Managements Discussion....
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, Web2U Limited and MSU Operations (US) Inc. All significant
inter-company accounts and transactions have been eliminated in the consolidated
financial statements.
The Company operates primarily through Web2U Limited, which is principally
engaged in the design and development of software and hardware for Internet
Access Devices. The Company has developed its own browser and operating system
and incorporates these in its products. The focus of the Company at this moment
of time is on the development of the Set Top Internet Access Device to be used
in conjunction with televisions and telephones. The strategic focus of the
Company is upon the establishment of long-term partnerships with companies in
various markets who can leverage the technology developed by Web2U to improve
their marketing performance and reach a wider audience than they otherwise
could.
The three-month period ending December 31, 2000 witnessed the ramping up of
production of the newest version of Web2U's set top box, Version 3, through
Flextronics International. During the quarter, sales were generated to Zimbabwe
and Kenya, through African Lakes Corporation; to Greece, through Millennium
Stores and to Italy, through Newtec SRL. Additionally this quarter, JadooNet
began the manufacturing of Web2U's products in India under a licensing agreement
established earlier in 2000. Revenue from the licensing deal should commence
during the first calendar quarter of 2001.
Throughout the quarter ended December 31, 2000, the Company continued the
pursuit of its partnership strategy and maintained its pursuit of commercial
opportunities, especially in Europe, the Middle East and Latin America. As part
of its marketing strategy, the Company exhibited at Comdex 2000 during November.
This exposure should support existing and future relationships within the
marketplace.
Progress continued on the Company's next version of its Internet Access Device,
Version 4, which is planned to begin production during the second quarter of
2001. Version 4 will
7
contain upgrades to increase the speed of processing and should enhance the
breadth of appeal of the product in more technically developed markets. During
the quarter ended December 31, 2000, the Company also shipped initial volumes
of Ethernet enabled units.
In December the Company announced the appointment of McFarlane Gordon as its
financial advisers and the appointment of Mr. Jean Belanger to its Board.
Additionally, the Board moved to establish an executive team presence in the
United States (which included the hiring of Bruce Walter as Chief Executive
Officer and Stuart Bitting as Chief Financial Officer) to re-focus the company
strategy and exploit technology. Concurrently, the Company has added another
focus to its product and technology strategy - to make products that are
programmable, easier to use and less costly to manufacture. These actions are
designed to improve the financial strength of the Company, enhance its
competitive position in the marketplace and position the Company for future
growth.
Risks
The Company's consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred losses
since inception. At December 31, 2000 there was an accumulated deficit of
$23,406,272. Additionally the Company has had recurring negative cash flows from
operations.
The Company expects that it is likely to incur net losses into the second
quarter of fiscal 2001, as it attempts to further develop, upgrade and market
its products and to develop its infrastructure and organization to support
anticipated operations, including anticipated product demand.
The foregoing statements are forward looking statements that involve risks and
uncertainties. The Company is likely to incur net losses beyond the second
quarter of fiscal 2001 if anticipated revenues from license fees, royalties and
conditional and forecasted purchase orders of customized Internet Access Devices
are not realized. 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
customized Internet Access Devices by consumers, satisfactory product
performance, including chip and software performance; modem approval from the
local or national telephone companies, 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 2001. The foregoing factors may obviously raise doubt about the Company's
ability to continue as a going concern without sufficient funds to meet its cash
requirements.
The Company anticipates that if revenues from operations are not generated in
the coming months, it will, at least in the short term, have to continue to fund
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.
8
The markets for the Company's products has only recently begun to develop, are
rapidly evolving and are highly competitive, with many competitors having
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 guarantees that the Company will be successful in
addressing any of the foregoing risks and that it will be successful in
implementing its strategy.
Results of Operations
Comparison of the three and six months ended December 31, 2000 to the three and
six months ended December 31, 1999:
Revenues in the three months ended December 31, 2000 were approximately
$613,000; the Revenues for the three months ended December 31, 1999 were zero.
Sales in the three months ended December 31, 2000 were to three customers based
in India, Greece and the UK.
The sales reported in the three months ended December 31, 2000 include sales
relating to Version 3 of the Internet Access Device and Ethernet Version 2 of
the Internet Access Device. The Company also had sales of Version 3 of the
Internet Access Device that involve ongoing income. The Company recognizes this
income in the month that it is invoiced.
Research and development expenses generally consist of expenditures related to
the Company's development of its software and prototype products. For the three
months ended December 31, 2000 research and development expenses decreased by
approximately $144,000 from $462,000 in the corresponding period in 1999. The
Company continues to expend considerable resources in research and development
of the Internet Access Device and associated software. Generally 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. The Company has been focused on the
development of Version 4 of its Internet Access Device while continuing to
develop Version 3 software applications. Version 4 is now in the prototype stage
and will begin to be produced commercially during next year. Additionally, the
Company will continue to develop its proprietary software. The nature of the
Internet Access Device enables software downloads to be provided to customers
upon release.
Selling, general and administrative and other expenses for the three months
ended December 31, 2000 increased by approximately $122,000 from $514,000 in the
same period of 1999. The increase in the three months ended December 31, 2000 is
primarily due to an increase in personnel, marketing and promotional costs in
this period. 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, occupancy costs and professional fees. In
general terms, the Company continues to develop a structured and professional
sales and marketing framework to
9
exploit the current and future products. Investment in this area is likely to
increase during the next year.
Interest expense for the three months ended December 31, 2000 increased by
approximately $24,000 from $12,000 in the corresponding period in 1999. Interest
expense in the current year represents interest payable on promissory notes
totalling $1,330,000 and the bank overdraft of approximately $106,000.
Liquidity and Capital Resources
The Company has financed its operations through private sales of equity and debt
securities.
For the six-month period ended December 31, 2000 cash used in operating
activities was approximately $1,338,000. Cash flows used in investing activities
of approximately $31,000 during such period related mainly to the acquisition of
computer equipment.
At December 31, 2000 the Company's principal source of liquidity was
approximately $1,571,000 in cash of which $1,500,000 is deposited as collateral
for a standby letter of credit in favor of Flextronics.
During the three month period ended December 31, 2000 the Company received short
term funding of $690,000.
The Company believes that cash flows expected to be generated by operations
through the remainder of fiscal 2001 will be insufficient to meet its cash needs
for working capital and capital expenditures for remainder of fiscal 2001. The
Company is actively pursuing negotiations for additional capital to fund its
operations through private sales of equity or debt securities and/or borrowings
from third parties. The sale of additional equity or convertible debt securities
will result in an additional dilution to the Company's stockholders.
PART 11 - OTHER INFORMATION
Item 5 - Other Information
In December, 2000 the Company entered into agreements with the holders of notes,
which were due December 31, 2000, to extend the maturity date of such notes
until the earlier of (i) September 30, 2001 or (ii) the completion of an equity
financing by the Company. The holders will also have the option to convert the
outstanding balance under their notes into the equity being offered pursuant to
such financing on the same terms and conditions as those participating in the
financing.
10
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 authorized.
MSU Corporation
(Registrant)
Date February 15, 2001
/s/ Stuart M. Bitting
---------------------------------
Stuart M. Bitting
Vice President Finance/CFO |
