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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED NOVEMBER 30, 2004
COMMISSION FILE NUMBER 000-33127
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AMERICHIP INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
Nevada 35701 98-0339467
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
9282 GENERAL DRIVE, SUITE 100, PLYMOUTH, MI 48170
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 207-0338
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
Joseph I. Emas, Esq.
Attorney at Law
1224 Washington Avenue
Miami Beach, FL 33139
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $37,964.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on March 15, 2005, computed by reference to the price at which
the stock was sold on that date: $411,286.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
128,757,225 shares of Common Stock, $.001 par value, as of November 30,
2004.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
AMERICHIP INTERNATIONAL, INC.
Report on Form 10KSB
For the Fiscal Year Ended November 30, 2004
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of the Business......................................1
Item 2. Description of the Property.....................................11
Item 3. Legal Proceedings...............................................11
Item 4. Submission of Matters to Vote of Security Holders...............11
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.....................................................12
Item 6. Management's Discussion and Analysis............................14
Item 7. Financial Statements............................................18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................18
Item 8A. Controls and Procedures............................................18
Item 8B. Other Information..................................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act................................................19
Item 10. Executive Compensation..........................................21
Item 11. Security Ownership of Certain Beneficial Owners and
Management..................................................23
Item 12. Certain Relationships and Related Transactions..................24
Item 13. Exhibits .......................................................26
Item 14. Principal Accountant Fees and Services .........................28
Signatures ...................................................................28
PART I
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR"
FOR FORWARD LOOKING STATEMENTS. This Form 10-KSB contains statements that are
not historical facts. These statements are called "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements involve important known
and unknown risks, uncertainties and other factors and can be identified by
phrases using "estimate," "anticipate," "believe," "project," "expect,"
"intend," "predict," "potential," "future," "may," "should" and similar
expressions or words. Our future results, performance or achievements may differ
materially from the results, performance or achievements discussed in the
forward-looking statements. There are numerous factors that could cause actual
results to differ materially from the results discussed in forward-looking
statements, including:
o 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.
o 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.
o Changes in economic conditions, including changes in interest rates,
financial market performance and our industry: these types of changes can
impact the economy in general, resulting in a downward trend that impacts
not only our business, but all companies with which we compete; or, the
changes can impact only those parts of the economy upon which we rely in a
unique fashion, including, hotels, restaurants and business travel.
o Changes in relationships with major customers and/or suppliers: an adverse
change in our relationships with major customers and/or suppliers would
have a negative impact on our earnings and financial position.
o Armed conflicts and other military actions: the considerable political and
economic uncertainties resulting from these events, could adversely affect
our order intake and sales, particularly in the limousine market.
o Factors that we have discussed in previous public reports and other
documents filed with the Securities and Exchange Commission.
This list provides examples of factors that could affect the results described
by forward-looking statements contained in this Form 10-KSB. However, this list
is not intended to be exhaustive; many other factors could impact our business
and it is impossible to predict with any accuracy which factors could result in
which negative impacts. Although we believe that the forward-looking statements
contained in this Form 10-KSB are reasonable, we cannot provide you with any
guarantee that the anticipated results will be achieved. All forward-looking
statements in this Form 10-KSB are expressly qualified in their entirety by the
cautionary statements contained in this section and you are cautioned not to
place undue reliance on the forward-looking statements contained in this Form
10-KSB. In addition to the risks listed above, other risks may arise in the
future, and we disclaim any obligation to update information contained in any
forward-looking statement.
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
GENERAL
The Company
We were incorporated in the State of Nevada on October 17, 2000 as
Southborrough Technology Corporation. On March 9, 2001 we changed our name to
Southborrough Ventures, Inc. We were in the business of mineral exploration but
initially relied upon the mineral exploration of others and never conducted any
mineral exploration ourselves. We obtained an option to acquire a 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 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 may repay any or all of this amount without penalty. Messrs
Howard, Walther and Rutkowski have agreed to a suspension in payments until we
begin generating revenues from operations. The amounts owed to them, however,
will continue to accrue.
On October 16, 2003, we executed a definitive Asset Purchase Agreement with
American Production Machining LLC, a Michigan limited liability company ("APM")
to acquire certain of its assets, pay APM's outstanding balance to Comerica Bank
and, assume $1,900,000 in liabilities owed by APM to Comerica Bank. The
agreement expired on January 24, 2004. We were unable to obtain the necessary
funding to conclude the transaction. Currently, we have secured the financing
resources to pursue this acquisition with our agreement with Cornell Capital. In
August 2004, we tendered a bid to the United States Bankruptcy Court to pursue
our acquisition of APM. APM continues to operate under bankruptcy protection
during this period.
In December 2003, we changed our name to AmeriChip International Inc. and
we now trade on the Bulletin Board operated by the National Association of
Securities Dealers, Inc. under the symbol (OTC-BB) under the symbol "ACHI".
Our principal offices are located at 9282 General Drive, Suite 100,
Plymouth, MI 48235 USA. Our telephone number is (734)207-0338.
Summary
As of September 8, 2004, we have two patents covering the technology
described below. To support these patents, we have ordered and put a deposit on
equipment sufficient to manufacture production and trial orders. The deposit was
in the amount of $50,000 and paid to GSI Lumonics, Inc. The total cost of the
robot and laser is $229,845.
Overview
Our core patented technology includes the use of lasers to effect a
controlled breaking of the metal chip. Our technology focuses on increasing the
machining efficiencies to effect faster feed rates and less down time. The
process is designed to work with technologies of existing machines and
operations. We expect to continue to develop additional proprietary technology
to enhance the patent and its benefits.
Our technology, when implemented, will eliminate dangerous ribbon-like
steel chips that tangle around moving tool parts, automation devices and other
components essential to the machine processing of low to medium grade carbon
steels and non-ferrous metal parts. We believe that the result of this process
is a superior product manufactured in a safer working environment, avoiding many
of the health and safety issues associated with traditional metal processing
methodologies, while offering potential cost savings.
We have completed the design and testing of the patented LACC technology.
We are currently working with automakers and vendors with a view to supplying
processed parts.
Alliances
The Company has the following alliances:
Meritage Solutions - a company that delivers integrated systems for
automated production lines. Meritage Solutions has designed production cells
that are lasered between centers.
GSI Lumonics - A leading provider of laser equipment. GSI Lumonics has
been used as the exclusive supplier of laser equipment to the Company. This is
being done, in part, as a result of GSI's participation and support of the
Company during our research and development stage.
Creative Automation - A leading integrator of palletized automation and
integration with laser, robots and part quality.
The Company does not have written agreements with the three named
strategic alliance companies. The Company's arrangement with GSI Lumonics is
that the Company will exclusively purchase lasers and robots from them in
exchange for being able to run trials in their laboratory in their Caton, MI
testing facility. Meritage, Inc. will be utilized if there is a requirement to
process a fully automated system which includes lasers robots and conveyors.
Should an order require palletization, then the Company is committed to giving
Creative Automation Company the right to fill the requirement on a first come,
first serve basis. All of the Company arrangements are sales driven.
Subsidiaries
On May 5, 2004, the Company created a wholly-owned subsidiary, AmeriChip
Tool and Abrasives, LLC. ("ATA"). The new subsidiary will be responsible for
providing all the tools necessary for metal removal in the machining process.
On July 19, 2004, ATA secured the right to represent Carboloy, in addition
to Kinik, Superior Abrasive and Val-U-Max. ATA has entered into distribution
agreements/arrangements with: Kinik - Grinding Wheels , Superior Abrasive -
abrasive products, Valu-U-Max,(Special cutting tools) - ACE Drill Corporation,
(High Speed Drills) Sidley Diamond Tool Company, ( Diamond Drills ) Bates
Abrasives, Inc. (Abrasive products) The Desmond-Stephan Mfg. Co., Production
Tool Supply, (Dressers and Cutters) Michigan Drill Corporation, (Drills)
Carboloy, (Carbide Tools) Oil Screen-Reven, (filters) Keo Cutters, (Drills)
Morse Cutting Tools (Cutting Tools), Marxman Tools (Cutting Tools) Gemtex
(Abrasive products) Indasa (Coated Abrasives) Howell Tool Service (Tooling and
Abrasives) Felton Brush ( Brushes) and Mitutoyo Gauges (Gauges) Magafor
Precision (Drills), Sandusky CO. (Abrasives), Cumi (Grinding Wheels), and Kinik
(Grinding Wheels). These relationships give the Company the right to make sales
calls and or sell the products of these companies directly to ATA's customer
base. The right to represent is defined by "being appointed to act as a
distributor on behalf of a specific company and given the right to represent
their product line on behalf of the subject company." The products are sold to
ATA, which acts as a distributor, at a discount from market price. ATA then
sells the product at the market price. The companies provide the Company with
all their marketing tools, samples and other selling material, which assists the
Company in selling their product line. The Company is also able to offer their
products via our on-line marketing section of the Company's website at
www.americhipta.com The Company derives the Company's income from selling the
various companies products to their customers. The primary motivation for having
distributors is to eliminate the need for a sales staff. All of the companies,
with which ATA has chosen to become associated, make products that are in the
metal removal industry, which is consistent with our business model.
On August 3, 2004, ATA announced its purchase of the Nasco Brand name
of abrasive products. This line of abrasive products has been sold throughout
the United States and Canada for many years. The Company believes that the
acquisition of this brand and its inventory will allow its subsidiary, AmeriChip
Tool and Abrasives, to immediately generate sales by offering a wider breadth of
products for all its current and future customers who require abrasive products
in their manufacturing processes. Abrasives are typically used in the process
after machining. The purchase of this brand name is consistent with the
implementation of the Company's business model.
The Process
Traditional methods of handling the residue of machining metal parts
has necessitated the manufacture of specially designed chip control inserts and
or the use of coolants to assist in the separation and flushing of contaminated
metal chips, a problem that has plagued the metal parts manufacturing industry
for more than 60 years. The problem, however, has become even more prevalent
with the development of highly automated machine tools during the last two
decades. Automated machinery was developed to satisfy the demand for the
increased production of machined metal components by the automotive sector as
well as other industries. Certain operations resulted in such serious chip
control problems that some companies were unable to effectively capitalize on
the benefits of automation.
The metal machining industry seeks to increase production and automate the
machining process. The automotive industry has been particularly hard pressed to
effect lower costs both within its own internal operations as well as components
manufactured on its behalf by outside suppliers who must remain competitive.
Preventing the forfeiting of contracts to foreign parts providers where labor
and other costs are considered lower than in the United States is of key
importance. Stringy metal chips wrap around automatic gauging and interfere with
robotics to cause an interruption or discontinuance of the automation to manual
operations. The AmeriChip LACC process allows this problem to be eliminated.
Currently coolant is deployed to flush the long stringy chips out of the
machine components and remove them from the machine base itself. If the base
becomes clogged it can cause many hours of non-productive down time and added
costs while the machinery is cleaned. Coolant represents a major component of
the entire manufacturing processes, representing as much as 15% of the total
machining production cost. Coolant also has to be disposed of in accordance with
environmental regulations, adding even more cost. Additional, coolant fumes may
pose potentially serious health risks and the cause of long term problems when
inhaled. The International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America ("UAW") has established standards for coolant
exposure in the five (5ml) per cubic meter and has requested that even stricter
regulations be adopted at ten times more stringent. The multiple cost factor
associated with the use of coolant as well as related health and environmental
factors represent a challenge for metal machining manufacturing companies to
significantly reduce the consumption of coolant or to eliminate its use
altogether. By eliminating the use of coolant, incidence of workman's
compensation claims will be dramatically reduced. Additionally, the ribbons of
metal chips that remain following the machining of metal components without the
contamination of bacteria laden coolant will provide an additional revenue
source for the company as the "chips" can be salvaged and recycled.
We have targeted the automotive sector initially, but our process can be
applied to any industry where the machining of metal is a major process of
manufacturing of component parts. This includes, but is not limited to oil
production and refining, off-road construction, farm implements, aerospace and
defense contractors.
Although our main goal is to acquire automotive parts manufacturers such
as APM, we could apply our process to auto parts such as axle shafts, axle
tubes, spindles, and connecting rods, in our own facility.
In this scenario, the customer would deliver raw goods (un-machined auto
parts) to our facility where we would apply the LACC process and the customer
would retrieve the "treated" part for machining at their location. Such a plan
would require the purchase of several specialized lasers and robotics and the
leasing of approximately 40,000 sq ft. This would allow for space three (3)
separate lasers and a holding area of approximately 10,000 sq ft for the raw
goods/treated parts.
Our customers are expected to find a variety of compelling benefits. We
believe that many of these benefits result in operational efficiencies and
significant cost savings in the overall machining of metal parts. We believe
that the benefits of using our process would include the following:
* Less Machine Down-Time
1. Chip Clearing by operators of tools and parts
2. Reduced tool breakage resulting from wrapping of chips, re-cutting
of chips
3. Eliminate down time required for chip pullers to clear machines and
under floor conveyers of clogged chip bundles
4. Increased machine efficiency by eliminating chip bundles from
tangling around tool slides, posts, holders and interfering with
adjacent moving parts, such as robotics, automation, chucking and
in-line process gauging
5. Predictable tool change management program linked to consistency in
tool life
6. Reduced incidents of on-the-job injury from exposure to sharp, long
continuous stringy chips, which requires medical down time. Jobs are
handled more quickly and efficiently leading to less frustration and
constant worry about dealing with dangerous chips.
* Reduced Costs
1. Increased throughput as a result of less downtime
2. Reduction of direct labor - chip pullers are no longer required
3. Elimination of maintenance and outside special services to clean and
repair chip evacuation systems, thus increasing productivity through
reduced machine down time
4. Reduction of overtime because of increased through-put per machine
5. Reduced use of Hi-Lo driver's time to removed containers filled
quickly because of the chip bundles. Few containers are necessary
due to chip compaction.
6. Improved tool life due to less breakage because of chip bundles
7. Less machine maintenance required
8. Reduced scrap
9. Elimination of coolant. The LACC process does not require the use of
coolant whatsoever. The working environment is therefore less toxic,
cleaner and safer.
10. Reduction in coolant filter cost
11. Reduction in coolant disposal cost
12. Reduced costs of gloves and aprons as fewer are needed
13. Better railcar utilization due to chip compaction
14. Lower insurance rates as a result in the reduction of injuries
related to the handling of long, sharp, stringy chips, cleaner and
safer work area, which is less toxic
15. Uncontaminated chips can now be sold for profit as compared to the
cost of removal of contaminated chips.
* Tooling and Process Efficiencies -
1. Elimination of the need for light/semi finish and finish depths of
cuts in low to medium carbon materials and non-ferrous metals
2. Reduced welding and packing of chips, which reduces the wear and
tear on cutting tools
3. Improved chip disposal and handling costs through better management
of chip lengths
4. Reduced capital equipment expenditures since high-pressure coolant
systems are no longer necessary
5. The need for specially designed chip control inserts and the use of
coolants to manage the "chip" are no longer required with the LACC
process.
The Company believes that as a result of implementing our LACC process on
certain automobile parts prior to machining that we well be able to pass on many
benefits that will result in operational efficiencies and significant cost
savings in the overall machining of metal parts.
With the lasering of parts prior to machining our process reduces machine
down time which is traditionally caused because chips have to be cleared by the
operators away from tools and parts and the replacement of tools which have been
broken as a result of the wrapping of chips around them. Down time is also
created when time is taken by chip pullers to clear machines and under floor
conveyers of clogged chip bundles. Since we can eliminate chip bundles from
tangling around tool slides, posts, holders and interfering with adjacent moving
parts, such as robotics, automation, chucking and in-line process gauging we
increase machine efficiencies. Tools are not damaged from chips and there we can
offer predictable tool change management program linked to consistency in tool
life. We believe that there will be reduced incidents of on-the-job injury from
exposure to sharp, long continuous stringy chips keeping workers working instead
of seeking medical treatment. With a continuous job run, projects will be
handled more quickly and efficiently leading to less frustration and constant
worry about dealing with dangerous chips.
With the implementation of the LACC prior to machining metal parts our
client will enjoy reduced costs due to increased throughput as a result of less
downtime and the reduction of direct labor since chip pullers will no longer be
required. Our process eliminates the need for maintenance and outside special
services to clean and repair chip evacuation systems, thus increasing
productivity through reduced machine down time. The LACC process provides for
increased through-put for each machine and therefore more work can be
accomplished per shift, allowing for the reduction of overtime costs required to
ensure that jobs are completed on schedule. With no chip bundles being produced,
a client would no longer need to use a Hi-Lo driver's time to removed containers
filled with chip bundles. In addition, fewer containers are necessary due to
chip compaction adding to reduced costs. Other benefits included improved tool
life due to less breakage because of chip bundles, less machine maintenance,
reduced scrap and the scrap that remains can be recycled and sold for cash.
Uncontaminated chips can now be sold for profit as compared to the cost of
removal of contaminated chips.
The LACC process does not require the use of coolant whatsoever and
therefore the working environment is therefore less toxic, cleaner and safer.
The benefits to the client include a reduction in coolant filter cost, reduction
in coolant disposal cost, reduced costs of gloves and aprons as fewer are needed
and better railcar utilization due to chip compaction. The reduction of injuries
related to the handling of long, sharp, stringy chips in a cleaner and safer
work area, in which there are fewer toxins can lead to reduced insurance costs
for the client.
One of the key benefits to applying the LACC process prior to machining is
that it results in tooling and process efficiencies .This is accomplished due to
the elimination of the need for light/semi finish and finish depths of cuts in
low to medium carbon materials and non-ferrous metals. In addition, the welding
and packing of chips is reduced which normally affects the wear and tear on
cutting tools, shortening their life span. Improved chip disposal and handling
costs through better management of chip lengths makes the machining process run
much more smoothly. Since high-pressure coolant systems are no longer necessary,
the client will enjoy reduced capital equipment expenditures. The need for
specially designed chip control inserts and the use of coolants to manage the
"chip" are no longer required with the LACC process.
KSI Machine & Engineering Inc.
t 6 0 On September 14, 2004, the Company executed a letter of intent with
KSI Machine and Engineering, Inc. (hereinafter "KSI") to acquire all of KSI's
outstanding stock. KSI is a manufacturer of automotive die and mold castings
which use horizontal spindle 5 axis computer numerical controlled machines.
During the year ended November 30, the Company paid a deposit of $50,000 for
this agreement. On December 7, 2004 the Company paid an additional $100,000 and
signed a stock purchase agreement with KSI. As of the report date of these
financial statements, this acquisition has not been completed.
The completion of the transaction is subject to a number of factors,
including but not limited to, the satisfactory completion of due diligence, the
negotiation and execution of definitive agreements, and other customary closing
conditions. There can be no assurance that the purchase will be consummated. The
material terms of the agreement are as follows: The stock purchase will be for
an aggregate consideration of $3.2 million. The Company agreed under a separate
agreement with Mr. Jim Kotsonis, owner of KSI to issue 500,000 restricted shares
of the Company's common stock for consulting services to be rendered over the
next 18 months.
Osborn International
On December 2, 2004, we issued a press release to announce the appointment
of AmeriChip International as a distributor for Osborn International, the
world's largest industrial brush maker and a manufacturer of tools for surface
finishes.
AmeriChip International Holdings, LLC
On September 10, 2004, we established AmeriChip International Holdings,
LLC, as a wholly owned subsidiary of AmeriChip International, Inc. This entity
was created in order to acquire American Production and Machining, LLC, an
unrelated entity, out of bankruptcy. This transaction has not occurred as of the
date of this report. Accordingly, AmeriChip International Holdings, LLC is at
present a non-operating entity.
RM Communications
In October 2003, we executed a six-month agreement with RM Communications
(hereinafter "RMC"), to provide services and website development for AmeriChip.
RMC is entitled to receive $2,000 per month for six months, 100,000 shares of
common stock upon signing the agreement, 100,000 shares of common stock upon
completion of services, and 300,000 three-year warrants, which will expire in
January 22, 2007. The warrants are exercisable per the following terms: 100,000
warrants at $0.30, 100,000 warrants at $0.40, and 100,000 warrants at $0.50. We
will also pay additional costs incurred by RMC in performance of the contract.
In April 2004, we executed a continuation of the aforementioned agreement
for an additional year. RMC is entitled to receive $3,500 per month, 200,000
shares of common stock upon signing the agreement, and 3-year warrants
exercisable at $0.25, payable in increments of 150,000 to be issued at the
beginning of each quarter. During the year ended November 30, 2004, 100,000
shares of common stock, 300,000 warrants, and $9,000 in cash were paid to RMC.
Current Products and Services
Our patented laser assisted chip control process is readily applicable to
any metal component that requires precision finishing. We believe that our
process will provide significant value to our customers by decreasing the costs
and increasing the efficiency of their operations. We are targeting our service
to businesses in the following markets:
*Automobiles
*Oil Production and Refining
*Aerospace
*Off-Road Construction
*Farm Implements Manufacturing
*Defense Contractors
Sales & Marketing
We intend to transition from being a company focusing almost solely on
product development and testing, to focusing on sales and marketing. We expect
to sell a service and a product. The service will be the manufacturing of a
finished product using equipment with the LACC technology. We further anticipate
that customers will purchase equipment using LACC technology from one of our
strategic alliances and also pay AmeriChip a royalty for use of the LACC
technology. Initially we will focus on customers in the automobile industry.
Management has identified what is believed to be large markets that remain
underserved but would be logical, potentially strong candidates given an
appropriate product and service offering at the right price. Just for automotive
products, management has identified particular market segments that would be
likely to benefit from our LACC technology: axle shafts, axle tubes, torque
converters, spindles, pinions, input/output shafts, side gears and connecting
rods.
Insurance
We do not maintain any insurance but are securing quotes from various
insurance underwriters to select the best plan for the Company. Because we do
not have any insurance, if we are made a party of a products liability action,
we may not have sufficient funds to defend the litigation. If that occurs a
judgment could be rendered against us which could cause us to cease operations.
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 not generated any
revenues from our operations and are a minuscule participant in the parts
manufacturing business.
Intellectual Property
We rely on our patents to protect our technology. We also have unpatented
proprietary technology. We rely on nondisclosure and other contractual
provisions to protect our proprietary technology. Currently, we have two patents
granted and we intend to file other patent applications for enhancements to the
existing patents. As part of our confidentiality procedures, we generally enter
into nondisclosure agreements with our employees, consultants, distributors and
partners and limit the dissemination and access to our technical documentation
and other proprietary information. There is no assurance our patents will
provide us with adequate protection. If a third party infringes on our patents,
we do not have adequate funds available for protracted litigation and
consequently may not be able to enforce our rights under applicable patent laws.
As of September 8, 2004, we had filed a total of two patent applications with
the U.S. Patent and Trademark Office (PTO) covering our technology, both of
which have been approved. The approved patents are as follows:
1. "UNITED STATES PATENT RUTKOWSKI" with PTO Patent Number 5,200,593,
issued April 6, 1993.
2. "UNITED STATES PATENT RUTKOWSKI" with PTO Patent Number 5,384,446,
issued January 24, 1995.
Employees
As of November 30, 2004, we employ three full-time employees and two
full-time consultants. We have no collective bargaining agreements with our
employees.
ITEM 2. DESCRIPTION OF PROPERTIES
Our principal executive offices are located at 9282 General Drive, Plymouth,
Michigan. We share space with our wholly-owned subsidiary, AmeriChip Tool and
Abrasives, LLC, and do not pay any rent.
We have also established a Canadian wholly-owned subsidiary, AmeriChip Canada
Inc., located in Newmarket, Ontario, in order to facilitate the transaction of
business with Canadian suppliers and customers.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is quoted on the NASD's OTC Bulletin Board
electronic system under the ticker symbol ACHI.
The following table sets forth the average high and low bid prices for the
common stock for each calendar quarter since January 10, 2003, as reported by
the National Quotation Bureau, and represent interdealer quotations, without
retail markup, markdown or commission and may not be reflective of actual
transactions. Our shares began trading on January 10, 2003.
Bid Price Per Share
-------------------
High Low
------------ ------------
2003
Quarter ended
February 28, 2003 $ 3.45 $ 2.75
May 31, 2003 $ 2.15 $ 1.60
August 31, 2003 $ 2.00 $ 0.14
November 30, 2003 $ 0.47 $ 0.07
2004
February 29, 2004 $ 0.19 $ 0.12
May 31, 2004 $ 0.17 $ 0.05
August 31, 2004 $ 0.11 $ 0.04
November 30, 2004 $ 0.03 $ 0.03
2005
Quarter ended
February 28, 2005 $ 0.06 $ 0.05
- ---------------
As of November 30, 2004, we believe there were approximately 48 holders of
record of our common stock.
We have not paid dividends in the past on any class of stock. Management and the
Board of Directors do not anticipate the payment of cash dividends within the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our unaudited
consolidated interim financial statements and related notes thereto included in
this quarterly report and in our audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contained in our Form 10-KSB for the year ended November 30,
2004. Certain statements in the following MD&A are forward looking statements.
Words such as "expects", "anticipates", "estimates" and similar expressions are
intended to identify forward looking statements. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. See "Special Note Regarding Forward Looking Information"
below.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Report and in the Company's periodic filings with
the Securities and Exchange Commission constitute forward-looking statements.
These statements involve known and unknown risks, significant uncertainties and
other factors what may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-
looking statements. In some cases, you can identify forward-looking statements
by terminology such as "may," "should," "could," "intends," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology.
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will obtain or have access to adequate
financing for each successive phase of its growth, that there will be no
material adverse competitive or technological change in condition of the
Company's business, that the Company's President and other significant employees
will remain employed as such by the Company, and that there will be no material
adverse change in the Company's operations, business or governmental regulation
affecting the Company. The foregoing assumptions are based on judgments with
respect to, among other things, further economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control.
Although management believes that the expectations reflected in the
forward-looking statements are reasonable, management cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither
management nor any other persons assumes responsibility for the accuracy and
completeness of such statements.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, costs and
expenses, and related disclosures. On an ongoing basis, we evaluate our
estimates and assumptions. Our actual results may differ from these estimates
under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in
Note 2 of the notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.
OVERVIEW
Our technology, when implemented, will eliminate dangerous ribbon-like steel
chips that tangle around moving tool parts, automation devices and other
components essential to the machine processing of low to medium grade carbon
steels and non-ferrous metal parts. The result of this process is a superior
product manufactured in a safer working environment, avoiding many of the health
and safety issues associated with traditional metal processing methodologies,
while offering potential cost savings.
We have completed the design and testing of our patented laser assisted chip
control technology. We are currently working with automakers and vendors with a
view to supplying processed parts.
RECENT EVENTS
In August 2004, the Company's wholly owned subsidiary, AmeriChip Tool and
Abrasives, LLC, agreed to purchase certain assets and inventory valued at
$250,000. The Company signed a promissory note providing for a monthly payment
of $729.17 representing interest only for the first six months. Thereafter, the
Company has committed to paying $2417.00 per month; such payments include
interest on the unpaid portion. The Company has 10 years to redeem the Note.
In addition, Richard Zyla received 125,000 shares of the Company's common stock
for signing a non-compete agreement. The Company also issued 25,000 shares of
its common stock to Mr. Thomas Howard in exchange for signing a non-compete
agreement.
On April 23, 2003, the Company executed a letter of intent with American
Production Machining, LLC (hereinafter "APM") to acquire certain assets of APM
subject to the execution of a definitive agreement. APM is manufacturer of
automotive, truck and aircraft parts. They use computer numerical controlled
machines and state of the art inspection equipment. On October 16, 2003, the
Company executed a definitive Asset Purchase Agreement which required the
payment of cash and the assumption of $1,900,000 in liabilities owed by APM to
Comerica Bank. The original closing date for this transaction was November 15,
2003. We were, at the time, unable to obtain the necessary funding to conclude
the transaction. Currently, the Company has secured the financing resources to
pursue this acquisition with its agreement with Cornell Capital. In August 2004,
the Company tendered a bid to the United States Bankruptcy Court to pursue its
acquisition of APM. APM continues to operate under bankruptcy protection during
this period.
On September 14, 2004, the Company executed a letter of intent with KSI Machine
and Engineering, Inc. (hereinafter "KSI") to acquire all of KSI's outstanding
stock. KSI is a manufacturer of automotive die and mold castings which use
horizontal spindle 5 axis computer numerical controlled machines. During the
year ended November 30, the Company paid a deposit of $50,000 for this
agreement. On December 7, 2004 the Company paid an additional $100,000 and
signed a purchase agreement with KSI. As of the report date of these financial
statements, this acquisition has not been completed.
The completion of the transaction is subject to a number of factors, including
but not limited to, the satisfactory completion of due diligence, the
negotiation and execution of definitive agreements, and other customary closing
conditions. There can be no assurance that the purchase will be consummated. The
material terms of the agreement are as follows: The stock purchase will be for
an aggregate consideration of $3.2 million. The Company agreed under a separate
agreement with Mr. Jim Kotsonis, owner of KSI to issue 500,000 restricted shares
of the Company's common stock for consulting services to be rendered over the
next 18 months.
In November 2003, the Company executed a six-month agreement with CEOcast, Inc.
(hereinafter "CEOcast") to provide consulting services for AmeriChip. CEOcast is
entitled to receive $10,000 upon signing the agreement, 300,000 shares of common
stock, and $10,000 per month for six months commencing on December 2003. During
the year ended November 30, 2004, 100,000 shares of common stock were issued and
CEOcast agreed to cancel the agreement with no penalties and also to agree to
cancel the amounts owed to CEOcast by the Company. In July 2004, the Company
signed a new agreement with CEOcast whereby the Company paid a retainer of
$5,000 and issued 2,000,000 shares of common stock. The Company also agreed to
pay $5,000 per month commencing in August 2004. During the year ended November
30, 2004, the Company paid $17,000 to CEOcast under the terms of the agreement.
In October 2003, the Company executed a six-month agreement with RM
Communications (hereinafter "RMC"), to provide services and website development
for AmeriChip. RMC is entitled to receive $2,000 per month for six months,
100,000 shares of common stock upon signing the agreement, 100,000 shares of
common stock upon completion of services, and 300,000 three-year warrants, which
will expire in January 22, 2007. The warrants are exercisable per the following
terms: 100,000 warrants at $0.30, 100,000 warrants at $0.40, and 100,000
warrants at $0.50. The Company will also pay additional costs incurred by RMC in
performance of the contract. In April 2004, the Company executed a continuation
of the aforementioned agreement for an additional year. RMC is entitled to
receive $3,500 per month, 200,000 shares of common stock upon signing the
agreement, and 3-year warrants exercisable at $0.25, payable in increments of
150,000 to be issued at the beginning of each quarter. During the year ended
November 30, 2004, 100,000 shares of common stock, 300,000 warrants, and $9,000
in cash were paid to RMC.
RESULTS OF OPERATIONS
REVENUE AND EXPENSES
We have only generated $37,964 in revenue from our operations during the last
two years all of which occurred in the latter half of our most recently
completed fiscal year. We recognize revenue in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." Revenue is recognized only when the price
is fixed or determinable, persuasive evidence of an arrangement exists, the
service is performed and collectibility is reasonably assured.
Operating expenses, which include administrative expenses, legal and accounting
expenses, consulting expenses and license expenses increased from $1,800,889 for
the year ended November 30, 2003 to $3,030,232 for the year ended November 30,
2004, an increase of $1,229,343. This increase was a result of a reduction in
consulting expenses and license expense related to the purchase of licenses from
three shareholders arising from a cancelable licensing agreement which provides
for payment to these shareholders of monthly installments of $10,000.
NET LOSS
Net loss increased from a net loss of ($1,925,880) for the year ended November
30, 2003 to a net loss of ($3,271,525) for the year ended November 30, 2004, an
increase in net loss of ($1,345,645), primarily due to the increase in operating
expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have not attained profitable operations since inception and we have not
progressed significantly in our operations. We have incurred recurring losses
and at November 30, 2004 had an accumulated deficit of ($5,217,423). For the
year ended November 30, 2004, we sustained a net loss of ($3,271,525). We have
secured financing from Cornell Capital, LLC which should enable us to secure
working capital for the next 24 months which will enhance our ability to conduct
business. These funds will be dedicated to securing commercial space for the
proposed production facility, to purchase necessary laser equipment, robot and
transfer equipment necessary to implement the patented Laser Assisted Chip
control process, and to provide sufficient working capital to commence
contemplated activities as well as providing funding to our wholly owned
subsidiary, AmeriChip Tool & Abrasives. We will also use capital available from
our agreement with Cornell Capital to purchase the assets of American Production
Machining, LLC.
On April 23, 2003, the Company executed a letter of intent with American
Production Machining, LLC (hereinafter "APM") to acquire certain assets of APM
subject to the execution of a definitive agreement. APM is manufacturer of
automotive, truck and aircraft parts. They use computer numerical controlled
machines and state of the art inspection equipment. On October 16, 2003, the
Company executed a definitive Asset Purchase Agreement which required the
payment of cash and the assumption of $1,900,000 in liabilities owed by APM to
Comerica Bank. The original closing date for this transaction was November 15,
2003. . We were, at the time, unable to obtain the necessary funding to conclude
the transaction. Currently, the Company has secured the financing resources to
pursue this acquisition with its agreement with Cornell Capital. In August 2004,
the Company tendered a bid to the United States Bankruptcy Court to pursue its
acquisition of APM. APM continues to operate under bankruptcy protection during
this period.
Even though we have secured adequate funding, no assurances can be provided that
our business activities will generate sufficient revenues which may result in
net profits for the Company.
Our auditors have raised substantial doubt as to our ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
We intend to continue to explore potential business combinations with other
parties which may enhance or supplement the operation of our business or which
may generate new or additional sources of revenues related to the patented Laser
Assisted Chip process. For example, we are exploring whether it may be feasible
to acquire the assets of an existing manufacturing firm engaged in manufacturing
automobile parts which we could subsequently enhance and benefit through the use
of the patented process. Any additional acquisition or other business
combination will be dependent on our ability to obtain financing from
traditional sources or from seller carryback financing, or a combination
thereof. There is no assurance that we will be able to obtain any financing to
pursue any future acquisitions or combinations. Even if adequate financing is
obtained, no assurance can be provided that any additional acquisition or
combination will generate sufficient revenues which may result in net profits
for us.
Cornell Capital Partners LP
On May 25, 2004, the Company entered into a Standby Equity Distribution
Agreement and various security and debenture agreements with Cornell Capital
Partners LP (hereinafter "Cornell Capital") in order to provide the Company with
up to $6,300,000 of funding over approximately the next 24 months. These
agreements are subject to limitation on borrowing and conversion of debt to
equity. As part of its obligation under the agreements, the Company filed a
registration statement on Form SB-2 to register the common stock issued to
Cornell Capital and the common stock issuable in accordance with the terms of
the equity distribution agreement. As of November 30, 2004, the Company has
received a total of $800,000 under these agreements. The Company also issued
3,134,329 shares of common stock valued at $207,000 as the commitment fee
associated with this agreement. The commitment fee was deemed to be a deferred
debt offering cost and is being amortized as a financing expense over the
effective period of 24 months. Amortization for the year ended November 30, 2004
was $52,500.
In May 2004, the Company received $300,000 (Loan 1) in cash upon execution of a
convertible debenture in favor of Cornell Capital. Terms of the debenture
agreement include a maturity date of May 25, 2007, an interest rate of 5% per
annum, and a provision for the holder to convert unpaid principal and interest
into Company common stock. The debenture agreement also enables the Company to
redeem unpaid principal by payment of 120% of the amount redeemed and the
distribution of common stock warrants to the holder. In connection with the
debenture, the Company incurred loan fees and expenses of $300,000, which are
being amortized as a financing expense over a period of three years. During the
year ended November 30, 2004, the Company recorded $75,000 of financing expense
In August 2004, the Company received $225,000 (Loan 2) in cash upon execution of
a short-term promissory note in favor of Cornell Capital. Terms of the note
included a stipulated interest rate of 12% and a provision for full repayment
within sixty-two calendar days. The Company incurred related fees and expenses
of $18,875, which were expensed to financing costs. During the year ended
November 30, 2004, Cornell Capital converted the loan into 5,809,251 shares of
common stock in payment of the aforementioned note principal and related
interest of $15,780.
In November 2004, the Company received $275,000 (Loan 3) in cash upon execution
of a short-term promissory note in favor of Cornell Capital. Terms of the note
included a stipulated interest rate of 12% and a provision for full repayment
within eighty-nine calendar days. The Company incurred related fees and expenses
of $25,625, which are being amortized as a financing expense over the duration
of the note. Amortization for the year ended November 30, 2004 was $8,193.
Cornell Capital also converted 3,243,210 shares of common stock in payment of
$50,000 of principal and $2,595 related interest for the aforementioned note.
The following is a summary of debt transactions with Cornell Capital during the
year ended November 30, 2004:
Loan 1 Loan 2 Loan 3 Total
---------- ---------- ---------- ----------
Convertible Debenture
5% annual interest
term: 3 years $ 300,000 $ -- $ -- $ 300,000
Promissory Note
12% annual interest
term: 89 days -- 225,000 -- 225,000
Promissory Note
12% annual interest
term: 62 days -- -- 275,000 275,000
---------- ---------- ---------- ----------
Total Notes at Face Value 300,000 225,000 275,000 800,000
---------- ---------- ---------- ----------
Less: principal payments
converted by stock -- (225,000) (50,000) (275,000)
Less: Discount due to
related financing costs (225,000) -- (17,432) (242,432)
---------- ---------- ---------- ----------
Total Current Debt $ 75,000 $ -- $ 207,568 $ 282,568
========== ========== ========== ==========
As of November 30, 2004, the Company had accrued unpaid interest on the above
transactions of $2,188.
In January 2005, the Company received $250,000 (Loan 4) in cash upon execution
of a short-term promissory note in favor of Cornell Capital. Terms of the note
included a stipulated interest rate of 12% and a provision for full repayment
within eighty-two calendar days. The Company incurred related fees and expenses
of $23,750, which will be amortized as financing expense over the duration of
the note and received $226,250 in cash. Cornell Capital also converted 2,873,065
shares of common stock in payment of $150,000 of principal for the
aforementioned note.
The following is a summary of the outstanding debt conversion transactions under
the agreements with Cornell Capital subsequent to November 30, 2004:
Loan 1 Loan 3 Loan 4
------------ ------------ ------------
Value of Notes at
November 30, 2004 $ 75,000 $ 207,568 $ --
------------ ------------ ------------
Promissory Note
12% annual interest
term: 82 days -- -- 250,000
Add: additional interest
expense of the stock
conversion -- 27,896 --
------------ ------------ ------------
Less: principal payments
converted by stock
December 1,2004 to
March 10, 2005 -- (235,464) (150,000)
------------ ------------ ------------
Balance of notes subsequent
November 30, 2004 $ 75,000 $ -- $ 100,000
============ ============ ============
Interest expense related to
stock conversion
through March 10, 2005 $ 12,500 $ 22,847 $ 7,854
============ ============ ============
Number of shares issued upon
subsequent conversion of
above notes prior to
March 10, 2005 2,403,846 4,961,842 2,873,065
============ ============ ============
PLAN OF OPERATION
Upon closing on the acquisition of KSI Machine and Engineering, we will be in a
position to implement our technology. We anticipate that the operations of KSI
Machine and Engineering will bring to the consolidated balance sheet of
AmeriChip annual revenues of approximately $3,600,000 based on revenues
generated in 2004. The Company intends to add two more shifts to the operations
at KSI Machine and Engineering commencing in the first quarter of our new fiscal
year. The Company believes that the two new shifts will add additional revenues
in the first year of operation. A key element to securing KSI Machine and
Engineering is their Tier One Status. This status is critical and affords us the
opportunity to quote on any jobs emanating from the big three auto makers
The facilities of KSI Machine and Engineering are large enough to permit
allocation of space for our laser and robotic equipment required in the
implementation of the LACC process. We are currently conducting trials for the
possible implementation our process for a number of customers. In addition to
the laser and robot already ordered by us, we believe that the volume of work
anticipated in the first quarter of its fiscal year will require the purchase of
an additional robot and laser. 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.
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 7. FINANCIAL STATEMENTS
AMERICHIP INTERNATIONAL INC.
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statement of Stockholders' Equity (Deficit) 4
Statements of Cash Flows 5
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS 6
The Board of Directors
AmeriChip International Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of AmeriChip
International Inc. (a Nevada corporation formerly known as Southborrough
Ventures, Inc.) as of November 30, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriChip International Inc.
as of November 30, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
has sustained substantial operating losses in recent years, has limited cash
resources and negative working capital. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 11 to the financial statements, an error resulted in
an understatement of reported accrued interest payable as of November 30, 2003.
This was discovered by management of the Company during the current year.
Accordingly, the 2003 financial statements have been restated to correct this
error.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
March 10, 2005
AMERICHIP INTERNATIONAL INC.
(Formerly Southborrough Ventures, Inc.)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
November 30, November 30,
2004 2003
(restated)
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 180,690 $ --
Accounts receivable 32,446 --
Prepaid expenses 5,745 --
Inventory 230,000 --
------------- -------------
Total Current Assets 448,881 --
------------- -------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 10,439 --
Machinery and equipment 14,000 --
Accumulated depreciation (1,616)
------------- -------------
Total Property and Equipment 22,823 --
------------- -------------
OTHER ASSETS
Intangible assets 6,750 --
Deposits 103,200 --
Technology rights and patents, net of amortization 24,716 28,923
------------- -------------
Total Other Assets 134,666 28,923
------------- -------------
TOTAL ASSETS $ 606,370 $ 28,923
============= =============
LIABILITES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 149,102 $ 586,415
Related party payable 826,407 389,338
Related party note payable - current portion 23,940 --
Convertible debenture, net of discounts 282,568 --
Accrued interest - related party 277,188 125,000
------------- -------------
Total Current Liabilities 1,559,205 1,100,753
------------- -------------
LONG-TERM LIABILITIES
Related party notes payable 226,060 --
------------- -------------
Total Long-term Liabilities 226,060 --
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
------------- -------------
MINORITY INTEREST IN SUBSIDIARY 3,413 3,413
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, 500,000,000 shares authorized,
$.001 par value; 128,757,225 and 85,370,000 shares
issued and outstanding, respectively 128,757 85,370
Additional paid-in capital 3,546,758 777,650
Warrants 359,600 54,000
Discount on common stock -- (46,365)
Accumulated deficit (5,217,423) (1,945,898)
------------- -------------
Total Stockholders' Equity (Deficit) (1,182,308) (1,075,243)
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 606,370 $ 28,923
============= =============
The accompanying notes are an integral part of these financial statements.
AMERICHIP INTERNATIONAL INC.
(Formerly Southborrough Ventures, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended
------------- -------------
November 30, November 30,
2004 2003
(restated)
------------- -------------
REVENUES $ 37,964 $ --
COST OF SALES 14,214
------------- -------------
NET SALES 23,750 --
------------- -------------
EXPENSES
Administrative services 269,980 --
Legal and accounting 263,452 49,748
Depreciation and amortization 8,073 4,507
Consulting services 2,099,315 1,283,667
License expense 360,000 300,000
Website expense -- 90,000
Office expense 29,412 72,967
------------- -------------
TOTAL OPERATING EXPENSES 3,030,232 1,800,889
------------- -------------
LOSS FROM OPERATIONS (3,006,482) (1,800,889)
OTHER INCOME (EXPENSE)
Forgiveness of debt 7,588 --
Interest and financing expense (272,631) (125,000)
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (265,043) (125,000)
------------- -------------
LOSS BEFORE TAXES (3,271,525) (1,925,889)
INCOME TAXES -- --
------------- -------------
NET LOSS $ (3,271,525) $ (1,925,889)
============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.03) $ (0.03)
============= =============
BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING 104,710,769 75,460,833
============= =============
The accompanying notes are an integral part of these financial statements.
AMERICHIP INTERNATIONAL INC.
(Formerly Southborrough Ventures, Inc.)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
Common Stock Additional Discount on
-------------------------------------- Paid-in Common
Shares Amount Capital Warrants Stock
----------- ----------- ----------- ----------- -----------
Balance, December 1, 2002 60,000,000 $ 60,000 $ -- $ -- $ (26,345)
Recapitalization of company via
reverse merger with Southborrough
Ventures, Inc. 20,020,000 20,020 -- -- (20,020)
Common stock issued for consulting services
at an average of $0.16 per share 5,350,000 5,350 777,650 -- --
Warrants issued for consulting services
at $0.18 per share -- -- -- 54,000 --
Net loss for the year ended November 30, 2003 (restated) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, November 30, 2003 (restated) 85,370,000 85,370 777,650 54,000 (46,365)
Common stock issued for consulting services
and payables at an average of $0.14 per share 6,900,000 6,900 981,100 -- --
Common stock issued in private placement
for cash at $0.05 per share 2,900,000 2,900 142,100 -- --
Common stock issued for debt offering costs
for convertible debt at $0.067 per share 3,134,329 3,134 203,866 -- --
Common stock and warrants issued for
services at an average of $0.08 per share 6,165,500 6,166 298,369 148,050 --
Common stock and warrants issued for
consulting services at an average
of $0.07 per share 14,834,285 14,834 879,616 147,050 --
Common stock issued for non-competition
agreement at an average of $0.06 per share 150,000 150 8,850 -- --
Common stock issued for services
at an average of $0.07 per share 250,000 250 17,250 -- --
Common stock issued for debt and interest
expense at an average of $0.033 per share 9,053,141 9,053 284,322 -- --
Warrants issued for consulting services -- -- -- 10,500 --
Adjustment to discount approved by directors -- -- (46,365) -- 46,365
Net loss for the year ended
November 30, 2004 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, November 30, 2004 128,757,255 $ 128,757 $ 3,546,758 $ 359,600 $ --
=========== =========== =========== =========== ===========
Total
Accumulated Stockholders'
Deficit Equity (Deficit)
----------- -----------
Balance, December 1, 2002 $ (20,009) $ 13,646
Recapitalization of company via
reverse merger with Southborrough
Ventures, Inc. -- --
Common stock issued for consulting services
at an average of $0.16 per share -- 783,000
Warrants issued for consulting services
at $0.18 per share -- 54,000
Net loss for the year ended November 30, 2003 (restated) (1,925,889) (1,925,889)
----------- -----------
Balance, November 30, 2003 (restated) (1,945,898) (1,075,243)
Common stock issued for consulting services
and payables at an average of $0.14 per share -- 988,000
Common stock issued in private placement
for cash at $0.05 per share -- 145,000
Common stock issued for debt offering costs
for convertible debt at $0.067 per share -- 207,000
Common stock and warrants issued for
services at an average of $0.08 per share -- 452,585
Common stock and warrants issued for
consulting services at an average
of $0.07 per share -- 1,041,500
Common stock issued for non-competition
agreement at an average of $0.06 per share -- 9,000
Common stock issued for services
at an average of $0.07 per share -- 17,500
Common stock issued for debt and interest
expense at an average of $0.033 per share -- 293,375
Warrants issued for consulting services -- 10,500
Adjustment to discount approved by directors -- --
Net loss for the year ended
November 30, 2004 (3,271,525) (3,271,525)
----------- -----------
Balance, November 30, 2004 $(5,217,423) $(1,182,308)
=========== ===========
The accompanying notes are an integral part of these financial statements.
AMERICHIP INTERNATIONAL INC.
(Formerly Southborrough Ventures, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended
----------------------------
November 30, November 30,
2004 2003
(restated)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,271,525) $ (1,925,889)
Depreciation and amortization 8,073 4,507
Amortization of discount on convertible debt 102,068 --
Adjustments to reconcile net loss
to net cash used by operating activities:
Common stock issued for consulting and services 1,668,318 693,000
Common stock issued for website -- 90,000
Common stock issued for director services 17,500 --
Common stock issued for interest expense 18,375 --
Warrants issued for services 305,600 54,000
Increase in accounts receivable (32,446) --
Increase in prepaids (5,745) --
Increase in accounts payable and accrued expenses 81,354 575,888
Increase in related party payables 437,069 383,494
Increase in accrued interest 152,188 125,000
------------ ------------
Net cash used in operating activities (519,171) 1,925,889
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,439) --
Deposits (103,200) --
------------ ------------
Net cash used in investing activities (107,639) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from convertible debt and notes 662,500 --
Common stock issued for cash in private placement 145,000 --
------------ ------------
Net cash provided by financing activities 807,500 --
------------ ------------
Net increase in cash 180,690 1,925,889
Cash, beginning of period -- --
------------ ------------
Cash, end of period $ 180,690 $ 1,925,889
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ -- $ --
============ ============
Income tax paid $ -- $ --
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for services and website $ 1,668,318 $ 783,000
Stock issued for intangible asset $ 9,000 $ --
Stock issued for debt offering costs $ 207,000 $ --
Stock issued for interest expense $ 18,375 $ --
Stock issued for repayment of convertible debt $ 275,000 $ --
Stock issued for director services $ 17,500 $ --
Warrants issued for services $ 305,600 $ 54,000
Note payable for inventory and equipment $ 250,000 $ --
The accompanying notes are an integral part of these financial statements.
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
AmeriChip International Inc. (hereinafter "AmeriChip" or "the Company") was
incorporated in the state of Nevada on October 17, 2000 as Southborrough
Technology Corporation for the purpose of mineral exploration. On March 9, 2001,
the corporate name was changed to Southborrough Ventures, Inc. Although the
Company obtained an option to acquire a 100% interest in a mineral claim located
in the Slocan Mining District Province of British Columbia, Canada, the Company
allowed the option on that claim to expire on or about June 30, 2003. The
Company changed its name to AmeriChip International Inc. on December 1, 2003.
AmeriChip's initial business objective was to conduct mineral exploration
activities on the aforementioned mineral claim in order to assess whether the
claim possessed commercially exploitable reserves of silver, lead or zinc. The
Company was unable to identify any commercially exploitable reserves.
On February 27, 2003, AmeriChip's board of directors approved the termination of
the Company's exploration activity and also approved the acquisition of
AmeriChip Ventures, Inc., a wholly owned subsidiary. AmeriChip, Inc., an 80%
owned subsidiary of AmeriChip Ventures, Inc., holds the patents for the Laser
Assisted Chip Control ("LACC") technology. The Company is currently engaged in
the development of its patented technology for use in manufacturing.
On March 22, 2003, the Company acquired all of the outstanding common stock of
AmeriChip Ventures, Inc., which is an 80% owner of the stock of AmeriChip, Inc.,
an operating company. For accounting purposes the acquisition has been treated
as a recapitalization of AmeriChip, Inc. with AmeriChip International Inc. as
the acquirer in a reverse acquisition. The historical financial statements prior
to March 22, 2003 are those of AmeriChip, Inc., the operating company.
On November 12, 2003, the Company established HRW, LLC, a fully owned subsidiary
of AmeriChip International, Inc. The name of this entity was subsequently
changed to AmeriChip Tool and Abrasives, LLC (hereinafter "ATA"). ATA's primary
focus will be to establish an extensive resource for cost saving services and
the sale of machining products. ATA has secured office space and established
headquarters in Plymouth, Michigan. On August 21, 2004, AmeriChip International,
Inc., through ATA, entered into an agreement to acquire certain assets of
National Abrasive Systems, Co. (hereinafter "NASCO"), a Michigan corporation.
NASCO is considered to be a related entity because its president is also the
president of AmeriChip International, Inc. This transaction is more fully
described in Note 8.
On September 10, 2004, the Company established AmeriChip International Holdings,
LLC, a wholly owned subsidiary of AmeriChip International, Inc. This entity was
created in order to acquire American Production and Machining, LLC, an unrelated
entity, out of bankruptcy. This transaction has not occurred as of the date of
this report. Accordingly, AmeriChip International Holdings, LLC is at present a
non-operating entity. (See Note 13.)
On August 9, 2004, the Company's board of directors elected to form a wholly
owned subsidiary, AmeriChip Canada Inc. This entity is a Canadian charter
corporation. The primary purpose of this subsidiary will be to channel Canadian
based opportunities to both AmeriChip International and AmeriChip Tool and
Abrasives for processing.
The Company's year end is November 30.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the U.S. and have been consistently applied in
the preparation of the financial statements.
Accounting Methods
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB
No. 43, Chapter 4" (hereinafter "SFAS No. 151"). This statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Management believes that the adoption of this statement will have no material
impact on the Company's financial condition or results of operations.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing
Transactions - an amendment of FASB Statements No. 66 and 67" (hereinafter "SFAS
No. 152"), which amends FASB Statement No. 66, "Accounting for Sales of Real
Estate", to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
04-2, "Accounting for Real Estate Time-Sharing Transactions"(hereinafter "SOP
04-2"). This statement also amends FASB Statement No. 67, "Accounting for Costs
and Initial Rental Operations of Real Estate Projects" to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the Company's financial condition or results of
operations.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.153, "Exchanges of Nonmonetary Assets - an
Amendment of APB Opinion No. 29", (hereinafter "SFAS No. 153"). This statement
eliminates the exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that
do not have commercial substance, defined as transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. This
statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Management believes that the adoption of this statement will have
no impact on the Company's financial condition or results of operations.
In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payments" (hereinafter "SFAS No. 123 (R)"). This statement replaces FASB
Statement No. 123, "Accounting for Stock-Based Compensation", and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 (R)
establishes standards for the accounting for share-based payment transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based award, share
appreciation rights and employee share purchase plans. SFAS No. 123 (R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of the award on the
grand date ( with limited exceptions). That cost will be recognized in the
entity's financial statements over the period during which the employee is
required to provide services in exchange for the award. The Company was
previously reporting in compliance with SFAS No. 123. Management has adopted
SFAS 123 (R) and believes this statement will have no impact on its overall
results of operations or financial position.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (hereinafter
"SFAS No. 150"). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has determined that there was no impact to its financial statements from the
adoption of this statement.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 149").
SFAS No. 149 amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 has not had a material impact on the
financial position or results of operations of the Company.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions. For
the year ended November 30, 2004, the Company had estimated that no allowance
for doubtful accounts was necessary, as the receivables are all expected to be
collected. This assessment may change as the Company develops the appropriate
history of transactions in its operating companies and a provision for doubtful
accounts will be established.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments (or short-term debt) with original maturities of three months
or less to be cash equivalents.
Concentration of Credit Risk
The Company maintains the majority of its cash in one commercial account at a
major financial institution. Although the financial institution is considered
creditworthy and has not experienced any losses on its deposits, at November 30,
2004, the Company's cash balance exceeded Federal Deposit Insurance Corporation
(FDIC) limits by $66,245.
Cost of Sales
Cost of sales consists of the purchase price of products sold, inbound and
outbound shipping charges, packaging supplies and costs associated with service
revenues and marketplace business. Cost of sales totaled $14,214 for the year
ended November 30, 2004.
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At November 30, 2004 and 2003, the Company has not engaged in any transactions
that would be considered derivative instruments or hedging activities.
Earnings Per Share
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, which provides for calculation of "basic" and "diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing net income available to common shareholders by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities that could share in the earnings of
an entity similar to fully diluted earnings per share. Although there were
common stock equivalents outstanding at November 30, 2004 and 2003, they were
not included in the calculation of earnings per share because they would have
been considered anti-dilutive. These common stock equivalents were primarily
from convertible debt of 9,053,141 and zero, and outstanding warrants of
12,621,428 and 300,000 as of November 30, 2004 and 2003, respectively.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include trade accounts receivable and payable, accrued expenses
and short-term borrowings. All instruments are accounted for on a historical
cost basis, which, due to the short maturity of these financial instruments,
approximates fair value at November 30, 2004 and 2003.
Inventories
Inventories, consisting of products available for sale, are recorded using the
weighted average method. As of November 30, 2004, the inventory of our
subsidiary AmeriChip Tool and Abrasives, LLC totaled $230,000, consisting of
$223,862 of grinding and abrasive products and $6,138 of other materials.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, after elimination of intercompany accounts and transactions.
Subsidiaries of the Company are listed in Note 1.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to seven years.
The following is a summary of property and equipment, and accumulated
depreciation thereto:
November 30,
2004
--------------
Furniture and fixtures $ 10,439
Plant assets 14,000
--------------
Total assets 24,439
Less accumulated depreciation (1,616)
--------------
$ 22,823
==============
The Company recognized $1,616 in depreciation expense for the year ended
November 30, 2004. The Company evaluates the recoverability of property and
equipment when events and circumstances indicate that such assets might be
impaired. The Company determines impairment by comparing the undiscounted future
cash flows estimated to be generated by these assets to their respective
carrying amounts. Maintenance and repairs are expensed as incurred. Replacements
and betterments are capitalized. The cost and related reserves of assets sold or
retired are removed from the accounts and any resulting gain or loss is
reflected in results of operations.
Provision for Taxes
Income taxes are provided based upon the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109 (hereinafter "SFAS No.
109"), "Accounting for Income Taxes." Under this approach, deferred income taxes
are recorded to reflect the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at each year-end. A valuation allowance is recorded against deferred tax
assets if management does not believe the Company has met the "more likely than
not" standard imposed by SFAS No. 109 to allow recognition of such an asset.
At November 30, 2004 and 2003, the Company had net deferred tax asset of
approximately $1,652,000 and $643,000, respectively, principally arising from
net operating loss carryforwards for income tax purposes multiplied by an
expected tax rate of 34%. As management of the Company cannot determine that it
is more likely than not that the Company will realize its benefit of the net
deferred tax asset, a valuation allowance equal to the net deferred tax asset
was present at November 30, 2004 and 2003.
The significant components of the deferred tax asset at November 30, 2004 and
2003 were as follows:
November 30, November 30,
2004 2003
-------------- --------------
Net operating loss carryforward $ 4,858,000 $ 1,892,000
============== ==============
Warrants issued: $ 305,600 $ 54,000
============== ==============
Deferred tax asset $ 1,652,000 $ 643,000
============== ==============
Deferred tax asset valuation allowance $ (1,652,000) $ (643,000)
============== ==============
At November 30, 2004 and 2003, the Company has net operating loss carryforwards
of approximately $4,858,000 and $1,892,000, respectively, which expires in the
years 2021 through 2023. The Company recognized approximately $305,600 and
$54,000 of losses from issuance of warrants for services in fiscal 2004 and
2003, respectively, which are not deductible for tax purposes and are not
included in the above calculation of deferred tax assets. The change in the
allowance account from November 30, 2003 to 2004 was $1,009,000.
The Tax Reform Act of 1986 substantially changed the rules relative to the use
of net operating losses and general business credit carryforwards in the event
of an "ownership change" of a corporation. The Company has issued additional
shares of common stock, which may have resulted in restrictions on the future
use of net operating losses and tax credit carryforwards generated before an
ownership change. The effect of such change has not been determined.
Reclassification
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, other than those
changes attributed to the correction of an error in the year ended November 30,
2003 as described in Note 11.
Use of Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Website Development
An outside consultant planned and developed the Company's website and corporate
branding to market the Company. The planning and development costs incurred in
this project, in the amount of $90,000 for the period ended November 30, 2003,
were expensed as incurred in accordance with SOP 98-1.
NOTE 3 - 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 November 30, 2004, the Company had an
accumulated deficit of $5,217,423. For the year ended November 30, 2004, the
Company sustained a net loss of $3,271,525. In addition, the Company has
negative working capital and very limited revenues. 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
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot 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 flows to meet its
obligations on a timely basis. The Company's management is currently putting
sales and acquisition strategies in place which will, if successful, mitigate
these factors which raise substantial doubt about the Company's ability to
continue as a going concern.
NOTE 4 - STOCK OPTIONS AND WARRANTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," defines a fair value-based method of accounting for stock options
and other equity instruments. The Company has adopted this method, which
measures compensation costs based on the estimated fair value of the award and
recognizes that cost over the service period.
On October 22, 2003, the Company's board of directors approved the AmeriChip
International Inc. 2003 Non-Qualified Incentive Stock Option Plan (hereinafter
"the Plan"). The Plan initially allowed the Company to issue up to 8,000,000
shares of the Company's common stock to officers, directors, employees and
consultants. On December 12, 2003, the Company's board of directors authorized
an increase of 4,000,000 shares issuable in accordance with the terms of the
Plan. In May 2004, the Company's board of directors authorized an increase of
8,000,000 shares issuable in accordance with the terms of the Plan. All
20,000,000 shares issuable in accordance with the Plan have been registered with
the Securities and Exchange Commission on Form S-8. In the years ended November
30, 2004 and 2003, the Company issued 14,650,000 and 5,350,000 stock options,
respectively, under this plan, which were immediately exercised. There are no
remaining options to be issued under the Plan.
The following is a summary of stock option activity:
Number of Weighted
Shares Average
Under Exercise
Options Price
------------ ------------
Outstanding October 22, 2003
Granted 5,350,000 $ 0.15
Exercised, forfeited or expired (5,350,000) (0.15)
------------ ------------
Outstanding, November 30, 2003
Granted 14,650,000 $ 0.11
Exercised, forfeited or expired (14,650,000) (0.11)
------------ ------------
Outstanding, November 30, 2004 -- --
============ ============
Weighted average fair value of options granted during the
year ended November 30, 2003 $ nil
============
In the year ended November 30, 2004, warrants were issued to acquire 750,000
shares of common stock at an exercise price of $0.25. The Company also issued
11,871,428 warrants at an exercise price of $0.08 per share. All warrants were
issued for three years and for consulting agreements valued at $148,050,
$147,050 and $10,500. (See Note 7.)
In the year ended November 30, 2003, 100,000 warrants were granted at an
exercise price of $0.30 per share, 100,000 warrants were granted at an exercise
price of $0.40 per share and 100,000 warrants were granted at an exercise price
of $0.50 per share for consulting services.
The fair value of each warrant granted in the years ended November 30, 2004 and
2003 were estimated on the grant date using the Black-Scholes Option Price
Calculation. The following assumptions were made in estimating fair value:
risk-free interest rate is 5%, volatility is 1.0, and expected life is 3 years.
Summarized information about stock warrants outstanding and exercisable at
November 30, 2004 and 2003 are as follows:
Number of Weighted Average Average exercise
warrants Remaining Life price
-------------- -------------- --------------
Warrants issued in 2003 300,000 2.00 $ 0.40
============== ============== ==============
Warrants issued in 2004 750,000 2.59 $ 0.25
11,871,428 2.50 $ 0.08
-------------- -------------- --------------
Total warrants in 2004 12,621,428 2.50 $ 0.09
============== ============== ==============
Total unexercised warrants 12,921,428 2.50 $ 0.09
============== ============== ==============
NOTE 5 - COMMON STOCK
In May 2004, the Company's board of directors elected to increase the authorized
capital of the Company from 100,000,000 shares of common stock to 500,000,000
shares of $0.001 par value common stock. All shares have equal voting rights,
are non-assessable and have one vote per share. Voting rights are not cumulative
and, therefore, the holders of more than 50% of the common stock could, if they
choose to do so, elect all of the directors of the Company.
During the year ended November 30, 2004, 7,150,000 shares of common stock were
issued for an average of $0.09 per share for consulting and services, 20,999,785
shares of common stock and warrants were issued for an average of $0.09 per
share for consulting and services and 2,900,000 shares of common stock were
issued in a private placement for $0.05 per share. The Company issued 3,134,329
shares of common stock for an average of $0.07 per share for financing
agreements and 9,053,141 shares of common stock for an average of $0.03 per
share for debt and related interest costs. The Company also issued 150,000
shares of common stock for $0.06 per share for non-compete agreements related to
the asset purchase agreement. (See Note 8.)
In the year ended November 30, 2001, Southborrough Ventures, Inc., the
registrant prior to recapitalization, issued 5,005,000 shares of common stock.
In the year ended November 30, 2003, the board of directors approved a three for
one forward stock dividend which increased the outstanding shares to 20,020,000
shares. All transactions from prior periods have been restated to reflect this
stock split. As part of the recapitalization of AmeriChip, Inc., the restated
shares previously issued by Southborrough Ventures, Inc. resulted in $20,020
being recognized as a discount on common stock.
In 2003, three shareholders acquired 900 shares of common stock of AmeriChip,
Inc., of which, 720 shares were traded for all of the 225,000 shares of common
stock outstanding of AmeriChip Ventures, Inc., which became a wholly owned
subsidiary. This transaction created a minority interest in AmeriChip, Inc. of
20%. The aforementioned 225,000 shares were exchanged in May 2003 for 60,000,000
shares of common stock of AmeriChip International Inc. as part of the reverse
merger acquisition. As the Company had no par value for its stock and had
negative stockholders' equity at the date of the merger, a discount on common
stock in the amount of $26,345 was recorded in the accompanying consolidated
financial statements for the year ended November 30, 2003. During the year ended
November 30, 2004, the board of directors elected to cancel the discount and
subsequently raise additional paid-in capital.
In 2003, the Company issued 5,350,000 shares from the exercise of stock options
to consultants for services valued at $783,000.
NOTE 6 - CORNELL CAPITAL PARTNERS LP FINANCING
On May 25, 2004, the Company entered into a Standby Equity Distribution
Agreement and various security and debenture agreements with Cornell Capital
Partners LP (hereinafter "Cornell Capital") in order to provide the Company with
up to $6,300,000 of funding over approximately the next 24 months. These
agreements are subject to limitation on borrowing and conversion of debt to
equity. As part of its obligation under the agreements, the Company filed a
registration statement on Form SB-2 to register the common stock issued to
Cornell Capital and the common stock issuable in accordance with the terms of
the equity distribution agreement. As of November 30, 2004, the Company has
received a total of $800,000 under these agreements. The Company also issued
3,134,329 shares of common stock valued at $207,000 as the commitment fee
associated with this agreement. The commitment fee was deemed to be a deferred
debt offering cost and is being amortized as a financing expense over the
effective period of 24 months. Amortization for the year ended November 30, 2004
was $52,500.
In May 2004, the Company received $300,000 (Loan 1) in cash upon execution of a
convertible debenture in favor of Cornell Capital. Terms of the debenture
agreement include a maturity date of May 25, 2007, an interest rate of 5% per
annum, and a provision for the holder to convert unpaid principal and interest
into Company common stock. The debenture agreement also enables the Company to
redeem unpaid principal by payment of 120% of the amount redeemed and the
distribution of common stock warrants to the holder. In connection with the
debenture, the Company incurred loan fees and expenses of $300,000, which are
being amortized as a financing expense over a period of three years. During the
year ended November 30, 2004, the Company recorded $75,000 of financing expense.
In August 2004, the Company received $225,000 (Loan 2) in cash upon execution of
a short-term promissory note in favor of Cornell Capital. Terms of the note
included a stipulated interest rate of 12% and a provision for full repayment
within sixty-two calendar days. The Company incurred related fees and expenses
of $18,875, which were expensed to financing costs. During the year ended
November 30, 2004, Cornell Capital converted the loan into 5,809,251 shares of
common stock in payment of the aforementioned note principal and related
interest of $15,780. The Company had a beneficial conversion feature of $30,750
attributed to the aforementioned debt. According to EIFT 98-5, because the debt
was convertible at issuance, the debt discount was recorded as a charge to
interest and was immediately expensed.
In November 2004, the Company received $275,000 (Loan 3) in cash upon execution
of a short-term promissory note in favor of Cornell Capital. Terms of the note
included a stipulated interest rate of 12% and a provision for full repayment
within eighty-nine calendar days. The Company incurred related fees and expenses
of $25,625, which are being amortized as a financing expense over the duration
of the note. Amortization for the year ended November 30, 2004 was $8,193.
Cornell Capital also converted 3,243,210 shares of common stock in payment of
$50,000 of principal and $2,595 related interest for the aforementioned note.
The following is a summary of debt transactions with Cornell Capital during the
year ended November 30, 2004:
Loan 1 Loan 2 Loan 3 Total
------------ ------------ ------------ ------------
Convertible Debenture
5% annual interest
term: 3 years $ 300,000 $ -- $ -- $ 300,000
Promissory Note
12% annual interest
term: 89 days -- 225,000 -- 225,000
Promissory Note
12% annual interest
term: 62 days -- -- 275,000 275,000
------------ ------------ ------------ ------------
Total Notes at Face Value 300,000 225,000 275,000 800,000
Less: principal payments
converted by stock -- (225,000) (50,000) (275,000)
Less: Discount due to
related financing
costs (225,000) -- (17,432) (242,432)
------------ ------------ ------------ ------------
Total Current Debt $ 75,000 $ -- $ 207,568 $ 282,568
============ ============ ============ ============
As of November 30, 2004, the Company had accrued unpaid interest on the above
transactions of $2,188.
In January 2005, the Company received $250,000 (Loan 4) in cash upon execution
of a short-term promissory note in favor of Cornell Capital. Terms of the note
included a stipulated interest rate of 12% and a provision for full repayment
within eighty-two calendar days. The Company incurred related fees and expenses
of $23,750, which will be amortized as financing expense over the duration of
the note and received $226,250 in cash. Cornell Capital also converted 2,873,065
shares of common stock in payment of $150,000 of principal for the
aforementioned note.
The following is a summary of the outstanding debt conversion transactions under
the agreements with Cornell Capital subsequent to November 30, 2004:
Loan 1 Loan 3 Loan 4
------------ ------------ ------------
Value of notes at
November 30, 2004 $ 75,000 $ 207,568 $ --
Promissory note
12% annual interest
term: 82 days -- -- 250,000
Add: additional interest
expense of the stock
conversion -- 27,896 --
Less: principal payments
converted by stock
December 1,2004 to
March 10, 2005 -- (235,464) (150,000)
------------ ------------ ------------
Balance of notes subsequent
March 10, 2005 $ 75,000 $ -- $ 100,000
============ ============ ============
Interest expense related to
stock conversion
through March 10, 2005 $ 12,500 $ 22,847 $ 7,854
============ ============ ============
Number of shares issued upon
subsequent conversion of
above notes prior to
March 10, 2005 2,403,846 4,961,842 2,873,065
============ ============ ============
NOTE 7 - CONTRACTS AND AGREEMENTS
CEOcast, Inc.
In November 2003, the Company executed a six-month agreement with CEOcast, Inc.
(hereinafter "CEOcast") to provide consulting services for AmeriChip. CEOcast is
entitled to receive $10,000 upon signing the agreement, 300,000 shares of common
stock, and $10,000 per month for six months commencing on December 2003. During
the year ended November 30, 2004, 100,000 shares of common stock were issued and
CEOcast agreed to cancel the agreement with no penalties and also to agree to
cancel the amounts owed to CEOcast by the Company
In July 2004, the Company signed a new agreement with CEOcast whereby the
Company paid a retainer of $5,000 and issued 2,000,000 shares of common stock.
The Company also agreed to pay $5,000 per month commencing in August 2004.
During the year ended November 30, 2004, the Company paid $17,000 to CEOcast
under the terms of the agreement.
RM Communications
In October 2003, the Company executed a six-month agreement with RM
Communications (hereinafter "RMC"), to provide services and website development
for AmeriChip. RMC is entitled to receive $2,000 per month for six months,
100,000 shares of common stock upon signing the agreement, 100,000 shares of
common stock upon completion of services, and 300,000 three-year warrants, which
will expire in January 22, 2007. The warrants are exercisable per the following
terms: 100,000 warrants at $0.30, 100,000 warrants at $0.40, and 100,000
warrants at $0.50. The Company will also pay additional costs incurred by RMC in
performance of the contract.
In April 2004, the Company executed a continuation of the aforementioned
agreement for an additional year. RMC is entitled to receive $3,500 per month,
200,000 shares of common stock upon signing the agreement, and 3-year warrants
exercisable at $0.25, payable in increments of 150,000 to be issued at the
beginning of each quarter. During the year ended November 30, 2004, 100,000
shares of common stock, 300,000 warrants, and $9,000 in cash were paid to RMC.
Consulting Contracts
In September 2003, the Company entered into two, four-year agreements with
consultants to provide administrative, shareholder inquiry and press
dissemination services to AmeriChip. Each contract provides for 750,000 shares
of common stock to be issued to the consultants. Common stock of 1,500,000
shares was issued in 2003 for these contracts.
In September 2003, the Company entered into a one-year agreement with a
consultant to provide consulting services to AmeriChip to develop overseas
markets for 1,500,000 shares of common stock. Those shares were issued in 2003.
NOTE 8 - LONG -TERM DEBT
In August 2004, the Company through its wholly owned subsidiary, AmeriChip Tool
& Abrasives LLC, entered into an agreement to acquire certain assets of National
Abrasive Systems, Co. (hereinafter "NASCO"), a Michigan corporation. NASCO is
considered to be a related party because its president is also the president of
the AmeriChip International Inc.
Assets acquired included inventory, equipment, and intangible assets. The
transaction was funded by the Company's execution of a $250,000 promissory note
and a UCC-1 security interest in the assets acquired. In recording the
transaction, the Company assigned fair values to the equipment and inventory,
and no additional value to intangible assets acquired. The purchase was recorded
as follows:
Furniture and fixtures $ 6,000
Machinery and equipment 14,000
Inventory 230,000
--------
Total purchase price $250,000
========
Terms of the promissory note include 3.5% interest per annum. Payment of the
note includes payment of interest only of $729.17 for the first six months and
monthly payments thereafter of $2,417. Payments are due on this note as follows
for the next five years:
2005 $ 23,940
2006 $ 29,004
2007 $ 29,004
2008 $ 29,004
2009 $ 29,004
As part of the transaction, the Company also issued 150,000 shares of its common
stock valued at $9,000 to two NASCO shareholders for their execution of one-year
non-competition agreements in favor of the Company. These non-competition
agreements are included in other assets on the balance sheet as intangible
assets. The cost is being amortized on the straight-line method over the term of
the arrangements. Amortization of $2,250 has been charged to expense as of
November 30, 2004.
The balance of the note at November 30, 2004 was as follows:
Related party note $ 250,000
Less: Current portion (23,940)
------------
Long-term portion $ 226,060
============
NOTE 9 - TECHNOLOGY RIGHTS AND PATENTS
In the year ended November 30, 2003, the Company acquired rights to patents held
by AmeriChip Ventures, Inc., a wholly owned subsidiary of AmeriChip
International Inc. These patents are for a process known as Laser Assisted Chip
Control technology ("LACC") which can be used in manufacturing.
Technology licenses and patents are stated at cost. Amortization is provided
using the straight-line method over the remaining estimated useful lives of the
assets, which is ten years.
The following is a summary of technology licenses and patents and accumulated
amortization:
November 30, November 30,
2004 2003
-------------- --------------
Technology licenses and patents $ 42,069 $ 42,069
Less accumulated amortization (17,353) (13,146)
-------------- --------------
$ 24,716 $ 28,923
============== ==============
Amortization expense for the technology licenses and patents was $4,207 and
$4,507, during the years ended November 30, 2004 and 2003, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company has a related party payable for advances from shareholders totaling
$166,407 and $89,338 as of November 30, 2004 and 2003, respectively. These
advances are uncollateralized, non-interest bearing and are payable upon demand.
The Company has recorded $660,000 and $300,000, respectively, for the years
ended November 30, 2004 and 2003 regarding the licensing agreement with
shareholders. See Note 12.
NOTE 11 - CORRECTION OF AN ERROR
The accompanying consolidated financial statements for 2003 have been restated
to correct information concerning accrued interest. The effect of the
restatement was to increase accrued interest by $110,000, increase interest
expense by $110,000 and increase net loss by $110,000. Accumulated deficit was
increased by $110,000. This correction represents the accrual of interest on the
licensing agreement. See Note 11.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company entered into a standby equity distribution agreement and various
security and debenture agreements with Cornell Capital. (See Note 6.) The
Company agreed to reserve 81,119,403 shares of common shares under these
agreements and to pursue a registration of these shares with Securities and
Exchange Commission. As of November 30, 2004, 9,053,141 common shares have been
distributed to Cornell Capital in accordance with these agreements and another
10,238,753 common shares prior to March 10, 2005.
Operating Lease
During the year ended November 30, 2004, the Company entered into an operating
lease for a vehicle and paid a refundable security deposit of $1,200 and lease
payments of $3,549. The remaining lease payments for this contract are as
follows:
2005 $ 14,196
2006 $ 14,196
2007 $ 14,196
2008 $ 10,647
Rental Agreement
During the year ended November 30, 2004, the Company signed a lease agreement
and made a deposit of $2,000 for the rental of office space in Plymouth,
Michigan. The lease term is for five years and payments of $2,000 per month on a
gradually increasing scale. The remaining lease payments for this contract are
as follows:
2005 $ 18,000
2006 $ 24,300
2007 $ 25,500
2008 $ 26,700
2009 $ 27,900
Pending Purchase Agreement
During the year ended November 30, 2004, the Company placed a deposit of $50,000
on the purchase of a robotic arm that works in tandem with the Company's laser
technology. This purchase will allow the Company to implement the patented LACC
process. The Company has a balance on the purchase of $179,845.
GSI Lumonics
GSI Lumonics is a leading provider of laser equipment.
GSI Lumonics is the exclusive supplier of laser equipment to
the Company. This is being done, in part, as a result of GSI's participation and
support of the Company during the research and development stage.
Licensing Agreement
In January 2003, the Company entered into a cancelable licensing agreement for
patented technology (see Note 9) with three shareholders which required
aggregate payments of $1,000,000 to each of the three shareholders, payable in
monthly installments of $10,000 to each shareholder. Interest on the unpaid
principal is accrued at prime plus 1% or 5%, whichever is greater. The Company
is currently in default under the agreement, due to non-fulfillment of the
insurance clause provision of the contract. The Company is seeking to obtain
insurance to satisfy this provision. The accrued principal due the shareholders
at November 30, 2004 was $660,000 and is included in the related party payable.
The accrued interest on the principal is $275,000 and is included in the accrued
interest. During the year ended November 30, 2004, the Company paid interest due
to two shareholders in the amount of $20,500. The Company recognized monthly
expenses totaling $360,000 under the licensing agreement as license expense. The
three shareholders have agreed to a suspension of payments until the Company
begins generating revenues from operations. The amounts owed will continue to
accrue monthly.
NOTE 13 - SUBSEQUENT EVENTS
American Production Machining, LLC
On April 23, 2003, the Company executed a letter of intent with American
Production Machining, LLC (hereinafter "APM") to acquire certain assets of APM
subject to the execution of a definitive agreement. APM is manufacturer of
automotive, truck and aircraft parts. They use computer numerical controlled
machines and state of the art inspection equipment. On October 16, 2003, the
Company executed a definitive Asset Purchase Agreement which required the
payment of cash and the assumption of $1,900,000 in liabilities owed by APM to
Comerica Bank. The original closing date for this transaction was November 15,
2003, although the deadline was subsequently extended to January 24, 2004. The
Company has secured the financing resources to pursue this acquisition with its
agreement with Cornell Capital. In August 2004, the Company tendered a bid to
the United States Bankruptcy Court to pursue its acquisition of APM. APM
continues to operate under bankruptcy protection during this period.
KSI Machine and Engineering Inc.
On September 14, 2004, the Company executed a letter of intent with KSI Machine
and Engineering, Inc. (hereinafter "KSI") to acquire all of KSI's outstanding
stock. KSI is a manufacturer of automotive die and mold castings which use
horizontal spindle 5 axis computer numerical controlled machines. During the
year ended November 30, the Company paid a deposit of $50,000 for this
agreement. On December 7, 2004 the Company paid an additional $100,000 and
signed a stock purchase agreement with KSI. As of the report date of these
financial statements, this acquisition has not been completed. The Company
intends to continue pursuing this acquisition.
Cornell Capital Partners LP
Subsequent to November 30, 2004, the Company had additional transactions with
Cornell Capital which are more fully described in Note 6.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer (CEO), who also serves as our Chief Financial
Officer (CFO), we conducted an evaluation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period cover by this Quarterly Report
on Form 10-QSB. Based upon that evaluation, our CEO and our CFO have concluded
that the design and operation of our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
There has been no change in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-QSB that
has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
While we believe our disclosure controls and procedures and our internal control
over financial reporting are adequate, no system of controls can prevent all
error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with its policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
ITEM 8B. OTHER INFORMATION
No reports on Form 8-K were filed in the forth quarter ended November 30, 2004.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officer as of November 30, 2004 are as follows:
Name Age Position
---- --- --------
Marc Walther 49 Chief Executive Officer and Director
Director, Vice President Research &
Edward Rutkowski 40 Development
Russ Weldon 74 Director
The following is a brief description of the background of our directors and
executive officers.
Background Information
Marc Walther. Mr. Walther is our Chief Executive Officer and a Director since
May, 2003. Since May 2003, Mr. Walther has served our Company in several
capacities, most recently as its Chief Executive Officer and a director. Prior
to joining our Company, Mr. Walther was an original founder in AmeriChip
Ventures, Inc. and AmeriChip, Inc. In 2001, Mr. Walther purchased Canadian
Grinding Wheel Company and the Wright Abrasive Company located in Hamilton
Ontario Canada. Since 1999 Mr. Walther has also been the owner and President of
National Abrasive Systems Company) a manufacturer and distributor of various
abrasive products throughout the north eastern United States. Mr. Walther is
still affiliated with that company, which he acquired in 1999.
Edward Rutkowski. Mr. Rutkowski is a member of our Board of Directors and has
been serving in that capacity since May 2003. Mr. Rutkowski has also served the
Company in a variety of capacities since May 2003, most recently as Vice
President Operations / Research & Development and President of AmeriChip Tool
and Abrasives. Prior to joining the Company, Mr. Rutkowski founded Americhip,
Inc. and Americhip Ventures in January 2001. Between 1993 and January 2001, Mr.
Rutkowski had been employed in various capacities involving product engineering,
technical support, distribution and marketing of products within the automotive
industry, most recently as a distribution account specialist for Komet of
America and prior to working with Komet, Mr. Rutkowski worked as a Supplier
Product Engineer for EWIE Company of Romeo, MI. In 1993, Mr. Rutkowski developed
and was issued the patent for the AmeriChip laser chip control process which is
currently held by Americhip.
Russ Weldon. Mr. Weldon is a member of our Board of Directors and has been
serving in that capacity since July, 2004. Mr. Weldon has spent over 40 years in
the automotive industry in a career that has spanned all aspects of the
industry. Mr. Weldon currently provides consulting services to companies engaged
in all areas of the Company's target markets. Prior to earning a mechanical
engineering degree at the University of Washington, Mr. Weldon apprenticed as a
tool and die maker. Mr. Weldon's professional experiences have included work
with companies including Distel Tools and Machining, Detroit, MI; ITT, Higgby,
Detroit, MI; Allied Products of Chicago, IL and Saturn, Springhill, TN. For the
past five years (5) Mr. Weldon has been a commissioned salesman and consultant
to Distel Tools and Machining of Detroit, MI.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
the Company directors and executive officers, and persons who own more than ten
percent (10%) of the Company's outstanding common stock, file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of Common Stock. Such persons are
required by the Commission to furnish the Company with copies of all such
reports they file. The Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and written representation, as
of December 31, 2003, all of the Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners have been
satisfied.
Audit Committee
The principal functions of the Audit Committee is to recommend the annual
appointment of the Company's auditors concerning the scope of the audit and the
results of their examination, to review and approve any the Company's internal
control procedures. Our audit committee consists of Mr. Peter Wanner, a
certified public accountant and Mr. Russ Weldon. The Board of Directors believes
that the Audit Committee, are capable of concluding that the Company's
disclosure controls and procedures were effective for purposes of the Securities
Exchange Act of 1934 filings with the Securities and Exchange Commission.
Family Relationships
There are no family relationships between any two or more of our directors or
executive officers. There is no arrangement or understanding between any of our
directors or executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or officer, and there
is no arrangement, plan or understanding as to whether non-management
shareholders will exercise their voting rights to continue to elect the current
board of directors. There are also no arrangements, agreements or understandings
to our knowledge between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the Securities and
Exchange Commission or the commodities futures trading commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities for the fiscal years ended
November 30, 2004, 2003 and 2002, paid to our most highly compensated executive
officers.
Summary Compensation Table
Annual Compensation Long Term Compensation
----------------------------------- --------------------------------------------
Awards
------
Restricted Securities
Stock Underlying All Other
Name and Principal Position Year Salary Bonus Award(s) Options Compensation
- --------------------------- ---- ------ ----- -------- ------- ------------
David Howard(1) 2004 $ 0 -- -- -- --
Former Chairman of the Board of 2003 $ 0 -- -- -- --
Directors and former Officer 2002 $ 0 -- -- -- --
Marc Walther 2004 $ 0 -- -- -- --
Chief Executive Officer, President and 2003 $ 0 -- -- -- --
member of the Board of Directors 2002 $ 0 -- -- -- --
Ed Rutkowski 2004 $ 0 -- -- -- --
Director, Vice President of Research 2003 $ 0 -- -- -- --
and
Development, Chief Operating Officer 2002 $ 0 -- -- -- --
John Taylor 2004 $ 0 -- -- -- --
Former President and Chief 2003 $ 0 -- -- -- --
Executive Officer 2002 $ 12,000 -- -- -- --
- -------------------------
(1) David Howard retired and was replaced as a director by Russ Weldon on July
19, 2004.
Aggregated Option Exercises in Last Fiscal Year And Fiscal
Year-End Option Values
The Company has not issued any stock options to any of the executive officers
listed in the Summary Compensation Table above.
Compensation of Directors
We have no standard arrangement pursuant to which our Directors are compensated
for services provided as a Director.
Employment Agreements
On October 22, 2003, the Board of Directors approved the AmeriChip
International Inc. 2003 Nonqualified Stock Option Plan under which employees,
officers, directors and consultants are eligible to receive grants of stock
options. AmeriChip has reserved a total of 20,000,000 shares of common stock
under the 2003 Nonqualified Stock Option Plan. It is presently administered by
the Board of Directors. Subject to the provisions of the 2003 Nonqualified Stock
Option Plan, the Board of Directors has full and final authority to select the
individuals to whom options will be granted, to grant the options and to
determine the terms and conditions and the number of shares issued pursuant
thereto.
Change in Control
There are no arrangements which would result in payments to any officers
or directors in the event of a change-in-control of AmeriChip.
Indemnification
Our Articles of Incorporation and Bylaws provide that we may indemnify an
officer or director who is made a party to any proceeding, including a lawsuit,
because of his position, if he acted in good faith and in a manner he reasonably
believed to be in our best interest. In certain cases, we may advance expenses
incurred in defending any such proceeding. To the extent that the officer or
director is successful on the merits in any such proceeding as to which such
person is to be indemnified, we must indemnify him against all expenses
incurred, including attorney's fees. With respect to a derivative action,
indemnity may be made only for expenses actually and reasonably incurred in
defending the proceeding, and if the officer or director is judged liable, only
by a court order. The indemnification is intended to be to the fullest extent
permitted by the laws of the State of Nevada.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the amount of our capital stock beneficially owned by
our directors, the executive officers named in the Summary Compensation Table
above and by all directors and executive officers as a group as of November 30,
2004. Unless otherwise indicated, beneficial ownership is direct and the person
indicated has sole voting and investment power. As of November 30, 2004, we had
128,757,225 shares of common stock outstanding.
Shares
Beneficially Percent
Name and Address Title of Class Owned (1) of Class(1)
- ---------------- -------------- --------- -----------
David Howard(2)
9282 General Drive
Plymouth, MI 48170 Common 20,000,000 15.5%
Marc Walther
9282 General Drive
Plymouth, MI 48170 Common 20,000,000 15.5%
Edward Rutkowski
9282 General Drive
Plymouth, MI 48170 Common 20,000,000 15.5%
Officers and Directors as a Group
(3 Persons) Common 60,000,000 46.5%
- -----------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 128,757,225 shares of
common stock outstanding as of November 30, 2004, together with applicable
options for each shareholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to options that are currently exercisable
or exercisable within sixty days of November 30, 2004 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
(2) David Howard retired and was replaced as a director by Russ Weldon on July
19, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 the Board of Directors,
Marc Walther, our President and Chief Executive Officer, and Ed Rutkowski, one
of our 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 hereinafter, to AVI. In consideration of the transfer
of the patent, we are obligated to pay the following:
Messrs Howard, Walther and Rutkowski, each shall receive US $1 million
payable at the rate of $10,000 on or before the first day of each calendar month
beginning September 1, 2003 with interest accruing on any unpaid balance at the
greater of (i) five percent (5%) and (ii) the prime rate plus 1% as reported in
the Wall Street Journal on the first business day following each July and
January 1, of each year until paid in full. The Company may repay any or all of
this amount without penalty. Messrs Howard, Walther and Rutkowski have agreed to
a suspension in payments until we begin generating revenues from operations;
however, the amounts owed will continue to accrue.
The Company has a related party payable for advances from shareholders
totaling $166,407 and $89,338 as of November 30, 2004 and 2003, respectively.
These advances are uncollateralized, non-interest bearing and are payable upon
demand.
Mr. Walther is the President of National Abrasives System, Co. He is also
the President/ CEO and Director of our Company. In the transaction with National
Abrasives System, Co., Mr. Walther received a note from the Company for
$250,000. During the Company's Board of Directors meeting held to approve the
purchase of National Abrasives System, Co., Mr. Walther abstained from voting.
In January 2003, the Company entered into a cancelable licensing agreement
for patented technology (see Note 9) with three shareholders which required
aggregate payments of $1,000,000 to each of the three shareholders, payable in
monthly installments of $10,000 to each shareholder. Interest on the unpaid
principal is accrued at prime plus 1% or 5%, whichever is greater. The Company
is currently in default under the agreement, due to non-fulfillment of the
insurance clause provision of the contract. The Company is seeking to obtain
insurance to satisfy this provision. The accrued principal due the shareholders
at November 30, 2004 was $660,000 and is included in the related party payable.
The accrued interest on the principal is $275,000 and is included in the accrued
interest. During the year ended November 30, 2004, the Company paid interest due
to two shareholders in the amount of $20,500. The Company recognized monthly
expenses totaling $360,000 under the licensing agreement as license expense. The
three shareholders have agreed to a suspension of payments until the Company
begins generating revenues from operations. The amounts owed will continue to
accrue monthly.
We believe that each of the above referenced transactions was made on
terms no less favorable to us than could have been obtained from an unaffiliated
third party. Furthermore, any future transactions or loans between us and our
officers, directors, principal stockholders or affiliates, and any forgiveness
of such loans, will be on terms no less favorable to us than could be obtained
from an unaffiliated third party, and will be approved by a majority of our
directors.
ITEM 13. EXHIBITS
3.1 Company's Amended and Restated Articles of Incorporation (1)
3.2 Company's Revised Amended and Restated Bylaws (1)
14.1 Code of Business Conduct (2)
10.1 Patent Licensing Agreement, dated January 21, 2003, by and between
Amerchip, Inc. and Americhip Ventures (2)
10.2 Shareholder Agreement, dated February 24, 2003, by and among David Howard,
Edward Rutkowski and Marc Walther. (2)
10.3 Agreement, dated October 22, 2003, by and between RM Communications and
Amerchip, Inc. (2)
10.4 Agreement, dated April 1, 2004, by and between RM Communications and
Amerchip, Inc. (2)
10.5 Purchase and Sele of Business Assets Agreement, dated August 1, 2004,
between National Abrasive Systems, Co. and Amerchip Tool and Abrasives,
LLC (2)
10.6 Promissory Note issued on August 1, 2004 by Amerchip Tool and Abrasives,
LLC to National Abrasive Systems, Co. (2)
10.7 Security Agreement, dated on August 1, 2004 between Amerchip Tool and
Abrasives, LLC to National Abrasive Systems, Co. (2)
10.8 Promissory Note issued on August 2, 2004 by Amerchip, Inc. to Cornell
Capital (2)
10.9 Promissory Note issued on September 30, 2004 by Amerchip, Inc. to Cornell
Capital (2)
10.10 Promissory Note issued on January 10, 2004 by Amerchip, Inc. to Cornell
Capital (2)
23.1 Consent of Independent Auditors (2)
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 Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 filed on December 4, 2001.
(2) Filed herewith.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Williams & Webster, P.S. ("Williams & Webster") billed us in the aggregate
amount of $68,181 and $17,207 for professional services rendered for their audit
of our annual financial statements and their reviews of the financial statements
included in our Forms 10-QSB for the year ended November 30, 2004 and November
30, 2003, respectively, and review of our SB2 registration statement.
AUDIT-RELATED FEES
Williams & Webster did not bill us for, nor perform professional services
rendered for assurance and related services that were reasonably related to the
performance of audit or review of the Company's financial statements for the
fiscal years ended November 30, 2004 and November 30, 2003, respectively.
TAX FEES
Williams & Webster did not bill us for, nor were perform professional
services rendered for tax related services for the fiscal years ended November
30, 2004 and November 30, 2003, respectively
ALL OTHER FEES
Williams & Webster did not bill us for, nor were perform professional services
rendered during the last two fiscal years, other than as reported above.
SIGNATURES
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.
AmeriChip International Inc.
By: Marc Walther
President, Chief Executive Officer, Principal
Accounting Officer, Chairman
of the Board of Directors
March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated and
on the dates indicated.
/s/ Marc Walther
- -------------------------
Marc Walther
President, Chief Executive Officer, Principal
Accounting Officer, Chairman
of the Board of Directors
March 15, 2005
/s/ Edward Rutkowski
- -------------------------
Edward Rutkowski
Director
March 15, 2005
/s/ Russ Weldon
- -------------------------
Russ Weldon
Director
March 15, 2005