MULTI-MEDIA TUTORIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2007
--------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 82,670
Accounts receivable, less allowance for
doubtful accounts of $14,940 65,214
Inventories 5,030
Prepaid expenses 87,198
------------
Total current assets 240,112
------------
FURNITURE AND EQUIPMENT, net 16,454
INTANGIBLE ASSETS, net 55,503
OTHER ASSETS 30,136
------------
$ 342,205
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 2,188,525
Accounts payable and accrued expenses 4,059,144
------------
Total Current Liabilities 6,247,669
------------
LONG TERM DEBT:
Notes Payable, net of discount of $277,115 372,885
------------
6,620,554
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Preferred stock, Series A, $0.01 par value
1,000,000 shares authorized no shares
issued and outstanding -
Preferred stock, Series B, $0.01 par value
50 shares authorized no shares issued and
outstanding -
Common stock, $0.0001 par value 100,000,000
shares authorized 51,110,422 shares issued
and outstanding 5,111
Stock subscription receivable (4,000)
Additional paid-in capital 14,948,832
Accumulated deficit (21,228,292)
------------
Total Stockholders' Deficit (6,278,349)
------------
$ 342,205
============
The accompanying notes are an integral part of these consolidated financial statements.
F-1
|
MULTI-MEDIA TUTORIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
AUGUST 31, 2007
----------------------------------------------------------------------------------------------------------------
(Unaudited)
For the Three Months Ended For the Six Months Ended
August 31, August 31,
-------------------------------- --------------------------------
2007 2006 2007 2006
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 177,133 $ 177,280 $ 356,875 $ 423,599
COST OF SALES 27,725 24,135 56,590 41,066
-------------- -------------- -------------- --------------
GROSS PROFIT 149,408 153,145 300,285 382,533
SELLING, GENERAL AND ADMINISTRATIVE 334,754 346,091 792,675 650,191
-------------- -------------- -------------- --------------
LOSS FROM OPERATIONS (185,346) (192,946) (492,390) (267,658)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Cancellation of Debt - 46,174
Interest Expense (161,018) (59,190) (288,309) (116,163)
-------------- -------------- -------------- --------------
(161,018) (59,190) (242,135) (116,163)
-------------- -------------- -------------- --------------
NET LOSS $ (346,364) $ (252,136) $ (734,525) $ (383,821)
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.01) $ (0.02) $ (0.01)
============== ============== ============== ==============
WEIGHTED-AVERAGE SHARES OUTSTANDING 50,043,165 38,655,450 47,373,085 38,832,839
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
|
MULTI-MEDIA TUTORIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
AUGUST 31, 2007
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
For the Six Months Ended
August 31,
------------------------------------
2007 2006
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (734,525) $ (383,821)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities
Depreciation and amortization 12,090 15,714
Forgiveness of debt (46,174) -
Amortization of prepaid contract for service 21,875 18,229
Amortization of deferred compensation 61,625 7,500
Amortization of discount on debt 98,530 733
Non-cash expense related to amortization of prepaid
consulting expenses acquired with notes payable - -
Stock based compensation 121,456 21,657
Common stock issued for:
Services 93,500 74,000
Changes in Operating assets and Liabilities:
Accounts receivable (2,380) 44,781
Inventories 2,371 3,382
Prepaid expenses and other assets (77,139) (1,256)
Accounts Payable and accrued expenses (16,082) 83,077
---------------- ----------------
Net cash used in operating activities (464,853) (116,004)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (7,464) (3,581)
Increase in intangibles (12,200) (13,455)
Security deposit on new facility - (2,600)
---------------- ----------------
Net cash used in investing activities (19,664) (19,636)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 650,000 123,500
Repayment of note payable (66,700) (1,000)
Cash deficit (16,113) 10,486
---------------- ----------------
Net cash provided by financing activities 567,187 132,986
---------------- ----------------
Net increase (decrease) in cash 82,670 (2,654)
CASH, BEGINNING OF PERIOD - 2,654
---------------- ----------------
CASH, END OF PERIOD $ 82,670 $ -
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ - $ -
================ ================
INCOME TAXES PAID $ - $ -
================ ================
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued:
Settlement of accounts payable and accrued expenses $ - $ 12,500
================ ================
With issuance of debt $ 354,505 $ 5,275
================ ================
Exercise of option / stock subscription receivable $ - $ 4,000
================ ================
Deferred compensation paid in common stock $ 317,000 $ 30,000
================ ================
Services 74,000
================ ================
Conversion of debt to common stock $ 132,000 $ -
================ ================
Debt issued for
Consulting services $ - $ 87,500
================ ================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
|
MULTI-MEDIA TUTORIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
AUGUST 31, 2007
------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Common Stock Stock Additional
-------------------------------- Subscription Paid-In Accumulated
Shares Amount Receivable Capital Deficit Total
-------------- -------------- -------------- ------------ ------------- ---------------
Balance, February 28, 2007 41,826,917 $ 4,183 $ (4,000) $ 14,162,759 $ (20,493,767) $ (6,330,825)
============== ============== ============== ============ ============= ===============
Common Stock issued for: 20,493,767
Services 1,900,000 190 68,185 68,375
Series E debt financing 2,500,000 250 236,000 236,250
Conversion of debt 500,000 50 49,950 50,000
Beneficial conversion
feature with debt 12,500 12,500
Employee stock options 99,378 99,378
Net Loss (388,161) (388,161)
-------------- -------------- -------------- ------------ ------------- ---------------
Balance, May 31, 2007 46,726,917 $ 4,673 $ (4,000) $ 14,628,772 $ (388,161) $ (6,252,483)
-------------- -------------- -------------- ------------ ------------- ---------------
Common Stock issued for:
Services 2,400,000 240 86,510 86,750
Series E debt financing 1,091,725 109 118,146 118,255
Conversion of debt 891,780 89 93,326 93,415
Employee stock options 22,078 22,078
Net Loss (346,364) (346,364)
-------------- -------------- -------------- ------------ ------------- ---------------
Balance, August 31, 2007 51,110,422 $ 5,111 $ (4,000) $ 14,948,832 $ (734,525) $ (6,278,349)
============== ============== ============== ============ ============= ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
|
MULTI-MEDIA TUTORIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED AUGUST 31, 2007 AND 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Multi-Media
Tutorial Services, Inc., a Delaware corporation ("MMTS" or the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all material adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
August 31, 2007 are not necessarily indicative of the results that August be
expected for the year ended February 28, 2008. The information contained in this
Form 10-QSB should be read in conjunction with the audited financial statements
filed as part of the Company's Form 10-KSB for the year ending February 28,
2007.
NOTE 2 - GOING CONCERN; INTERNAL REVENUE SERVICE FEDERAL TAX LIEN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring losses and has an accumulated deficit of $21,225,508 and a working
capital deficiency of $6,007,557 at August 31, 2007. Also, the Internal Revenue
Service has placed a federal tax lien on substantially all of the Company's
assets as the Company is in arrears on payment of payroll taxes, accrued prior
to February 28, 2004 of approximately $500,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters include restructuring its
existing debt, settling its existing debt by issuing shares of its common stock
and raising additional capital through future issuance of stock and or
debentures. The accompanying consolidated financial statements do not include
any adjustments that might be necessary should the Company be unable to continue
as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of MMTS
and its wholly-owned subsidiaries, Video Tutorial Services, Inc. ("VTS") and
Math Channel, Inc. ("Math Channel"). All significant intercompany transactions
and balances have been eliminated in consolidation. Action Telesales and
Communications, Inc. is an affiliated company of the Company which handles the
billing process for MMTS and VTS. All intercompany transactions have been
eliminated.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-5
CASH AND CASH EQUIVALENTS
The Company classifies highly liquid temporary investments with an original
maturity of six months or less when purchased as cash equivalents.
CONCENTRATION OF CREDIT RISK FOR CASH HELD AT BANKS
The Company maintains cash in bank deposit accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses on these
accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued payroll and other expenses, the carrying amounts approximate
fair value due to their short maturities. The amount shown for notes payable
also approximates fair value because the current interest rates offered to the
Company for debt of similar maturities are substantially the same.
STOCK BASED COMPENSATION
Effective March 1, 2006, the Company began recording compensation expense
associated with stock-based awards and other forms of equity compensation in
accordance with Statement of Financial Accounting Standards No. 123-R,
Share-Based Payment, ("SFAS 123R") as interpreted by SEC Staff Accounting
Bulletin No. 107. The Company adopted the modified prospective transition method
provided for under SFAS 123R and consequently has not retroactively adjusted
results from prior periods. Under this transition method, compensation cost
associated with stock-based awards recognized in the first six months of fiscal
year 2007 included 1) six months amortization related to the remaining unvested
portion of stock-based awards granted prior to December 15, 2005, based on the
grant date fair value estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123"); and 2) would include six months amortization related
to stock-based awards granted subsequent to March 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
In addition, the Company records expense over the vesting period in connection
with stock options granted. The compensation expense for stock-based awards
includes an estimate for forfeitures and is recognized over the expected term of
the award on a straight line basis.
Prior to March 1, 2006, the Company accounted for stock-based awards using the
intrinsic value method of accounting in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Under the intrinsic value method of accounting, no compensation expense was
recognized in the Company's consolidated statements of operations when the
exercise price of the Company's employee stock option grant equaled the market
price of the underlying common stock on the date of grant and the measurement
date of the option grant is certain. Under SFAS 123R, the Company measures the
intrinsic value of the options at the end of each reporting period until the
options are exercised, cancelled or expire unexercised. As of August 31, 2007,
there are 2,160,000 options with a weighted average exercise price of $0.075 and
a weighted average remaining life of approximately eight years, remaining
outstanding and continue to be measured at the intrinsic value over their
remaining vesting period ranging from 1/4 years to 3-1/2 years. Compensation
expense in any given period is calculated as the difference between total earned
compensation at the end of the period, less total earned compensation at the
beginning of the period. Compensation earned is calculated on a straight line
basis over the requisite service period for any given option award.
F-6
When the stock options are granted, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes valuation model and the
assumptions noted in the following table. The assumptions in the table below are
weighted based on all options granted in the respective period.
---------------------------- --------------------------------- ---------------------------------
For the Three Months Ended For the Six Months Ended
August 31, August 31,
---------------------------- --------------------------------- ---------------------------------
2007 2006* 2007 2006*
---------------------------- ---------------- ---------------- ---------------- ----------------
Risk free interest rate: 4.64% -- 4.65% --
---------------------------- ---------------- ---------------- ---------------- ----------------
Expected life: 10 -- 10 --
---------------------------- ---------------- ---------------- ---------------- ----------------
Dividend rate: 0% -- 0% --
---------------------------- ---------------- ---------------- ---------------- ----------------
Expected Volatility: 271% -- 270% --
---------------------------- ---------------- ---------------- ---------------- ----------------
|
* The Company did not grant any Options during the six months ended August 31,
2006
During the six months ended August 31, 2007 the Company granted options for
750,000 shares of the Company's common stock to the Company's CEO and President,
500,000 were granted at an exercise price of $0.10 per share and 250,000 at an
exercise price of $0.07 per share. These options were valued with the use of the
Black-Scholes valuation model at $0.10 per share, or $50,000. These options are
exercisable upon grant, and accordingly their entire value has been expensed as
a general and administrative expense for the six months ended August 31, 2007.
These options expire ten years from the date of grant. During the six months
ended August 31, 2007 the Company extended the exercise period of options, for
1,000,000 shares of the Company's common stock that originally had a five year
life and had expired in January 2007. These options were extended for five
additional years until January 2012. The original exercise price of $0.07 per
share has not been amended. These options were granted to the Company's CEO and
President. These options, with their extended exercise period, were valued with
the use of the Black-Scholes valuation model at $0.0448 per share, or $44,800.
These options are exercisable upon grant, and accordingly their entire value has
been expensed as a general and administrative expense for the six months ended
August 31, 2007.
The Company recorded $121,456 and $21,656 of compensation expense, net of
related tax effects, relative to stock options for the six months ended August
31, 2007 and 2006, respectively, in accordance with SFAS 123R. Included in such
expense for the six months ended August 31, 2007 is the expenses associated with
the granting of the above mentioned options for 500,000 shares at $0.10, 250,000
options at $0.07 and the extension of the expiration date of options for
1,000,000 shares at $0.07, both these options granted to the Company's President
and CEO. Net loss per share, basic and diluted, for SFAS 123R expense is
approximately ($0.02) and ($0.01), for the six months ended August 31, 2007 and
2006, respectively.
As of August 31, 2007, there is approximately $49,201 of total unrecognized
compensation costs related to granted stock options that are unvested. These
costs are expected to be recognized over a weighted average period of 3-1/2
years.
F-7
NOTE 4 - NOTES PAYABLE
SHORT-TERM NOTES PAYABLE
a) 10% notes, unsecured, payable on demand. These advances
accrue interest based on an annualized rate of 10% per
annum. During the quarter ended May 31, 2007 the Company
repaid $81,700 of these demand notes payable. $ 490,613
b) On April 10, 2006, the Company issued demand notes
totaling $87,500 for consulting services to be performed
by the note holders over a twenty-four month period,
subsequent to the issuance of these notes payable. These
notes accrue interest at 10% per annum. In lieu of cash
payment the Company may redeem these notes, and any
accrued interest, with the issuance of Series E
unsecured convertible promissory notes ("Series E"). The
Company has recorded the issuance of these notes payable
for consulting services as a prepaid expense of $87,500
that is being expensed over the twenty four month period
of the consulting agreement. During the year quarter
ended May 31, 2007, the Company expensed $10,938, of
this deferred compensation.
In February 2007, a total of $75,000 of these demand
notes redeemed their note principal (accrued interest
paid subsequent to February 28, 2007) for Series E
notes. Under the terms of the Series E note, the note
holder upon issuance of Series E receives 5 shares of
common stock for each $1 of debt, for a total of 375,000
share of common stock. These shares have been valued at
$29,950, and have been recorded as a discount on debt,
that was to have been amortized and expensed as interest
over the life of the debt, or until such time as the
debt was converted. The Series E debt is convertible at
$.50 per share, or 50 percent of the average closing bid
during the five trading days prior to the note holder
giving notice of conversion, but not lower than $.10 per
share. This note, including accrued interest, was due
and payable in February 2010. In February 2007, these
demand note holders, upon conversion into these Series E
notes, converted all $75,000 Series E principal into
750,000 shares of common stock valued at $0.10 per share
or $75,000. The $29,950 discount on debt was fully
expensed as interest upon conversion of the Series E
into common stock.
In March 2007, one of these notes payable for $50,000 of
redeemed their note principal for a Series E note. Under
the terms of the Series E note, the note holder upon
issuance of Series E receives 5 shares of common stock
for each $1 of debt, for a total of 250,000 share of
common stock. These shares have been valued at $31,250,
and have been recorded as a discount on debt, that was
to have been amortized and expensed as interest over the
life of the debt, or until such time as the debt was
converted. In addition, the company recognized a
beneficial conversion of $12,500 related to the Series
E. As Series E are immediately convertible to common
stock, this Series E was issued and convertible at a
rate below market on the date of issuance of the Series
E. The Series E debt is convertible at $.50 per share,
or 50 percent of the average closing bid during the five
trading days prior to the note holder giving notice of
conversion, but not lower than $.10 per share. This
Series E note, including accrued interest, was due and
payable in March 2010. On the date of conversion from a
demand note to a Series E note, the note holder
converted the $50,000 Series E principal into 500,000
shares of common stock valued at $0.10 per share or
$50,000. The $31,250 discount on debt, plus the $12,500
beneficial conversion feature, was fully amortized, and
recorded as an interest expense upon conversion of the
Series E into common stock. 69,846
F-8
c) 8% notes, unsecured, payable on demand. These
advances accrue interest based on an annualized
rate of 8% per annum. 750,000
--------------------------------------------------------------------------------
d) Non-interest bearing notes, unsecured, payable on
demand. 201,676
--------------------------------------------------------------------------------
e) 17% convertible unsecured notes payable on demand;
the notes are convertible into common stock at a
price of $1.2656 per share or an alternate
conversion of 75% of the closing bid for the first
five trading days prior to conversion. The
alternate conversion price cannot be lower than
$0.55 per share, or more than $3.55 per share. 250,000
--------------------------------------------------------------------------------
f) 10% convertible unsecured notes, payable on
demand. The notes are convertible into common
stock at a price of the lesser of $.50 or 50% of
the average closing bid during the five trading
days prior to notice of conversion, but not lower
than $.10 per share. 401,390
--------------------------------------------------------------------------------
g) 10% convertible notes payable variously in 2006;
the notes are convertible into common stock at the
lesser of $.50 or 50% of the average of the
closing bid price in the over the counter market
during the five business days ending on the day
before the holder gives notice of conversion, but
not lower than $.10 per share.
During the year ended February 28, 2007, a total of
$50,000 of these notes payable including accrued
interest of $17,000, converted into 670,000 shares of
the Company's common stock at $0.10 per share. 25,000
--------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 2,188,525
================================================================================
|
F-9
LONG-TERM NOTES PAYABLE
During the six months ended August 31, 2007, the Company
issued $650,000 of Series E notes payable. Issued with
this debt were 3,250,000 shares of the Company's common
stock value at $315,000, which the Company recorded as a
discount on debt that is being amortized and expensed as
interest over the life of the debt, or until such time
as the debt is converted. During the six months ended
August 31, 2007, the Company amortized $37,883, of this
debt discount. These Series E notes payable have a three
(3) year life from the date of issuance. The debt is
convertible at $.50 per share or 50 percent of the
average closing bid during the five trading days prior
to the note holder giving notice of conversion, but not
lower than $.10 per share. $ 650,000
Less: unamortized portion of debt discount (277,115)
--------------
TOTAL LONG-TERM NOTES PAYABLE $ 372,885
==============
|
NOTE 5 - COMMON STOCK
For the six months ended August 31, 2007, related to the conversion of a $67,000
demand note payable plus accrued interest of $605 into a Series E note payable
the Company issued 1,025,175 share of common stock. These common shares have
been valued at $99,005, and have been recorded as a discount on debt, that was
to have been amortized and expensed as interest over the life of the debt, or
until such time as the debt was converted. In addition, the Company recognized a
beneficial conversion of $12,500 related to the Series E having an immediate
conversion provision that was below market on the date of conversion. The Series
E debt is convertible at $.50 per share, or 50 percent of the average closing
bid during the five trading days prior to the note holder giving notice of
conversion, but not lower than $.10 per share. This Series E note, including
accrued interest, was due and payable in March 2010. On the date of conversion
from a demand note to a Series E note, the note holder converted the $50,000
Series E principal into 500,000 shares of common stock valued at $0.10 per share
or $50,000.
For the six months ended August 31, 2007, the Company converted Series E notes
payable of $50,000 plus accrued interest of $5,833 for a total of $55,883 into
558,330 shares of common stock at a per share price of $.10. The stock price was
$.11 on the date of conversion; the balance of $5,583 was charged to interest
expense.
For the six months ended August 31, 2007, the Company converted $15,000 notes
payable directly to 150,000 shares of common stock at a per share price of $.10.
On August 27, 2007, the Company issued 100,000 shares of common stock for a
consulting services agreement valued at $7,000, on an average per share price of
$.07. For the six months ended August 31, 2007, a total of $7,000 has been
expensed for these consulting agreements and included in selling, general and
administrative expenses.
On June 19, 2007, the Company issued 2,000,000 shares of common stock for a two
(2) year consulting services agreement valued at $220,000, on an average per
share price of $.11. For the six months ended August 31, 2007, a total of
$27,500 has been expensed for these consulting agreements and included in
selling, general and administrative expenses.
F-10
In March, April and June 2007, the Company issued an additional $650,000 of
Series E notes payable. Issued with this debt were 3,250,000 shares of the
Company's common stock valued at $315,000, at an average per share price of
$.097.
In March 2007, the Company entered into a one year advertising and marketing
consulting agreement. Under the terms of this agreement the Company is required
to issue 100,000 shares of common stock each month commencing in March 2007. A
total of 1,000,000 shares of common stock are to be to be issued under this
agreement. During each of the six months in the six months ended August 31, 2007
the Company issued 100,000 shares of common stock, for a total of 600,000 shares
of common stock. These shares were valued at market on their dates of issue. The
Company has recorded $55,000, on an average per share price of $.092, for the
issuance of these common shares as a consulting expense included in selling,
general and administrative expenses.
In May 2007, the Company entered into an investor relations consulting
agreement. This agreement has a one year term, and requires the issuance of
750,000 shares of common stock upon commencement. These shares have a market
value of $57,000 on an average per share price of $.076, and have been recorded
as a deferred compensation expense, netted against additional paid in capital.
As services commence under this agreement, a pro-rata share of the deferred
compensation is expensed. For the six months ended August 31, 2007, a total of
$16,625 has been expensed for this consulting agreement and included in selling,
general and administrative expenses.
In March 2007, the Company entered into a financial consulting agreement. This
agreement has a one year term, and requires the issuance of 500,000 shares of
common stock. Services under this agreement are set to commence in June 2007.
These shares have a market value of $40,000, and have been recorded as a
deferred compensation expense, netted against additional paid in capital. For
the six months ended August 31, 2007, the Company has recorded $10,000, as a
consulting expense included in selling, general and administrative expenses.
During the six months ended August 31, 2007, the Company expensed the remaining
deferred compensation cost of $7,500 related to a consulting agreement entered
into in June 2006 and paid for in common stock, which concluded in August 2007.
On March 15, 2007, Company issued 350,000 shares of common stock for financial
related services valued at market for a total of $31,500. . For the six months
ended August 31, 2007, the Company has recorded $31,500, as a consulting expense
included in selling, general and administrative expenses.
NOTE 6 - CANCELLATION OF DEBT
In June 2007, the Company settled an outstanding debt with a creditor for less
than the amount owed. This total forgiveness of debt was included in the
financial statements, in other income and expenses for the six months ended
August 31, 2007. The debt originally for $63,674 was settled for 17,500; the
difference of $46,174 was forgiven. The settlement amount was paid in July 2007.
F-11
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS:
CONSULTING AGREEMENTS:
On August 27, 2007, the Company issued 100,000 shares of common stock for a
consulting services agreement valued at $7,000, on an average per share price of
$.07. For the six months ended August 31, 2007, a total of $7,000 has been
expensed for these consulting agreements and included in selling, general and
administrative expenses.
On June 19, 2007, the Company issued 2,000,000 shares of common stock for a two
(2) year consulting services agreement valued at $220,000, on an average per
share price of $.11. For the six months ended August 31, 2007, a total of
$27,500 has been expensed for these consulting agreements and included in
selling, general and administrative expenses.
In March, April and June 2007, the Company issued an additional $650,000 of
Series E notes payable. Issued with this debt were 3,250,000 shares of the
Company's common stock valued at $315,000, at an average per share price of
$.097.
In March 2007, the Company entered into a one year advertising and marketing
consulting agreement. Under the terms of this agreement the Company is required
to issue 100,000 shares of common stock each month commencing in March 2007. A
total of 1,000,000 shares of common stock are to be to be issued under this
agreement. During each of the six months in the six months ended August 31, 2007
the Company issued 100,000 shares of common stock, for a total of 600,000 shares
of common stock. These shares were valued at market on their dates of issue. The
Company has recorded $55,000, on an average per share price of $.092, for the
issuance of these common shares as a consulting expense included in selling,
general and administrative expenses.
In May 2007, the Company entered into an investor relations consulting
agreement. This agreement has a one year term, and requires the issuance of
750,000 shares of common stock upon commencement. These shares have a market
value of $57,000 on an average per share price of $.076, and have been recorded
as a deferred compensation expense, netted against additional paid in capital.
As services commence under this agreement, a pro-rata share of the deferred
compensation is expensed. For the six months ended August 31, 2007, a total of
$16,625 has been expensed for this consulting agreement and included in selling,
general and administrative expenses.
In March 2007, the Company entered into a financial consulting agreement. This
agreement has a one year term, and requires the issuance of 500,000 shares of
common stock. Services under this agreement are set to commence in June 2007.
These shares have a market value of $40,000, and have been recorded as a
deferred compensation expense, netted against additional paid in capital. For
the six months ended August 31, 2007, the Company has recorded $10,000, as a
consulting expense included in selling, general and administrative expenses.
CONTINGENCIES:
The Company is subject to litigation in the normal course of business, and
claims August arise from time to time. Presently the Company is not aware of any
pending or threatened litigation and has not provided a reserve or an accrual
for any such contingencies.
The Company has a significant amount of debt and notes payable that have been
recorded. In certain instances, the Company has been involved, and August be
involved in the future, in litigation due to non-payment of debt and notes
payable.
F-12
NOTE 8 - SUBSEQUENT EVENTS
As previously reported on a Current Report on Form 8-K filed by the Company on
October 1, 2007 with the Securities and Exchange Commission, on October 1, 2007,
the Company terminated Sherb & Co., LLP ("Sherb"), as their independent
registered certified public accountants. Sherb had been the Company's auditors
since the year ended February 28, 2004. The Company has hired Conner &
Associates, PC, to become auditors commencing for the quarter and six months
ended August 31, 2007, during the fiscal year ending February 29, 2008. The
reports of Sherb, on the Company's financial statements as of and for the fiscal
years ended February 28, 2007, 2006, 2005 and 2004, did not contain any adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
audit scope or accounting principles. During the fiscal years audited, and
through October 1, 2007, there were no disagreements with Sherb on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Sherb's satisfaction,
would have caused Sherb to make reference to the subject matter in connection
with periods; and there were no reportable events as defined in Item 304 (a) (1)
(iv) of Regulation S-B. During the years audited by Sherb, their audit reports
contained an additional paragraph with regards to the Company continuing as a
going concern. The Company's Board of Directors has chosen Conner & Associates,
PC, as its new independent auditors and has authorized the termination of audit
services by Sherb. The Company provided Sherb with a copy of the foregoing
disclosures and requested Sherb to furnish it with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements
F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS STATEMENTS THAT WE BELIEVE ARE, OR AUGUST BE CONSIDERED TO
BE, "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACT INCLUDED IN THIS REPORT REGARDING THE PROSPECTS OF OUR INDUSTRY
OR OUR PROSPECTS, PLANS, FINANCIAL POSITION OR BUSINESS STRATEGY, AUGUST
CONSTITUTE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS
GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS
"AUGUST," "WILL," "EXPECT," "INTEND," "ESTIMATE," "FORESEE," "PROJECT,"
"ANTICIPATE," "BELIEVE," "PLANS," "FORECASTS," "CONTINUE" OR "COULD" OR THE
NEGATIVES OF THESE TERMS OR VARIATIONS OF THEM OR SIMILAR TERMS. FURTHERMORE,
SUCH FORWARD-LOOKING STATEMENTS AUGUST BE INCLUDED IN VARIOUS FILINGS THAT WE
MAKE WITH THE SEC OR PRESS RELEASES OR ORAL STATEMENTS MADE BY OR WITH THE
APPROVAL OF ONE OF OUR AUTHORIZED EXECUTIVE OFFICERS. ALTHOUGH WE BELIEVE THAT
THE EXPECTATIONS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS ARE REASONABLE,
WE CANNOT ASSURE YOU THAT THESE EXPECTATIONS WILL PROVE TO BE CORRECT. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, AS WELL AS ASSUMPTIONS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN THESE FORWARD-LOOKING STATEMENTS. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, WHICH REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE DATE
HEREOF. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO REVISE OR
PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO ANY FORWARD-LOOKING STATEMENTS.
YOU ARE ADVISED, HOWEVER, TO CONSULT ANY ADDITIONAL DISCLOSURES WE MAKE IN OUR
REPORTS TO THE SEC. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED IN THIS REPORT.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED AUGUST
31, 2007 AND 2006.
NET SALES
Net sales for the three months ended August 31, 2007 were $177,133, compared to
$177,280 for the three months ended August 31, 2006. The Company incurred less
advertising expenditures during the period ended August 31, 2007 as compared
with the period ended August 31, 2006 which resulted in lower sales overall for
the six months ended August 31, 2007. This lower advertising was a consequence
of a more competitive internet environment which provided limited opportunistic
advertising purchases for the Company. The Company has since retained an
internet advertising agency to develop new advertising strategies to expand the
Company's advertising options.
GROSS PROFIT
Gross profit was $149,408 for the three months ended August 31, 2007, compared
to $153,145 for the three months ended August 31, 2006. This decrease was due to
lower sales.
2
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were $334,754 for the three
months ended August 31, 2007, compared to $346,091 for the three months ended
August 31, 2006. This decrease was related primarily to the expensing of the
vested six month portion of stock options granted to employees, for the six
months ended August 31, 2007 of $121,456, versus an expense of $21,656 for the
six months ended August 31, 2006. In addition, the Company experienced less
expense in the three months ended August 31, 2007, versus the three months ended
August 31, 2006, as the Company had expanded operations related to their Math
Channel, Inc. subsidiary in 2006. Also during the three months ended August 31,
2007 the Company engaged more consultants to assist the Company in developing a
marketing and media campaign for its Math Made Easy and tutorial services. These
services have generally been obtained through the issuance of the Company's
common stock. If the common stock is issued for an extended period of service,
the Company records the proportional share of expense related for the period in
which the services were obtained. Any unearned expense, for services obtained
with the issuance of common stock, is recorded as a deferred compensation and is
netted in the additional paid in capital of the Company.
NET SALES
Net sales for the six months ended August 31, 2007 were $356,875, compared to
$423,599 for the six months ended August 31, 2006. The Company incurred less
advertising expenditures during the period ended August 31, 2007 as compared
with the period ended August 31, 2006 which resulted in lower sales overall for
the six months ended August 31, 2007. This lower advertising was a consequence
of a more competitive internet environment which provided limited opportunistic
advertising purchases for the Company. The Company has since retained an
internet advertising agency to develop new advertising strategies to expand the
Company's advertising options.
GROSS PROFIT
Gross profit was $300,285 for the six months ended August 31, 2007, compared to
$382,533 for the six months ended August 31, 2006. This decrease was due to
lower sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were $792,675 for the six
months ended August 31, 2007, compared to $650,191 for the six months ended
August 31, 2006. This increase was related primarily to the expensing of the
vested six month portion of stock options granted to employees, for the six
months ended August 31, 2007 of $121,456, versus an expense of $21,656 for the
six months ended August 31, 2006. In addition, the Company experienced more
expenses in the August 31, 2007 six months, versus the August 31, 2006 six
months, as the Company expanded operations related to their Math Channel, Inc.
subsidiary. Also during the six months ended August 31, 2007 the Company engaged
more consultants to assist the Company in developing a marketing and media
campaign for its Math Made Easy and tutorial services. These services have
generally been obtained through the issuance of the Company's common stock. If
the common stock is issued for an extended period of service, the Company
records the proportional share of expense related for the period in which the
services were obtained. Any unearned expense, for services obtained with the
issuance of common stock, is recorded as a deferred compensation and is netted
in the additional paid in capital of the Company.
3
SETTLEMENT OF OUTSTANDING DEBT
During June 2007 the Company settled an outstanding debt with a creditor for
less than the amount owed. This total forgiveness of debt was included in the
financial statements, in other income and expenses for the six months ended
August 31, 2007. The debt originally for 63,674 was settled for 17,500; the
difference of $46,174 was forgiven. The settlement amount was paid in July 2007.
There was no debt settlement in the six months ended August 31, 2006.
INTEREST EXPENSE
Interest expense was $288,309 for the six months ended August 31, 2007 as
compared to $116,163 for the six months ended August 31, 2006. The Company has
entered into new notes payable subsequent to August 31, 2006, resulting in
increased interest expense for the six months ended August 31, 2007. During the
six months ended August 31, 2007 the Company issued $650,000 Series E notes
payable for cash. The Series E debt has a discount related to common stock that
is issued with the issuance of Series E. This discount is expensed over the life
of the Series E, or until such time as the Series E converts to common stock or
is redeemed, at which time any remaining portion of unexpired discount is
expensed. The amortization of the debt discount is a non-cash expense accounted
for as interest expense. This amortization of debt discount for Series E entered
into during the six months ended August 31, 2007, as well as Series E entered
into in the year ended February 28, 2007, resulted in $38,763 of interest
expense.
In addition to the Series E notes issued for cash, the Company converted an
existing promissory note of $50,000 to a Series E note that immediately
converted the Series E note to common stock. This Series E issuance had a
discount for the 250,000 shares of common stock issued upon the initial
conversion from a promissory note into a Series E note of $31,250. In addition,
to the discount, this Series E had a beneficial conversion of $12,500 related to
this Series E. As Series E are immediately convertible to common stock, this
Series E was issued and convertible at a rate below market on the date of
issuance of the Series E. This beneficial conversion was valued at $12,500. On
the date of conversion from a demand note to a Series E note, the note holder
converted the $50,000 Series E principal into 500,000 shares of common stock
valued at $0.10 per share or $50,000. The $31,250 discount on debt, plus the
$12,500 beneficial conversion feature, was fully amortized, and recorded as an
interest expense upon conversion of the Series E into common stock.
LIQUIDITY AND CAPITAL RESOURCES.
At August 31, 2007, the Company had a cash of approximately $83,000. During the
six months ended August 31, 2007 the Company issued $650,000 worth of Series E
notes payable for cash, while repaying $66,700 of promissory notes payable.
The Company continues to suffer recurring losses and has an accumulated deficit
of approximately $21,228,000 and a working capital deficiency of approximately
$6,008,000 at August 31, 2007. In addition, the Internal Revenue Service has
placed a federal tax lien on substantially all of the Company's assets as the
Company is in arrears on payment of payroll taxes, accrued prior to February 28,
2004 approximating $500,000. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements have been prepared assuming that that the Company will continue as a
going concern. Management's plans with respect to these matters include
restructuring its existing debt, raising additional capital through future
issuances of stock and/or equity, and finding sufficient profitable markets for
its products to generate sufficient cash to meet its business obligations. The
accompanying financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
4
The Company continues to meet its working capital requirements through debt and
equity funding from outside sources and internally generated funds. In addition,
the Company August have to incur increased capital expenditures as it seeks to
expand its product lines and tutorial services. In order to meet its current and
future cash requirements, the Company is in discussions to negotiate additional
debt and equity financing. There can be no assurance that any financing will be
successful or that the Company will be able to fund internally its working
capital requirements or meet its debt repayment obligations. In the event that
the Company is unable to secure additional financing, it August be obligated to
significantly reduce its operations and seek to sell assets, which would have a
material adverse affect on the Company's prospects and financial results.
Each the reports of our independent registered auditors for our audited
consolidated financial statements for the fiscal years ended February 28, 2007
and February 29, 2006 contains an explanatory paragraph, assuming that the
Company will continue as a going concern. The report mentioned that we have
incurred losses, have an accumulated deficit and have a working capital
deficiency. In addition the report mentioned the on-going situation with the IRS
regarding payroll taxes in arrears. This report raised substantial doubt about
our ability to continue as a going concern. This report is not viewed favorably
by analysts or investors and makes it more difficult for us to raise additional
debt or equity financing needed to run our business.
The Company had cash of $82,670 as of August 31, 2007, compared to a bank
overdraft of $16,113 as of February 28, 2007 and cash of $78,263 as of August
31, 2006.
Net cash used in operating activities during the six months ended August 31,
2007 was $464,853, compared to net cash used in operating activities of $116,004
for the six months ended August 31, 2006.
Net cash used in investing activities during the six months ended August 31,
2007 was $19,664, compared to net cash used in investing activities of $19,636
for the six months ended August 31, 2006.
Net cash provided by financing activities during the six months ended August 31,
2007 was $567,187, compared to net cash provided by financing activities of
$132,986 for the six months ended August 31, 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A summary of significant accounting policies is included in Note 2 to the
audited consolidated financial statements for the year ended February 28, 2007
in the Form 10-KSB. Management believes that the application of these policies
on a consistent basis enables us to provide useful and reliable financial
information about our operating results and financial condition. Our financial
statements and accompanying notes are prepared in accordance with U.S. Generally
Accepted Accounting Principles. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. These estimates and assumptions are
affected by management's application of accounting policies. Critical accounting
policies for us include revenue recognition.
