The accompanying notes are an integral part of these
consolidated financial statements.
MULTI-MEDIA TUTORIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 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 nine month periods ended
November 30, 2007 are not necessarily indicative of the results that are to 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 unaudited 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 approximately
$21,628,000 and a working capital deficiency of approximately $6,532,000 at
November 30, 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 unaudited 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.
CASH AND CASH EQUIVALENTS
The Company classifies highly liquid temporary investments with an original
maturity of nine months or less when purchased as cash equivalents.
F-4
CONCENTRATION OF CREDIT RISK FOR CASH HELD AT BANKS
The Company maintains cash in bank deposit accounts which, at times, exceed
federally insured limits. Historically, 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 nine months of fiscal
year 2007 included 1) nine 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
SFAS 123R; and 2) would include nine 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 November 30, 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.
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.
F-5
------------------------------ -------------------------------------------- ----------------------------------------------
For the Three Months Ended For the Nine Months Ended
November 30, November 30,
------------------------------ -------------------------------------------- ----------------------------------------------
2007 2006* 2007 2006
------------------------------ ------------------- ------------------------ ------------------ ---------------------------
Risk free interest rate: 4.62% 4.46% 4.65% 4.46% - 5.00%
------------------------------ ------------------- ------------------------ ------------------ ---------------------------
Expected life (years): 10 10 10 10
------------------------------ ------------------- ------------------------ ------------------ ---------------------------
Dividend rate: 0% 0% 0% 0%
------------------------------ ------------------- ------------------------ ------------------ ---------------------------
Expected Volatility: 269% 264% 268% 248% - 264%
------------------------------ ------------------- ------------------------ ------------------ ---------------------------
|
During the nine months ended November 30, 2007, the Company granted options for
1,000,000 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; 250,000
at an exercise price of $0.07 per share and 250,000 at an exercise price of
$0.05. These options were valued with the use of the Black-Scholes valuation
model. These options are exercisable upon grant, and accordingly their entire
value has been expensed as a general and administrative expense for the nine
months ended November 30, 2007. These options expire ten years from the date of
grant. During the nine months ended November 30, 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 nine months ended November 30, 2007.
The Company recorded $138,534 and $21,657 of compensation expense, net of
related tax effects, relative to stock options for the nine months ended
November 30, 2007 and 2006, respectively, in accordance with SFAS 123R. Included
in such expense for the nine months ended November 30, 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, 250,000 options at $0.05 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
nine months ended November 30, 2007 and 2006, respectively.
As of November 30, 2007, there is approximately $44,109 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-6
NOTE 4 - NOTES PAYABLE
NOTES PAYABLE, Current
----------------------
As of November 30, 2007, the Company maintained the following notes payable,
current:
a) 10% notes, unsecured, payable on demand. These advances accrue
interest based on an annualized rate of 10% per annum. During the
nine months ended November 30, 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 nine months ended November 30,
2007, the Company expensed $32,813, 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 shares 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 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 received 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
F-7
|
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
-------- ------------------------------------------------------------------------------------------ --------------------
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
------------------------------------------------------------------------------------------ --------------------
i) 8% notes, unsecured, payable on demand. These advances accrue
interest based on an annualized rate of 8% per annum. 22,100
------------------------------------------------------------------------------------------ --------------------
TOTAL NOTES PAYABLE, CURRENT $ 2,210,625
------------------------------------------------------------------------------------------ ====================
F-8
|
NOTES PAYABLE, long-term
------------------------
As of November 30. 2007, the Company maintained the following notes payable,
long-term:
During the nine months ended November 30, 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 nine months ended November 30, 2007, the Company amortized $71,773
($315,000 minus $243,227), 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% of the average closing bid during the
five (5) 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 (243,227)
---------------------
TOTAL NOTES PAYABLE, LONG-TERM $406,773
=====================
|
NOTE 5 - COMMON STOCK
For the nine months ended November 30, 2007, as 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% of the average
closing bid during the five (5) 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 nine months ended November 30, 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 nine months ended November 30, 2007, the Company converted $15,000 of
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 nine months ended November 30, 2007, a total of $7,000 has been
expensed for these consulting agreements and included in selling, general and
administrative expenses.
F-9
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 nine months ended November 30, 2007, a total of
$55,000 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 the nine months ended November 30, 2007 the Company issued
800,000 shares of common stock. These shares were valued at market on their
dates of issue. The Company has recorded $74,000, on an average per share price
of $.0925, 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 nine months ended November 30, 2007, a total
of $33,250 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 nine months ended November 30, 2007, the Company has recorded $20,000, as a
consulting expense included in selling, general and administrative expenses.
During the nine months ended November 30, 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 nine months
ended November 30, 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 nine months ended
November 30, 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.
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 nine months ended November 30, 2007, a total of $7,000 has been
expensed for these consulting agreements and included in selling, general and
administrative expenses.
F-10
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 nine months ended November 30, 2007, a total of
$55,000 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 the nine months ended November 30, 2007 the Company issued
800,000 shares of common stock. These shares were valued at market on their
dates of issue. The Company has recorded $74,000, on an average per share price
of $.0925, 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 nine months ended November 30, 2007, a total
of $33,250 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 nine months ended November 30, 2007, the Company has recorded $20,000, 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 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 be involved
in the future, in litigation due to non-payment of debt and notes payable.
NOTE 8 - CHANGE IN AUDITORS
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 the company's auditors commencing for the quarter and
nine months ended November 30, 2007, and 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
F-11
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 cCompany
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
0f 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.
NOTE 9 - SUBSEQUENT EVENTS
In December 2007, the Company issued 381,551 shares of its common stock as part
of the consulting and investor relations agreements.
F-12