | - | 19,787 | ||||||
Proceeds from sale of fixed assets | 6,712 | (11,036 | ) | |||||
Net cash used by investing activities | (17,342 | ) | (234,034 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Payoff of note on equipment of acquired subsidiary | - | (3,204,292 | ) | |||||
Proceeds from refinance of note on equipment of acquired subsidiary | - | 2,880,000 | ||||||
Payments on related party payable | (15,915 | ) | - | |||||
Proceeds from related party notes payable | - | (16,482 | ) | |||||
Payments on related party notes payable | (15,149 | ) | - | |||||
Payments made on notes payable - bank | (165,597 | ) | (54,030 | ) | ||||
Proceeds from note payable - bank | 45,919 | 34,326 | ||||||
Payments made on notes payable - other | (129,231 | ) | (67,641 | ) | ||||
Proceeds received on convertible debentures | 54,333 | 100,000 | ||||||
Payments made on convertible debentures | (100,000 | ) | - | |||||
Deposits-private placements | 81,051 | - | ||||||
Issuance of preferred stock | 75,000 | - | ||||||
Issuance of common stock | 1,227,728 | 1,187,485 | ||||||
Net cash provided by financing activities | 1,058,139 | 859,366 | ||||||
Net increase in cash | 2,022 | 10,157 | ||||||
Cash, beginning of period | 131 | 1,716 | ||||||
Cash, end of period | $ | 2,153 | $ | 11,873 | ||||
Supplemental Information: | ||||||||
Interest paid | $ | 346,053 | $ | 316,476 | ||||
Taxes paid | $ | - | $ | - | ||||
Supplemental Non-Cash Activity: | ||||||||
Common stock issued for private placement deposits received in prior year | $ | 4,125 | $ | 388,838 | ||||
Common stock issued for related party note receivable | $ | 258,000 | $ | - | ||||
Common stock issued for accrued interest payable | $ | 228,573 | $ | - | ||||
Common stock issued from convertible debentures | $ | 100,000 | $ | - | ||||
Common stock issued from private placement funds received | $ | 457,004 | $ | - | ||||
Common stock issued for consulting services | $ | 820,890 | $ | 430,440 | ||||
Common stock issued for expenses paid on behalf of company | $ | 210,023 | $ | - | ||||
Preferred stock issued from private placement funds received | $ | 75,000 | $ | - |
The accompanying consolidated notes are an integral part of these consolidated financial statements.
F-4
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
AmeriChip International, Inc. (hereinafter “AmeriChip” or “the Company”) is currently engaged in the development of its patented technology for use in manufacturing.
On February 15, 2007, the Company acquired all of the outstanding stock of KSI Machine & Engineering, Inc. (KSI). Upon its acquisition, KSI became a fully owned subsidiary of AmeriChip International, Inc. Concurrent with its acquisition by AmeriChip International, Inc., KSI’s status as a Subchapter S Corporation for Federal Income Tax purposes was terminated, effective January 1, 2007. In addition, the fiscal year end of KSI was changed from December 31 to November 30 of each year, in order to coincide with the fiscal year of AmeriChip International, Inc. KSI is an automotive supplier, who provides CNC machining services to its customers.
NOTE 2 – SUMMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim reporting
The foregoing unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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, 2007. 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 results of operations, for the period presented are not necessarily indicative of the results to be expected for the year ended November 30, 2008.
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 nine months ending August 31, 2008, 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.
F-5
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 2 – SUMMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Going concern
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 August 31, 2008, the Company had an accumulated deficit of $34,935,799, limited cash, and negative working capital. For the nine months ended August 31, 2008, the Company sustained a net loss of $2,775,832. 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. 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. 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.
Use of estimates
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. Operating results for the three and nine-month period ended August 31, 2008 are not necessarily indicative of the results that may be expected for the year ending November 30, 2008.
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.
Reclassifications
Certain reclassifications have been made to the 2007 financial statements to conform to classifications used in the 2008 financial statements.
F-6
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 2 – SUMMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
The Company recognizes revenue from product sales in accordance with the provisions of SAB No. 104 “Revenue Recognition in Financial Statements”. Revenue is recognized 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.
Goodwill
As of August 31, 2008, 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. 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 existed as of August 31, 2008. 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 include the Company’s Tier 1 status for automotive customers, a good credit history for KSI, a trained workforce, and a platform by which AmeriChip may begin to implement the use of its patented Laser Assisted Chip Control technology. These benefits still exist as of August 31, 2008. Impairment will again be evaluated at the end of the Company’s fiscal year.
F-7
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
In June 2008, the the Financial Accounting Standards Board (“FASB”) issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The FSP affects entities that accrue dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. This FSP is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP EITF 03-6-1 on its consolidated financial position and results of operations.
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an entity's Own Stock
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of EITF 07-5 on its consolidated financial position and results of operations.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” The FSP clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statement of operations. The FSP requires retrospective application to the terms of instruments as they existed for all periods presented. The FSP is effective for us as of December 1, 2009 and early adoption is not permitted. The Company is currently evaluating the potential impact of FSP APB 14-1 upon its consolidated financial statements.
F-8
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" (FAS No.162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The implementation of this standard will not have a material impact on the Company's consolidated financial position and results of operations.
Determination of the Useful Life of Intangible Assets
In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position on Financial Accounting Standard (“FSP FAS”) No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. The Company is currently evaluating the potential impact of FSP FAS No. 142-3 on its consolidated financial statements.
Disclosure about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, (SFAS 161). This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company is required to adopt SFAS 161 on January 1, 2009. The Company is currently evaluating the potential impact of SFAS 161 on the Company’s consolidated financial statements.
Delay in Effective Date
In February 2008, the FASB issued FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157”. This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material to the Company’s consolidated financial condition or results of operations.
F-9
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS (continued)
Noncontrolling Intersts in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in consolidated Financial Statements - an Amendment of ARB No. 51" (SFAS 160). This statement requires that noncontrolling or minority interests in subsidiaries be presented in the consolidated statement of financial position within equity, but separate from the parents' equity, and that the amount of the consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS 160 is effective for the fiscal years beginning on or after December 15, 2008. Currently the Company is evaluating what impact this statement will have on its financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations” (SFAS 141R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for the fiscal year beginning after December 15, 2008. Management is in the process of evaluating the impact, if any, SFAS 141R will have on the Company’s financial statements upon adoption.
NOTE 4 – INVENTORY
Inventory is comprised of the following:
August 31, 2008 | November 30, 2007 | |||||||
(Unaudited) | (Audited) | |||||||
Raw materials | $ | - | $ | - | ||||
Work-in-progress | 85,000 | 114,555 | ||||||
Finished goods | - | 20,492 | ||||||
$ | 85,000 | $ | 135,047 |
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AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Litigation
James Miller vs AmeriChip International, AmeriChip Inc. Edward Rutkowski, Thomas P Schwantiz, Richard H Rossmann, Mark Shircliff and Marc Walther. Specific damages have not been stated. The Company considers the lawsuit to be without merit and will vigorously defend this action.
Toyoda Machine USA versus AmeriChip International Inc. Breach of lease by the Company on a machining center. Amount of Claim is $109,000. The Company is in the process of settling with Toyoda Machine USA.
Knight Carbide Inc. vs KSI Machine and Engineering Inc. Unpaid invoices for machine parts valued at $15,900.85. The Company entered into an installment payment agreement secured by a consent judgment in the amount of approximately $16,000. This liability was accrued by the Company and included in accounts payable.
Select Remedy Personnel Services Inc. vs AmeriChip International Holdings, LLC, AmeriChip Tool and Abrasives, LLC. Unpaid fees for personnel placement services for $24,213.07. The Company allowed Select Remedy Personnel Services, Inc. to secure a default judgment against the above noted entities which have no assets. This liability was accrued by the Company and included in accounts payable.
XY Tool & Die Inc versus AmeriChip International Inc. and Marc Walther. Unpaid fees for machine part valued at $23,000. The Company has reached a tentative settlement agreement in the amount of $26,000. A liability of $26,000 was accrued by the Company and included in accounts payable.
Amera Seiki v AmeriChip International, Inc. for unpaid claim in amount of $75,000. The Company intends to attempt to settle the debt.
Sankyo Oilless Industry (USA) Corp. vs KSI Machine and Engineering, Inc. for an unpaid claim of $41,718.40. The liability had been accrued and is included in note payable – other on the Company’s consolidated balance sheets. The Company intends to attempt to settle the debt. No assurances can be given that a settlement can be reached.
GMAC, LLC versus AmeriChip International, Inc. Since the end of the nine months ended August 31, 2008, the Company is attempting to make arrangements for the voluntary return of the vehicle.
Integrity Steel Company V KSI Machine & Engineering, Inc. for an unpaid claim of $2,160. The Company intends to attempt to settle the debt.
Banc of America Leasing V KSI Machine & Engineering, Inc. Unpaid lease for copier/printer in the amount of $26,220. The Company intends to attempt to settle the debt. A liability of $24,000 was accrued by the Company and included in accounts payable.
NOTE 6 – EQUITY
Common Stock
During the three months ended February 29, 2008, 458,383 shares of common stock were issued at an average price of $0.09 per share in a private placement received during the fiscal year ended November 30, 2007 for $4,125 in cash; 9,636,849 shares of common stock were issued at an average price of $0.044 per share for consulting services with a fair value of $427,240; 27,740,000 shares of common stock were issued at an average price of $0.018 per share for a related party receivable in the amount of $258,000 and accrued interest payable to the same related party in the amount of $228,673; and 100,000 shares of common stock were issued at an average price of $0.04 per share to an officer of one of the Company’s subsidiaries in the amount of $4,000 for an officer’s fee.
During the three months ended May 31, 2008, 7,300,000 shares of common stock were issued at an average price of $0.01 per share in private placements in the amount of $75,000; 3,075,000 shares were issued at an average price of $0.04 per share for consulting services in the amount of $93,000; 200,000 shares were issued at a average price of $0.02 per share for director fees in the amount of $4,000; 1,543,210 shares were issued at an average price of $0.016 per shares for the payment of loans payable in the amount of $25,000; and 13,177,067 shares were issued at an average price of $0.0158 per share for expenses paid on behalf of the company in the amount of $210,023.
During the three months ended August 31, 2008, 48,600,000 shares of common stock were issued at an average price of $0.008 per share in private placements in the amount of $382,004; 47,550,000 shares were issued at an average price of $0.006 per share for consulting services in the amount of $300,650; 8,026,729 shares were issued at an average price of $0.009 per shares for the payment of loans payable in the amount of $75,000; and 2,650,000 shares were issued at an average price of $0.01 per share for wages in the amount of $26,500.
Preferred Stock
In January, 2008, the Board of Directors authorized the Company to issue 255,000 shares of Series A Convertible Preferred Stock to its three Board members as follows: 115,000 shares to one Board member, 115,000 shares to a second Board member, and 25,000 shares to a third Board member. Terms of the preferred stock allow its holders 1,000 votes for each share of preferred stock held. These shares are not subject to increase without the consent of all of the holders of the preferred stock. The preferred stock has no conversion provisions.
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AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 6– EQUITY (continued)
In February, 2008, the Company filed Form 4 “Statement of Changes in Beneficial Ownership” with the Security and Exchange Commission to register the preferred shares to be issued to each holder. On February 4, 2008, the Corporation issued the preferred shares to each respective holder. The value of the preferred shares issued was determined based upon the fair market value of the Company’s common stock at the date of issue, on a share for share basis. Accordingly, during the three months ended May 31, 2008, the Company’s equity was increased in the amount of $12,750 to reflect the value of the preferred shares issued. These shares are reflected as director fees in the Company’s statement of operations for the nine months ended August 31, 2008.
In June, 2008, the Board of Directors authorized the Company to issue up to 75 units; each unit is made up of a combination of 500,000 common shares and 500,000 preferred series B shares. Each 500,000 preferred series B shares pay a quarterly dividend equal to .033% of the Company’s gross revenue. During the quarter ending August 31, 2008, the company sold 30 units or 15,000,000 preferred shares. The preferred stock has no conversion provisions.
Warrants
During the nine months ended August 31, 2008, warrants to acquire 3,625,000 shares of the Company’s common stock, which had an accumulated value of $88,838, were cancelled because they were not exercised by their respective maturity dates. The cancellation of these warrants had no effect on the Company’s results from operations or equity balance. As of August 31, 2008, there were no outstanding warrants which had not been exercised.
F-12
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 6 – EQUITY (continued)
Summarized information about stock warrants outstanding and exercisable at May 31, 2008 are as follows:
Number of warrants | Weighted Average Remaining Life | Average exercise price | ||||
During the year ended November 30, 2007: | ||||||
Issued | 33,625,000 | .69 | $0.034 | |||
Cancelled | (10,000,000) | - | - | |||
Exercised | (10,000,000) | .50 | $0.030 | |||
Total warrants outstanding at November 30, 2007 | 13,625,000 | .60 | $0.037 | |||
Total unexercised warrants at November 30, 2007 | 13,625,000 | .60 | $0.037 | |||
During the six months ended August 31, 2008: | ||||||
Issued | - | - | - | |||
Cancelled | (13,625,000) | .60 | $0.037 | |||
Exercised | - | - | - | |||
Total warrants outstanding at August 31, 2008 | - | - | - | |||
Total unexercised warrants at August 31, 2008 | - | - | - |
NOTE 7 – RELATED PARTY TRANSACTIONS
Related party receivable
As of November 30, 2007, the Corporation was obligated to an unrelated entity for accrued interest in the amount of $228,573, related to a licensing agreement with a former shareholder. The former shareholder assigned his rights to the principal and interest amounts due under this licensing agreement to an unrelated entity during the year ended November 30, 2007. During the nine months ended August 31, 2008, the Corporation issued 27,740,000 shares to various unrelated entities in exchange for the unpaid interest on this licensing agreement in the amount of $228,573, as well as a loan from the unrelated entity which was assigned the licensing agreement in the amount of $258,000. Common stock issuances in excess of accrued interest, licensing agreement payments, and loan have occurred. The balance of the related party receivable as of August 31, 2008 is $402,010.
F-13
AMERICHIP INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS August 31, 2008 |
NOTE 8 - - LONG -TERM DEBT
Notes 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 1). In order to finance this equipment acquisition, the Corporation was obligated to two local area banks.
On March 12, 2008, the Oakland County Business Finance Corporation completed the sale of the SBA 504 debenture related to the KSI acquisition. Proceeds from the sale of this bond were used to repay the temporary loan provided by a local area bank as a result of the KSI acquisition. Terms of this obligation require the Company to repay the principal amount of $1,317,000, inclusive of interest accruing at a rate of 4.74238% per annum. Payments in the amount of $14,599.08 are required on a monthly basis beginning April 1, 2008 and maturing on March 1, 2018. As of August 31, 2008, the Company was 30 days past due on this note.
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. As of August 31, 2008 the Company was 30 days past due on this note.
Note Payable - Other
On February 15, 2007, the Corporation acquired 100% of the outstanding common stock of KSI Machine & Engineering, Inc. Pursuant the terms of the stock purchase agreement, the Corporation is obligated to the former sole shareholder of KSI in the amount of $2,524,017, 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 while not in default and a 9% rate per annum during any period of default, with minimum payments of $50,000 being required on a monthly basis, inclusive of interest, beginning March 15, 2007, with balance of note due on March 15, 2009. Additional payments may be required, depending upon the closing price of the Company’s common stock in excess of certain minimum levels. As of August 31, 2008, the Company has made less than minimum payments and are in default on this note.
As of August 31, 2008, the Company was obligated in the amount of $99,497 to several vendors, related to the conversion of its account payable balance to a note payable. Terms of these obligations require various monthly payments, with no interest accruing on these obligations.
NOTE 9 - AGREEMENTS
In June 2008, the Company entered into an Employment Agreement with Kenneth Mann, its newly appointed interim President and CEO. Under the terms of the agreement, the CEO is entitled to annual compensation of $160,000. The agreement covers a one year period.
NOTE 10 - - SUBSEQUENT EVENTS
On September 15, 2008, the Company appointed three new members to their Board of Directors.
F-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements and the notes thereto and other financial information included elsewhere in this Quarterly Report on Form 10-QSB. This Quarterly Report, including the following Management’s Discussion and Analysis, and other reports filed by the Registrant from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain forward-looking statements which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results.
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.
These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
• | Changes in existing product liability, tort or warranty laws or the introduction of new laws, regulations or policies that could affect our business practices: these |
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laws, regulations or policies could impact our industry as a whole, or could impact only those portions in which we are currently active.
• | Changes in environmental regulations: these regulations could have a negative impact on our earnings; for example, laws mandating greater fuel efficiency could increase our research and development costs. |
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law. 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.
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.
These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking
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statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
• | Changes in existing product liability, tort or warranty laws or the introduction of new laws, regulations or policies that could affect our business practices: these laws, regulations or policies could impact our industry as a whole, or could impact only those portions in which we are currently active. |
• | Changes in environmental regulations: these regulations could have a negative impact on our earnings; for example, laws mandating greater fuel efficiency could increase our research and development costs. |
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law. 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.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our critical accounting policies are described in Note 2 of the Company’s Consolidated Financial Statements. This summary of critical accounting policies of the Company is presented to assist in understanding the Company’s financial statements. All accounting estimates are at risk to change because of internal and external factors, and when adjustments
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are adopted. Most of our estimates are based upon historically known data and have remained stable over time. Certain estimates are subject to market place conditions, and are discussed below. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
• | Armed conflicts and other military actions: the considerable political and economic uncertainties resulting from these events, could adversely affect our order intake and sale. |
• | Factors that we have discussed in previous public reports and other documents filed with the Securities and Exchange Commission. |
We believe the following critical accounting estimates and policies, among others, involve the more significant judgments and estimates used in the preparation of our financial statements as of this time. These assessments may change as the Company completes its acquisitions.
Accounting for Convertible Notes and Securities with Beneficial Conversion Features
Following guidance by EITF 00-27, the Company allocates a portion of proceeds received from convertible notes to warrants (granted to note holders) and also to the beneficial conversion feature of the debt. 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 stockholders’ equity. The discounts are amortized over the life of the loans.
Inventories
Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and/or our ability to sell the products and production requirements. Demand for our products can fluctuate significantly. Factors which could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by
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customers and/or continued weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory. Our estimates are based upon our understanding of historical relationships which can change at anytime.
Revenue and Product Sales
The Company recognizes revenue from product sales when the products are shipped and title passes to customers. The Company has not provided an allowance for sales returns because the revenues are new and there is no historical experience on which to base an estimate. This assessment may change as the Company develops the appropriate history of transactions in its operating companies and a provision for sales returns will be established. 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. During the year ended November 30, 2007 the Company, through its business plan expanded its focus to include certain agency relationships for multiple vendors. As such, its policy for revenue recognition has been revised to recognize its status as an agent for these vendors. As an agent, the Company recognizes its commissions when earned. Commissions are earned by the Company when an order has been placed, delivery taken, and title has passed to the customer.
General Development of Business.
General
This summary highlights important information about our company and business. Because it is a summary, it may not contain all of the information that is important to you. To understand this offering fully, you should read this entire report on Form 10-QSB and the financial statements and related notes included in this report on Form 10-QSB carefully. Unless the context requires otherwise, “we,” “us,” “our”, “ and the “company” and similar terms refer to AmeriChip International, Inc., and our subsidiaries collectively, while the term “AmeriChip” refers to AmeriChip International, Inc. in its corporate capacity.
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. We obtained an option to acquire a
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100% interest in a mineral claim located in the Slocan Mining District Province of British Columbia, Canada. We referred to this mineral claim as the Cedar mineral claim. This option was exercisable by us completing further cash payments and share issuances to the option or and by completing minimum required exploration expenditures on the Cedar mineral claim. We allowed the option on this claim to expire on or about June 30, 2003. Our objective was to conduct mineral exploration activities on the Cedar mineral claim in order to assess whether the claim possessed commercially exploitable reserves of silver, lead or zinc. We were unable to identify any commercially exploitable reserves. Our proposed exploration program was designed to search for commercially exploitable deposits. 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 former 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 are 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 had the right to prepay any or all of this amount without penalty. In 2006 Mr. Rutkowski and Mr. Walther converted their outstanding notes and accrued interest to shares. In 2007, Mr. Howard sold his note and the related accrued interest to a third party which has subsequently converted the debt to stock. 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 “ACII”. Our principal offices are located at 24700 Capital Blvd. Clinton Township, MI 48036 USA.
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Overview
Our core patented technology includes the use of lasers to affect a controlled breaking of the metal chip. Our technology focuses on increasing the machining efficiencies to affect faster feed rates, deeper depths of cut 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 by the customer, 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. The core cost savings to this technology is the ability to effect faster thru put with less capital equipment and labor as a component of cost per piece. 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.
Subsidiaries
On May 5, 2004, the Company created a wholly-owned subsidiary, AmeriChip Tool and Abrasives, LLC (“ATA”). The new subsidiary was responsible for providing all the tools necessary for metal removal in the machining process. 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 believed that the acquisition of this brand and its inventory would 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. With the shift of focus to the implementation of the company’s patented LACC technology the Company closed this subsidiary in August 2008. This is a non-operating entity.
On August 9, 2004, The Company incorporated a wholly owned subsidiary, AmeriChip Canada, Inc. a Canadian charter corporation. This entity was formed to channel Canadian based opportunities to both AmeriChip International, Inc. and AmeriChip Tool and Abrasives, LLC.
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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. The Company terminated its interest in this transaction in 2005. As of the date of this report, AmeriChip International Holdings, LLC is a non-operating entity and was incorporated in the State of Michigan.
In February, 2005, AmeriChip Pipe Technologies, Inc. was established as a wholly owned subsidiary of AmeriChip International, Inc. and is a Texas corporation. This subsidiary was created in furtherance of the LACC process as it relates to threading internal and external threads of oil pipe and drilling pipe. We are currently working with two of the largest manufacturers of oil pipe and oil drilling pipe to establish off line lasering systems to be used in their facility. AmeriChip is testing this system currently in the LACC labs for demonstration during the first quarter of its fiscal year. Additional specialized laser heads and software are being developed for this process. As of the date of this report, AmeriChip Pipe Technologies is a non-operating entity and was incorporated in the State of Michigan.
On April 17, 2006, the Company formed AmeriChip Automotive, Inc., a wholly owned subsidiary, to develop opportunities related to the automotive industry. As of the date of this report, AmeriChip Automotive, Inc. is a non-operating entity and was incorporated in the State of Michigan.
On October 19, 2006, the Company formed Excellence 3, Inc., a wholly owned subsidiary, incorporated in the State of Michigan. This subsidiary was established in order to acquire the fixed assets of KSI Machine and Engineering, Inc. (KSI) as part of AmeriChip International’s acquisition of the outstanding common stock of KSI. Upon the acquisition of KSI on February 15, 2007, Excellence 3, Inc. will lease the fixed assets back to AmeriChip International, Inc.
On September 14, 2004, the Company executed a letter of intent with KSI Machine and Engineering, Inc. (KSI) to acquire all of KSI’s outstanding common stock. This letter of intent was subsequently modified and executed again on November 7, 2006. 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, 2004, 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 into a license agreement with KSI 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
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November 7, 2005, the Company paid another $20,000 deposit for a total of $200,000. 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 was $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.
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 was payable in monthly installments of $50,000 over a period of 24 months, inclusive of interest accruing at a rate of 7% per annum. The payments terms were subsequently revised. Weekly payments in the amount of $6,000 are currently required for the remaining terms of the note. After the expiration of the 24 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 of 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 were scheduled to be provided within six months of the closing date. Peoples State. Bank agreed to provide temporary funding for this six month period. This temporary funding provided by Peoples State Bank was subsequently extended through April 1, 2008, at which time the SBA funding was ultimately provided. 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.
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The 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 allowed AmeriChip International, Inc. to become an operating company, with Tier One status recognized by many actual and potential customers of AmeriChip.
On March 12, 2008, the Oakland County Business Finance Corporation completed the sale of the SBA 504 debenture related to the KSI acquisition. Proceeds from the sale of this bond were used to repay the temporary loan provided by a local area bank as a result of the KSI acquisition. Terms of this obligation require the Company to repay the principal amount of $1,317,000, inclusive of interest accruing at a rate of 4.74238% per annum. Payments in the amount of $14,599.08 are required on a monthly basis beginning April 1, 2008 and maturing on March 1, 2018.
The Process
The AmeriChip LACC process is designed to increase thru put with less capital equipment and labor as a component of cost per unit. By increasing depth of cut and feed rates, less capital equipment and labor are required to perform the same manufacturing tasks. The LACC process also sets up an additional platform for savings that can be utilized but is not essential to creating the justification for the use of this patented process. For example, 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
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manual operations. The AmeriChip LACC process allows this problem to be eliminated.
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 should 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.
AmeriChip has a flexible marketing plan that is customer driven. 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) License the process to specific customers for specific parts. Under this scenario, the customer would pay AmeriChip a per piece price on a monthly or quarterly basis. This is the most desirable, due to the fact that AmeriChip has no capital outlay.
2) AmeriChip will process parts with the LACC process and deliver to the customer location for a cost per piece price. This operation can be at the customer facility, at or close by the metal supplier to stay in the logistics path or at an AmeriChip facility at an agreed upon location.
3) AmeriChip manufactures a complete part and delivers to customer for a per piece cost. This is the most capital intensive but gives a significant increase in total revenues and profit over the previously mentioned market approaches.
1. Chip Clearing by operators of tools and parts
2. Reduced unpredictable 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 thru-put will require less time needed to create the same number of parts. Faster feed rates and deeper depth of cut.
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 thru-put per machine. Less machinery and labor required to do the same number of parts.
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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 and the heat dissipating with the chip.
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. Helps achieve the Zero Waste- Zero Landfill philosophy.
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
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
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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.
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 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
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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 esults 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.
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 30,2005, the Company paid an accumulated deposit of $50,000 for this agreement. During the year ended November 30, 2005, the Company paid an additional $150,000 and signed a stock purchase agreement with KSI. This total deposit of $200,000 completes the deposit requirement related to the KSI acquisition. 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. 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. 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 was payable in monthly installments of $50,000 over a period of 24 months, inclusive of interest accruing at a rate of 7% per annum. After the expiration of the 24 month period, the unpaid balance is due to the seller. The payment schedule was subsequently revised. Weekly payments of $6,000 are currently required over the remaining term of the note. Additional principal payments may be required, depending upon the value of the Company’s stock price. In conjunction with this 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
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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). 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 acquisition of KSI allowed AmeriChip International, Inc. to become an operating company, with tier one status recognized by many actual and potential customers of AmeriChip. Company has also hired a full time robotic and laser technician to provide faster turnaround for customer parts located at the KSI facility.
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
*Wind Energy
Sales & Marketing
In February 2008 we made the strategic decision to become an entity that focuses on sales and marketing. To that end The Company will be manufacturing a finished product using equipment with the LACC technology offering a “total solution” for our customers. 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. We are approaching a diverse customer base in the automotive, aerospace, oil pipe, heavy truck, farm implements, defense and wind energy. Management has identified what is believed to be large markets that remain untapped but would be logical, potentially strong candidates given an appropriate product and service offering at the right price. For example, in the automotive industry, 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.
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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 August 31, 2008, 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 Company is in the process of filing provisional patents to further enhance our original patents.
Employees
As of August 31, 2008, we employ 10 full-time employees, one commissioned salesman and 3 full-time consultants. We have no collective bargaining agreements with our employees.
Description of Property
Our principal executive offices are located at 24700 Capital Blvd, Clinton Township MI, Michigan. We relocated AmeriChip Tool and Abrasives to our headquarters in Clinton Township, MI. On February 15, 2007, we established our World Headquarters at their facility. KSI has 50,000 sq. feet of manufacturing space.
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RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2008 TO THE NINE MONTHS ENDED AUGUST 31, 2007.
Revenue Recognition. We have generated revenues from our operations during the last two years. We recognize revenue when received 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 collectability is reasonably assured.
Revenues and Sales. Revenues for the nine months ended August 31, 2008 increased from $1,672,459 for the nine months ended August 31, 2007 to $1,933,945. Gross Profit for the nine months ended August 31, 2008 decreased from $1,185,324 for the nine months ended August 31, 2007 to $832,010. sales were up by $261,486 (15.6%) from the previous year due to a better response to the Company’s marketing approach. Gross profit margins were off $353,314 (30%) due to retooling costs associated with new sales orders.
Operating Expenses. Operating expenses, which include administrative expenses, legal and accounting expenses, consulting expenses and license expense decreased from $10,790,431 for the nine months ended August 31, 2007 to $3,424,633 for the nine months ended August 31, 2008, a decrease of $7,365,798. This decrease is due to a significant decrease in Director Fees and consulting expenses during the nine months ended August 31, 2008.
Net Loss. Net loss decreased from a net loss of ($9,973,938) for the nine months ended August 31, 2007 to a net loss of ($2,775,832) for the nine months ended August 31, 2008 primarily due to the decrease in operating expenses.
PLAN OF OPERATION
Since we have completed the acquisition of KSI Machine and Engineering, we are now in a position to implement our technology on an expanded basis. We anticipate that the operations of KSI Machine and Engineering will bring to the consolidated balance sheet of AmeriChip annual revenues of approximately $2,600,000 based on revenues generated during the nine months ended August 31, 2008.
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
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the LACC process and we are currently conducting pilot projects for various Tier One suppliers. We have been working with the Michigan Economic Development Group and the Indiana Economic Development to look for and secure space in excess of 100,000 sq ft. to augment our 50,000 sq ft. plant. We are capable of processing up to $30 million in sales at our current 50,000 sq ft facility. We have applied for training dollars from the State of Michigan for various job opportunities
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
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 August 31, 2008 the Company had an accumulated deficit of ($34,935,799.) For the nine months ended August 31, 2008, the Company sustained a net loss of ($2,775,832). 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. The Company has recently initiated a change in senior management that it believes will be instrumental in opening and exploiting new, worldwide markets in addition to the current core automotive business. The Company will continue to present to a diverse group of blue chip private and governmental prospects, including but not limited to those in such manufacturing industries as oil pipe drilling, aerospace, off-road construction, farm implement, defense and military -- worldwide.
In management’s opinion, we have been able to secure adequate funding on an on-going basis, 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 the underlying uncertainties as discussed.
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Hennessey Capital
We have entered into a finance program with Hennessey Capital for receivables which will assist in our cash flow as the business model develops. On April 17, 2007 the Company signed an Accounts Receivable Purchase and Security Agreement (the “Agreement”) with Hennessey Capital of Huntington Woods MI. The Agreement provides for Hennessey Capital to purchase the Company’s accounts receivable from time to time. The Company continues to work with Hennessey Capital under the terms of the Agreement.
ACCOUNTING POLICIES SUBJECT TO ESTIMATION AND JUDGMENT
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When preparing our financial statements, we make estimates and judgments that affect the reported amounts on our balance sheets and income statements, and our related disclosure about contingent assets and liabilities. We continually evaluate our estimates, including those related to revenue, allowance for doubtful accounts, reserves for income taxes, and litigation. We base our estimates on historical experience and on various other assumptions, which we believe to be reasonable in order to form the basis for making judgments about the carrying values of assets and liabilities that are not readily ascertained from other sources. Actual results may deviate from these estimates if alternative assumptions or condition are used.
ITEM 3 CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company’s operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
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Our management, with the participation of the Interim Chief Executive Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of August 31, 2008. We carried out an evaluation, under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Interim Principal Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, our Interim Chief Executive Officer has concluded that our disclosure controls and procedures as of August 31, 2008 may not be effective due to possible material weakness in our internal controls over financial reporting described below, and other factors related to the Company’s financial reporting processes. The Company is in the process of evaluating the internal controls and procedures to ensure that the internal controls and procedures satisfy the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.
The Company and its independent registered public accounting firm identified certain significant internal control deficiencies that we considered to be, in the aggregate, a material weakness. Although the Company has an onsite controller, the primary concerns continue to be the lack of segregation of duties and the fact that all accounting systems are currently not in one place. Due to the size of our Company and the costs associated to remediate these issues, we still consider these concerns to be relevant.
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various claims and legal actions in the ordinary course of business.
During the nine months ended August 31, 2008, we were named as parties in certain material legal proceedings which include employment-related and trade related claims.
Below is a summary of these claims:
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James Miller vs AmeriChip International, AmeriChip Inc. Edward Rutkowski, Thomas P Schwantiz, Richard H Rossmann, Mark Shircliff and Marc Walther. Specific damages have not been stated. The Company considers the lawsuit to be without merit and will vigorously defend this action.
Toyoda Machine USA versus AmeriChip International Inc. Breach of lease by the Company on a machining center. Amount of Claim is $109,000. The Company is in the process of settling with Toyoda Machine USA. No assurances can be given that a settlement can be reached.
Knight Carbide Inc. vs KSI Machine and Engineering Inc. Unpaid invoices for machine parts valued at $15,900.85. The Company entered into an installment payment agreement secured by a consent judgement in the amount of approximately $16,000.
Select Remedy Personnel Services Inc. vs AmeriChip International Holdings, LLC, AmeriChip Tool and Abrasives, LLC. Unpaid fees for personnel placement services for $24,213.07. The Company allowed Select Remedy to secure a default judgment against the above noted entities which have no assets.
XY Tool & Die Inc versus AmeriChip International Inc. and Marc Walther. Unpaid fees for machine part valued at $23,000. The Company has reached a tentative settlement agreement in the amount of $26,000. There are no assurances that the settlement will be finalized.
Tru Green Limited Partnership versus AmeriChip International Inc. Unpaid invoice for landscape services valued at $2100.00. The Company settled the Tru Green Landscape Services litigation.
Sankyo Oilless Industry (USA) Corp. vs KSI Machine and Engineering, Inc. for an unpaid claim of $41,718.40. The Company intends to attempt to settle the debt. No assurances can be given that a settlement can be reached.
GMAC, LLC versus AmeriChip International Inc. Since the end of the nine months ended August 31, 2008, the Company is attempting to make arrangements for the voluntary return of the vehicle.
Integrity Steel Company v KSI Machine & Engineering, Inc. for an unpaid claim for material furnished in the amount of $2160. The Company intends to attempt to settle the debt. No assurances can be given that a settlement can be reached.
Banc of America Leasing, v KSI Machine & Engineering, Inc. for an unpaid lease for copier/printer. Amount of claim is $26,220.49 The Company intends to attempt to settle the debt. No assurances can be given that a settlement can be reached.
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We are not aware of any threatened or contemplated proceeding by any governmental authority against the Company or its subsidiaries.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities
There were no changes in securities or purchase or sales of securities during the period ended August 31, 2008.
Item 3. Defaults upon Senior Securities
There were no defaults upon senior securities during the period ended August 31, 2008.
Item 4. Submission of Matters to a Vote of Security Holders
On August 13, 2008 the Company held its Annual Meeting of it shareholders and submitted the following matters to the vote of securities holders during the period ended August 31, 2008:
1) | To elect four (4) members of the Board of Directors to serve until the next annual meeting of the shareholders or until their successors shall have been elected and qualified; |
2) | To ratify the appointment of Jewett Schwartz, Wolfe & Associates as AmeriChip’s International Inc.’s independent accounting firm; and |
3) | To transact such other business as may properly come before the meeting or any adjournment or postponements thereof. |
Item 5. Other Information
On July 18, 2008, the Board of Directors of the Company appointed Kenneth Mann as the Interim Chief Financial and Accounting Officer.
On August 13, 2008 three (3) newly elected members of the board of directors resigned in good standing.
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On September 15, 2008 three (3) new members were appointed to the Board of Directors. They included Mr. William Conlin, Mr. John Rehfeld and Mr. Drew Mouton.
Apart from the above, there is no information with respect to which information is not otherwise called for by this form.
Item 6. Exhibits
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. |
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SIGNATURE
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: October 21, 2008 | By: | /s/ Kenneth W Mann | |
Kenneth W Mann, Interim President and CEO, Director and Authorized Signatory | |||
By: | /s/ Kenneth W Mann | ||
Kenneth W Mann, Interim Chief Financial and Accounting Officer | |||
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