SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number: 0-29651
USA Video Interactive Corp.
(Exact name of registrant as specified in its charter)
Wyoming 06-15763-91
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
70 Essex Street
Mystic, Connecticut, USA 06355
(Address of principal executive offices) (zip code)
(800) 625-2200
(Registrant's Telephone Number, including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate 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 past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 16, 2000, there were outstanding 81,400,088 shares of the
registrant's common stock, par value $0.001 per share.
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................3
Independent Accountants' Report
Consolidated Balance Sheet as at September 30, 2000
(unaudited) and December 31, 1999.
Consolidated Statement of Operations for the
nine months ended September 30, 2000 and 1999 (unaudited)
Consolidated Statement of Stockholders Equity (Deficiency)for
the period ended December 31, 1998 to September 30, 2000 and
1999 (unaudited).
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited).
Consolidated Schedule of General and Administrative Expenses
for the nine months ended September 30, 2000 and 1999
(unaudited).
Notes to Consolidated Financial Statements (unaudited) for the
period ended September 30, 2000.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................14
Item 3. Quantitative and Qualitative Disclosure About Market Risk............20
PART II OTHER INFORMATION....................................................22
Item 1. Legal Proceedings....................................................22
Item 2. Changes in Securities and Use of Proceeds............................22
Item 3. Defaults Upon Senior Securities......................................23
Item 4. Submission of Matters to a Vote of Security Holders..................23
Item 5. Other Information....................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................23
SIGNATURES...........................................................23
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Stated in US Dollars)
3
TERRY AMISANO LTD. AMISANO HANSON
KEVIN HANSON, C.A. Chartered Accountants
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders,
USA Video Interactive Corp.
We have reviewed the accompanying consolidated balance sheet of USA Video
Interactive Corp. as of September 30, 2000, and the consolidated statements of
operations, stockholders' equity and cash flows for the nine month period then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the Company's consolidated balance sheet as of December 31, 1999 (presented
herein), and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein). In our
report dated March 13, 2000 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 1999,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived. The comparative figures for the
nine months ended September 30, 1999 were prepared by management and were
neither audited nor reviewed, and accordingly, we do not express an opinion or
any other form of assurance on them.
Vancouver, Canada "AMISANO HANSON"
November 13, 2000 Chartered Accountants
Suite 604 - 750 West Pender Street, Vancouver, BC, Canada, V6C 2T7
Telephone: (604) 689-0188
Facsimile: (604) 689-9773
E-MAIL: amishan@telus.net
4
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
(Unaudited)
(Stated in US Dollars)
ASSETS September 30, December 31,
2000 1999
------------ ------------
Current
Cash and cash equivalents $ 981,360 $ 417,666
Marketable securities 20,700 20,700
Accounts receivable 316,494 17,661
Inventory 145,911 --
Prepaid expenses 21,053 43,841
Loan receivable 100,000 --
------------ ------------
1,585,518 499,868
Deposit on capital asset 75,000 --
Capital assets - Note 3 544,435 436,417
Patents 62,412 59,066
------------ ------------
$ 2,267,365 $ 995,351
============ ============
LIABILITIES
Current
Accounts payable $ 795,851 $ 497,163
Due to related parties 206,878 188,866
------------ ------------
1,002,729 686,029
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - Notes 2 and 4 24,245,148 20,950,152
Deficit (22,980,512) (20,640,830)
------------ ------------
1,264,636 309,322
------------ ------------
$ 2,267,365 $ 995,351
============ ============
Commitments - Note 2 Subsequent events - Note 4 Contingent Liability - Note 5
APPROVED BY THE DIRECTORS:
"Anton J. Drescher", Director "Edwin Molina", Director
------------------- --------------
Anton J. Drescher Edwin Molina
SEE ACCOMPANYING NOTES
5
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Sales $ 307,464 $ -- $ 546,064 $ 10,000
Cost of sales (190,544) -- (343,127) --
------------ ------------ ------------ ------------
Gross Profit 116,920 -- 202,937 10,000
General and Administrative Expenses
- Schedule I (1,056,200) (409,747) (2,660,014) (992,786)
Provision for Doubtful Accounts (440) -- (4,905) --
Non-operating Income
Interest income 11,756 2,248 19,495 2,248
Foreign exchange gain 2,051 2,238 2,805 12,221
Finders fees -- -- 100,000 --
------------ ------------ ------------ ------------
Loss before Other Items (925,913) (405,261) (2,339,682) (968,317)
Cumulative effect on prior years of
changing to a different amortization
method - Note 3 -- (27,390) -- (27,390)
------------ ------------ ------------ ------------
Net loss $ (925,913) $ (432,651) $ (2,339,682) $ (995,707)
============ ============ ============ ============
Basic loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ ============ ============
Weighted average shares outstanding 74,784,088 64,504,867 74,784,088 64,504,867
============ ============ ============ ============
SEE ACCOMPANYING NOTES
6
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the period ended December 31, 1998 to September 30, 2000
(Unaudited)
(Stated in US Dollars)
Common
Date Number Stock
of Issuance of Shares Price Amount Deficit Total
----------- --------- ----- ------ ------- -----
Balance December 31, 1998 58,756,088 18,722,966 (18,956,362) (233,396)
Issued for cash:
Private placement Feb. 24, 1999 2,000,000 $0.067 133,574 133,574
Private placement Apr. 17, 1999 1,000,000 $0.114 114,293 114,293
Private placement Jun. 28, 1999 500,000 $0.395 197,400 197,400
Private placement Sept. 1, 1999 750,000 $1.00 750,000 750,000
Stock purchase warrants Various 3,820,000 $0.067 255,940 255,940
Stock purchase warrants Jul. 12, 1999 25,000 $0.128 3,190 3,190
Stock purchase warrants Various 1,250,000 $0.294 366,894 366,894
Stock purchase options Various 4,265,000 $0.067 287,755 287,755
Stock purchase options Various 550,000 $0.095 52,140 52,140
Stock purchase options Various 66,000 $1.00 66,000 66,000
Net loss for the year (1,684,468) (1,684,468)
------------ ----------- ----------- ----------
Balance, December 31, 1999 72,982,088 20,950,152 (20,640,830) 309,322
SEE ACCOMPANYING NOTES
7
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the period ended December 31, 1998 to September 30, 2000
(Unaudited)
(Stated in US Dollars)
Common
Date Number Stock
of Issuance of Shares Price Amount Deficit Total
----------- --------- ----- ------ ------- -----
Balance, December 31, 1999 (forward) 72,982,088 20,950,152 (20,640,830) 309,322
Issued for cash:
Stock purchase options Various 550,000 $0.095 52,140 -- 52,140
Stock purchase options Various 453,000 $1.00 453,000 -- 453,000
Stock purchase options Various 1,065,000 $0.068 71,845 -- 71,845
Stock purchase options Various 10,000 $0.47 4,710 4,710
Stock purchase warrants Various 3,675,000 $0.068 247,628 -- 247,628
Stock purchase warrants Various 500,000 $0.128 63,921 63,921
Stock purchase warrants Various 255,000 $0.493 125,252 125,252
Stock purchase warrants Various 15,000 $1.10 16,500 16,500
Private placement April 10,2000 190,000 $4.00 760,000 -- 760,000
Private placement July 20, 2000 1,000,000 $1.50 1,500,000 1,500,000
Net loss for the period (2,339,682) (2,339,682)
---------- ------------ ------------ -----------
Balance, September 30, 2000 80,695,088 $ 24,245,148 $(22,980,512) $ 1,264,636
========== ============ ============ ===========
SEE ACCOMPANYING NOTES
8
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
2000 1999
----------- -----------
Cash flow from operating activities:
Net loss $(2,339,682) $ (995,707)
Adjustments to reconcile net loss to net cash used in operations:
Amortization of capital assets 173,717 40,338
Amortization of patents 3,468 787
Cumulative effect on prior years amortization of changing to a
different amortization method -- 27,390
Accounts receivable (298,833) (2,160)
Inventory (145,911) --
Prepaid expenses 22,788 17,552
Loan receivable (100,000) --
Accounts payable 298,688 69,095
Due to related parties 18,012 (113,675)
----------- -----------
Net cash used in operating activities (2,367,753) (956,380)
----------- -----------
Cash flow used in investing activities:
Purchase of marketable securities -- (81,145)
Purchases of capital assets (281,735) (216,659)
Patent fees (6,814) (11,691)
Deposit (75,000) (25,000)
----------- -----------
Net cash used in investing activities (363,549) (334,495)
----------- -----------
Cash flow provided by financing activity:
Common stock issued for cash 3,294,996 2,025,492
----------- -----------
Net cash provided by financing activity 3,294,996 2,025,492
----------- -----------
Net increase in cash 563,694 734,617
Cash, beginning of the period 417,666 2,618
----------- -----------
Cash and cash equivalents, end of the period $ 981,360 $ 737,235
=========== ===========
SEE ACCOMPANYING NOTES
9
USA VIDEO INTERACTIVE CORP. Schedule I
CONSOLIDATED SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
for the nine months ended September 30, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Amortization of capital assets $ 61,621 $ 18,036 $ 173,717 $ 40,338
Amortization of patents 1,156 263 3,468 787
Advertising 21,748 6,811 82,570 6,811
Consulting 38,467 35,945 141,467 98,952
Filing 4,364 2,273 12,184 13,498
Insurance 3,362 3,305 3,362 3,305
Interest expense 75 4,204 75 5,053
License fee -- 7,498 -- 17,345
Management fees 6,600 7,549 18,600 22,500
Membership fees 2,782 43,206 15,248 43,206
Office and general 185,522 55,308 504,450 133,207
Printing (6,867) 24,989 50,573 59,411
Product development 232,581 18,547 483,071 47,470
Product marketing 329,007 101,101 662,637 244,903
Professional fees 73,742 20,294 212,274 54,088
Public relations 8,250 (12,879) 13,250 17,580
Rent 16,011 14,978 55,938 35,895
Telephone and utilities 30,810 16,343 63,044 48,825
Transfer agent 3,543 2,484 8,337 7,621
Travel 37,994 10,713 118,991 41,746
Website expenses 5,432 28,779 36,758 50,245
----------- ----------- ----------- -----------
$ 1,056,200 $ 409,747 $ 2,660,014 $ 992,786
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES
10
USA VIDEO INTERACTIVE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Stated in U.S. Dollars)
Note 1 Interim Reporting
While the information presented in the accompanying interim nine
months financial statements is unaudited (except for as indicated in
Independent Accountants' Report), it includes all adjustments which
are, in the opinion of management, necessary to present fairly the
financial position, results of operations and cash flows for the
interim periods presented. All adjustments are of a normal recurring
nature. It is suggested that these interim financial statements be
read in conjunction with the Company's December 31, 1999 annual
financial statements.
Note 2 Common Stock - Note 4
Authorized:
250,000,000 common stock without par value
250,000,000 preferred stock without par value
Commitments:
Common Stock Purchase Options
The following common stock purchase options were outstanding at
September 30, 2000 entitling the holders thereof the right to purchase
one common share for each option held:
Number of Exercise Price
Options Per Share Expiry Date
------- --------- -----------
Directors 2,200,000 $ 1.00 July 16, 2001
100,000 $ 2.00 June 16, 2002
150,000 $ 1.00 November 25, 2001
300,000 $ 5.00 February 17,2002
Employees 55,000 $ 0.067 (CDN$0.10) October 20, 2000
250,000 $ 0.067 (CDN$0.10) January 31, 2001
475,000 $ 1.00 July 16, 2001
381,000 $ 1.00 November 25, 2001
750,000 $ 1.00 December 22, 2001
600,000 $ 5.00 February 17, 2002
425,000 $ 2.00 June 16, 2002
75,000 $ 2.50 June 30, 2002
160,000 $ 3.00 August 23, 2002
30,000 $ 3.25 September 5, 2002
10,000 $ 3.35 September 15, 2002
85,000 $ 3.35 September 21, 2002
625,000 $ 2.00 April 28, 2005
---------
6,671,000
=========
11
USA Video Interactive Corp.
Notes to the Consolidated Financial Statements
September 30, 2000
(Unaudited) - Page 2
(Stated in U.S. Dollars)
Note 2 Common Stock - Note 4 - (cont'd)
Common Stock Purchase Warrants
The following stock purchase warrants were outstanding at September
30, 2000 entitling the holders thereof the right to acquire one common
share for each warrant held:
Number Exercise Price
of Warrants Per Share Expiry Date
----------- --------- -----------
350,000 $0.067(CDN$0.10) January 31, 2001
475,000 $0.128(CDN$0.19) March 23, 2001
245,000 $0.493(CDN$0.73) May 19, 2001
735,000 $1.10 July 15, 2001
1,000,000 $1.50 July 20, 2001
190,000 $4.00 January 26, 2002
---------
2,995,000
=========
Note 3 Change in Accounting Principle
Amortization of capital assets acquired in prior years was previously
calculated using the graduated straight-line method over 7 years for
all classes of capital assets. The new method using straight-line
amortization over various periods for different classes was adopted to
recognize amortization over a shorter period in order to reflect the
rapid pace of technological change. This change has been applied
retroactively to capital asset acquisitions of prior years, and is
treated as a change in accounting principle due to the change in
method of amortization for previously recorded assets.
The effect of the change in amortization policy decreased the
amortization expense and the loss for the nine months ended September
30, 1999 by $3,230. The cumulative effect on prior years of changing
to a different amortization method of $27,390 is included in the
statement of operations for the nine months ended September 30, 1999.
The corresponding amount has been reflected in increased accumulated
amortization of the capital assets.
12
USA Video Interactive Corp.
Notes to the Consolidated Financial Statements
September 30, 2000
(Unaudited) - Page 3
(Stated in U.S. Dollars)
Note 4 Subsequent Events
During October 2000 the company received 769,609 common shares of
Future Link Systems Inc. ("FLS") pursuant to a debt settlement
agreement dated July 5, 2000, between the company and FLS at a fair
market price of CDN$0.21 per share to settle indebtedness of
CDN$161,618 (US$108,746). This amount was written-off in prior years.
On October 18, 2000, the company issued 650,000 common shares pursuant
to the exercise of share purchase warrants at CDN$0.10 per share
(300,000 shares) and CDN$0.19 per share (350,000 shares) for
CDN$96,500 (US$64,931).
On October 19, 2000, the company issued 55,000 common shares pursuant
to the exercise of share purchase options at CDN$0.10 per share for
CDN$5,500 (US$3,666).
Note 5 Contingent Liability
There is a contingent liability in respect to a default judgement
entered against the Company's subsidiary in the State of Texas with
respect to the lease of premises in Dallas, Texas in the amount of
$505,169 ($25,399 included in accounts payable at December 31, 1999).
The subsidiary vacated its premises in Dallas, Texas during the year
ended December 31, 1995 and was sued for the total amount payable
under the terms of the lease through the term of the lease, ended in
2002. Management of the Company is of the opinion that the amounts
payable under the terms of this judgement is not determinable at this
time as the damages may be substantially mitigated by the landlord
renting the property to another party. Any settlement resulting from
the resolution of this contingency will be accounted for during the
period of settlement. The range of possible loss is NIL to $505,169.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY STATEMENT
This Report on Form 10-Q of USA Video Interactive Corp. (the "Company")
contains forward-looking statements that are subject to risks and uncertainties,
which could cause actual results to differ materially from those expressed or
implied in the statements. Forward-looking statements are statements about
future performance or results, and include any statements using the words
"believe," "expect," "anticipate" or similar words. All forward-looking
statements are only predictions or statements of current plans, which the
Company is constantly reviewing. All forward-looking statements may differ from
actual future results due to, but not limited to, changes in the overall
economy, the nature and pace of technological changes, the number and
effectiveness of competitors in the Company's markets, success in overall
strategy, changes in legal and regulatory policy, the Company's ability to
identify future markets and successfully expand existing ones and the mix of
products and services offered in the Company's target markets. You should
consider these important factors in evaluating any statement contained in this
report and/or made by the Company or on its behalf. The Company has no
obligation to update or revise forward-looking statements.
The following information has not been audited. You should read this
information in conjunction with the unaudited financial statements and related
notes to financial statements included in this report.
OVERVIEW OF THE COMPANY
The Company is emerging from the development stage. The Company is listed
on the Canadian Venture Exchange under the trading symbol "US" and on the
NASD-OTC Bulletin Board under the trading symbol "USVO". A development stage
company is one where substantial efforts are devoted to establishing a new
business but the planned principal business has not commenced or has commenced
but has not generated significant revenues. This describes the Company through
the end of 1999. However, a shift has occurred and the Company is now focused on
marketing and selling its products and services in an effort to grow revenues.
The Company is essentially "emerging" from its development stage by fully
implementing its principal business.
The Company provides systems and services for converting and delivering
digitized video with superior quality and ease of use. These systems and
services allow businesses and individuals to transmit video data through the
Internet and other local and wide area networks, while maintaining superior
video quality at the receiving end. Specifically, the Company's systems and
services help create and move affordable and reliable streaming media
information to customers' target audiences through a variety of means including
end-to-end video distribution systems; value-added video services such as
encoding, hosting, and streaming; intellectual property licensing; webcast and
network
14
productions; and media distribution technology solutions ranging from software
design and development to engineering support services.
Key Products and Services
The Company's key current and proposed technologies are the following:
Video Compression - an array of compression techniques that allow
large video files to be greatly reduced in size to allow customers to
optimize use of available bandwidth;
Store and Forward Video-on-Demand ("VoD") - a patented technique for
transmitting video over switched (telephone-like) networks, allowing the
user to view the video using VCR-like controls (play, pause, stop, etc.);
and
A Wavelet compression technique to complement standard MPEG and
QuickTime formats is under development. The Company has applied for a
patent on this technology.
The Company's current revenue-generating system and service related
applications include high-quality, end-to-end video distribution systems that
process video content from its source to its display on a remote user's computer
screen or TV. The Company is focusing on the sale of a basic set of standard
system configurations that can be constructed, delivered and billed efficiently
and cost-effectively. The Company anticipates that intellectual property
licensing will provide another significant revenue stream for the Company as it
seeks to establish its technology as a standard component of the products and
services of major industry players. In addition, the Company is developing other
products and services including content licensing, management and encoding,
hosting for Web-based video delivery, services to support webcast events,
end-to-end production services, and advertising contained within content and
associated with web hosting and event support.
RESULTS OF OPERATIONS
Sales
Sales for the nine-month period ended September 30, 2000 were $546,064
compared to $10,000 during the nine-month period ended September 30, 1999. Sales
for the three months ended September 30, 2000 were $307,464. The Company had no
sales for the comparable period in 1999. Approximately fifty percent (50%) of
these sales were of the Company's hardware and software systems and
approximately fifty percent (50%) were of engineering services.
Cost of Goods Sold
The cost to the Company of goods sold during the nine months ended
September 30, 2000 was $343,127, resulting in a gross profit margin of 37%. Cost
of sales for the three months ended September 30, 2000 was $190,544, resulting
in a gross profit margin of 38%.
15
Net Losses
To date, the Company has not achieved profitability and, in fact, expects
to incur substantial net losses for the foreseeable future. The Company's net
loss for the nine months ended September 30, 2000, was $2,339,682 as compared
with a net loss of $995,707 for the nine months ended September 30, 1999. Net
loss for the three months ended September 30, 2000 was $925,913 compared to a
net loss of $432,651 for the three-month period in 1999.
General and Administrative Expenses
General and Administrative (Operating) expenses consisted of product
development, product marketing, amortization of capital assets, consulting fees,
office, professional fees and other expenses to execute the business plan and
for day-to-day operations of the Company.
General and Administrative expenses for the nine months ended September 30,
2000 increased $1,667,228 to $2,660,014 as compared to General and
Administrative expenses of $992,786 for the nine months ended September 30,
1999. General and Administrative expenses for the three months ended September
30, 2000 increased $646,453 to $1,056,200 from $409,747 for the 1999
three-month period.
General and Administrative expenses increased substantially in the nine
months and the three months ended September 30, 2000 compared to the same
periods in 1999, due to the need to target additional resources in support of
the Company's increased effort to bring products to market.
Product development expenses consisted primarily of compensation, hardware,
software and licensing fees. Product development expenses for the nine months
and the three months ended September 30, 2000 increased 1,018% and 1,254%,
respectively, from the comparable periods in 1999, reflecting development of new
technology and refinement and enhancement of product offerings to ensure
competitiveness in the market and support the Company's overall business plan.
Product development expenses are impacted by increased salaries as well as the
timing of the development of products. The Company is developing Wavelet
compression techniques for still and moving images, for which it has applied for
a patent. During the first nine months of 2000, additional staff was engaged to
accelerate these efforts. No assurance can be given that these efforts will
result in a competitively marketable product.
Product marketing expenses for the nine months and the three months ended
September 30, 2000, increased 270% and 325% from the 1999 nine months and three
months, respectively, as the Company hired additional staff and engaged in
marketing activities in an effort to identify and assess appropriate market
segments, develop business arrangements with prospective partners, create
awareness of new products and services, and communicate to the industry and
potential customers. These expenses are expected to increase as the Company
builds its business.
Office and general expenses increased 379% and 335% for the nine and three
month periods in 2000, respectively, mainly for administrative support resources
and the annual shareholders meeting expenses. The Company also incurred
increased professional fees
16
in the nine- and three-month periods in 2000 as the Company, in connection with
becoming a reporting issuer in the United States, required increased levels of
accounting and legal services. Other increases in expenses in both the nine
months and the three months ended Septebmer 30, 2000 included rent, as
headquarters office space was expanded, and travel and promotional expenses, due
to the necessity of attending trade shows and meeting with suppliers and
potential customers. Amortization of capital assets also increased in 2000,
reflecting the increase in level of depreciable capital assets.
As the Company expands its business, its product development, sales and
marketing, and general and administrative expenses will continue to increase.
Product development expenses will increase as the Company adds engineering
personnel to its technology and Web development teams, and as its new
technologies are integrated into its product line. Sales and marketing expenses
will increase as the Company adds business development, sales, and marketing
personnel to build business relationships, sell advertising time and build brand
awareness. Advertising and public relations expenses also will increase as the
Company invests to grow its business. General and administrative expenses will
grow as the Company continues to build its management infrastructure, including
additional personnel, office space and internal information systems.
Other
The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its sales to date have been billed and
collected in U.S. dollars. The Company pays the expenses of its Canadian
operations in Canadian currency. Foreign currency exchange gain or loss for the
nine months ended September 30, 2000 was $2,805 compared with $12,221 during the
1999 period, and was $2,051 for the three months ended September 30, 2000
compared to $2,238 for the comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's cash position was $981,360, an
increase of $563,694 from $417,666 at December 31, 1999. The Company's principal
source of cash during the nine months ended September 30, 2000, was $3,294,996
that was generated from the issuance of stock upon exercise of options and
warrants and in private placements (see Consolidated Statement of Stockholders
Equity). This was offset by $2,367,753 of cash used in operating activities.
The Company has historically satisfied its capital needs primarily by
issuing equity securities. From January 1, 2000, through the date of this
report, the Company completed two private placements, resulting in gross
proceeds to the Company of $2,260,000.
In the first offering, each unit consisted of one common share and one
warrant to acquire an additional share at $4.00 per share
17
by January 26, 2002. On completion of the offering, a total of 190,000 units
were issued at $4.00 per unit for total proceeds of $760,000.00.
The second offering consisted of 1,000,000 units at $1.50 per unit. Each
unit consisted of one (1) common share and one (1) share purchase warrant to
purchase one (1) common share at $1.50 per share, exercisable until July 20,
2002.
The Company's independent accountants, in their report accompanying the
Company's audited financial statements at and for the year ended December 31,
1999, have expressed the opinion that the Company may not be capable of
continuing its existence as a going concern. As of September 30, 2000, the
Company had approximately $981,360 in cash and liquid assets on hand, which is
sufficient to fund current operations for three to four months. Management
currently plans on raising an additional $3.5 million to $4 million through
private equity offerings, which will be sufficient to finance operations for the
next 12 months. The threat to the Company's continuation in business as a going
concern will be removed only when revenues have reached a level that sustains
the Company's business operations.
Management's current expectation is that, assuming the aforementioned $3.5
million to $4 million in financing is obtained, continuing operations for the
longer-term will be supported either through growth in revenues from sales of
products and services, or through a return to the equity markets for additional
funding, the level of which management cannot accurately anticipate at this time
due to the unpredictability of longer-term sales performance. However,
management would expect such additional funding requirements to exceed $4
million for the following 12 months. There is no assurance that management will
be able to obtain any additional financing on terms acceptable to the Company,
if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company needs substantial additional capital to continue as a going concern.
If the Company is unable to raise additional capital, it may not be able to
continue as a going concern. At present, the Company has sufficient cash
resources to continue its operations for the next three to four months. The
Company will need to raise, by way of equity financing, from $3.5 million to $4
million to fund operations over the next 12 months. There is no assurance that
the Company will be able to continue to raise the funds needed for its business.
The Company will, in all likelihood, require additional financing thereafter.
Failure to raise the necessary funds in a timely fashion will limit the
Company's ability to grow and ultimately sustain its business.
The Company has not produced a profit and cannot be certain that it will produce
a profit or remain profitable if it does generate a profit.
The Company's auditors have expressed doubt about the Company's ability to
continue as a going concern. At this time, the Company has not achieved
profitability and, in fact, expects to incur substantial net losses for the
foreseeable future. The Company's limited operating history contributes to the
difficulty of predicting its potential to generate a
18
profit. The Company expects to continue to increase its marketing and sales
efforts. As a result, it will need to generate significant additional revenue
and raise substantial additional funds to achieve profitability.
The Company's operating results in future periods are expected to be subject to
significant fluctuations, which would likely affect the trading price of its
common stock.
The Company's quarterly operating results may in the future vary significantly
depending on factors including the timing of customer development projects and
purchase orders, new product announcements and releases by the Company and other
companies, gain or loss of significant customers, price discounting of the
Company's products, the timing of expenditures, customer product delivery
requirements, availability and cost of components or labor and economic
conditions generally and in the electronics industry specifically. Any
unfavorable change in these or other factors could have a material adverse
effect on the Company's operating results for a particular quarter, thus
potentially adversely affecting the price of its common stock. Many of the
Company's customers order on an as-needed basis and often delay issuance of firm
purchase orders until their project commencement dates are determined. Quarterly
revenue and operating results will therefore depend on the volume and timing of
orders received during the quarter, which are difficult to forecast accurately.
The Company faces intense competition that could harm its business.
The Company may not be able to compete effectively against intense competition
from a multitude of competitors, which could limit the amount of market share
the Company captures. Many of the Company's current and potential competitors
have longer operating histories, larger customer bases, greater name recognition
and significantly greater financial, marketing and other resources than the
Company. In addition, the Company may not be able to maintain a competitive
position due to the pace at which the marketplace is changing. The demand for
its products and services may rapidly decline if the marketplace for its
products and services changes. The Company's success is dependent on its ability
to adjust to change and meet new demands.
The industry is subject to rapid technological change that could render the
Company's technology obsolete and require the Company to continue to develop new
products and services.
The industry is characterized by extremely rapid technological change in both
hardware and software development, frequent new product introductions, evolving
industry standards and changing customer requirements. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to enhance its products and services and to
design, develop and support its future products and services on a timely basis.
These efforts require a high level of expenditures for research and development
by the Company to address the increasingly sophisticated needs of the customers.
There can be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change or evolving industry standards or changing customer
19
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of those
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality or will
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company may announce new products or
technologies that have the potential to replace the Company's existing product
offerings.
The Company's future success is dependent upon its ability to maintain its key
personnel.
The Company depends upon a small number of key persons to implement its business
plan. The Company may not be able to retain its key personnel if it is unable to
adequately compensate them, which could affect its competitive position and
business operations.
The Company's marketing plan is subject to unproven assumptions.
The Company's marketing plan is based upon a number of assumptions, which, if
invalid, could result in lower revenues than anticipated. The assumptions of the
marketing plan are as follows:
o The appeal of Company's end-to-end video distribution systems will
continue to generate client interest;
o The overall market for the Company's products and services develops as
anticipated;
o Competition is not suppressed by an overwhelming technical
breakthrough by one of the major players in the field; and
o The Company's technology continues to keep pace with industry
standards and with the products of its competitors.
The Company may not be able to protect its proprietary technology.
There can be no assurance that the Company will be able to maintain the
confidentiality of any of its proprietary technology, know-how or trade secrets,
or that others will not independently develop substantially equivalent
technology. The failure or inability to protect these rights could have a
material adverse effect on the Company's operations. Additionally, the Company
may not receive a favorable ruling on the reinstatement of its lapsed patent for
its Store and Forward VoD.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe our exposure to overall foreign currency risk is immaterial. The
Company does not manage or maintain market risk sensitive instruments for
trading or other purposes and is, therefore, not subject to multiple foreign
exchange rate exposures.
We report our operations in US dollars and our currency exposure, although
considered by us to be immaterial, is primarily between US and Canadian dollars.
Exposure to the currencies of other countries is also immaterial as
international transactions are settled in US dollars. Any future financings
undertaken by the Company will be
20
denominated in US dollars. As we increase our marketing efforts, the related
expenses are primarily in US dollars except for the marketing efforts in Canada.
The Company is not exposed to the effects of interest rate fluctuations as it
does not carry any long-term debt.
From a quantitative point of view, the Company has had a foreign exchange
gains in 1999, 1998 and 1997, respectively. In addition, there is no material
foreign exchange market risk exposure because, although held in Canadian bank
accounts, 90% of the Company's cash deposits are in US dollars.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
USA Video Interactive Corp. v. William Meyer.
On September 1, 2000, the Company filed an action against William
Meyer, the Company's former Chief Operating Officer, in United States
District Court, District of Connecticut. The Company's complaint
alleges that Mr. Meyer breached his employment agreement with the
Company, and the Company is seeking damages in an undetermined amount,
but not less than $350,000.00, plus interest and costs. Prior to the
Company filing this action, upon his resignation as chief operating
officer of the Company, Mr. Meyer demanded payment from the Company of
the remaining two years of his employment agreement in the amount of
$213,641.00 and options to purchase 250,000 shares of Company common
stock at $2.00 per share.
The Company is not a party to any other legal proceeding or litigation
and none of its property is the subject of a pending legal proceeding.
Item 2. Changes in Securities and Use of Proceeds
a) During the quarter ended September 30, 2000, the Company issued
1,038,000 shares of common stock pursuant to options exercised at
between $0.067 and $1.00 per share for total proceeds of
$445,735. The sale of the stock was exempt from registration
under Rule 701 under the Securities Act of 1933. The sales were
made on exercise of options granted to officers, employees and
directors under the Company's written share option plan, a copy
of which the Company has provided to its participants.
b) During the quarter ended September 30, 2000, the Company issued
3,620,000 shares of common stock pursuant to warrants exercised
at between $0.067 and $1.10 per share for total proceeds of
$397,474. The shares acquired were exempt from registration under
Rule 504 and Rule 506 of Regulation D under Sections 3(b) and
4(2), respectively, of the Securities Act of 1933. The Company
has made publicly available financial and disclosure information
with its filings to the Canadian Venture Exchange, and provided
disclosure regarding the offering and the Company to the
investors. The Company limited the manner of the offering. The
investors included executive officers, directors, and employees
and there were fewer than five (5) non-accredited investors. The
Company believes that a portion of these sales were also exempt
under Regulation S under the Securities Act of 1933, as
22
amended, due to the foreign nationality of the relevant
purchasers.
c) In July 2000, the Company completed an offering, which it
commenced in June 2000, of units. Each unit consisted of one
share of common stock and one warrant to acquire an additional
share at $1.50 per share by June, 2002. On completion of the
offering, a total of 1,000,000 units were issued at $1.50 per
unit for total proceeds of $1,500,000.00. The offer and sale of
the units were exempt from registration under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933. The
Company limited the manner of the offering and provided
disclosure regarding the offering and the Company to the
investors. Four officers and directors of the Company, two
employees (one accredited investor and one nonaccredited
investor) of the Company, five (5) additional unaffiliated
nonaccredited investors, and ten (10) additional unaffiliated
accredited investors purchased the securities. The Company
believes that a portion of these sales were also exempt under
Regulation S under the Securities Act of 1933, as amended, due to
the foreign nationality of the relevant purchasers.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter for which this Report on Form 10-Q is filed,
the registrant filed a report on Form 8-K dated August 11, 2000
(the "8-K"). Under Item 5 of the 8-K, the registrant reported the
resignation of William Meyer as chief operating officer of the
registrant, demands made by Mr. Meyer for salary and options
alleged to be due from the registrant, and the registrant's
intention to initiate litigation against Mr. Meyer contesting his
claims. The registrant also reported in Item 5 the hiring of
Robert D. Smith, Jr. as the registrant's new chief operating
officer.
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SIGNATURE
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.
USA Video Interactive Corp.
Dated: November 20, 2000 By: /s/ Anton J. Drescher
----------------- ---------------------------------
Name: Anton J. Drescher
Title: Chief Financial Officer
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