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Media Sciences International 10-K 2011
Registrant’s telephone number, including area code: (201) 677-9311
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
Indicated by check mark whether the 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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the 90 past days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 504 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to file such files). o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of voting and non-voting stock of the issuer held by non-affiliates on December 31, 2010 was $2,345,349.
As of October 11, 2011, we had 13,647,376 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: >None.
MEDIA SCIENCES INTERNATIONAL, INC.
INDEX
2
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This report contains forward-looking information, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, about our financial results and estimates, business plans and prospects that involve substantial risks and uncertainties. You can identify these statements by the fact that they do not relate strictly to historic or current facts. These forward-looking statements use terms such as “believes,” “expects,” “may”, “will,” “should,” “anticipates,” “estimate,” “project,” “plan,” or “forecast” or other words of similar meaning relating to future operating or financial performance or by discussions of strategy that involve risks and uncertainties. From time to time, we also may make oral or written forward-looking statements in other materials we release to the public.
Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects upon our business. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. We cannot predict whether future developments affecting us will be those anticipated by management, and there are a number of factors that could adversely affect our future operating results or cause our actual results to differ materially from the estimates or expectations reflected in such forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I
ITEM 1. BUSINESS
Business Development and Company Overview
Media Sciences International, Inc. is a Delaware corporation that was originally incorporated in Utah in 1983 under the name Communitra Energy, Inc. In 1998, we reincorporated in Delaware under the name Cadapult Graphic Systems, Inc. In 2002, we changed our corporate name to Media Sciences International, Inc.
Media Sciences International, Inc. is a holding company that conducted substantially all of its operations through its subsidiaries. Media Sciences International, Inc. has two wholly-owned operating subsidiaries: Media Sciences, Inc. and Cadapult Graphic Systems, Inc.
The Company was a manufacturer of business color printer supplies and industrial ink applications, which the Company distributed through a distribution channel and direct to original equipment manufacturers. Through two transactions in the year ending June 30, 2011, we sold one of our product lines and exited the other. On November 8, 2010, the Company elected to discontinue selling toner related products and sold substantially all of its toner assets to Katun Corporation. On April 22, 2011, the Company entered into an agreement with Xerox settling a patent infringement lawsuit, after which the Company ceased manufacturing its inks for use in Xerox color printers and effectively exited the ink business. As a result, we currently have no substantive operations.
Our headquarters are located at 8 Allerman Road, Oakland, New Jersey 07436, and our telephone number is 201-677-9311. Our website is www.mediasciences.com.
Business
The Company was a manufacturer of business color printer supplies and industrial ink applications, which the Company distributed through a distribution channel and direct to original equipment manufacturers. We offered color toner cartridges and solid ink for use in nine printer brands and over 100 printer models. Typically, our products were priced to the end user at a 25-40% discount from the printer manufacturers brand supplies.
Through two transactions in the year ending June 30, 2011, we sold one of our product lines and exited the other. As a result, we currently have no substantive operations. While we are reviewing all options available to us, including the acquisition of a new business by means of merger or otherwise, we currently expect to wind down and dissolve the company. There may or may not be additional distributions to our stockholders during and at the end of this process.
Principal Products
We presently do not offer any products or services. We manufactured and distributed solid ink sticks for use in substantially all business color solid ink printers. Our solid inks offer the end user the opportunity to save 30-40% on their solid inks purchases versus buying the Xerox® brand. We also developed and commercialized application specific solid inks on behalf of certain industrial printer manufacturers. We also sold toner cartridges for use in over 100 color laser printers manufactured by Xerox®, Konica-Minolta®, Oki®, Epson®, Brother®, Dell®, Samsung® and Ricoh®.
Distribution Methods
We distributed products to our customers in the United States from our Oakland, New Jersey facility. We distributed products to our customers throughout Western Europe from our third party logistics provider in the Netherlands. We sold our products through a network of distributors, wholesalers and dealers. We directly employed sales personnel in the United States and Europe. We did not sell our products directly to end users.
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Status of any Publicly Announced New Product or Service
Not applicable.
Competitive Business Conditions
With respect to our discontinued business, we had competed primarily with the original manufacturer (the OEM) of the printers for which we provide supplies, including Xerox®, Konica-Minolta®, Oki®, Epson®, Brother®, Dell®, Samsung® and Ricoh®. These competitors use several tactics to limit the penetration of aftermarket supplies such as those offered by Media Sciences. These tactics include protecting their technology through the use of patents, the development of sales and marketing programs that provide for incentives to distributors, wholesalers and dealers who sell exclusively the printer manufacturers’ brand supplies (loyalty programs), and through campaigns intended to instill fear, uncertainty and doubt about the quality of third party supplies into the minds of the end user. We competed with these manufacturers primarily by offering a compelling value proposition of quality, value (through lower end user costs and higher channel margins) and choice.
Principal Suppliers and Raw Materials
Some key components and raw materials, including certain toners and electronic chips, were obtained only from a single supplier or a limited group of suppliers, either because alternative sources were not available or the relationship was advantageous due to performance, quality, support, delivery, capacity, or price considerations. Currently, we are not dependent on any suppliers.
Major Customers
With respect to current operations, we are not dependent on any customers. In 2011, two customers represented 22% and 11% of the Company’s sales from discontinued operations, respectively. In 2010, three customers represented 19%, 12% and 10% of the Company’s sales from discontinued operations, respectively.
Intellectual Property
Not applicable.
Need for Government Approval
Not applicable.
Government Regulation
Not applicable.
Research and Development
Not applicable.
Compliance with Environmental Laws
Not applicable.
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Employees
We currently have 3 employees, who all work on a full-time basis.
ITEM 1A. RISK FACTORS
We are subject to certain risks in our business operations. We have identified below certain risks which we believe may affect our business and the principal ways in which we anticipate that they may affect our business or financial condition. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or that are currently deemed immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.
Our product warranty and related expenses could substantially increase our costs, and affect any potential distributions to our stockholders.
Our warranty program exposes us to substantial costs that could affect our ability to distribute additional funds to our stockholders. Our warranty provides in most cases, broader and more complete coverage than that provided by the original equipment printer manufacturer. We provide warranties for our products as to suitability for use in the intended printer models and that our products are free of defects that could cause damage to these printers. Costs covered include customary charges for the repair or replacement of the printer with an equivalent new or refurbished printer, at our sole discretion.
Despite the sale of our toner product line and exit from the solid ink business, we continue to be exposed to warranty expenses associated with the products manufactured and distributed before the ceasing of our operations. Some of the products we offered are internally complex and, despite extensive testing and quality control, may contain defects. Because we provide warranties to our customers, we may incur costs with remedying the problem. We may need to recall defective products if these defects are not discovered until after commercial shipment and may incur substantial product warranty and service costs if our products damage customer printers. Accordingly, any product defects could have a material and adverse effect on our business, financial condition, and our ability to make distributions to our stockholders.
Local laws in effect or that may be enacted in foreign jurisdictions may afford less protection to holders of our securities than those in effect in the United States.
We presently have four non-U.S. subsidiaries, Media Sciences U.K. Limited, Media Sciences Trading Ltd. (a Bermudan entity), SAMC Funding I Limited (a Cayman Islands entity) and Media Sciences Hong Kong Co. Ltd. (a Hong Kong entity). These foreign subsidiaries are organized under the laws of their respective jurisdictions. Thus, holders of our securities should not conclude that assets and interests held by such foreign subsidiaries are subject to the same protections afforded similar entities incorporated in a United States jurisdiction.
Existing and future claims of intellectual property infringement against us could seriously harm our business.
It is possible that third parties, including competitors, technology partners, and other technology companies, could claim that our past products, whether developed internally or acquired, infringe their rights, including their trade secret, copyright and patent rights. In the Asset Purchase Agreement with Katun, to whom we sold our toner business, we provided indemnification against claims of intellectual property infringement for the products sold to Katun through November 7, 2013. These types of claims, with or without merit, can cause costly litigation. Costs under this indemnification, when aggregated with all other indemnifications claims that arise through the Agreement with Katun, may not exceed $2 million.
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Because of technological changes in our industry, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain of our products, components, and business methods may have unknowingly infringed existing patents of others. We attempted to ensure that the products we developed, and our processes, did not infringe upon third party patents and other proprietary rights. We typically conducted as many as three independent intellectual property reviews as an integral part of our product development process: an extensive in-house review, a review by external counsel, and our key suppliers conduct their own review. Before product launch, these independent reviews were compared and reconciled. Despite these efforts, we cannot guarantee that this process was effective in preventing the infringement of the patent rights of others.
We do not believe that any threatened litigation, based on our assessment of merit, will have a material adverse effect on our financial condition. However, the litigation process is inherently expensive, uncertain and includes the risk of an unexpected, unfavorable result. Accordingly, it is possible in the future that the eventual outcome of any claims or litigation could materially and adversely affect our financial position and ability to make distributions to our stockholders.
Failure to maintain effective internal control over financial reporting may materially and adversely impact our business.
If we fail to maintain an effective internal control over financial reporting, if our management does not timely assess the adequacy of such internal controls, we could be subject to regulatory sanctions and the public’s perception of our company may decline and the trading price of our stock could drop significantly. Ongoing compliance with these requirements is complex, costly and time-consuming. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only limited assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could fail to meet our reporting obligations, and there could be a material adverse effect on our stock price.
Our stock price has been volatile, and you could lose the value of your investment.
Our stock price has been volatile and has fluctuated significantly in the past and your investment in our stock could lose some or all of its value. For example, during the past twelve months ended June 30, 2011, the sales price of our common stock has fluctuated from a high of $0.55 per share to a low of $0.10 per share. The trading price of our stock is likely to continue to be volatile and subject to fluctuations in the future in response to various factors, some of which are beyond our control. These factors include, but are not limited to the following:
The stock market in general and the market for small market capitalization technology companies in particular have experienced extreme price and volume fluctuations. These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance. Our fluctuating stock price also carries other risks, including the increased risk of stockholder litigation.
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We have authorized a class of preferred stock which may alter the rights of common stock holders by giving preferred stock holders greater dividend rights, liquidation rights and voting rights than our common stockholders have.
Our board is empowered to issue, without stockholder approval, preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. While we do not currently have any shares of preferred stock outstanding, our Certificate of Incorporation, as amended, authorizes a class of 5,000,000 shares of preferred stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors, of which 1,000,000 shares were previously designated as Series A Preferred Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the company.
Anti-takeover defenses in our governing documents and certain provisions under Delaware law could be dilutive and prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.
Our governing documents and certain provisions of the Delaware General Corporation Law could make it difficult for another company to acquire control of our company. Our certificate of incorporation allows our board to issue, at any time and without stockholder approval, preferred stock with voting rights or such other rights, preferences and terms as it may determine. Also, Delaware law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met. All or any one of these factors could limit the price that certain investors would be willing to pay for shares of our common stock and could delay, prevent or allow our Board of Directors to resist an acquisition of our company, even if the proposed transaction were favored by independent stockholders.
Our common stock is quoted on the Pink Sheets, which may limit the ability of our stockholders to resell their common stock in the secondary market.
Since July 22, 2010, our common stock has been quoted on an electronic quotation system operated by Pink OTC Markets, and is subject to the Securities and Exchange Commission’s “penny stock rules,” which impose sales practice requirements on broker-dealers that sell that common stock to persons other than established customers and “accredited investors.” Application of this rule could make broker-dealers unable or unwilling to sell our common stock and limit the ability of stockholders to sell their common stock in the secondary market. Securities quoted on the Pink Sheets generally have significantly less liquidity than securities traded on a national securities exchange, including lower trading volumes, delays in the timing of transactions, reduced securities analyst and news coverage, and lower market prices than might otherwise be obtained. Stockholders may find it difficult to resell their shares at prices quoted on the Pink Sheets or at all. Additionally, our common stock may be more adversely affected by changes in general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and announcements made by us, our competitors or parties with whom we have business relationships. Further, we cannot ensure that market makers will make a market in our common stock or that trading of its common stock will continue on the Pink Sheets.
Our common stock not being traded on a national securities exchange could have other adverse effects, including limitations on our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing it needs in the future, and the loss of confidence in our company by current or prospective employees, customers, suppliers and others with whom we have or may seek to initiate business relationships.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. PROPERTIES
We have maintained our executive offices in Oakland, New Jersey since 2005 in facilities covering approximately 41,800 square feet. The facilities were adequately maintained, were suitable for their intended use, and adequately covered by insurance for claims arising out of such occupancies. The annual rental was $250,000. In July 2011, we entered into an agreement to terminate the lease with an effective date of June 30, 2011. We can continue to occupy the space through October 31, 2011. As we no longer have any substantive operations, we no longer need facilities of such size and will seek to occupy offices to match our business needs.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 2011, the Company was not a party to any material pending legal proceeding, other than ordinary routine litigation incidental to its business. See also Note 1 of the Notes to the Consolidated Financial Statements in Item 8 of Part II of this report for a discussion of the litigation settlement.
ITEM 4. (REMOVED AND RESERVED)
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PART II
Market Information
Our common stock is currently quoted on the OTCQB market tier of OTC Markets Group Inc. under the symbol “MSII”. During our past two fiscal years prior to July 21, 2010, our common stock was listed on the Nasdaq stock exchange.
The following table sets forth, for the periods indicated, the high and low closing sale prices for a share of our common stock, as reported by Nasdaq.
Holders
On September 15, 2011, there were 331 stockholders of record of shares of our common stock. We estimate that approximately 686 persons held shares in “street name” as of such date.
Dividends
We have never declared any cash dividends on our common stock, other than a one-time special cash distribution paid on June 9, 2011. Future cash dividends on the common stock, if any, will be at the discretion of our Board of Directors.
No shares of preferred stock are presently outstanding.
Transfer Agent
The transfer agent for our common stock is Continental Stock Transfer & Trust Company, New York, New York.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements.
EXECUTIVE SUMMARY
Fiscal 2011 was a transformative year. In the second quarter of our fiscal year we sold our toner business to Katun Corporation and signed a master distribution agreement and made changes to both personnel and the corporate structure. The Board of Directors and management undertook an effort during the fiscal year to further preserve and enhance stockholder value, by pursuing and successfully settling the litigation with Xerox Corporation. The result was achieved during the fourth quarter. In connection with the settlement of the litigation with Xerox, we terminated the distribution agreement with Katun. Under the terms of the settlement, the parties resolved, on mutually agreeable terms, infringement claims on certain Xerox-held patents related to the shape of the ink sticks, and the parties exchanged certain other business and financial considerations. The Company delivered to Xerox certain inventory and assets related to industrial ink, the Company assigned certain patent and other intellectual property rights to Xerox, and the Company ceased manufacturing its inks for use in Xerox color printers and effectively exited the ink business.
The Company is no longer actively engaged in any substantial operations and the Board of Directors is reviewing business options, including a proposal for a plan of liquidation.
RESULTS OF OPERATIONS
Due to the discontinued operations, expenses related to discontinued operations were reported in discontinued operations and not in selling, general and administrative expenses. General corporate overhead was not allocated to discontinued operations and thus was reported in selling, general and administrative expenses, as in prior years. These expenses previously included the payroll related expenses of the Chief Executive Officer and Chief Financial Officer, insurance related to the corporate areas, board of director fees, professional fees as well as corporate rent expenses.
Other income. >In fiscal 2011, we did not have other income. In fiscal 2010, we had other income of $213,000 of non-recurring income from the purchase of stock in a foreign liquidating entity. There were no other material transactions in connection with this purchase which was determined not to be an acquisition of a business.
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Discontinued Operations. Discontinued operations are related to the toner product line that was sold to Katun as well as the industrial ink product line that was transferred to Xerox and the phaser ink product line that was exited as a result of the settlement of the lawsuit with Xerox. In fiscal 2011, we had a pre-tax loss from discontinued operations of $517,742. In fiscal 2010, we had a pre-tax income from discontinued operations of $932,548. In fiscal 2011, we recorded a gain on the sale of the toner product line, net of taxes, of $2,495,246 and a gain on the litigation settlement, net of taxes, of $2,100,946.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended June 30, 2011, our cash and cash equivalents increased by $3,795,000 to $4,113,000.
We used $2,153,000 of cash from operating activities for the year ended June 30, 2011 as compared to generating $671,000 in the year ended June 30, 2010. The use of $2,153,000 of cash by operating activities for the year ended June 30, 2011 resulted from $1,697,000 net income, less non-cash adjustments totaling $5,363,000, primarily resulting from the net gain on the sale of the toner business and the net gain on the Xerox litigation settlement, and $1,513,000 of cash provided primarily to increase our non-cash working capital (current assets less cash and cash equivalents net of current liabilities). The most significant drivers behind the $1,513,000 increase in our working capital include: inventory reductions, net of reserve changes in the amount of $246,000 and a decrease in accounts receivable of $2,737,000, achieved during fiscal 2011 offset by a $1,228,000 reduction in our trade obligations and other accrued expenses; and a $299,000 reduction in our accrued product warranties.
We increased our cash provided by investing activities to $14,696,000 in the year ended June 30, 2011 compared to utilizing $443,000 of cash in the year ended June 30, 2010. This cash was provided primarily by the proceeds from the sale of operating toner assets and the settlement of the litigation with Xerox offset by the purchase of equipment, tooling and leasehold improvements and a net increase in restricted cash resulting from the escrow arrangement pursuant to the sale of the toner business.
During the year ended June 30, 2011, we utilized cash for financing activities of $8,775,000. We repaid our bank line and term note obligations of $2,341,000 during this period and repaid the 10% subordinated debt of $1,250,000 as well as paid out cash dividends of $5,330,000. During the year ended June 30, 2010, there was a decrease in cash of $425,000, predominantly as a result of net repayment of our bank line.
On September 24, 2008, we completed a $1,250,000 convertible debt financing with MicroCapital Fund, LP and MicroCapital Fund, Ltd. (collectively, “MicroCapital”). We issued three year notes, bearing interest at 10% payable quarterly and convertible into shares of our common stock at $1.65 per share. We also issued to MicroCapital (a) five year warrants to purchase 387,787 shares of our common stock at $1.65 per share, and (b) three year warrants allowing MicroCapital to repeat its investment up to $1,250,000 on substantially the same terms and conditions. The three year warrants were callable under certain criteria. During March 2010, the terms of our financing with MicroCapital were modified by eliminating the convertibility of the notes, by cancelling the warrants, and issuing them 400,000 shares of common stock. On May 19, 2011, the notes were paid in full and this obligation was repaid.
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In fiscal 2010, our cash and cash equivalents decreased by $233,000 to $318,000. Cash provided by operating activities was $671,000. This increase was offset by $443,000 of cash utilized by investing activities, mostly from the purchase of equipment, tooling and leasehold improvements and $425,000 by financing activities.
We had a revolving credit facility with Sovereign Bank. As amended through September 27, 2010, the advance limit under the line of credit was the lesser of: (a) $4,000,000; or (b) up to 80% of eligible domestic accounts receivable and up to the lesser of $1, 000,000 or 75% of eligible foreign receivables plus up to the lesser of: (i) $2,500,000; or (ii) 50% of eligible inventory; or (iii) 60% of the maximum amount available to be advanced under the line. The line of credit was collateralized by a first priority security interest in substantially all of our U.S. based assets and our foreign receivables and required payments of interest only through the facilities three year term. As amended, the interest rate on the term note and the line of credit varied based on the bank’s prime rate and was equal to the greater of the bank’s prime rate plus 4% or 8%. This facility was repaid and terminated on November 8, 2010.
The revolving loan could be converted into one or more term notes upon mutual agreement of the parties. On February 12, 2008, we entered into a non-amortizing term note with the bank in the amount of $1,500,000, due October 1, 2011, as amended. At June 30, 2010, this note had a principal balance of $1,500,000. As of June 30, 2010, we had an outstanding balance of $840,863. On November 8, 2010, this term note was repaid in full.
Our former credit facilities have been subject to financial covenants. Past financial covenants included monitoring a ratio of debt to tangible net worth, an ebitda, as defined, covenant for the three months ended September 30, 2010 and a fixed charge coverage ratio, as defined in the loan agreements. As of June 30, 2010, the bank waived the non-compliance of our ebitda covenant by an amendment and amended the specific terms of certain covenants going forward. On November 8, 2010, these credit facilities were repaid.
SOME SIGNIFICANT FACTORS AFFECTING FUTURE LIQUIDITY
Lack of ongoing operations. Our liquidity could be significantly affected by future legal fees and other costs as the Company currently does not have any material ongoing operations.
FUTURE FINANCING REQUIREMENTS
Management believes that cash on hand will be sufficient to meet the Company’s obligations and fund its day-to-day operations for the next twelve months.
CAPITAL EXPENDITURES
We currently do not plan to invest in any material capital expenditures over the next twelve months.
SEASONALITY
Historically, we have not experienced significant seasonality in our business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of the accounting principles requires our management to make estimates about the future resolution of existing uncertainties that affect the reported amounts of assets, liabilities, revenues, and expenses, which in the normal course of business are subsequently adjusted to actual results. Actual results could differ from such estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the consolidated financial statements giving due regard to materiality.
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Warranty
We provide a warranty for all of our consumable supply products. We retained our warranty policy on solid inks, when the toner business was sold. We warrant our products’ suitability for use in the intended printer models and that our products are free of defects that could cause damage to these printers. Costs covered under the product warranty include customary charges for the repair or replacement of the printer with an equivalent new or refurbished printer, at our sole discretion. The warranty does not cover damage to the product or a printer caused by accident, abuse, misuse, natural disaster, human error, unauthorized disassembly, repair, or modification. We believe that our product warranty is relatively liberal, providing in most cases, broader and more complete coverage than that provided by the original equipment printer manufacturer. The estimated warranty cost is based on historical product performance and field expenses. We update these estimated charges every quarter. The actual product performance and/or field expense profiles may differ, and in those cases we adjust warranty accruals accordingly.
Contingencies and Litigation
We are named from time to time as a party to various legal proceedings. Currently, there are no known legal proceedings against the Company. While we currently believe the ultimate outcome of such proceedings, based on their merit, will not have a material adverse effect on our financial position, the results of complex legal proceedings are difficult to predict.
Income Taxes
We account for income taxes in accordance with Accounting Standards Codification No.740, “Income Taxes” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. In projecting future taxable income, for the purpose of evaluating the need for a valuation allowance associated with its deferred tax assets, we consider all evidence, both positive and negative; whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result, a valuation allowance has been recorded against a substantially all of the deferred tax assets.
On a quarterly basis, we provide for income taxes based upon an annual effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of forecasted worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We carefully monitor the changes in many factors and adjust our effective income tax rate on a quarterly basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of ASC 740, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company has released its reserves for uncertain tax positions. The reserves are no longer required as the future tax benefits were effectively written-off with the recording of the valuation allowance noted above.
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RECENT ACCOUNTING PRONOUNCEMENTS
In April 2010, the FASB issued ASU No. 2010-13, Compensation-Stock Compensation (Topic 718). This ASU provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. We do not expect this guidance to have an impact on our financial position, results of operations and cash flows.
In June 2011, the FASB issued Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard becomes effective for the Company’s fiscal year, and interim periods on or after December 15, 2011. We are currently evaluating the impact of the implementation of this guidance on our financial position, results of operations and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency exchange rates and commodity price inflation. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange, commodity price inflation and interest rates. We do not hedge our foreign currency exposures. We had no forward foreign exchange contracts outstanding as of June 30, 2011. In the future we may hedge these exposures based on our assessment of their significance.
Foreign Currency Exchange Risk
We are primarily exposed to changes in exchange rates for the Euro and the British pound as some of our cash balances are held in these currencies. At June 30, 2011, none of our receivables were invoiced in foreign currencies.
Commodity Price Inflation Risk
Over the last twelve months we have experienced increases in some raw material costs and the costs of shipping and freight to deliver those materials and finished products to our facility and, where paid for by us, shipments to customers. As the operations have been discontinued as of fiscal 2011 year end, this risk has been eliminated.
Interest Rate Risk
At June 30, 2011, we did not have debt outstanding under any lines or credit or term notes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
15
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Media Sciences International, Inc.
We have audited the accompanying consolidated balance sheets of Media Sciences International, Inc. and Subsidiaries as of June 30, 2011 and 2010, and the related consolidated statement of operations, shareholders’ equity and comprehensive loss and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Media Sciences International, Inc. and Subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
October 11, 2011
Edison, New Jersey16
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements
17
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statement
18
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
See accompanying notes to consolidated financial statements
19
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS:
Nature of Business and Discontinued Operations – Media Sciences International, Inc. is a holding company which conducts its business through its operating subsidiaries. The Company was a manufacturer of business color printer supplies and industrial ink applications, which the Company distributed through a distribution channel and direct to original equipment manufacturers. On November 8, 2010, the Company elected to discontinue selling toner related products and sold substantially all of its toner assets to Katun Corporation and one of its subsidiaries, including inventory, fixed assets and intangibles, as well as its business name and trademarks, for approximately $11 million cash of which the net carrying amount of these assets was $7.9 million. Of the purchase price approximately $1.1 million is to be held in escrow for a fifteen month period to cover certain indemnity claims. Certain indemnity claims are limited to no more than $2.0 million dollars for a three year time period after which there is no indemnity coverage. Katun has filed claims against the escrow for $40,876 which have been settled. Additional claims have been raised, which the Company expects to settle for an additional $192,500. The Company has accrued for these expected, additional claims. These settlements have been reflected as a reduction in the net gain on the transaction. The Company subsequently entered into a licensing arrangement with Katun whereby it could continue to use the Company’s corporate name and other intellectual property. The Company recorded a net gain from the transaction of $2,495,246 (net of a tax provision of $426,387). The Company has reclassified all of its activity related to the toner business as discontinued operations for all periods presented prior to the sale.
In connection with the transaction the Company terminated 29 employees and accepted the resignations of the Company’s Chief Executive Officer and Chief Financial Officer. The Company incurred total severance expense in the amount of $1,682,427, all of which has been paid.
Upon the completion of the sale to Katun, the Company entered into a three year distribution agreement with Katun whereby Katun became the exclusive worldwide distributor of all of the Company’s solid ink products. The distribution agreement was terminated effective April 22, 2011. The Company recorded an early termination penalty of $250,000 in the fourth quarter of fiscal 2011, which was expensed in discontinued operations.
On April 22, 2011, Media Sciences International, Inc., Media Sciences, Inc. and Xerox Corporation entered into an agreement settling a patent infringement lawsuit before the United States District Court for the Southern District of New York, Case No. 06CV4872. Under the terms of the settlement, all claims of the parties in the litigation were resolved by the exchange of releases that the Company received from Xerox and that the Company provided to Xerox, and additional consideration exchanged between the parties. The settlement agreement was deemed entered into and became effective on April 22, 2011, and the parties agreed to apply for an order granting consent dismissal of the litigation. Under the terms of the settlement, the parties resolved, on mutually agreeable terms, infringement claims on certain Xerox-held patents related to the shape of the ink sticks, and the parties exchanged certain other business and financial considerations. The Company has delivered to Xerox certain inventory and assets related to industrial ink and has assigned certain patent and other intellectual property rights to Xerox. The Company has ceased manufacturing its inks for use in Xerox color printers and has effectively exited the ink business. Each party bore its own fees, costs and expenses relating to the litigation. The gain from the settlement included settlement proceeds from Xerox of $4,950,000, plus transition service fees of $134,660 and less the net carrying amount of assets of $2,624,705. The Company recorded a net gain from the transaction of $2,100,946 (net of a tax provision of $359,009) after netting the carrying amount of the ink business assets of $2,624,705 against the cash settlement proceeds. The Company has reclassified all of its activity related to the ink business as discontinued operations for all periods presented prior to the settlement.
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS (CONTINUED):
Assets of discontinued operations are summarized as follows:
Liabilities of discontinued operations are summarized as follows:
Summarized statements of operations data for discontinued operations are as follows:
The Company is no longer actively engaged in any material operations and the Board of Directors has been investigating business alternatives, including a plan of liquidation proposal for shareholder vote at a meeting of shareholders. There can be no assurances, however, that any such proposal will be made and/or approved or if made and approved, the ultimate amount of net assets available for distribution to shareholders.
22
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation – >All significant intercompany balances and transactions have been eliminated in consolidation.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
These warrant obligations were settled on March 30, 2010 in the transaction described in Note 4 with the holders of the Company’s convertible debt.
23
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recurring Level 3 Activity, Reconciliation and Basis for Valuation >– The table below provides a reconciliation of the beginning and ending balances for the major classes of assets and liabilities measured at fair value using significant unobservable inputs (Level 3).
Changes in our Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
The fair value of each warrant group is estimated using the Black-Scholes option pricing model with the following weighted average assumptions as of (number of warrants in thousands):
24
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
25
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Otherwise, a valuation allowance is applied. To the extent that the Company’s deferred tax assets require valuation allowances in the future, the recording of such valuation allowances would result in an increase to its tax provision in the period in which the Company determines that such a valuation allowance is required.
Recent Accounting Pronouncements
In April 2010, the FASB issued ASU No. 2010-13, Compensation-Stock Compensation (Topic 718). This ASU provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect this guidance to have an impact on our financial position, results of operations and cash flows.
26
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In June 2011, the FASB issued Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard becomes effective for fiscal years, and interim periods within those years beginning on or after December 15, 2011. We are currently evaluating the impact of the implementation of this guidance on our consolidated financial statements.
The following table sets forth the computation of the basic and diluted earnings (loss) per common share:
27
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The following options to purchase common stock were excluded from the computation of diluted earnings per share for the years ended June 30, 2011 and 2010 as the Company was in a net loss position from continuing operations and all potential common shares derived from stock options would have had an anti-dilutive effect.
NOTE 3 – PROPERTY AND EQUIPMENT:
NOTE 4 – DEBT:
The Company’s indebtedness under secured commercial loan agreements consisted of the following:
On November 8, 2010, as a result of the sale of the Company’s toner business as more fully disclosed in Note 1, the Company terminated and repaid all of its outstanding balance under its revolving credit facility with Sovereign Bank. The facility was previously amended on September 27, 2010 so as to terminate on October 1, 2011. The advance limit under the line of credit was the lesser of: (a) $4,000,000; or (b) up to 80% of eligible domestic accounts receivable and up to the lesser of $1,000,000 or 75% of eligible foreign receivables plus up to the lesser of: (i) $2,500,000; or (ii) 50% of eligible inventory; or (iii) 60% of the maximum amount available to be advanced under the line. The line of credit was collateralized by a first priority security interest in substantially all of the Company’s U.S. based assets and its foreign receivables and required payments of interest only through the facilities three year term.
28
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – DEBT (CONTINUED):
The interest rate on the term note and the line of credit varied based on the bank’s prime rate and was equal to the greater of the bank’s prime rate plus 4% or 8%. The revolving loan could have been converted into one or more term notes upon mutual agreement of the parties. The Company, on February 12, 2008, entered into a non-amortizing term note with the bank in the amount of $1,500,000, due October 1, 2011. On November 8, 2010, the term note was repaid. At June 30, 2010, the note had a principal balance of $1,500,000. As of June 30, 2010, the Company had an outstanding balance of $840,863 under the revolving line.
The Company’s credit facilities were subject to financial covenants. These financial covenants included monitoring a ratio of debt to tangible net worth and an ebitda or a fixed charge coverage ratio, as defined in the loan agreements. At June 30, 2010, the Company was not in compliance with its fixed charge coverage ratio covenant, which was waived by the bank via an amendment dated September 27, 2010.
Convertible Debt
On September 24, 2008, the Company completed a $1,250,000 convertible debt financing with MicroCapital Fund, LP and MicroCapital Fund, Ltd. (“MicroCapital”). The Company issued three year notes, bearing interest at 10% payable quarterly and convertible into shares of the Company’s common stock at $1.65 per share. The Company also issued (a) five year warrants to purchase 378,787 shares of the Company’s common stock at $1.65 per share, and (b) three year warrants allowing MicroCapital to repeat its investment up to $1,250,000 on substantially the same terms and conditions.
The various elements of the September 24, 2008 transaction were recorded on a relative fair value basis in accordance with authoritative guidance. The $486,615 fair value of the warrants and the debt’s beneficial conversion feature was recorded to equity and as a debt discount to the value of the convertible note. This discount was being amortized using the effective interest method over the three year term of the convertible note. Amortization of debt discount on the convertible note payable amounted to $255,377 and $146,453, respectively, for the years ended June 30, 2011 and 2010, respectively. The remaining unamortized discount was $255,377 at June 30, 2010.
On March 30, 2010, the Company entered into agreements with MicroCapital, whereby certain terms and conditions of the 10% convertible notes issued on September 24, 2008, were modified and all of the warrants issued and contingently issuable to MicroCapital were repurchased and cancelled. Modifications to the terms and conditions of the 10% convertible notes included elimination of convertibility of the notes and anti-dilution provisions. At June 30, 2010, as a result of the transaction, the MicroCapital debt was reflected as 10% subordinated unsecured debt.
Before the transaction, 2,272,726 shares of the Company’s common stock were issuable or contingently issuable. In consideration of the modifications of the loans and the repurchases of the warrants, 400,000 shares of the Company’s common stock were issued. On April 20, 2010, the Company filed a registration statement covering the resale of the shares of common stock issued in the transaction.
On May 19, 2011, the subordinated debt with MicroCapital was paid in full and thus the agreements were terminated.
29
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of recording stock-based compensation for the years ended June 30, 2011 and 2010 was as follows:
As of June 30, 2011, the unrecognized stock-based compensation balance was $0 after estimated forfeitures.
During the year ended June 30, 2011, the Company granted 100,002 stock options with an estimated total grant-date fair value of $12,780 after estimated forfeitures. During the same period, the Company granted 200,000 shares of restricted stock with a grant date fair value of $34,772 after estimated forfeitures.
During the year ended June 30, 2010, the Company granted 45,000 stock options with an estimated total grant-date fair value of $6,814 after estimated forfeitures. During the same period, the Company granted 592,000 shares of restricted stock with a grant date fair value of $248,960 after estimated forfeitures.
The Company used its historical stock price volatility to compute the expected volatility for purposes of valuing stock options expense. The Company is using the simplified method for determining the expected life of the options. Under this method, the Company calculates the expected term of an option grant by averaging its vesting and contractual term. Based on studies of the Company’s historic actual option terms, compared with expected terms predicted by the simplified method, the Company has concluded that the simplified method yields materially accurate expected term estimates. The Company estimates its applicable risk-free rate based upon the yield of U.S. Treasury securities having maturities similar to the estimated term of an option grant, adjusted to reflect its continuously compounded “zero-coupon” equivalent.
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – STOCK-BASED COMPENSATION (CONTINUED):
Under the Plans, stock options generally have a vesting period of three to five years, are exercisable for a period not to exceed ten years from the date of issuance and are not granted at prices less than the fair market value of the Company’s common stock at the grant date. Restricted stock units may be granted with varying service-based vesting requirements.
Under the Company’s 1998 Plan, 1,000,000 common shares were authorized for issuance. On June 17, 2008 the Company’s 1998 Plan ended and therefore no further awards may be made under the plan. As of June 30, 2011, 323,385 shares were issued as a result of awards of options or other equity instruments under the 1998 Plan. Under the Company’s 2006 Plan, 1,000,000 common shares are authorized for issuance. As of June 30, 2011, 716,539 common shares were issued as a result of awards of options or other equity instruments under the 2006 Plan, leaving 283,461 available for future issuance. Under the Company’s 2009 Plan, 1,250,000 common shares are authorized for issuance. As of June 30, 2011, 1,062,002 common shares were issued as a result of awards of options or other equity instruments under the 2009 Plan, leaving 187,998 shares available for future issuance.
The following table summarizes the combined stock option plan and non-plan activity for the indicated periods:
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – STOCK-BASED COMPENSATION (CONTINUED):
The options outstanding and exercisable at June 30, 2011 were in the following exercise price ranges:
At June 30, 2011, none of the Company’s exercisable options were “in-the-money.” Accordingly, all outstanding and exercisable options at that date had no aggregate intrinsic value.
The weighted average grant date fair value of options, as determined under ASC Topic 718, granted during the year ended June 30, 2011 and 2010 was $0.34 and $0.22 per share, respectively.
The total intrinsic value of options exercised during the years ended June 30, 2011 and 2010 was $0 and $0, respectively. The total cash received from employees as a result of employee stock option exercises during the years ended June 30, 2011 and 2010 was $57,251 and $0, respectively. In connection with these exercises, the tax benefits realized by the Company for the years ended June 30, 2011 and 2010 were $0 and $0, respectively.
The Company settles employee stock option exercises with newly issued common shares.
During the year ended June 30, 2010, the Company’s Board of Directors approved the grant of 340,000 shares of restricted stock units to senior management and 252,000 shares to non-employee directors. These restricted stock units generally vest in equal installments on the first, second and third anniversaries of the grant date for senior management. The restricted stock units for non-employee directors vest over two years from the grant date. The value of the restricted stock units is based on the closing market price of the Company’s common stock on the date of award. The total grant date fair value of the restricted stock units granted during the year ended June 30, 2010 was $242,940 after estimated forfeitures. Stock based compensation cost for restricted stock units for the year ended June 30, 2010 was $319,601.
As of June 30, 2011, there was $0 remaining of total unrecognized deferred stock-based compensation related to non-vested restricted stock units granted under the Plans.
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – STOCK-BASED COMPENSATION (CONTINUED):
For substantially all restricted stock grants, at the date of grant, the recipient has all rights of a stockholder, subject to certain restrictions on transferability and a risk of forfeiture. These restricted stock grants generally vest in equal installments over one to five years from the date of grant. These restricted stock units are included in the calculation of diluted earnings per share utilizing the treasury stock method. All restricted stock grants are approved by the Compensation Committee of the Board of Directors.
The following table summarizes the Company’s restricted stock unit activity for the indicated periods:
NOTE 6 – COMMITMENTS, LITIGATION AND CONTINGENCIES:
Litigation –> At June 30, 2011, the Company was not a party to any material pending legal proceeding, other than ordinary routine litigation incidental to its business.
Effective June 30, 2011, as a result of the discontinued operations as discussed in Note 1, the Company completed an agreement to terminate the lease of our premises for $500,000, which required that the premises be surrendered by October 31, 2011 or sooner. Real estate taxes and property taxes shall be the Company’s responsibility through the surrender date. The termination fee is included in discontinued operations in the accompanying statement of operations. This amount was paid in July 2011.
In January 2008, the Company entered in an operating lease agreement, covering various equipment used for research and development activities. The lease requires monthly payments of $6,126 for 48 months.
In June 2010, the Company entered in an operating lease agreement, covering an automobile used for CEO transportation. The automobile is currently in use by the ex-CEO and now current Board Member, who reimburses the Company for the expense on a monthly basis. The lease requires monthly payments of $980 for 36 months.
33
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – COMMITMENTS, LITIGATION AND CONTINGENCIES (CONTINUED):
One November 8, 2010, the Company entered into a consulting agreement with Mr. Levin, ex-CEO. The service term was through March 31, 2011. Subject to any restrictions placed upon Mr. Levin by future employment, Mr. Levin agreed to hold himself available to provide additional consulting services after March 31, 2011. The compensation for the consulting term was in the amount of $150,000 and at the rate of $1,000 per day for additional services. The consulting agreement permitted Mr. Levin to enter full time employment with a third party after January 31, 2011. Total consulting services fees paid to Mr. Levin in fiscal 2011 were $169,000.
Future minimum lease payments are as follows:
Rent expense was $370,711, net of $226,900 of sublease rents, for the year ended June 30, 2011, and $510,600, net of $243,400 of sublease rents, for the year ended June 30, 2010.
NOTE 7 – PRODUCT WARRANTY EXPENSES:
The Company provides a warranty for all of its consumable supply products. The Company’s warranty stipulates that it will pay reasonable and customary charges for the repair of printers requiring service as a result of using the Company’s products. The Company estimates warranty costs that may be incurred and records a liability in the amount of such costs at the time product revenue is recognized. Factors that may affect the warranty obligation reserve include the volume of products shipped to customers, historical and anticipated rates of warranty claims and expected cost per claim. The Company periodically assesses the adequacy of its recorded warranty reserve. The Company continues to warrant its products sold prior to discontinuing its operations (see Note 1) and did not sell the liability with the respect to those operations. This liability relates exclusively to operations which have been discontinued and the liability is included in liabilities of discontinued operations on the accompanying consolidated balances sheets.
Changes in accrued product warranty reserve for the years ended June 30, 2011 and 2010 are as follows:
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES:
The components of provision (benefit) for income taxes are summarized as follows:
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