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, 2001
Commission file number: 0-29651
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
WYOMING 06-1576391
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
70 Essex Street, Mystic, Connecticut 06355
(Address of principal executive offices) (ZIP code)
(860) 572-1560
(Registrant's Telephone Number, including Area Code)
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 |_|
At November 9, 2001, there were 88,445,088 shares of the registrant's common
stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
USA VIDEO INTERACTIVE CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
(Stated in US Dollars)
--------------------
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATED IN US DOLLARS)
=========================================================================================================
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 113,075 $ 231,197
Marketable securities - related parties 84,495 202,826
Accounts receivable, net of allowance for doubtful accounts of $7,000 8,981 122,813
Inventory 145,911 145,911
Prepaid expenses and other current assets 36,220 99,368
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 388,682 802,115
Property and Equipment - at cost, net of accumulated
depreciation of $443,812 and $194,871, respectively 1,105,507 873,544
Other Assets, net of accumulated amortization of $25,659
and $22,170, respectively 49,947 68,412
Deferred Tax Assets, net of valuation allowance
of $6,995,000 and $6,168,000, respectively - -
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,544,136 $ 1,744,071
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 960,317 $ 1,110,033
Accounts payable and accrued expenses - related parties - 20,830
Due to related parties 81,063 75,896
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,041,380 1,206,759
- ---------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - no par value; authorized 250,000,000 shares,
none issued
Common stock - no par value; authorized 250,000,000 shares,
issued and outstanding 88,445,088 and 81,700,088 shares, respectively 28,821,721 25,766,071
Accumulated other comprehensive income (loss) (44,608) 73,723
Accumulated deficit (28,274,357) (25,302,482)
- ---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 502,756 537,312
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,544,136 $ 1,744,071
=========================================================================================================
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN US DOLLARS)
(UNAUDITED)
============================================================================================================
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Revenue $ 67,626 $ 307,464 $ 101,861 $ 546,064
- ------------------------------------------------------------------------------------------------------------
Expenses:
Cost of sales 36,036 190,544 56,602 343,127
Research and development 232,695 232,581 672,304 483,071
Selling, general and administrative 440,254 761,282 1,501,250 2,004,663
Depreciation and amortization 104,645 62,777 276,622 177,185
Noncash compensation charges 9,750 - 575,347 -
- ------------------------------------------------------------------------------------------------------------
Total expenses 823,380 1,247,184 3,082,125 3,008,046
- ------------------------------------------------------------------------------------------------------------
Loss from operations (755,754) (939,720) (2,980,264) (2,461,982)
- ------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest income 98 11,756 5,132 19,495
Other 1,657 2,051 3,257 102,805
- ------------------------------------------------------------------------------------------------------------
1,755 13,807 8,389 122,300
- ------------------------------------------------------------------------------------------------------------
Net loss $ (753,999) $ (925,913) $ (2,971,875) $ (2,339,682)
============================================================================================================
Net loss per share - basic and diluted $ (.01) $ (.01) $ (.04) $ (.03)
============================================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 84,533,977 74,784,088 83,719,069 74,784,088
============================================================================================================
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(STATED IN US DOLLARS)
(UNAUDITED)
=============================================================================================================
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net loss $ (753,999) $ (925,913) $ (2,971,875) $ (2,339,682)
Other comprehensive income:
Change in unrealized gain on investments (20,535) - (118,331) -
- --------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (774,534) $ (925,913) $ (3,090,206) $ (2,339,682)
==============================================================================================================
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(STATED IN US DOLLARS)
==========================================================================================================
(UNAUDITED)
COMMON STOCK ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT LOSS DEFICIT EQUITY
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 81,700,088 $ 25,766,071 $ 73,723 $(25,302,482) $ 537,312
Issuance of common stock and
common stock warrants for cash 6,500,000 2,407,391 - - 2,407,391
Issuance of common stock upon
exercise of warrants 245,000 72,912 - - 72,912
Noncash compensation charges - 575,347 - - 575,347
Change in unrealized gains
on investments - - (118,331) - (118,331)
Net loss - - - (2,971,875) (2,971,875)
- ----------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 88,445,088 $ 28,821,721 $ (44,608) $(28,274,357) $ 502,756
==========================================================================================================
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN US DOLLARS)
=================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
- --------------------------------------------------------------------- ------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net loss $(2,971,875) $(2,339,682)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 276,622 177,185
Noncash compensation charge 575,347 -
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable 113,832 (298,833)
(Increase) in loan receivable - (100,000)
Decrease in prepaid expenses and other current assets 63,148 (123,123)
Increase in other assets -
Increase in accounts payable and accrued expenses (149,716) 298,688
Decrease in accounts payable and accrued expenses
related parties (20,830) -
Increase in due to related parties 5,167 18,012
- --------------------------------------------------------------------- ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,108,305) (2,367,753)
- --------------------------------------------------------------------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net (486,120) (281,735)
Patent fees (4,000) (6,814)
Deposit - (75,000)
- --------------------------------------------------------------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (490,120) (363,549)
- --------------------------------------------------------------------- ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock 2,407,391 3,294,996
Proceeds from the issuance of common stock upon exercise of
warrants 72,912 -
Loans from related parties - -
- --------------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,480,303 3,294,996
- --------------------------------------------------------------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (118,122) 563,694
Cash and cash equivalents at beginning of period 231,197 417,666
- --------------------------------------------------------------------- ------------ ------------
Cash and cash equivalents at end of period $ 113,075 $ 981,360
===================================================================== ============ ============
USA VIDEO INTERACTIVE CORP. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01(a)(5) of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. The results for the interim periods are
not necessarily indicative of the results that may be attained for an entire
year or any future periods. For further information, refer to the Financial
Statements and footnotes thereto in the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2000.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basic loss per common share ("EPS") is computed as net loss divided by the
weighted-average number of common shares outstanding during the period. Diluted
EPS includes the impact of common stock potentially issuable upon the exercise
of options and warrants. Potential common stock has been excluded from the
computation of diluted net loss per share as their inclusion would be
antidilutive.
Inventory, which consists of computer equipment, is stated at the lower of cost
or market using the specific-identification method.
The assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at current exchange rates, and revenue and expenses are
translated at average rates of exchange prevailing during the period. The
aggregate effect of translation adjustments is immaterial at September 30, 2001
and 2000.
NOTE C - COMMON STOCK
On March 12, 2001, the Company issued 1,585,000 units to investors at $.54 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.66 per share.
On March 12, 2001, the Company issued 915,000 units to employees at $.54 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.66 per share. The Company
charged operations for approximately $278,000 representing the differential
between the fair value and the purchase price of the common stock and for
approximately $168,000 representing the differential between the fair value of
the underlying common stock and the exercise price of the warrants.
From January 1, 2001 to September 30, 2001, the Company issued 125,000 and
120,000 shares of common stock upon the exercise of warrants with exercise price
of $.125 and $.476 per common share, respectively.
USA VIDEO INTERACTIVE CORP. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
NOTE C - COMMON STOCK (CONTINUED)
On September 28, 2001, the Company issued 3,512,500 units to investors at $.27
per unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.35 per share.
On September 28, 2001, the Company issued 487,500 units to employees at $.27 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.35 per share. The Company
charged operations for approximately $9,750 representing the differential
between the fair value and the purchase price of the common stock.
NOTE D - CONTINGENT LIABILTIY
The Company is party to a default judgement entered against one of the Company's
subsidiaries. During the year ended December 31, 1995, a claim was made to the
Company for the total amount payable under the terms of the lease with the
Company's subsidiaries for office space in Dallas Texas through 2002. The
Company's management is of the opinion that the amount payable under the terms
of this judgement is not estimable or determinable at this time and may be
substantially mitigated by the landlord renting the property to another party.
The range of possible loss is from $-0- to approximately $500,000. Any
settlement resulting from the resolution of this contingency will be accounted
for in the period of settlement when such amounts are estimable or determinable.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY STATEMENT
Certain statements contained in this Quarterly Report on Form 10-Q ("Report"),
including, without limitation, statements containing the words
"believes,""anticipates," "estimates," "expects," and words of similar import,
constitute "forward-looking statements." Readers should not place undue reliance
on these forward-looking statements. USA Video's actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including risks and uncertainties set forth in USA Video Interactive
Corp.'s Annual Report on Form 10-K, the most important of which are summarized
below under Factors Which May Affect Future Results of Operations, as well as in
other documents USA Video files with the Securities and Exchange Commission
("SEC").
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
USA Video Interactive Corp. ("USVO" or the "Company") designs and markets to
business customers streaming video and video-on-demand services, systems, and
source-to-destination digital media delivery solutions that allow live or
recorded digitized and compressed video to be transmitted through Internet,
intranet, satellite, or wireless connectivity. The Company's systems, services,
and delivery solutions include video content production, content encoding, media
asset management, media and application hosting, content distribution,
specialized engineering services, and Internet streaming hardware. Key areas of
market focus are advertising, education, training, and entertainment for
corporations, institutions, and consumers.
USVO holds the patent for Store-and-Forward Video-on-Demand (#5,130,792), filed
in 1990 and issued by the United States Patent and Trademark Office on July 14,
1992. It has been cited by at least 145 subsequent patents. USVO holds similar
patents in England, France, Spain, Italy, Germany, and Canada, and has a patent
pending in Japan. USVO is actively engaged in licensing this patent.
MARKETS AND PRODUCTS:
As an outgrowth of its video streaming systems business and specialized
engineering services, USVO has identified emerging markets for global media
streaming services and has developed a unique solution to provide a wide range
of business customers with value-added streaming media support services. With
this services-based approach, called StreamHQ(TM), customers can leverage USVO's
infrastructure and technical expertise, while focusing on their own core
business competencies.
StreamHQ(TM) facilitates the transmission of digitized and compressed video to
the user's desktop via multiple streaming modes that take advantage of the
available connectivity. While competitive services take a "one-size-fits-all"
streaming approach, StreamHQ(TM) brings unique value propositions to individual
vertical markets with functionality designed specifically for those markets.
Beyond quality streaming, USVO's overriding goal has been to give customers
media asset management tools and information that provide a basis for them to
calculate their return on investment in streaming media expenditures.
StreamHQ(TM) encompasses a range of end-to-end services from source to viewing,
including content production, content encoding, asset management and protection,
media and application hosting, multi-mode content distribution, and transaction
data capture and reporting.
USVO has tailored an initial deployment product, Zmail, which uses StreamHQ(TM)
to deliver rich media emails. Zmail leverages the diverse functional
capabilities of this architecture to provide a value-added service to
advertisers, as well as other business applications, such as corporate
communications, consumer notices, product recalls, and customer support.
Clicking on a link within a Zmail accesses a customized web page with an
embedded, non-proprietary streaming player (e.g., Windows Media, QuickTime).
The user can customize his or her viewing experience and access any of the web
page links for additional information, guidance, or e-commerce. Zmail
functionality monitors all media player transactions, as well as web
click-throughs, and aggregates the data across multiple users to provide
web-based campaign reports to the customer.
TECHNOLOGY APPROACH:
USVO is approaching the global media streaming services market with a Tier 1
media-streaming infrastructure that the Company has attempted to differentiate
from competitive products and services in terms of architectural, functional,
and business features. Leveraging some of the industry's most prominent
providers for data storage, networking, and data management, StreamHQ(TM)
strives to compete based on service availability, an efficient streaming
process, redundancy and fail-over features, and continuity in the event of power
outages.
USVO has created a modular system that can be scaled to meet the requirements of
a growing clientele. StreamHQ(TM) can also be rapidly replicated to provide a
streaming utility in multiple Internet Data Centers around the world.
StreamHQ(TM) functionality is software driven, allowing USVO to create future
system enhancements based on the needs of the marketplace. Additionally, USVO
can customize the baseline features of StreamHQ(TM) and plans to expand the
system features to support the specialized needs of additional types of
customers.
RESEARCH AND DEVELOPMENT:
USVO has ongoing research and development (R&D) efforts that are aimed at
improving the efficiency and security of media delivery to clients. Among these
R&D efforts is the ongoing development of wavelet-based video compression
techniques that allow high-quality video files to be streamed at low bit rates,
thereby optimizing the use of available bandwidth. USVO also has a proprietary
still-image wavelet compression technology. Part of USVO's R&D effort is the
development of technology that will help protect the intellectual property of
content owners.
BUSINESS OBJECTIVES:
USVO has established the following near-term business objectives:
1. Establish StreamHQ(TM) as the industry standard in the streaming video and
rich media marketplace;
2. Generate services- and systems-based revenues in accordance with the
corporate business plan;
3. Attain industry recognition for the superior architectural, functional, and
business differentiators of the StreamHQ(TM) architecture;
4. Leverage USVO's digital video patent for licensing fees and partnerships in
the United States and internationally;
5. Develop at least one client per year for a complete StreamHQ(TM) system,
including intellectual property licensing and operational support;
6. Expand StreamHQ(TM) functionality to provide enhanced support for corporate
training and education markets; and
7. Patent and license new technology developed within the corporate R&D
program.
MARKET PERSPECTIVE:
With its StreamHQ(TM) service offering, USVO's goals are: 1) to become a
market-leading streaming media service provider; 2) to establish itself as a
leader in streaming technology innovation; 3) to capture revenue and market
share from services and products in advertising, corporate communications,
education, entertainment, and other markets. Numerous published reports
estimate the current value of these markets as in excess of 20 billion dollars.
As a secondary objective, USVO intends to leverage its broad video-on-demand
patent by licensing it to other companies.
The Company was incorporated on April 18, 1986, as First Commercial Financial
Group Inc. in the Province of Alberta, Canada. In 1989,its name was changed to
Micron Metals Canada Corp., which purchased 100% of the outstanding shares of
USA Video Inc., a Texas corporation, in order to focus on the digital media
business. In 1995, the Company changed its name to USA Video Interactive Corp.
and continued its corporate existence to the State of Wyoming. The Company has
four wholly-owned subsidiaries: USA Video (California) Corp., USA Video Corp.,
USA Video Productions Inc., and USA Video Technologies, Inc. USA Video's
executive and corporate offices are located in Mystic, Connecticut, and its
Canadian offices are located in Vancouver, British Columbia.
RESULTS OF OPERATIONS
Sales
Sales for the nine-month period ended September 30, 2001 were $101,861, compared
to revenue of $546,064 for the nine-month period ended September 30, 2000.
Sales for the three-month period ended September 30, 2001 were $67,626 compared
to $307,464 three-month period ended September 30, 2000. The decline in revenue,
which began in the fourth quarter of 2000 and is continuing, is attributable to
the continuing decline in demand throughout the technology sector, as well the
Company decreased the marketing of its hardware products in connection with the
shift in focus of its core business. Starting in the fourth quarter of 2000 and
continuing during the first nine months of 2001, the Company concentrated its
managerial and technical efforts on the remaining critical stages of developing
and refining its new streaming rich media services.
These services are intended to become the Company's core business in place of
its hardware-based systems for video encoding, decoding and streaming; the
market for which has diminished significantly in the last nine to 12 months. The
Company believes the market declined for a number reasons, the most important of
which is that customers no longer can afford to invest in expensive hardware
systems of this type. As a result, profit margins on the Company's hardware
systems have continued to decline, as the Company has lowered prices in the face
of declining demand. A change in focus was necessary to capture the market for
affordable streaming media services.
The change in focus required shifting technical and managerial resources from
sales of the old line of products to service-based offerings. Additionally, the
Company was required to make a significant investment in a centralized computer
hardware and software infrastructure that will be used to provide the new
services, as well as hiring a core sales team on which to build a growing sales
organization for the future.
Cost of Sales
The cost of sales for the nine months ended September 30, 2001 was $56,602, as
compared to $343,127 for the comparable period of 2000. For the three-month
period ended September 30, 2001, the cost of sales was $36,036 as compared to
$190,544 for the comparable period 2000. The decrease in cost of sales is
directly attributable to the decline in sales.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses consisted of product marketing
expenses, consulting fees, office, professional fees and other expenses to
execute the business plan and for day-to-day operations of the Company.
Selling, General and Administrative expenses for the three months ended
September 30, 2001 decreased $321,028 to $440,254 from $761,282 for the three
months ended September 30, 2000. The nine months ended September 30, 2001 these
cost decreased by $503,413 to $1,501,250 from $2,004,663 for the comparable
period.
Product marketing expenses for the nine months ended September 30, 2001,
decreased to $489,458 from $662,637 for the comparable period of 2000 and
decreased to $175,366 for the three months ended September 30, 2001 from
$329,007 for the comparable period in 2000, as the Company reduced its marketing
efforts for its old, hardware-based systems. The Company expects product
marketing expenses to increase significantly during the remainder of 2001 as new
products are launched. The Company has 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. Other components of Selling, General and Administrative
expense did not change significantly.
Research and Development Expenses
Research and development expenses consisted primarily of compensation, hardware,
software, licensing fees, and new product applications for the Company's
proprietary StreamHQ(TM). Research and development expenses increased by 39% to
$672,304 for the nine months ended September 30, 2001, from $483,071 for the
comparable period in 2000. For the three months ended September 30, 2001,
research and development expenses were approximately the same as the comparable
three-month period in 2000 - $232,695 in 2001 versus $232,581 in 2000. This
parity reflects the development of the StreamHQ(TM) and other technologies
underlying the shift in the Company's business to a services-based model.
As the Company expands its business, its product development, product marketing,
and other general and administrative expenses will continue to increase. Product
development expenses, which include research and 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. Product 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 also will increase
as the Company invests to grow its business. Other general and administrative
expenses will grow as the Company continues to build its management
infrastructure, including additional personnel, office space and internal
information systems.
Non-Cash Compensation Charges
Non-cash compensation charges for the nine months ended September 30, 2001
reflected charges in the third and first quarter of 2001 of $575,347. Of this
amount, $9,750 and $462,097, respectively, was due to the issuance of common
shares and common share warrants to the Company's officers, directors and
employees at a price or exercise price below the market price of the common
shares at the time of issuance. Because the rules of the Canadian Venture
Exchange require that the offering price for privately placed securities of
listed companies be set when the offering is first announced, rather than upon
closing, and the market price of the common shares increased between
announcement of the offering and closing, the sale price of the common shares
and the exercise price of the warrants were below the market price of the common
shares on the date of issuance. In addition, the Company issued options to
purchase 150,000 common shares to consultants, resulting in a $97,500 charge.
The Company also incurred a charge of $6,000 for the issuance of employee stock
options.
Net Losses
To date, the Company has not achieved profitability and, in fact, for the
immediate future, expects to continue to incur substantial net losses. The
Company's net loss for the nine months ended September 30, 2001 was $2,971,875
as compared with a net loss of $2,339,682 for the nine months ended September
30, 2000 and for the three months ended September 30, 2001 was $753,999 as
compared to $925,913 for the comparable period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company's had a cash position of $113,075, compared
to $231,197 at December 31, 2000. The Company's principal sources of cash during
the nine months ended September 30, 2001, were proceeds of $2,407,391 from the
issuance of stock from private placements and $72,912 from the exercise of
outstanding warrants. This was substantially offset by $2,108,305 of cash used
in operating activities.
The Company will require additional financing to fund current operations through
the fourth quarter of 2001. The Company has historically satisfied its capital
needs primarily by issuing equity securities. The Company will require an
additional $1.0 million to $1.5 million to finance operations for the rest of
fiscal 2001 and intends to seek such financing through sales of its equity
securities.
Assuming the aforementioned $1.0 million to $1.5 million in financing is
obtained, the Company believes that continuing operations for the longer term
will be supported through anticipated growth in revenues and through additional
sales of the Company's securities. Although longer-term financing requirements
may vary depending upon the Company's sales performance, management expects that
the Company will require additional financing of $5.0 million to $6.0 million
for fiscal 2002. The Company has no binding commitments or arrangements for
additional financing, and 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
Certain risks and uncertainties could cause actual results to differ materially
from the results contemplated by the forward-looking statements contained in
this Report. Risks and uncertainties have been set forth in the Company's Annual
Report on Form 10-K, as well as in other documents the Company files with the
SEC. These risk factors include the following:
THE COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE ITS
BUSINESS AND PROSPECTS.
The Company's business and prospects must be considered in light of the risks
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as streaming media.
IF THE COMPANY IS UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING IN THE NEXT
FEW MONTHS IT MAY NOT BE ABLE TO MAINTAIN OPERATIONS AT CURRENT LEVELS.
The Company requires substantial additional financing to maintain operations at
current levels beyond the third quarter of 2001. Financing may not be available
when needed on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company may be
unable to further develop or enhance its products and services, take advantage
of future opportunities or respond to competitive pressures, or ultimately, to
continue in business.
CONTINUATION OF THE CURRENT SLUMP IN THE TECHNOLOGY SECTOR WILL ADVERSELY AFFECT
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES.
The Company's sales have been adversely affected by the ongoing slump in the
technology industry segment and the continuation of these market conditions can
be expected to result in depressed demand for the Company's products and
services.
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 SHARES.
Factors that could cause such fluctuations include the Company's ability to
attract and retain customers; the introduction of new video transmission
services or products by others; price competition; the continued development of
and changes in the streaming media market; its ability to remain competitive in
its product and service offerings; its ability to attract new personnel; and
potential U.S. and foreign regulation of the Internet.
THE COMPANY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER THE
COMPANY'S PRODUCTS AND SERVICES OBSOLETE.
Keeping pace with the technological advances may require substantial
expenditures and lead time, particularly with respect to acquiring updated
hardware and infrastructure components of its systems. The Company may require
additional financing to fund such acquisitions. Any such financing may not be
available on commercially reasonably terms, if at all, when needed.
IF THE COMPANY DOES NOT CONTINUOUSLY IMPROVE ITS TECHNOLOGY IN A TIMELY MANNER,
ITS PRODUCTS COULD BE RENDERED OBSOLETE.
These changes and developments may render the Company's products and
technologies obsolete in the future. As a result, the Company's success depends
on its ability to develop or adapt products and services or to acquire new
products and services that can compete successfully. There can be no assurance
that the Company will be successful in these efforts.
THE COMPANY INTENDS TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE
INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE
COMMON SHARES.
Accordingly, existing shareholders may experience additional dilution of their
percentage ownership interest in the Company. In addition, the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of the Company's common shares.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes its exposure to overall foreign currency risk is not
material. The Company does not manage or maintain market risk sensitive
instruments for trading or other purposes and is not exposed to the effects of
interest rate fluctuations as it does not carry any long-term debt.
The Company reports its operations in US dollars and its currency exposure,
although considered by the Company as immaterial, is primarily between the US
and Canadian dollars. Exposure to other currency risks is also not material as
international transactions are settled in US dollars. Any future financing
undertaken by the Company will be denominated in US dollars. As the Company
increases its marketing efforts, the related expenses will be primarily in US
dollars. In addition, 90% of the Company's bank deposits are in US dollars.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any other material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended September 30, 2001, 25,000 common shares were issued
pursuant to warrants exercised for total proceeds of $12,053. The issuance of
the shares was exempt from registration under Rules 504 and 506 of Regulation D
under the Securities Act of 1933 ("Securities Act"). 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 purchaser was a non-affiliated investor.
During the quarter ended September 30, 2001, the Company completed an
offering, which it commenced in August 2001, of units. Each unit consisted
of one share of common stock and one warrant to acquire an additional share
at $0.35 per share ($0.53 CN) by September 2003. On completion of the
offering, a total of 4,000,000 units were issued at $0.27 per unit ($0.42
CN) for total proceeds of $1,074,131.34 (adjusted for exchange rate conversions
for sales to Canadian purchasers).
The offer and sale of the units were exempt from registration under Rule
506 of Regulation D of the Securities Act. The Company limited the manner
of the offering and provided disclosure regarding the offering and
the Company to the investors. Two officers and directors of the Company,
five employees (two accredited investors and three nonaccredited
investors) of the Company, two (2) additional unaffiliated nonaccredited
investors, and fifteen (15) 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, as the sales were
made in offshore transactions to non-U.S. persons.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's security holders during the
third quarter of 2001.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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 9, 2001 By: /s/ Anton J. Drescher
--------------------------------
Name: Anton J. Drescher
Title: Chief Financial Officer