Management’s
Plan of Operation
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.
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. To address these needs, we have purchase property to build a new
facility and we have hired an architectural and engineering firm to design
such
new facility. We have received estimate drawing and are in the process of
selecting building contractors. We are hoping to begin construction by the
end
of November or early December 2007.
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.
Results
of Operations
Basis
of Presentation
The
results of operations set forth below for the periods ended September 30,
2007and September 30, 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:
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Revenues
|
|
$
|
1,594,578
|
|
$
|
2,093,224
|
|
$
|
4,974,858
|
|
$
|
3,134,400
|
|
|
Cost
of Sales
|
|
|
1,228,092
|
|
|
1,696,301
|
|
|
4,108,099
|
|
|
2,455,777
|
|
|
Gross
Margin
|
|
|
366,486
|
|
|
396,923
|
|
|
866,759
|
|
|
678,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
147,056
|
|
|
127,126
|
|
|
397,806
|
|
|
436,346
|
|
|
General
and administrative
|
|
|
158,274
|
|
|
408,208
|
|
|
516,655
|
|
|
1,266,244
|
|
|
Depreciation
and amortization
|
|
|
146,818
|
|
|
5,645
|
|
|
301,218
|
|
|
16,780
|
|
|
Loss
from Operations
|
|
$
|
(85,662
|
)
|
$
|
(144,056
|
)
|
$
|
(348,920
|
)
|
$
|
(1,040,727
|
)
|
Comparison
of the Three Months Ended September 30, 2007 and September 30,
2006
Revenues
.
Our
revenues decreased to $1,594,578, or approximately --24%, for the three months
ended September 30, 2007, from $2,093,224 for the three months ended September
30, 2006. The reason for the decrease is primarily attributable to revenue
recognition of billings of our commercial projects.
Cost
of Sales
.
Cost of
sales for continued operations decreased to $1,228,092, or approximately 28%,
for the three months ended September 30, 2007, from $1,696,301 for the three
months ended September 30, 2006. This is attributable to better management
of
commercial projects in progress and the fact that two new projects were incurred
within this current quarter.
As
a
percentage of revenues, cost of sales decreased to approximately 77% of revenues
for the quarter ended September 30, 2007 versus approximately 81% of revenues
for the quarter ending September 30, 2006. [The decrease in cost of sales as
a
percentage of revenues resulted primarily due to more efficient manufacturing
procedures coupled with new quality and purchasing controls.] We generated
a
gross margin of $366,486 with a gross profit percentage of approximately 23%
for
the quarter ended September 30, 2007 as compared to $396,923 with a gross profit
percentage of approximately 19% for the comparable period in 2006.
Salaries
and employee benefits
.
Salaries and employee benefits increased to $147,056, or an increase of
approximately 16% for the three months ended September 30, 2007 from $127,126
for the three months ended September 30, 2006. The increase is attributable
to a
reduction of manpower required for current projects through more streamlined
project management procedures and resource allocation.
General
and administrative
.
General
and administrative expenses decreased to $158,274, or a decrease of
approximately 61%, for the three months ended September 30, 2007, from $408,208
for the three months ended September 30, 2006. This is attributable to there
being no equity based compensation consultant transactions nor conversion of
certain promissory notes in the three month ended September 30,
2007.
Depreciation
and Amortization.
Depreciation
and amortization expense increased to $146,818 for the three months ended
September 30, 2007, from $5,645 for the three months ended September 30, 2006.
This increase is attributable to amortization of both deferred financing cost
and debt discount related to that certain $3,000,000 debenture dated March
22,
2007.
Profit
(Loss) from operations.
We
had
operating loss of $85,662 for the three months ended September 30, 2007,
compared to an operating loss of $144,056 for the three months ended September
30, 2006. This is due to a significant decrease in general and administrative
costs during the three months ended September 30, 2007 from the three months
ended September 30, 2006 including equity based compensation expenses incurred
during such period.
Comparison
of the Nine Months Ended September 30, 2007 and September 30,
2006
Revenues
.
Our
revenues increased to $4,974,858, or approximately 59%, for the nine months
ended September 30, 2007, from $3,134,400 for the nine months ended September
30, 2006. The increase is primarily attributable to the award and partial
completion of several large commercial projects.
Cost
of Sales
.
Cost of
sales for continued operations increased to $4,108,099, or 67%, for the nine
months ended September 30, 2007, from $2,455,777 for the nine months ended
September 30, 2006. This is attributable to our performance on large commercial
projects which cost associated to these projects are considerably
higher.
As
a
percentage of revenues, cost of sales increased to approximately 83% of revenues
for the nine month ended September 30, 2007 versus approximately 78% of revenues
for the nine months ended September 30, 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. We generated a gross
margin of $866,759 with a gross profit margin of approximately 17% for the
nine
months ended September 30, 2007 as compared to $678,623 with a gross profit
margin of approximately 22% for the comparable period in 2006.
Salaries
and employee benefits
.
Salaries and employee benefits decreased to $397,806, or a decrease of
approximately 9% for the nine months ended September 30, 2007 from $436,346
for
the nine months ended September 30, 2006. This decrease is attributable
primarily to a lack of compensatory stock grants to employees in the nine months
ended September 30, 2007.
General
and administrative
.
General
and administrative expenses decreased to $516,655 or a decrease of approximately
59%, for the nine months ended September 30, 2007, from $1,266,224 for the
nine
months ended September 30, 2006. This is attributable to there being no equity
based compensation consultant transactions in the nine month period ended
September 30, 2007
Depreciation
and Amortization.
Depreciation
and amortization expense increased to $301,218 for the nine months ended
September 30, 2007, from $16,780 for the nine months ended September 30, 2006.
This increase is attributable to the amortization of both deferred financing
cost and debt discount related to that certain $3,000,000 debenture dated March
22, 2007.
Profit
from operations.
We
had
operating loss of $348,920 for the nine months ended September 30, 2007,
compared to an operating loss of $1,040,727 for the nine months ended September
30, 2006. This decrease is attributable to a significant decrease in general
and
administrative costs.
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 September 30, 2007, was $523,667
and
at September 30, 2006 it was a deficit of $707,079. We had cash of $1,375,244
at
September 30, 2007, compared to having cash of $9,663 at September 30, 2006.
Our
operating activities used $981,144 for the nine months ended September 30,
2007
compared to using $337,915 in the nine months ended September 30, 2006.
Net
cash
flows used in investing activities was $318,640 for the nine months ended
September 30, 2007, compared to $7,413 of net cash flows used in investing
activities for the comparable period in 2006. These cash flows were related
to
the purchase of property and equipment.
Net
cash
flows provided by financing activities were $2,673,243 for the nine months
ended
September 30, 2007, compared to net cash provided by financing activities of
$332,217 in the nine months ended September 30, 2006. The increase was due
to
our consummation of a private placement (see March 2007 Private Offering
below).
We
have
recently completed a financing (See March 2007 Private Offering below) through
our sale of a convertible debenture and related warrants. Pursuant to such
offering, we 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.
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 Offering
On
March
22, 2007, we entered into a Subscription Agreement with certain accredited
investors pursuant to which we issued a $3,000,000 of principal amount of
debenture and warrants to purchase 100,000,000 shares of our common stock (the
“Purchase Agreement”). 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. Beginning on the 7
th
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 $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 debenture
and any other transaction document is 30%. The debenture is secured by a
1
st
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 the debenture 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” (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
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 we recorded a beneficial conversion feature
value
of $1,741,702 for the below market conversion rights of such debt and another
$940,716 for debt discount attributed the warrants issued. The $1,741,702 of
beneficial conversion rights were expensed, currently, as such debt is
convertible at the option of the holder at any time.
We
received $750,000 of such debt financing in March 2007 and $2,250,000 in April
2007, before financing costs. Of the $3 million gross proceeds received in
the
March 2007 private placement, we paid $115,000 to 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.
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.
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 September 30, 2007 and September 30, 2006 was $86,960 and $31,367,
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. At September 30, 2007 there were four
long
term contracts outstanding. The Company recorded $112,010 and $118,496 in costs
and estimated earnings in excess of billings, and billings in excess of costs
and estimated earnings, respectively, at September 30, 2007 in regard to these
contracts.
STOCK-BASED
COMPENSATION
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.
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
June
2006, the FASB issued Interpretation No. 48,
Accounting
for Uncertainty in
Income
Taxes- an
interpretation
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.
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.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements.
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