SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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 an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- --------
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- --------
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date: As of November 11, 2005 there were
3,831,878 shares of the Issuer's Common Stock, par value $.01 per share
outstanding.
1
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
SEPTEMBER 30, 2005
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2005 (unaudited) and June 30, 2005 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2005 and 2004 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 29
Item 4. Controls and Procedures. 29
PART II- OTHER INFORMATION
Item 6. Exhibits 30
SIGNATURES 31
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2005 June 30, 2005
------------------ -------------
(Unaudited) (1)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,567,463 $ 118,465
Accounts receivable, net of allowances of $221,449
and $215,700 respectively 952,795 838,139
Note receivable 60,830 -
Accounts receivable - related party 116,285 61,456
Inventory 74,268 49,781
Other current assets 237,879 238,139
--------- ----------
Total current assets 3,009,520 1,305,980
Investments in Excelsa S.p.A. 4,066,192 4,063,077
Goodwill 3,108,471 3,108,471
Intangible assets, net 297,459 323,739
Property and equipment, net 2,054,872 2,136,190
Related party note receivable 1,157,256 1,139,687
Note receivable - net of current portion 110,343 -
Other assets 354,345 21,651
------------ ------------
Total assets $ 14,158,458 $ 12,098,795
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft 710,818 544,799
Accounts payable-trade 1,426,875 1,205,490
Accounts payable - related party in Italy 591,966 538,906
Accrued expenses and other current liabilities 3,563,169 3,439,704
Current portion of long-term liabilities 240,960 241,320
8% Convertible Note, net of debt discount of $1,371,412 1,628,588 -
--------- ---------
Total current liabilities 8,162,376 5,970,219
Long-term debt, net of current portion 180,720 180,990
Other liabilities 1,039,451 1,066,881
--------- ---------
Total liabilities 9,382,547 7,218,090
--------- ---------
Stockholders' equity:
Convertible preferred stock - $.01 par value; 18,750 shares authorized;
9,844.8 shares of Series F issued and outstanding (liquidation
preference $3,314,178 and $3,266,535, respectively) at September 30
and June 30, 2005 98 98
Common stock - $.01 par value; 9,375,000 shares authorized; 3,849,540
shares issued; 3,831,878 shares outstanding as of
September 30, and June 30, 2005 38,495 38,495
Additional paid-in capital 234,034,421 233,344,128
Deferred compensation - (1,301,974)
Accumulated deficit (227,939,919) (225,835,306)
Accumulated other comprehensive income 36,526 28,974
Less: 17,662 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------ -------------
Total stockholders' equity 4,775,911 4,880,705
------------ -------------
Total liabilities and stockholders' equity $ 14,158,458 $ 12,098,795
============ =============
(1) Derived from the Audited Consolidated Financial Statements for the year
ended June 30, 2005.
See Notes to Condensed Consolidated Financial Statements.
3
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
2005 2004
---- ----
Revenues $ 685,532 $ 150,000
Revenues - Related party 50,750 --
----------- -----------
Total revenue 736,282 150,000
Cost of goods sold 522,721 32,454
----------- -----------
Gross Profit 213,561 117,546
----------- -----------
Operating costs and expenses:
Research and development -- 48,869
Salaries and benefits 653,296 298,782
Non cash compensation 469,143 235,886
Selling, general and administrative 881,709 477,695
Depreciation and amortization 125,035 --
Gain on termination of lease -- (70,300)
----------- -----------
Total operating costs and expenses 2,129,183 990,932
----------- -----------
Loss from operations (1,915,622) (873,386)
Other income (expense):
Interest income 28,148 19,028
Interest expense (215,021) (17,674)
Other income 6,760 --
----------- -----------
Total other income/(expense) (180,113) 1,354
Minority interests in subsidiaries -- 139,845
Loss from continuing operations
before provision for income taxes (2,095,735) (732,187)
Provision for income taxes 8,878 3,000
----------- -----------
Loss from continuing operations (2,104,613) (735,187)
Discontinued operations:
Loss from discontinued operations -- (40,295)
----------- -----------
Net loss (2,104,613) (775,482)
Undeclared dividends on preferred stock (47,643) --
----------- -----------
Net loss attributable to common stockholders $(2,152,256) $ (775,482)
=========== ===========
Basic and diluted earnings (loss) per share attributable
to common stockholders:
Continuing operations $ (0.56) $(0.24)
Discontinued operations - (0.01)
-------- --------
Basic and diluted earnings (loss) per share $ (0.56) $(0.25)
======== =========
Weighted average common shares outstanding
basic and diluted 3,831,878 3,136,002
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(unaudited)
2005 2004
---- ----
Operating activities:
Net loss $(2,104,613) $ (775,482)
Loss from discontinued operations -- 40,295
Loss from continuing operations (2,104,613) (735,187)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 97,736 4,742
Amortization 26,280 --
Amortization of deferred financing costs 29,773 --
Non cash compensation 469,143 235,886
Non cash interest expense 99,757 --
Gain from termination of lease -- (70,300)
Minority interest in subsidiary -- (139,745)
Changes in assets and liabilities:
Accounts receivable (114,656) (150,000)
Account receivable - related party (54,829) --
Inventory (24,487) (173,070)
Other current assets 260 (89,510)
Note receivable (171,173) --
Other assets (5,163) (7,000)
Accounts payable - trade 221,385 (54,451)
Accounts payable - related party 53,060 --
Accrued expenses and other liabilities 96,035 (164,620)
----------- -----------
Net cash from/(used in) operating activities (1,381,429) (1,343,255)
----------- -----------
Investing activities:
Investment in Excelsa (3,115) --
Increase in related party note receivable (17,569) (17,355)
Purchases of property and equipment (16,418) (108,499)
----------- -----------
Net cash used in investing activities (37,102) (125,854)
----------- -----------
Financing activities:
Proceeds from issuance of 8% convertible notes, net 3,000,000 --
Deferred financing costs related to issuance of 8% convertible notes (300,250) --
Costs in connection with registration of stock (5,099) --
Expenditures from private placement of common shares -- (16,000)
Proceeds from issuance of common stock -- 800,000
Net borrowings on bank overdraft facilities - Italy 166,019 --
Repayment of related party note payable -- (500,000)
Decrease in long-term debt (630) --
----------- -----------
Net cash provided by financing activities 2,860,040 284,000
----------- -----------
Change in accumulated other comprehensive income 7,552 --
Net cash used in discontinued operations -- (130,742)
----------- -----------
Net decrease in cash and cash equivalents 1,448,998 (1,315,851)
Cash and cash equivalents at beginning of period 118,465 2,548,598
----------- -----------
Cash and cash equivalents at end of period $ 1,567,463 $ 1,232,747
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
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"), Innalogic, LLC ("Innalogic") and AONet
International S.r.L. ("AONet") (in combination "MSGI" or the "Company"). These
condensed consolidated financial statements are unaudited and should be read in
conjunction with the Company's Form 10-K, as amended, for the fiscal year ended
June 30, 2005 and the historical consolidated financial statements and related
notes included therein. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the
three-month period ended September 30, 2005 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2006.
Certain reclassifications have been made in the fiscal 2005 financial statements
to conform to the fiscal 2006 presentation.
Liquidity:
The Company has limited capital resources and has incurred significant
historical losses, negative working capital and negative cash flows from
operations. 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 including obligations for
the purchase of its interests in AONet and payments under its callable
secured convertible notes for the next twelve months. Failure of the new
operations to generate such sufficient future cash flow could have a
material adverse effect on the Company's ability to continue as a going
concern and to achieve its business objectives. A future funding event
may be required in order to meet the obligations for the next twelve
months. 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 July 12, 2005, MSGI closed a Callable Secured Convertible Note financing of
$3 million with a New York based institutional investor. The Company received $2
million in gross proceeds upon closing, and received an additional $500,000 upon
filing of the registration statement relating to this financing transaction, and
$500,000 upon the effectiveness of the registration statement (see Note 6). The
Note requires repayment over a three-year term with an 8% interest per annum.
Repayment shall be made in cash or in registered shares of common stock, or a
combination of both, at the option of the Company, and payment commences 90 days
after each closing date and is payable monthly in equal principal installments
plus interest over the remaining 33 months. The Holder has the option to convert
all or any part of the outstanding principle to common stock if the average
daily price, as defined in the agreement, for the preceding five trading days is
greater than the defined Initial Market Price of $6.56. The conversion price is
$4.92. The agreement provides that for any monthly period in which the stock
price is greater than 125% of the initial market price of $6.56, as defined in
the agreement, for the month, the interest rate for that month will be 0%. The
Company granted registration rights to the investors for the resale of the
shares of common stock underlying the notes and certain warrants that were
issued in the transaction.
8
2. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 Revised 2004, "Share-Based Payment" ("SFAS 123R"). 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. SFAS 123R is effective at the beginning of the first annual
reporting that ends after June 15, 2005. We adopted this Statement effective
July 1, 2005. Our adoption of SFAS 123R impacted our results of operations by
increasing the non cash compensation expense. The amount of the impact to the
Company for the three months ended September 30, 2005 was approximately $175,000
of additional expense that resulted under SFAS 123R as compared to the expense
that would have been recorded under APB 25 (see Note 7).
The Company adopted EITF No. 04-8 "The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share" during the quarter ended September
30, 2005. The Company's 8% Convertible Notes are convertible at the option of
the holder into shares of the Company's Common Stock once the common stock
trades above $6.56 per share for a specified period of time (a market price
trigger). EITF 04-08 requires companies with contingently convertible debt
instruments to include the dilutive effect of the contingently convertible debt
in the diluted earnings per share calculations regardless of whether the market
price trigger has been met. The adoption of this statement did not have any
effect on earnings per share, since the Company had losses during the period and
the effect of the conversion of the notes would have an antidilutive effect.
3. SUMMARY OF 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. Operations of subsidiaries acquired are
included in the MSGI financial statements from the date of the respective
acquisition. Operations of any subsidiaries sold are presented as discontinued
operations. Investments where the Company has less than a 20% ownership interest
and does not exert significant control and influence are recorded on the cost
basis.
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.
Deferred Financing Costs
Deferred financing costs are amortized over three years, the term of the debt
instrument.
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.
9
Revenues are reported for the operations of the various subsidiaries of MSGI
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.
FDA currently does not have any revenue transactions. Innalogic recognizes sales
of its product upon shipment if the above criteria have been met.
Revenue from AONet is mainly service based, consisting principally of specific
technical projects and maintenance activities and is either project specific or
of a long-term service (e.g., one year) relationship in nature. Short-term
projects are generally recognized at the end of the contract when the amounts
are billed and the customer has accepted the delivered service.
Other significant contractual arrangements for AONet relate to the maintenance
of data backup for customers on a periodic basis. The contractual terms for
these types of services varies based on the amount of data space required by the
customer and how often the activity occurs. These types of services, including
maintenance services, are such that the customer is billed monthly for the
service and revenue recognized in the month in which the service is provided.
There are certain customers for which several months may be invoiced in advance
of providing the service. In those cases, the revenue is deferred until the
services have been rendered.
Certain AONet contracts contain penalty clauses, such that if a customer breaks
the agreement prior to its termination, the Company is eligible to bill a
termination fee to the customer. Revenue on these billings is not recognized
until the amounts are collected, as it is not generally considered probable at
the time of billing that the full amount will be collected. Contracts do not
have upfront or non-refundable payment features.
Income Taxes:
The Company uses the 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. AONet files a
separate tax return in Italy on an annual basis.
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 goodwill and intangible assets, deferred tax valuation
allowance, valuation of stock options, fair value of net assets acquired and the
allowance for doubtful accounts. Actual results could differ from those
estimates.
10
Foreign Currency Transactions:
Assets and liabilities of our European subsidiary, whose functional currency is
the Euro, are translated at the prevailing rate at the balance sheet date and
revenues and expenses are translated at the average exchange rates prevailing
during the period. Gains and losses are recognized in other income as incurred.
Unrealized gains or losses are reported as accumulated other comprehensive
income within stockholders equity.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and accounts
receivable. A significant portion of cash balances is maintained with one
financial institution and may, at time, exceed federally insurable amounts. In
addition, the Company's European subsidiary maintains cash in a foreign bank
account, of which the amount was approximately $1,500 at September 30, 2005. The
Company has no financial instruments with off-balance-sheet risk.
The Company's services are provided to a variety of customers, generally located
in the continental United States and the northern area of Italy. The Company
maintains a reserve for potential credit losses based on an analysis of the
customers aging of receivables, financial risk profile and ongoing customer
contact. No single customer accounted for more than 10% of the revenues or
accounts receivable at September 30, 2005. No single supplier is considered to
be critical to the Company's ongoing business activities.
4. EARNINGS (LOSS) PER SHARE
Weighted average shares outstanding- basic and diluted for the quarters ending
September 30, 2005 and 2004:
2005 2004
---- ----
Weighted average common shares outstanding - basic 3,831,878 3,136,002
Common stock equivalents for options and warrants - -
--------- ---------
Weighted average common shares outstanding- diluted 3,831,878 3,136,002
========= =========
Stock options and warrants in the amount of 1,440,535 and 570,000 shares,
preferred stock convertible into 461,538 and 0 shares and 8% convertible notes
convertible into 609,756 and 0 shares were not included in the computation of
diluted earnings (loss) per share attributable to common stockholders, as they
are anti-dilutive as a result of net losses for the three months ended September
30, 2005 and 2004, respectively.
5. OTHER ASSETS
Other assets as of September 30, 2005 included the following:
Domestic Operations Italy Totals
Deferred financing costs, net $327,531 - $327,531
Deposits 26,500 314 26,814
-------- ----- --------
$354,031 $ 314 $354,345
======== ===== ========
The Company incurred deferred financing costs of $357,304 in connection with the
issuance of the 8% callable convertible notes (see Note 6). These costs are
being amortized over three years, the term of the Note. Amortization expense was
$29,773 for the three months ended September 30, 2005.
11
Other assets of $21,651 as of September 30, 2004 consists primarily of deposits.
6. 8% CALLABLE CONVERTIBLE NOTE
On July 12, 2005, MSGI entered into a Callable Secured Convertible Note
financing of $3 million with a New York based institutional investor. The
Company received $2 million in gross proceeds upon closing, received an
additional $500,000 in gross proceeds on August 4, 2005 upon filing of the
registration statement relating to this offering, and received $500,000 in gross
proceeds on September 10, 2005 upon the effectiveness of such registration
statement.
The Note requires repayment over a three-year term with an 8% interest per
annum. Repayment shall be made in cash or in registered shares of common stock,
or a combination of both, at the option of the Company, and payment commences 90
days after each closing date and is payable monthly in equal principal
installments plus interest over the remaining 33 months. The Holder has the
option to convert all or any part of the outstanding principle to common stock
if the average daily price, as defined in the agreement, for the preceding five
trading days is greater than the defined Initial Market Price of $6.56. The
conversion price is $4.92. The agreement provides that for any monthly period in
which the stock price is greater than 125% of the initial market price of $6.56,
as defined in the agreement, for the month, the interest rate for that month
will be 0%. The Company granted registration rights to the investors for the
resale of the shares of common stock underlying the notes and certain warrants
that were issued in the transaction.
The Notes are secured by a first lien on all Company assets. The Note agreement
provides the Company with the option to call the loan and prepay the remaining
balance due. If the loan is called early, the Company will be required to pay
125% of the outstanding principal and interest as long as the common stock of
the Company is at $6.00 or less. If the stock is higher than $6.00 when the
Company exercises the call option, then the amount owed is based upon a
calculation, as defined in the agreement, using the average daily price. If in
any month a default occurs, the note shall become immediately due and payable at
130% of the outstanding principal and interest.
The Company also issued five-year warrants to the investors for the purchase of
up to 75,000 shares of the Company's common stock, $0.01 par value, at an
exercise price of $7.50 per share, which are exercisable at any time.
The placement agent received three-year warrants for the purchase of 12,195
shares of the Company's common stock, at an exercise price of $7.50 per share
exercisable between the period January 12, 2005 and January 11, 2009. The agent
warrants were valued at $57,054 using the Black-Scholes option pricing model and
recorded as part of the financing costs. In addition, the agent received a fee
equal to 7% of the aggregate offering, in an amount of $210,000, which was
recorded as part of the financing costs. Total financing cost recorded in
connection with the Notes was $357,304 which is included in other assets on the
balance sheet and is being amortized over the term of the Notes (see Note 5).
The Company recorded a discount to the note payable of $1,471,169, of which
$404,792 represented the discount allocated to the warrants and $1,066,377
represented the beneficial conversion feature of the note. The fair value of the
warrants was determined using a Black-Scholes option pricing model. The discount
on the note 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 term of the note. Interest expense for the three months ended
September 30, 2005 in connection with the note was approximately $99,800. Should
the notes be converted or paid prior to the payment terms, the amortization of
the discount will be accelerated.
12
The Company made the first scheduled payment on the Note on November 1, 2005 in
the amount of $109,702 which represented principal and interest owed. Aggregate
monthly principal payments under all three installments of the notes will be
approximately $90,900 plus interest.
7. STOCK BASED COMPENSATION
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 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.
Effective July 1, 2005, the Company has adopted SFAS 123R, "Share-Based
Payment." SFAS 123R SFAS 123R replaces SFAS 123 "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statement based on their fair values. Under
SFAS 123R, the pro forma disclosures previously permitted under SFAS 123 are no
longer an alternative to financial statement recognition.
The Company has selected the Black-Scholes method of valuation for share-based
compensation and has adopted the modified prospective transition method under
SFAS 123R, which requires that compensation cost be recorded, as earned, for all
unvested stock options outstanding at the beginning of the first quarter of
adoption of SFAS 123R. As permitted by SFAS 123R, prior periods have not been
restated. The charge is being recognized in non cash compensation on a
straight-line basis over the remaining service period after the adoption date
based on the options' original estimate of fair value. 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.
Prior to the adoption of SFAS 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by APB 25 and related
interpretations, to account for its fixed-plan stock options to employees. Under
this method, compensation cost was recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. As permitted
by SFAS 123, the Company elected to continue to apply the intrinsic-value-based
method of accounting described above, and adopted only the disclosure
requirements of SFAS 123. The fair-value-based method used to determine
historical pro forma amounts under SFAS 123 was similar in most respects to the
method used to determine stock-based compensation expense under SFAS 123R.
However, in its pro forma disclosures, the Company accounted for option
forfeitures as they occurred, rather than based on estimates of future
forfeitures.
In connection with the adoption and provisions of SFAS 123R, the Company
reversed the deferred compensation balance of $1,301,974, resulting from the
application of the intrinsic value method of accounting for stock options, at
July 1, 2005 against Additional paid-in capital. This expense is now superceded
by the SFAS 123R expense, which will be recorded over the vesting period of the
stock options.
The following table illustrates the pro forma effect on the Company's net loss
and net loss per share as if the Company had adopted the fair-value-based method
of accounting for stock-based compensation under SFAS 123 for the three months
ended September 30, 2004:
13
September 30, 2004
Net loss attributable to common stockholders:
as reported $ (775,482)
Add: Stock-based employee compensation recorded 235,886
Subtotal (539,596)
Less: Stock based employee compensation expense
determined under the fair value method for all awards (265,381)
--------
Pro forma net loss attributable to common stockholders $ (804,977)
===========
Basic and diluted net loss per common share:
As reported $ (0.25)
==========
Pro forma $ (0.26)
==========
There were no stock options granted during the three months ended September 30,
2005. The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used for grants for the period ended September 30, 2004:
September 30 ,2004
Risk -free interest rate 4.00%
Expected option life Vesting life + four years
Dividend yield None
Volatility 158%
As of September 30, 2005, 176,000 options are exercisable. The weighted average
exercise price of all outstanding options is $2.43. As of September 30, 2005,
the Company has 880,535 warrants outstanding to purchase shares of common stock
at prices ranging from $6.00 to $8.25, of which 868,340 warrants are currently
exercisable.
8. DISCONTINUED OPERATIONS
In March 2004, the Company completed the sale of substantially all of the assets
relating to its telemarketing and teleservices business held by its wholly owned
subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices"). As such, the
operations and cash flows of MKTG Teleservices have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Loss from discontinued operations of approximately $40,000 during
the quarter ended September 30, 2004 are the result of trailing legal fees
associated with certain legal settlements pertaining to the discontinued
operation.
9. ACQUISITIONS
On July 1, 2005, MSGI and it's subsidiary Future Developments America, Inc.
("FDA") entered into a Stock Purchase, Earnout and Royalty Payment Agreement
(the "Agreement") with Future Developments, Ltd. ("FDL"), Darren Labas and Jamie
Labas, to acquire the remaining 49% of the issued and outstanding shares of
Future Developments America, Inc. held by Darren and Jamie Labas, not held by
the Company. This transaction gives 100% ownership of all issued and outstanding
shares of Future Developments America, Inc. to MSGI. The Agreement calls for a
purchase price by virtue of an earn out payment of 15% of gross sales of any FDL
products, less direct costs associated with such products, for sales of such
products by either MSGI or FDA. The earn out payments are capped at a maximum
payment of $1,000,000. Further subject to the terms and conditions of the
Agreement, ownership of certain fixed assets and component parts inventory on
the balance sheet of FDA is transferred to FDL as part of the purchase price.
These assets had minimal value and had been impaired and expensed on MSGI's
financial statements at June 30, 2005. The Agreement also calls for royalty
payments to be made by FDL to MSGI/FDA in the amount of 5% of net sales made to
any government sector law enforcement, security or intelligence based customer
in the United States for any and all sales of a certain transmitter product only
made directly by FDL or through any subsidiary, affiliate, distributor, dealer
or agent of FDL for a period of 18 months from the date of execution of the
Agreement. There were no sales transactions for the three months ended September
30, 2005 under this agreement.
14
On August 31, 2005 MSGI acquired an additional percentage of Innalogic LLC,
thereby providing MSGI with a 76% stake in the company. Pursuant to a ratchet
provision included in the Amended and Restated Limited Liability Company
Agreement, dated August 18, 2004 between MSGI and the Innalogic LLC Members,
MSGI was entitled to receive an additional stake in the LLC with no additional
consideration. effective August 31, 2005.
10. INVESTMENTS
MSGI owns approximately 19.5% of the issued and outstanding shares of common
stock of Excelsa S.p.A. ("Excelsa"), a corporation organized under the laws of
the Republic of Italy. Excelsa and the signatory stockholders have agreed to
anti-dilution protection of MSGI's equity stake, such that MSGI will continue to
own no less than 19.5% of Excelsa's issued and outstanding shares of common
stock through December 31, 2005. As the Company has less than 20% ownership
interest in Excelsa and does not have the ability to exercise significant
influence over Excelsa, this aggregate investment is accounted for under the
cost method. The increase in the investment for the period ended September 30,
2005 relates to immaterial trailing direct costs associated with the investment.
11. NOTES RECEIVABLE
A note receivable totaling approximately $189,000 is due from a customer of
AONet in connection with the sale of a computer system server during the three
months ended September 30, 2005. The note is non-interest bearing and is payable
in 36 equal monthly installments. The Company applied Accounting Principles
Bulletin No. 21 ("APB 21") and discounted the future payments in relation to the
note at AONet's prevailing cost of capital of 6% and recorded approximately
$17,000 of deferred interest income. The discounted note will be accreted over
the life of the note and interest income will be realized with future payments.
The discounted value of the note receivable has been classified into a current
asset of approximately $61,000 and a long-term asset of approximately $110,000.
12. INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the Company's
intangible assets as of September 30, 2005 and 2004 are as follows:
September 30, 2005 September 30, 2004
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets
Unpatented technology $287,288 $107,090 $287,288 $ --
Favorable lease 56,136 3,119 -- --
Unamortized intangible assets
Trade name 64,244 -- -- --
-------- -------- -------- ------------
Totals $407,668 $110,209 $287,288 $ --
======== ======== ======== ============
15
Amortization expense recorded for the three months ended September 30, 2005 was
$26,280. The estimated remaining amortization expense for the five succeeding
years is as follows:
Fiscal Year Amount
2006 (remaining nine months) $ 78,820
2007 105,100
2008 22,000
2009 9,400
2010 9,400
13. SHORT TERM BORROWINGS
The Company's majority owned subsidiary, AOnet, is completely financed with
short-term debt from Italian banks denominated in Euros. The Company has bank
overdraft protection with a local Italian bank. This overdraft protection allows
the Company to pay vendors or other creditors even if funds on hand are
insufficient. The interest rate associated with this financing mechanism was
approximately 6% at September 30, 2005. At September 30, 2005, AONet borrowed
approximately $711,000 under such facilities. The total facilities available to
the Company as of September 30, 2005 were as follows:
Weighted Average Credit Available
Lines of Credit Total Credit Facility Interest Rate at September 30, 2005
Advance on accounts receivable $512,000 5.80% $ 10,800
Overdraft facility 295,200 8.95% 92,800
Unsecured financing 39,800 6.00% 19,300
---------- ---------
Total $847,000 $122,900
======== =========
Included in the overdraft facility, is a specific overdraft facility for
approximately $168,600 at an interest rate of 10.25%, which expires on November
15, 2005. It is the intention of local management to roll over this overdraft
facility for 30 days.
The managing director of AONet (previously the controlling shareholder) has
personally guaranteed the unsecured financing line of $39,800 and the former
majority shareholder has personally guaranteed approximately $585,000 of the
credit facilities.
14. RELATED PARTY TRANSACTIONS
During the period ended September 30, 2005, the Company, through its subsidiary
Innalogic LLC, made a sale totaling approximately $50,000 of its wireless
surveillance technology to Excelsa S.p.a., a related party in which MSGI has a
19.5% investment. The balance is also included in Accounts Receivable - related
party.
On December 31, 2001, the Company advanced $1,000,000 pursuant to a promissory
note receivable agreement with an officer due and payable to the Company at
maturity, October 15, 2006. The Company recorded the note receivable at a
discount of approximately $57,955 to reflect the incremental borrowing rate of
the officer and is being amortized as interest income over the term of the note
using the straight-line method. The note receivable is collateralized by current
and future holdings of MSGI common stock owned by the officer and bears interest
at prime. Interest is due and payable yearly on October 15th. The Company
recognized interest income of $17,569 and $17,355 for the three months ended
September 30, 2005 and 2004, respectively. As of September 30, 2005, the
interest due through October 15, 2004 of approximately $162,600 is in arrears.
The note will be forgiven in the event of a change in control.
16
AONet
At September 30, 2005, AONet had the following related party transactions:
Accounts receivable - related party consists of $65,535 due from a minority
shareholder for software services provided. Accounts payable - related party
consists of a payable to the same minority shareholder in the amount of
approximately $108,500 for reimbursement of telecommunications charges and
approximately $177,200 remaining liability balance on the purchase of the
operating division during 2004, (prior to MSGI's acquisition date),
approximately $227,800 due to a Company related to a minority shareholder for a
compensation agreement and approximately $78,500, in aggregate, due to two
minority shareholders by way of a trust for 2005 compensation. The Company had
expenses of approximately $105,000 paid to related parties for the three months
ended September 30, 2005, mainly for compensation to the above related parties.
15. SEGMENT INFORMATION
In accordance with SFAS No. 131, 'Disclosures about Segments of an Enterprise
and Related Information' segment information is being reported consistent with
the Company's method of internal reporting. The Company believes it has two
reporting segments. The Company has two product and services line (security
technologies and data center technologies). The security technologies product
and services line, which includes Innalogic and FDA is a new and emerging
business and, as such, has limited revenue earnings to report. The data center
technologies product and services line, which includes AONet, is a new business
emerging from an historical bankruptcy and, as such, has limited revenue
earnings to report.
Financial information relating to the quarter ended September 30, 2005
continuing operations by business segment is as follows:
Security Data Center
Technologies Technologies Corporate Total
Net revenues $ 116,830 $ 619,452 $ -- $ 736,282
Gross profit $ 82,707 $ 130,854 $ -- $ 231,561
Selling, general & administrative $ 440,176 $ 377,606 $ 1,186,366 $ 2,004,148
Depreciation and amortization $ 33,565 $ 89,238 $ 2,232 $ 125,035
Loss from operations $ (391,034) $ (335,989) $ (1,188,599) $ (1,915,622)
Segment assets $ 671,973 $ 6,275,983 $ 7,210,502(1) $ 14,158,458
Capital expenditures -- -- $ 16,418 $ 16,418
The Company's continuing operations activity during the quarter ended September
30, 2004 were from the corporate functions and the Securities Technology
business alone; therefore detail by segment is not presented for this period.
(1) Principally the investment in Excelsa S.p.A. and other related party note
receivable.
17
16. SUBSEQUENT EVENTS
On November 1, 2005, MSGI formed a new entity, MSGI Italia, Srl., which will
function as the holding company for all business units in Italy. MSGI Italia
will operate the legal interception business in Italy and will provide
oversight for the AONet International subsidiary and the minority investment
in Excelsa. The new platform will specialize in intelligence monitoring, data
protection, and video surveillance, operating out of offices in Milan and Rome.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995
including, but not limited to, statements regarding our near-term objectives
and long-term strategies, expectations of short-term and long-term liquidity
requirements and needs, statements that are not historical facts, and/or
statements containing words such as "anticipate(s)", "expect(s)", "intend(s)",
"plan(s)", "target(s)", "project(s)", "will", "believe(s)", "may", "would",
"seek(s)", "estimate(s)" and similar expressions. These statements are based
on management's current expectations, beliefs and assumptions and are subject
to a number of known and unknown risks, uncertainties and other factors that
could lead to actual results materially different from those described in the
forward-looking statements. The Company can give no assurance that its
expectations will be attained. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; industry
capacity; industry trends; demographic changes; competition; the loss of any
significant customers; changes in business strategy or development plans;
availability and successful integration of acquisition candidates; availability,
terms and deployment of capital; advances in technology; retention of clients
not under long-term contract; quality of management; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or the
failure to comply with, government regulations; and technology and
telecommunication costs.
Introduction
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month periods ended September 30, 2005 and 2004. This should be
read in conjunction with the financial statements, and notes thereto, included
in this Report on Form 10-Q and the Company's financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K, as amended, for
the year ended June 30, 2005.
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.
Revenue Recognition:
The Company accounts for revenue recognition in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 104, ("SAB 104"), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements.
Revenues will be reported for the operations of Future Developments America,
Inc. and for Innalogic, LLC 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.
FDA recognized no revenues during the periods ended September 30, 2005 and 2004.
Revenues derived from the operations of Innalogic, from the sale of equipment
and the provision of supporting services if requested by the customer, are
realized upon shipment or delivery of the product and/or upon the services being
provided and completed.
19
Revenue from AONet is mainly service based, consisting principally of specific
technical projects and maintenance activities and is either project specific or
of a long-term service (e.g., one year) relationship in nature. Short-term
projects are generally recognized at the end of the contract when the amounts
are billed and the customer has accepted the delivered service.
Other significant contractual arrangements for AONet relate to the maintenance
of data backup for customers on a periodic basis. The contractual terms for
these types of services varies based on the amount of data space required by the
customer and how often the activity occurs. These types of services, including
maintenance services, are such that the customer is billed monthly for the
service and revenue recognized in the month in which the service is provided.
There are certain customers for which several months may be invoiced in advance
of providing the service. In those cases, the revenue is deferred until the
services have been rendered.
Certain AONet contracts contain penalty clauses, such that if a customer breaks
the agreement prior to its termination, the Company is eligible to bill a
termination fee to the customer. Revenue on these billings is not recognized
until the amounts are collected, as it is not generally considered probable at
the time of billing that the full amount will be collected. Contracts do not
have upfront or non-refundable payment features.
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.
Goodwill and Intangible Assets:
Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill
and Other Intangible Assets", goodwill is no longer amortized. The Company
performs an annual impairment test to determine if there is any impairment of
goodwill. The current goodwill of $3,108,471 resulted from the Company's
acquisition of AONet during in June 2005. The Company has not yet performed an
annual impairment test related to this amount since the acquisition was recent.
Intangible assets of approximately $287,000 were acquired during the period
ended September 30, 2004 in connection with the acquisition of Innalogic. For
the three months ended September 30, 2005, amortization expense of approximately
$24,000 has been recognized and as of September 30, 2005 accumulated
amortization of $107,090 has been realized associated with these intangible
assets. Intangible assets of approximately $120,000 were acquired during the
period ended June 30, 2005 in connection with the acquisition of AONet. For the
three months ended September 30, 2005, amortization expense of approximately
$2,000 has been recognized and as of September 30, 2005 accumulated amortization
of $3,119 has been realized associated with these intangible assets.
Long-Lived Assets:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, the Company will recognize impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
20
Accounting for Income Taxes:
The Company uses the 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. AONet files a
separate tax return in Italy on an annual basis.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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 intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts. Actual results
could differ from those estimates.
Equity Based Compensation:
The accompanying financial position and results of operations for the Company
have been prepared in accordance with SFAS 123R, "Share-Based Payment." SFAS
123R SFAS 123R replaces SFAS 123 "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statement based on their fair values. Under SFAS 123R, the pro forma
disclosures previously permitted under SFAS 123 are no longer an alternative to
financial statement recognition.
The Company has selected the Black-Scholes method of valuation for share-based
compensation and has adopted the modified prospective transition method under
SFAS 123R, which requires that compensation cost be recorded, as earned, for all
unvested stock options outstanding at the beginning of the first quarter of
adoption of SFAS 123R. As permitted by SFAS 123R, prior periods have not been
restated. The charge is being recognized in non cash compensation on a
straight-line basis over the remaining service period after the adoption date
based on the options' original estimate of fair value. 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.
Investments:
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.
21
An investment is considered impaired if the fair value of the investment is less
than its cost. 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.
22
Recent Accounting Pronouncements:
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 Revised 2004, "Share-Based Payment" ("SFAS 123R"). 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. SFAS 123R is effective at the beginning of the first annual
reporting that ends after June 15, 2005. We adopted this Statement effective
July 1, 2005. Our adoption of SFAS 123R impacted our results of operations by
increasing the non cash compensation expense. The amount of the impact to the
Company for the three months ended September 30, 2005 was approximately $175,000
of additional expense that resulted under SFAS 123R as compared to the expense
that would have been recorded under APB 25 (see Note 7).
Significant Events:
To facilitate an analysis of MSGI operating results, certain significant events
should be considered.
In April 2004, the Company completed its purchase of 51% of the outstanding
shares of the common stock of Future Developments America, Inc. ("FDA") for an
aggregate purchase price of $1.0 million, pursuant to a definitive agreement
entered into as of April 10, 2004. On July 1, 2005, MSGI and FDA entered into a
Stock Purchase, Earnout and Royalty Payment Agreement (the "Agreement") with
Future Developments, Ltd. ("FDL"), Darren Labas and Jamie Labas, to acquire the
remaining 49% of the issued and outstanding shares of FDA held by Darren and
Jamie Labas, not held by the Company. This transaction gives 100% ownership of
all issued and outstanding shares of Future Developments America, Inc. to MSGI.
The Agreement calls for a purchase price by virtue of an earn out payment of 15%
of gross sales of any FDL products, less direct costs associated with such
products, for sales of such products by either MSGI or FDA. The earn out
payments are capped at a maximum payment of $1,000,000. Further subject to the
terms and conditions of the Agreement, ownership of certain fixed assets and
component parts inventory on the balance sheet of FDA is transferred to FDL as
part of the purchase price. These assets had minimal value and had been impaired
and expensed on MSGI's financial statements at June 30, 2005. The Agreement also
calls for royalty payments to be made by FDL to MSGI/FDA in the amount of 5% of
net sales made to any government sector law enforcement, security or
intelligence based customer in the United States for any and all sales of a
certain transmitter product only made directly by FDL or through any subsidiary,
affiliate, distributor, dealer or agent of FDL for a period of 18 months from
the date of execution of the Agreement. There were no sales transactions for the
three months ended September 30, 2005 under this agreement.
In August 2004, the Company completed an acquisition of a 51% membership
interest in Innalogic, LLC, for an aggregate capital contribution of $1,000,000.
Further subject to the terms and conditions of an Investment Agreement, the
Company issued an aggregate of 50,000 unregistered shares of its common stock to
Innalogic. These shares were subsequently distributed to the founding members of
Innalogic. In addition, the Company may issue, at its discretion, an aggregate
of 50,000 options to purchase shares of common stock to the founding members of
Innalogic, if certain pre-tax income targets are exceeded. The options will have
an exercise price equal to the fair market value of the Company's common stock
at the time of the grant of the options. The Company also issued 50,000
unregistered shares of common stock to certain advisors as compensation for
services rendered in connection with the completion of this transaction. On
August 31, 2005 MSGI acquired an additional percentage of Innalogic LLC thereby
providing MSGI with a 76% stake in the company. Pursuant to a ratchet provision
included in the Amended and Restated Limited Liability Company Agreement, dated
August 18, 2004 between MSGI and the Innalogic LLC Members, MSGI was entitled to
receive an additional stake in the LLC with no additional consideration
effective August 31, 2005.
23
On June 1, 2005, the Company entered into a Stock Purchase Agreement to acquire
equity ownership interests in AONet International Srl ("AONet"), a limited
liability company organized under the laws of the Republic of Italy,
representing 51% of all of AONet's equity ownership interests issued and
outstanding as of the date of the Stock Purchase Agreement on a fully diluted
basis. The purchase price for the 51% stake was 1,100,000 Euro, of which 600,000
Euro has been paid to date (100,000 Euro on May 17, 2005, 250,000 Euro on June
1, 2005 and 250,000 on October 2, 2005) and the remainder is payable in two
equal installments of 250,000 Euro due on each of December 31, 2005 and March
31, 2006. The Stock Purchase Agreement provides that, if the Company fails to
pay any of the individual installments within 48 hours of the applicable due
date, the Stock Purchase Agreement will be terminated and the Company will be
obligated to return all acquired equity ownership interests in AONet to the
previous owner, forfeiting any and all payments made to that date. In addition,
the remaining minority stakeholder granted to MSGI the option to acquire their
interest in AONet for a purchase price equal to the lesser of (a) 2.3 times
EBITDA of AONet for the fiscal 2006 year (calculated on a US GAAP basis) or (b)
1,200,000 Euros. If MSGI does not exercise this option, then the current
minority investor can acquire a 2% interest in AONet from MSGI for a price to be
determined. The acquisition agreement between MSGI and the prior controlling
shareholders contained representations and warranty clauses that allow, among
other things, for a reduction of the purchase price based upon a referred equity
date.
On July 12, 2005, MSGI entered into a Callable Secured Convertible Note
financing of $3 million with a New York based institutional investor. The
Company received $2 million in gross proceeds upon closing, received an
additional $500,000 in gross proceeds on August 4, 2005 upon filing of the
registration statement relating to this offering, and received $500,000 in gross
proceeds on September 10, 2005 upon the effectiveness of such registration
statement. The Note requires repayment over a three-year term with an 8%
interest per annum. Repayment shall be made in cash or in registered shares of
common stock, or a combination of both, at the option of the Company, and
payment commences 90 days after each closing date and is payable monthly in
equal principal installments plus interest over the remaining 33 months. The
Holder has the option to convert all or any part of the outstanding principle to
common stock if the average daily price, as defined in the agreement, for the
preceding five trading days is greater than the defined Initial Market Price of
$6.56. The conversion price is $4.92. The agreement provides that for any
monthly period in which the stock price is greater than 125% of the initial
market price of $6.56, as defined in the agreement, for the month, the interest
rate for that month will be 0%. The Company granted registration rights to the
investors for the resale of the shares of common stock underlying the notes and
certain warrants that were issued in the transaction. The Company also issued
five-year warrants to the investors for the purchase of up to 75,000 shares of
the Company's common stock, $0.01 par value, at an exercise price of $7.50 per
share, which are exercisable at any time. The placement agent received
three-year warrants for the purchase of 12,195 shares of the Company's common
stock, at an exercise price of $7.50 per share exercisable between the period
January 12, 2005 and January 11, 2009. In addition, the agent received a fee
equal to 7% of the aggregate offering, in an amount of $210,000, which was
recorded as part of the financing costs. Total financing cost recorded in
connection with the Notes was $357,304 which is included in other assets on the
balance sheet and is being amortized over the term of the Notes.
24
Results of Operations for the Three Months Ended September 30, 2005, Compared to
the Three Months Ended September 30, 2004.
Revenues of approximately $0.7 million for the three months ended September 30,
2005 (the "Current Period") increased by approximately $0.6 million, or 390%,
compared to revenue of approximately $0.1 million during the three months ended
September 30, 2004 (the "Prior Period"). The increase in revenue can be directly
attributed to data center technologies segment revenues of approximately
$620,000 as a result of the recent acquisition of AONet. Approximately $171,000
of the AONet revenue for the period was for a one-time sale of equipment, which
is not part of AONet's core revenue stream. There were no such revenues from
AONet realized in the Prior Period. The revenues from domestic operations
decreased $33,000 compared to the Prior Period, due to the timing of when orders
are received and shipped, which continues to be somewhat unpredictable for these
emerging technologies.
Costs of goods sold of approximately $523,000 million in the Current Period
increased by approximately $491,000 over costs of goods sold of approximately
$32,000 in the Prior Period. Of the increase, approximately $489,000 is directly
attributed costs associated with the data center technologies segment as a
result of the recent acquisition of AONet. Gross profit margins on domestic
revenues remained relatively consistent compared to the Prior Period.
The Company did not recognize any research and development costs in the Current
Period in comparison to approximately $49,000 of research and development costs
in the Prior Period. The costs realized in the Prior Period were the result of
related activities in the Company's majority owned subsidiary Future
Developments America, Inc. As a result of a recent change in business
operations, Future Developments America, Inc. no longer participates in research
and development activities.
Salaries and benefits of approximately $0.7 million in the Current Period
increased by approximately $0.4 million or 119% over salaries and benefits of
approximately $0.3 million in the Prior Period. Of the increase, approximately
$0.2 million is directly attributed to expenses associated with the data center
technologies segment as a result of the recent acquisition of AONet. The
remaining balance of approximately $0.2 million is the result of newly hired
corporate management personnel responsible supporting the Company's European
operations.
Non cash compensation expenses of approximately $0.5 million in the Current
Period increased by approximately $0.2 million, or 99%, over similar expenses of
approximately $0.2 million in the Prior Period. The increase in expenses
realized in the Current Period is attributable to the adoption of SFAS 123R as
of July 1, 2005 which now requires employee stock compensation, including stock
options, to be recorded at fair value instead of intrinsic value under the
previous accounting method. The expenses realized in the Prior Period were the
result of the fair market value of common shares issued to the founding members
of Innalogic by MSGI as part of the acquisition of the original 51% membership
in Innalogic.
Selling, general and administrative expenses of approximately $0.9 million in
the Current Period increased by approximately $0.4 million or 85% over
comparable expenses of $0.5 million in the Prior Period. The increase is due
primarily to increases in corporate marketing fees, consulting fees, accounting
and audit fees, and travel expenses totaling approximately $0.4 million, as well
as new expenses associated with the data center technologies segment resulting
from the acquisition of AONet of approximately $0.2 million, offset by
reductions in similar expenses in both FDA and Innalogic totaling approximately
$0.2 million.
25
Depreciation and amortization expenses of approximately $125,000 were realized
in the Current Period with no comparable expenses having been realized during
the Prior Period. The expenses in the Current Period are the direct result of
the addition of depreciable fixed assets and amortizable intangible assets
resulting from the acquisitions of Innalogic and AONet, as well as minor
additions to fixed assets in the corporate operations.
The gain from termination of a lease of approximately $70,000 in the Prior
Period was the result of the early termination of a lease for an abandoned
property. A final settlement payment of approximately $175,000 was paid in order
to terminate the lease early against accrued costs of approximately $245,000.
There is no such transaction in the Current Period.
The net provision for income taxes of approximately $9,000 in the Current Period
increased by approximately $6,000, or 195%, over provisions of approximately
$3,000 in the Prior Period. The increase is due to the provisions associated
with the newly acquired AONet operations. The Company records provisions for
state and local taxes incurred on taxable income or equity at the operating
subsidiary level, which cannot be offset by losses incurred at the parent
company level or other operating subsidiaries. The Company has recognized a full
valuation allowance against the deferred tax assets because it is more likely
than not that sufficient taxable income will not be generated during the carry
forward period to utilize the deferred tax assets. The Company files a separate
tax return in Italy on an annual basis. The Company uses the 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.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
As a result of the above, loss from continuing operations of approximately $2.1
million in the Current Period increased by approximately $1.3 million over
comparable loss from continuing operations of $0.8 million in the Prior Period.
The minority interests in subsidiaries of approximately $0.1 million in the
Prior Period represented the minority holdings in FDA. There are no such
minority interests to report in the Current Period.
The loss from discontinued operations of $40,295 in the Prior Period was the
result of a settlement and legal expenses related to the settlement of certain
legal matters pertaining to a discontinued operation. There are no such losses
from discontinued operations to report in the Current Period.
As a result of the above, net loss of approximately $2.1 million in the Current
Period increased by approximately $1.3 million over comparable net loss of
approximately $0.8 million in the Prior Period.
In the Current Period the Company recognized undeclared dividends on preferred
stock of approximately $48,000. This pertains to the issuance of the Company's
Series F Convertible Preferred Stock. The Company is required to pay an annual
dividend of 6% on the Preferred Stock, payable in shares of the Company's common
stock.
As a result of the above, net loss attributable to shareholders of approximately
$2.2 million in the Current Period increased by approximately $1.4 million over
comparable net loss of approximately $0.8 million in the Prior Period.
26
Capital Resources and Liquidity
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.
Our contractual obligations are summarized in the table below
Payments Due
(In thousands)
--------------------------------------------------------------------
Contractual Obligations Total Less than 1 - 3 4 - 5 More Than
1 year years years 5 years
------------------------------------------------------ ------------ ---------------- ------------- ------------
Operating leases (1) 2,349 624 1,379 346 --
Purchase obligations for AONet
acquisition - related party 917 917 -- -- --
Long-term debt 422 242 180 -- --
8% callable convertible notes 3,000 955 2,045 -- --
(1) Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
(2) 8% Notes: The payments disclosed above represent principle payments
only and do not include any interest payments which may be incurred.
Of such lease commitments, $1.0 million is for facilities that we no longer
occupy and the cost of which was accrued upon abandonment in fiscal 2002.
Debt:
The Company's domestic operations do not have any debt related to credit
facilities on its balance sheet as of September 30, 2005 or 2004.
The Company's majority owned subsidiary, AONet, is completely financed with
short-term debt from Italian banks. The Company has bank overdraft protection
with a local Italian bank. This overdraft protection allows the Company to pay
vendors or other creditors even if funds on hand are insufficient. The interest
rate associated with this financing mechanism was approximately 6% at September
30, 2005. (See Note 13). At September 30, 2005, AONet had overdrafts of
approximately $711,000 from a total availability of approximately $847,000. A
portion of these facilities are guaranteed by the former majority shareholder
and/or managing director of AONet. On September 30, 2005, AONet paid
approximately $168,000 of overdue withholding taxes relating to 2004 by
increasing its overdraft facility with the bank for the same amount. The new
bank debt is due within one year.
The Company is required to withhold income taxes from direct employees' payroll
and remit these amounts to the applicable governmental entity. The Company is
also required to pay social security taxes, as well as withhold and remit the
employee portion of these taxes to the government. As of September 30, 2005,
AONet had not paid any amounts to these governmental agencies since April 2004,
aggregating approximately $1.1 million. The accrued amounts also include
approximately $0.1 million of penalties and interest, assessed based on the
applicable rates used by the governmental entities for late payments. AONet has
approached the Italian Social Security department to discuss the fact that
payments of employee withholdings are in arrears. No final determinations
related to a possible payment plan or settlement has been reached, therefore,
the full amount of the taxes withheld and the related interest and penalties
have been recorded.
27
During June of 2005, AONet, through its affiliate Nexo, exercised an option
agreement with a third party and purchased the data center for approximately
$422,300. The data center has been recorded in these financial statements of
AONet at its cost of approximately $422,300 and a corresponding note payable has
been booked.
On June 1, 2005, the Company entered into a Stock Purchase Agreement to acquire
equity ownership interests in AONet, a company organized under the laws of the
Republic of Italy, representing 51% of all of AONet's equity ownership interests
issued and outstanding as of the date of the Stock Purchase Agreement on a fully
diluted basis. The purchase price for the 51% stake was 1,100,000 Euro (of which
350,000 Euro has been paid through September 30,2005 and the remainder is
payable in three equal installments of 250,000 Euro due on each of September 30
(paid October 2, 2005) and December 31, 2005 and March 31, 2006. The Stock
Purchase Agreement provides that, if the Company fails to pay any of the
individual installments within 48 hours of the applicable due date, the Stock
Purchase Agreement will be terminated and the Company will be obligated to
return all acquired equity ownership interests in AONet to the previous owner,
forfeiting any and all payments made to that date. In addition, the remaining
minority stakeholder granted to MSGI the option to acquire their interest in
AONet for a purchase price equal to the lesser of (a) 2.3 times EBITDA of AONet
for the fiscal 2006 year (calculated on a US GAAP basis) or (b) 1,200,000 Euros.
If MSGI does not exercise this option, then the current minority investor can
acquire a 2% interest in AONet from MSGI for a price to be determined. The
acquisition agreement between MSGI and the prior controlling shareholders
contained representations and warranty clauses that allow, among other things,
for a reduction of the purchase price based upon a referred equity date.
Liquidity:
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
equity transactions, and its credit facilities. At September 30, 2005, the
Company had cash and cash equivalents of approximately $1.6 million and a
working capital deficit of approximately $4.6 million.
The Company recognized a net loss of approximately $2.1 million in the Current
Period. Cash used in operating activities was approximately $1.4 million. Cash
used in operating activities principally resulted from our operating loss,
increases in accounts receivable and notes receivable as well as decreases in
accounts payable of approximately offset by increases in accrued expenses. Cash
used in operating activities in the Prior Period was $1.3 million.
In the Current Period, net cash of approximately $37,000 was used in investing
activities consisting primarily of purchases of property and equipment and an
increase in a related party note receivable. In the Prior Period, approximately
$0.1 million of cash was used in or provided by investing activities.
In the Current Period, net cash of $2.9 million was provided by financing
activities. Net cash provided by financing activities consisted primarily of net
proceeds from the issuance of 8% callable convertible notes receivable of
approximately $2.7 million and an increase in net borrowings on bank overdraft
facilities of approximately $0.2 million, offset by an increase in a note
receivable of approximately $0.2 million. In the Prior Period, net cash of $0.3
million was provided by financing activities consisting primarily of proceeds
from the issuance of common stock of approximately $0.8 million offset by
repayments in a related party note payable of approximately $0.5 million.
In the Current Period, net cash of $7,552 was provided from a change in
accumulated other comprehensive income. This income was the result of changes in
foreign currency valuations during the period. There was no such income in the
Prior Period.
In the Current Period there was no cash used in discontinued operations, while
approximately $0.1 million was used by discontinued operations in the Prior
Period.
28
While the Company has realized significant losses in past periods, it has most
recently raised significant working capital through the issuance of 8% callable
convertible notes (see Note 6.) In addition, the Company's subsidiary,
Innalogic, has begun to realize revenue during the quarter ended September 30,
2004. The Company believes that current 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 including obligations for the purchase of its
interests in AONet and payments under its callable secured convertible notes for
the next twelve months. Failure of the new operations to generate such
sufficient future cash flow could have a material adverse effect on the
Company's ability to continue as a going concern and to achieve its business
objectives. A future funding event may be required in order to meet the
obligations for the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2005, MSGI has liabilities due, through its Italian
subsidiary AONet, to various vendors and creditors which are payable in Euros.
There may be a risk to MSGI associated with volatility of currency exchange
rates over time. MSGI has obtained certain debt instruments bearing fixed
interest rates. There may be risk associated with the interest rates applied to
these debt instruments, should the rates drop significantly above/ below the
fixed price.
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 concluded that the Company's disclosure controls
and procedures as of September 30, 2005 were 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 October 12, 2005, certain material weaknesses
were communicated to the Company by our independent registered public accounting
firm. Although the Company acknowledges that certain weaknesses, as stated and
identified, need to be addressed, it is our belief that the existence of such
material weaknesses have not compromised our ability to ensure that the
information required to be disclosed by the Company in reports that is files or
submits under the Securities Exchange Act of 1394 are not recorded, processed
summarized and reported within the time periods specified in Securities and
Exchange Commission's rules and forms. The Company has taken initial actions,
such as employing additional personnel on a consulting basis during the quarter,
to help ensure that such material weaknesses are mitigated. The Company plans to
address and rectify each of the stated material weaknesses as quickly as
practical.
There were no other changes in the Company's internal control over financial
reporting that occurred during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
29
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.
-------------
30
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MSGI SECURITY SOLUTIONS, INC.
(Registrant)
Date: November 15, 2005 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)
31
Exhibit 31.1
CERTIFICATION
I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of MSGI Security
Solutions, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: November 15, 2005 By: /s/ J. Jeremy Barbera
-------------------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
32
Exhibit 31.2
CERTIFICATION
I, Richard J. Mitchell III, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of MSGI Security
Solutions, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: November 15, 2005 By: /s/ Richard J. Mitchell III
-----------------------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
33
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MSGI Security Solutions, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Jeremy Barbera, as Chairman of the Board and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 15, 2005 By: /s/ J. Jeremy Barbera
-------------------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
34
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MSGI Security Solutions, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Richard J. Mitchell III, as Chief Accounting Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 15, 2005 By: /s/ Richard J. Mitchell III
-----------------------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
35