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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO _____________________
Commission File Number: 33-2822-A
MSU CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 22-274288
(State or other jurisdiction of (I R S Employer ID No)
incorporation or organization)
ELDER HOUSE, 526-528 ELDER GATE, CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
(Address of principal executive offices)
011 44 1908 232100
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 as the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock of the Registrant outstanding as of
February 10, 1998 was 16,168,391 according to the Company's transfer agent.
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Form 10-Q INDEX
PART I - FINANCIAL INFORMATION
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Page No.
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance sheets as of December 31, 1997 and June 30, 1997 3
Condensed Consolidated statements of Operations for the three and six months ended
December 31, 1997 and the three and six months ended December 31, 1996 4
Condensed Consolidated statements of Cash Flows for the six months ended
December 31, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-9
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Change in Securities 10
Item 3 Defaults upon Senior Securities 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 10
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PART 1 -- FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
MSU Corporation
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31 JUNE 30
1997 1997
<S> <C> <C>
CURRENT ASSETS $ $
Cash and cash equivalents 15,016 859,238
Accounts receivable - trade 78,138 105,842
Accounts receivable - other 51,254 77,469
Inventory 7,329 12,325
Prepaid expenses and other 34,704 67,085
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TOTAL CURRENT ASSETS 186,441 1,121,959
EQUIPMENT, net of accumulated depreciation of $60,099 and $41,764 at December 31,
1997 and June 30, 1997 respectively 90,610 76,305
OTHER ASSETS
Deferred financing costs, net of accumulated amortization of $436,247 and $13,201 at
December 31, 1997 and June 30, 1997 respectively 409,845 803,077
Deferred registration costs 56,667 85,000
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466,512 888,077
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TOTAL ASSETS $ 743,563 $ 2,086,341
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LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
10% Convertible Notes -- current 2,299,750 --
Short term borrowings 126,000 131,595
Shareholders' advances payable 1,527,920 1,562,680
Notes payable 250,000
Accounts payable and accrued liabilities 820,119 713,461
Related-party payables 19,995 20,239
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TOTAL CURRENT LIABILITIES 4,793,784 2,677,975
LONG TERM DEBT - 10% Convertible Notes -- 1,829,742
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.01 par value; 50,000,000 shares authorized 16,168,391 and
15,986,891 shares issued and outstanding at December 31, 1997 and June 30, 1997
respectively 161,684 159,869
Additional paid-in capital 4,815,995 4,456,560
Cumulative translation adjustments 102,494 94,701
Accumulated deficit (9,130,394) (7,132,506)
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TOTAL SHAREHOLDERS' DEFICIT (4,050,221) (2,421,376)
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TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 743,563 $ 2,086,341
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</TABLE>
See notes to condensed consolidated financial statements
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MSU Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31 December 31
1997 1996 1997 1996
$ $ $ $
<S> <C> <C> <C> <C>
REVENUES 8,719 883,951 9,423 1,010,542
EXPENSES
Cost of revenues 5,574 585,594 6,311 587,787
Selling, general and
administrative and other 341,700 327,195 648,408 416,319
Depreciation 10,571 9,124 18,982 15,013
Amortisation of deferred financing costs 239,856 - 451,379 -
Interest expense 57,500 169 115,167 1,019
Research and development 429,848 432,798 771,618 764,588
--------- --------- --------- ---------
TOTAL EXPENSES 1,085,049 1,354,880 2,011,865 1,784,726
---------- --------- ---------- ---------
OPERATING LOSS (1,076,330) (470,929) (2,002,442) (774,184)
NON OPERATING INCOME
Interest income 475 2,585 4,554 2,585
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NET LOSS $(1,075,855) $(468,344) $(1,997,888) (771,599)
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----------- --------- ----------- ---------
LOSS PER COMMON SHARE $(0.07) $(0.03) $(0.12) $(0.05)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 16,131,000 15,621,000 16,078,000 15,578,000
</TABLE>
See notes to condensed consolidated financial statements
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MSU Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31 December 31
1997 1996
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (1,997,888) (771,599)
Adjustments to reconcile net loss to net
cash used in operating activities 388,257 200,715
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NET CASH USED IN OPERATING ACTIVITIES (1,609,631) (570,884)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (33,287) (33,487)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (net) 429,653 165,620
Issuance of common stock 361,250 800,000
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 790,903 965,620
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EFFECT OF EXCHANGE RATE CHANGES 7,793 (19,629)
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NET INCREASE (DECREASE) IN CASH (844,222) 341,620
CASH AT BEGINNING OF PERIOD 859,238 54,805
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CASH AT END OF PERIOD $15,016 $396,425
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</TABLE>
See notes to condensed consolidated financial statements
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MSU CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of MSU Corporation and its subsidiaries at
December 31, 1997, the results of its operations for three and six months ended
December 31, 1997 and 1996, and its cash flows for the six months ended December
31, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the Company's annual report on form 10-K for the fiscal
year ended June 30, 1997. The results of the operations for the three and six
months ended December 31, 1997 are not necessarily indicative of the operating
results that may be expected for the fiscal year ending June 30, 1998.
NOTE 2 - SHAREHOLDERS' EQUITY
During the six months ended December 31, 1997, shareholders deficit increased
approximately $1,630,000. Net loss for the six month period was $1,988,000. The
cumulative translation adjustment decreased by approximately $11,000. The
Company issued 181,500 shares of its common stock for $361,250 during the six
month period. Of the 181,500 shares issued, 94,500 were issued for cash in
private transactions with JM Simpson, a director, 37,000 were issued pursuant to
the exercise of warrants; and 25,000 were issued pursuant to an agreement with
the note-holder of the $250,000 non-interest bearing Note which was repaid in
July 1997
NOTE 3 - LOSS PER COMMON SHARE
The Loss per common share is computed based upon the weighted average of the
shares outstanding during the period.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW OF BUSINESS OPERATIONS AND SIGNIFICANT RISKS
The consolidated financial statements include the accounts of MSU Corporation,
MSU PLC, MSU (UK) Limited and MSU Operations (US) Inc. (collectively the
"Company"). All significant inter company accounts have been eliminated in the
consolidated financial statements.
The Company operates primarily through MSU (UK) Limited which is principally
engaged in the design and development of computer chips and chipsets for use in
consumer electronic products.
The Company's consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred losses
since inception. At December 31, 1997 there was an accumulated deficit of
$9,130,394. Additionally the Company has had recurring negative cash flows from
operations. The Company expects that it is likely to incur net losses at least
through to the end of the third quarter of fiscal 1998, and possibly through
that year, as it attempts to further develop, upgrade and market its products
and to develop its infrastructure and organisation to support anticipated
operations, including anticipated product demand. The foregoing statement is a
forward looking statement that involves risks and uncertainties. The reader
should be aware that the Company is likely to incur net losses beyond the third
quarter of fiscal 1998 if anticipated revenues from development fees, and
royalties in respect of sales of the Envoy chip, or royalties and conditional
and forecasted purchase orders of customised Internet Access Devices are not
realised. Such conditional and forecasted purchase orders in respect of the
Internet Access Device assume, without limitation, approval of final production
samples by potential purchasers; acceptance by and demand for customised
Internet Access Devices by consumers, satisfactory product performance,
including chip and software performance; modem approval from the local or
national telephone company; and the ability of the products to successfully
compete in an extremely competitive marketplace. The Company believes such
assumptions are reasonable, however should any one of such assumptions prove
to be unfounded, the Company could incur net losses beyond fiscal 1998 and/or
be unable to continue as a going concern. The foregoing factors raise
substantial doubt about the Company's ability to continue as a going concern
without sufficient funds to meet its cash requirements. There can be no
assurance that the Company will be able to obtain sufficient funds to enable
it to continue as a going concern.
During the six month period ended December 31, 1997 significant software
modifications to the Internet Access Device were completed, and Mitac Inc.,
the Company's licensee and joint venture partner, has announced the commencement
of pre-production samples of the latest 4 megabyte version of the proprietary
Slipstream Internet Access Device for which it has now received orders. Mitac
Inc. manufactures and sells the Internet Access Devices designed by the Company.
The Company is developing the ISP Chip - version 3 which will provide enhanced
Internet features and capabilities. In addition, the development of the
Company's Envoy chip is continuing and the Company considers that commercial
sales could commence later in the fiscal year.
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The Company's strategy is to increase cash flows from operations through further
development, upgrade and marketing of its chips and products incorporating such
technology, with particular emphasis on the Envoy chip and on customised
Internet Access Devices incorporating its ISP Chip-Version 2, and potential
expansion of its operations in the United States and elsewhere. In order to
support this strategy, the Company anticipates that if sales revenues are not
generated in the coming months, it will, at least in the short term, have to
continue to fund a significant portion of its operations, through private sales
of equity or debt securities to and/or borrowings from third parties, to the
extent such sources of capital are available to the company. The Company also
intends to further develop its infrastructure and organisation to support its
anticipated operations activity, although it has no funds to address these
concerns presently.
The markets for the Company's products have only recently begun to develop, are
rapidly evolving and are highly competitive, with substantially all competitors
having significantly greater resources than the Company. The Company and its
prospects must be considered in light of the substantial risks, expenses and
difficulties facing the Company. There can be no assurance that the Company will
be successful in addressing any of the foregoing risks, that it will be
successful in implementing its strategy, that it will ever achieve profitability
or that it will be able to continue as a going concern.
RESULTS OF OPERATIONS
Comparison of the three and six months ended December 31, 1997 to the three and
six months ended December 31, 1996
Revenues for the three and six months ended December 31, 1997 decreased over the
same periods of 1996 by $875,232 and $1,001,119 respectively. Comparison with
the previous periods however is not meaningful as in this period, apart from the
sale of a small number of samples, there were no revenues generated as the
Company concentrated its efforts on the development of its Internet Access
Device, the ISP Chip-version 3 and the Envoy chip.
The Company has only limited customers to date that frequently systematically
purchase its products or retains its services. The loss of one customer could
have a material effect on the Company's business.
Costs of revenues for the three and six months ended December 31, 1997 decreased
over the same periods in 1996 by $580,020 and $581,476 respectively. The cost of
revenues fluctuate due to variations in gross margins as between chip sales,
support services and development services; however, because of the limited
number of sales in the three and six months ended December 31, 1997 comparison
with 1996 is meaningless.
Research and development expenditures generally consist of expenditure related
to the Company's development of its chips and prototype products, such as the
ISP Chip, the Envoy Chip, and the prototype Internet Access Device and specific
research and development performed pursuant to development arrangements with
third parties. For the three and six months ended December 31, 1997 research
and development expenses were $2,950 less and $7,030 more than in the
corresponding periods in the previous year. As mentioned above, as the revenues
generated in the three and six months ended December 31, 1997 were negligible,
compared to the revenues generated in the three and six months to December 31,
1996, comparison of research and development expenditure as a percentage of
revenues for the respective periods is not meaningful. The fluctuations from
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period to period reflect the varying demands for research and development which
are dictated by technological changes and the need for the Company's products to
remain competitive and commercially viable, and the requirements of the
Company's customers.
Selling, general and administrative and other expenses for the three and six
months ended December 31, 1997 increased over the same periods of 1996 by
$14,505 and $232,089 respectively primarily due to increased personnel costs
resulting from the development of the Company's infrastructure, costs associated
with marketing and promotion, including related travel, and professional costs
incurred in the preparation of the Exchange Act annual reports. Selling, general
and administrative and other expenses principally consist of the cost of
employees (other than those dedicated to research and development) advertising
and promotional costs, which are charged to operations as incurred,
communication' rent and occupancy costs; and professional fees.
Interest expense for the three and six months ended December 31, 1997 increased
over the same periods of 1996 by $57,331 and $114,148 respectively due to the
interest which is now payable on the 10% Convertible Notes; there was no similar
interest cost in the three and six months ended December 31, 1996.
The costs associated with the financing of the 10% Convertible Notes are being
amortised over the period of the Notes; there was no similar expense in the
three and six months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private sales of equity and
debt securities. For the six month period ended December 31, 1997 cash used
in operating activities of approximately $1,610,000 was primarily attributable
to the Company's net loss for the period. Cash used in investment activities
of approximately $33,000 during such period related mainly to the acquisition of
computer equipment. Cash flows from financing activities of approximately
$791,000 were attributable to aggregate net proceeds of $430,000 from private
sales of common stock; $301,000 from the issuance of further 10% Convertible
Notes and $126,000 from the proceeds of a bridge note private placement.
At December 31, 1997 the Company's principal source of liquidity was
approximately $15,000 in cash. Since December 31, 1997 additional liquidity
has been provided by the receipt of further loans of $125,000 under the above
mentioned bridge note private placement. The total bridge loan is anticipated
to be $1 million. The loan bears interest at 9%, has a term of one year and
shall be prepaid from 50% of the proceeds of any institutional equity
investment and from new licensing fees obtained from its products.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 1998 may not be sufficient to meet its cash
needs for working capital and capital expenditures for remainder of fiscal 1998.
The Company is actively pursuing negotiations for additional capital to fund
its operations through private sales of equity or debt securities and or
borrowings from third parties. The sale of additional equity or convertible
debt securities will result in an additional dilution to the Company's
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stockholders. Even assuming such additional financing, there can be no assurance
that the Company's liquidity requirements will be met or that the Company will
be able to continue as a going concern.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On December 15, 1997, the Company received a Complaint which was filed in
New York State Supreme Court, New York County by Forte Communications, Inc.,
alleging damages in the amount of $112,800, for public relations and consulting
services rendered by plaintiff to the Company. The Company intends to defend
against the suit but has not yet filed its answer.
Item 2 - Changes in securities
In July 1997 the Company repaid the $250,000 non-interest bearing note payable
and issued to the holder thereof 25,000 shares of its restricted common stock.
In July, September and October 1997 a total of 37,000 shares of the Company's
restricted stock were issued, pursuant to the exercise of a warrant, at $1 per
share.
On September 3, 1997 Jeremy Simpson acquired from the Company, in a private
transaction, 26,900 shares of the Company's common stock for $79,000 in cash.
In October 1997 Mr. Simpson acquired a further 47,320 shares of the Company's
common stock for $118,300 in cash and in November 1997 20,280 shares of the
Company's common stock for $50,700 in cash. In all cases the price paid for the
shares was the market price prevailing on the respective dates.
Item 3 - Defaults upon Senior Securities
The Company is currently in default on the interest due on its outstanding 10%
Promissory Notes. The Notice of Default received by the Company does not
specify an amount, but the Company estimates the interest due at approximately
$115,000.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other information
Effective July 1, 1997 Jeremy Simpson was appointed to serve as a director of
the Company as non-executive Deputy Chairman.
In August 1997, Fred Kashkooli also joined the Board following the appointment
of Capital Bay Securities as the company's investment bankers.
In September 1997 Keith Peirson was appointed to the Board and he has also been
appointed the Company's managing director.
In November 1997 Gerald J Capaci resigned from the Board.
Item 6 - Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorised.
MSU Corporation
(Registrant)
Date: February 20, 1998
/s/ R. H. Phillips
R H Phillips, Vice President
(Principal Financial and Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUN-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,016
<SECURITIES> 0
<RECEIVABLES> 78,138
<ALLOWANCES> 0
<INVENTORY> 7,329
<CURRENT-ASSETS> 186,441
<PP&E> 90,610
<DEPRECIATION> 60,099
<TOTAL-ASSETS> 743,563
<CURRENT-LIABILITIES> 4,793,784
<BONDS> 2,299,750
<COMMON> 161,684
0
0
<OTHER-SE> 4,211,905
<TOTAL-LIABILITY-AND-EQUITY> 743,563
<SALES> 0
<TOTAL-REVENUES> 9,423
<CGS> 6,311
<TOTAL-COSTS> 2,011,865
<OTHER-EXPENSES> 2,005,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,167
<INCOME-PRETAX> (1,997,888)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,997,888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,997,888)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
