We
are
registering up to 15,900,000 shares of our common stock for the offer or sale
by
the selling stockholder named in this prospectus which are issuable upon
conversion of the convertible debenture issued to the selling stockholder.
The
selling stockholder will determine when they will sell their shares, and in
all
cases, will sell their shares at the current market price or at negotiated
prices at the time of the sale. Although we have agreed to pay the expenses
related to the registration of the shares being offered, we will not receive
any
proceeds from the sale of the shares by the selling stockholder.
Investing
in our common stock involves risks, and investors should not buy these shares
unless they can afford to lose their entire investment. Please see “Risk
Factors” beginning on page 5 to read about certain factors you should consider
before buying shares of our common stock.
Neither
the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved these securities or passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a criminal
offense.
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This prospectus and the documents to which we refer
you and incorporate into this prospectus by reference contain forward-looking
statements. In addition, from time to time, we or our representatives may make
forward-looking statements orally or in writing. These are statements that
relate to future periods and include statements regarding our future strategic,
operational and financial plans, potential acquisitions, anticipated or
projected revenues, expenses and operational growth, markets and potential
customers for our products and services, plans related to sales strategies
and
efforts, the anticipated benefits of our relationships with strategic partners,
growth of our competition, our ability to compete, the adequacy of our current
facilities and our ability to obtain additional space, use of future earnings,
and the feature, benefits and performance of our current and future products
and
services.
You
can
identify forward-looking statements by those that are not historical in nature,
particularly those that use terminology such as “may,”“will,”“should,”“expects,”“anticipates,”“contemplates,”“estimates,”“believes,”“plans,”“projected,”“predicts,”“potential,”“seek” or “continue” or the negative of
these or similar terms. In evaluating these forward-looking statements, you
should consider various factors, including those described in this prospectus
under the heading “Risk Factors” beginning on page 5. These and other factors
may cause our actual results to differ materially from any forward-looking
statement. We caution you not to place undue reliance on these forward-looking
statements.
We
base
these forward-looking statements on our expectations and projections about
future events, which we derive from the information currently available to
us.
Such forward-looking statements relate to future events or our future
performance. Forward-looking statements are only predictions. The
forward-looking events discussed in this prospectus, the documents to which
we
refer you and other statements made from time to time by us or our
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about us.
For
these statements, we claim the protection of the “bespeaks caution” doctrine.
The forward-looking statements speak only as of the date hereof, and we
expressly disclaim any obligation to publicly release the results of any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this filing.
Factors
that may affect forward-looking statements. A
wide range of factors could materially affect future developments and
performance of our business. Significant factors affecting specific business
operations are identified in connection with the description of these operations
and the financial results of these operations incorporated by reference into
this prospectus. General factors affecting our operations include:
• Changes
in business plans,
• Changes
in U.S., global or regional economic conditions,
•
Changes
in U.S. and global financial and equity markets, including market disruptions
and significant interest rate fluctuations.
•
Increased competitive pressures,
•
Legal
developments that may affect our business,
•
Technological developments that may affect our business, and
•
Changes
in government regulations relating to the pharmaceutical industry.
This
list
of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
2
Prospectus
Summary Information
Our
Company
Our
executive offices are located at 9103 Emmott Road, Building 6, Suite A, Houston,
Texas, 77040 and telephone number (713) 466-6585. We maintain a website at
www.marmionair.com.
The
Offering
This
offering relates to the offer and sale of 15,900,000 shares of our common stock
by the selling stockholder identified in this prospectus. We are initially
registering a sufficient number of shares to cover conversions for the expected
four “interest only” payments remaining under the convertible debenture issued
by us to the selling stockholder in March 2007 which runs through August 2007
(based upon a $.0075 conversion price on the initial issuance date and interest
only payments of $29,730.53). We may register additional shares in the future.
The selling stockholder will determine when it will sell its shares, and in
all
cases, will sell its shares at the current market price or at negotiated prices
at the time of the sale. Although we have agreed to pay the expenses related
to
the registration of the shares being offered, we will not receive any proceeds
from the sale of the shares by the selling stockholder.
Common
stock outstanding before the offering:
57,709,990
Common
stock offered by the selling stockholder:
15,900,000
Common
stock underlying convertible debenture to be registered:
15,900,000
with a total dollar value of $190,800 at the time the debenture was
issued
Common
stock outstanding if all stock offered by selling stockholder is
sold:
73,609,990
Use
of Proceeds of the Offering:
We
will not receive any of the proceeds from the sale of the shares
by this
Offering
OTC
Bulletin Board symbol for common stock
“MMIO.OB”
3
Summary
Financial Information
The
summary financial information set forth below has been derived from our
financial statements for the year ended December 31, 2006 and December 31,2005
and for the three month periods ended March 31, 2007 and 2006. You should
read this information in conjunction with the financial statements and notes
thereto included elsewhere in this prospectus.
An
investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and the other information in
this
annual report before investing in our common stock. Our business and results
of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these
risks.
RISKS
RELATED TO OUR SECURITIES AND THIS REGISTRATION
We
have issued a substantial number of securities convertible into shares of our
common stock which will result in substantial dilution to the ownership
interests of our existing stockholder.
As
of
April 9, 2007, approximately 440 million shares of our common stock were
reserved for issuance upon exercise or conversion of the following securities:
(i) 340 million shares representing shares of common stock issuable upon
conversion in part of the outstanding convertible debentures issued and issuable
pursuant to that Subscription Agreement dated as of March 22, 2007 (without
regard to any limitations on conversion); and (ii) 100,000,000 shares of common
stock issuable upon exercise of in full of the warrants issued to the holders
of
the convertible debentures issued pursuant to that Subscription Agreement dated
as of March 22, 2007 (without regard to any limitations on exercise). The
convertible debentures have a variable conversion price based upon the trading
price of our common stock, with a floor conversion of $0.001 per share. If
the
entire $3 million convertible note was converted at the floor conversion price,
we would be obligated to issue 3 billion shares of common stock.
The
exercise or conversion of these securities will result in a significant increase
in the number of outstanding shares and substantially dilute the ownership
interests of our existing shareholders.
Our
convertible debentures are convertible into shares of common stock at a discount
to market price. Most of these shares are eligible for public resale. The
trading price of our common stock and our ability to raise additional financing
may be adversely affected by the influx into the market of such a substantial
number of shares.
Our
outstanding convertible debentures are presently convertible into approximately
400 million shares of common stock at a per share conversion price (based upon
a
25% discount to market price at time of conversion) of approximately $0.0075
(based on a April 9, 2007 closing price of 0.01) which is less than the current
trading price of our shares. Although many of the shares issuable upon
conversion of our convertible warrants are eligible for public resale under
Securities and Exchange Commission Rule 144, we have agreed to file a
registration statement to cover the public resale of all of these shares. This
significant increase in number of shares available for public sale may have
a
negative impact on the trading price of our shares and substantially dilute
the
ownership interest of our existing shareholders. In order to raise additional
financing we would likely be required to issue additional shares of common
stock
or securities convertible into common stock at a purchase or conversion price
as
applicable, on similar terms. To the extent these factors are viewed negatively
by the market, it may provide an incentive for persons to execute short sales
of
our common stock that could adversely affect the trading price of our common
stock.
Our
recent financing requires a registration statement to become effective within
90
days after the filing deadline of April 16, 2007 and if this fails to happen
we
will incur liquidated damages.
We
recently received financing from an accredited investor pursuant to a
Subscription Agreement dated March 22, 2007. Such financing requires us to
file
a registration statement and have the registration statement declared effective
by the SEC within 90 days of the filing deadline of April 16, 2007. If such
registration statement is not declared effective by July16, 2007, we begin
incurring liquidated damages equal to 2% of the principal of the promissory
notes issued for each 30 day period that this registration statement is not
declared effective after July 16, 2007.
The
conversion price of the debentures based on our recent financing is based on
an
average of our closing bid price of our intra day trading prices of our common
stock over a certain period of time prior to conversion and the decrease of
the
intra day trading price will result in issuance of a significant increase of
shares resulting in dilution to our shareholders.
The
conversion price of the debentures in our recent financing is equal to the
lesser of (i) .075 and (ii) 75% of the lowest bid price for the Common Stock
during the twenty (20) trading day period prior to conversion but in no event
shall the conversion price be less than $0.001 per share. The price of our
common shares may fluctuate and the lower intra-day trading price in the future,
will result in a conversion ratio resulting in issuance of a significant amount
of our common shares to the promissory note holders. This will result in our
present shareholders being diluted.
5
Selling
shareholders may impact our stock value through the execution of short sales
which may decrease the value of our common stock.
Short
sales are transactions in which a selling shareholder sells a security it does
not own. To complete the transaction, a selling shareholder must borrow the
security to make delivery to the buyer. The selling shareholder is then
obligated to replace the security borrowed by purchasing the security at the
market price at the time of replacement. The price at such time may be higher
or
lower than the price at which the security was sold by the selling shareholder.
If the underlying security goes down in price between the time the selling
shareholder sells our security and buys it back, the selling shareholder will
realize a gain on the transaction. Conversely, if the underlying security goes
up in price during the period, the selling shareholder will realize a loss
on
the transaction. The risk of such price increases is the principal risk of
engaging in short sales. The selling shareholders in this registration statement
could short the stock by borrowing and then selling our securities in the
market, and then converting the stock through either the debenture or warrants
at a discount to replace the security borrowed. Because the selling shareholders
control a large portion of our common stock, the selling shareholders could
have
a large impact on the value of our stock if they were to engage in short selling
of our stock. Such short selling could impact the value of our stock in an
extreme and volatile manner to the detriment of other shareholders.
Our
common stock is deemed to be a “penny stock” which may make it more difficult
for investors to sell their shares due to suitability
requirements.
Our
common stock is deemed to be a "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are
stock:
-
With a
price of less than $5.00 per share;
-
That
are not traded on a "recognized" national exchange;
-
Whose
prices are not quoted on the NASDAQ automated quotation system; or
-
Of
issuers with net tangible assets of less than $2.0 million (if the issuer has
been in continuous operation for at least three years) or $5.0 million (if
issuer has been in continuous operation for less than three years), or with
average revenues of less than $6.0 million for the last three
years.
Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. These requirements may reduce the
potential market for our common stock by reducing the number of potential
investors. This may make it more difficult for our shareholders to sell shares
to third parties or to otherwise dispose of them. This could cause our share
price to decline.
We
do not expect to pay dividends for the foreseeable future.
For
the
foreseeable future, it is anticipated that earnings, if any, that may be
generated from our operations will be used to finance our operations and that
cash dividends will not be paid to holders of our common stock.
RISKS
RELATED TO OUR BUSINESS
As
of December 31, 2006, there was substantial doubt about our ability to
continue as a going concern.
As
of
December 31, 2006, our independent public accounting firm issued a “going
concern opinion” wherein they stated that the accompanying financial statements
were prepared assuming the Company will continue as a going concern. The Company
has suffered recurring losses from operations, including a net loss of
approximately $7.0 million for the year ended December 31, 2006, and has a
substantial working capital deficiency as of December 31, 2006. These matters
raise substantial doubt about the Company’s ability to continue as a going
concern.
6
We
may not have sufficient funds to operate our business and may not be able to
obtain additional financing.
We
have
recently completed a financing which could ultimately result in $3 million
gross
proceeds to us. We expect these fund to be sufficient to carry out operations
through at least fiscal 2007. However, if unanticipated expenses, problems,
and
difficulties occur which result in material delays in the development of our
products, we will not be able to operate within our budget. If we do not operate
within our budget, we will require additional funds to continue our business.
We
may not be able to obtain additional financing as needed, on acceptable terms,
or at all, which would force us to delay our plans for growth and implementation
of our strategy which could seriously harm our business, financial condition,
and results of operations. If we need additional funds, we may seek to obtain
them primarily through stock or debt financings. Those additional financings
could result in dilution to our stockholder.
We
may need to raise additional money before we achieve profitability; if we fail
to raise additional money, it could be difficult to continue our business.
Based
on
our current plans, we believe that we have sufficient financial resources to
meet our operating expenses and capital requirements for fiscal 2007. If we
plan
to expand our operations to manufacture and market additional products or
services or if we make material acquisitions, we will need to obtain additional
funds. We may seek additional funding through public or private financing or
through collaborative arrangements with strategic partners.
You
should be aware that in the future:
• we
may
not obtain additional financial resources when necessary or on terms favorable
to us, if at all; and
• any
available additional financing may not be adequate.
If
we
cannot raise additional funds when needed, or on acceptable terms, we will
not
be able to continue to expand our operations or develop and manufacture our
products.
We
may be adversely affected by problems in the availability, or increases in
the
prices, of raw materials and components.
Problems
in the availability, or increases in the prices, of raw materials or components
could depress our sales or increase the costs of our products. We are dependent
upon components purchased from third parties, as well as raw materials such
as
steel, copper and aluminum. We enter into cancelable contracts on terms from
six
months to one year for raw materials and components at fixed prices. However,
if
a key supplier is unable or unwilling to meet our supply requirements, we could
experience supply interruptions or cost increases, either of which could have
an
adverse effect on our gross profit.
7
We
may need to develop manufacturing capacity for our existing and future products,
which will increase our expenses.
We
have
evaluated in the past, and continue to evaluate, the feasibility of acquiring
manufacturing capabilities to support the production of our products. These
facilities may be required to meet the production capacities required to produce
such products for commercial sale at an acceptable cost. We have not
manufactured these products in the past. Developing these capabilities and
building or purchasing a facility will increase our expenses with no guarantee
that we will be able to recover our investment in our manufacturing
capabilities.
We
depend heavily on key personnel, and loss of the services of one or more of
our
key executives or a significant portion of any prospective local management
personnel could weaken our management team adversely affecting our operations.
Our
success largely depends on the skills, experience and efforts of our senior
management, particularly our Chief Executive Officer, Wilbert H. Marmion, III.
Our operations will also be dependent on the efforts, ability and experience
of
key members of our prospective local management staff. The loss of services
of
one or more members of our senior management or of a significant portion of
any
of our local management staff could weaken significantly our management
expertise and our ability to deliver health care services efficiently. We do
not
maintain key man life insurance policies on any of our officers, although we
intend to obtain such insurance policies in the future.
Because
stock ownership is concentrated, you and other investors will have minimal
influence on stockholder’ decisions.
Assuming
that issued and outstanding warrants and options for our common stock have
not
been exercised, one of our shareholders controls in excess of 90% of our
outstanding voting rights as of March 27, 2007. Pursuant to their terms each
share of our series A preferred stock is and each share of series B preferred
stock are entitled to that number of votes equal to the number of shares of
common stock issuable upon conversion of the series A and series B preferred
stock held by them. As such, Wilbert Marmion, our sole preferred stockholder,
holds voting rights equal to approximately 3.4 billion shares of common stock
based on his holdings of series A and series B preferred stock. As a result
our
executive officers may be able to significantly influence the management of
the
company and all matters requiring stockholder approval, including the election
of directors. Such concentration of ownership may also have the effect of
delaying or preventing a change in control of our company.
We
rely on a few large customers.
While
we
consider our relationships with our customers to be satisfactory, given the
concentration of our sales to a few key customers, our continued relationships
may be subject to the policies and practices of the customers. We continue
to
concentrate our efforts on expanding our customer base in order to reduce our
reliance on our current customers.
We
may not be able to compete favorably in the highly competitive
HVAC
business.
Our
quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside our control, including
the demand for our services, seasonal trends in purchasing, the amount and
timing of capital expenditures; price competition or pricing changes in the
industry; technical difficulties or system downtime; general economic
conditions, and economic conditions specific to our industry. Our quarterly
results may also be significantly impacted by the impact of the accounting
treatment of acquisitions, financing transactions or other matters. Particularly
at our early stage of development, occurrences such as accounting treatment
can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results will fall below
our expectations or those of investors in some future quarter.
We
have no independent directors.
We
cannot
guarantee that our board of directors will have a majority of independent
directors in the future. In the absence of a majority of independent directors,
our executive officers, could establish policies and enter into transactions
without independent review and approval thereof. This could present the
potential for a conflict of interest between us and our stockholder generally
and the controlling officers, stockholder or directors.
We
have agreed to indemnify our directors and officers.
Our
officers and directors are required to exercise good faith and high integrity
in
our management affairs. Our bylaws and the Nevada Revised Statutes provide,
however, that our officers and directors shall have no liability to our
stockholder for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated
their
duty of loyalty, did not act in good faith, engaged in intentional misconduct
or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our bylaws and the Nevada
Revised Statutes also provide for the indemnification by us of the officers
and
directors against any losses or liabilities they may incur as a result of the
manner in which they operate our business or conduct the internal affairs,
provided that in connection with these activities they act in good faith and
in
a manner that they reasonably believe to be in, or not opposed to, our best
interests, and their conduct does not constitute gross negligence, misconduct
or
breach of fiduciary obligations.
We
may not manage growth effectively.
We
may
experience rapid growth which will place a significant strain on our managerial,
operational, and financial systems resources. To accommodate our current size
and manage growth, we must continue to implement and improve our financial
strength and our operational systems, and expand, train and manage our sales
and
distribution base. There is no guarantee that we will be able to effectively
manage the expansion of our operations, or that our facilities, systems,
procedures or controls will be adequate to support our expanded operations.
Our
inability to effectively manage our future growth would have a material adverse
effect on us.
Substantial
sales of our stock may impact the market price of our common stock.
Future
sales of substantial amounts of our common stock, including shares that we
may
issue upon exercise of options and warrants, could adversely affect the market
price of our common stock. Further, if we raise additional funds through the
issuance of common stock or securities convertible into or exercisable for
common stock, the percentage ownership of our stockholder will be reduced and
the price of our common stock may fall.
The
marketability and profitability of our products is subject to unknown economic
conditions.
The
marketability and profitability of our products may be adversely affected by
local, regional, national and international economic conditions beyond our
control and/or the control of our management. Favorable changes may not
necessarily enhance the marketability or profitability of the products. Even
under the most favorable marketing conditions, there is no guarantee that our
products can be sold or, if sold, that such sale will be made upon favorable
prices and terms.
9
Any
projections used in this prospectus may not be accurate.
Any
and
all projections and estimates contained in this annual report or otherwise
prepared by us are based on information and assumptions which management
believes
to
be
accurate; however, they are mere projections and no assurance can be given
that
actual performance will match or approximate the projections.
Issuing
preferred stock with rights senior to those of our common stock could adversely
affect holders of common stock.
Our
charter documents give our board of directors the authority to issue series
of
preferred stock without a vote or action by our stockholder. The board also
has
the authority to determine the terms of preferred stock, including price,
preferences and voting rights. The rights granted to holders of preferred stock
may adversely affect the rights of holders of our common stock. For example,
a
series of preferred stock may be granted the right to receive a liquidation
preference - a pre-set distribution in the event of a liquidation - that would
reduce the amount available for distribution to holders of common stock. In
addition, the issuance of preferred stock could make it more difficult for
a
third party to acquire a majority of our outstanding voting stock. As a result,
common stockholder could be prevented from participating in transactions that
would offer an optimal price for their shares.
10
Use
of Proceeds
We
will
not receive any proceeds from the resale of our common stock by the selling
stockholder.
Dilution
As
of
December 31, 2006, our total liabilities exceeded our total tangible assets,
giving rise to a negative net tangible book value of $653,734. In connection
with our issuance of a $3 million convertible debenture, which $750,000 was
received in March and the balance $2,250,000 to be received after the filing
of
this registration statement (See “Description of Securities—Convertible
Notes—March 2007 Private Placement”), we will recognize $2.6 million of equity
which was allocated as such due to the beneficial conversion feature of the
debenture and the 100,000,000 detachable warrants issued in connection
therewith. This $2.6 million for the beneficial conversion feature and
detachable warrants will be expensed over the term of the debenture, while
compensating for the repayment terms of the debenture for the interest expense
incurred. You may experience substantial dilution as a result of the March
2007
private placement, as well as if we raise funds through the issuance of
additional equity and/or convertible securities.
As
a
result of the March 2007 private placement, the selling stockholder may convert
the shares underlying the debenture and exercise the shares underlying the
related warrant, into shares of the our common Stock. As Dutchess converts
or
exercises such shares into shares of our Common Stock, such conversion or
exercise will dilute the current percentage ownership of our existing
shareholders. The conversion price of the debenture issued in the March 2007
private placement fluctuates at a substantial percentage discount (25%) to
fluctuating market prices with an absolute floor conversion price of $0.001.
As
a result, the number of shares issuable to the selling stockholder, upon full
conversion of the debenture at the floor conversion price (not including
interest) would be 3 billion shares and thus the selling stockholder’s potential
ownership of our common stock could substantially dilute the current
shareholders ownership in the our common stock.
Upon
the
selling stockholder conversion of the shares underlying the Debenture and the
exercise of the related warrant into shares of our common stock, the current
shareholders will experience substantial dilution of their current percentage
ownership.
The
following table shows the combined effect that various declines and increases
in
the current market price would have with respect to the floating conversion
rate
of the debenture. The current market price is based on the most recent trading
price at April 2, 2007. The second column, pertaining to the debenture
conversion price is calculated either at 75% of the decreased or increased
current market price, or calculated at the maximum conversion price of $.075
or
the floor conversion price of $.001. The number of shares issuable upon
conversion of the underlying debentures is based on a principal amount of
$3,000,000 of outstanding debentures as of the date of this prospectus, while
the number of shares issuable upon exercise of the warrants is 100,000,000,
which has an exercise price of $0.015.
Market
Price
Debenture
Conversion Price (1)
Shares
Issuable upon full conversion of Debenture
Shares
issuable upon exercise of warrant
Shares
outstanding prior to issuance
Potential
total of # of Shares outstanding (2)
Percentage
of Potential Ownership of Existing Common Stockholders (2)
Percent
of Dilution to Existing Common Stockholder (2)
at
4/2/07
$0.01
0.0075
400,000,000
100,000,000
57,709,990
557,709,990
10.34%
89.65
25%
decline in Market Price
$.0075
0.005625
533,333,333
100,000,000
57,709,990
691,043,323
8.4
91.6
50%
decline in Market Price
$0.005
0.00375
800,000,000
100,000,000
57,709,990
957,709,990
6.0
94.0
75%
decline in Market Price
$0.0025
0.001875
1,600,000,000
100,000,0000
57,709,990
1,757,709,990
3.3
96.7
50%
increase in market price
$0.015
.01125
266,666,666
100,000,000
57,709,990
424,376,656
13.5%
86.5
100%
increase in market price
$0.02
.015
200,000,000
100,000,000
57,709,990
357,709,990
16.1%
83.9
----------------
(1)
Based
on the lesser of (i) $0.075 and (ii) 75% of the lowest bid price
for the
common stock on the twenty trading days prior to conversion. In no
event
will the conversion price be below $0.001 per
share.
(2)
Assumes
full conversion of the debenture and exercise of the
warrant.
11
Market
for Common Equity and Related Stockholder Matters
Our
common stock trades on the OTC Bulletin Board under the symbol “MMIO.” The
following table shows the high and low bid prices for our common stock for
each
quarter since January 1, 2005 as reported by the OTC Bulletin Board. All share
prices have been adjusted to provide for the 1-for-500 reverse stock split
which
was effected on November 19, 2004, the 1-for-1000 reverse stock split which
was
effected on March 17, 2005 and the 1 for 100 reverse stock split which was
effected on January 26, 2006. We consider our stock to be “thinly traded” and
any reported sale prices may not be a true market-based valuation of the stock.
Some of the bid quotations from the OTC Bulletin Board set forth below may
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and
may not represent actual transactions.
As
of
March 29, 2007, there were approximately 163 record holders of our common
stock.
We
have
not paid any cash dividends since our inception and do not contemplate paying
dividends in the foreseeable future. It is anticipated that earnings, if any,
will be retained to retire debt and for the operation of the
business.
Shares
eligible for future sale could depress the price of our common stock, thus
lowering the value of a buyer’s investment. Sales of substantial amounts of
common stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for shares of our common stock.
Our
revenues and operating results may fluctuate significantly from quarter to
quarter, which can lead to significant volatility in the price and volume of
our
stock. In addition, stock markets have experienced extreme price and volume
volatility in recent years. This volatility has had a substantial effect on
the
market prices of securities of many smaller public companies for reasons
unrelated or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market
price
of our common stock.
12
Securities
Authorized for Issuance Under Equity Compensation Plans. The
following provides information concerning compensation plans under which our
equity securities are authorized for issuance as of December 31,2006:
(a)
(b)
(c)
Plan
Category
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
Weighted-average
exercise price of outstanding options, warrants and
rights
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
Equity
compensation plans approved by security holders
--
--
1,015,418,219
(1)
Equity
compensation plans not approved by security holders
--
--
--
Total
1,015,418,219
(1)
(1)
Represents shares available for issuance under our Stock Plan for the Year
2005
No. 2. We did not issue any options, warrants or securities with vesting
provisions or exercise prices in 2006.
RECENT
SALES OF UNREGISTERED SECURITIES
In
March
2007, we issued a $3,000,000 convertible secured debenture with a related
warrant to purchase 100,000,000 shares of our common stock to a single
accredited investor. The issuance was exempt under Section 4(2) of the
Securities Act. (See “Description of Securities - Convertible Notes - March 2007
Private Placement”)
In
November 2006, we issued 2,000,000 shares of our common stock to a single
accredited investor for an aggregate purchase price of $50,000. This issuance
was exempt under Regulation S.
On
September 5, 2006, the holder of all of our series A preferred stock converted
250,000 shares of his series A preferred stock upon which he received 10 million
shares of our common stock. The issuance was exempt under Section 3(a)(9) of
the
Securities Act of 1933, as amended.
In
May
2006, our wholly owned subsidiary, Marmion Investments, Inc. amended and
restated a promissory note in the amount of $55,949 (plus $13,653
accrued interest) held by an accredited investor. The amended and
restated note is convertible into our common stock at a rate of $.005 per
share and is guaranteed by us. This note has been partially converted as of
the
date of this report. The amendment and restatement of the note and the
conversion of the note into common stock were exempt pursuant to Section 3
(a)(9) and 4 (2) of the Securities Act.
In
May
2006, our wholly owned subsidiary, Marmion Investments, Inc. amended and
restated a promissory note in the amount of $72,788 (plus $17,763
accrued interest) held by an accredited investor. The amended and
restated note is convertible into our common stock at a rate of $.005 per
share and is guaranteed by us. This note has been partially converted as of
the
date of this report. The amendment and restatement of the note and the
conversion of the note into common stock were exempt pursuant to Section 3
(a)(9) and 4 (2) of the Securities Act.
In
March
2006, our wholly owned subsidiary, Marmion Investments, Inc. issued a
convertible promissory note in the amount of $24,262.70 (plus $5,802 accrued
interest) to a single accredited investor in exchange for cancellation of a
note
of similar amount. This note is convertible into our common stock at a rate
of
$.005 per share and is guaranteed by us. This note has been converted in full
as
of the date of this report.
13
Plan
of Distribution
We
are
registering 15,900,000 shares of common stock issuable upon conversion of the
convertible debenture dated March 22, 2007 to permit resale of the shares of
common stock by the holder of the convertible debenture from time to time after
the date of this prospectus. Such shares of common stock are not outstanding,
but the selling stockholder beneficially owns the underlying shares because
the
convertible debenture can be converted at the selling stockholder’s election. We
will not receive any of the proceeds from the sale by the selling stockholder
of
the shares of common stock. We will bear all fees and expenses incident to
our
obligation to register the shares of common stock.
The
selling stockholder may sell all or a portion of the common stock beneficially
owned by them and offered hereby from time to time directly or through one
or
more underwriters, broker-dealers or agents. If the common stock is sold through
underwriters or broker-dealers, the selling stockholder will be responsible
for
underwriting discounts or commissions or agent's commissions. The common stock
may be sold in one or more transactions at fixed prices, at prevailing market
prices at the time of the sale, at varying prices determined at the time of
sale, or at negotiated prices. These sales may be effected in transactions,
which may involve crosses or block transactions,
(1) on
any
national securities exchange or quotation service on which the securities may
be
listed or quoted at the time of sale,
(2) the
over-the-counter market,
(3) in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market,
(4) through
the writing of options, whether such options are listed on an options exchange
or otherwise, or
(5) through
the settlement of short sales.
If
the
selling stockholder effects such transactions by selling shares of common stock
to or through underwriters, broker-dealers or agents, such underwriters,
brokers-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholder or commissions from
purchasers of the shares of common stock for whom they may act as agent or
to
whom they may sell as principal (which discounts, concessions or commissions
as
to particular underwriters, brokers-dealers or agents may be in excess
of
those customary in the types of transactions involved). In connection with
sales
of the common stock or otherwise, the selling stockholder may enter into hedging
transactions with broker-dealers, which may in turn engage in short sales of
the
common stock in the course of hedging in positions they assume. The selling
stockholder may also sell shares of common stock short and deliver shares of
common stock covered by this prospectus to close out short positions, provided
that the short sale is made after the registration statement is declared
effective and a copy of this prospectus is delivered in connection with the
short sale. The selling stockholder may also loan or pledge shares of common
stock to broker-dealers that in turn may sell such shares.
The
selling stockholder may pledge or grant a security interest in some or all
of
the shares of common stock owned by them and, if it defaults in the performance
of its secured obligations, the pledgees or secured parties may offers and
sells
the shares of common stock from time to time pursuant to the prospectus. The
selling stockholder also may transfer and donate the shares of common stock
in
other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
the
prospectus.
The
selling stockholder and any broker-dealer participating in the distribution
of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act, and any commissions paid, or any discounts or concessions
allowed to any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of
the
shares of common stock is made, a prospectus supplement, if required, will
be
distributed which will set forth the aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of
any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
14
Under
the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There
can
be no assurance that any selling stockholder will sell any or all of the shares
of common stock registered pursuant to the shelf registration statement, of
which this prospectus forms a part.
The
selling stockholder and any other person participating in such distribution
will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of common stock by the selling stockholder and any other participating
person. Regulation M may also restrict the ability of any person engaged in
the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing may affect
the
marketability of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
common stock.
We
will
pay all expenses of the registration of the shares of common stock pursuant
to
the registration rights agreement estimated to be $41,000 in total, including,
without limitation, Commission filing fees and expenses of compliance with
state
securities or "blue sky" laws; provided, however, that the selling stockholder
will pay all underwriting discounts and selling commissions, if any. In
connection with sales made pursuant to this prospectus, we will indemnify the
selling stockholder against liabilities, including some liabilities under the
Securities Act, in accordance with the related registration rights agreement
or
the selling stockholder will be entitled to contribution. We will be indemnified
by the selling stockholder against liabilities, including some liabilities
under
the Securities Act, that may arise from any written information furnished to
us
by the selling stockholder for use in this prospectus, in accordance with the
related registration rights agreement or we will be entitled to
contribution.
Once
sold
under the shelf registration statement, of which this prospectus forms a part,
the shares of common stock will be freely tradable in the hands of persons
other
than our affiliates.
15
Management’s
Discussion and Analysis or Plan of Operation
The
following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and related notes included in this report.
This report contains “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. The statements contained
in
this report that are not historic in nature, particularly those that utilize
terminology such as “may,”“will,”“should,”“expects,”“anticipates,”“estimates,”“believes,” or “plans” or comparable terminology are
forward-looking statements based on current expectations and
assumptions.
Various
risks and uncertainties could cause actual results to differ materially from
those expressed in forward-looking statements. Factors that could cause actual
results to differ from expectations include, but are not limited to, those
set
forth under the section “Risk Factors” set forth in this report.
The
forward-looking events discussed in this annual report, the documents to which
we refer you and other statements made from time to time by us or our
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about us.
For
these statements, we claim the protection of the “bespeaks caution” doctrine.
All forward-looking statements in this document are based on information
currently available to us as of the date of this report, and we assume no
obligation to update any forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results to differ materially from any future results, performance
or
achievements expressed or implied by such forward-looking
statements.
General
Beginning
in the second quarter of 2004, we have entered the business of manufacturing
and
marketing of the explosion proof air conditioners, refrigeration systems,
chemical filtration systems and building pressurizers. This entry was effected
by Mr. Wilbert H. Marmion’s, our key officer and director, contribution to us of
his controlling interest in Marmion Investments, Inc., (d/b/a Marmion Air
Service), a Texas corporation. The explosion-proof market encompasses industries
including: oil and gas exploration and production, chemical plants, granaries
and fuel storage depots. We believe there is significant demand for these
systems in any area where sensitive computer systems and analysis equipment
is
located. We also provide residential and commercial HVAC service in Texas,
as
well as specialty service to Fortune 500 clients.
Our
executive offices are located at 9103 Emmott Road, Building 6, Suite A, Houston,
Texas, 77040 and telephone number (713) 466-6585. We maintain a website at
www.marmionair.com.
Current
Business Plan
We
manufacture and modify heating, ventilation and air conditioning (HVAC)
equipment for the petrochemical industry specifically for hazardous location
applications. We custom engineer special systems for strategic industrial
environments. Additionally we perform new commercial HVAC construction services
currently in the Houston, Texas area.
We
currently target refinery and chemical plants service companies that build
analyzer shelters, controls centers and computer rooms in corrosive or hazardous
locations on our industrial side. Commercially we are emerging into the new
HVAC
construction market to take advantage of the constant new development taking
place in the Houston area.
With
the
demand for oil and the price constantly in today's market, our position in
this
industry is poised to take advantage of the increasing boom in petroleum
expansion taking place both here in the national market as well as the
international markets emerging in Mexico, the Middle East and South America.
We
foresee the next cycle of renovation and new construction in the commercial
market, and population expansion currently taking place in the gulf-coast area
to continue long into the future.
In
November of 2004 our State of Texas Air Conditioning Contractor’s License for
Marmion Air Service (TACLA019367C) was upgraded to ”A” status allows us to sell
air conditioners to unlimited tonnages, as opposed to the “B” license which
limited us to sell equipment up to 20 tons. In October 2005, we received our
Mechanical and Sheet Metal Contractor License in the State of Louisiana (Lic.
No. 44001) allowing us to perform projects in that State.
16
Marmion
Industries Corp. began eight years ago as a HVAC company in Beaumont, Texas.
We
then moved to Houston to take advantage of the accessibility to a larger market
in and around the Houston area. Marmion Industries Corp. has always been owned
and operated by W. H. Marmion and Ellen Raidl Marmion, who are husband and
wife.
In the first few years we acquired an agreement with Nextel Corporation to
provide service and replacement of HVAC machines across southern Texas. This
enabled Marmion to grow at a rapid pace as we completed Nextel's 3-G upgrade
in
2000 and generated $1.1 million in gross revenues. In early 2001 Marmion began
building industrial grade machines and providing them to petrochemical customers
in the Houston area. At that time Nextel began tightening their services budgets
due to the low price of their stock and approached us to reduce our pricing
to a
rate below our cost factor. As a result, we terminated our contract with Nextel
and made a strategic decision to concentrate on the Industrial markets and
develop our line of explosion-proof machines as our core business. We developed
and refined our product line and continued to market to a growing list of
customers primarily in the Houston area. Our alliance with a major wall mount
air conditioner manufacturer Marvair, a subsidiary of AHI Holding, Inc., allowed
us to gain a substantial market share in the industrial market as a reseller
of
Marvair products to two large national building manufacturers.
We
believe that diversification is a key factor to maintain market share in the
industrial and commercial markets. Accordingly, in 2004 we began making plans
to
open a commercial division and hired personnel to bid and supervise commercial
projects. We have opened our commercial division and have successfully completed
several projects for customers such as Houston Independent School District,
City
of Clute Texas, State of Texas Parks and Recreation. As of the date of this
report, we are currently completing two projects for the Pasadena Independent
School District in Pasadena, Texas and midway through two additional projects
for the Houston Independent School District. Until 2003 we operated as an S
corporation and in 2003 converted to C corp. in anticipation of accessing the
public markets to enable us to raise capital to grow our business. Today Marmion
has ten full time employees and depending on the commercial projects undertaken
as many or more subcontractors to accomplish our business objectives.
One
of
our challenges continues to be our ability to attract and keep excellent
employees to accomplish our business objectives. This challenge is highlighted
due to the fact that we do not offer any type of benefits program to our
employees. Cash flow has and remains a major challenge due to the fact that
we
are outgrowing our receivables and increasing our growth rate beyond 30 percent
annually. Our customers normally pay on 45 to 60 day intervals and our suppliers
bill us on 30 day terms. We need larger facilities and equipment to increase
profitability and meet increasing demand and we are currently seeking new
facilities and/or property to erect facilities. We have generally outsourced
5%
of our manufacturing. In November 2005, we acquired several pieces metal
manufacturing equipment which has allowed us to reduce our outsourcing needs.
This new equipment will allow us to take on a diversified work load, which
could
increase our profitability.
Our
long-term plans for growth include continued expansion of our industrial base
into Louisiana and abroad. We have recently started servicing the commercial
market in the Houston area and have obtained the necessary licenses in Louisiana
and have begun bidding on commercial projects in that area as well. We believe
that, with right personnel and growth capital, we can grow our industrial and
commercial division over the next two years.
We
have
acquired third party certification (ETL Certification) for the wallmount line
for our products and have begun the process of getting our hazardous location
package units as well as our pressurizers certified as well. These third parties
certify our hazardous location equipment, saying it is indeed explosion-proof
on
our industrial line of equipment which will enable us to bid on new jobs and
we
believe the certification will allow us to be successful on our bids\. Because
of third party certification, we will now be able to be listed as an “approved
supplier/provider” for large multi-national petrochemical company’s
specifications, as some large oil companies will spec in the company A/C’s they
want. Normally they will require a UL/CSA listing or another third party
certification from their suppliers/providers This will allow us to increase
our
profit margin on the certified equipment. We are currently educating engineering
companies in Houston of the options now available to them and their customers.
By
attracting and keeping better employees and retaining our current ones we
believe that we can maintain our current growth rate over the next 3-5
years.
17
Basis
of Presentation
The
results of operations set forth below for the (1) years ended December 31,2006
and 2005 and (ii) three months ended March 31, 2007 and 2006 are those of the
continuing operations of Marmion Industries Corp.
The
following table sets forth, for the periods indicated, certain selected
financial data from continuing operations:
Revenues.
Our
revenues increased to $1,627,935, or an increase of approximately 270%, for
the
three months ended March 31, 2007, from $438,937 for the three months ended
March 31, 2006. The increase is primarily attributable to the award of several
large commercial projects.
Cost
of Sales.
Cost of
sales for continued operations increased to $1,371,465, for the three months
ended March 31, 2007, from $283,416 for the three months ended March 31, 2006.
As a percentage of revenues, cost of sales increased to approximately 84% of
revenues for the quarter ended March 31, 2007 versus approximately 65% of
revenues for the quarter ended March 31, 2006. The increase in cost of sales
as
a percentage of revenues resulted primarily due to new quality and purchasing
controls, as well as performing more commercial projects which realizes a 7%
to
10% margin. We generated a gross margin of $256,470 with a gross profit margin
of approximately 16% for the quarter ended March 31, 2007 as compared to
$155,521 and 35% for the comparable period in 2006.
Salaries
and employee benefits.
Salaries
and employee benefits decreased to $122,247, or a decrease of approximately
24%
for the three months ended March 31, 2007 from $160,414 for the three months
ended March 31, 2006. This decrease is attributable primarily to a lack of
compensatory stock grants to employees in the three months ended March 31,2007.
General
and administrative.
General
and administrative expenses decreased to $171,504, or a decrease of
approximately 81%, for the three months ended March 31, 2007, from $918,605
for
the three months ended March 31, 2006. As a percentage of revenues, general
and
administrative expenses were approximately 10% for the quarter ended March31,2007, as compared to approximately 210% for the comparable period in 2006.
The
decrease in general and administrative expenses primarily to a lack of
compensatory stock grants to consultants in the three months ended March 31,2007.
Depreciation
and Amortization.
Depreciation and amortization expense increased to $7,863 for the three months
ended March 31, 2007, from $5,519 for the three months ended March 31, 2006.
This decrease was primarily due to asset dispositions.
18
Loss
from operations.
We had
operating loss of $(45,144) for the three months ended March 31, 2007, compared
to an operating loss of $(929,017) for the three months ended March 31, 2006.
Our operating loss in the three months ended March 31, 2007 compared to large
operating losses in the prior year is primarily due to our decreased equity
based compensation expenses during the period.
Revenues.
Our
revenues increased to $4,613,282, an increase of approximately 85%, for the
year
ended December 31, 2006, from $2,491,736 for the year ended December 31, 2005.
This increase is primarily attributable to the award of several large commercial
projects.
Cost
of Sales.
Cost of
sales increased to $3,721,102, an increase of approximately 88%, for the year
ended December 31, 2006, from $1,982,053 for the year ended December 31, 2005.
As a percentage of revenues, cost of sales increased to approximately 81% of
revenues for the year ended December 31, 2006, versus approximately 80% of
revenues for the year ended December 31, 2005. The increase in cost of sales
as
a percentage of revenues resulted primarily from new quality and purchasing
controls, as well as performing more commercial projects which realizes a 7%
to
10% margin. The company generated a gross margin of $892,180, or approximately
19%, for the year ended December 31, 2006, compared to a gross profit margin
of
$509,683, or approximately 20%, for the year ended December 31, 2005.
Salaries
and employee benefits.
Salaries and employee benefits increased to $551,626, or an increase of
approximately 44% for the year ended December 31, 2006 from $382,920 for the
year ended December 31, 2005. This increase is attributable primarily to the
hiring of 3 new administrative employees.
General
and administrative.
General
and administrative expenses decreased to $1,447,935 for the year ended December31, 2006, from $2,352,867 for the year ended December 31, 2005. Included in
general and administrative expense is equity based compensation expense of
$893,236 and $1,985,043 for the years ended December 31, 2006 and 2005,
respectively. As a percentage of revenues, general and administrative expenses
were approximately 31% for the year ended December 31, 2006, as compared to
approximately 94% for the comparable period in 2005. The decrease in general
and
administrative expenses primarily results from decreased stock issued to
consultants in connection with our research and business development activities,
offset by expanding operations requiring additional square footage and normal
economic increases.
Depreciation
and Amortization. Depreciation
and amortization expense increased to $32,912 for the year ended December 31,2006, from $31,584 for the year ended December 31, 2005.
Loss
from operations. We
incurred an operating loss of $1,140,293 for the year ended December 31, 2006,
compared to an operating loss of $2,257,688 for the year ended December 31,2005. The company had lower operating losses in the year ended December 31,2006
compared to the prior year primarily because of a decrease in administrative
expenses, and equity based compensation.
Liquidity
and Capital Resources
We
have
financed our operations, acquisitions, debt service, and capital requirements
through cash flows generated from operations, debt financing, and issuance
of
securities. Our working capital deficit at March 31, 2007 was $544,697 and
at
December 31, 2006 was $720,574. We had cash of $415,649 at March 31, 2007 and
$1,785 at December 31, 2006.
Our
operating activities used $147,286 in cash for the three months ended March31,2007 and $316,343 in cash for the year ended December 31, 2006.
Net
cash
flows used by investing activities was $2,436 for the three months ended March31, 2007 and $8,712 for the year ended December 31, 2006
Net
cash
flows provided by financing activities was $563,406 for the three months ended
March 31, 2007 and $304,066 for the year ended December 31, 2006.
We
have
recently completed a financing (See March 2007 Private Offering below) through
our sale of convertible promissory notes and related warrants. Pursuant to
such
offering, we have received gross proceeds of $3,000,000. We expect these
proceeds to be sufficient to fund our operations through December 2007. In
the
event we seek to expand our operations or launch new products for sale into
the
marketplace, or in the event we seek to acquire a company or business or
business opportunity, or in the event that our cash flows from operations are
insufficient to fund our operations, working capital requirements, and debt
service requirements, we would need to finance our operations through additional
debt or equity financing, in the form of a private placement or a public
offering, a strategic alliance, or a joint venture. Such additional financing,
alliances, or joint venture opportunities might not be available to us, when
and
if needed, on acceptable terms or at all. If we are unable to obtain additional
financing in sufficient amounts or on acceptable terms under such circumstances,
our operating results and prospects could be adversely affected. In addition,
any debt financings or significant capital expenditures require the written
consent of our lender under the March private placement.
19
Our
working capital is not sufficient to meet our obligations. These factors raise
substantial doubt about our ability to continue as a going concern.
March
2007 Private Placement
On
March22, 2007, we entered into a Subscription Agreement with a single accredited
investor pursuant to which we agreed to issue up to $3,000,000 of principal
amount of convertible debentures and warrants to purchase 100,000,000 shares
of
our common stock (the “Purchase Agreement”). The convertible debenture has a 5
year term and bears interest at twelve percent (12%). We are required to make
“interest only” payments for the first six months following issuance. As of the
date of this prospectus, the first 3 interest only payments have been made
in
cash. Beginning on the 7th
month
following issuance, we are required to make amortizing payments of principal
plus interest in the amount equal to $224,375.41. If a registration statement
is
effective, this amount can be satisfied by conversion of the debenture. The
notes are convertible into our common stock pursuant to a “variable conversion
price” equal to the lesser of $0.075 and 75% of the lowest bid price for our
common stock during the 20 trading day period prior to conversion; provided,
however, upon an event of default (as defined) this conversion price will be
reduced to the lesser of the then current conversion price and 50% of the lowest
bid price for the 15 trading days prior to conversion. In no event shall the
conversion price be less than $0.001 per share. In addition, upon an event
of
default (as defined) the holder can exercise its right to increase the face
amount of the debenture by 10% for the first default and by 10% for each
subsequent event of default. In addition, the Holder may elect to increase
the
face amount by 2.5% per month paid as liquidated damages. The maximum amount
that the face amount may be increased by holder for all defaults under the
note
and any other transaction document is 30%, The debenture is secured by a
1st
lien on
our assets, a guaranty by our subsidiary and a pledge of 4 million shares of
Mr.
Marmion’s series B preferred stock
Under
the
terms of the debenture and the related warrants, the debenture and the warrants
are convertible/exercisable by any holder only to the extent that the number
of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of
the
Securities Exchange Act of 1934, as amended
Subject
to certain terms and conditions set forth therein, the debenture is redeemable
by us at a rate of 125% of the outstanding principal amount of the notes plus
interest. In addition, so long as the average daily price of our common stock
is
below the “initial market price” (as defined) we may prepay such monthly portion
due on the outstanding notes and the investors agree that no conversions will
take place during such month where this option is exercised by us.
The
debenture was issued with warrants to purchase up to 100,000,000 shares of
our
common stock at an exercise price of $0.015 per share, subject to adjustment.
To
the extent that the shares of common stock underlying the warrant of not
registered for resale, the warrant holder may designate a "cashless exercise
option." This option entitles the warrant holders to elect to receive fewer
shares of common stock without paying the cash exercise price. The number of
shares to be determined by a formula based on the total number of shares to
which the warrant holder is entitled, the current market value of the common
stock and the applicable exercise price of the warrant.
We
agreed
to register the secondary offering and resale of the shares issuable upon
conversion of the debenture and the shares issuable upon exercise of the
warrants by April 16, 2007. Such registration statement was initially filed
on
April 11, 2007.
20
We
relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, for the offer and sale of the debenture and the
warrants.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements, we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
Earnings
are charged with a provision for doubtful accounts based on a current review
of
collectibility of accounts receivable. Accounts deemed uncollectible are applied
against the allowance for doubtful accounts. The allowance for doubtful accounts
at December 31, 2006 and December 31, 2005 was $88,463 and $24,914,
respectively. Management considers this allowance adequate to cover probable
future losses due to uncollectible trade receivables.
REVENUE
RECOGNITION
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. These criteria are generally met at the time product
is shipped or services are performed. Shipping and handling costs are included
in cost of goods sold.
The
Company from time to time may enter into a long term construction project,
which
such services may be performed over a few months. The Company records such
revenues from long term contracts on a percentage of completion basis. At each
report date an evaluation is made to determine if there is a loss contingency
to
record for such long term contracts. There were no such long term contracts
outstanding as at December 31, 2005. At December 31, 2006, there were six long
term contracts outstanding. The Company recorded $27,836 and $198,552 in costs
and estimated earnings in excess of billings, and billings in excess of costs
and estimated earnings, respectively, at December 31, 2006 in regard to these
contracts.
STOCK-BASED
COMPENSATION
In
December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation -Transition and Disclosure. This statement amends SFAS No. 123
-
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. SFAS 148 also requires disclosure of
the
method used to account for stock-based employee compensation and the effect
of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
In
December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based Payment"
("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based payment
("SBP") awards, including shares issued under certain employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. SFAS
No.123R will require the Company to expense SBP awards with compensation cost
for SBP transactions measured at fair value. The FASB originally stated a
preference for a lattice model because it believed that a lattice model more
fully captures the unique characteristics of employee stock options in the
estimate of fair value, as compared to the Black-Scholes model which the Company
currently uses for its footnote disclosure. The FASB decided to remove its
explicit preference for a lattice model and not require a particular valuation
methodology. SFAS No. 123R requires us to adopt the new accounting provisions
beginning in our first quarter of 2006. We do not expect a material impact
on
our consolidated results of operations, as we do not intend to issue employee
stock options in the near future.
21
ACCOUNTING
FOR INCOME TAXES
As
part
of the process of preparing our financial statements we are required to estimate
our income taxes. Management judgment is required in determining a provision
of
our deferred tax asset. We recorded a valuation for the full-deferred tax asset
from our net operating losses carried forward due to the Company not
demonstrating any consistent profitable operations. In the event that the actual
results differ from these estimates or we adjust these estimates in future
periods we may need to adjust such valuation recorded.
GOING
CONCERN
The
financial statements of the Company have been prepared assuming that the Company
will continue as a going concern. The Company has had negative working capital
for each of the least two years ended December 31, 2006 and 2005. The Company
has incurred significant losses for these years and has a negative working
capital position. Those conditions raise substantial doubt about the Company’s
ability to continue as a going concern. The financial statements of the Company
do not include any adjustments that might be necessary should the Company be
unable to continue as a going concern.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of
FASB Statements No. 133 and 140. This Statement; a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
This Statement is effective for financial statements for fiscal years beginning
after September 15, 2006. Earlier adoption of this Statement is permitted
as of the beginning of an entity’s fiscal year, provided the entity has not yet
issued any financial statements for that fiscal year. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
In
March
2006, the FASB issued FASB Statement No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
This Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity’s fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
In
June
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty inIncome
Taxes- aninterpretation
of FASB Statement No. 109, Accounting for Income Taxes.
The
Statement clarifies the accounting for uncertainty in income taxes recognized
in
an enterprise’s financial statements, and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN
48
is effective for fiscal years beginning after December 15, 2006. Management
believes this Statement will have no impact on the financial statements of
the
Company once adopted.
22
In
September 2006, the FASB issued FASB Statement No. 157. This Statement defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements
that
require or permit fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is a relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will
change current practices. This Statement is effective for financial statements
for fiscal years beginning after November 15, 2007. Earlier application is
permitted provided that the reporting entity has not yet issued financial
statements for that fiscal year. Management believes this Statement will have
no
impact on the financial statements of the Company once adopted.
In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of
FASB
Statement No. 115” (SFAS 159). This Statement provides companies with an option
to measure, at specified election dates, many financial instruments and certain
other items at fair value that are not currently measured at fair value. A
company that adopts SFAS 159 will report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. This Statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
This Statement is effective for fiscal years beginning after November 15, 2007,
which for us is the first quarter of fiscal 2009. We do not believe that the
adoption of SFAS 159 will have a material impact on our results of operations
or
financial condition.
Insider
and Affiliate Loans
We
received advances from our controlling stockholder during fiscal 2006 totaling
$322,412. Total advances from this stockholder aggregate $524,056 as of December31, 2006. The advances are unsecured and payable upon demand. Interest on these
advances is being accrued at 6% per annum and accrued interest on these advances
totals $29,605 as of December 31, 2006.
Off-Balance
Sheet Arrangements
None.
23
Business
Our
Company
We
manufacture and market explosion-proof air conditioners, refrigeration systems,
chemical filtration systems and building pressurizers as well as provide air
conditional and services for the commercial sector. Our executive office is
located at 9103 Emmott Road, Building 6, Suite A, Houston, Texas, 77040,
telephone number (713) 466-6585. We maintain a website at
www.marmionair.com
Our
Business
Corporate
History
We
were
formed in Florida on September 5, 1996 under the name Fairbanks, Inc. On April18, 1997, we changed our name to Jet Vacation, Inc. On May 11, 1998 we changed
our name to Precom Technology, Inc. On October 12, 2002 we again changed our
name, this time to International Trust & Financial Systems, Inc.
Prior
to
2002, we were a blind pool whose sole business plan and direction was to
identify and merge with an operating business. During 2002 we entered into
two
separate transactions to acquire operating businesses. Both acquisitions proved
not to be profitable and were terminated. During 2002 and 2003, we continued
our
efforts to identify and merge with an operating business and entered into
several agreements and transactions to accomplish that goal.
On
May20, 2004, Wilbert H. Marmion, III our President and Chief Executive Officer,
contributed all of his shares of common stock in Marmion Investments, Inc.,
a
Texas corporation d/b/a Marmion Air Service, to us as a contribution to our
capital. The shares contributed to us by Wilbert H. Marmion constitute one
hundred percent of the issued and outstanding shares in Marmion Investments,
Inc. As a result of the capital contribution by Mr. Marmion, Marmion
Investments, Inc. became our wholly-owned subsidiary.
In
July
of 2004, we completed a merger and change of our domicile from Florida to
Nevada. We also changed our name from "International Trust and Financial
Systems" to "Marmion Industries Corp.”
Current
Business Plan
We
manufacture and modify heating, ventilation and air conditioning (HVAC)
equipment for the petrochemical industry specifically for hazardous location
applications. We custom engineer special systems for strategic industrial
environments. Additionally we perform new commercial HVAC construction services
currently in the Houston, Texas area.
We
currently target refinery and chemical plants service companies that build
analyzer shelters, controls centers and computer rooms in corrosive or hazardous
locations on our industrial side. Commercially we are emerging into the new
HVAC
construction market to take advantage of the constant new development taking
place in the Houston area.
With
the
demand for oil and the price constantly in today's market, our position in
this
industry is poised to take advantage of the increasing boom in petroleum
expansion taking place both here in the national market as well as the
international markets emerging in Mexico, the Middle East and South America.
We
foresee the next cycle of renovation and new construction in the commercial
market, and population expansion currently taking place in the gulf-coast area
to continue long into the future.
In
November of 2004 our State of Texas Air Conditioning Contractor’s License for
Marmion Air Service (TACLA019367C) was upgraded to ”A” status allows us to sell
air conditioners to unlimited tonnages, as opposed to the “B” license which
limited us to sell equipment up to 20 tons. In October 2005, we received our
Mechanical and Sheet Metal Contractor License in the State of Louisiana (Lic.
No. 44001) allowing us to perform projects in that State.
24
Marmion
Industries Corp. began eight years ago as a HVAC company in Beaumont, Texas.
We
then moved to Houston to take advantage of the accessibility to a larger market
in and around the Houston area. Marmion Industries Corp. has always been owned
and operated by W. H. Marmion and Ellen Raidl Marmion, who are husband and
wife.
In the first few years we acquired an agreement with Nextel Corporation to
provide service and replacement of HVAC machines across southern Texas. This
enabled Marmion to grow at a rapid pace as we completed Nextel's 3-G upgrade
in
2000 and generated $1.1 million in gross revenues. In early 2001 Marmion began
building industrial grade machines and providing them to petrochemical customers
in the Houston area. At that time Nextel began tightening their services budgets
due to the low price of their stock and approached us to reduce our pricing
to a
rate below our cost factor. As a result, we terminated our contract with Nextel
and made a strategic decision to concentrate on the Industrial markets and
develop our line of explosion-proof machines as our core business. We developed
and refined our product line and continued to market to a growing list of
customers primarily in the Houston area. Our alliance with a major wall mount
air conditioner manufacturer Marvair, a subsidiary of AHI Holding, Inc., allowed
us to gain a substantial market share in the industrial market as a reseller
of
Marvair products to two large national building manufacturers.
We
believe that diversification is a key factor to maintain market share in the
industrial and commercial markets. Accordingly, in 2004 we began making plans
to
open a commercial division and hired personnel to bid and supervise commercial
projects. We have opened our commercial division and have successfully completed
several projects for customers such as Houston Independent School District,
City
of Clute Texas, State of Texas Parks and Recreation. As of the date of this
report, we are currently completing two projects for the Pasadena Independent
School District in Pasadena, Texas and midway through two additional projects
for the Houston Independent School District. Until 2003 we operated as an S
corporation and in 2003 converted to C corp. in anticipation of accessing the
public markets to enable us to raise capital to grow our business. Today Marmion
has ten full time employees and depending on the commercial projects undertaken
as many or more subcontractors to accomplish our business objectives.
One
of
our challenges continues to be our ability to attract and keep excellent
employees to accomplish our business objectives. This challenge is highlighted
due to the fact that we do not offer any type of benefits program to our
employees. Cash flow has and remains a major challenge due to the fact that
we
are outgrowing our receivables and increasing our growth rate beyond 30 percent
annually. Our customers normally pay on 45 to 60 day intervals and our suppliers
bill us on 30 day terms. We need larger facilities and equipment to increase
profitability and meet increasing demand and we are currently seeking new
facilities and/or property to erect facilities. We have generally outsourced
5%
of our manufacturing. In November 2005, we acquired several pieces metal
manufacturing equipment which has allowed us to reduce our outsourcing needs.
This new equipment will allow us to take on a diversified work load, which
could
increase our profitability.
Our
long-term plans for growth include continued expansion of our industrial base
into Louisiana and abroad. We have recently started servicing the commercial
market in the Houston area and have obtained the necessary licenses in Louisiana
and have begun bidding on commercial projects in that area as well. We believe
that, with right personnel and growth capital, we can grow our industrial and
commercial division over the next two years.
We
have
acquired third party certification (ETL Certification) for the wallmount line
for our products and have begun the process of getting our hazardous location
package units as well as our pressurizers certified as well. These third parties
certify our hazardous location equipment, saying it is indeed explosion-proof
on
our industrial line of equipment which will enable us to bid on new jobs and
we
believe the certification will allow us to be successful on our bids. Because
of
third party certification, we will now be able to be listed as an “approved
supplier/provider” for large multi-national petrochemical company’s
specifications, as some large oil companies will spec in the company A/C’s they
want. Normally they will require a UL/CSA listing or another third party
certification from their suppliers/providers This will allow us to increase
our
profit margin on the certified equipment. We are currently educating engineering
companies in Houston of the options now available to them and their customers.
By
attracting and keeping better employees and retaining our current ones we
believe that we can maintain our current growth rate over the next 3-5
years.
Competition
As
of
December 31, 2006, we had four primary competitors to Marmion within the
industry. All of these competitors are substantially larger and have greater
resources than us. In the custom market, the Company competes with many larger
and smaller manufacturers. We compete on the basis of total value, quality,
function, serviceability, efficiency, availability of product, product line
recognition and acceptability of sales outlet. However, in new construction
where the contractor is the purchasing decision maker, we are often is at a
competitive disadvantage on sales of its products because of the emphasis placed
on initial cost; whereas, in the replacement market and other owner-controlled
purchases, we have a better chance of getting the business since quality and
long-term cost are generally taken into account.
25
Major
Customers
Our
three
largest customer last year accounted for almost 70% of total sales in 2006,
with
our largest customer accounting for 34% of total sales. In order to diversify
its customer base, we have added to and/or upgraded its sales representation
in
various markets. The loss of a significant portion of sales to any of these
customers could have a material adverse effect on our financial condition.
In
addition, many of the arrangements that we have with such customers are by
purchase order and terminable at will at the option of either party. A
significant decrease or interruption in businesses of any of our significant
customers could have a material adverse effect on our financial position,
results of operations or liquidity.
Sources
and Availability of Raw Materials
The
most
important materials purchased by us are steel, copper and aluminum, which are
obtained from domestic suppliers. We also purchase from other domestic
manufacturers certain components, including compressors, electric motors and
electrical controls used in its products. We endeavor to obtain the lowest
possible cost in its purchases of raw materials and components, consistent
with
meeting specified quality standards. We are not dependent upon any one source
for its raw materials or the major components of its manufactured products.
We
reduced our reliance on our largest vendor to 24% from 50% in 2005. By having
multiple suppliers, we believe that we will have adequate sources of supplies
to
meet its manufacturing requirements for the foreseeable future.
We
attempt to limit the impact of increases in raw materials and purchased
component prices on its profit margins by negotiating with each of its major
suppliers on a term basis from six months to one year. However, in each of
the
last three years cost increases in basic commodities, such as steel, copper
and
aluminum, severely impacted profit margins.
Employees
We
have
10 full-time employees as of March 27, 2007. As we grow, we will need to attract
an unknown number of additional qualified employees. Although we have
experienced no work stoppages and believe our relationships with our employees
are good, we could be unsuccessful in attracting and retaining the persons
needed. None of our employees are currently represented by a labor
union.
Our
Properties
Our
principal offices are located at 9103 Emmott Road, Building 6, Suite A, Houston
Texas 77040. We lease our offices and warehouse facilities under three operating
lease which all expire on May 31, 2007.The
monthly cost of the lease is $4,075.00. We are currently seeking new facilities
and/or properties to erect new facilities.
Legal
Proceedings
None
26
Management
Executive
Officer and Directors
Our
executive officers and directors, the positions held by them, and their ages
are
as follows:
Name
Age
Position
Wilbert
H. Marmion, III
49
Director,
Chief Executive Officer
Ellen
Raidl
40
Director,
Secretary, Treasurer
Wilbert
H. Marmion
has
served as our President , Chief Executive Officer and as a director since
January 2004. Mr. Marmion founded Marmion Air Service, our wholly owned
subsidiary in 1998 and has served as its president since that time. Mr. Marmion
also serves as Vice President of Mar-Len Distributing, a privately held
corporation. Mr. Marmion is married to Ellen Raidl, our Secretary, Treasurer
and
director.
Ellen
Raidl has
served as our Secretary, Treasurer and director since January 2004. Previously,
Ms. Raidl worked in multi family property management, most recently with Hanover
Company in Houston, Texas. Ms. Raidl currently serves as the President of
Mar-Len Distributing, a privately held corporation. Ms. Raidl is married to
Wilbert H. Marmion, our President, Chief Executive Officer and
director.
Audit
Committee
We
do not
have a separately designated audit committee at this time. The entire board
of
directors is acting as our audit committee as specified in Section 3(a)(58)(B)
of the Securities Exchange Act of 1934, as amended.
Board
of Directors
Each
director holds office until his successor is elected and qualified or until
his
earlier termination in the manner provided in our Bylaws. The officers serve
at
the discretion of the Board.
Executive
Compensation
The
following table sets forth the cash compensation paid to our President Chief
Executive Officer, the principal executive officer for services rendered during
the fiscal years ended December 31, 2006 and 2005. No other employee or
executive officer had total compensation in excess of $100,000 during the fiscal
years ended December 31, 2006 and 2005.
SUMMARY
COMPENSATION TABLE
Name
and Position
Year
Salary
Stock
Awards
Total
Wilbert
H. Marmion, III
2006
$
120,000
-0-
$
120,000
President
Chief Executive Officer
2005
$
120,000
$
6.,000(1
)
$
126,000
and
Director
(1)
Based
on 30,000,000 shares of Series B Preferred Stock granted to Mr. Marmion
in
2005.
27
Stock
Option Grants
No
stock
options, warrants or stock appreciation rights were issued to any executive
officers or other employees in fiscal 2006. There are no unexercised options,
unvested stock awards or equity incentive plan awards for any executive officers
in 2006 or 2005
Director
Compensation
Directors
who are also employees are not entitled to receive any compensation for their
services as directors. We currently have only 1 director who is also an
employee.
Employment
Agreements
None.
Confidentiality
Agreements
None.
Indemnification
of Directors
Under
our
Bylaws, we may indemnify an officer or director who is made a party to a
proceeding, including any lawsuit, because of his position, if he acted in
good
faith and in a manner he reasonably believed to be in our best interest. We
may
advance expenses incurred in defending a proceeding. To the extent that the
officer or director is successful on the merits in a proceeding as to which
he
is being indemnified, we must indemnify him against all expenses incurred,
including attorney's fees. With respect to a derivative action, indemnity may
also 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. Chapter 78 of the Nevada Revised Statutes grants corporations the right
to indemnify their directors, officers, employees and agents in accordance
with
applicable law.
The
indemnification provisions in the Bylaws may be sufficiently broad to permit
indemnification of our officers and directors for liabilities arising under
the
Securities Act. However, we are aware that in the opinion of the Securities
and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and therefore unenforceable.
Certain
Relationships and Related Transactions
On
May20, 2004, Wilbert H. Marmion, III, our President and Chief Executive Officer,
contributed all of his shares of common stock in Marmion Investments, Inc.,
a
Texas corporation d/b/a Marmion Air Service, to us as a contribution to our
capital. The shares contributed to us by Wilbert H. Marmion constitute one
hundred percent of the issued and outstanding shares in Marmion Investments,
Inc.
From
December 2003 through May 2004, a corporation controlled by the sister-in-law
of
our majority stockholder advanced $500,000 to Marmion Investments, Inc, our
wholly owned subsidiary. These advances were evidenced by 6% promissory notes.
As of December 31, 2005, the principal amount due on this note was $153,000,
with accrued interest of $34,293 (the “SAS Note”). During fiscal 2006, this note
was sold (in 3 separate tranches) to an unrelated third party.
To
date,
our wholly owned subsidiary Marmion Investments, Inc. has received net advances
from its majority stockholder and our President of $201,645. These advances
are
evidenced by 10% demand notes
We
received advances from our controlling stockholder during fiscal 2006 totaling
$322,412. Total advances from this stockholder aggregate $524,056 as of December31, 2006. The advances are unsecured and payable upon demand. Interest on these
advances is being accrued at 6% per annum and accrued interest on these advances
totals $29,605 as of December 31, 2006.
28
Principal
Stockholder and Beneficial Owners and Management.
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 9, 2007 by the following
persons:
· each
person who is known to be the beneficial owner of more than five percent (5%)
of
our issued and outstanding shares of common stock;
· each
of
our directors and executive officers; and
· all
of
our directors and executive officers as a group.
The
following table assumes that there are 57,709,990 common shares issued and
outstanding immediately before this offering. Except as set forth in the
footnotes to the table, the persons names in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where applicable.
A person is considered the beneficial owner of any securities as of a given
date
that can be acquired within 60 days of such date through the exercise of any
option, warrant or right. Shares of common stock subject to options, warrants
or
rights which are currently exercisable or exercisable within 60 days are
considered outstanding for computing the ownership percentage of the person
holding such options, warrants or rights, but are not considered outstanding
for
computing the ownership percentage of any other person.
Name
And Address (1)
Number
Of Shares Beneficially
Owned
Percentage
Owned
Wilbert
H. Marmion, III
3,390,000,100
(2
)
>90
%
Ellen
Raidl
0
*
All
directors and officers as a group (2 persons)
3,390,000,100
>90
%
----------------------------------------------
*
Less
than 1% of the outstanding shares of common stock.
(1)
Unless
otherwise noted, the address for each person is 9103 Emmott Road,
Building
6, Suite A.
(2)
Includes
(i) 380,000,000 shares of common stock issuable upon conversion of
9,500,000 shares of series A preferred stock and (ii) 3,000,000,000
issuable upon conversion of 30,000,000 shares of series B preferred
stock.
By their terms, the series A and series B preferred stock convert
into
more shares of common stock than we have authorized.
There
are
no arrangements, known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of Marmion Industries Corp. There are no arrangements or
understandings among members of both the former and the new control groups
and
their associates with respect to election of directors or other
matters.
29
Selling
Security Holders
This
prospectus relates to the offer and sale of shares of our common stock by the
selling stockholder identified below. Except as indicated below, none of the
selling stockholder are or have been affiliates of ours.
The
selling stockholder will determine when they will sell their shares, and in
all
cases, will sell their shares at the current market price or at negotiated
prices at the time of the sale. Although we have agreed to pay the expenses
related to the registration of the shares being offered, we will not receive
any
proceeds from the sale of the shares sold by the selling stockholder. We intend
to repay the convertible note through a combination of cash payments and through
issuance of common stock upon conversion and we do not expect to, and based
upon
current facts and assumptions reasonably believe that we will not, default
on
our obligations thereunder. The selling stockholder does not have an existing
short position in our securities. In addition, the selling stockholder has
agreed, during the period in which the convertible debenture is outstanding,
not
to short our securities.
The
shares of common stock being offered by the selling stockholder are issuable
upon conversion of our convertible promissory notes issued pursuant to that
Subscription Agreement dated as of March 22, 2007. For additional information
regarding the convertible debenture, see “Description of Securities—Convertible
Notes.” We are registering the shares in order to permit the selling stockholder
to offer the shares of common stock for resale from time to time.
The
following table sets forth (i) the names of the selling stockholder, (ii) the
number of shares of common stock owned beneficially by each of them as of April9, 2007, (iii) the number of shares which may be offered pursuant to this
prospectus and (iv) the number of shares and percentage of class to be owned
by
the selling stockholder after this offering. The selling stockholder may sell
all, some or none of their shares in this offering. See "Plan of Distribution."
Pursuant to various agreements with the selling stockholder, we have filed
a
registration statement, of which this prospectus forms a part, in order to
permit such stockholder to resell to the public their shares of common stock
as
specifically set forth below. The following information is based upon
information provided by the selling stockholder. Except as otherwise set forth
in the footnotes to the table, none of the selling stockholder has held any
position or office or has had any other material relationship with us or any
of
our affiliates within the past three years other than as a result of his or
her
ownership of shares of equity securities. Because the selling stockholder may
offer all, some or none of their common stock, no definitive estimate as to
the
number of shares that will be held by the selling stockholder after this
offering can be provided.
Except
as
set forth in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws, where
applicable. A person is considered the beneficial owner of any securities as
of
a given date that can be acquired within 60 days of such date through the
exercise of any option, warrant or right. Shares of common stock subject to
options, warrants or rights which are currently exercisable or exercisable
within 60 days are considered outstanding for computing the ownership percentage
of the person holding such options, warrants or rights, but are not considered
outstanding for computing the ownership percentage of any other
person.
Because
of adjustments to and variations in the conversion price of the convertible
promissory notes, the number of shares that will actually be issued upon
conversion of the notes may be more or less than the number of shares being
offered by this prospectus. The fourth column assumes the sale of all of the
shares offered by the selling stockholder pursuant to this
prospectus.
Under
the
terms of the convertible debenture, the selling stockholder may not convert
the
convertible debenture to the extent such conversion or exercise would cause
the
selling stockholder, together with its affiliates, to have acquired a number
of
shares of common stock which would exceed 4.99% of our then outstanding common
stock, excluding for purposes of such determination shares of common stock
issuable upon conversion of the convertible promissory notes which have not
been
converted and upon exercise of the warrants issued in connection therewith
which
have not been exercised. The number of shares in the second column reflects
this
limitation.
30
The
"Common Shares Beneficially Owned after Offering" column assumes the sale of
all
shares offered by the selling stockholder set forth below. The "Percentage
of
Common Shares Beneficially Owned after Offering" column is based on 57,709,990
shares of common stock outstanding as of April 9, 2007.
Represents
15,900,00 shares of common stock issuable upon conversion of a $3,000,000
convertible debenture.
(2)
Assumes
all of the offered shares are sold.
(3)
Dutchess
Private Equities Fund Ltd. is a private investment fund that is owned
by
its investors and managed by its directors, Douglas Leighton and
Michael
Novielli, who share dispositive and voting power of the shares listed
above.
The
table
below shows the relationship between shares of our common stock held by persons
other than the selling stockholder versus the shares registered by the selling
stockholder on this and other registration statements, including shares sold
under this and other registration statements:
Shares
held by persons other than the selling stockholder prior to the March
2007
private placement
Number
of shares registered for resale by the selling stockholder or its
affiliates in prior registration statements (1)
Shares
registered for resale by the selling stockholder or its affiliates
that
continue to be held by the selling stockholder or its affiliates
(1)
Shares
that have been sold in registered or affiliates of the selling stockholder
(1)
Shares
registered for resale on behalf of the selling stockholder in this
prospectus (1)
57,709,990
0
0
0
15,900,000
(1)
The
March 2007 Private Placement is the first transaction between us and the selling
stockholder. The 15,900,000 shares being registered for resale pursuant to
this
prospectus represent the only shares we have registered for, or on behalf of,
the selling stockholder.
31
` The
following table sets forth the total profit or loss the selling stockholder
could have realized as a result of the discount for the securities underlying
the convertible promissory debenture issued in the March 2007 Private Placement
assuming the selling stockholder converted the convertible note in full and
sold
the common stock on the date such debenture was issued. The purpose of this
table is to illustrate potential profit or losses. At the time the convertible
debenture was issued, the underlying shares of common stock were not registered.
Therefore the selling stockholder could not actually have sold the shares at
the
time the convertible debenture was issued:
Date
of Issuance
Market
price per share of common stock on date of issuance
Conversion
price per share on date of debenture issuance
Amount
of shares of common stock underlying debenture
Combined
market price of the total number of shares underlying the
debenture
Total
possible shares selling stockholder may receive and the combined
conversion price of the total number of shares underlying
the
debenture
Total
discount to the market price as of the date of the issuance of the
debenture
3/22/2007
$0.012
.0075
(1)
400,000,000
$4,800,000
(2)
$3,000,000
(3)
$1,800,000
(4)
(1)
The
debenture has a variable conversion price equal to the lesser of
.075 and
75% of the lowest bid price for our common stock during the 20 trading
period immediately preceding conversion. The lowest closing bid price
during the 20 trading days preceding March 22, 2007 was $0.01 (February
22).
(2)
Calculated
using the market price per share of common stock on the date of issuance
multiplied by the amount of shares of common stock underlying the
debenture.
(3)
Calculated
by using the conversion price on the date of issuance multiplied
by the
total possible number of shares the selling stockholder could have
received.
(4)
Calculated
by subtracting the total conversion price on the date of issuance
of the
debenture from the combined market price of the total number of shares
underlying the debenture on that
date.
32
The
following table sets forth the total profit or loss the selling stockholder
could have realized as a result of the discount for the securities underlying
the warrants issued in the March 2007 Private Placement assuming the selling
stockholder exercised the warrants in full and sold the common stock on the
date
such warrant was issued. The purpose of this table is to illustrate potential
profit or losses. At the time the warrants were issued, the underlying shares
of
common stock were not registered. Therefore the selling stockholder could not
actually have sold the shares at the time the warrants were issued:
Date
of Issuance
Market
price per share of common stock on date of issuance
Exercise
price per share on date of note issuance
Amount
of shares of common stock underlying warrant
Combined
market price of the total number of shares underlying
the
warrant
Total
possible shares selling stockholder may receive and the combined
exercise
price of the total number of shares underlying the
warrant
Total
discount to the market price as of the date of the issuance of the
warrant
3/22/2007
$0.012
.015
100,000,000
$1,200,000
(1)
$1,500,000
(2)
No
discount
($300,000)
(3)
(1)
Calculated
using the market price per share of common stock on the date of the
issuance multiplied by the amount of shares of common stock underlying
the
warrant.
(2)
Calculated
by using the exercise price on the date of issuance multiplied by
the
total possible number of shares the selling stockholder could have
received.
(3)
Calculated
by subtracting the total exercise price on the date of issuance of
the
warrant from the combined market price of the total number of shares
underlying the warrant on that
date.
33
Description
of Securities
Common
Stock
We
are
authorized to issued 500,000,000 shares of common stock, of which, as of the
date of this prospectus, 57,709,990 shares were issued, outstanding, and held
by
approximately 163 record holders. Each holder of common stock is entitled to
one
vote per share on all matters voted on generally by the stockholder, including
the election of directors, and, except as otherwise required by law or except
as
provided with respect to any series of preferred stock, the holders of the
shares possess all voting power. Our charter does not provide for cumulative
voting for the election of directors. As a result, under Nevada Law, the holders
of more than one-half of the outstanding shares of common stock generally will
be able to elect all of our directors then standing for election and holders
of
the remaining shares will not be able to elect any director. Subject to any
preferential rights of any series of preferred stock, holders of shares of
common stock will be entitled to receive dividends on the stock out of assets
legally available for distribution when, as and if authorized and declared
by
our Board of Directors. The payment of dividends on the common stock will be
a
business decision to be made by our Board of Directors from time to time based
upon results of our operations and our financial condition and any other factors
as our Board of Directors considers relevant. Payment of dividends on the common
stock may be restricted by loan agreements, indentures and other transactions
entered into by us from time to time. Any material contractual restrictions
on
dividend payments will be described in the applicable prospectus supplement.
Subject to any preferential rights of any series of preferred stock, holders
of
shares of common stock are entitled to share ratably in our assets legally
available for distribution to our stockholder in the event of our liquidation,
dissolution or winding up. Holders of common stock have no preferential,
preemptive, conversion or exchange rights.
Preferred
Stock
Pursuant
to our certificate of incorporation, the board of directors has the authority,
without further action by our stockholder, to issue up to 500,000,000 shares
of
preferred stock. The board of directors may issue this stock in one or more
series and may fix the rights, preferences, privileges and restrictions of
this
stock. Some of the rights and preferences that the board of directors may
designate include dividend rights, conversion rights, voting rights, terms
of
redemption, liquidation preferences and sinking fund terms. The board of
directors may determine the number of shares constituting any series or the
designation of such series. Any or all of the rights and preferences selected
by
the board of directors may be greater than the rights of the common stock.
The
issuance of preferred stock could adversely affect the voting power of holders
of common stock and the likelihood that stockholder will receive dividend
payments and payments upon liquidation. The issuance of preferred stock could
also have the effect of delaying, deferring or preventing a change in control
of
Marmion.
We
currently have designated two series of preferred stock, a summary of the terms
of which are set forth below. While we have no present intention to issue shares
of any additional series of preferred stock, any such issuance could dilute
the
equity of the outstanding shares of common stock and could have the effect
of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value
of
the common stock.
Series
A Preferred Stock
10,000,000
shares of our preferred stock have been designated as series A preferred stock.
As of March 31, 2007, we had outstanding 9,500,000 shares of series A preferred
stock. Each share of series A preferred stock is convertible into 40 shares
of
our common stock.
The
holders of the series A preferred stock are entitled to receive dividends if
and
as when declared by the board of directors. The holders of the series A
preferred stock have voting rights on all matters submitted to holders of our
common stock. Each holder of series A preferred stock is entitled to that number
of votes on such matters equal to the number of shares of common stock into,
which the series A preferred stock is convertible.
In
the
event of any voluntary or involuntary liquidation, dissolution or winding up,
the holders of the series A preferred stock are entitled to receive in cash
out
of our assets, before any amount shall be paid to the common stock or any class
junior in rank to the series A preferred stock, an amount per share of series
A
preferred stock equal to $0.001 per share.
34
Series
B Preferred Stock
30,000,000
shares of our preferred stock have been designated as series B preferred stock.
As of March 31, 2007, we had outstanding 30,000,000 shares of series B preferred
stock. Each share of series B preferred stock is convertible into 100 shares
of
our common stock.
The
holders of the series B preferred stock are entitled to receive dividends if
and
as when declared by the board of directors. The holders of the series B
preferred stock have voting rights on all matters submitted to holders of our
common stock. Each holder of series B preferred stock is entitled to that number
of votes on such matters equal to the number of shares of common stock into
which its series B preferred stock is convertible
In
the
event of any voluntary or involuntary liquidation, dissolution or winding up,
the holders of the series B preferred stock are entitled to receive in cash
out
of our assets, before any amount shall be paid on the Common stock or to any
class junior in rank to the series B preferred stock, an amount per share of
series B preferred stock equal to $0.0001 per share.
Convertible
Notes
March
2007 Private Placement
On
March22, 2007, we entered into a Subscription Agreement with a single accredited
investor pursuant to which they agreed to issue up to $3,000,000 of principal
amount of convertible debenture and warrants to purchase 100,000,000 shares
of
our common stock. The debenture has a 5 year term and bear interest at twelve
percent (12%). We are required to make “interest only” payments for the first
six months following issuance. As of the date of this prospectus, the first
3
interest only payments have been made in cash. Beginning on the 7th
month
following issuance, we are required to make amortizing payments of principal
plus interest in the amount equal to $224,375.41. If a registration statement
is
effective, this amount can be satisfied by conversion of the debenture. The
debenture is convertible into our common stock pursuant to a “variable
conversion price” equal to the lesser of (i) $0.075 and (ii) 75% of the lowest
bid price for our common stock during the 20 trading day period prior to
conversion; provided, however, upon an event of default (as defined) this
conversion price will be reduced to the lesser of the then current conversion
price and 50% of the lowest bid price for the 15 trading days prior to
conversion. In no event shall the conversion price be less than $0.001 per
share. In addition, upon an event of default (as defined) the holder can
exercise its right to increase the face amount of the debenture by 10% for
the
first default and by 10% for each subsequent event of default. In addition,
the
holder may else to increase the face amount by 2.5% per month paid as liquidated
damages The maximum amount that the face amount may be increased by holder
for
all defaults under the note and any other transaction document is 30%, The
debenture is secured by a 1st
lien on
our assets, a guaranty by our subsidiary and a pledge of 4 million shares of
Mr.
Marmion’s series B preferred stock
Under
the
terms of this debenture and the related warrants, the debenture and the warrants
are convertible/exercisable by any holder only to the extent that the number
of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the
debenture or unexercised portions of the warrants) would not exceed 4.99% of
our
then outstanding common stock as determined in accordance with Section 13(d)
of
the Securities Exchange Act of 1934, as amended
Subject
to certain terms and conditions set forth therein, the debenture is redeemable
by us at a rate of between 125% of the outstanding principal amount of the
notes
plus interest. In addition, so long as the average daily price of our common
stock is below the “initial market price” (as defined) we may prepay a such
monthly portion due on the outstanding notes and the investors agree that no
conversions will take place during such month where this option is exercised
by
us.
The
debenture was issued with warrants to purchase up to 100,000,000 shares of
our
common stock at an exercise price of $0.015 per share, subject to adjustment.
To
the extent that the shares of common stock underlying the warrant of not
registered for resale, the warrant holder may designate a "cashless exercise
option." This option entitles the warrant holders to elect to receive fewer
shares of common stock without paying the cash exercise price. The number of
shares to be determined by a formula based on the total number of shares to
which the warrant holder is entitled, the current market value of the common
stock and the applicable exercise price of the warrant.
35
We
agreed
to register the secondary offering and resale of the shares issuable upon
conversion of the debenture and the shares issuable upon exercise of the
warrants by April 16, 2007.
We
relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, for the offer and sale of the debenture and the
warrants.
The
following table sets forth the dollar amount of each payment that has been
made
or that we may be required to make in connection with the above described
transaction to the selling stockholder, any affiliate of the selling stockholder
or any person with whom the selling stockholder has a contractual relationship
regarding the transaction. The debenture has a 5 year term but amortizes over
a
period of 24 months. Payments begin during the month of issuance and each
payment is due on the last day of the month. We did not make any payments that
were for liquidated damages, paid to finders or placement agents.
All
payments to be made on the last day of each
month.
(2)
On
any date where this prospectus is effective, this amount can be satisfied
by conversion at a rate equal to the lesser of $0.075 and 75% of
the
lowest bid price for our common stock during the 20 trading day period
prior to conversion but in no event shall the conversion price be
less
than $0.001 per share.
(3)
Interest
only at rate of 12%, compounded
daily.
(4)
Assumes
30 day month and that payment is received timely on last day of each
month.
(5)
Each
payment consists of (i) an interest component at 12% compounded daily
and
(ii) a principal redemption component which is 125% of the principal
for
each payment.
(6)
September
2007 payment: $29,730.53 interest; $194,644.88 redemption ($38,928.98
profit).
(7)
October
2007 payment: $28,187.36 interest; $196,188.05 redemption ($39,237.61
profit).
(8)
November
2007 payment: $26,631.95 interest; $197,743.46 redemption ($39,548.69
profit).
(9)
December
2007 payment: $25,064.21 interest; $199,311.20 redemption ($39,862.24
profit)
(10)
January
2008 payment: $23,484.05 interest; $200,891.36 redemption ($40,178.27
profit).
(11)
February
2008 payment: $21,891.35 interest; $202,484.06 redemption ($40,496.81
profit).
(12)
March
2008 payment: $20,286.03 interest; $204,089.38 redemption ($40,817.88
profit).
(13)
April
2008 payment: $18,667.98 interest; $205,707.43 redemption ($41,141.49
profit).
(14)
May
2008 payment: $17,037.10 interest; $207,338.31 redemption ($41,467.66
profit).
(15)
June
2008 payment: $15,393.29 interest; $208,982.11 redemption ($41,796.42
profit).
(16)
July
2009 payment: $13,736.45 interest; $210,638.95 redemption ($42,127.79
profit).
(17)
August
2009 payment: $12,066.48 interest; $212,308.93 redemption ($42,461.79
profit).
(18)
September
2009 payment: $10,383.26 interest; $213,992.14 redemption ($42,798.43
profit).
(19)
October
2008 payment: $8,686.70 interest; $215,688.70 redemption ($43,137.74
profit).
(20)
November
2008 payment: $6,976.69 interest; $217,398.71 redemption ($43,479.74
profit)
(21)
December
2008 payment: $5,253.13 interest; $219,122.28 redemption ($43,824.46
profit).
(22)
January
2009 payment: $3,515.89 interest; $220,859.51 redemption ($44,171.90
profit).
(23)
February
2009 payment: $1,764.90 interest; $222,610.52 redemption ($44,522.10
profit).
(24)
Holder
may elect to increase the face amount of the debenture by 10% for
each
default or holder may elect to increase the face amount by 2.5% per
month
as liquidated damages. The maximum amount that the face amount may
be
increased for all defaults is 30%
36
Of
the $3
million gross proceeds received in the March 2007 private placement, we paid
$115,000 to the selling stockholder as a closing fee. In addition, we incurred
$25,000 in legal expenses in connection with the offering. As such, our net
proceeds from the March 2007 private placement were $2,860,000 at closing.
The
total possible cash payments to the selling stockholder during the first 12
months after issuance of the convertible debenture is approximately
$1,357,140.
The
table
below shows the amount of proceeds received by us as compared to amounts which
can be realized by the selling stockholder.
Gross
Proceeds from March
2007 Offering
All
Payments that have been made or may be required to be made by
Issuer (1)
Net
Proceeds to Issuer
Combined
Total Possible Profit to be Realized by Selling Stockholder as a
Result
of
Conversion Discounts
$3,000,000
$1,357,140
(2)
$1,642,860
$1,800,000
(3)
(1)
Does
not include any amounts attributable to repayment of
principal
(2)
Includes:
(i) $467,140.53 in interest; (ii) $750,000 in profit on the redemption
portion of any payments made; (iii) $115,000 in closing costs payable
to
the selling stockholder and (iv) $25,000 in legal
costs.
(3)
Represents
the profit on conversion of the $3,000,000 convertible note issued
in the
March 2007 private placement. The only other Marmion security held
by the
selling stockholder is a warrant issued in our March 2007 private
placement which was issued with a premium to market
price.
The
total
amount of all payments due under the note combined with the total possible
profit as a result of the conversion discount represents approximately 182%
of
the net proceeds actually received by us, or 3.0% per month over the 5 year
term
of the note.
Warrants
The
March22, 2007 debenture was issued with Warrants to purchase up to 100,000,000 shares
of our common stock at an exercise price of $0.015 per share until March 22,2012. To the extent that the shares of common stock underlying the warrant
of
not registered for resale, the warrant holder may designate a "cashless exercise
option." This option entitles the warrant holders to elect to receive fewer
shares of common stock without paying the cash exercise price. The number of
shares to be determined by a formula based on the total number of shares to
which the warrant holder is entitled, the current market value of the common
stock and the applicable exercise price of the warrant.
Registration
Rights
The
holders of our convertible debenture and related warrants issued pursuant to
the
March 2007 Private Placement discussed above are entitled to have the shares
of
common stock underlying such securities registered by us under the terms of
an
agreement between us and the holders of the convertible debenture and related
warrants. Under the terms of such agreement, we are required to file a
registration statement covering the shares of common stock underlying such
debenture and related warrants by April 16, 2007. Such registration statement
was filed on April 11, 2007. If this registration statement has not been
declared effective by July 16, 2007, then for each month (prorated for partial
months) thereafter during which the registration statement is not declared
effective, we begin incurring liquidated damages equal to 2% of the principal
of
the promissory notes issued for each 30 day period that this registration
statement is not declared effective after July 16, 2007.
We
are
also required to maintain the effectiveness of the registration statement
covering such shares of common stock until the earlier of:
·
the
date as of which the holders of the convertible debenture and related
warrants may sell all of the shares of common stock covered by such
registration statement under Rule 144(k) of the Securities Act,
and
37
·
the
date on which the holders of the convertible debenture and related
warrants have sold all of the shares of common stock issued or issuable
upon conversion of the notes and exercise of the related
warrants.
We
will
bear all registration expenses, other than underwriting discounts and
commissions, with respect to the registration statement relating to the
convertible debenture and the related warrants.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is American Registrar &
Transfer Co. Their address is 342 East 900 South, Salt Lake City, UT84111
and
telephone number (801) 363-9065.
Legal
Matters
Spectrum
Law Group LLP has given us an opinion relating to the due issuance of the common
stock being registered.
Interests
of Named Experts and Counsel
Spectrum
Law Group, LLP and certain affiliates of Spectrum Law Group, LLP may be issued
shares of our common stock being offered by the prospectus.
Experts
Our
financial statements for the year ended December 31, 2006 appearing in this
prospectus and this registration statement have been audited by Sherb & Co.,
LLP, independent auditors, as set forth in their report thereon, which contains
an explanatory paragraph with respect to the uncertainty surrounding our ability
to continue as a going concern, appearing elsewhere herein, and are included
in
reliance upon such report given upon the authority of such firm as experts
in
accounting and auditing
Changes
In Disagreements With Accountants on Accounting and Financial
Disclosure
Effective
July 16, 2005, we dismissed our independent auditor, Lopez, Blevins, Bork &
Associates LLP ("Lopez, Blevins").
The
report of Lopez, Blevins on the Registrant's consolidated financial statements
as of and for the year ended December 31, 2004 did not contain any adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as
to
audit scope or accounting principles. However, the report did contain a
modification paragraph that raised substantial doubt about our ability to
continue as a going concern.
The
decision to change accountants was approved by the Registrant's Board of
Directors.
During
the two most recent fiscal years and any subsequent interim period through
July16, 2005 there were no disagreements between the Registrant and Lopez, Blevins
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Lopez, Blevins, would have caused Lopez, Blevins to
make
reference to the subject matter of the disagreements in connection with his
reports on the financial statements for such periods.
On
July16, 2005, we engaged Sherb & Co., LLP (Sherb) as our independent accountant
to report on our balance sheet as of December 31, 2005, and the related combined
statements of income, stockholder's equity and cash flows for the years then
ended. The decision to appoint Sherb was approved by our Board of
Directors.
During
the Registrant's two most recent fiscal years and any subsequent interim period
prior to the engagement of Sherb, neither we nor anyone on our behalf consulted
with Sherb regarding either (i) the application of accounting principles to
a
specified transaction, either contemplated or proposed, or the type of audit
opinion that might be rendered on our financial statements or (ii) any matter
that was either the subject of a “disagreement" or a "reportable event," as
those terms are defined in Regulation S-K, Items 304(a)(1)(iv) and
304(a)(1)(v).
38
We
provided Lopez, Blevins with a copy of the Current Report before our filing
with
the Commission. We requested Lopez, Blevins to furnish us with a letter
addressed to the Commission stating whether they agree with the statements
made
by us in that Report and, if not, stating the respects in which they do not
agree. We filed the former auditor's letter as an exhibit to our Current Report
on Form 8-K dated August 12, 2005.
Available
Information
We
filed
with the Securities and Exchange Commission a registration statement on Form
SB-2 under the Securities Act with respect to the shares being offered in this
offering. This prospectus does not contain all of the information set forth
in
the registration statement, certain items of which are omitted in accordance
with the rules and regulations of the Commission. The omitted information may
be
inspected and copied, at prescribed rates, at the public reference facilities
maintained by the Commission at Judiciary Plaza, 100 F Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains an Internet site at http://www.sec.gov
that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. Statements
contained in this prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are not necessarily
complete, and in each instance where reference is made to the copy of the
document filed as an exhibit to the registration statement, each such statement
is qualified in all respects by such reference. For further information with
respect to our company and the securities being offered in this offering,
reference is hereby made to the registration statement, including the exhibits
thereto and the financial statements, notes, and schedules filed as a part
thereof.
39
Index
to Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
Consolidated
Statements of Operations for the three months ended March 31, 2007
and
2006
(unaudited)
F-19
Consolidated
Statements of Cash Flows for the three months ended March 31, 2007
and
2006
(unaudited)
F-20
Note
to Financial Statements (unaudited)
F-21
40
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholder
and Directors
Marmion
Industries Corp.
Houston,
Texas
We
have
audited the accompanying consolidated balance sheet of Marmion Industries Corp.
as of December 31, 2006, and the related consolidated statements of operations,
stockholder’s deficit and cash flows for each of the years then ended December31, 2006 and 2005. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Marmion Industries Corp.
as
of December 31, 2006, and the results of its operations and its cash flows
for
each of the years then ended December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. The Company has suffered recurring
losses from operations, including a net loss of approximately $7.0 million
for
the year ended December 31, 2006, and has a substantial working capital
deficiency as of December 31, 2006. These factors raise substantial doubt the
Company’s ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
Marmion
Industries Corp., a Texas corporation d/b/a Marmion Air Service (“Marmion Air”)
(“the Company”), was incorporated on June 8, 1995. Marmion Air Service commenced
operations in 1998 in residential and commercial HVAC service. Marmion Air
specializes in explosion-proof heating, ventilation, cooling pressurization
and
chemical filtration solutions for mission-critical applications. The Marmion
Air
customer base is centrally located in the state of Texas.
On
May20, 2004, Wilbert H. Marmion, the President and Chief Executive Officer of
Marmion Industries Corporation (formerly International Trust & Financial
Systems, Inc.) contributed all of his shares of common stock in Marmion
Investments, Inc., a Texas corporation d/b/a Marmion Air Service, to Marmion
Industries Corporation (formerly International Trust & Financial Systems,
Inc.) as a contribution to Marmion Industries Corp.’s capital. The shares
contributed to Marmion Industries Corporation (formerly International Trust
& Financial Systems, Inc.) represent one hundred percent of the issued and
outstanding shares in Marmion Investments, Inc.
For
accounting purposes this transaction was treated as an acquisition of Marmion
Industries Corporation (formerly International Trust & Financial Systems,
Inc.) and a recapitalization of Marmion Investments, Inc. Marmion Investments,
Inc. is the accounting acquirer and the results of its operations carry over.
Accordingly, the operations of Marmion Industries Corporation (formerly
International Trust & Financial Systems, Inc.) were not carried over and
were adjusted to $0.
NOTE
1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF
PRESENTATION - Going Concern
Marmion
Air has incurred losses totaling $13,068,632 through December 31, 2006 and
has a
working capital deficit of $720,574 at December 31, 2006. Because of these
conditions, Marmion Air will require additional working capital to develop
business operations. Marmion Air intends to raise additional working capital
either through private placements, public offerings and/or bank
financing.
There
are
no assurances that Marmion Air will be able to achieve a level of revenues
adequate to generate sufficient cash flow from operations or obtain additional
financing through private placements, public offerings and/or bank financing
necessary to support Marmion Air’s working capital requirements. To the extent
that funds generated from any private placements, public offerings and/or bank
financing are insufficient, Marmion Air will have to raise additional working
capital. No assurance can be given that additional financing will be available,
or if available, will be on terms acceptable to Marmion Air. If adequate working
capital is not available Marmion Air may not increase its
operations.
These
conditions raise substantial doubt about Marmion Air's ability to continue
as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might be necessary should Marmion Air
be
unable to continue as a going concern.
F-6
Consolidation
The
accompanying consolidated financial statements of Marmion Industries Corp (the
"Company"), include the accounts of the Company and its wholly owned subsidiary,
Marmion Investments Inc., which is an inactive company. All significant
intercompany accounts and transactions are eliminated in
consolidation.
Basis
of
Accounting
Marmion
Air maintains its accounts on the accrual method of accounting in accordance
with accounting principles generally accepted in the United States of
America.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Allowance
for Doubtful Accounts
Earnings
are charged with a provision for doubtful accounts based on a current review
of
collectibility of accounts receivable. Accounts deemed uncollectible are applied
against the allowance for doubtful accounts. The allowance for doubtful accounts
at December 31, 2006 and December 31, 2005 was $88,463 and $24,914,
respectively. Management considers this allowance adequate to cover probable
future losses due to uncollectible trade receivables.
Inventory
Finished
goods are stated at the lower of cost or net realizable value using a first-in,
first-out method of costing. At December 31, 2006, inventory totaling $169,888
consisted of $42,142 in finished goods and $127,746 in raw
material.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Major renewals
and improvements are capitalized; minor replacements, maintenance and repairs
are charged to current operations. Depreciation is computed by applying the
straight-line method over the estimated useful lives, which are generally three
to seven years.
Long
Lived Assets
The
Company reviews for impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the
use
of the asset and its eventual disposition are less than its carrying amount.
The
Company has not identified any such impairment losses.
F-7
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. These criteria are generally met at the time product
is shipped or services are performed.
The
Company from time to time may enter into a long term construction project,
which
such services may be performed over a few months. The Company records such
revenues from long term contracts on a percentage of completion basis. At each
report date an evaluation is made to determine if there is a loss contingency
to
record for such long term contracts. There were no such long term contracts
outstanding as at December 31, 2005. At December 31, 2006, there were six long
term contracts outstanding. The Company recorded $27,836 and $198,552 in costs
and estimated earnings in excess of billings, and billings in excess of costs
and estimated earnings, respectively, at December 31, 2006 in regard to these
contracts. At December 31, 2006, there was $86,227 billed out but not paid
by
customers because of retainage provisions. For these long term construction
projects, there is still $1.3 million to be billed out in subsequent periods
as
the work is completed.
We
extend
a one year parts warranty on all equipment manufactured and one year parts
and
labor warranty on all equipment manufactured and in service within one hundred
miles of our facility. We recognized a warranty expense of $10,739 and $2,975
for the years 2006 and 2005. There is no warranty accrual at December 31, 2006.
Any returns are accepted within 30 days of sale with a 35% restock
fee.
Shipping
and Handling Costs
Shipping
and handling costs are normally FOB the Company’s factory, prepay and add. These
costs are included in cost of goods sold.
Advertising
Costs
The
Company expenses the cost of advertising in the period in which the advertising
takes place. Advertising for the year ended December 31, 2006 and 2005 were
$12,610 and $12,377, respectively.
Fair
Value of Financial Instruments
The
Company's financial instruments consist of accounts receivable, accounts
payable, accrued liabilities, factor payable and notes payable. The carrying
amount of these financial instruments approximates fair value due either to
length of maturity or interest rates that approximate prevailing market rates
unless otherwise disclosed in these consolidated financial statements. Amounts
due from related parties were not evaluated for their fair value, due to the
nature of such debt.
Concentration
of Credit Risk
Occasionally,
the Company may have cash balances in its bank accounts that exceed $100,000,
the federal insured limits. In addition, the Company maintains relationships
with major customers and vendors as disclosed in note 9.
Income
Taxes
Income
taxes are computed using the asset and liability method. Under the asset and
liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities, and are measured using the currently enacted tax rates and
laws. A valuation allowance is provided for the amount of deferred tax assets
that, based on available evidence, are not expected to be realized.
F-8
Loss
per
Share
Basic
loss per share is computed by dividing net loss attributable to common
stockholder by the weighted average number of common shares outstanding during
the year. Diluted earnings per share
would be calculated as the per share amount that would have resulted if dilutive
potential stock had been converted to common stock, as prescribed by SFAS 128.
The Company has not presented diluted per share amounts, as the dilution would
reduce the loss per share. The common stock equivalents at December 31, 2006
and
2005 was zero and 585,000 respectively.
Reclassifications
Certain
reclassifications have been made to the prior year financials to be in
conformity to the current year presentations.
Statements
of Cash Flows
For
purposes of the statements of cash flows the Company considers all highly liquid
investments purchased with a remaining maturity of three months or less to
be
cash equivalents.
Reverse
Stock Split
On
January 25, 2006, the Board of Directors of the Company authorized a reverse
stock split of 1 share for every 100 shares outstanding. As a result all share
and per share data have been adjusted retroactively to give effect to this
1 for
100 reverse stock split.
Stock
Based Compensation
We
previously accounted for stock-based compensation issued to our employees under
Accounting Principles Board Opinion 25, (APB 25). Accordingly, no compensation
costs for stock options issued to employees, measured as the excess, if any,
of
the fair value of our common stock at the date of grant over the exercise price
of the options, was recorded. The pro forma net earnings per share amounts
as if
the fair value method had been used are presented below for the year ended
December 30, 2005, in accordance with the Company’s adoption of SFAS 123(R).
Marmion
Industries granted 2,703,000 options to purchase common stock to employees
in
the year ended December 31, 2005. All options vest immediately, have an exercise
price of 85 percent of market value on the date of grant and expire 10 years
from the date of grant. Marmion Industries recorded compensation expense of
$547,663 under the intrinsic value method during the year ended December 31,2005. Marmion Air did not grant options to purchase common stock to employees
in
the year ending December 31, 2006.
For
purposes of the following disclosures during the transition period of the
adoption of SFAS 123(R), the weighted average fair value of options has been
estimated on the date of grant using the Black-Scholes options pricing model.
The following table illustrates the effect on net loss and net loss per share
if
Marmion Air had applied the fair value provisions of FASB Statement No. 123,
Accounting
for Stock-Based Compensation,
to
stock-based employee compensation.
Net
loss available to common stockholder, as reported
$
(2,276,487
)
Add:
stock based compensation
determined
under intrinsic value
based
method
547,663
Less:
stock based compensation
determined
under fair value
based
method
(1,150,010
)
Pro
forma net loss
$
(2,878,834
)
Basic
and diluted net income
(loss)
per share:
As
reported
$
(1.22
)
Pro
forma
$
(1.54
)
The
fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of $0, expected volatility of 308%, risk-free
interest rate of 4.26%, and expected lives of 0.167 years.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of
FASB Statements No. 133 and 140. This Statement; a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133, c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
This Statement is effective for financial statements for fiscal years beginning
after September 15, 2006. Earlier adoption of this Statement is permitted
as of the beginning of an entity’s fiscal year, provided the entity has not yet
issued any financial statements for that fiscal year. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
In
March
2006, the FASB issued FASB Statement No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
This Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity’s fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
F-10
In
June
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty inIncome
Taxes- aninterpretation
of FASB Statement No. 109, Accounting for Income Taxes.
The
Statement clarifies the accounting for uncertainty in income taxes recognized
in
an enterprise’s financial statements, and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN
48
is effective for fiscal years beginning after December 15, 2006. Management
believes this Statement will have no impact on the financial statements of
the
Company once adopted.
In
September 2006, the FASB issued FASB Statement No. 157. This Statement defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements
that
require or permit fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is a relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will
change current practices. This Statement is effective for financial statements
for fiscal years beginning after November 15, 2007. Earlier application is
permitted provided that the reporting entity has not yet issued financial
statements for that fiscal year. Management believes this Statement will have
no
impact on the financial statements of the Company once adopted.
NOTE
2 -
PROPERTY AND EQUIPMENT
Components
of property and equipment, at December 31, 2006 are as follows:
Depreciation
and amortization expense totaled $32,912 and $31,584 in 2006 and 2005,
respectively.
In
2005,
Marmion Air received $46,500 in the disposition of a vehicle resulting in a
loss
of $2,067. The proceeds were used to pay off the remaining balance of the note
for the vehicle.
F-11
NOTE
3 -
FACTOR PAYABLE
In
September 2006, the Company terminated its factoring arrangement for the
financing of selected receivables and engaged a new factoring agreement.. The
receivables factored are subject to a full recourse repurchase guarantee
arrangement. The factoring fee can be up to 10% per receivable factored, but
is
usually less depending on the timeliness of the payments by the customers due
to
rebates of the factoring fee. As of December 31, 2006 and 2005 there were
$137,162 and $257,316 of receivables factored with recourse. Both the
receivables and the full factor payable are presented on the balance sheets.
NOTE
4 -
RELATED PARTY TRANSACTIONS
ADVANCES
- STOCKHOLDER
Marmion
Air has received net advances from its Series A preferred stockholder of
$322,412 during fiscal year 2006 to increase such advances outstanding to such
stockholder to $524,056 as of December 31, 2006. The advances are unsecured
and
are due upon demand. Interest is being accrued at 6% per annum. Accrued interest
as of December 31, 2006 for the stockholder advances is $29,605.
NOTES
PAYABLE - RELATED PARTY
As
of
December 31, 2003, the sister in-law of the stockholder advanced $245,000 to
Marmion Air. The same related party then advanced $15,000 per week though May12, 2004 bringing the total cash advanced to $500,000. Starting May 20, 2004
Marmion Air began re-paying the loan at a rate of $25,000 per week. The
repayment terms were orally agreed to. Interest for the loan is being accrued
at
the rate of 6% per year. As of December 31, 2005, the principle balance due
was
$153,000 and accrued interest totaled $34,293. During fiscal 2006, the balance
of the note and accrued interest was sold to unrelated third parties (see note
6, Convertible Debt). As of December 31, 2006, the outstanding balance due
to
the related party was $-0-.
OFFICERS
The
CEO
and Treasurer, sole officers of the Company, are married to each
other.
NOTE
5 -
NOTES PAYABLE
Marmion
Air entered into two financing agreements to purchase automobiles in 2005
totaling $31,064 and $22,293 with interest rates of 9.2% and 16.4%,
respectively. Monthly payments on the vehicles are $648 and $551, respectively.
The notes are secured by the vehicles. The financing agreements are for a period
of 60 months and expire in fiscal year 2010.
During
fiscal year 2006, the note payable to related party (see note 4) in the amount
of $153,000 and accrued interest totaling $37,218 was sold to unrelated third
parties. The Company reconfirmed the note and issued guarantees for the payments
of the new notes and related interest. The Company did not receive any new
monies as a result of these transactions. The notes and accrued interest are
convertible at will by the holders into common stock at the rate of $.005 per
share The four resulting notes payable are as follows:
(1)
$24,263
of the related party note plus accrued interest approximating
$5,802.
As
of
December 31, 2006, all of the debt and accrued interest totaling $5,737 had
been
converted to 6,000,000 shares.
(2)
$52,569
of the related party note plus accrued interest approximating
$12,828.
As
of
December 31, 2006, all of the principal and accrued interest totaling $8,431
had
been converted to 12,200,000 shares.
(3)
$20,219
of the related party note plus accrued interest approximating
$4,935.
As
of
December 31, 2006 none of the debt or accrued interest had been
converted.
(4)
$55,949
of the related party note plus accrued interest approximating
$13,653.
As
of
December 31, 2006, $7,500 of the principal had been converted to 1,500,000
shares.
As
of
December 31, 2006, the total unpaid principal and accrued interest relating
to
these notes was $68,668 and $26,920, respectively.
The
Company recorded charges totaling $5,791,637 as a form of compensation expense
for these convertible debt securities due on demand, based on the conversion
of
such debt into shares of common stock. The expense recorded relates to the
intrinsic value of the conversion price of $.005 per share as compared to the
market price of the shares at time of issue.
The
accounting for these convertible debt securities with beneficial conversion
features was provided for under the interpretative guidance of EITF 98-5, EITF
00-27 and SFAS No. 133 as the effective dilution to the common shareholders
as
of December 31, 2006, including the pro-forma effects providing for second
re-issuance of debt to have been fully converted, would be to have issued 99%
of
the outstanding shares of common stock to these debt holders for the conversion
of $160,000 in debt, at the option of the holder of such debt.
NOTE
7 -
INCOME TAXES
The
Company follows Statement of Financial Accounting Standards Number 109 (SFAS
109), “Accounting for Income Taxes.” Deferred income taxes reflect the net
effect of (a) temporary difference between carrying amounts of assets and
liabilities for financial purposes and the amounts used for income tax reporting
purposes, and (b) net operating loss carryforwards. No net provision for
refundable Federal income tax has been made in the accompanying statement of
loss because no recoverable taxes were paid previously. Similarly, no deferred
tax asset attributable to the net operating loss carryforward has been
recognized, as it is not deemed likely to be realized.
F-13
The
provision for Federal income tax consists of the following:
At
December 31, 2006, we had an unused net operating loss carryover approximating
$4,520,000 that is available to offset future taxable income; it expires
beginning in 2023 through 2027. In accordance with Section 382 of the Internal
Revenue Code of 1986, as amended, a change in equity ownership of greater than
50% of the Company within a three year period can result in an annual limitation
on the Company’s ability to utilize its NOL carryforwards that were created
during tax periods prior to the change in ownership.
The
valuation of the deferred tax asset increased by approximately $304,000 for
2006.
NOTE
8 -
COMMITMENTS
Office
Lease
Marmion
Air leases office and warehouse facilities at the same location under three
operating leases all commencing June 1, 2006 and expiring May 31, 2007. Combined
rent expense is $4,075 per month. Rent expense was $45,472 and $35,825 for
2006
and 2005, respectively.
Officers
Salaries
Accrued
Salaries - Officers consists of salaries to two officers under oral agreements.
The officers’ salaries are $120,000 and $72,000 per year.
NOTE
9 -
MAJOR CUSTOMERS AND VENDORS
Major
customers during the year ended December 31, 2006 and 2005 as shown as a percent
of total revenue were:
2006
2005
Customer
A
24
%
34
%
Customer
B
1
%
26
%
Customer
C
7
%
13
%
Customer
D
34
%
0
%
Customer
E
11
%
0
%
F-14
In
2006
Marmion Air purchased 24% of its goods from one vendor. In 2005 Marmion Air
purchased just over 50% of their goods from one vendor.
NOTE
10 -
EQUITY
In
November 2004 Marmion Industries approved a change to their articles of
incorporation bringing the number of authorized shares of common stock to
3,000,000,000 and authorized shares of preferred stock to 500,000,000. In
January 2006, such articles were amended to reduce the authorized shares of
common stock to 50,000,000, and in September 2006 the articles were again
amended to increase the authorized shares of common stock to
500,000,000.
The
terms
of the Series A and B Preferred shares are as follows:
The
9,500,000 Series A Preferred Shares outstanding have preferences which include
a
liquidation right of $.001 per share or $9,500, and conversion rights into
40
shares of common stock for each share of preferred stock.
The
30,000,000 Series B Preferred Shares outstanding have preferences which include
a liquidation right of $.0001 per share or $3,000, and conversion rights into
100 shares of common stock for each share of preferred stock.
Prior
to
August 2006 the conversion rights of both the Series A and B Preferred shares
had an adjustment clause, which essentially provided for an adjustment to be
the
equivalent of an offset to any stock split, stock dividend or recapitalization
to increase or decrease such conversion factor to ensure a majority voting
control in the Company. In August 2006 we filed a certificate of amendment
to
our certificate of designation for both Series A and B Preferred shares deleting
the adjustment of conversion rate upon subdivision or combination of the common
stock. In addition, the holders of the Preferred shares waived all prior
adjustments to the conversion rate for previous subdivisions and combinations
of
our common stock.
On
September 5, 2006, the Series A Preferred shareholder elected to convert 250,000
shares of Series A Preferred shares to 10,000,000 shares of common
stock.
In
November 2004, Marmion Industries declared a reverse stock split effected in
the
form of 1 common share for each 500 issued and outstanding common shares of
Marmion Industries common stock. In March 2005, Marmion Industries declared
a
reverse stock split effected in the form of 1 common share for each 1,000 issued
and outstanding common shares of Marmion Industries common stock. In
January 2006, the Board of Directors authorized a reverse stock split of 1
share
for every 100 shares outstanding. All share and per share data have been
adjusted retroactively to give effect to these stock splits.
During
the twelve months ended December 31, 2005, the Company issued 2,120,574 shares
of common stock to various consultants. Expense of $1,437,380 was recorded
related to these shares, which was the market value of such shares issued at
prices varying from $0.22 to $160.
The
Company recorded $547,663 of expense due to the issuance of 2,703,000 stock
options to employees in fiscal 2005. These options were issued at 85% of the
then market price, and were exercised within a short period of time. The
recorded expense was to be representative of the below market exercise price
and
a value was placed on the related party event of a large amount of options
issued to employees which potentially could have affected ownership
control.
F-15
During
the twelve months ended December 31, 2005, employees exercised options to
acquire 1,601,000 shares of common stock. The Company received proceeds totaling
$687,216 upon exercise of these options.
During
the twelve months ended December 31, 2006, the Company issued 7,185,187 shares
of common stock to various consultants. Expense of $893,236 was recorded related
to these shares, which was the market value of such shares at prices varying
from $0.026 to $0.25.
During
the twelve months ended December 31, 2006, the Company issued 19,700,000 shares
of common stock to convert debt totaling $98,500 to equity.
During
the twelve months ended December 31, 2006, the Company sold 2,000,000 shares
of
common stock for cash proceeds totaling $50,000.
As
of
December 31, 2006 Mr. Marmion controls in excess of 90% of the votes available
based on his stock ownership. The Series A and Series B Preferred Stock are
currently convertible into more common stock than we have authorized and as
such
his ownership is determined on a basis of conversion into all common stock
currently authorized. We do not consider his ownership of the Series A and
Series B Preferred Stock to include derivative liability instruments due to
the
related party nature of his holdings and he already owns a controlling ownership
in the Company.
The
following table summarizes stock option activity:
The
options and stock issued for services in 2005 were issued pursuant to an
employee stock incentive plan and a non-employee directors and consultants
retainer stock plan both adopted in January 2005. The weighted average fair
value of options granted for the years ended December 31, 2006 and 2005 are
$0
and $0.43, respectively.
In
January 2006 these 585,000 options were cancelled.
NOTE
11 -
SUBSEQUENT EVENTS
In
January 2007 through March 2007, the Company issued 600,000 shares of common
stock to consultants. Expense of $8,400 was recorded related to these
shares.
In
January 2007 through March 2007, the Company issued 14,500,000 shares of common
stock to convert debt totaling $72,500 to equity.
F-16
In
January 2007, the Series A preferred stockholder advanced another $60,000 to
the
Company.
On
March22, 2007, we entered into a Subscription Agreement with certain accredited
investors pursuant to which they agreed to issue up to $3,000,000 of principal
amount of convertible promissory notes and warrants to purchase 100,000,000
shares of our common stock (the “Purchase Agreement”). The convertible notes
have a 5 year term and bear interest at twelve percent (12%). Beginning on
the
7th
month
following issuance, we are required to make amortizing payments of principal
plus interest in the amount equal to $224,375.41. If a registration statement
is
effective, this amount can be satisfied by conversion of the debenture. The
notes are convertible into our common stock pursuant to a “variable conversion
price” equal to the lesser of $0.075 and 75% of the lowest bid price for our
common stock during the 20 trading day period prior to conversion. Provided,
however, upon an event of default this conversion price will be reduced to
the
lesser of the then current conversion price and 50% of the lowest bid price
for
the 15 trading days prior to conversion. In no event shall the conversion price
be less than $0.001 per share. In addition, upon an event of default, the holder
can exercise its right to increase the face amount of the Debenture by 10%
for
the first default and by 10% for each subsequent event of default. In addition,
the Holder may else to increase the face amount by 2.5% per month paid as
liquidated damages The maximum amount that the face amount may be increased
by
holder for all defaults under the note and any other transaction document is
30%,. The debenture is secured by a 1st
lien, a
guaranty by our subsidiary and a pledge of 4 million shares of Mr. Marmion’s
series B preferred stock
Under
the
terms of these notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of
the
Securities Exchange Act of 1934, as amended
Subject
to certain terms and conditions set forth therein, the notes are redeemable
by
us at a rate of between 125% of the outstanding principal amount of the notes
plus interest. In addition, so long as the average daily price of our common
stock is below the “initial market price”, we may prepay a such monthly portion
due on the outstanding notes and the investors agree that no conversions will
take place during such month where this option is exercised by us.
The
notes
were issued with warrants to purchase up to 100,000,000 shares of our common
stock at an exercise price of $0.015 per share, subject to adjustment. To the
extent that the shares of common stock underlying the warrant of not registered
for resale, the warrant holder may designate a "cashless exercise option."
This
option entitles the warrant holders to elect to receive fewer shares of common
stock without paying the cash exercise price. The number of shares to be
determined by a formula based on the total number of shares to which the warrant
holder is entitled, the current market value of the common stock and the
applicable exercise price of the warrant.
We
agreed
to register the secondary offering and resale of the shares issuable upon
conversion of the notes, the shares issuable upon exercise of the warrants
by
April 16, 2007.
We
relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, for the offer and sale of the notes and the
warrants.
Costs
and estimated earnings in excess of billings
in
excess of billings
(49,812
)
--
Accounts
Payable
(104,866
)
(64,060
)
Accrued
Expenses
36,149
42,659
Billings
in excess of costs and
Estimated
earnings
(192,260
)
--
Net
cash provided by (used in) operating activities
(147,286
)
54,889
INVESTING
ACTIVITIES:
Purchase
of property and equipment
(2,436
)
(7,413
)
Net
cash used in investing activities
(2,436
)
(7,413
)
FINANCING
ACTIVITIES:
Advances,
shareholder (net)
60,000
94,343
Net
change in factor payable
(104,299
)
(94,833
)
Net
proceeds from convertible note payable
610,000
--
Repayments
of notes payable
(2,295
)
(6,887
)
Net
cash provided by (used in) financing activities
563,406
(7,377
)
NET
CHANGE IN CASH
413,684
40,099
CASH,
beginning of period
1,785
22,774
CASH,
end of period
$
415,469
$
62,873
SUPPLEMENTAL
CASH FLOW INFORMATION:
Interest
paid
$
1,636
$
4,078
Income
taxes paid
$
--
$
--
Conversion
of debt to equity
$
72,500
$
14,000
Issuance
of warrants with debt
294,067
--
See
notes
to consolidated financial statements
F-20
MARMION
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 -
BASIS OF PRESENTATION
The
accompanying unaudited financial statements of Marmion Industries Corp., (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation (consisting of normal recurring
accruals) have been included. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Operating results for the three months ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the year ending December31,2007. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2006.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has suffered from recurring losses
from operations, and has a negative working capital and shareholder deficiency
as of December 31, 2006 and March 31, 2007. These factors raise substantial
doubt as to the Company's ability to continue as a going concern. Management
expects to incur additional losses in the foreseeable future and recognizes
the
need to raise debt or capital to achieve their business plans. The financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
NOTE
2 -
RELATED PARTY TRANSACTIONS
ADVANCES
- STOCKHOLDER
Marmion
Air has received advances from its Series A preferred stockholder of $60,000
during the quarter ended March 31, 2007 to increase such advances outstanding
to
such stockholder to be $382,412 as of March 31, 2007. The advances are unsecured
and are due upon demand. Interest on these new advances is being accrued at
6%
per annum. Accrued interest as of March 31, 2007 for the stockholder advances
is
$35,251.
NOTE
3 -
CONVERTIBLE DEBT
At
December 31, 2006, Marmion Air was indebted for total unpaid principal and
accrued interest relating to convertible notes amounting to $68,668 and $26,920,
respectively.
As
of
March 31, 2007, $67,718 in principal and $4,782 in interest had been converted
to 14,500,000 shares of common stock. As of March 31, 2007, the total unpaid
principal and interest relating to these notes was $949 and $22,641,
respectively.
NOTE
4 -
COMMON STOCK
In
January through March 2007, Marmion Air issued 600,000 shares of common stock
to
consultants. Expense of $8,400 was recorded related to these
shares.
NOTE
5 -
SUBSCRIPTION AGREEMENT
On
March22, 2007, we entered into a Subscription Agreement with certain accredited
investors pursuant to which they agreed to issue up to $3,000,000 of principal
amount of convertible promissory notes and warrants to purchase 100,000,000
shares of our common stock (the “Purchase Agreement”). The convertible notes
have a 5 year term and bear interest at twelve percent (12%). Beginning on
the
7th
month
following issuance, we are required to make amortizing payments of principal
plus interest in the amount equal to $224,375.41. If a registration statement
is
effective, this amount can be satisfied by conversion of the debenture. The
notes are convertible into our common stock pursuant to a “variable conversion
price” equal to the lesser of $0.075 and 75% of the lowest bid price for our
common stock during the 20 trading day period prior to conversion. Provided,
however, upon an event of default this conversion price will be reduced to
the
lesser of the then current conversion price and 50% of the lowest bid price
for
the 15 trading days prior to conversion. In no event shall the conversion price
be less than $0.001 per share. In addition, upon an event of default, the holder
can exercise its right to increase the face amount of the Debenture by 10%
for
the first default and by 10% for each subsequent event of default. In addition,
the Holder may elect to increase the face amount by 2.5% per month paid as
liquidated damages The maximum amount that the face amount may be increased
by
holder for all defaults under the note and any other transaction document is
30%. The debenture is secured by a 1st
lien, a
guaranty by our subsidiary and a pledge of 4 million shares of Mr. Marmion’s
series B preferred stock
F-21
Under
the
terms of these notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of
the
Securities Exchange Act of 1934, as amended.
Subject
to certain terms and conditions set forth therein, the notes are redeemable
by
us at a rate of 125% of the outstanding principal amount of the notes plus
interest. In addition, so long as the average daily price of our common stock
is
below the “initial market price”, we may prepay such monthly portion due on the
outstanding notes and the investors agree that no conversions will take place
during such month where this option is exercised by us.
The
notes
were issued with warrants to purchase up to 100,000,000 shares of our common
stock at an exercise price of $0.015 per share, subject to adjustment. To the
extent that the shares of common stock underlying the warrant of not registered
for resale, the warrant holder may designate a "cashless exercise option."
This
option entitles the warrant holders to elect to receive fewer shares of common
stock without paying the cash exercise price. The number of shares to be
determined by a formula based on the total number of shares to which the warrant
holder is entitled, the current market value of the common stock and the
applicable exercise price of the warrant.
The
Company recorded $140,000 deferred financing costs attributed to this
transaction as of March 31, 2007, to be amortized as such debts are converted
to
equity or over the maturity term of such debt, whichever method is more
representative of the term of such debt. In addition the Company recorded a
beneficial conversion feature value of $455,933 for the below market conversion
rights of such debt and another $294,067 for debt discount attributed the
warrants issued. The $455,933 of beneficial conversion rights were expensed,
currently, as such debt is convertible at the option of the holder at any
time.
We
agreed
to register the secondary offering and resale of the shares issuable upon
conversion of the notes, the shares issuable upon exercise of the warrants
by
April 16, 2007. Such registration statement was filed on April 11,2007.
We
relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, for the offer and sale of the notes and the
warrants.
NOTE
6 -
SUBSEQUENT EVENTS
In
April
2007, convertible debt principal of $949 and accrued interest of $13,051 was
converted into 14,000 shares of common stock.
In
April
2007, we received the balance of the $3 million financing mentioned above in
the
amount of $2,250,000 before costs of such debt raise.
F-22
TABLE
OF CONTENTS
Page
Prospectus
Summary
3
Risk
Factors
5
Use
of Proceeds
11
Dilution
11
Market
for Common Equity and Related
Stockholder
Matters
12
Plan
of Distribution
14
Management’s
Discussion and Analysis
Or
Plan of Operation
16
Business
24
Management
27
Certain
Relationships and Related
Transactions
28
Principal
Stockholder and Beneficial
Ownership
of Management
29
Selling
Security Holders
30
Description
of Securities
34
Legal
Matters
38
Interests
of Named Experts and Counsel
38
Experts
38
Available
Information
39
Index
to Financial Statements
40
Until
August 26, 2007, 25 days after commencement of the offering, all dealers that
buy, sell or trade shares, whether or not participating in this offering, may
be
required to deliver a prospectus. This requirement is in addition to the
dealers’ obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
