Attached files
file | filename |
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EX-31.1 - MSGI TECHNOLOGY SOLUTIONS, INC | v203551_ex31-1.htm |
EX-32.1 - MSGI TECHNOLOGY SOLUTIONS, INC | v203551_ex32-1.htm |
EX-31.2 - MSGI TECHNOLOGY SOLUTIONS, INC | v203551_ex31-2.htm |
EX-32.2 - MSGI TECHNOLOGY SOLUTIONS, INC | v203551_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2010
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: 212-605-0245
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit post such files).
Yes x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
State
number of shares outstanding of each of the issuer’s classes of common equity as
of the latest practical date:
As of
November 12, 2009 there were 82,424,371 shares of the Issuer’s Common Stock, par
value $.01 per share outstanding.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF
CONTENTS
FORM 10-Q
REPORT
SEPTEMBER
30, 2010
Page
|
|||
PART
I - FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
||
Condensed
Consolidated Balance Sheets as of September 30, 2010 (unaudited)
and June 30, 2010, as derived from audited financial
statements
|
3
|
||
Condensed
Consolidated Statements of Operations for the three months ended September
30, 2010 and 2009 (unaudited)
|
4
|
||
Condensed
Consolidated Statements of Stockholders Equity (Deficit) for the three
months ended September 30, 2010 (unaudited)
|
5
|
||
Condensed
Consolidated Statements of Cash Flows for the three months
ended September 30, 2010 and 2009 (unaudited)
|
6
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7-15
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
15-19
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
19
|
|
Item
4.
|
Controls
and Procedures
|
19
|
|
PART
II- OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
21
|
|
Item
6.
|
Exhibits
|
21
|
|
SIGNATURES
|
22
|
2
PART
I - FINANCIAL INFORMATION
Item 1. Financial
Statements.
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
September 30, 2010
|
June 30, 2010
|
|||||||
(Unaudited)
|
*
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 51,069 | $ | 160,656 | ||||
Other
current assets, principally deferred financing costs
|
178,566 | 244,400 | ||||||
Total
current assets
|
229,635 | 405,056 | ||||||
Investments
in Current Technology Corporation
|
300,000 | 300,000 | ||||||
Property
and equipment, net
|
17,773 | 19,419 | ||||||
Other
assets, principally long term deposits
|
20,305 | 17,755 | ||||||
Total
assets
|
$ | 567,713 | $ | 742,230 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 1,209,168 | $ | 1,206,719 | ||||
Derivative
liability for excess shares
|
740,579 | 3,170,374 | ||||||
Liability
for RFMon settlement
|
1,430,333 | 1,430,333 | ||||||
Accrued
expenses and other current liabilities
|
7,666,251 | 6,664,938 | ||||||
Advances
from strategic partner
|
238,950 | 246,950 | ||||||
Advances
from corporate officer
|
1,027,808 | 840,518 | ||||||
Other
advances
|
60,000 | 60,000 | ||||||
Convertible
term notes payable
|
3,120,004 | 3,120,004 | ||||||
10%
Callable convertible promissory notes payable
|
250,000 | 250,000 | ||||||
6%
Callable convertible notes payable
|
2,000,000 | 2,000,000 | ||||||
8%
callable convertible notes payable
|
8,000,000 | 8,000,000 | ||||||
10%
Callable convertible notes payable, net of discounts
|
||||||||
of
$929,983 and $946,464, respectively
|
20,107 | 3,536 | ||||||
Total
current liabilities
|
25,763,200 | 26,993,372 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity (deficit):
|
||||||||
Common
stock - $.01 par value; 100,000,000 shares
authorized; 82,442,033 and 73,692,033 shares issued; 82,424,371
and 73,674,371 shares outstanding as of September 30, 2010 and
June 30, 2010, respectively
|
824,419 | 736,919 | ||||||
Additional
paid-in capital
|
271,796,748 | 271,743,167 | ||||||
Accumulated
deficit
|
(296,422,944 | ) | (297,337,518 | ) | ||||
Less: 17,662
shares of common stock in treasury, at cost
|
(1,393,710 | ) | (1,393,710 | ) | ||||
Total
stockholders’ equity (deficit)
|
(25,195,487 | ) | (26,251,142 | ) | ||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 567,713 | $ | 742,230 |
* Derived
from audited financial statement
See Notes
to Condensed Consolidated Financial Statements.
3
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2010
|
2009
|
|||||||
Total
revenue
|
$ | - | $ | - | ||||
Cost
of goods sold
|
- | - | ||||||
Gross
Profit
|
- | - | ||||||
Operating
costs and expenses:
|
||||||||
Salaries,
benefits and payroll taxes
|
209,216 | 179,468 | ||||||
Research
and Development
|
64,996 | 415,004 | ||||||
Selling,
general and administrative
|
629,322 | 581,991 | ||||||
Depreciation
and amortization
|
3,254 | 3,220 | ||||||
Total
operating costs and expenses
|
906,788 | 1,179,683 | ||||||
Loss
from operations
|
(906,788 | ) | (1,179,683 | ) | ||||
Other
income (expense):
|
||||||||
Interest
expense
|
(872,352 | ) | (1,893,253 | ) | ||||
Non-cash
loss on debt guarantee
|
- | (170,000 | ) | |||||
Gain
on change in derivative liability
|
2,698,714 | - | ||||||
Total
other income (expense)
|
1,826,362 | (2,063,253 | ) | |||||
Net
loss before provision for income taxes
|
919,574 | (3,242,936 | ) | |||||
Provision
for income taxes
|
5,000 | 6,000 | ||||||
Net
loss
|
$ | 914,574 | $ | (3,248,936 | ) | |||
Basic
and diluted loss per share:
|
0.01 | (0.10 | ) | |||||
Weighted
average common shares outstanding
|
||||||||
-
basic
|
78,321,110 | 31,229,829 | ||||||
Weighted
average common shares outstanding
|
||||||||
-
diluted
|
78,821,110 | 31,229,829 |
See Notes
to Condensed Consolidated Financial Statements.
4
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2010
(Unaudited)
Common
Stock
|
Paid-in
|
Accumulated
|
Treasury
Stock
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Shares
|
Amount
|
Totals
|
||||||||||||||||||||||
Balance
June 30, 2010
|
73,692,033 | $ | 736,919 | $ | 271,743,167 | $ | (297,337,518 | ) | (17,662 | ) | $ | (1,393,710 | ) | $ | (26,251,142 | ) | ||||||||||||
Issuance
of shares under terms of various consulting and services
agreements
|
8,750,000 | 87,500 | 322,500 | 410,000 | ||||||||||||||||||||||||
Derivative
value of shares of common stock committed in excess
of authorized total available
|
(268,919 | ) | (268,919 | ) | ||||||||||||||||||||||||
Net
loss for the three months ended September 30, 2010
|
914,574 | 914,574 | ||||||||||||||||||||||||||
Balance
September 30, 2010
|
82,442.033 | $ | 824,419 | $ | 271,796,748 | $ | (296,422,944 | ) | (17,662 | ) | $ | (1,393,710 | ) | $ | (25,195,487 | ) |
See Notes
to Condensed Consolidated Financial Statements.
5
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
(unaudited)
2010
|
2009
|
|||||||
Operating
activities:
|
||||||||
Net
income (loss)
|
$ | 914,574 | $ | (3,248,936 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
3,254 | 3,220 | ||||||
Amortization
of deferred financing costs
|
54,992 | 93,873 | ||||||
Non-cash
compensation expense
|
- | 1,372 | ||||||
Non-cash
amortization of debt discounts
|
16,571 | 1,274,334 | ||||||
Non-cash
loss on guarantee of debt
|
- | 170,000 | ||||||
Non-cash
value of shares issued for services
|
410,000 | 480,050 | ||||||
Gain
on change in derivative liability
|
(2,698,714 | ) | - | |||||
Changes
in assets and liabilities:
|
||||||||
Other
current assets
|
10,842 | - | ||||||
Other
assets
|
7,450 | 175,000 | ||||||
Accounts
payable - trade
|
2,449 | 38,596 | ||||||
Accrued
expenses and other liabilities
|
1,001,313 | 583,223 | ||||||
Net
cash used in operating activities
|
(277,269 | ) | (429,268 | ) | ||||
Investing
activities:
|
||||||||
Purchases
of property and equipment
|
(1,608 | ) | - | |||||
Net
cash used in investing activities
|
(1,608 | ) | - | |||||
Financing
activities:
|
||||||||
Proceeds
from promissory note
|
- | 240,004 | ||||||
Additional
closing costs paid from proceeds
|
(10,000 | ) | - | |||||
Cash
advances from strategic partners, officer and others, net of
repayments
|
179,290 | 188,798 | ||||||
Net
cash provided by financing activities
|
169,290 | 428,802 | ||||||
Net
decrease in cash
|
(109,587 | ) | (466 | ) | ||||
Cash
at beginning of period
|
160,656 | 689 | ||||||
Cash
at end of period
|
$ | 51,069 | $ | 223 |
See Notes
to Condensed Consolidated Financial Statements.
6
MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
|
BASIS
OF PRESENTATION
|
The
accompanying unaudited Condensed Consolidated Financial Statements include the
accounts of MSGI Security Solutions, Inc. and its Subsidiaries, Future
Developments America, Inc (FDA), Innalogic, LLC (Innalogic), Nanobeak Inc.
(Nanobeak) and Andromeda Energy Inc. (Andromeda), (in combination MSGI or the
“Company”). These condensed consolidated financial statements are unaudited and
should be read in conjunction with the historical consolidated financial
statements and related notes included in the Company's Form 10-K for the fiscal
year ended June 30, 2010. 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, except for the derivative liability accounting described in Note
2. 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, 2010 are not necessarily indicative of the results that may
be expected for any subsequent period or the fiscal year ending June 30,
2011.
Liquidity:
Historically,
the Company has funded its operations, capital expenditures and acquisitions
primarily through private placements of equity and debt transactions. The
Company currently has limited capital resources, has incurred significant
historical losses and negative cash flows from operations and has no current
revenues. At September 30, 2010, the Company had approximately $51,000 in cash
and no accounts receivable. The Company believes that funds on hand will not be
adequate to finance its operations and enable the Company to meet its financial
obligations and payments under its convertible notes and promissory notes for
the next twelve months. All of our promissory notes and other notes payable are
currently either past due or due within the next 12 months. There are no
assurances that any further capital raising transactions will be consummated.
Although certain transactions have been successfully closed in the past, failure
of our operations to generate sufficient future cash flow and failure to
consummate our strategic transactions or raise additional financing could have a
material adverse effect on the Company's ability to continue as a going concern
and to achieve its business objectives. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern. There are no assurances the Company will receive the necessary
funding or generate revenue necessary to fund operations. If we are unable to
obtain additional funds, or if the funds cannot be obtained on terms favorable
to us, we will be required to delay, scale back or eliminate our plans to
continue to develop and expand our operations or in the extreme situation, cease
operations altogether.
As of
September 30, 2010, we are authorized to issue 100,000,000 shares of common
stock. If the holders of the convertible promissory notes outstanding elect to
convert their holdings into common stock, and the holders of the stock options
and warrants outstanding elect to exercise their rights to purchase common
stock, the Company is obligated to have issued approximately 188,000,000 shares
of commons stock, which is in excess of what we currently have authorized. We
plan to ask the Company’s shareholders to authorize the issuance of additional
shares or reverse split our common stock at our annual meeting. However there is
no guarantee that we will be able to obtain the votes needed to obtain the
additional authorized shares.
7
Summary
of significant recent financing transactions:
During
the three-month period ended September 30, 2010, the Company received net
proceeds of approximately $189,000 from a certain corporate officer, which has
no stated interest rate or maturity date.
Earnings
(Loss) Per Share:
In
accordance with FASB ASC 260, “Earnings Per Share,” basic earnings per share is
calculated based on the weighted average number of shares of common stock
outstanding during the reporting period. Diluted earnings per share gives effect
to all potentially dilutive common shares that were outstanding during the
reporting period; however such potentially dilutive common shares are excluded
from the calculation of earnings (loss) per share if their effect would be
anti-dilutive. Diluted earnings per share for the three months ended September
30, 2010 and 2009 excluded 100,360,496 and 71,231,555 potentially issuable
shares from the calculation of earnings per share, respectively, from the
conversion of outstanding convertible debt and accrued interest, options and
warrants since they would be anti-dilutive to the periods
presented.
Subsequent
events:
In
accordance with ASC 855-10, “Subsequent Events”, the Company evaluated all
events or transactions that occurred after September 30, 2010 up through
November 22, 2010. During this period no material subsequent events came to our
attention.
2.
DERIVATIVE LIABILITY FOR EXCESS SHARES
Beginning
in July 2009, the Company had convertible debt, accrued interest, contractually
issuable shares, options and warrants that, if converted into common stock
shares, would exceed the amount of the Company’s authorized common shares. From
July 2009 through September 30, 2010 the Company continued to issue new shares
of its common stock and new instruments convertible or exercisable into shares
of its common stock. At each period of time that one of these instruments was
issued, the amount of common shares, which potentially exceeded the Company’s
issuable shares above its authorized common shares increased. As of September
30, 2010, the Company had approximately 88,100,000 shares of common stock
issuable upon exercise or conversion in excess of its authorized
capital.
At
various points of time when the amount of excess shares increased, and at each
subsequent reporting date, the Company used a Black-Scholes model with the
following range of assumptions to value the derivative liability that resulted
from these shares issuable in excess of its authorized share capital.
Liabilities recorded each time the amount of excess shares increased were
recorded with a corresponding entry to additional paid in capital. Any change to
the amount of liability after it was initially recorded impacted the statements
of operations as income or expense.:
Low
|
High
|
|||||||
Underlying
stock price:
|
$ | 0.03 | $ | 0.18 | ||||
Exercise/conversion
price:
|
$ | 0.07 | $ | 0.51 | ||||
Term
until expiration:
|
.75
year
|
1
year
|
||||||
Dividend
yield:
|
0.00 | % | 0.00 | % | ||||
Risk
free rate:
|
0.25 | % | 0.49 | % | ||||
Volatility:
|
205 | % | 298 | % |
The
cumulative total of the liability and corresponding reduction in additional
paid-in capital recorded at each inception was $5,851,799, which included
$268,919 and $0 recorded in the three months ended September 30, 2010 and 2009,
respectively.
8
The
Company used a Black-Scholes model with the following range of assumptions to
value the derivative liability at September 30, 2010:
Low
|
High
|
|||||||
Underlying
stock price:
|
$ | 0.03 | $ | 0.03 | ||||
Exercise/conversion
price:
|
$ | 0.07 | $ | 0.25 | ||||
Term
until expiration:
|
.75
year
|
1
year
|
||||||
Dividend
yield:
|
0.00 | % | 0.00 | % | ||||
Risk
free rate:
|
0.27 | % | 0.27 | % | ||||
Volatility:
|
211 | % | 212 | % |
At
September 30, 2010, the resulting liability from the approximately 88,100,000
excess shares was $740,579. The change in the liability from June 30, 2010 to
September 30, 2010 of $2,698,714 was recorded in the line item “gain on change
in derivative liability” in the statement of operations.
As a
result of recording the derivative liability for the shares issuable which
exceeded the authorized number of common stock shares, the Company did not
record additional derivative liabilities for certain reset provisions in the
March 2010 and June 2010 convertible note agreements and detachable warrants
issued in connection with those note agreements.
3. DEBT
OBLIGATIONS
Instrument
|
Maturity
|
Face Amount
|
Coupon Interest
Rate
|
Carrying
Amount at
September 30,
2010, net of
discount
|
Carrying
Amount at
September 30,
2009, net of
discount
|
|||||||||
6%
Notes
|
Dec.
13, 2009*
|
1,000,000
|
15%
|
$ |
1,000,000
|
$
|
214,858
|
|||||||
6%
April Notes
|
April
4, 2010*
|
1,000,000
|
15%
|
1,000,000
|
44,674
|
|||||||||
8%
Debentures
|
May
21, 2010*
|
4,000,000
|
18%
|
4,000,000
|
85,190
|
|||||||||
8%
Notes
|
May
21, 2010*
|
4,000,000
|
18%
|
4,000,000
|
4,000,000
|
|||||||||
10%
March Notes
|
March
31, 2011
|
650,000
|
10%
|
18,438
|
—
|
|||||||||
10%
June Notes
|
June
30, 2011
|
300,000
|
10%
|
1,670
|
—
|
|||||||||
Term
notes short-term
|
December
31, 2009*
|
420,000
|
18%
|
420,000
|
400,000
|
|||||||||
Term
note short-term
|
February
28, 2009*
|
960,000
|
18%
|
960,000
|
960,000
|
|||||||||
Term
note short-term
|
March
31, 2009*
|
1,500,000
|
18%
|
1,500,000
|
1,500,000
|
|||||||||
Term
notes short-term
|
June
17, 2009*
|
250,000
|
18%
|
250,000
|
250,000
|
|||||||||
Term
notes – short terms
|
August
21, 2009
|
240,004
|
30%
for loan term + 3% per month
|
240,004
|
240,004
|
|||||||||
Short
term borrowings from Apro Media Corp
|
N/A
|
200,000
|
N/A
|
206,950
|
206,950
|
|||||||||
Short
term borrowings from Current Technologies Corp.
|
N/A
|
70,000
|
N/A
|
32,000
|
70,000
|
|||||||||
Short
term borrowings from officer of the Company
|
N/A
|
1,027,808
|
N/A
|
1,027,808
|
355,860
|
|||||||||
Short
term borrowings from others
|
N/A
|
60,000
|
N/A
|
60,000
|
60,000
|
|||||||||
$ |
15,677,812
|
$ |
14,716,870
|
$
|
8,387,536
|
*These
notes are due on demand.
9
The
following section provides further information about certain of the debt listed
in the table above.
10%
CALLABLE CONVERTIBLE NOTES PAYABLE
The 10%
Callable Convertible Notes Payable consist of the following as of September 30,
2010:
Instrument
|
Maturity
|
Face Amount
|
Discount
|
Carrying Amount
at September 30,
2010, net of
discount
|
Carrying
Amount at
September 30,
2009, net of
discount
|
|||||||||||||
10%
Notes
|
March
23, 2011
|
$ | 650,000 | $ | 631,562 | $ | 18,438 | $ | - | |||||||||
10%
Notes
|
June
30, 2011
|
300,000 | 298,330 | 1,670 | - | |||||||||||||
Total
|
$ | 950,000 | $ | 929,892 | $ | 20,108 | $ | - |
March 10 %
Notes
The
Company has also entered into a security agreement (the “Security Agreement”)
with the Investors in connection with the closing, which grants security
interests in certain assets of the Company and the Company’s subsidiaries to the
Investors to secure the Company’s obligations under the Notes and
Warrants.
The March
Notes and warrants contain reset provisions, such that should the Company issue
any common share or instrument convertible into any common share at a price
lower than the conversion or exercise then in effect than the exercise price and
conversion price reset to that lower price.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2010 and 2009 in connection with these notes was
approximately $16,000 and $0, respectively.
June 10%
Notes
The June
Notes and warrants contain reset provisions, such that should the Company issue
any common share or instrument convertible into any common share at a price
lower than the conversion or exercise then in effect than the exercise price and
conversion price reset to that lower price.
Total
interest expense, including debt discount amortization, for the twelve months
ended September 30, 2010 and 2009 in connection with these notes was
approximately $7,500 and $0, respectively.
8%
CALLABLE CONVERTIBLE NOTES PAYABLE
8%
Debentures
It is
expected that the shares will be issued to the holders sometime during the third
quarter of fiscal year 2011 ending on March 31, 2011, pending approval for an
increase to the number of authorized shares of common stock by a vote of the
shareholders of the Company.
The 8%
Debentures and the Warrants have anti-dilution protections. The Company has also
entered into a Security Agreement with the investors in connection with the
closing, which grants security interests in certain assets of the Company and
the Company’s subsidiaries to the investors to secure the Company’s obligations
under the 8% Debentures and Warrants.
10
The
holders agreed to waive certain provisions in the debentures and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the debentures and warrants, respectively, to reset
based on future equity issuances. The waivers covered the entire three month
period ended September 30, 2010.
On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 8% Debentures principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2010 and 2009 in connection with this note was approximately
$226,000 and $210,000, respectively.
8% Notes
The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances. The waivers covered the entire three month period
ended September 30, 2010.
On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 8% Notes principal and accrued interest
with the intent to convert the value of the debt into a series of investments in
various MSGI operating subsidiaries, primarily those subsidiaries related to the
NASA technologies.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2010 and 2009 in connection with this note was approximately
$259,000 and $84,000, respectively.
6%
CALLABLE CONVERTIBLE NOTES PAYABLE
6% December
Notes
The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances. The waivers covered the entire year ended June 30,
2010 and the Company obtained a further waiver through October 1,
2010.
On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 6% Notes principal and accrued interest
with the intent to convert the value of the debt into a series of investments in
various MSGI operating subsidiaries, primarily those subsidiaries related to the
NASA technologies.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2010 and 2009 in connection with this note was approximately
$38,000 and $199,000, respectively.
6% April
Notes
It is
expected that the shares will be issued to the holders sometime during the third
quarter of fiscal year 2011 ending on March 31, 2011, pending approval for an
increase to the number of authorized shares of common stock by a vote of the
shareholders of the Company.
11
The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances. The waivers covered the entire three month period
ended September 30, 2010.
On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 6% April Notes principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.
Total
interest expense, including debt discount amortization, for the three months
ended September 30, 2010 and 2009 in connection with this note was approximately
$38,000 and $61,000, respectively.
OTHER
NOTES PAYABLE AND ADVANCES
Convertible Term Notes
payable
During
March 2010, the holders certain of these convertible promissory notes provided
the Company with letters of agreement that the various notes shall be
extinguished and that the principal balances of these notes of approximately
$1.9 million, plus any and all accrued interest thereon, would be converted into
shares of common stock of the Company at an exchange rate of $0.20 per share.
Further, it was agreed that these shares will be locked up and will not be
eligible for trading until at least December 31, 2010. As of September 30, 2010,
the exchange shares have not been issued to the lenders by the Company and the
notes will remain reported as debt until such time as said shares are issued. It
is expected that the shares will be issued to the lenders sometime during the
third quarter of fiscal year 2011 ending on March 31, 2011, pending approval for
an increase to the number of authorized shares of common stock by a vote of the
shareholders of the Company.
10% Convertible Term Notes
payable
Due to
the default event, commencing on June 17, 2009, the interest rate is now at the
default rate of 18%. While the notes are technically in default at September 30,
2010, the lender has made no claim of default.
The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances. The waivers covered the entire year ended June 30,
2010 and the Company obtained a further waiver through October 1,
2010.
On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 10% Notes principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.
25% Convertible Term Notes
payable
In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered into
with The National Aeronautics and Space Administration. The note bears interest
at 25% and matured on August 30, 2009. As of September 30, 2010, and through the
date of this filing, the principal balance and accrued interest has not yet been
paid to the lender. Although the note is technically in default as of the date
of this filing, the lender has not made any claim of default.
12
Advances
During
the three months ended September 30, 2010, the Company received net funding in
the amount of approximately $187,000 from a certain corporate officer. During
the three months ended September 30, 2009, the Company received net funding in
the amount of approximately $189,000 from this same corporate officer. As of
September 30, 2010, the total net amount received from the officer is
approximately $1,028,000. There is no interest expense associated with this
advanced funding and this is to be repaid upon the closing of any adequately
successful funding event or upon the collection of the Apro Media related
accounts receivable, which has not yet occurred. It is also noted by the Company
that this certain corporate officer is owed approximately $824,000 in gross
wages (including current period wages totaling approximately $127,000) as of the
three months ended September 30, 2010.
The advances have no stated maturity
dates and are considered payable on demand. The Company has not recorded interest on the above advances since
it would not be material.
4. STOCK
BASED COMPENSATION, COMMON STOCK AND WARRANTS
Common
Stock Transactions:
During
the three months ended September 30, 2010, the Company issued 8,750,000 shares
of common stock. These shares were issued to various parties in order to pay for
consulting services and legal fees.
Stock
Options:
The
Company maintains a qualified stock option plan (the 1999 Plan) for the issuance
of up to 1,125,120 shares of common stock under qualified and non-qualified
stock options. The 1999 Plan is administered by the compensation committee of
the Board of Directors which has the authority to determine which officers and
key employees of the Company will be granted options, the option price and
vesting of the options. In no event shall an option expire more than ten years
after the date of grant.
There
were no stock options granted during the three months ended September 30, 2010
or 2009. As of September 30, 2010, 1,025,000 options are outstanding, all of
which are exercisable. The stock based compensation expense related to stock
options for the three months ended September 30, 2010 and 2009 was approximately
$0 and $1,400, respectively. As of September 30, 2010, there is no intrinsic
value for these outstanding options.
Warrants:
As of
September 30, 2010, the Company has 16,198,822 warrants outstanding for the
purchase shares of common stock at prices ranging from $0.01 to $8.25, all of
which are currently exercisable. The major transactions involving the warrants
for the current period are below:
There
were no additional warrants issued during the three months ended September 30,
2010. During three months ended September 30, 2009, the Company issued 46,200
five-year warrants to certain lenders in relationship to the addendum
agreements. A fair market value of $4,320 for these warrants was calculated
using the Black-Scholes method and was expensed to interest expense in the
period ended September 30, 2009.
During
the period ended September 30, 2009, 7,760,635 warrants were exchanged for
5,300,000 shares of common stock under the Warrant Exchange
Agreement.
13
5.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued
expenses as of September 30, 2010 and June 30, 2010 consist of the
following:
September
30,
|
June
30,
|
|||||||
2010
|
2010
|
|||||||
Salaries
and benefits
|
$ | 1,098,741 | $ | 947,706 | ||||
Payroll
taxes and penalties
|
1,570,030 | 1,543,477 | ||||||
Audit
and tax preparation fees
|
311,755 | 264,755 | ||||||
Interest
|
4,475,997 | 3,686,914 | ||||||
Taxes
|
66,907 | 66,907 | ||||||
Board
fees
|
109,000 | 104,000 | ||||||
Rent
|
11,000 | 23,314 | ||||||
Other
|
22,821 | 27,865 | ||||||
Total
|
$ | 7,666,251 | $ | 6,664,938 |
The
Company has not filed or paid payroll taxes from September 2006 to
date.
6.
CERTAIN KEY RELATIONSHIPS
Relationship with The
National Aeronautics and Space Administration (NASA)
The
Company’s collaborative relationship with NASA was begun in August 2009 with the
execution of a Space Act Agreement (SAA) forming a partnership between MSGI and
the Ames Research Center (ARC) located at Moffet Field in California. The
purpose of this collaboration between MSGI and NASA is to develop new prototype
chemical sensors using NASA’s nano-sensor technology to meet MSGI’s need in
sensor commercialization in security, biomedical and other areas. This sensor
technology platform could potentially be used in efforts such as chemical leak
detection and hazardous material detection. MSGI intends to develop this
technology for commercial applications, homeland security applications, and
medical diagnostic applications for type I diabetes (acetone detection) at first
and possibly other applications in future years. There can be no assurances that
we will be successful in commercializing such applications.
In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring, radiation
detection and various other critical capabilities. The commercial applications
of these nanotech chemical sensors relate specifically to efforts in Homeland
Security and defense, medical diagnostics and environmental monitoring and
controls. Nanobeak seeks to offer products in these market sectors beginning in
the current fiscal year ending June 30, 2011, but the timing of such offers may
be affected by unforeseen difficulties in development and commercialization
efforts. In September 2009, the Company announced that it is developing its
first product derived from the NASA nanotechnology, a handheld diagnostic device
designed for medical and environmental testing and detection using breakthroughs
in nanotechnology and chemical sensing. Nanobeak intends to take the handheld
sensor from prototype to commercial production and international
distribution.
In
September 2009, the Company announced the formation of its second subsidiary for
NASA based technology. Andromeda Energy Inc. (Andromeda) will be focused on
scalable alternative energy solutions employing NASA developed nanotechnology.
These technologies operate more efficiently than current technologies and
therefore yield significantly lower electricity costs per watt than conventional
energy systems and sources.
14
7.
COMMITMENTS AND CONTINGENCIES
Operating
Leases:
The
Company recorded research and development expenses of approximately $65,000 and
$415,000 during the three months ended September 30, 2010 and 2009, respectively
for costs associated with nanotechnology and product development under the
Company’s agreements with NASA. An additional amount of approximately $0.9
million of research and development expenses are estimated to be incurred in the
future, based on the company’s agreements with NASA.
Contingencies
and Litigation:
Certain
legal actions in the normal course of business are pending to which the Company
is a party. Certain ongoing matters relate to vendors seeking to get paid
amounts owed by us, which amounts are included in trade accounts payable or are
fully accrued as of September 30, 2010. The Company does not expect that the
ultimate resolution of the pending legal matters will have a material effect on
the financial condition, results of operations or cash flows of the
Company.
Tax
Returns:
The
Company has not filed payroll tax returns since 2006 and has not filed its
fiscal 2008 or 2009 income tax returns as of September
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, 2010 and 2009. This should be
read in conjunction with the financial statements, and notes thereto, included
in this Report on Form 10-Q and the Company’s financial statements and notes
thereto, included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2010.
15
The
following is a brief description of the more significant accounting policies and
methods used by the Company.
Revenue
Recognition:
There was
no revenue reported for the three months ended September 30, 2010 or
2009.
Significant
Events:
To
facilitate an analysis of MSGI operating results, certain significant events
should be considered:
In August
2009, the Company announced that it had executed two Space Act Agreements with
NASA forming a partnership between MSGI and the Ames Research Center (ARC)
located in Moffet Field, California. The purpose of this collaboration between
MSGI and NASA is to commercialize various revolutionary technologies developed
by NASA in the fields of nanotechnology and alternative energy. The Company’s
initial area of focus is to be on the use of chemical sensors or nano-sensing
technology. These wired and wireless detection systems were first developed for
space exploration in 2007 and 2008 for experiments carried out on the Space
Shuttle Endeavor. The Company intends to form a number of majority owned
subsidiaries, each of which will hold the rights to a specific technology and
also serve as the vehicle for investment capital.
In August
2009, the Company announced that it had formed its first subsidiary for NASA
based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection – effectively electronic sniffing. NASA developed these Nano Chemical
Sensors for space missions to increase scientific measurement capabilities with
less mass and lower power requirements. The potential space and terrestrial
applications include cabin air monitoring onboard the Space Shuttle,
surveillance of global weather, forest fire monitoring, radiation detection, and
various other mission critical capabilities. This technology was developed at
the NASA Ames Research Center located in Moffet Field, California. The
commercial applications of these Nano Chemical Sensors relate specifically to
Homeland Security and Defense, Medical Diagnoses, Environmental Monitoring and
Process Control. Nanobeak seeks to offer products in each of these sectors
beginning in the fiscal year ending June 30, 2010, but timing of these efforts
cannot be assured. The Company subsequently reported the launching of its first
product derived from NASA technology, a handheld test for Diabetes, which uses
breath instead of blood. Nanobeak will take the prototype handheld sensor, which
measures acetone levels with a simple breath, out of the laboratory and into the
marketplace. Nanobeak will undertake product testing which will be done in
conjunction with a major hospital network in the United States, followed by
licensing discussions with the top pharmaceutical companies.
In
September 2009, the Company announced that it had formed its second subsidiary
for NASA based technology. The subsidiary is named Andromeda Energy Inc. and it
is a nanotechnology company focused on scalable alternative energy solutions
that operate more efficiently, and therefore yield significantly lower
electricity cost per watt than conventional energy sources. The Company is in
receipt of several expressions of interest for partnerships in the planned
deployment of this new technology from major corporations located in the
People’s Republic of China. The Company has also been asked to consider a dual
listing on the Hong Kong Stock Exchange.
The
Company has entered into several business development, investor relations and
consulting and advisory agreements with separate service providers. Under the
terms of these agreements, the Company has committed to issue shares of common
stock in lieu of cash in consideration for the valuable services provided and to
be provided by these individual firms. During the three months ended September
30, 2010, the Company issued approximately 8.75 million shares of common stock
in lieu of various categories of cash compensation for services rendered and to
be rendered by the firms. Such services included, but were not be limited to,
investor relations, identification of potential providers of equity or hybrid
financing, the identification of strategic or joint-venture and licensing
partners, the identification of merger and/or acquisition candidates and the
provision of general business and legal advice.
16
Results of Operations for
the Three Months Ended September 30, 2010, Compared to the Three Months Ended
September 30, 2009
There
were no reported revenues during the three months ended September 30, 2010 (the
Current Period), nor in the three months ended September 30, 2009 (the Prior
Period).
There
were no costs of goods sold in the Current Period or in the Prior
Period.
Research
and development expenses of approximately $65,000 were realized during the
Current Period. These expenses were paid to NASA as reimbursement for research
and development costs incurred by NASA under certain Space Act Agreements, which
have been executed with the Company. There were approximately $415,000 of such
costs in the Prior Period.
Salaries
and benefits of approximately $209,000 in the Current Period increased by
approximately $30,000 from salaries and benefits of approximately $179,000 in
the Prior Period. This increase results primarily from costs associated with a
new employee working in business development efforts.
Research
and development expenses of approximately $65,000 in the Current Period
decreased by approximately $350,000 from similar expenses of approximately
$415,000 in the Prior Period. The decrease was primarily the result of our not
obtaining significant funding during the quarter ended September 30, 2010. In
any given quarter going forward, our expenses related to R&D will be
dependent upon our obtaining additional financing, which we cannot predict with
great accuracy.
Selling,
general and administrative expenses of approximately $629,000 in the Current
Period increased by approximately $47,000 or 8% from comparable expenses of
$582,000 in the Prior Period. This increase is due primarily to increases in
travel and entertainment related expenses of approximately $16,000, professional
fees for accounting of approximately $44,000, various rent expenses of
approximately $11,000 and Directors and Officers insurances costs of
approximately $13,000 offset by decreases in consulting fees of approximately
$37,000.
Depreciation
and amortization expenses of approximately $3,000 were realized in the Current
Period and were in line with comparable expenses during the Prior
Period.
As a
result of the above, loss from operations of approximately $907,000 in the
Current Period decreased by approximately $273,000 from comparable loss from
operations of $1,180,000 in the Prior Period.
Interest
expense of approximately $872,000 in the Current Period represents a decrease of
approximately $1.0 from expenses of approximately $1.9 million in the Prior
Period. This decrease is due primarily to a decrease in non-cash interest
expenses derived from the amortization of certain debt discounts.
The
non-cash loss on debt guarantee realized during the Prior Period was the result
of the issuance of shares of the Company’s common stock to the note holder of a
certain bridge loan agreement, which was entered into by Mr. Jeremy Barbera,
Chief Executive Officer and Chairman of MSGI, and for which a portion of the
proceeds were used to advance funds to the Company. The Company issued 1,000,000
shares of its common stock at a market value of $170,000 on the date of
issuance. The Company has no further guarantee obligations under the bridge loan
agreement.
During
the Current Period, the Company realized a gain on change in certain derivative
liabilities of approximately $2.7 million. This gain represents an adjustment to
the derivative liability related to the number of common stock shares, which
would exceed the authorized number of common stock shares, if convertible debt
and equity instruments were exercised and converted into common stock, based on
fair value calculated by Black-Scholes as of September 30, 2010. There was no
such gain realized in the Prior Period.
17
As a
result of the above, net income before taxes of approximately $920,000 in the
Current Period increased by approximately $4.2 million over the comparable net
loss of approximately $3.25 million in the Prior Period.
Capital Resources and
Liquidity
Liquidity:
Historically,
the Company has funded its operations, capital expenditures and acquisitions
primarily through private placements of equity and debt transactions. The
Company currently has limited capital resources, has incurred significant
historical losses and negative cash flows from operations and has no current
revenues. At September 30, 2010, the Company had approximately $51,000 in cash
and no accounts receivable. The Company believes that funds on hand will not be
adequate to finance its operations and enable the Company to meet its financial
obligations and payments under its convertible notes and promissory notes for
the next twelve months. All of our promissory notes and other notes payable are
currently either past due or due within the next 12 months. There are no
assurances that any further capital raising transactions will be consummated.
Although certain transactions have been successfully closed in the past, failure
of our operations to generate sufficient future cash flow and failure to
consummate our strategic transactions or raise additional financing could have a
material adverse effect on the Company's ability to continue as a going concern
and to achieve its business objectives. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern. There are no assurances the Company will receive the necessary
funding or generate revenue necessary to fund operations. If we are unable to
obtain additional funds, or if the funds cannot be obtained on terms favorable
to us, we will be required to delay, scale back or eliminate our plans to
continue to develop and expand our operations or in the extreme situation, cease
operations altogether.
As of
September 30, 2010, we are authorized to issue 100,000,000 shares of common
stock. If the holders of the convertible promissory notes outstanding elect to
convert their holdings into common stock, and the holders of the stock options
and warrants outstanding elect to exercise their rights to purchase common
stock, the Company is obligated to have issued approximately 188,000,000 shares
of commons stock, which is in excess of what we currently have authorized. We
plan to ask the Company’s shareholders to authorize the issuance of additional
shares or reverse split our common stock at our annual meeting. However there is
no guarantee that we will be able to obtain the votes needed to obtain the
additional authorized shares.
The
Company recognized net income of approximately $915,000 in the Current Period.
Cash used in operating activities was approximately $277,000. Cash used in
operating activities principally resulted from our loss from operations. Cash
used in operating activities in the Prior Period was approximately
$429,000.
A use of
cash for investing activities of approximately $2,000 was realized in the
Current Period for purchased of property and equipment. There was no such
activity in the Prior Period.
In the Current Period, net cash of
approximately $169,000 was provided by financing activities. Net cash provided
by financing activities consisted of funds received that were advanced from a
certain corporate officer, offset pay a payment of closing costs from proceeds
of a previous financing. In the Prior Period there was $429,000 provided by
financing activities.
18
Debt
The
Company does not have any credit facilities as of September 30, 2010. Debt
obligations as of September 30, 2010 are summarized as follows:
Instrument
|
Maturity
|
Face Amount
|
Coupon Interest
Rate
|
Carrying
Amount at
September 30,
2010, net of
discount
|
Carrying
Amount at
September 30,
2009, net of
discount
|
||||||||
6%
Notes
|
Dec.
13, 2009*
|
1,000,000
|
15%
|
$ |
1,000,000
|
$
214,858
|
|||||||
6%
April Notes
|
April
4, 2010*
|
1,000,000
|
15%
|
1,000,000
|
44,674
|
||||||||
8%
Debentures
|
May
21, 2010*
|
4,000,000
|
18%
|
4,000,000
|
85,190
|
||||||||
8%
Notes
|
May
21, 2010*
|
4,000,000
|
18%
|
4,000,000
|
4,000,000
|
||||||||
10%
March Notes
|
March
31, 2011
|
650,000
|
10%
|
18,438
|
—
|
||||||||
10%
June Notes
|
June
30, 2011
|
300,000
|
10%
|
1,670
|
—
|
||||||||
Term
notes short-term
|
December
31, 2009*
|
420,000
|
18%
|
420,000
|
400,000
|
||||||||
Term
note short-term
|
February
28, 2009*
|
960,000
|
18%
|
960,000
|
960,000
|
||||||||
Term
note short-term
|
March
31, 2009*
|
1,500,000
|
18%
|
1,500,000
|
1,500,000
|
||||||||
Term
notes short-term
|
June
17, 2009*
|
250,000
|
18%
|
250,000
|
250,000
|
||||||||
Term
notes – short terms
|
August
21, 2009
|
240,004
|
30%
for loan term + 3% per month
|
240,004
|
240,004
|
||||||||
Short
term borrowings from Apro Media Corp
|
N/A
|
200,000
|
N/A
|
206,950
|
206,950
|
||||||||
Short
term borrowings from Current Technologies Corp.
|
N/A
|
70,000
|
N/A
|
32,000
|
70,000
|
||||||||
Short
term borrowings from officer of the Company
|
N/A
|
1,027,808
|
N/A
|
1,027,808
|
355,860
|
||||||||
Short
term borrowings from others
|
N/A
|
60,000
|
N/A
|
60,000
|
60,000
|
||||||||
$ |
15,677,812
|
$ |
14,716,870
|
$8,387,536
|
*These
notes are due on demand.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.
Item
4. Controls and Procedures.
Our
Company's Chairman and Chief Executive Officer and Chief Accounting Officer have
carried out an evaluation 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, our Chief
Executive Office and Chief Accounting Officer have concluded that the Company's
disclosure controls and procedures as of September 30, 2010 were not effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission's rules and forms and ensure that information
required to be disclosed by us in the reports we file or submit under the
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosure..
19
It is
noted by the Company that on November 15, 2010, certain of these material
weaknesses were communicated to the Company by our independent registered public
accounting firm. See the Form 10-K file for the year ended June 30, 2010 for the
disclosure of these material weaknesses. A material weakness is a control
deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
Remediation
of Material Weaknesses
The
Company intends to take action to hire additional staff, implement stronger
financial reporting systems and software and develop the adequate policies and
procedures with said enhanced staff to ensure all noted material weaknesses are
addressed and resolved. The Company has also retained a third party consulting
services to assist in developing and maintaining adequate internal control over
financial reporting. However, due to the Company’s cash flow constraints, the
timing of implementing the above has not yet been determined.
Changes
in Internal Control Over Financial Reporting
There
were no other changes in the Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2010 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
20
PART
II- OTHER INFORMATION
Item
1. Legal Proceedings
Certain
legal actions in the normal course of business are pending to which the Company
is a party. The Company does not expect that the ultimate resolution of any
pending legal matters will have a material effect on the financial condition,
results of operations or cash flows of the Company.
In May
2009, the Company engaged the law firm of GCA Law Partners LLP, of Mountain
View, California, to represent us in possible action against Hyundai Syscomm
Corp., Apro Media Corp., Hirsch Capital Corp. and other entities and
individuals. Subsequently, the Company filed suit in United States District
Court, Northern District of California, alleging, among other faults, fraud,
breach of contract and unfair business practices. The Company seeks financial
relief and compensation for the alleged actions of the parties named in the
action. The engagement agreement calls for GCA to be compensated for all fees
incurred on a contingent basis, pending outcome of the lawsuit, and, further,
calls for the Company to issue 50,000 shares of common stock of the Company to
each of the two partners managing the legal proceedings.
During
the last quarter of the fiscal year ended June 30, 2010, GCA Law Partners filed
a motion to be dismissed as counsel for the Company and formally withdrew from
the proceedings. This action was not due to any foreseen difficulties with the
Company’s case against the defendants, but rather was the result of the
Company’s currently inability to remit cash compensation to the firm on a timely
basis. The Company has engaged the assistance of alternative legal counsel and
the case is proceeding.
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.
|
21
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 22, 2010
|
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)
|
22