Attached files
file | filename |
---|---|
EX-31.1 - MSGI TECHNOLOGY SOLUTIONS, INC | v167376_ex31-1.htm |
EX-32.1 - MSGI TECHNOLOGY SOLUTIONS, INC | v167376_ex32-1.htm |
EX-32.2 - MSGI TECHNOLOGY SOLUTIONS, INC | v167376_ex32-2.htm |
EX-31.2 - MSGI TECHNOLOGY SOLUTIONS, INC | v167376_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from __________________ to __________________
Commission
file number 0-16730
MSGI
SECURITY SOLUTIONS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
88-0085608
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
One
Market Street
|
|
Spear
Tower, 36th
Floor
|
|
San Francisco,
CA
|
94105
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: 415-293-8551
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit post such files).
Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
State
number of shares outstanding of each of the issuer’s classes of common equity as
of the latest practical date:
As of
November 13, 2009 there were 45,064,838 shares of the Issuer’s Common Stock, par
value $.01 per share outstanding.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF
CONTENTS
FORM 10-Q
REPORT
SEPTEMBER
30, 2009
Page
|
|||
PART
I - FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
3
|
|
Condensed
Consolidated Balance Sheets as of
|
|||
September
30, 2009 (unaudited) and June 30, 2009
|
3
|
||
Condensed
Consolidated Statements of Operations for the
|
|||
three
months ended September 30, 2009 and 2008 (unaudited)
|
4
|
||
Condensed
Consolidated Statements of Stockholders Equity
|
|||
(Deficit)
for the three months ended September 30, 2009 (unaudited)
|
5
|
||
Condensed
Consolidated Statements of Cash Flows for the
|
|||
three
months ended September 30, 2009 and 2008 (unaudited)
|
6
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7-23
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial
|
||
Condition
and Results of Operations.
|
23-34
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
34
|
|
Item
4.
|
Controls
and Procedures
|
34
|
|
PART
II- OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
36
|
|
Item
6.
|
Exhibits
|
36
|
|
SIGNATURES
|
37
|
2
PART
I - FINANCIAL INFORMATION
Item 1. Financial
Statements.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
September 30, 2009
|
June 30, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 223 | $ | 689 | ||||
Total
current assets
|
223 | 689 | ||||||
Investments
in Current Technology Corporation
|
1,500,000 | 1,500,000 | ||||||
Property
and equipment, net
|
29,079 | 32,299 | ||||||
Deposits
on technology licenses
|
— | 175,000 | ||||||
Other
assets, principally deferred financing costs, net
|
244,350 | 338,223 | ||||||
Total
assets
|
$ | 1,773,652 | $ | 2,046,211 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 2,761,988 | $ | 2,723,392 | ||||
Accrued
expenses and other current liabilities
|
5,486,415 | 4,684,192 | ||||||
Advances
from strategic partner
|
276,950 | 276,950 | ||||||
Advances
from corporate officer
|
355,860 | 167,062 | ||||||
Other
advances
|
60,000 | 60,000 | ||||||
Convertible
notes payable
|
3,350,004 | 3,110,000 | ||||||
6%
Callable convertible notes payable, net of discount of
|
||||||||
$1,740,468
and $1,942,430, respectively
|
259,532 | 57,570 | ||||||
8%
callable convertible notes payable, net of discount of
|
||||||||
$3,914,810
and $3,980,109, respectively
|
4,085,190 | 4,019,891 | ||||||
Total
liabilities
|
16,635,939 | 15,099,057 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity (deficit):
|
||||||||
Common
stock - $.01 par value; 100,000,000 shares authorized;
|
||||||||
39,024,167
and 24,932,967 shares issued; 39,006,505 and 24,915,305
shares
|
||||||||
outstanding
as of September 30, 2009 and June 30, 2009, respectively
|
390,241 | 249,329 | ||||||
Additional
paid-in capital
|
273,355,966 | 272,057,383 | ||||||
Accumulated
deficit
|
(287,214,784 | ) | (283,965,848 | ) | ||||
Less: 17,662
shares of common stock in treasury, at cost
|
(1,393,710 | ) | (1,393,710 | ) | ||||
Total
stockholders’ equity (deficit)
|
(14,862,287 | ) | (13,052,846 | ) | ||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 1,773,652 | $ | 2,046,211 |
See Notes
to Condensed Consolidated Financial Statements.
3
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2009
|
2008
|
|||||||
Total
revenue
|
$ | — | $ | — | ||||
Cost
of goods sold
|
— | — | ||||||
Gross
Profit
|
— | — | ||||||
Operating
costs and expenses:
|
||||||||
Salaries,
benefits and payroll taxes
|
179,468 | 375,447 | ||||||
Research
and development
|
415,004 | — | ||||||
Selling,
general and administrative (including non-cash
|
||||||||
credit
for shares to be issued to Apro Media of
|
||||||||
$26,094
for 2008)
|
581,991 | 610,014 | ||||||
Depreciation
and amortization
|
3,220 | 3,927 | ||||||
Total
operating costs and expenses
|
1,179,683 | 989,388 | ||||||
Loss
from operations
|
(1,179,683 | ) | (989,388 | ) | ||||
Other
income (expense):
|
||||||||
Interest
expense
|
(1,893,253 | ) | (970,730 | ) | ||||
Non-cash
expense for revaluation of put options to fair value
|
— | (150,000 | ) | |||||
Gain
on securities exchange agreement
|
— | 1,700,000 | ||||||
Non-cash
loss on debt guarantee
|
(170,000 | ) | — | |||||
Interest
income
|
— | 13,124 | ||||||
Total
other income (expense)
|
(2,063,253 | ) | 592,394 | |||||
Net
loss before provision for income taxes
|
(3,242,936 | ) | (396,994 | ) | ||||
Provision
for income taxes
|
6,000 | — | ||||||
Net
loss
|
$ | (3,248,936 | ) | $ | (396,994 | ) | ||
Basic
and diluted loss per share:
|
(0.10 | ) | (0.02 | ) | ||||
Weighted
average common shares outstanding
|
||||||||
basic
and diluted
|
31,229,829 | 22,618,386 |
See Notes
to Condensed Consolidated Financial Statements.
4
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)
Common Stock
|
Additional Paid
|
Accumulated
|
Treasury Stock
|
|||||||||||||||||||||||||
Shares
|
Amount
|
in Capital
|
Deficit
|
Shares
|
Amount
|
Totals
|
||||||||||||||||||||||
Balance
June 30, 2009
|
24,932,967 | $ | 249,329 | $ | 272,057,383 | $ | (283,965,848 | ) | (17,662 | ) | $ | (1,393,710 | ) | $ | (13,052,846 | ) | ||||||||||||
Exchange
of shares of common stock for warrants
in Exchange Agreement
|
5,300,000 | 53,000 | 706,000 | 759,000 | ||||||||||||||||||||||||
Non-cash
compensation expenses
|
1,372 | 1,372 | ||||||||||||||||||||||||||
Issuance
of shares per terms of various consulting
and services agreements
|
7,245,000 | 72,450 | 407,600 | 480,050 | ||||||||||||||||||||||||
Issuance
of shares for debt guarantee
|
1,000,000 | 10,000 | 160,000 | 170,000 | ||||||||||||||||||||||||
Issuance
of shares per terms of a certain
loan agreement
|
500,000 | 5,000 | 15,000 | 20,000 | ||||||||||||||||||||||||
Issuance
of shares of common stock under Addendum
to term notes payable
|
46,200 | 462 | 4,291 | 4,753 | ||||||||||||||||||||||||
Fair
value of warrants issued under Addendums to term notes
payable
|
4,320 | 4,320 | ||||||||||||||||||||||||||
Net
loss for the three months ended September
30, 2009
|
(3,248,936 | ) | (3,248,936 | ) | ||||||||||||||||||||||||
Balance
September 30, 2009
|
39,024,167 | $ | 390,241 | $ | 273,355,966 | $ | (287,214,784 | ) | (17,662 | ) | $ | (1,393,710 | ) | $ | (14,862,287 | ) |
See Notes
to Condensed Consolidated Financial Statements.
5
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
(unaudited)
2009
|
2008
|
|||||||
Operating
activities:
|
||||||||
Net
loss
|
$ | (3,248,936 | ) | $ | (396,994 | ) | ||
Adjustments
to reconcile net loss to net cash used in
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization
|
3,220 | 3,928 | ||||||
Gain
on securities exchange agreement
|
— | (1,700,000 | ) | |||||
Amortization
of deferred financing costs
|
93,873 | 297,968 | ||||||
Non-cash
compensation expense
|
1,372 | 119,578 | ||||||
Non-cash
expense for put option revaluation to fair value
|
— | 150,000 | ||||||
Non-cash
interest expense
|
1,274,334 | 399,596 | ||||||
Non-cash
loss on guarantee of debt
|
170,000 | — | ||||||
Non-cash
expense (credit) for shares to be issued to Apro
|
— | (26,094 | ) | |||||
Non-cash
value of shares issued for services
|
480,050 | — | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
— | 128,000 | ||||||
Other
assets
|
175,000 | (8,000 | ) | |||||
Accounts
payable - trade
|
38,596 | (51,910 | ) | |||||
Accrued
expenses and other liabilities
|
583,223 | 207,641 | ||||||
Net
cash used in operating activities
|
(429,268 | ) | (876,287 | ) | ||||
Investing
activities:
|
||||||||
Purchases
of property and equipment
|
— | (1,860 | ) | |||||
Net
cash used in investing activities
|
— | (1,860 | ) | |||||
Financing
activities:
|
||||||||
Proceeds
from promissory note
|
240,004 | — | ||||||
Cash
advances from corporate officer
|
188,798 | — | ||||||
Release
of restricted cash to Company
|
— | 1,800,000 | ||||||
Cash
paid from restricted stock in Securities Exchange
Agreement
|
— | (1,000,000 | ) | |||||
Net
cash provided by financing activities
|
428,802 | 800,000 | ||||||
Net
decrease in cash
|
(466 | ) | (78,147 | ) | ||||
Cash
at beginning of period
|
689 | 150,624 | ||||||
Cash
at end of period
|
$ | 223 | $ | 72,477 | ||||
Non-cash
Transactions:
|
||||||||
Deferred
financing charges accrued in connection with
|
||||||||
Securities
Exchange Agreement
|
$ | — | $ | 20,000 |
See Notes
to Condensed Consolidated Financial Statements.
6
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS
OF PRESENTATION
The
accompanying unaudited Condensed Consolidated Financial Statements include the
accounts of MSGI Security Solutions, Inc. and its Subsidiaries, Future
Developments America, Inc (FDA) and Innalogic, LLC (Innalogic), Nanobeak Inc.
(Nanobeak) and Andromeda Energy Inc. (Andromeda), (in combination MSGI or the
Company). These condensed consolidated financial statements are
unaudited and should be read in conjunction with the Company's Form 10-K for the
fiscal year ended June 30, 2009 and the historical consolidated financial
statements and related notes included therein. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the condensed consolidated financial position, results of operations and
cash flows of the Company. Certain information and footnote disclosure normally
included in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. Operating results for the
three-month period ended September 30, 2009 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30,
2010.
Liquidity:
Historically,
the Company has funded its operations, capital expenditures and acquisitions
primarily through private placements of equity and debt transactions. The
Company currently has limited capital resources, has incurred significant
historical losses and negative cash flows from operations and has no current
period revenues. At September 30, 2009, the Company had $223 in cash and no
accounts receivable. The Company believes that funds on hand combined with funds
that will be available from its various operations will not be adequate to
finance its operations requirements and enable the Company to meet any of its
financial obligations, including its payments under convertible notes and
promissory notes for the next twelve months. Certain promissory notes in the
amount of $960,000 were due February 28, 2009, $1,500,000 due March 31, 2009,
$250,000 due on June 17, 2009 and $240,004 due on August 31, 2009. These notes
are technically in default as of the date of this filing, but none of the
lenders have made a claim of default and the Company is in the process of
negotiating extended terms for each of the debt instruments. Other promissory
notes in the amount of $1,000,000 are due on December 13, 2009 and $400,000 is
due on December 31, 2009. All other convertible notes are due prior to June 30,
2010 and the Company does not have the funds to repay such
notes. Further, there is uncertainty as to timing, volume and
profitability of transactions, if any, that may arise from our relationship with
The National Aeronautics and Space Administrations (NASA) and others. There can
be no assurance as to the timing of when or if we will receive amounts due to us
for products shipped to customers prior to June 30, 2008, which transactions
have not yet been recognized as revenue. As of the date of this
filing, the Company has ceased its business relationship with both Hyundai
Syscomm Corp. (Hyundai) and Apro Media Corp. (Apro or Apro Media) and a legal
action has been filed in the State of California naming both, among others, as
defendants. There are no assurances that any further capital raising
transactions will be consummated. Although certain financing related
transactions have been successfully closed, failure of our operations to
generate sufficient future cash flow and failure to consummate our strategic
transactions or raise additional financing could have a material adverse effect
on the Company's ability to continue as a going concern and to achieve its
business objectives.These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. If the Company is unable to raise
additional funds, it may be forced to further reduce, or cease operations,
liquidate assets, or renegotiate terms with lenders and others of which there
can be no assurance of success. The accompanying financial statements do
not include any adjustments relating to the recoverability of the carrying
amount of recorded assets or the amount of liabilities that might result should
the Company be unable to continue as a going concern.
7
As of
September 30, 2009, we are authorized to issue 100,000,000 shares of common
stock. If the holders of the convertible promissory notes outstanding elect to
convert their holdings into common stock, and the holders of the stock options
and warrants outstanding elect to exercise their rights to purchase common
stock, the Company is obligated to have issued approximately 109,000,000 shares
of commons stock, which is in excess of what we currently have authorized. We
plan to ask the Company’s shareholders to authorize the issuance of additional
shares or reverse split our common stock at our annual
meeting. However there is no guarantee that we will be able to obtain
the votes needed to obtain the additional authorized shares.
Summary
of significant recent financing transactions:
During
the three-month period ended September 30, 2009, the Company received net
proceeds of approximately $189,000 from a certain corporate officer, which has
no stated interest rate or maturity date.
In July 2009, the Company executed a
NASA Funding Promissory Note in the amount of $240,004 with a lender who also
holds a promissory note from December 2007. The new promissory note was executed
in order to enable the Company to meet its obligations under a certain Space Act
Agreement, which had been entered into with NASA. The note bears interest at 25% and
matured on August 30, 2009. In addition, the
Company was obligated to issue 500,000 shares of
common stock to the lender as additional consideration to enter into the note
agreement. The shares were issued to the lender in September 2009. As of the
date of this filing, the principal balance and accrued interest has not yet been
paid to the lender. Although the note is technically in default as of the date
of this filing, the lender has not made any claim of default and the Company is
currently in negotiations with the lender for an extension to the terms of the
note. There can be no assurance that the Company will be successful in securing
any extension to the note.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB.” The FASB sets generally accepted
accounting principles (GAAP) that we follow to ensure that we consistently
report our financial condition, results of operations, and cash flows.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC. The
Codification is effective for periods ending after September 15,
2009.
A summary
of the major accounting policies followed by the Company in the preparation of
the accompanying financial statements is set forth below.
Principles of
Consolidation:
The
consolidated financial statements include the accounts of MSGI and its majority
owned subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation. The Company believes it has only one reporting
segment.
Fair
Value of Financial Instruments:
The
carrying value of accounts payable, notes payable, accrued expenses and advances
approximate their respective fair values because of their short term
nature.
Revenue
Recognition:
Revenues
are reported upon the completion of a transaction that meets the prescribed
criteria when (1) persuasive evidence of an arrangement exists; (2) delivery of
our services has occurred; (3) our price to our customer is fixed or
determinable; and (4) collectibility of the sales price is reasonably
assured.
There was
no revenue reported for the three months ended September 30, 2009 and
2008.
8
The
Company had certain shipments of products to various customers during fiscal
2008 in the aggregate of approximately $6.5 million that were not recognized as
revenue in fiscal 2008, fiscal 2009, or fiscal 2010 to date, due to certain
revenue recognition criteria not being met in these periods, related to the
assurance of collectibility among other factors. These transactions will only be
recognized as revenue in the period in which all the revenue recognition
criteria, as noted above, have been fully met. Inventory costs related to these
transactions for which revenue has not been recognized had been reported on the
balance sheet in “Costs of product shipped to customers for which revenue has
not been recognized” as of June 30, 2008, but have been fully reserved and
expensed to the statement of operations as costs of good sold during the year
ended June 30, 2009.
Costs of product shipped to
customers for which revenue has not been recognized
As of September 30, 2009, the Company
has capitalized approximately $5.4 million in product costs for goods that were
shipped to customers during fiscal 2008 but for which revenue has not yet been
recognized in either fiscal 2008, fiscal 2009, or to date in fiscal 2010. The
Company has also recorded a full reserve against these product costs in the
aggregate amount of approximately $5.4 million, all of which was recorded during
the years ended June 30, 2009 and 2008. This reserve estimates the potential
costs that may be unrecoverable. The Company is currently engaged in vigorous
collection activities regarding the various amounts due which are related to
these costs, which have now been fully reserved. The Company has filed legal
action against various parties involved in the business operations to recover
certain payments through court action or potential
settlement. However, there can be no assurances that this will
occur.
Deferred Financing and other
debt-related Costs:
Deferred
financing costs are amortized over the term of its associated debt instrument.
The Company evaluates the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. The Company
allocates the aggregate proceeds of the notes payable between the warrants and
the notes based on their relative fair values in accordance with FASB ASC 470-20
“Debt with Conversion and Other Options”. The fair value of the warrants issued
to note holders or placement agents are calculated utilizing the Black-Scholes
option-pricing model. The Company is amortizing the resultant discount or other
features over the term of the notes through its earliest maturity date using the
effective interest method. Under this method, the interest expense recognized
each period will increase significantly as the instrument approaches its
maturity date. If the maturity of the debt is accelerated because of defaults or
conversions, then the amortization is accelerated. The Company’s debt
instruments do not contain any embedded derivatives at September 30, 2009 and
June 30, 2009.
Investments in non-consolidated
companies:
The
Company accounts for its investments in non-consolidated companies under the
cost basis method of accounting if the investment is less than 20% of the voting
stock of the investee, or under the equity method of accounting if the
investment is greater than 20% of the voting stock of the investee. Investments
accounted for under the cost method are recorded at their initial cost, and any
dividends or distributions received are recorded in income. For equity method
investments, the Company records its share of earnings or losses of the investee
during the period. Recognition of losses will be discontinued when the Company’s
share of losses equals or exceeds its carrying amount of the investee plus any
advances made or commitments to provide additional financial
support.
An
investment in non-consolidated companies is considered impaired if the fair
value of the investment is less than its cost on an other-than-temporary basis.
Generally, an impairment is considered other-than-temporary unless (i) the
Company has the ability and intent to hold an investment for a reasonable period
of time sufficient for an anticipated recovery of fair value up to (or beyond)
the cost of the investment; and (ii) evidence indicating that the cost of the
investment is recoverable within a reasonable period of time outweighs evidence
to the contrary. If impairment is determined to be other-than-temporary, then an
impairment loss is recognized equal to the difference between the investment’s
cost and its fair value.
9
Research
and Development Costs:
The
Company recognizes research and development costs associated with certain product development activities. The Company realized expenses of
$415,004 during the three-months ended September 30, 2009 for costs associated
with product development under the Company’s agreement with
NASA.
Income Taxes:
The
Company recognizes deferred taxes for differences between the financial
statement and tax bases of assets and liabilities at currently enacted statutory
tax rates and laws for the years in which the differences are expected to
reverse. The Company uses the asset and liability method of accounting for
income taxes, as set forth in FASB ASC 740 “Income Taxes”. As prescribed by FASB
ASC 740, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities and net operating loss
carry-forwards, all calculated using presently enacted tax rates. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
On July
1, 2007, the Company adopted the provisions of FASB ASC 740-10. FASB ASC 740-10
prescribes recognition criteria and a related measurement model for uncertain
tax positions taken or expected to be taken in income tax returns. FASB ASC
740-10 requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not that the
position would be sustained upon examination by tax authorities. Tax positions
that meet the more likely than not threshold are then measured using a
probability weighted approach recognizing the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate settlement. There is
no liability related to unrecognized tax benefits at September 30, 2009 and June
30, 2009.
Earnings
(Loss) Per Share:
In
accordance with FASB ASC 260, “Earnings Per Share,” basic earnings per share is
calculated based on the weighted average number of shares of common stock
outstanding during the reporting period. Diluted earnings per share gives effect
to all potentially dilutive common shares that were outstanding during the
reporting period; however such potentially dilutive common shares are excluded
from the calculation of earnings (loss) per share if their effect would be
anti-dilutive. In addition, stock options and warrants with exercise prices
above average market price in the amount of 14,045,873 and 22,438,725 shares for
the periods ended September 30, 2009 and 2008, respectively were not included in
the computation of diluted earnings per share as they are
anti-dilutive.
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 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. The most significant estimates and assumptions made
in the preparation of the consolidated financial statements relate to the
carrying amount of long lived assets, deferred tax valuation allowance,
valuation of stock options, warrants and debt features and the allowance for
doubtful accounts. Actual results could differ from those
estimates.
Subsequent
events:
In
accordance with ASC 855-10, “Subsequent Events”, the Company evaluated all
events or transactions that occurred after September 30, 2009 up through
November 23, 2009. During this period no material subsequent events came to
our attention.
10
Summary
of Recent Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (FASB) issued its final Statement
of Financial Accounting Standards (SFAS) No. 168 – The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162. SFAS No. 168 made the FASB
Accounting Standards Codification (the Codification or ASC) the single source of
U.S. GAAP used by nongovernmental entities in the preparation of financial
statements, except for rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to simplify
user access to all authoritative accounting guidance by reorganizing U.S. GAAP
pronouncements into roughly 90 accounting topics within a consistent structure;
its purpose is not to create new accounting and reporting guidance. The
Codification supersedes all existing non-SEC accounting and reporting standards
and was effective for the Company beginning July 1, 2009. Following SFAS No.
168, FASB will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead, it will issue
Accounting Standards Updates. The FASB will not consider Accounting Standards
Updates as authoritative in their own right; these updates will serve only to
update the Codification, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the Codification. In the
description of Significant Accounting Policies that follows, references in
“italics” relate to Codification Topics and Subtopics, and their descriptive
titles, as appropriate
In June
2008, the FASB issued new accounting guidance as codified in ASC 815-40 on
determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock. This guidance also addresses how to assess
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity’s own stock for purposes of determining whether the appropriate
accounting treatment falls under the scope of ASC 815 “Derivatives and
Hedging”. This guidance was effective for the Company July 1, 2009,
the adoption of which did not have a material impact on the Company’s
consolidated financial statements.
3. SECURITIES
EXCHANGE TRANSACTION
On March
16, 2009, the Company entered into a Warrant Exchange Agreement with a group of
investors (Enable). Under this agreement Enable has been granted the right to
exchange all warrants held into 10,000,000 shares of common stock of the
Company, provided, however, that at no time shall any Holder beneficially own
more than the Beneficial Ownership Limitation of 9.99% of the Common Stock
issued and outstanding from time to time. The original warrants carry exercise
prices ranging from $0.50 to $2.50 and represent a total of 14,642,852 shares
available to purchase. As of September 30, 2009, 5,800,000 shares of common
stock have been issued under this exchange agreement and 4,200,000 shares remain
to be issued under the Warrant Exchange Agreement. A liability of $504,000
has been recorded by the Company to recognize the fair value of the remaining
shares to be issued at a market price of $0.12 per share at September 30,
2009. For the three months ended September 30, 2009, approximately
$978,000 was recorded as interest expense on the accompanying consolidated
statement of operations, representing the value of shares issued during the
three months then ended, in addition to the value of the change in accrual for
the three months then ended.
4.
DEPOSITS ON TECHNOLOGY LICENSES
During
the year ended June 30, 2009, the Company expended $175,000 as a non-refundable
deposit with NASA for the rights to license technologies. During the
three month period ended September 30, 2009, the Company executed certain Space
Act Agreements with NASA and expended an additional $240,004 as reimbursed
research and development costs under these agreements. The $175,000, which was
previously categorized as a deposit, was also expensed as research and
development under these agreements. As of September 30, 2009, the aggregate
total expended for such research and development reimbursed to NASA is
$415,004.
11
5. INVESTMENTS
Current Technology
Corporation
On
January 10, 2008, the Company entered into a Subscription Investment Agreement
with Current Technology Corporation, a corporation formed under the laws of the
Canada Business Corporation Act. The agreement provided for the Company to
purchase from Current Technology a total of 25,000,000 shares of its common
stock, and common stock purchase warrants exercisable for 25,000,000 million
shares of its common stock, for an aggregate purchase price of $2,500,000.
Payment of the $2,500,000 was to be made in five installments of $500,000
between January 4, 2008 and April 15, 2008. The common stock purchase warrants
were immediately exercisable at an exercise price of $.15 per share and they
expire on January 9, 2013. The warrants contain anti-dilution and adjustment
provisions, which allow for adjustment to the exercise price and/or the number
of shares should there be a change in the number of outstanding shares of common
stock through a declaration of stock dividends, a recapitalization resulting in
stock splits or combinations or exchange of such shares.
The
Company currently has a $1.5 million investment in Current Technology
Corporation. The Company owns 15 million shares of the common stock
of Current Technology, which represents approximately 9.5% ownership of its
outstanding common stock. The Company recorded the investment on a cost method
of accounting.
Pursuant
to the original share purchase transaction, the Company held warrants to
purchase 20,000,000 additional shares of common stock of Current Technology
Corporation with an exercise price of $0.15 per share. In August 2008, MSGI
entered into a Securities Exchange Agreement with holders of the Company’s
Series H Preferred stock and other instruments. In connection with this
exchange, the warrants to purchase 20,000,000 additional shares of common stock
of Current Technology were assigned to the parties to this agreement
.
Pursuant
to a junior guarantee provided by the Company under a certain bridge loan
agreement, which was entered into by Mr. J. Jeremy Barbera, Chief Executive
Officer and Chairman of MSGI, the Company surrendered 5,000,000 shares of common
stock of it’s holdings in Current Technology Corporation at a carrying value of
$500,000. The Company has no further guarantee obligations under the bridge loan
agreement.
In
addition, as part of this investment transaction, Current Technology is to
outsource 25% of its business to MSGI through Celevoke, Inc. (an entity in which
Current Technology holds a 59% ownership interest). No such transactions between
MSGI and Celevoke have occurred during the three months ended September 30, 2009
or to date.
6. 8%
CALLABLE CONVERTIBLE NOTES PAYABLE
The 8%
Callable Convertible Notes Payable consist of the following as of September 30,
2009:
Instrument
|
Maturity
|
Face Amount
|
Discount
|
Carrying Amount
at September 30,
2009,
net of discount
|
Carrying
Amount at June
30, 2009, net of
discount
|
|||||||||||||
8%
Debentures
|
May 21, 2010
|
$ | 4,000,000 | $ | 3,914,810 | $ | 85,190 | $ | 19,891 | |||||||||
8%
Notes
|
May
21, 2010
|
4,000,000 | — | 4,000,000 | 4,000,000 | |||||||||||||
Total
|
$ | 4,085,190 | $ | 4,019,891 |
8%
Debentures
On May
21, 2007, MSGI entered into a private placement with several institutional
investors and issued 8% convertible debentures in the aggregate principal amount
of $5,000,000 (the 8% Debentures), of which $4,000,000 is currently outstanding
with the remaining principal balance having been converted into shares of common
stock during fiscal 2008. There were no conversions during fiscal 2009 or the
three months ended September 30, 2009.
12
The 8%
Debentures have a maturity date of May 21, 2010 and accrue interest at a rate of
8% per annum. Payments of principal and interest under the Debentures are not
due until the maturity date. The investors can convert the principal amount of
the 8% Debentures into common stock of the Company, provided certain conditions
are met, and each conversion is subject to certain volume limitations. The
conversion price of the 8% Debentures is currently at $0.25.
In
connection with this debt, the note holders have warrants for the purchase of up
to 7,142,852 shares of common stock, exercisable over a five-year period at an
exercise price of $0.50. These warrants could be exchanged by the holder for
shares of common stock of the Company per the Warrant Exchange Agreement dated
March 16, 2009 (see Note 3). The shares will be issued to the holders of the
exchanged warrants over time.
The
Company allocated the aggregate proceeds of the 8% Debentures between the
warrants and the Debentures based on their fair value and calculated a
beneficial conversion feature and warrant discount in an amount in excess of the
$5 million in proceeds received. Therefore, the total discount was limited to $5
million. The discount on the Debentures was allocated from the gross
proceeds and recorded as additional paid-in capital. The discount is being
amortized to interest expense over the three-year maturity date. Should the 8%
Debentures be converted or paid prior to the payment terms, the amortization of
the discount will be accelerated. On March 16, 2009, the Company entered
into certain convertible promissory notes, which effected the anti-dilution
provision of these Debentures. The conversion price of the Debentures was
reduced from $0.50 to $0.25. No additional beneficial conversion expense was
recorded related to the conversion price change due to the immaterial effect of
this adjustment to the financial results of the Company as of September 30,
2009.
The 8%
Debentures and the Warrants have anti-dilution protections. The Company has also
entered into a Security Agreement with the investors in connection with the
closing, which grants security interests in certain assets of the Company and
the Company’s subsidiaries to the investors to secure the Company’s obligations
under the 8% Debentures and Warrants.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2009 and 2008 in connection with this note was approximately
$210,000 and $143,000, respectively.
8% Notes
On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, an existing institutional investor of MSGI. In
connection with that Agreement, MSGI entered into an 8% convertible note in the
aggregate principal amount of $4,000,000 (the 8% Notes).
The 8%
Notes have a maturity date of May 21, 2010 and accrue interest at a rate of 8%
per annum. Payments of principal and interest under the Notes are not due until
the maturity date. The investors can convert the principal amount of
the 8% Notes into common stock of the Company, provided certain conditions are
met, and each conversion is subject to certain volume limitations. The
conversion price of the 8% Notes is currently at $0.25.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2009 and 2008 in connection with this note was approximately
$84,000 and $34,000, respectively.
13
7. 6% CALLABLE CONVERTIBLE NOTES PAYABLE
The 6%
Callable Convertible Notes Payable consist of the following as of September 30,
2009:
Instrument
|
Maturity
|
Face Amount
|
Discount
|
Carrying
Amount at
September
30, 2009,
net of discount
|
Carrying
Amount at
June 30, 2009,
net of discount
|
|||||||||||||
6%
Notes
|
December 13, 2009
|
$ | 1,000,000 | $ | 785,142 | $ | 214,858 | $ | 45,940 | |||||||||
6%
April Notes
|
April
4, 2010
|
1,000,000 | 955,326 | 44,674 | 11,630 | |||||||||||||
Total
|
$ | 1,740,468 | $ | 259,532 | $ | 57,570 |
6% Notes
On
December 13, 2006, pursuant to a Securities Purchase Agreement between the
Company and several institutional investors, MSGI issued $2,000,000 aggregate
principal amount of Callable Secured Convertible Notes (the 6% Notes) and stock
purchase warrants exercisable for 3,000,000 shares of common stock in a private
placement for an aggregate offering price of $2,000,000, of which $1,000,000 is
currently outstanding with the remaining principal balance having been converted
into shares of common stock during fiscal 2008. There were no conversions during
fiscal 2009 or the three months ended September 30, 2009.
The 6%
Notes have a single balloon payment of $1,000,000 due on the maturity date of
December 13, 2009 and will accrue interest at a rate of 6% per annum. The
Investors can convert the principal amount of the 6% Notes into common stock of
the Company, provided certain conditions are met, and each conversion is subject
to certain volume limitations. The conversion price of the 6% Notes is currently
at $0.25. The payment obligations under the Notes accelerate if payments under
the Notes are not made when due or upon the occurrence of other defaults
described in the Notes. The warrants are exercisable through December 2013. The
exercise price of the warrants is $0.50 per share. These warrants could be
exchanged by the holder for shares of common stock of the company per the
Warrant Exchange Agreement dated March 16, 2009 (see Note 3). The shares will be
issued to the holders of the exchanged warrants over time.
The 6%
Notes and the warrants have anti-dilution protections. The Company has also
entered into a Security Agreement and an Intellectual Property Security
Agreement with the Investors in connection with the closing, which grants
security interests in certain assets of the Company and the Company’s
subsidiaries to the Investors to secure the Company’s obligations under the 6%
Notes and warrants.
The
Company allocated the aggregate proceeds of the 6% Notes between the warrants
and the Notes based on their fair values and calculated a beneficial conversion
feature and warrant discount in an amount in excess of the $1 million in
proceeds received. Therefore, the total discount was limited to $1 million. The
Company is amortizing this discount over the remaining term of the 6% Notes
through December 2009. Should the 6% Notes be converted or paid prior to the
payment terms, the amortization of the discount will be accelerated. On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these Notes. The conversion price of the
Notes was reduced from $0.50 to $0.25. No additional beneficial conversion
expense was recorded related to the conversion price change due to the
immaterial effect of this adjustment to the financial results of the Company as
of September 30, 2009.
On
October 3, 2007, a $1.0 million portion of the Notes outstanding were purchased
by certain third-party institutional investors, from the original note holders.
The Company did not receive any cash as a result of these transactions and was
not a party to the transaction. These institutional investors converted $1.0
million of the note balance as well as interest expense of $40,086 into an
aggregate of 2,080,172 shares of the Company’s common stock. In connection with
the conversion, the discount was accelerated for the related portion of the note
in an amount of $736,111. In addition, as part of the conversion transaction,
the Company allowed the note holders to convert at a rate of $0.50, which was
lower than the stated conversion price under the note agreement. Therefore, in
connection with this lower conversion rate, the Company recognized an additional
beneficial conversion charge on the principal and interest converted of
approximately $299,200 upon conversion.
14
As a
result of the conversion transaction of the Callable Secured Convertible 8%
Notes above and the 6% Notes converted, anti-dilution provisions of the
remaining 6% Notes were triggered. The conversion price of the remaining 6%
Notes was reduced from the variable conversion rate noted above to a fixed rate
of $0.50. As a result, the Company recognized an additional beneficial
conversion discount of approximately $263,900 which was recorded as a discount
to the note and allocated to additional paid in capital. This additional
discount will be amortized over the remaining term of the note.
Total
interest expense, including debt discount amortization, for the three months
ended September, 2009 and 2008 in connection with this note was approximately
$199,000 and $31,000, respectively.
6% April
Notes
On April
5, 2007, pursuant to a Securities Purchase Agreement between the Company and
several institutional investors, MSGI issued $1.0 million aggregate principal
amount of Callable Secured Convertible Notes (the 6% April Notes) and stock
purchase warrants exercisable for 1,500,000 shares of common stock in a private
placement for an aggregate offering price of $1.0 million. The 6% April Notes
have a single balloon payment of $1.0 million due on the maturity date of April
4, 2010 and will accrue interest at a rate of 6% per annum. The Investors can
convert the principal amount of the 6% April Notes into common stock of the
Company, provided certain conditions are met, and each conversion is subject to
certain volume limitations. The warrants have an exercise price of $1.00 and are
exercisable for a term of 7 years. These warrants can be exchanged by the holder
for shares of common stock of the company per the Warrant Exchange Agreement
dated March 16, 2009 (see Note 3). The shares will be issued to the holders of
the exchanged warrants over time.
As a
result of a conversion transaction of the Callable Secured Convertible 8% Notes
and the 6% Notes converted above, anti-dilution provisions of the April 6% Notes
were triggered. The conversion price of the April 6% Notes was reduced from a
variable conversion rate noted above to a fixed rate of $0.50. As a result, the
Company recognized an additional beneficial conversion discount of approximately
$166,700, which was recorded as a discount to the note and allocated to
additional paid in capital. This additional discount will be amortized over the
remaining term of the note.
The
Company allocated the aggregate proceeds of the 6% April Notes between the
warrants and the Notes based on their fair values and calculated a beneficial
conversion feature and warrant discount in an amount in excess of the $1 million
in proceeds received. Therefore, the total discount was limited to $1 million.
The Company is amortizing this discount to interest expense over the remaining
term of the 6% April Notes through April 2010. Should the 6% April Notes be
converted or paid prior to the payment terms, the amortization of the discount
will be accelerated. On March 16, 2009, the Company entered into certain
convertible promissory notes, which effected the anti-dilution provision of
these April Notes. The conversion price of the April Notes was reduced from
$0.50 to $0.25. No additional beneficial conversion expense was recorded related
to the conversion price change due to the immaterial effect of this adjustment
to the financial results of the Company as of September 30, 2009.
The
payment obligation under the April Notes may accelerate if payments under the
April Notes are not made when due or upon the occurrence of other defaults
described in the April Notes.
The 6%
April Notes and the warrants have anti-dilution protections. The Company has
also entered into a Security Agreement and an Intellectual Property Security
Agreement with the Investors in connection with the closing, which grants
security interests in certain assets of the Company and the Company’s
subsidiaries to the Investors to secure the Company’s obligations under the 6%
April Notes and warrants.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2009 and 2008 in connection with this note was approximately
$61,000 and $28,000, respectively.
15
8. OTHER
NOTES PAYABLE AND ADVANCES
Other
Notes Payable consists of the following as of September 30, 2009:
Instrument
|
Maturity
|
Face Amount
|
Discount
|
Carrying Amount at
September 30, 2009,
net of discount
|
Carrying
Amount at June
30, 2009,
net of discount
|
|||||||||||||
Convertible
Term Notes – short term
|
February
28, 2009
|
$ | 960,000 | $ | — | $ | 960,000 | $ | 960,000 | |||||||||
Convertible
Term Notes – short term
|
March
31, 2009
|
1,500,000 | — | 1,500,000 | 1,500,000 | |||||||||||||
Convertible
Term Notes – short term
|
December
31, 2009
|
400,000 | — | 400,000 | 400,000 | |||||||||||||
10%
Convertible Term Notes – short term
|
June
17, 2009
|
250,000 | — | 250,000 | 250,000 | |||||||||||||
25%
Convertible Term Notes – short term
|
August
31, 2009
|
204,004 | — | 240,004 | — | |||||||||||||
Total
|
— | $ | 3,350,004 | $ | 3,110,000 |
Convertible Term Notes
payable
On
December 13, 2007, the Company entered into four short-term notes with private
institutional lenders. These promissory notes provided proceeds totaling $2.86
million to the Company. The proceeds of these notes were used to purchase
inventory. The notes carry a variable rate of interest based on the prime rate
plus two percent. These notes had an original maturity date of April 15, 2008.
These notes were not repaid on this date and the terms were amended at several
different dates to extend them to maturity dates of February 28, 2009, March 31,
2009, and December 31, 2009. While two of the notes payable are technically in
default at this time, neither of the lenders have claimed default on the notes
and the Company is presently in discussions with these lenders regarding
extended terms for these notes payable. There are no guarantees that the Company
will successfully execute the proposed addendum extensions with the two
lenders.
Warrants
to purchase up to an aggregate of 100,000 shares of common stock of the Company
were issued to the lenders in conjunction with these notes. The warrants have a
term of 5 years and carry an exercise price of $1.38 per share. The Company
allocated the aggregate proceeds of the term notes payable between the warrants
and the Notes based on their fair values, which resulted in a discount of
$80,208, which was fully amortized in fiscal 2008.
Between
April 30, 2008 and April 1, 2009, the Company executed a series of Amendments to
the Term Notes, which extended the payment terms for the term notes through
February 28, 2009 for one lender, March 31, 2009 for one lender, and December
31, 2009 for the remaining two lenders. Due to the default event,
commencing on April 15, 2008, the interest rate is now at the default interest
rate of 18%. Also, two of the holders now have the right to convert
the note at a rate of $0.51 per share, and the other two holders have the right
to convert the note at a rate of $0.25 per share.
16
In
addition, the terms of certain of the Amendments to the Loan Agreements called
for the Company to issue five-year warrants to purchase shares of common stock
of the Company to certain group lenders each week beginning May 1, 2008 and
continuing for each week that the principal balance of the term notes remains
outstanding. These warrants are to be issued with an exercise price set at the
greater of market value on the date of issuance or $0.50 per
share. As of June 30, 2008, a total of 284,717 warrants were issued
to the note holders, 33,218 warrants with an exercise price at $0.60 per share
and the remaining at an exercise price of $0.50 per share. These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued. In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.
During
the three months ended September 30, 2008, a total of 715,283 additional
warrants were issued to the note holders, all with an exercise price of
$0.50. These warrants were subsequently cancelled with the October
2008 addendum, as noted below. In addition, other group lenders
received shares of common stock of the Company instead of warrants under the
Amendments.
Effective
October 1, 2008, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
terminated all warrants to purchase common stock issued under previous addendum
agreements, which aggregated 1,000,000 warrants issued under those previous
addendum agreements, and, in their place, issued new warrants and additional
shares of common stock. At execution of the addendums, the Company issued
378,000 shares of common stock and warrants to purchase an additional 378,000
shares of common stock at an exercise price of $0.50. The Company issued an
additional 252,000 shares of common stock and warrants to purchase an additional
252,000 shares of common stock, at an exercise price of $0.50, between the date
of the agreement and December 31, 2008.
Effective
January 1, 2009, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
issued new warrants and additional shares of common stock and extended the
maturity date to March 31, 2009. The Company issued an additional 204,420 shares
of common stock and warrants to purchase an additional 204,420 shares of common
stock, at an exercise price of the greater of $0.50 or market value on the date
of grant. Effective February 1, 2009, the Company entered into an additional
addendum agreement with the fourth lender with regard to its held Note, which
issued 400,000 shares of common stock to the lender and extended the maturity
date of this Note to February 28, 2009. Effective April 1, 2009, the
Company entered into additional addendum agreements with two out of four lenders
with regard to their respectively held Notes, which issued new warrants and
additional shares of common stock and extended the maturity date to December 31,
2009. The Company issued an additional 221,195 shares of common stock
and warrants to purchase an additional 221,195 shares of common stock, at an
exercise price of the greater of $0.25 or market value on the date of the grant
for the period April 1, 2009 through June 30, 2009.
During
the three months ended September 30, 2009, the Company issued 46,200 warrants at
an exercise price of $0.25 and 46,200 shares of common stock. The
stock was determined to have a fair value of $4,753, based upon the fair market
value of the common stock on each date issued. The warrants were
determined to have a value of $4,320. The warrants were fair valued, at each
warrant issuance, using the Black-Scholes model. The warrant and
stock values were recorded as additional interest expense on the note during the
three months ended September 30, 2009.
The
following assumptions were used in the Black-Scholes model for the warrants for
the three months ended September 30, 2009:
17
Expected
term (years)
|
3 | |||
Dividend
yield
|
0 | % | ||
Expected
volatility
|
213% - 216 | % | ||
Risk-Free
interest rate
|
1.01%-1.50 | % | ||
Weighted
average fair value
|
$ | 0.09 |
Expected
volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the stock options. We rely solely
on historical volatility because our traded options do not have sufficient
trading activity to allow us to incorporate the mean historical implied
volatility from traded options into our estimate of future volatility. The
expected term calculation for stock options is based on the “simplified” method
described in SEC Staff Accounting Bulletin No. 107, Share−Based Payment. The
risk−free interest rate is based on the U.S. Treasury yield in effect at the
time of grant for an instrument with a maturity that is commensurate with the
expected term of the stock options. The dividend yield of zero is based on the
fact that we have never paid cash dividends on our common stock, and we have no
present intention to pay cash dividends.
Total
interest expense, including value of warrants and stock issued above, for the
three months ended September 30, 2009 and 2008 in connection with this note was
approximately $139,000 and $527,000, respectively.
10% Convertible Term Notes
payable
On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. The notes
had a maturity date of June 17, 2009. As an inducement to Enable to
enter into the Convertible Term Notes, the Company entered into a Warrant
Exchange Agreement with Enable (see Note 3). The remaining terms of the 10%
notes carry the same provisions as the 8% Debentures in Note 6. Due to the
default event, commencing on June 17, 2009, the interest rate is now at the
default rate of 18%. While the notes are technically in default at
September 30, 2009, the lender has made no claim of default and the Company is
currently in negotiations with the lender for an extension to the terms of the
notes. There can be no assurance that the Company will be successful in securing
the extensions.
Total
interest expense for the three months ended September 30, 2009 in connection
with this note was approximately $11,000.
25% Convertible Term Notes
payable
In July 2009, the Company executed a
NASA Funding Promissory Note in the amount of $240,004 with a lender who also
holds a promissory note from December 2007. The new promissory note was executed
in order to enable the Company to meet its obligations under a certain Space Act
Agreement, which had been entered into with The National Aeronautics and Space
Administration. The note bears interest at 25% and matured on August 30, 2009. In addition, the
Company issued 500,000 shares of common stock to the
lender as additional consideration to enter into the note agreement. The shares
were issued to the lender in September 2009. As of the date of this filing, the
principal balance and accrued interest has not yet been paid to the lender.
Although the note is technically in default as of the date of this filing, the
lender has not made any claim of default and the Company is currently in
negotiations with the lender for an extension to the terms of the note. There
can be no assurance that the Company will be successful in securing any
extension to the note.
Total
interest expense for the three months ended September 30, 2009 in connection
with this note was approximately $10,000.
18
Advances
During
the three months ended September 30, 2009, the Company received net funding in
the amount of approximately $189,000 from a certain corporate officer. During
the year ended June 30, 2009, the Company received net funding in the amount of
approximately $167,000 from this same corporate officer. As of
September 30, 2009, the total net amount received from the officer is
approximately $356,000. There is no interest expense associated with this
advanced funding and this is to be repaid upon the closing of any adequately successful
funding event or upon the collection of the Apro Media related accounts
receivable, which has not yet occurred. It is also noted by the Company that
this certain corporate officer is owed approximately $325,000 in back due
compensation as of the three months ended September 30,
2009.
During
the year ended June 30, 2008, the Company received funding in the amount of
$200,000 from Apro Media. These funds were advanced to the Company against
expected collections of accounts receivable generated under the Apro
sub-contract agreement. During the year ended June 30, 2009, the Company
received an additional $6,950 from Apro Media, bringing the aggregate to
$206,950. There is no interest expense associated with this advanced funding and
this is to be repaid to Apro upon collection of the related accounts receivable,
which has not yet occurred.
During
the year ended June 30, 2009, the Company received funding in the amount of
approximately $70,000 from Current Technology Corp. There is no interest expense
associated with this advanced funding and this is to be repaid upon collection
of the Apro Media related accounts receivable, which has not yet
occurred.
During the year ended June 30, 2009,
the Company received funding in the amount of approximately $60,000 from certain
third parties. There is no interest expense associated with these advanced
fundings and they are to be repaid upon collection of the Apro Media related
accounts receivable, which has not yet occurred.
9. STOCK
BASED COMPENSATION, COMMON STOCK AND WARRANTS
Stock
Options:
The
Company maintains a qualified stock option plan (the 1999 Plan) for the issuance
of up to 1,125,120 shares of common stock under qualified and non-qualified
stock options. The 1999 Plan is administered by the compensation committee of
the Board of Directors which has the authority to determine which officers and
key employees of the Company will be granted options, the option price and
vesting of the options. In no event shall an option expire more than ten years
after the date of grant.
The
Company accounts for employee stock-based compensation under FASB ASC 718,
“Compensation – Stock Compensation”, which requires all share−based payments to
employees, including grants of employee stock options, to be recognized in the
financial statement at their fair values. The expense is being recognized on a
straight−line basis over the vesting period of the options. The Company did not
record a tax benefit related to the share−based compensation expense since the
Company has a full valuation allowance against deferred tax assets.
There
were no stock options granted during the three months ended September 30, 2009
or 2008. As of September 30, 2009, 1,025,000 options are outstanding,
of which 1,016,666 options are exercisable. The stock based
compensation expense related to stock options for the three months ended
September 30, 2009 and 2008 was approximately $1,400 and $108,000, respectively.
As of September 30, 2009, there is no intrinsic value for these outstanding
options. The non-cash compensation expense is included in salaries
and benefits as a component of operating costs on the statements of operations.
As of September 30, 2009, non-vested compensation cost that has not yet been
recognized was approximately $3,200, which is expected to be recognized over a
weighted average period of approximately 0.5 years.
Warrants:
As of
September 30, 2009, the Company has 13,020,873 warrants outstanding for the
purchase shares of common stock at prices ranging from $0.25 to $8.25, all of
which are currently exercisable. The major transactions involving the warrants
for the current period are below:
During
the three months ended September 30, 2009, the Company issued 46,200 five-year
warrants to certain lenders in relationship to the addendum agreements. These
warrants carry an exercise price of $0.25. A fair market value of $4,320 for
these warrants was calculated using the Black-Scholes method and was expensed to
interest expense in the period ended September 30, 2009.
19
During
the period ended September 30, 2009, 7,760,635 warrants were exchanged for
5,300,000 shares of common stock under the Warrant Exchange Agreement (see Note
3).
Common
Stock Transactions:
During
the period ended September 30, 2009, the Company issued 46,200 shares of its
common stock to a certain private institutional lender with relation to a series
of addendums executed to that lender’s short term loan agreement. The shares
carried a fair market value of $4,753 and this amount was expensed as additional
non-cash interest during the period.
During
the period ended September 30, 2009, the Company issued 5,300,000 shares of
common stock to a certain lender with relation to a Warrant Exchange Agreement
(see Note 3). The shares were valued at their market rate as of the date of
exchange and carried an aggregate fair market value of $759,000, which was
expensed as additional non-cash interest expense during the period.
During
the period ended September 30, 2009, the Company issued 500,000 shares of common
stock to a certain lender in relation to the 25% Convertible term note payable
(see Note 7). These shares were valued at market price on the date of execution
of the note payable and carried a fair market value of $20,000, which was
expensed as additional non-cash interest expense during the period.
During
the period ended September 30, 2009, the Company issued 7,245,000 shares of
common stock to various consulting and legal service providers. The shares were
issued to the service providers in lieu of cash compensation for services to be
provided. The shares were valued at market price as of the date of obligation
and carried an aggregate fair market value of $480,050, which was expensed to
consulting and legal fees during the period.
During
the period ended September 30, 2009, the Company issued 1.0 million shares of
common stock as an additional default penalty associated pursuant to a certain
bridge loan agreement, which was entered into by Mr. J. Jeremy Barbera, Chief
Executive Officer and Chairman of MSGI. The proceeds of this loan were used
primarily for payments due under the NASA relationship and for general operating
expenses of the Company. The Company has no further obligations under this
bridge loan agreement.
10. ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued
expenses as of September 30, 2009 and June 30, 2009 consist of the
following:
September
30,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
Salaries
and benefits
|
$ | 568,905 | $ | 397,558 | ||||
Payroll
taxes and penalties
|
1,489,728 | 1,489,450 | ||||||
Warrant
exchange liability (see Note 3)
|
504,000 | 285,000 | ||||||
Audit
and tax preparation fees
|
212,755 | 214,755 | ||||||
Interest
|
2,304,476 | 1,953,706 | ||||||
Taxes
|
48,907 | 42,907 | ||||||
Board
fees
|
83,750 | 80,000 | ||||||
Rent
|
74,310 | 97,910 | ||||||
Consulting
and legal fees
|
94,670 | 10,670 | ||||||
104,914 | 112,236 | |||||||
Total
|
$ | 5,486,415 | $ | 4,684,192 |
The
Company has not filed or paid payroll taxes from September 2006 to
date.
20
11.
CERTAIN KEY RELATIONSHIPS
Relationship with Hyundai
Syscomm Corp.
Beginning
September 11, 2006, the Company entered into several Agreements with Hyundai
Syscomm Corp. (Hyundai). The Company currently has executed a License
Agreement (License), Subscription Agreement and a Sub-Contract with
Hyundai and in prior periods received in consideration a one-time $500,000 fee
for the License and the Company issued 900,000 shares of the Company's common
stock to Hyundai, in connection with all the agreements, of which 35,000 shares
of common stock remain to be issued at September 30, 2009.
The
initial term of the Sub-Contracting Agreement is three years, with subsequent
automatic one-year renewals unless the Sub-Contracting Agreement is terminated
by either party under the terms allowed by the Agreement.
On
February 7, 2007, the Company issued to Hyundai a warrant to purchase up to a
maximum of 24,000,000 shares of common stock in exchange for a maximum of
$80,000,000 in revenue, which was expected to be realized by the Company over a
maximum period of four years. The vesting of the Warrant will take place
quarterly over the four-year period based on 300,000 shares for every $1,000,000
in revenue realized by the Company from contracts referred to us by
Hyundai. The revenue is subject to the sub-contracting agreement
between Hyundai and the Company dated October 25, 2006. No
transactions under this agreement have occurred as of and through September 30,
2009 or to date and therefore there have been no warrants vested under this
agreement. As such, the various agreements with Hyundai are deemed by the
company to be null and void as of September 30, 2009. In May 2009, the Company
engaged the law firm of GCA Law Partners LLP of Mountain View, California to
represent the Company in legal action against Hyundai Syscomm Corp, as well as
several other related entities and individuals, for alleged breach of
contract.
Relationship with Apro Media
Corporation
On May
10, 2007, the Company entered into an exclusive sub-contract and distribution
agreement with Apro for at least $105 million of expected sub-contracting
business over seven years to provide commercial security services to a Fortune
100 defense contractor and/or other customers. Under the terms of contract, MSGI
would acquire components from Korea and deliver fully integrated security
solutions at an average expected level of $15 million per year for the length of
the seven-year engagement. In accordance with the Agreement, MSGI was
to establish and operate a 24/7/365 customer support facility in the
Northeastern United States. Apro was to provide MSGI with a web-based interface
to streamline the ordering process and create an opportunity for other
commercial security clients to be acquired and serviced by MSGI. The contract
calls for gross profit margins estimated to be between 26% and 35% including a
profit sharing arrangement with Apro Media, which will initially take the form
of unregistered MSGI common stock, followed by a combination of stock and cash
and eventually just cash. In the aggregate, assuming all the stated revenue
targets are met over the next seven years, Apro Media would eventually acquire
approximately 15.75 million shares of MSGI common stock. MSGI was referred to
Apro Media by Hyundai as part of a general expansion into the Asian security
market, however revenue under the Apro contract does not constitute revenue
under the existing Hyundai warrant to acquire common stock of MSGI.
Per the
terms of the sub-contract agreement with Apro, the Company was to compensate
Apro with 3,000,000 shares of the Company’s common stock when the sub-contract
transactions result in $10.0 million of GAAP recognized revenue for the Company.
In December 2007, the Company elected to issue 1,000,000 shares of common stock
to Apro under that agreement. The Company computed a fair value for a pro rata
share of the remaining shares to be issued under that agreement, which was
$62,336 at June 30, 2008, and has been reflected as a liability in
our consolidated balance sheet. As discussed below, such revenue is never
expected to be recognized by the Company, and therefore this accrual was
reversed out during the year ended June 30, 2009.
21
For the
year ended June 30, 2008, the Company had shipped product to various customers
in the aggregate of approximately $1.6 million under the Apro sub-contract
agreement. These shipments have not been recognized as revenue in fiscal 2008 or
to date. In addition inventory costs related to these transactions
had been reported on the balance sheet in Costs of product shipped to customers
for which revenue has not been recognized as of June 30, 2008 and these costs
have been fully reserved and written off as of December 31, 2008.
On August
22, 2008, MSGI negotiated an acceleration of both its sub-contracting agreements
with Hyundai and Apro, through Hirsch Capital Corp., the San Francisco based
private equity firm operating Hyundai Syscomm and Apro Media. Under the
accelerated terms, MSGI would endeavor to build up to a platform with the
potential to generate approximately $100 million in expected annual gross
revenue supporting several of the largest commercial businesses in Korea (see
Daewoo sub-contract below). Based upon its commitment to expand MSGI
to a potential run rate of $100 million in annual gross revenue, Hirsch Capital
will have the right to earn shares of MSGI as indicated under the Apro
sub-contracting and distribution agreement referenced above. There have not yet
been any business transactions under this new contract, and the Company
considers the contract to be null and void.
In May
2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View,
California to represent the Company in legal action against Apro Media
Corporation, as well as several other related entities and individuals, for
alleged breach of contract. As such, the sub-contract with Apro is deemed by the
Company to be null and void as of September 30, 2009.
Daewoo / Hankook
relationships
On
September 17, 2008, the Company executed a new contract with Hankook
Semiconductor, a division of Samsung Electronics, to manufacture and supply
advanced technology displays and other electronic products for commercial
security purposes for Daewoo International. Under the terms of the new contract,
MSGI will subcontract to Hankook the right to manufacture certain Hi-definition
display systems, which will be supplied to Daewoo for its existing customers.
MSGI has similarly entered into an agreement to supply Daewoo with these
products based upon Daewoo specifications from its customers. There have not yet
been any business transactions under this new contract.
In May
2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View,
California to represent the Company in legal action against Hankook
Semiconductor, as well as several other related entities and individuals, for
alleged breach of contract. As such, the contract with Hankook and
Daewoo is deemed by the Company to be null and void as of September 30,
2009.
Relationship with CODA
Octopus Group
On April
1, 2007, the Company entered into a non-exclusive license agreement with CODA
Octopus, Inc. (CODA) whereby the Company will receive a referral fee on sales of
products using the Innalogic proprietary technology. No such revenue has been
recognized during the three month period ended September 30, 2009.
Relationship with the National
Aeronautics and
Space Administration
In August
2009, the Company announced that it had executed a Space Act Agreement with NASA
forming a partnership between MSGI and the Ames Research Center (ARC) located in
Moffet Field, California. The purpose of this collaboration between MSGI and
NASA is to commercialize various revolutionary technologies developed by NASA in
the fields of nanotechnology and alternative energy. The Company’s initial area
of focus is to be on the use of chemical sensors or nano-sensing technology.
These wired and wireless detection systems were first developed for space
exploration in 2007 and 2008 for experiments carried out on the Space Shuttle
Endeavor. The Company intends to form a number of majority owned subsidiaries,
each of which will hold the rights to a specific technology and also serve as
the vehicle for investment capital.
22
In August
2009, the Company announced that it had formed its first subsidiary for NASA
based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection – effectively electronic sniffing. NASA developed these Nano Chemical
Sensors for space missions to increase scientific measurement capabilities with
less mass and lower power requirements. The potential space and terrestrial
applications include cabin air monitoring onboard the Space Shuttle,
surveillance of global weather, forest fire monitoring, radiation detection, and
various other mission critical capabilities. This technology was developed at
the NASA Ames Research Center located in Moffet Field, California. The
commercial applications of these Nano Chemical Sensors relate specifically to
Homeland Security and Defense, Medical Diagnoses, Environmental Monitoring and
Process Control. Nanobeak seeks to offer products in each of these sectors
beginning in the fiscal year ending June 30, 2010, but timing of these efforts
can not be assured. The Company subsequently reported the launching of its first
product derived from NASA technology, a handheld test for Diabetes, which uses
breath instead of blood. Nanobeak will take the prototype handheld sensor, which
measures acetone levels with a simple breath, out of the laboratory and into the
marketplace. Nanobeak will undertake product testing which will be done in
conjunction with a major hospital network in the United States, followed by
licensing discussions with the top pharmaceutical companies.
In
September 2009, the Company announced that it had formed its second subsidiary
for NASA based technology. The subsidiary is named Andromeda Energy Inc. and it
is a nanotechnology company focused on scalable alternative energy solutions
that operate more efficiently, and therefore yield significantly lower
electricity cost per watt than conventional energy sources. The Company is in
receipt of several expressions of interest for partnerships in the planned
deployment of this new technology from major corporations located in the
People’s Republic of China. The Company has also been asked to consider a dual
listing on the Hong Kong Stock Exchange.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Special Note Regarding
Forward-Looking Statements
Some of
the statements contained in this Report on Form 10-Q discuss our plans and
strategies for our business or state other forward-looking statements, as this
term is defined in the Private Securities Litigation Reform Act of 1995 including, but not limited
to, statements regarding our near-term objectives and long-term strategies,
expectations of short-term and long-term liquidity requirements and needs,
statements that are not historical facts, and/or statements containing words
such as "anticipate(s)," "expect(s)," "intend(s)," "plan(s)," "target(s),"
"project(s)," "will," "believe(s)," “may,” “would,” "seek(s)," "estimate(s)" and
similar expressions. These statements are based on management's current
expectations, beliefs and assumptions and are subject to a number of known and
unknown risks, uncertainties and other factors that could lead to actual results
materially different from those described in the forward-looking statements. The
Company can give no assurance that its expectations will be
attained. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; industry
capacity; industry trends; demographic changes; competition; the loss of any
significant customers; changes in business strategy or development plans;
availability and successful integration of acquisition candidates; availability,
terms and deployment of capital; advances in technology; retention of clients
not under long-term contract; quality of management; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or the
failure to comply with, government regulations; and technology and
telecommunication costs.
Introduction
This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month periods ended September 30, 2009 and 2008. This
should be read in conjunction with the financial statements, and notes thereto,
included in this Report on Form 10-Q and the Company’s financial statements and
notes thereto, included in the Company’s Annual Report on Form 10-K for the year
ended June 30, 2009.
23
The
following is a brief description of the more significant accounting policies and
methods used by the Company.
FASB
Codification Discussion:
In June
2009, the Financial Accounting Standards Board (FASB) issued its final Statement
of Financial Accounting Standards (SFAS) No. 168 – The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162. SFAS No. 168 made the FASB Accounting
Standards Codification (the Codification or ASC) the single source of U.S. GAAP
used by nongovernmental entities in the preparation of financial statements,
except for rules and interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative accounting guidance for SEC
registrants. The Codification is meant to simplify user access to all
authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into
roughly 90 accounting topics within a consistent structure; its purpose is not
to create new accounting and reporting guidance. The Codification supersedes all
existing non-SEC accounting and reporting standards and was effective for the
Company beginning July 1, 2009. Following SFAS No. 168, FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting Standards Updates. The
FASB will not consider Accounting Standards Updates as authoritative in their
own right; these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for conclusions
on the change(s) in the Codification.
Revenue
Recognition:
Revenues
are reported upon the completion of a transaction that meets the prescribed
criteria when (1) persuasive evidence of an arrangement exists; (2) delivery of
our services has occurred; (3) our price to our customer is fixed or
determinable; and (4) collectibility of the sales price is reasonably
assured.
There was
no revenue reported for the three month period ended September 30,
2009.
The
Company had certain shipments to various customers during fiscal 2008 in the
aggregate of approximately $6.5 million that were not recognized as revenue in
fiscal 2008 or to date due to certain revenue recognition criteria not being met
in these periods, related to the assurance of collectibility among other
factors. Through September 30, 2009, these factors have not been
met. These transactions will only be recognized as revenue in the
period in which all the revenue recognition criteria, as noted above, have been
fully met. Inventory costs related to these transactions for which revenue has
not been recognized are reported on the balance sheet in Costs of product
shipped to customers for which revenue has not been recognized.
Costs of
product shipped to customers for which revenue has not been
recognized:
As of
September 30, 2009, the Company had capitalized the expense recognition of
approximately $5.4 million in product costs for goods that were shipped to
customers associated with our Apro relationships as of June 30, 2008 but for
which revenue has not yet been recognized. The Company had also
recorded a reserve against these product costs in full during the fiscal years
ended June 30, 2009 and 2008. The Company has instituted a lawsuit to
recover some of the damages that we suffered as a result of such
transactions. However, there can be no assurance that this will
occur.
24
Accounting
for Income Taxes:
The
Company recognizes deferred taxes for differences between the financial
statement and tax bases of assets and liabilities at currently enacted statutory
tax rates and laws for the years in which the differences are expected to
reverse. The Company uses the asset and liability method of accounting for
income taxes, as set forth in FASB ASC 740 “Income Taxes”. As prescribed by FASB
ASC 740, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities and net operating loss
carry-forwards, all calculated using presently enacted tax rates. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
On July
1, 2007, the Company adopted the provisions of FASB ASC 740-10. FASB ASC 740-10
prescribes recognition criteria and a related measurement model for uncertain
tax positions taken or expected to be taken in income tax returns. FASB ASC
740-10 requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not that the
position would be sustained upon examination by tax authorities. Tax positions
that meet the more likely than not threshold are then measured using a
probability weighted approach recognizing the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate settlement. There is
no liability related to unrecognized tax benefits at September 30, 2009 and June
30, 2009.
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 financial statements and the reported amounts of
revenues and expenses during the reporting period. The most significant
estimates and assumptions made in the preparation of the consolidated financial
statements relate to the carrying amount and amortization of long lived assets,
deferred tax valuation allowance, valuation of stock options, warrants and debt
features and the allowance for doubtful accounts. Actual results could differ
from those estimates.
Equity
Based Compensation:
The
Company follows FASB ASC 718 in accounting for all share-based payments to
employees, directors or others. This Statement requires that the cost
resulting from all share−based payment transactions are recognized in the
financial statements of the Company. That cost will be measured based on
the fair market value of the equity or liability instruments
issued.
Debt
instruments, and the features/instruments contained therein:
Deferred
financing costs are amortized over the term of its associated debt instrument.
The Company evaluates the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. The Company
allocates the aggregate proceeds of the notes payable between the warrants
and the notes based on their relative fair values, calculated utilizing the
Black-Scholes option-pricing model. The Company is amortizing the resultant
discount or other features over the term of the notes through its earliest
maturity date using the effective interest method. Under this method, the
interest expense recognized each period will increase significantly as the
instrument approaches its maturity date. If the maturity of the debt is
accelerated because of defaults or conversions, then the amortization is
accelerated. The Company’s debt instruments do not contain any embedded
derivatives at September 30, 2009 and June 30, 2009.
Investments
in Non-Consolidated Entities:
The
Company accounts for its investments under the cost basis method of accounting
if the investment is less than 20% of the voting stock of the investee, or
under the equity method of accounting if the investment is greater than 20% of
the voting stock of the investee. Investments accounted for under the cost
method are recorded at their initial cost, and any dividends or distributions
received are recorded in income. For equity method investments, the Company
records its share of earnings or losses of the investee during the period.
Recognition of losses will be discontinued when the Company’s share of losses
equals or exceeds its carrying amount of the investee plus any advances
made or commitments to provide additional financial support.
25
An
investment in non-consolidated companies is considered impaired if the fair
value of the investment is less than its cost on another-than-temporary basis.
Generally, an impairment is considered other-than-temporary unless (i) the
Company has the ability and intent to hold an investment for a reasonable
period of time sufficient for an anticipated recovery of fair value up to (or
beyond) the cost of the investment; and (ii) evidence indicating that the
cost of the investment is recoverable within a reasonable period of
time outweighs evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss is recognized equal to the
difference between the investment’s cost and its fair value.
Significant
Events:
To
facilitate an analysis of MSGI operating results, certain significant events
should be considered:
In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered into
with The National Aeronautics and Space Administration. The note bears interest
at 25% and matured on August 30, 2009. In addition, the Company was obligated to
issue 500,000 shares of common stock to the lender as additional consideration
to enter into the note agreement. The shares were issued to the lender in
September 2009. As of the date of this filing, the principal balance and accrued
interest has not yet been paid to the lender. Although the note is technically
in default as of the date of this filing, the lender has made no formal claim of
default and the Company is currently in negotiations with the lender for
extension of the terms.
In August
2009, the Company announced that it had executed a Space Act Agreement with NASA
forming a partnership between MSGI and the Ames Research Center (ARC) located in
Moffet Field, California. The purpose of this collaboration between MSGI and
NASA is to commercialize various revolutionary technologies developed by NASA in
the fields of nanotechnology and alternative energy. The Company’s initial area
of focus is to be on the use of chemical sensors or nano-sensing technology.
These wired and wireless detection systems were first developed for space
exploration in 2007 and 2008 for experiments carried out on the Space Shuttle
Endeavor. The Company intends to form a number of majority owned subsidiaries,
each of which will hold the rights to a specific technology and also serve as
the vehicle for investment capital.
In August
2009, the Company announced that it had formed its first subsidiary for NASA
based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection – effectively electronic sniffing. NASA developed these Nano Chemical
Sensors for space missions to increase scientific measurement capabilities with
less mass and lower power requirements. The potential space and terrestrial
applications include cabin air monitoring onboard the Space Shuttle,
surveillance of global weather, forest fire monitoring, radiation detection, and
various other mission critical capabilities. This technology was developed at
the NASA Ames Research Center located in Moffet Field, California. The
commercial applications of these Nano Chemical Sensors relate specifically to
Homeland Security and Defense, Medical Diagnoses, Environmental Monitoring and
Process Control. Nanobeak seeks to offer products in each of these sectors
beginning in the fiscal year ending June 30, 2010, but timing of these efforts
cannot be assured. The Company subsequently reported the launching of its first
product derived from NASA technology, a handheld test for Diabetes, which uses
breath instead of blood. Nanobeak will take the prototype handheld sensor, which
measures acetone levels with a simple breath, out of the laboratory and into the
marketplace. Nanobeak will undertake product testing which will be done in
conjunction with a major hospital network in the United States, followed by
licensing discussions with the top pharmaceutical companies.
In
September 2009, the Company announced that it had formed its second subsidiary
for NASA based technology. The subsidiary is named Andromeda Energy Inc. and it
is a nanotechnology company focused on scalable alternative energy solutions
that operate more efficiently, and therefore yield significantly lower
electricity cost per watt than conventional energy sources. The Company is in
receipt of several expressions of interest for partnerships in the planned
deployment of this new technology from major corporations located in the
People’s Republic of China. The Company has also been asked to consider a dual
listing on the Hong Kong Stock Exchange.
26
During
the period ended September 30, 2009, the Company entered into several business
development, investor relations and consulting and advisory agreements with
separate service providers. Under the terms of these agreements, the Company has
committed to issue shares of common stock in lieu of cash in consideration for
the valuable services provided and to be provided by these individual firms. As
of the date of this filing, the Company has issued approximately 5.8 million
shares of common stock in lieu of various categories of cash compensation for
services rendered and to be rendered by the firms. Such services include, but
are not be limited to, investor relations, identification of potential providers
of equity or hybrid financing, the identification of strategic or joint-venture
and licensing partners, the identification of merger and/or acquisition
candidates, the provision of general business advice, the overview of
governmental procurement programs, the preparation of disclosure, marketing and
promotional materials.
Results of Operations for
the Three Months Ended September 30, 2009, Compared to the Three Months Ended
September 30, 2008
There
were no reported revenues during the three months ended September 30, 2009 (the
Current Period), nor in the three months ended September 30, 2008 (the Prior
Period).
There
were no costs of goods sold in the Current Period or in the Prior
Period.
Research
and development expenses of approximately $415,000 were realized during the
Current Period. These expenses were paid to NASA as reimbursement for research
and development costs incurred by NASA under certain Space Act Agreements, which
have been executed with the Company. There were no such costs in the Prior
Period.
Salaries
and benefits of approximately $179,000 in the Current Period decreased by
approximately $196,000 from salaries and benefits of approximately $375,000 in
the Prior Period. This reduction results primarily from a reduction in non-cash
compensation for the expense related to stock options issued to officers and
directors.
Selling,
general and administrative expenses of approximately $582,000 in the Current
Period decreased by approximately $28,000 or 5% from comparable expenses of
$610,000 in the Prior Period. This decrease is due primarily to reductions in
travel and entertainment related expenses of approximately $64,000, rents of
approximately $57,000, insurance of approximately $12,000 and investor relations
of approximately $72,000 offset by an increase in expense for various
professional fees of approximately $183,000.
Depreciation
and amortization expenses of approximately $3,000 were realized in the Current
Period and represent a decrease of approximately $1,000 from comparable expenses
during the Prior Period.
As a
result of the above, loss from operations of approximately $1,180,000 in the
Current Period increased by approximately $191,000 from comparable loss from
operations of $989,000 in the Prior Period.
During
the Prior Period, the Company recognized expenses for adjustments to the fair
market value of certain put options of $150,000. These expenses represent the
adjustment to the fair market value of the put options as of August 22, 2008 on
which date the put options were redeemed and subsequently
cancelled. As such, there were no such expenses in the Current
Period.
During
the Prior Period, the Company recognized a gain on the securities exchange
agreement of $1.7 million. This gain is the result of the redemption and
subsequent cancellation of all put options, Series H Preferred Stock and certain
related warrants held by Enable on August 22, 2008 and the related issuance by
us of the new $4 million convertible note, a $1 million cash payment and the
issuance of 20 million warrants for shares of common stock of Current Technology
Corporation. There was no such gain recognized in the Current
Period.
27
The
Company realized interest income of approximately $13,000 during the Prior
Period as a result of earnings on restricted cash on hand during such period.
There was no such income in the Current Period.
Interest
expense of approximately $1.9 million in the Current Period represents an
increase of approximately $929,000 from expenses of approximately $971,000 in
the Prior Period. This increase is due primarily the increase in non-cash
interest expenses derived from the amortization of certain debt discounts as
well as from interest accrued on new debt instruments issued during the Current
Period.
The
non-cash loss on debt guarantee realized during the Current Period was the
result of the issuance of shares of the Company’s common stock to the noteholder
of a certain bridge loan agreement, which was entered into by Mr. J. Jeremy
Barbera, Chief Executive Officer and Chairman of MSGI, and for which a portion
of the proceeds were used to advance funds to the Company. The Company issued
1,000,000 shares of its common stock at a market value of $170,000 on the date
of issuance. The Company has no further guarantee obligations under the bridge
loan agreement.
As a
result of the above, net loss of approximately $3.2 million in the Current
Period increased by approximately $2.8 million from comparable net loss of
approximately $0.4 million in the Prior Period.
Capital Resources and
Liquidity
Liquidity:
Historically,
the Company has funded its operations, capital expenditures and acquisitions
primarily through private placements of equity and debt transactions. The
Company currently has limited capital resources, has incurred significant
historical losses and negative cash flows from operations and has no current
period revenues. At September 30, 2009, the Company had $223 in cash and no
accounts receivable and a working capital deficit of $16.6 million. The Company
believes that funds on hand combined with funds that will be available from its
various operations will not be adequate to finance its operations requirements
and enable the Company to meet any of its financial obligations and payments
including those under its convertible notes and promissory notes for the next
twelve months. Certain promissory notes in the amount of $960,000 were due
February 28, 2009, $1,500,000 due March 31, 2009, $250,000 due on June 17, 2009
and $240,004 due on August 31, 2009. These notes are technically in default as
of the date of this filing, but none of the lenders have made a claim of default
and the Company is in the process of negotiating extended terms for each of the
debt instruments. Other promissory notes in the amount of $400,000 are due on
December 31, 2009. All other convertible notes are due prior to June 30, 2010
and the Company does not have the funds to repay such notes. Further,
there is uncertainty as to timing, volume and profitability of transactions, if
any, that may arise from our relationship with The National Aeronautics and
Space Administrations (NASA) and others. There can be no assurance as to the
timing of when or if we will receive amounts due to us for products shipped to
customers prior to June 30, 2008, which transactions have not yet been
recognized as revenue. As of the date of this filing, the Company has
ceased its business relationship with both Hyundai and Apro and a legal action
has been filed in the State of California naming both, among others, as
defendants. There are no assurances that any further capital raising
transactions will be consummated. Although certain transactions have been
successfully closed, failure of our operations to generate sufficient future
cash flow and failure to consummate our strategic transactions or raise
additional financing could have a material adverse effect on the Company's
ability to continue as a going concern and to achieve its business objectives.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. If the Company is unable to raise additional funds, it
may be forced to further reduce, or cease operations, liquidate assets, or
renegotiate terms with lenders and others of which there can be no assurance of
success. The accompanying financial statements do not include any
adjustments relating to the recoverability of the carrying amount of recorded
assets or the amount of liabilities that might result should the Company be
unable to continue as a going concern.
28
As of
September 30, 2009, we are authorized to issue 100,000,000 shares of common
stock. If the holders of the convertible promissory notes outstanding elect to
convert their holdings into common stock, and the holders of the stock options
and warrants outstanding elect to exercise their rights to purchase common
stock, the Company is obligated to have issued approximately 109,000,000 shares
of commons stock, which is in excess of what we currently have authorized. We
plan to ask the Company’s shareholders to authorize the issuance of additional
shares or reverse split our common stock at our annual
meeting. However there is no guarantee that we will be able to obtain
the votes needed to obtain the additional authorized shares.
The
Company recognized a net loss of approximately $3.2 million in the Current
Period. Cash used in operating activities was approximately $429,000. Cash used
in operating activities principally resulted from our operating loss, offset by
increases in accrued liabilities, the fair value of shares issued for services,
and non-cash interest expenses. Cash used in operating activities in the Prior
Period was approximately $876,000.
A use of
cash for investing activities of approximately $2,000 was realized in the Prior
Period for purchased of property and equipment. There was no such
activity in the Current Period.
In the Current Period, net cash of
approximately $429,000 was provided by financing activities. Net cash
provided by financing activities consisted of funds received that were advanced
from a certain corporate officer as well as cash provided by proceeds from a
promissory note. In the Prior Period there was $800,000 provided by financing
activities.
Debt
The
Company does not have any credit facilities as of September 30,
2009. Debt obligations as of September 30, 2009 are summarized as
follows:
Instrument
|
Maturity
|
Face
Amount
|
Discount
|
Carrying
Amount
at
September
30,
2009,
net
of discount
|
Carrying
Amount
at
June
30, 2009,
net
of discount
|
|||||||||||||
6%
Notes
|
December
13, 2009
|
$ | 1,000,000 | $ | 785,142 | $ | 214,858 | $ | 45,940 | |||||||||
6%
April Notes
|
April
4, 2010
|
1,000,000 | 955,326 | 44,674 | 11,630 | |||||||||||||
8%
Debentures
|
May
21, 2010
|
4,000,000 | 3,914,810 | 85,190 | 19,891 | |||||||||||||
8%
Notes
|
May
21, 2010
|
4,000,000 | — | 4,000,000 | 4,000,000 | |||||||||||||
Convertible
Term Notes – short term
|
February
28, 2009
|
960,000 | — | 960,000 | 960,000 | |||||||||||||
Convertible
Term Notes – short term
|
March
31, 2009
|
1,500,000 | — | 1,500,000 | 1,500,000 | |||||||||||||
Convertible
Term Notes – shot term
|
December
31, 2009
|
400,000 | — | 400,000 | 400,000 | |||||||||||||
10%
Convertible Term Notes – short term
|
June
17, 2009
|
250,000 | — | 250,000 | 250,000 | |||||||||||||
25%
Convertible Term Notes – short term
|
August
31, 2009
|
240,004 | — | 240,004 | — | |||||||||||||
Total
|
13,350,004 | 5,655,278 | 7,694,726 | 7,187,461 |
29
As of
September 30, 2009, the Company has the following debt commitments
outstanding:
8%
Debentures
On May
21, 2007, MSGI entered into a private placement with several institutional
investors and issued 8% convertible debentures in the aggregate principal amount
of $5,000,000 (the 8% Debentures), of which $4,000,000 is currently outstanding
with the remaining principal balance having been converted into shares of common
stock during fiscal 2008. There were no conversions during fiscal 2009 or the
three months ended September 30, 2009.
The 8%
Debentures have a maturity date of May 21, 2010 and accrue interest at a rate of
8% per annum. Payments of principal and interest under the Debentures are not
due until the maturity date. The investors can convert the principal amount of
the 8% Debentures into common stock of the Company, provided certain conditions
are met, and each conversion is subject to certain volume limitations. The
conversion price of the 8% Debentures is currently at $0.25.
In
connection with this debt, the note holders have warrants for the purchase of up
to 7,142,852 shares of common stock, exercisable over a five-year period at an
exercise price of $0.50. These warrants could be exchanged by the holder for
shares of common stock of the Company per the Warrant Exchange Agreement dated
March 16, 2009 (see Note 3). The shares will be issued to the holders of the
exchanged warrants over time.
The
Company allocated the aggregate proceeds of the 8% Debentures between the
warrants and the Debentures based on their fair value and calculated a
beneficial conversion feature and warrant discount in an amount in excess of the
$5 million in proceeds received. Therefore, the total discount was limited to $5
million. The discount on the Debentures was allocated from the gross
proceeds and recorded as additional paid-in capital. The discount is being
amortized to interest expense over the three-year maturity date. Should the 8%
Debentures be converted or paid prior to the payment terms, the amortization of
the discount will be accelerated.On March 16, 2009, the Company entered into
certain convertible promissory notes, which effected the anti-dilution provision
of these Debentures. The conversion price of the Debentures was reduced from
$0.50 to $0.25. No additional beneficial conversion expense was recorded related
to the conversion price change due to the immaterial effect of this adjustment
to the financial results of the Company as of September 30, 2009.
The 8%
Debentures and the Warrants have anti-dilution protections. The Company has also
entered into a Security Agreement with the investors in connection with the
closing, which grants security interests in certain assets of the Company and
the Company’s subsidiaries to the investors to secure the Company’s obligations
under the 8% Debentures and Warrants.
8% Notes
On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, an existing institutional investor of MSGI. In
connection with that Agreement, MSGI entered into an 8% convertible note in the
aggregate principal amount of $4,000,000 (the 8% Notes).
The 8%
Notes have a maturity date of May 21, 2010 and accrue interest at a rate of 8%
per annum. Payments of principal and interest under the Notes are not due until
the maturity date. The investors can convert the principal amount of
the 8% Notes into common stock of the Company, provided certain conditions are
met, and each conversion is subject to certain volume limitations. The
conversion price of the 8% Notes is currently at $0.25.
6% Notes
On
December 13, 2006, pursuant to a Securities Purchase Agreement between the
Company and several institutional investors, MSGI issued $2,000,000 aggregate
principal amount of Callable Secured Convertible Notes (the 6% Notes) and stock
purchase warrants exercisable for 3,000,000 shares of common stock in a private
placement for an aggregate offering price of $2,000,000, of which $1,000,000 is
currently outstanding with the remaining principal balance having been converted
into shares of common stock during fiscal 2008. There were no conversions during
fiscal 2009 or the three months ended September 30, 2009.
30
The 6%
Notes have a single balloon payment of $1,000,000 due on the maturity date of
December 13, 2009 and will accrue interest at a rate of 6% per annum. The
Investors can convert the principal amount of the 6% Notes into common stock of
the Company, provided certain conditions are met, and each conversion is subject
to certain volume limitations. The conversion price of the 6% Notes is currently
at $0.25. The payment obligations under the Notes accelerate if payments under
the Notes are not made when due or upon the occurrence of other defaults
described in the Notes. The warrants are exercisable through December 2013. The
exercise price of the warrants is $0.50 per share. These warrants could be
exchanged by the holder for shares of common stock of the company per the
Warrant Exchange Agreement dated March 16, 2009 (see Note 3). The shares will be
issued to the holders of the exchanged warrants over time.
The 6%
Notes and the warrants have anti-dilution protections. The Company has also
entered into a Security Agreement and an Intellectual Property Security
Agreement with the Investors in connection with the closing, which grants
security interests in certain assets of the Company and the Company’s
subsidiaries to the Investors to secure the Company’s obligations under the 6%
Notes and warrants.
The
Company allocated the aggregate proceeds of the 6% Notes between the warrants
and the Notes based on their fair values and calculated a beneficial conversion
feature and warrant discount in an amount in excess of the $1 million in
proceeds received. Therefore, the total discount was limited to $1 million. The
Company is amortizing this discount over the remaining term of the 6% Notes
through December 2009. Should the 6% Notes be converted or paid prior to the
payment terms, the amortization of the discount will be accelerated. On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these Notes. The conversion price of the
Notes was reduced from $0.50 to $0.25. No additional beneficial conversion
expense was recorded related to the conversion price change due to the
immaterial effect of this adjustment to the financial results of the Company as
of September 30, 2009.
On
October 3, 2007, a $1.0 million portion of the Notes outstanding were purchased
by certain third-party institutional investors, from the original note holders.
The Company did not receive any cash as a result of these transactions and was
not a party to the transaction. These institutional investors converted $1.0
million of the note balance as well as interest expense of $40,086 into an
aggregate of 2,080,172 shares of the Company’s common stock. In connection with
the conversion, the discount was accelerated for the related portion of the note
in an amount of $736,111. In addition, as part of the conversion transaction,
the Company allowed the note holders to convert at a rate of $0.50, which was
lower than the stated conversion price under the note agreement. Therefore, in
connection with this lower conversion rate, the Company recognized an additional
beneficial conversion charge on the principal and interest converted of
approximately $299,200.
As a
result of the conversion transaction of the Callable Secured Convertible 8%
Notes above and the 6% Notes converted, anti-dilution provisions of the
remaining 6% Notes were triggered. The conversion price of the remaining 6%
Notes was reduced from the variable conversion rate noted above to a fixed rate
of $0.50. As a result, the Company recognized an additional beneficial
conversion discount of approximately $263,900 which was recorded as a discount
to the note and allocated to additional paid in capital. This additional
discount will be amortized over the remaining term of the note.
6% April
Notes
On April
5, 2007, pursuant to a Securities Purchase Agreement between the Company and
several institutional investors, MSGI issued $1.0 million aggregate principal
amount of Callable Secured Convertible Notes (the 6% April Notes) and stock
purchase warrants exercisable for 1,500,000 shares of common stock in a private
placement for an aggregate offering price of $1.0 million. The 6% April Notes
have a single balloon payment of $1.0 million due on the maturity date of April
4, 2010 and will accrue interest at a rate of 6% per annum. The Investors can
convert the principal amount of the 6% April Notes into common stock of the
Company, provided certain conditions are met, and each conversion is subject to
certain volume limitations. The warrants have an exercise price of $1.00 and are
exercisable for a term of 7 years. These warrants can be exchanged by the holder
for shares of common stock of the company per the Warrant Exchange Agreement
dated March 16, 2009 (see Note 3). The shares will be issued to the holders of
the exchanged warrants over time.
31
As a
result of a conversion transaction of the Callable Secured Convertible 8% Notes
and the 6% Notes converted above, anti-dilution provisions of the April 6% Notes
were triggered. The conversion price of the April 6% Notes was reduced from a
variable conversion rate noted above to a fixed rate of $0.50. As a result, the
Company recognized an additional beneficial conversion discount of approximately
$166,700, which was recorded as a discount to the note and allocated to
additional paid in capital. This additional discount will be amortized over the
remaining term of the note.
The
Company allocated the aggregate proceeds of the 6% April Notes between the
warrants and the Notes based on their fair values and calculated a beneficial
conversion feature and warrant discount in an amount in excess of the $1 million
in proceeds received. Therefore, the total discount was limited to $1 million.
The Company is amortizing this discount to interest expense over the remaining
term of the 6% April Notes through April 2010. Should the 6% April Notes be
converted or paid prior to the payment terms, the amortization of the discount
will be accelerated. On March 16, 2009, the Company entered into certain
convertible promissory notes, which effected the anti-dilution provision of
these April Notes. The conversion price of the April Notes was reduced from
$0.50 to $0.25. No additional beneficial conversion expense was recorded related
to the conversion price change due to the apparent immaterial effect of this
adjustment to the financial results of the Company as of September 30,
2009.
The
payment obligation under the April Notes may accelerate if payments under the
April Notes are not made when due or upon the occurrence of other defaults
described in the April Notes.
The 6%
April Notes and the warrants have anti-dilution protections. The Company has
also entered into a Security Agreement and an Intellectual Property Security
Agreement with the Investors in connection with the closing, which grants
security interests in certain assets of the Company and the Company’s
subsidiaries to the Investors to secure the Company’s obligations under the 6%
April Notes and warrants.
Convertible Term Notes
payable
On
December 13, 2007, the Company entered into four short-term notes with private
institutional lenders. These promissory notes provided proceeds totaling $2.86
million to the Company. The proceeds of these notes were used to purchase
inventory. The notes carry a variable rate of interest based on the prime rate
plus two percent. These notes had an original maturity date of April 15, 2008.
These notes were not repaid on this date and the terms were amended at several
different dates to extend them to maturity dates of February 28, 2009, March 31,
2009, and December 31, 2009. While two of the notes payable are technically in
default at this time, neither of the lenders have claimed default on the notes
and the Company is presently in discussions with these lenders regarding
extended terms for these notes payable. There are no guarantees that the Company
will successfully execute the proposed addendum extensions with the two
lenders.
Warrants
to purchase up to an aggregate of 100,000 shares of common stock of the Company
were issued to the lenders in conjunction with these notes. The warrants have a
term of 5 years and carry an exercise price of $1.38 per share. The Company
allocated the aggregate proceeds of the term notes payable between the warrants
and the Notes based on their fair values, which resulted in a discount of
$80,208, which was fully amortized in fiscal 2008.
Between
April 30, 2008 and April 1, 2009, the Company executed a series of Amendments to
the Term Notes, which extended the payment terms for the term notes through
February 28, 2009 for one lender, March 31, 2009 for one lender, and December
31, 2009 for the remaining two lenders. Due to the default event,
commencing on April 15, 2008, the interest rate is now at the default interest
rate of 18%. Also, two of the holders now have the right to convert
the note at a rate of $0.51 per share, and the other two holders have the right
to convert the note at a rate of $0.25 per share.
32
In
addition, the terms of certain of the Amendments to the Loan Agreements called
for the Company to issue five-year warrants to purchase shares of common stock
of the Company to certain group lenders each week beginning May 1, 2008 and
continuing for each week that the principal balance of the term notes remains
outstanding. These warrants are to be issued with an exercise price set at the
greater of market value on the date of issuance or $0.50 per
share. As of June 30, 2008, a total of 284,717 warrants were issued
to the note holders, 33,218 warrants with an exercise price at $0.60 per share
and the remaining at an exercise price of $0.50 per share. These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued. In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.
During
the three months ended September 30, 2008, a total of 715,283 additional
warrants were issued to the note holders, all with an exercise price of
$0.50. These warrants were subsequently cancelled with the October
2008 addendum, as noted below. In addition, other group lenders
received shares of common stock of the Company instead of warrants under the
Amendments.
Effective
October 1, 2008, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
terminated all warrants to purchase common stock issued under previous addendum
agreements, which aggregated 1,000,000 warrants issued under those previous
addendum agreements, and, in their place, issued new warrants and additional
shares of common stock. At execution of the addendums, the Company issued
378,000 shares of common stock and warrants to purchase an additional 378,000
shares of common stock at an exercise price of $0.50. The Company issued an
additional 252,000 shares of common stock and warrants to purchase an additional
252,000 shares of common stock, at an exercise price of $0.50, between the date
of the agreement and December 31, 2008.
Effective
January 1, 2009, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
issued new warrants and additional shares of common stock and extended the
maturity date to March 31, 2009. The Company issued an additional 204,420 shares
of common stock and warrants to purchase an additional 204,420 shares of common
stock, at an exercise price of the greater of $0.50 or market value on the date
of grant. Effective February 1, 2009, the Company entered into an additional
addendum agreement with the fourth lender with regard to its held Note, which
issued 400,000 shares of common stock to the lender and extended the maturity
date of this Note to February 28, 2009. Effective April 1, 2009, the
Company entered into additional addendum agreements with two out of four lenders
with regard to their respectively held Notes, which issued new warrants and
additional shares of common stock and extended the maturity date to December 31,
2009. The Company issued an additional 221,195 shares of common stock
and warrants to purchase an additional 221,195 shares of common stock, at an
exercise price of the greater of $0.25 or market value on the date of the grant
for the period April 1, 2009 through June 30, 2009.
During
the three months ended September 30, 2009, the Company issued 46,200 warrants at
an exercise price of $0.25 and 46,200 shares of common stock. The
stock was determined to have a fair value of $4,753, based upon the fair market
value of the common stock on each date issued. The warrants were
determined to have a value of $4,320. The warrants were fair valued, at each
warrant issuance, using the Black-Scholes model. The warrant and
stock values were recorded as additional interest expense on the note during the
three months ended September 30, 2009.
10% Convertible Term Notes
payable
On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. Total
interest expense was approximately $7,000 for the year ended June 30,
2009. The notes had a maturity date of June 17, 2009. As
an inducement to Enable to enter into the Convertible Term Notes, the Company
entered into a Warrant Exchange Agreement with Enable (see Note 3). The
remaining terms of the 10% notes carry the same provisions as the 8% Debentures
in Note 5. While the notes are technically in default at September 30, 2009, the
lender has made no claim of default and the Company is currently in negotiations
with the lender for an extension to the terms of the notes. There can be no
assurance that the Company will be successful in securing the
extensions.
33
25% Convertible Term Notes
payable
In July 2009, the Company executed a
NASA Funding Promissory Note in the amount of $240,004 with a lender who also
holds a promissory note from December 2007. The new promissory note was executed
in order to enable the Company to meet its obligations under a certain Space Act
Agreement, which had been entered into with The National Aeronautics and Space
Administration. The note bears interest at 25% and matures on August 30, 2009.
In addition, the Company is obligated to issue 500,000 shares of common stock to
the lender as additional consideration to enter into the note agreement. The
shares were issued to the lender in September 2009. As of the date of this
filing, the principal balance and accrued interest has not yet been paid to the
lender. Although the note is technically in default as of the date of this
filing, the lender has not made any claim of default and the Company is
currently in negotiations with the lender for an extension to the terms of the
note. There can be no assurance that the Company will be successful in securing
any extension to the note.
Advances
During
the three months ended September 30, 2009, the Company received net funding in
the amount of approximately $189,000 from a certain corporate officer. During
the year ended June 30, 2009, the Company received net funding in the amount of
approximately $167,000 from this same corporate officer. As of
September 30, 2009, the total net amount received from the officer is
approximately $356,000. There is no interest expense associated with this
advanced funding and this is to be repaid upon the closing of any adequately successful
funding event or upon the collection of the Apro Media related accounts
receivable, which has not yet occurred. It is also noted by the Company that
this certain corporate officer is owed approximately $325,000 in back due
compensation as of the three months ended September 30,
2009.
During
the year ended June 30, 2008, the Company received funding in the amount of
$200,000 from Apro Media. These funds were advanced to the Company against
expected collections of accounts receivable generated under the Apro
sub-contract agreement. During the year ended June 30, 2009, the Company
received an additional $6,950 from Apro Media, bringing the aggregate to
$206,950. There is no interest expense associated with this advanced funding and
this is to be repaid to Apro upon collection of the related accounts receivable,
which has not yet occurred.
During
the year ended June 30, 2009, the Company received funding in the amount of
approximately $70,000 from Current Technology Corp. There is no interest expense
associated with this advanced funding and this is to be repaid upon collection
of the Apro Media related accounts receivable, which has not yet
occurred
During the year ended June 30, 2009,
the Company received funding in the amount of approximately $60,000 from certain
third parties. There is no interest expense associated with these advanced
fundings and they are to be repaid upon collection of the Apro Media related
accounts receivable, which has not yet occurred.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.
Item
4. Controls and Procedures.
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including Jeremy Barbera, the
Company's Chairman and Chief Executive Officer and Richard J. Mitchell III, the
Company’s Chief Accounting Officer, of the effectiveness of the Registrant's
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities and Exchange Act of 1934. Based on that evaluation, Mr.
Barbera and Mr. Mitchell have identified several material weaknesses and, as a
result, have concluded that the Company's disclosure controls and procedures as
of September 30, 2009 were not effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission's rules
and forms.
34
It is
noted by the Company that on November 13, 2009, certain of these material
weaknesses were communicated to the Company by our independent registered public
accounting firm. See the Form 10-K file for the year ended June 30, 2009 for the
disclosure of these material weaknesses. A material weakness is a
control deficiency, or a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
Remediation
of Material Weaknesses
The
Company intends to take action to hire additional staff, implement stronger
financial reporting systems and software and develop the adequate policies and
procedures with said enhanced staff to ensure all noted material weaknesses are
addressed and resolved. The Company has also retained a third party consulting
services to assist in developing and maintaining adequate internal control over
financial reporting. However, due to the Company’s cash flow
constraints, the timing of implementing the above has not yet been
determined.
There
were no other changes in the Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
35
PART
II- OTHER INFORMATION
Item
1. Legal Proceedings
Certain
legal actions in the normal course of business are pending to which the Company
is a party. The Company does not expect that the ultimate resolution of any
pending legal matters will have a material effect on the financial condition,
results of operations or cash flows of the Company.
In May
2009, the Company engaged the law firm of GCA Law Partners LLP, of Mountain
View, California, to represent us in possible action against Hyundai Syscomm
Corp., Apro Media Corp., Hirsch Capital Corp. and other entities and
individuals. Subsequently, the Company filed suit in United States District
Court, Northern District of California, alleging, among other faults, fraud,
breach of contract and unfair business practices. The Company seeks financial
relief and compensation for the alleged actions of the parties named in the
action. The engagement agreement calls for GCA to be compensated for all fees
incurred on a contingent basis, pending outcome of the lawsuit, and, further,
calls for the Company to issue 50,000 shares of common stock of the Company to
each of the two partners managing the legal proceedings. These shares were
issued to the respective partners during the three-month period ended September
30, 2009.
Item
6. Exhibits
(a) Exhibits
31.1
|
Rule
13a-14(a)/15d-14(a) Certification.
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification.
|
32.1
|
Section
1350 Certification.
|
32.2
|
Section
1350 Certification.
|
36
SIGNATURES
Pursuant
to the requirements of the Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
MSGI
SECURITY SOLUTIONS, INC.
|
||
(Registrant)
|
||
Date:
November 23, 2009
|
By:
|
/s/ J. Jeremy Barbera
|
J. Jeremy Barbera
|
||
Chairman of the Board and Chief Executive Officer
|
||
(Principal Executive Officer)
|
||
By:
|
/s/ Richard J. Mitchell III
|
|
Richard J. Mitchell III
|
||
Chief Accounting Officer
|
||
(Principal Financial Officer)
|
37