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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 March 31, 1998
|_| 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 I D No)
incorporation or organisation)
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 May 11,
1998 was 16,282,622 according to the Company's transfer agent.
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Form 10-Q INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance sheets as of March 31, 1998
and June 30, 1997 3
Condensed Consolidated statements of Operations for the three
and nine months ended March 31, 1998 and the three and nine
months ended March 31, 1997 4
Condensed Consolidated statements of Cash Flows for the nine
months ended March 31, 1998 and 1997 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
2
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PART I - FINANCIAL INFORMATION
Item 1
Condensed Consolidated Financial Statements
MSU Corporation
Condensed Consolidated Balance Sheets (Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31 June 30
1998 1997
<S> <C> <C>
CURRENT ASSETS $ $
Cash and cash equivalents 23,086 859,238
Accounts receivable -trade 28,285 105,842
Accounts receivable -other 67,360 77,469
Inventory 6,523 12,325
Prepaid expenses and other 44,445 67,085
------------ -----------
TOTAL CURRENT ASSETS 169,699 1,121,959
EQUIPMENT, net of accumulated depreciation of $79,955 and
$41,764 at March 31, 1998 and June 30, 1997 respectively 122,384 76,305
OTHER ASSETS
Deferred financing costs, net of accumulated amortisation of
$647,770 and $13,201at March 31,1998 and
June 30, 1997 respectively 198,322 803,077
Deferred registration costs 28,333 85,000
------------ -----------
226,655 888,077
------------ -----------
TOTAL ASSETS $ 518,738 $ 2,086,341
============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
10% Convertible Notes - current 2,299,750 --
Short term borrowings 314,985 131,595
Shareholders' advances payable 1,572,010 1,562,680
Note payable -- 250,000
Accounts payable and accrued liabilities 1,235,684 713,461
Related-party payables 20,292 20,239
------------ -----------
TOTAL CURRENT LIABILITIES 5,442,721 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
16,282,622 and 15,986,891 shares issued and outstanding at
March 31, 1998 and June 30 1997 respectively 162,825 159,869
Additional paid-in capital 4,889,103 4,456,560
Cumulative translation adjustments 91,084 94,701
Accumulated deficit (10,066,995) (7,132,506)
------------ -----------
TOTAL SHAREHOLDERS' DEFICIT (4,923,983) (2,421,376)
------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 518,738 $ 2,086,341
============ ===========
</TABLE>
See notes to condensed consolidated financial statements
3
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MSU Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 1,582 $ 145,508 $ 11,005 $ 1,156,050
EXPENSES
Cost of revenues 934 73,100 7,245 660,887
Selling, general and
administrative and other 314,731 469,069 963,138 896,030
Depreciation 18,578 13,951 37,560 18,332
Amortisation of deferred financing costs 239,857 -- 691,236 --
Interest expense 57,693 3,826 172,860 4,835
Research and development 306,391 269,010 1,078,009 1,033,598
------------ ------------ ------------ ------------
TOTAL EXPENSES 938,184 828,956 2,950,049 2,613,682
------------ ------------ ------------ ------------
OPERATING LOSS (936,602) (683,448) (2,939,044) (774,184)
NON OPERATING INCOME
Interest income -- -- 4,554 2,585
------------ ------------ ------------ ------------
NET LOSS $ (936,602) $ (683,448) $ (2,934,490) $ (1,455,047)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (0.06) $ (0.04) $ (0.18) $ (0.09)
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 16,226,000 15,760,000 16,146,000 15,622,000
</TABLE>
See notes to condensed consolidated financial statements
4
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MSU Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31 March 31
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(2,934,490) $ (1,455,047)
Adjustments to reconcile net loss to net
cash used in operating activities 1,087,366 (119,574)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,847,124) (1,574,621)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment (net) (83,639) (67,474)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings (net) 662,728 765,620
Issuance of common stock 435,499 800,000
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,098,227 1,565,620
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES (3,617) (68,976)
----------- -----------
NET INCREASE (DECREASE) IN CASH (836,153) (7,499)
CASH AT BEGINNING OF PERIOD 859,238 54,805
----------- -----------
CASH AT END OF PERIOD $ 23,085 $ 47,306
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
5
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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
March 31, 1998, the results of its operations for three and nine months ended
March 31, 1998 and 1997, and its cash flows for the nine months ended March 31,
1998 and 1997.
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 nine
months ended March 31, 1998 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 nine months ended March 31, 1998, shareholders deficit increased
approximately $2,503,000. Net loss for the nine month period was $2,934,000. The
cumulative translation adjustment decreased by approximately $4,000. The Company
issued 295,731 shares of its common stock for $435,500 during the nine month
period and 114,231 shares for $74,250 in the three month period ended
March 31, 1998. Of the shares issued in the nine month period, 208,731 were
issued for cash in private transactions with Mr. J. M. 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 March 31, 1998 there was an accumulated
deficit of $10,066,995. Additionally, the Company has had recurring negative
cash flows from operations.
In May 1998, the Company received aggregate royalty income of $500,000
with additional licensing fees of $650,000 due on May 31, 1998, and 560,000
restricted shares of common stock in a licensee. 60,000 of such shares in the
licensee have been issued directly to Daybreak Fund LLC ("Daybreak") in
settlement of the short term loan funding received of $314,985 from Daybreak and
Capitol Bay Management. The balance of the shares are held as security on behalf
of the holders of the 10% convertible notes.
On May 6, 1998 the Company also entered into an agreement with Capitol Bay
Securities, acting on behalf of the $2.3 million 10% convertible note holders
under which, in consideration for reducing the conversion price from $3.00 to
$1.50 and for granting to them the security of the 500,000 restricted shares of
common stock in the licensee, the Noteholders agreed that there would be an
automatic conversion of their notes into shares of common stock of the Company
immediately following the effectiveness of a Registration Statement in respect
of the shares underlying the Notes and once the Company's shares have then
traded for 10 consecutive days at a price of $1.50 or higher. The Registration
Statement has to become effective within 45 days of May 6, 1998; if there is a
delay the conversion price reduces by $0.25 for each 30 day period in which
there is a delay with a minimum conversion price of $0.75.
In addition, on May 6, 1998 the Company agreed to issue 168,000 shares of
common stock to the Noteholders in consideration of the interest due on the
Notes through to July 31, 1998. The Noteholders also agreed that they would not
declare the Notes in default at any time prior to July 31, 1998 for any reason
whatsoever.
The income received and receivable by the Company following the agreements
in May 1998, will be reflected in the financial statements for the period
ending June 30, 1998.
The Company expects that it is now likely to report a small surplus for
fiscal 1998 provided that the value of the licensee's shares is maintained at,
or about, the current level. Further costs are
7
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however still being incurred by the Company 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 in fiscal 1999 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 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 nine month period ended March 31, 1998, significant software
modifications to the Internet Access Device were completed and the Company
commenced production of the latest 4 megabyte version of the proprietary
Slipstream Internet Access Device for which orders have now been received by
Mitac Inc, our joint venture partner which manufactures and sells the Internet
Access Devices. The Company is continuing to develop the ISP Chip which will
provide enhanced Internet features. In addition, the development of the
Company's Envoy chip is continuing and the Company considers that commercial
sales could commence later in the next fiscal year.
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 Slipstream technology.
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.
8
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Results of Operations
Comparison of the three and nine months ended March 31, 1998 to the three and
nine months ended March 31, 1997
Revenues for the three and nine months ended March 31, 1998 decreased over
the same periods of 1997 by $143,926 and $1,145,045 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 further software and hardware
developments of its Internet Access Device, and the Envoy chip.
The Company has only limited customers to date that frequently and
systematically purchase its products or retain its services. The loss of one
customer could have a material effect on the Company's business.
Costs of revenues for the three and nine months ended March 31, 1998
decreased over the same periods in 1997 by $72,166 and $653,642, 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 nine months ended March 31, 1998,
comparison with 1997 is meaningless.
Research and development expenses generally consist of expenditures
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 nine months ended
March 31, 1998 research and development expenses were $37,380 and $44,411 more
than in the corresponding periods in the previous year. As mentioned above, as
the revenues generated in the three and nine months ended March 31, 1998 were
negligible, compared to the revenues generated in the three and nine months
ended March 31, 1997, comparison of research and development expenditure as
a percentage of revenues for the respective periods is not meaningful. The
fluctuations from 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
months ended March 31, 1998 decreased over the same period of 1997 by $154,338
and increased over the nine months ended March 31, 1998 by $67,108. The decrease
in the three months ended March 31, 1998 is primarily due to a reduction in
personnel, marketing and promotional costs in this period during which the
company was concentrating its efforts on the development of its products..
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 nine months ended March 31, 1998
increased over the same periods of 1997 by $53,867 and $168,025, respectively,
due to the interest which is now payable on the 10% Convertible Notes; there was
no similar interest cost in the three and nine months ended March 31, 1997.
9
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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 nine months ended March 31, 1997.
Liquidity and Capital resources
The Company has financed its operations through private sales of equity
and debt securities. For the nine month period ended March 31, 1998 cash used in
operating activities of approximately $1,847,000 was primarily attributable to
the Company's net loss for the period. Cash used in investment activities of
approximately $83,000 during such period related mainly to the acquisition of
computer equipment. Cash flows from financing activities of approximately
$1,098,000 were attributable to aggregate net proceeds of $435,000 from private
sales of common stock; $301,000 from the issuance of further 10% Convertible
Notes and $315,000 from the proceeds of short term loans.
At March 31, 1998 the Company's principal source of liquidity was
approximately $23,000 in cash. Since March 31, 1998 additional liquidity has
been provided by the receipt from interests connected to Mr. Jeremy Simpson, a
director of the Company, of $90,750 from the sale of 139,615 of the Company's
shares, and from the receipt of $500,000 of royalty income.
The balance of the bridge loan, which the directors had expected to
receive in the three months ended March 31, 1998, was not received.
The Company believes that cash flows expected to be generated by
operations through the remainder of fiscal 1998 will be sufficient to meet its
cash needs for working capital and capital expenditures for the remainder of
fiscal 1998. The Company is however 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 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.
10
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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 Superior Court, New York County, by Forte Communications, Inc.,
alleging damages in the amount of $112,800, for public relations and consulting
services rendered by the Plaintiff to the Company, and alleged expenses. The
Company has filed an answer to the suit on the basis of Forte's failure to
fulfill its contractual obligations and to obtain the necessary authority for
alleged expenses.
Item 2 - Changes in securities
In February 1998 the Company agreed with Mr J M Simpson that he, or
interests with which he is connected, would purchase a further 253,846 shares of
the Company's common stock at $0.65 per share (being the prevailing market price
at the date of the agreement). The total consideration is $165,000 with the
purchase of shares being made between February 1998 and May 1998. At 31 March
1998, $74,250 had been received and since 31 March 1998, the balance of
$90,750 has also been paid to the company
On May 6, 1998 the Company also entered into an agreement with Capitol Bay
Securities, acting on behalf of the $2.3 million 10% convertible note holders
under which in consideration for reducing the conversion price from $3.00 to
$1.50 and for granting to them the security of 500,000 restricted shares of
common stock of a licensee, the Noteholders agreed that there would be an
automatic conversion of their notes into shares of common stock of the
Company immediately following the effectiveness of a Registration Statement
in respect of the shares underlying the Notes and once the Company's shares have
then traded for 10 consecutive days at a price of $1.50 or higher. The
Registration Statement has to become effective within 45 days of May 6, 1998;
if there is a delay the conversion price reduces by $0.25 for each 30 day
period in which there is a delay with a minimum conversion price of $0.75
Item 3 - Defaults upon Senior Securities
The Company has been in default of the interest due on its outstanding 10%
promissory notes. The Notice of Default received by the Company did not specify
an amount, but the Company estimates that the interest due at March 31, 1998 was
approximately $175,000.
On May 6, 1998, the Noteholders agreed that in consideration for the
issuance of 168,000 shares of common stock representing interest through July
31, 1998, the Notes would not be declared in default at any time prior to July
31, 1998 for any reason whatesoever
Item 4 - Submission of Matters to a Vote of Security Holders
None
11
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Item 5 - Other information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
12
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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: May 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
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet of the Company as of March 31, 1998 and the Statement of Operations of the
Company for the three months and nine month periods ended March 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> DEC-31-1997 JUN-30-1997
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 23,086 0
<SECURITIES> 0 0
<RECEIVABLES> 95,645 0
<ALLOWANCES> 0 0
<INVENTORY> 6,523 0
<CURRENT-ASSETS> 169,699 0
<PP&E> 122,384 0
<DEPRECIATION> 79,955 0
<TOTAL-ASSETS> 518,738 0
<CURRENT-LIABILITIES> 5,442,721 0
<BONDS> 2,299,750 0
<COMMON> 162,825 0
0 0
0 0
<OTHER-SE> (5,086,808) 0
<TOTAL-LIABILITY-AND-EQUITY> 518,738 0
<SALES> 0 0
<TOTAL-REVENUES> 1,582 11,005
<CGS> 934 7,245
<TOTAL-COSTS> 938,184 2,950,049
<OTHER-EXPENSES> 603,941 1,942,105
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 57,693 172,860
<INCOME-PRETAX> (936,602) (2,939,044)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (936,602) (2,939,044)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (936,602) (2,939,044)
<EPS-PRIMARY> (0.06) (0.18)
<EPS-DILUTED> 0 0
</TABLE>
