Unassociated Document
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 December 31, 2008
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)
|
|
|
|
|
|
575
Madison Avenue
|
|
|
New York, New York
|
|
10022
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s telephone number,
including area code: (917)
339-7134
_____________________________________________________
(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 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
January 31, 2009 there were 23,657,830 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
DECEMBER
31, 2008
|
Page |
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of
|
|
|
December
31, 2008 (unaudited) and June 30, 2008
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the
|
|
|
three
and six months ended December 31, 2008
|
|
|
and
2007 (unaudited)
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders Equity
|
|
|
(Deficit)
for the six months ended December 31, 2008 (unaudited)
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
six
months ended December 31, 2008 and 2007 (unaudited)
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7-22
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial
|
|
|
Condition
and Results of Operations
|
23-31
|
|
|
|
Item
4.
|
Controls
and Procedures.
|
32
|
|
|
|
PART
II- OTHER INFORMATION
|
|
|
|
|
Item
6.
|
Exhibits
|
33
|
|
|
|
|
|
|
SIGNATURES
|
|
34
|
PART
I - FINANCIAL INFORMATION
Item 1. Financial
Statements.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
188 |
|
|
$ |
150,624 |
|
Restricted
cash
|
|
|
- |
|
|
|
1,800,000 |
|
Accounts
receivable, net of allowances of $60,000 for each period
|
|
|
- |
|
|
|
128,000 |
|
Costs
of products shipped to customers for which revenue has not been
recognized, net of reserve of $5,416,616 and $1,350,000, respectively (see
Note 2)
|
|
|
- |
|
|
|
4,066,646 |
|
Other
current assets
|
|
|
6,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,188 |
|
|
|
6,145,270 |
|
|
|
|
|
|
|
|
|
|
Investments
in Current Technology Corporation
|
|
|
2,000,000 |
|
|
|
2,000,000 |
|
Property
and equipment, net
|
|
|
24,873 |
|
|
|
30,946 |
|
Other
assets, principally deferred financing costs, net
|
|
|
522,213 |
|
|
|
894,006 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,553,274 |
|
|
$ |
9,070,222 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable-trade
|
|
$ |
2,612,191 |
|
|
$ |
2,572,471 |
|
Convertible
term notes payable
|
|
|
2,860,000 |
|
|
|
2,860,000 |
|
Accrued
expenses and other current liabilities
|
|
|
3,432,673 |
|
|
|
2,755,588 |
|
Advances
from strategic partners
|
|
|
276,950 |
|
|
|
200,000 |
|
Advances
from corporate officer
|
|
|
100,137 |
|
|
|
- |
|
Other
advances
|
|
|
10,000 |
|
|
|
- |
|
6%
Callable convertible note payable, net of discount of
$997,814
|
|
|
2,186 |
|
|
|
- |
|
Accrued
liability for put options
|
|
|
- |
|
|
|
6,550,000 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,294,137 |
|
|
|
14,938,059 |
|
|
|
|
|
|
|
|
|
|
8%
Callable convertible notes payable, net of discount of $3,998,873 and
$3,999,938, respectively
|
|
|
4,001,127 |
|
|
|
62 |
|
6%
Callable convertible notes payable, net of discount of $999,183 and
$1,999,845, respectively
|
|
|
817 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
4,001,944 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit):
|
|
|
|
|
|
|
|
|
Convertible
preferred stock - $.01 par value; 0 shares at December 31, 2008 and
5,000,000 shares at June 30, 2008 of Series H issued and
outstanding
|
|
|
- |
|
|
|
50,000 |
|
Common
stock - $.01 par value; 100,000,000 shares authorized; 23,607,352 and
22,348,781 shares issued; 23,589,690 and 22,331,119 shares outstanding as
of December 31, 2008 and June 30, 2008, respectively
|
|
|
236,073 |
|
|
|
223,487 |
|
Additional
paid-in capital
|
|
|
271,919,486 |
|
|
|
271,243,011 |
|
Accumulated
deficit
|
|
|
(281,504,656 |
) |
|
|
(275,990,842 |
) |
Less: 17,662
shares of common stock in treasury, at cost
|
|
|
(1,393,710 |
) |
|
|
(1,393,710 |
) |
Total
stockholders’ equity (deficit)
|
|
|
(10,742,807 |
) |
|
|
(5,868,054 |
) |
Total
liabilities and stockholders’ equity (deficit)
|
|
$ |
2,553,274 |
|
|
$ |
9,070,222 |
|
(1)
Derived from the Audited Consolidated Financial Statements for the year ended
June 30, 2008.
See Notes
to Condensed Consolidated Financial Statements.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31,
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenues - Apro
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,816,560 |
|
Referral
fee revenues
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
Total
revenue
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,916,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
4,066,646 |
|
|
|
- |
|
|
|
4,066,646 |
|
|
|
2,844,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
(4,066,646 |
) |
|
|
- |
|
|
|
(4,066,646 |
) |
|
|
1,072,233 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
353,117 |
|
|
|
379,919 |
|
|
|
728,564 |
|
|
|
749,572 |
|
Selling,
general and administrative (including non-cash expense (credit) for shares
to be issued to Apro Media of ($7,248) and ($98,698) for the three months
for 2008 and 2007 and ($33,342) and $1,140,867 for the six months for 2008
and 2007, respectively
|
|
|
303,714 |
|
|
|
722,382 |
|
|
|
913,728 |
|
|
|
2,494,982 |
|
Depreciation
and Amortization
|
|
|
4,006 |
|
|
|
3,178 |
|
|
|
7,933 |
|
|
|
18,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating costs and expenses
|
|
|
660,837 |
|
|
|
1,105,479 |
|
|
|
1,650,225 |
|
|
|
3,263,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(4,727,483 |
) |
|
|
(1,105,479 |
) |
|
|
(5,716,871 |
) |
|
|
(2,191,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
expense for revaluation of put options to fair value
|
|
|
- |
|
|
|
- |
|
|
|
(150,000 |
) |
|
|
- |
|
Gain
on securities exchange agreement
|
|
|
- |
|
|
|
- |
|
|
|
1,700,000 |
|
|
|
- |
|
Interest
income
|
|
|
- |
|
|
|
624 |
|
|
|
13,124 |
|
|
|
624 |
|
Interest
expense
|
|
|
(382,680 |
) |
|
|
(8,520,853 |
) |
|
|
(1,353,410 |
) |
|
|
(9,931,345 |
) |
Total
other income (expense)
|
|
|
(382,680 |
) |
|
|
(8,520,229 |
) |
|
|
209,714 |
|
|
|
(9,930,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before provision for income taxes
|
|
|
(5,110,163 |
) |
|
|
(9,625,708 |
) |
|
|
(5,507,157 |
) |
|
|
(12,121,960 |
) |
Provision
for income taxes
|
|
|
6,657 |
|
|
|
3,000 |
|
|
|
6,657 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,116,820 |
) |
|
$ |
(9,628,708 |
) |
|
$ |
(5,513,814 |
) |
|
$ |
(12,127,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$ |
(0.22 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
|
23,465,060 |
|
|
|
17,033,762 |
|
|
|
23,041,723 |
|
|
|
14,026,663 |
|
See Notes
to Condensed Consolidated Financial Statements
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE
SIX MONTHS ENDED DECEMBER 31, 2008
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
in
Capital
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2008
|
|
|
5,000,000 |
|
|
$ |
50,000 |
|
|
|
22,348,781 |
|
|
$ |
223,487 |
|
|
$ |
271,243,011 |
|
|
$ |
(275,990,842 |
) |
|
|
(17,662 |
) |
|
$ |
(1,393,710 |
) |
|
$ |
(5,868,054 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of preferred stock for debt in
Securities Exchange Agreement
|
|
|
(5,000,000 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
to officer as a bonus
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
1,000 |
|
|
|
62,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
under Addendum to term notes payable
|
|
|
|
|
|
|
|
|
|
|
1,158,571 |
|
|
|
11,586 |
|
|
|
331,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued under
Addendums to term notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the six months ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,513,814 |
) |
|
|
|
|
|
|
|
|
|
|
(5,513,814 |
) |
|
|
|
- |
|
|
$ |
- |
|
|
|
23,607,352 |
|
|
$ |
236,073 |
|
|
$ |
271,919,486 |
|
|
$ |
(281,504,656 |
) |
|
|
(17,662 |
) |
|
$ |
(1,393,710 |
) |
|
$ |
(10,742,807 |
) |
See Notes
to Condensed Consolidated Financial Statements.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
SIX MONTHS ENDED DECEMBER 31,
(unaudited)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,513,814 |
) |
|
$ |
(12,127,960 |
) |
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,933 |
|
|
|
18,918 |
|
Gain
on securities exchange agreement
|
|
|
(1,700,000 |
) |
|
|
- |
|
Amortization
of deferred financing costs
|
|
|
392,793 |
|
|
|
375,133 |
|
Non-cash
compensation expense
|
|
|
226,790 |
|
|
|
318,624 |
|
Non-cash
expense for put option revaluation to fair value
|
|
|
150,000 |
|
|
|
- |
|
Non-cash
interest expense
|
|
|
363,984 |
|
|
|
8,961,515 |
|
Non-cash
expense (credit) for shares to be issued to Apro
|
|
|
(33,342 |
) |
|
|
150,867 |
|
Reserve
on deferred costs of products shipped
|
|
|
4,066,646 |
|
|
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
128,000 |
|
|
|
(3,916,560 |
) |
Inventory
|
|
|
- |
|
|
|
(1,438,200 |
) |
Other
current assets
|
|
|
(6,000 |
) |
|
|
1,250 |
|
Other
assets
|
|
|
(1,000 |
) |
|
|
(69,754 |
) |
Accounts
payable - trade
|
|
|
39,720 |
|
|
|
1,502,927 |
|
Accrued
expenses and other liabilities
|
|
|
742,627 |
|
|
|
1,206,881 |
|
Net
cash used in operating activities
|
|
|
(1,135,663 |
) |
|
|
(5,016,359 |
) |
Investing
activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,860 |
) |
|
|
(5,892 |
) |
Net
cash used in investing activities
|
|
|
(1,860 |
) |
|
|
(5,892 |
) |
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of term notes
|
|
|
- |
|
|
|
2,860,000 |
|
Release
of restricted cash to Company
|
|
|
1,800,000 |
|
|
|
- |
|
Cash
paid from restricted stock in Securities Exchange
Agreement
|
|
|
(1,000,000 |
) |
|
|
- |
|
Cash
advances from strategic partners, officers and others
|
|
|
187,087 |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
987,087 |
|
|
|
2,860,000 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(150,436 |
) |
|
|
(2,162,251 |
) |
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
150,624 |
|
|
|
2,463,691 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
188 |
|
|
$ |
301,440 |
|
|
|
|
|
|
|
|
|
|
Non-cash
Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
financing charges accrued in connection with Securities Exchange
Agreement
|
|
$ |
20,000 |
|
|
$ |
- |
|
Conversion
of $3,571,958 in convertible debt principal and $590,397 of interest to
7,957,532 shares of common stock
|
|
$ |
- |
|
|
$ |
4,162,355 |
|
1,000,000
shares of common stock issued to Apro Media pursuant to sub-contract
agreement
|
|
|
- |
|
|
|
990,000 |
|
91,965
shares of common stock issued for payment of services to Board of
Directors
|
|
|
- |
|
|
|
193,129 |
|
Additional
debt discount related to anti-dilution provision of conversion features
option on notes
|
|
|
- |
|
|
|
1,032,408 |
|
Deferred
financing fees and warrant discount related to the new term
debt
|
|
|
- |
|
|
|
182,992 |
|
See Notes
to Condensed Consolidated Financial Statements
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) (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-KSB for the fiscal year ended June 30, 2008 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 and six-month periods
ended December 31, 2008 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2009.
Liquidity
and Capital Resources:
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 December 31, 2008, the Company had approximately $188 in
cash and no accounts receivable. The Company believes that funds on hand
combined with funds that will be available from its various operations may not
be adequate to finance its operations and capital expenditure requirements and
enable the Company to meet its financial obligations and payments under its
convertible notes and promissory notes for the next twelve months. Certain
promissory notes in the amount of $960,000 are due February 28, 2009 and
$1,900,000 are due March 31, 2009 and certain convertible notes in the amount of
$1,000,000 are due December 13, 2009. Further, there is uncertainty
as to timing, volume and profitability of transactions that may arise from our
relationship with Hyundai, Apro 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. 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. 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.
Summary
of significant recent financing transactions:
On August
22, 2008, the Company entered into an Exchange Agreement with Enable Growth
Partners, LP (Enable), an existing institutional investor of MSGI and as of that
date, holder of 100% of MSGI’s Series H Convertible Preferred Stock pursuant to
which MSGI retired all outstanding shares of the Series H Preferred, warrants
issued in connection with the preferred stock, exercisable for 5,000,000 shares
of common stock of MSGI and put options exercisable for 5,000,000 shares of
common stock of MSGI. Enable recently acquired the Series H Preferred, Warrants
and Options pursuant to a private transaction with third
parties.
In
exchange for the retirement and/or redemption of the above securities, MSGI
issued Enable an 8% Secured Convertible Debenture due May 21, 2010 in the
principal amount of $4,000,000, a $1,000,000 cash redemption payment and
transferred to Enable warrants to purchase up to, in the aggregate, 20,000,000
shares of the common stock of Current Technology Corporation. The Redemption
Payment was paid by MSGI from the proceeds of the restricted cash accounts
maintained in connection with the original issuance of the Series H Preferred
Stock. The balance of the funds held in the restricted cash accounts
of $800,000 has been released to MSGI for working capital purposes (See Note
3).
Effective
October 1, 2008, the Company entered into addendum agreements to certain term
notes payable with three out of four lenders, which terminated all warrants to
purchase common stock issued under 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 a 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
the greater of $0.50 or market value on the date of grant, between the date of
agreement and December 31, 2008.
On
October 24, 2008 the Company received an irrevocable commercial letter of credit
from Shinhan Bank Seoul Korea in conjunction with Wells Fargo Bank, NA. The
letter of credit was in the amount of $920,000 for the purpose of acquiring
hardware and inventory required in order to fulfill specific purchase orders
from clients. This letter of credit expired on December 15, 2008
without having been utilized. Delays in production of hardware by the
manufacturer in Korea resulted in the expiration of the letter of credit without
utilization. It is the intent of the Company to enter into a new irrevocable
commercial letter of credit and to proceed with the acquisition of hardware and
inventory in order to fulfill the purchase orders received.
The
transactions described below were entered into after December 31, 2008, and will
impact our liquidity:
Effective
January 1, 2009, the Company entered into addendum agreements to certain term
notes payable with certain lenders, which, issued new warrants and additional
shares of common stock. The Company will issue 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, should the notes remain outstanding through March 31, 2009. Effective
February 1, 2009, the Company entered into an addendum to a certain term note
payable with an additional lender which, at execution of the addendum, the
Company issued 400,000 shares of common stock as well as revised the maturity
date of this note to February 28, 2009. The Company has not yet
determined the additional interest expense impact of these amendments to
financial statements for the three months ended March 31, 2009.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accounting policies of the Company are contained in the June 30, 2008 Form
10-KSB. The following are the more significant policies.
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, the securities technologies segment.
Revenue
Recognition:
The
Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin No. 104, (SAB 104), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. Revenues are
reported upon the completion of a transaction that meets the following criteria
of SAB 104 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.
The
majority of our revenues are derived from the shipment of product, without
installation or maintenance requirements by us, and accordingly revenue is
recognized upon shipment, when the above criteria have been met. Revenue for
maintenance contracts are deferred and recognized over the term of the
maintenance period. There was no deferred revenue as of December 31,
2008.
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 in fiscal 2009 due to certain revenue recognition
criteria not being met in these periods, related to the assurance of
collectibility among other factors. Through December 31, 2008, these factors
have not yet 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 as of
June 30, 2008, but have been fully reserved and expensed to the statement of
operations as costs of good sold as of December 31, 2008.
Costs of product shipped to
customers for which revenue has not been recognized
As of
December 31, 2008, the Company has capitalized the expense recognition of
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 or to date in fiscal 2009. The Company has also recorded a
full reserve against these product costs in the aggregate amount of
approximately $5.4 million, of which $4.1 million was recorded during the six
month period ended December 31, 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 been now fully reserved. The Company remains confident
that certain payment will be forthcoming and that income will be recognized,
effectively offsetting the expense of the reserve, upon receipt of payment from
the customers. However, there can be no assurances that this will
occur.
Accounts receivable and allowance
for doubtful accounts:
The
Company extends credit to its customers in the ordinary course of business.
Accounts are reported net of an allowance for uncollectible accounts. Bad debts
are provided on the allowance method based on historical experience and
management’s evaluation of outstanding accounts receivable. In assessing
collectibility, the Company considers factors such as historical collections, a
customer’s credit worthiness, age of the receivable balance both individually
and in the aggregate, and general economic conditions that may affect a
customer’s ability to pay. The Company does not require collateral from
customers nor are customers required to make up-front payments for goods and
services. At December 31, 2008 and June 30, 2008, the Company has an allowance
for doubtful accounts of $60,000 for accounts receivable from CODA (see Note
10).
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 Accounting
Principle Board No. 14 (APB 14), “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.” 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 December 31, 2008 and
June 30, 2008.
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.
Cost of Goods
Sold:
Costs of
goods sold are primarily the expenses related to acquiring, testing and
assembling the components required to provide the specific technology
applications ordered by each individual customer. In addition, reserves against
costs of product shipped to customers for which revenue has not been recognized
are also included in these expenses.
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 SFAS No. 109, “Accounting for Income Taxes.” Under
this method, 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.
The Company has a full valuation allowance established against deferred tax
assets.
On July
1, 2007, the Company adopted the provisions of Financial Standards Accounting
Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
related measurement model for uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 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 December 31, 2008 and June 30, 2008.
Earnings
(Loss) Per Share:
In
accordance with SFAS No. 128, “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 22,068,725 and 2,087,677 shares for
the periods ended December 31, 2008 and 2007, respectively were not included in
the computation of diluted earnings per share as they are anti-dilutive. Stock
options and warrants with exercise prices below average market price in the
amount of 13,751,048 for the periods ended December 31, 2007 were not included
in the computation of diluted earnings per share as they are anti-dilutive as a
result of net losses during the period presented. These amounts do
not include any securities issuable under the Hyundai and Apro agreements, as
such amounts are considered “contingently issuable,” and do not include any
securities under the convertible debt agreements as the impact would be
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.
Summary of Recent Accounting
Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115”, (SFAS 159) which provides companies with an option to
measure, at specified election dates, many financial instruments and certain
other items at fair value that are not currently measured at fair value. A
company will report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
This Statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company
has not elected to fair value its financial assets and liabilities under SFAS
No. 159 and therefore the application of this statement has not had a
material impact on the Company’s consolidated financial statements.
In
May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants.”
Additionally,
FSP APB 14-1 specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB 14-1 beginning in the first
quarter of 2010, and this standard must be applied on a retrospective basis. We
are currently evaluating the impact the adoption of FSP APB 14-1 will have on
our consolidated financial position and results of operations.
3. SECURITIES
EXCHANGE TRANSACTION
On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, LP (Enable), an existing institutional investor of MSGI and as
of that date, holder of 100% of MSGI’s Series H Convertible Preferred Stock
pursuant to which MSGI retired all outstanding shares of the Series H Preferred
Stock, 5,000,000 warrants issued in connection with the preferred stock,
exercisable for shares of common stock of MSGI and put options exercisable for
5,000,000 shares of Common Stock, which
had a fair value of $6,700,000 on August 22, 2008 (see Note 8). Enable
recently acquired the Series H Preferred Stock, Warrants and Put Options
pursuant to a private transaction with third parties. In exchange for the
retirement and/or redemption of the above securities, MSGI issued Enable an 8%
Secured Convertible Debenture ( the 8% Notes) due May 21, 2010 in the principal
amount of $4,000,000 (see Note 5), a $1,000,000 cash redemption payment and
transferred to Enable warrants to purchase up to, in the aggregate, 20,000,000
shares of the common stock of Current Technology Corporation. The redemption
payment was paid by MSGI from the proceeds of the restricted cash accounts
maintained in connection with the original issuance of the Series H Preferred
Stock. The balance of the funds held in the restricted cash accounts of $800,000
has been released to MSGI for working capital purposes. In connection with the
Securities Exchange Agreement and the Debenture, MSGI and its subsidiaries
entered into a Security Agreement and a Subsidiary Guarantee Agreement, whereby
MSGI and the subsidiaries granted Enable a first priority security interest in
certain property of MSGI and each of the Subsidiaries. The net effect
of this transaction resulted in a gain of $1,700,000.
4.
INVESTMENTS
Current Technology
Corporation
The
Company currently has a $2 million investment in Current Technology Corporation,
a corporation formed under the laws of the Canada Business Corporation Act. The
Company owns 20 million shares of the common stock of Current Technology, which
represents approximately 15% ownership of their outstanding common stock. The
Company recorded the investment on a cost method of accounting.
In
addition, the Company held warrants to purchase 20 million additional shares of
common stock 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 million
additional shares of common stock of Current Technology were assigned to the
parties to this agreement. See Note 3.
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 transactions
between MSGI and Celevoke have occurred during the six months ended December 31,
2008 or to date.
5. 8%
CALLABLE CONVERTIBLE NOTES PAYABLE
The 8%
Callable Convertible Notes Payable consist of the following as of December 31,
2008:
Instrument
|
|
Maturity
|
|
Face Amount
|
|
|
Discount
|
|
|
Carrying Amount
at December 31,
2008,
net of discount
|
|
|
Carrying
Amount at June
30, 2008, net of
discount
|
|
8%
Debentures
|
|
May
21, 2010
|
|
$ |
4,000,000 |
|
|
$ |
3,998,873 |
|
|
$ |
1,127 |
|
|
$ |
62 |
|
8%
Notes
|
|
May
21, 2010
|
|
|
4,000,000 |
|
|
|
— |
|
|
|
4,000,000 |
|
|
|
— |
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,001,127 |
|
|
$ |
62 |
|
8% Notes
On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, an existing institutional investor of MSGI (See Note
3). 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 $0.50.
Total
interest expense for the six months ended December 31, 2008 and 2007 in
connection with this note was approximately $118,000 and $0,
respectively.
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 the period ended
December 31, 2008.
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
$0.50.
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.
In fiscal
2008, 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.
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 six months ended
December 31, 2008 and 2007 in connection with this note was approximately
$288,000 and $618,000, respectively.
6. 6%
CALLABLE CONVERTIBLE NOTES PAYABLE
Instrument
|
|
Maturity
|
|
Face Amount
|
|
|
Discount
|
|
|
Carrying
Amount at
December
31, 2008,
net of discount
|
|
|
Carrying
Amount at
June 30, 2008,
net of discount
|
|
6% Notes
|
|
December
13, 2009
|
|
$ |
1,000,000 |
|
|
$ |
997,814 |
|
|
$ |
2,186
|
|
|
$ |
100 |
|
6%
April Notes
|
|
April
4, 2010
|
|
|
1,000,000 |
|
|
|
999,183 |
|
|
|
817 |
|
|
|
55 |
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,003 |
|
|
$ |
155 |
|
The 6%
Callable Convertible Notes Payable consist of the following as of December 31,
2008:
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 the period ended December 31, 2008.
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 $0.50. 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.
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.
Total
interest expense, including debt discount amortization, for the six months ended
December 31, 2008 and 2007 in connection with this note was approximately
$63,000 and $948,000 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 warrants have an
exercise price of $1.00 and are exercisable for a term of 7
years.
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
conversion price of the 6% April Notes is $0.50.
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.
The
payment obligation under the Notes may accelerate if payments under the Notes
are not made when due or upon the occurrence of other defaults described in the
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 six months ended
December 31, 2008 and 2007 in connection with this note was approximately
$57,000 and $114,000, respectively.
7. OTHER
NOTES PAYABLE AND ADVANCES
Other
Notes Payable consists of the following as of December 31, 2008:
Instrument
|
|
Maturity
|
|
Face Amount
|
|
|
Discount
|
|
|
Carrying
Amount at
December 31, 2008
and June
30, 2008,
net of discount
|
|
Convertible
Term Notes – short term
|
|
February
28, 2009
|
|
$ |
960,000 |
|
|
$ |
- |
|
|
$ |
960,000 |
|
Convertible
Term Notes – short term
|
|
March
31, 2009
|
|
|
1,900,000 |
|
|
|
- |
|
|
|
1,900,000 |
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,860,000 |
|
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 their current maturity dates of February 28,
2009 and March 31, 2009.
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 has been fully amortized in fiscal 2008.
Between
April 30, 2008 and February 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 and March 31, 2009 for the remaining three
lenders. Due to the default event, commencing on April 15, 2008, the
interest rate is now at the default interest rate of 18%. Also, the
holders now have the right to convert the note at a rate of $0.51 per
share.
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 in fiscal 2009 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.
The net
effect of all of the addendums to these term notes during the six months ended
December 31, 2008, was the issuance of 630,000 warrants at an exercise price of
$0.50 and 1,158,571 shares of common stock. The stock was determined
to have a fair value of $343,103 for the six months ended December 31, 2008,
based upon the fair market value of the common stock on each date
issued. The warrants were determined to have a value of $16,968,
which includes an offset of the value of the cancelled warrants previously
recorded. 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 six months ended December 31,
2008.
The
following assumptions were used in the Black-Scholes model for the warrants for
the six months ended December 31, 2008:
Expected term (years)
|
|
|
3 |
|
Dividend yield
|
|
|
0 |
% |
Expected volatility
|
|
|
143% - 167% |
|
Risk-Free interest rate
|
|
|
0.98-2.12% |
|
Weighted average fair value
|
|
$ |
0.16 |
|
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 will issue
new warrants and additional shares of common stock. The Company shall issue up
to 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, should these Notes remaining
outstanding until March 31, 2009. 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. The
Company has not yet determined the additional interest expense impact of these
amendments to financial statements for the three months ended March 31,
2009.
Total interest expense, including the
warrants and stock issued above, was approximately $618,000 and $35,000 for the
six months ended December 31, 2008 and 2007, respectively.
Advances
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 three months ended December 31, 2008, the
Company received an additional $76,950 from Apro Media, bringing the aggregate
to $276,950. 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 three months ended December 31, 2008, the Company received funding in the
amount of approximately $100,000 from a certain corporate officer. 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.
The
Company has not imputed interest on the above advances since it would not be
material.
8. 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 SFAS 123R,
“Share-Based Payment”, 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 six months ended December 31, 2008 or
2007. As of December 31, 2008, 1,025,000 options are outstanding, of
which 1,008,333 options are exercisable. The stock based compensation
expense related to stock options for the six months ended December 31, 2008 and
2007 was approximately $216,000 and $254,000, respectively. As of December 31,
2008, 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 December 31,
2008, non-vested compensation cost that has not yet been recognized was
approximately $10,000, which is expected to be recognized over a weighted
average period of approximately 1.25 years.
During
fiscal 2007, the Company had approved the issuance of 100,000 shares of common
stock to an officer at the end of one year and an additional 100,000 shares of
common stock to the officer at the end of two years. The Company has
accounted for this additional stock award as a liability, under SFAS 123R, which
had a value of $15,800 as of December 31, 2008, which is for the last 100,000
shares to be awarded. The Company recorded an expense for this award
of approximately $11,000 and $64,500 for the six months ended December 31, 2008
and 2007, respectively
Warrants:
As of
December 31, 2008, the Company has 21,043,725 of warrants outstanding for the
purchase shares of common stock at prices ranging from $0.50 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, 2008, the Company issued 715,283 five-year
warrants to certain lenders in relationship to the addendum agreements (see Note
7). These warrants carry an exercise price of $0.50. A fair market value of
$194,727 for these warrants was calculated using the Black-Scholes method and
was expensed to interest expense in the period ended September 30,
2008.
During
the three months ended December 31, 2008, the Company terminated the
715,283 warrants issued during the three months ended September 30, 2008, as
well as 260,717 warrants issued during the fiscal year ended June 30, 2008 and,
in their place, issued 630,000 new warrants as well as shares of common stock. A
fair market value of $100,073 for these new warrants was calculated using the
Black-Scholes method and was expensed to interest expense in the period ended
December 31, 2008, which was offset by the expense previously recorded for the
terminated warrants, in the amount of $278,000.
Common
Stock Transactions:
During
the six months ended December 31, 2008, the Company issued 100,000 shares of
common stock to an officer of the Company as a bonus, resulting in a non-cash
compensation charge of $63,000. This compensation charge was fully accrued for
in fiscal 2008, so there was no impact to the current period. In
addition, the Company had previously approved the issuance of 100,000 shares of
common stock to the officer, which are due to the officer in May 2009. The
Company has accounted for this additional stock as a liability, under SFAS 123R,
in the amount of $15,833 as of December 31, 2008.
During
the six months ended December 31, 2008, the Company issued 1,158,571 shares of
its common stock to a certain private institutional lenders in relation to a
series of addendums executed to the lenders’ short term loan agreements. The
shares carried a fair market value of $343,100 and this amount was expensed as
additional non-cash interest during the period.
9. ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued
expenses as of December 31, 2008 and June 30, 2008 consist of the
following:
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
Salaries
and benefits
|
|
$ |
120,366 |
|
|
$ |
136,487 |
|
Payroll
taxes and penalties
|
|
|
1,457,199 |
|
|
|
1,341,746 |
|
Fair
value of shares to be issued to Apro
|
|
|
28,994 |
|
|
|
62,336 |
|
Audit
and tax preparation fees
|
|
|
229,755 |
|
|
|
280,352 |
|
Interest
|
|
|
1,311,126 |
|
|
|
716,857 |
|
Taxes
|
|
|
32,907 |
|
|
|
32,907 |
|
Board
fees
|
|
|
67,496 |
|
|
|
52,996 |
|
Rent
|
|
|
70,050 |
|
|
|
- |
|
Other
|
|
|
114,780 |
|
|
|
131,907 |
|
Total
|
|
$ |
3,432,673 |
|
|
$ |
2,755,588 |
|
The
Company has not filed or paid payroll taxes during fiscal 2007, 2008 or 2009 to
date.
10.
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, 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.
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 December 31,
2008 or to date and therefore there have been no warrants vested under this
agreement.
Relationship with Apro Media
Corporation
On May
10, 2007, the Company entered into an exclusive sub-contract and distribution
agreement with Apro Media Corp. (Apro or Apro Media) 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 will 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. MSGI is to
establish and operate a 24/7/365 customer support facility in the Northeastern
United States. Apro will 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. The contract required working
capital of at least $5 million due to considerable upfront expenses including a
$2.5 million payment by MSGI to Apro Media, which was made on May 31, 2007, for
the proprietary system development requirements of the Fortune 100 client and
the formation of a staffed production and customer service facility and
warehouse.
Per the
terms of the sub-contract agreement with Apro, the Company is 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
$28,994 and $62,336 at December 31, 2008 and June 30, 2008, respectively, and
has been reflected as a liability in our consolidated balance sheet. For the
three and six months ended December 31, 2008 the Company recorded a reduction in
expense of $7,248 and $33,342, respectively, related to the decrease of the
liability for this period due to changes in the fair value of the stock to be
issued. The expense is included in selling, general and
administrative expenses. This liability will be re-measured at each period end,
until all shares are issued.
As of
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
fiscal 2009. In addition inventory costs related to these
transactions have 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.
See Note 2 for further details.
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).
As part of this expansion MSGI may become the beneficiary of various technology
transfers. These new assets are expected to include Hi-Definition Video
Surveillance systems, Hi-Definition DVR systems and emerging RFID
Technology. 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 there can be no assurances that this
proposed level of revenues can or will be attained.
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, and there can be no assurances that this level of revenues can or will
be attained.
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. In connection with such
transaction, CODA assumed certain development and operations responsibilities of
the Innalogic entity. The Company recognized $100,000 in revenues during the six
months ended December 31, 2007 under this arrangement. No such revenue has been
recognized during the six months ended December 31, 2008.
11.
SERIES H CONVERTIBLE PREFERRED STOCK AND PUT OPTION
On
January 10, 2008, the Company entered into a Preferred Stock Agreement
Transaction with certain institutional investors (the Buyers), which consisted
of a Series H Preferred Stock, warrants and a put option agreement. The Company
received proceeds of $5 million, of which a portion was used to make a
significant investment in Current Technology Corporation (see Note
4).
The
Company issued 5,000,000 shares of the Series H Convertible Preferred Stock, par
value $0.01 per share. The preferred stock shall rank on a pari passu
basis with the holders of the common stock in event of a liquidation, therefore
there is no liquidation preference to the preferred stockholders. The preferred
stock is not entitled to any dividends. The preferred stock is
convertible at the holder’s election into common stock at a conversion rate of
$1.00 per share.
The
Company also issued warrants to purchase 5,000,000 shares of common stock at an
exercise price of $2.50 per share. The Warrants are immediately exercisable and
provide for a cashless exercise option for the period while each share of Common
Stock issuable upon exercise of the Warrants is not registered for resale with
the SEC or such registration statement is not available for resale. The Warrants
expire five years following the date of issuance.
The
conversion price of the preferred stock and the warrant exercise price are both
subject to an anti-dilution adjustment in the event that the Company issues or
is deemed to have issued certain securities at a price lower than the applicable
conversion or exercise price. Conversion of the preferred stock and
exercise of the warrant is limited if the holder would beneficially own in
excess of 4.99% of the shares of common stock outstanding.
Concurrently,
the Company entered into the five-year Put Option Agreement with the Buyers
pursuant to which the Buyers may compel the Company to purchase up to 5 million
common shares (or equivalent preferred shares) at an initial put price per share
of $1.20 which is in effect beginning July 10, 2008 through January 10, 2009. At
each January anniversary date of the agreement, the put price increases $0.20
over the prior year put price until the put price is $2.00 in the last year of
the put option agreement. The Buyers cannot exercise the options
under the Put Option agreement until July 10, 2008. The Buyers are
initially limited to a Maximum Eligible Amount, as defined in the agreement, of
shares that can be put which is initially 1/6 of the total 5 million shares,
which increases by 1/6 on each monthly anniversary. The put option
agreement also contains a put termination price which is initially set at $2.00
for the period of July 10, 2008 through January 10, 2009 and then increases by
approximately $0.33 for each anniversary year of the contract until it reaches
$3.33 at the end of the contract. There are also certain other
limitations, as defined within the agreement.
The Put
Price may be paid by the Company in shares of Common Stock or at the Company’s
election in cash or in a combination of cash and Common
Stock. However, there are certain limitations and restrictions within
the agreement that may limit the Company’s option to pay the shares in Common
Stock and may at that point require cash payment. Payments made in
common stock are based upon 75% of the weighted average stock price as defined
in the agreement.
As part
of the $5 million in proceeds received for this Securities Purchase Agreement,
$1,800,000 was designated as restricted cash to be held in a secured Blocked
Control Account in order to collateralize the put option agreement and this
account was available to be drawn upon by a Buyer exercising its rights under
the put option agreement.
The put
option agreement was accounted for as a liability under guidance from SFAS 150,
“Accounting for Certain Hybrid Financial Instruments with Characteristics of
both Liabilities and Equity.” The Company had to allocate the
proceeds between the put option and the preferred stock, and determined that the
entire proceeds should be first allocated to the liability instrument. The
initial fair value calculated at January 10, 2008 for the put option agreement
was $5,800,000. The liability is adjusted to fair value for each
reporting period and the fair value at August 22, 2008 was $6,700,000, such that
an aggregate loss of $1.7 million has been recognized since
inception. The additional increase in fair value of $150,000 from
June 30, 2008 through August 22, 2008 was recorded as an expense for the period
ended September 30, 2008. Fair value for the put options was calculated using
the following assumptions as of August 22, 2008:
|
|
August 22, 2008
|
|
Expected term
(years)
|
|
|
1.80 |
|
Expected
put option price
|
|
$ |
1.60 |
|
Dividend
yield
|
|
|
0 |
% |
Expected
volatility
|
|
|
153 |
% |
Risk-free
interest rate
|
|
|
2.420 |
% |
Put
option fair value per share
|
|
$ |
1.34 |
|
On August
22, 2008, the Company entered into a Securities Exchange Agreement (see Note 3)
with the holders of the Series H Convertible Preferred Shares and Put Options.
The effect of this transaction was to fully cancel and redeem the Series H
Preferred Stock, certain warrants and the Put Option agreements in exchange for
other securities issued. Therefore, as of December 31, 2008, there
are no shares of the Series H Preferred Stock outstanding, as well as there is
no liability related to the put option.
12.
SUBSEQUENT EVENTS
Effective
January 1, 2009, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes and
effective February 1, 2009, the Company entered into an additional addendum
agreement with the fourth lender with regard to its held Note. See
Note 7 for details of these addendums.
On
February 9, 2009, Mr. J. Jeremy Barbera, Chief Executive Officer and Chairman of
MSGI entered into a 90-day bridge loan agreement with a lender yielding net
proceeds of $240,000. Certain personal assets of Mr. Barbera were used as senior
collateral. The Company also provided a full guarantee and certain Company
assets were used as junior collateral. The Board of Directors of the
Company approved the transaction during a meeting held on February 6, 2009. The
net proceeds of the bridge loan were used primarily for a new business venture
on behalf of the Company as well as to meet short-term working capital
requirements of the Company. The Company has given no consideration to Mr.
Barbera for this personal guarantee of the 90-day bridge
loan.
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
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 and six-month periods ended December 31, 2008 and
2007. 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-KSB for the year ended June 30, 2008.
Financial
Reporting Release No. 60 requires all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. The following is a brief description of the more significant
accounting policies and methods used by the Company.
The
Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin No. 104, (SAB 104), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. Revenues are
reported upon the completion of a transaction that meets the following criteria
of SAB 104 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.
The
majority of our revenues are derived from the shipment of product, without
installation or maintenance requirements by us, and accordingly revenue is
recognized upon shipment, when the above criteria have been met. Revenue for
maintenance contracts are deferred and recognized over the term of the
maintenance period. There was no deferred revenue as of December 31,
2008.
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 in fiscal 2009 due to certain revenue recognition
criteria not being met in these periods, related to the assurance of
collectibility among other factors. Through December 31, 2008, these
factors have not yet 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 as of June 30, 2008, but have been fully reserved and expensed
to the statement of operations as costs of good sold as of December 31, 2008.
The Company is currently engaged in vigorous collection activities regarding the
various amounts due and the Company remains confident that payment will be
forthcoming and that income will be recognized at such time. However,
there can be no assurances that this will occur.
Costs of
product shipped to customers for which revenue has not been
recognized:
As of
June 30 and December 31, 2008, the Company has capitalized the expense
recognition of 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 or to date in fiscal 2009. The Company has also
recorded a full reserve against these product costs in the amount of
approximately $5.4 million, of which $4.1 million was recorded during the six
month period ended December 31, 2008. This reserve estimates the potential costs
that may be unrecoverable. As stated above, the Company is currently engaged in
vigorous collection activities regarding the various amounts due which are
related to these costs, which have been now fully reserved. The Company remains
confident that certain payments will be forthcoming and that income will be
recognized, effectively offsetting the expense of the reserve, upon receipt of
payment from the customers. However, there can be no assurances that
this will occur.
Accounts
Receivable and Allowance for Doubtful Accounts:
The
Company extends credit to its customers in the ordinary course of business.
Accounts are reported net of an allowance for uncollectible accounts. Bad debts
are provided on the allowance method based on historical experience and
management’s evaluation of outstanding accounts receivable. In assessing
collectibility, the Company considers factors such as historical collections, a
customer’s credit worthiness, age of the receivable balance both individually
and in the aggregate, and general economic conditions that may affect a
customer’s ability to pay. The Company does not require collateral from
customers nor are customers required to make up-front payments for goods and
services. At December 31, 2008 and June 30, 2008, the Company has an allowance
for doubtful accounts of $60,000 for accounts receivable from CODA.
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 SFAS No. 109, “Accounting for Income Taxes.” Under
this method, 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.
The Company has a full valuation allowance established against deferred tax
assets.
The
Company follows the provisions of Financial Standards Accounting Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
related measurement model for uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 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 December 31, 2008 and June 30, 2008.
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:
We follow
Statement of Financial Accounting Standards No. 123 Revised 2004 (SFAS 123R),
"Share−Based Payment". 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 in accordance with Accounting
Principles Board No. 14 (APB 14), “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants”. The fair value of the warrants is
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 December 31, 2008 and June 30, 2008.
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.
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.
Recent
Accounting Pronouncements:
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115”, (SFAS 159) which provides companies with an option to
measure, at specified election dates, many financial instruments and certain
other items at fair value that are not currently measured at fair value. A
company will report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
This Statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company has not elected to fair value its financial
assets and liabilities under SFAS No. 159 and therefore the application of this
statement has not had a material impact on the Company’s consolidated financial
statements.
In
May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants.”
Additionally,
FSP APB 14-1 specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the entity’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. We will adopt FSP APB 14-1 beginning in the first
quarter of 2010, and this standard must be applied on a retrospective basis. We
are currently evaluating the impact the adoption of FSP APB 14-1 will have on
our consolidated financial position and results of operations.
Significant
Events:
To
facilitate an analysis of MSGI operating results, certain significant events
should be considered.
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 to fulfill the contract referred to us by Apro.
On
January 10, 2008, the Company issued (i) 5,000,000 shares of the Company’s
Series H Convertible Preferred Stock (ii) a Put Option agreement and (iii)
warrants exercisable for 5,000,000 shares of Common Stock at an exercise price
of $2.50 per share. The Buyers paid a total of $5,000,000 for securities issued
in the Preferred Stock Transaction. From the Total Purchase Price, $2,000,000
was used to purchase the securities of Current Technology and $1,800,000 was
placed in a restricted cash account to be used as collateral for the Company’s
obligations under the Put Option Agreement. See below for a
description of the Securities Exchange Transaction.
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. Under this agreement, at June 30, 2008, the
Company has invested a total of $2 million and owns 20 million shares of the
common stock of Current Technology, which represents approximately 15% ownership
of their outstanding common stock. In addition, the Company held
warrants to purchase 20 million additional shares of common stock. As
of June 30, 2008, the Company has an option to invest an additional $500,000
under the original agreement terms. Subsequent to year end, the 20 million
warrants were assigned to a third party as part of a Securities Exchange
Agreement involving the Company’s Preferred Stock.
On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, LP (Enable), an existing institutional investor of MSGI and as
of that date, holder of 100% of MSGI’s Series H Convertible Preferred Stock
pursuant to which MSGI retired all outstanding shares of the Series H Preferred
Stock, 5,000,000 warrants issued in connection with the preferred stock,
exercisable for shares of common stock of MSGI and put options exercisable for
5,000,000 shares of Common Stock. Enable recently acquired the Series H
Preferred Stock, Warrants and Put Options pursuant to a private transaction with
third parties.
Results of Operations for
the Three Months Ended December 31, 2008, Compared to the Three Months Ended
December 31, 2007
There
were no reported revenues during the three months ended December 31, 2008 (the
Current Period), nor were there revenues reported during the three months ended
December 31, 2007 (the Prior Period).
Costs of
goods sold in the amount of $4.1 million were realized during the Current
Period. These costs represent a reserve against certain product costs (see Note
2). 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 been now fully
reserved. The Company remains confident that payment will be forthcoming and
that income will be recognized, effectively offsetting the expense of the
reserve, upon receipt of payment from the customers. However, there can be no
assurances that this will occur. There were no costs of goods sold in
the Prior Period.
Salaries
and benefits of approximately $353,000 in the Current Period were approximately
$27,000 or 7.0% less than those expenses of approximately $380,000 in the Prior
Period. This decrease is primarily the result of reductions to compensation of
certain executives.
Selling,
general and administrative expenses of approximately $304,000 in the Current
Period decreased by approximately $418,000 or 58% from comparable expenses of
approximately $722,000 in the Prior Period. This decrease is due primarily to a
reduction in expense for investor relations, accounting fees, office expenses
and travel related costs offset by increases in consulting fees, legal fees and
rents. A non-cash credit for the value of shares to be issued to Apro Media in
the amount of approximately ($7,000) was realized in the Current Period. This
credit represents a reduction in the market value of the shares to be issued to
Apro. A similar credit of approximately ($99,000) was realized in the Prior
Period.
As a
result of the above, loss from operations of approximately $4.7 million in the
Current Period increased by approximately $5.8 million from comparable loss from
operations of $1.1 million in the Prior Period.
Interest
expense of approximately $0.4 million in the Current Period represents a
decrease of approximately $8.1 million from expenses of approximately $8.5 in
the Prior Period. This decrease is due primarily to a reduction in non-cash
interest expenses derived from the amortization of certain debt
discounts.
As a
result of the above, net loss of approximately $5.1 million in the Current
Period decreased by approximately $4.5 million from comparable net loss of
approximately $9.6 million in the Prior Period.
Results of Operations for
the Six Months Ended December 31, 2008, Compared to the Six Months Ended
December 31, 2007
There
were no reported revenues during the six months ended December 31, 2008 (the
Current Period). Revenues from the sale of products of approximately $3.8
million for the six months ended December 31, 2007 (the Prior Period) were
directly attributed to transactions introduced to us through Apro Media, and a
referral fee of $100,000 associated with the Coda Octopus Group
arrangement.
Costs of
goods sold in the Current Period of approximately $4.1 million increased by
approximately $1.3 million compared to costs of goods sold of approximately $2.8
million in the Prior Period. These costs in the Current Period represent a
reserve against certain product costs (see Note 2). 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 been now fully reserved. The Company remains
confident that payment will be forthcoming and that income will be recognized,
effectively offsetting the expense of the reserve, upon receipt of payment from
the customers. However, there can be no assurances that this will occur. These
costs in the Prior Period represent the actual cost of product shipped to
clients and customers under the Apro sub-contract. The 28% gross margin
recognized under the product sale in the Prior Period is within the range
expected for transactions referred to us by Apro.
Salaries
and benefits of approximately $729,000 in the Current Period decreased by
approximately $21,000 from salaries and benefits of approximately $750,000 in
the Prior Period. This decrease is primarily the result of reductions to
compensation of certain executives.
Selling,
general and administrative expenses of approximately $0.9 million in the Current
Period decreased by approximately $1.6 million or 64% over comparable expenses
of $2.5 million in the Prior Period. This decrease is due primarily to a
reduction in expense for the value of shares due to Apro, investor relations,
accounting fees, office expenses and travel related costs offset by increases in
consulting fees, legal fees and rents. A non-cash credit for the value of shares
to be issued to Apro Media in the amount of approximately ($33,000) was realized
in the Current Period. This credit represents a reduction in the market value of
the shares to be issued to Apro. An expense of approximately $1.1 million was
realized in the Prior Period.
Depreciation
and amortization expenses of approximately $8,000 were realized in the Current
Period and represent a decrease of approximately $11,000 from comparable
expenses during the Prior Period. This decrease is primarily the result of
reductions in amortization as all intangible assets have been fully amortized in
the Prior Period.
As a
result of the above, loss from operations of approximately $5.7 million in the
Current Period increased by approximately $3.5 million from comparable loss from
operations of $2.2 million in the Prior Period.
During
the Current Period, the Company recognized expenses for adjustments to the fair
market value of certain put options of $150,000. There were no such expenses in
the Prior Period. 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.
During
the Current Period, the Company recognized a gain on the securities exchange
agreement of $1.7 million. There was no such gain recognized in the Prior
Period. 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 from shares of common stock of Current Technology
Corporation.
Interest
expense of approximately $1.4 million in the Current Period represents a
decrease of approximately $8.5 million from expenses of approximately $9.9 in
the Prior Period. This decrease is due primarily to a reduction in non-cash
interest expenses derived from the amortization of certain debt
discounts.
As a
result of the above, net loss of approximately $5.5 million in the Current
Period decreased by approximately $6.6 million from comparable net loss of
approximately $12.1 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 December 31, 2008, the Company had approximately $188 in
cash and no accounts receivable and a working capital deficit of $9.3 million.
The Company believes that funds on hand combined with funds that will be
available from its various operations may not be adequate to finance its
operations and capital expenditure requirements and enable the Company to meet
its financial obligations and payments under its convertible notes and
promissory notes for the next twelve months. Certain promissory notes in the
amount of $1,900,000 are due March 31, 2009, and one promissory note in the
amount of $960,000 is due on February 28, 2009, as well as certain convertible
notes in the amount of $1,000,000 are due December 13, 2009. Further, there is
uncertainty as to timing, volume and profitability of transactions that may
arise from our relationship with Hyundai, Apro and others. Further,
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. 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. 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.
On
October 24, 2008 the Company received an irrevocable commercial letter of credit
from Shinhan Bank Seoul Korea in conjunction with Wells Fargo Bank, NA. The
letter of credit was in the amount of $920,000 for the purpose of acquiring
hardware and inventory required in order to fulfill specific purchase orders
from clients. This letter of credit expired December 15, 2008,
without having been utilized. The Company intends to enter into
a new irrevocable commercial letter of credit arrangement and proceed with the
fulfillment of the purchase orders from clients.
The
Company recognized a net loss of approximately $5.5 million in the six month
period ended December 31, 2008. Cash used in operating activities was
approximately $1.1 million. Cash used in operating activities principally
resulted from our operating loss, offset by increases in accrued liabilities and
decreases in accounts receivable. Cash used in operating activities in the Prior
Period was approximately $5.0 million.
In the
Current Period, net cash of approximately $987,000 was provided by financing
activities. Net cash provided by financing activities consisted of
restricted cash that was released to the Company in connection with the August
22, 2008 securities exchange transaction as well as non interest bearing
advances provided by strategic partners and an officer of the Company. In the
Prior Period there was approximately $2.9 million received from financing
activities as a result of the issuance of certain term notes.
Debt
The
Company does not have any credit facilities as of December 31,
2008. Debt obligations as of December 31, 2008 are summarized as
follows:
Instrument
|
|
Maturity
|
|
Face Amount
|
|
Coupon
Interest
Rate
|
|
Carrying
Amount at
December
31, 2008,
net of
discount
|
8% Debentures
|
|
May 21, 2010
|
|
|
4,000,000
|
|
8
|
%
|
1,127
|
8% Notes
|
|
May 21, 2010
|
|
|
4,000,000
|
|
8
|
%
|
4,000,000
|
6% Notes
|
|
Dec. 13, 2009
|
|
|
1,000,000
|
|
6
|
%
|
2,186
|
6% April Notes
|
|
April 4, 2010
|
|
|
1,000,000
|
|
6
|
%
|
817
|
Term Notes short-term
|
|
February, 28, 2009 and March 31,
2009
|
|
|
2,860,000
|
|
18
|
%
|
2,860,000
|
Advances from Apro Media
|
|
N/A
|
|
|
276,950
|
|
N/A
|
|
276,950
|
Advances from corporate
officer
|
|
N/A
|
|
|
100,137
|
|
N/A
|
|
100,137
|
Advances - other
|
|
N/A
|
|
|
10,000
|
|
N/A
|
|
10,000
|
As of
December 31, 2008, the Company has the following debt commitments
outstanding:
Callable Secured Convertible
Note financing
8%
Notes
On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, an existing institutional investor of MSGI (See Note
3). 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 $0.50.
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 the period
ended December 31, 2008.
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, at a
conversion price of $0.50. In connection with this debt, the note
holders have warrants for the purchase of up to 7,142,852 of common stock
exercisable over a five-year period at an exercise price of $0.50.
6% Notes
On
December 13, 2006, 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. The 6% Notes have a single balloon
payment 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 at a conversion rate of
$0.50, provided certain conditions are met, and each conversion is subject to
certain volume limitations. During fiscal 2008, certain note holders
fully converted $1 million of principal and related accrued
interest. Therefore, as of December 31, 2008, only $1 million of
principal balance of this debt remains outstanding.
6% April
Notes
On April
5, 2007 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 5, 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 at a
conversion rate of $0.50, provided certain conditions are met, and each
conversion is subject to certain volume limitations.
Convertible Term
Notes
On
December 13, 2007, the Company entered into four short-term notes. These
promissory notes provided proceeds totaling $2.86 million to the
Company. The initial maturity date of these notes was April 15, 2008,
which the Company did not meet. The Company has entered into several
amendments with these note holders and the current maturity date is March 31,
2009, except for one note, which now has a February 28, 2009 maturity date.
There can be no assurances that these notes can be paid or further
negotiated.
The notes
initially had a variable interest rate of the prime rate plus two percent and
since April 15, 2008 are at a default interest rate of 18% until repayment
occurs. As of April 15, 2008, these notes are convertible at a
conversion rate of $0.51 per share, subject to limitations in the
agreement.
As part
of the amendments on these notes entered into to date, the Company has issued
certain shares of common stock of MSGI and certain warrants to purchase shares
of common stock at MSGI at an exercise price of $0.50.
Advance from Apro
Media
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 period ended December 31, 2008, the Company
received further advances from Apro in the amount of $76,950. 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 is currently
expected to be collected during the third and fourth quarter of fiscal
2009.
Advance from corporate
officer
During
the period ended December 31, 2008, the Company received funding in the amount
of $100,137 from a corporate officer. These funds were advanced to the Company
against expected collections of accounts receivable generated under the Apro
sub-contract agreement. There is no interest expense associated with this
advanced funding and this is to be repaid to the officer upon collection of the
certain accounts receivable, which are currently expected to be collected during
the third and fourth quarter of fiscal 2009.
Off-Balance Sheet
Arrangements
Financial
Reporting Release No. 61, which was released by the SEC, requires all companies
to include a discussion to address, among other things, liquidity, off-balance
sheet arrangements, contractual obligations and commercial commitments. The
Company currently does not maintain any off-balance sheet
arrangements.
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 December 31, 2008 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.
It is
noted by the Company that on November 12, 2008, certain of these material
weaknesses were communicated to the Company by our independent registered public
accounting firm. See the Form 10-KSB filed for the year ended June 30, 2008 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 December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART
II- OTHER INFORMATION
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.
|
_____________
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:
February 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)
|