SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
-------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ___________
Commission file number 0-27043
-----------------------------------------------------
E-VIDEOTV, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 51-0389325
- -------------------------------- ---------------------------
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.)
7333 East Doubletree Ranch Road, Suite 205, Scottsdale, AZ 85258
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
602-421-9165
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common shares, as of the latest practicable date: 32,223,882
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
E-VIDEOTV, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED June 30,2002
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 2
Item 2. Management's Discussion and Analysis and Plan of
Operation. . . . . . . . . . . . . . . . . . . . . . . . 1
PART II OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 3
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . 3
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 3
Item 4. Submission of Matters to a Vote of Security Holders. . . 3
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . 3
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . 3
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are included as part of this quarterly
report:
Unaudited Consolidated Balance Sheet at June 30, 2002 and December 31, 2001.
Unaudited Consolidated Statement of Operations for the period from inception,
March 5, 1999, to June 30, 2002, and the six months ended June 30, 2002 and
2001.
Unaudited Consolidated Statement of Cash Flows for the period from inception,
March 5, 1999, to June 30, 2002, and the six months ended June 30, 2002 and
2001.
Notes to the Unaudited Consolidated Financial Statements . . . . . . . . . . . .
E-VIDEOTV, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
June 30 December 31
2002 2001
====================================================================================================
(unaudited) (audited)
ASSETS
Current
Cash $ 468 $ -
Sundry receivables 4,300 -
Prepaid expenses - 4,225
------------ -------------
4,768 4,225
Non-current receivables (Note 4) 80,500 32,500
Computer equipment (net of accumulated depreciation of $48,066
(2001: $22,398)) 38,553 21,097
Software development costs (net of accumulated amortization of $33,300) 619,830 -
Advances to Ziracom Digital Communications, Inc. - 269,744
Debt issue costs (Note 7) 75,958 113,782
------------ -------------
$ 819,609 $ 441,348
============ =============
====================================================================================================
Liabilities
Current
Accounts payable and accrued liabilities (Note 5) $ 490,165 $ 233,341
Loans from related parties (Note 6) 80,479 102,713
Convertible debentures (Note 7) 449,712 237,667
Current portion of deferred revenue 80,000 -
Loan payable (Note 9) - 100,139
------------ -------------
1,100,356 673,860
Non-current deferred 280,000 -
revenue
------------ -------------
1,380,356 673,860
------------ -------------
Shareholders'
Deficiency
Capital stock (Note 8)
Issued and outstanding:
32,223,882 (2001: 18,397,743) common shares 3,222 1,840
Additional paid-in capital 5,490,272 5,151,439
Share subscriptions 79,200 79,200
------------ -------------
5,572,694 5,232,479
Deficit accumulated
during the development
stage (6,133,441) (5,464,991)
------------ -------------
(560,747) (232,512)
------------ -------------
$ 819,609 $ 441,348
============ =============
====================================================================================================
Continuance of operations (Note 1)
Commitment (Note 11)
Contingency (Note 12)
See accompanying notes to the consolidated financial statements.
E-VIDEOTV, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
Cumulative Six Months Six Months Quarter Quarter
March 5, 1999 Ended Ended Ended Ended
to June 30 June 30 June 30 June 30 June 30
2002 2002 2001 2002 2001
========================================================================================================
Revenue $ 40,000 40,000 $ - $ 20,000 $ -
--------------- ----------- ----------- ----------- ----------
General and administrative expenses
Amortization 651,920 65,107 156,229 44,507 78,343
Compensation expense for stock
option (Note 8) 408,583 16,000 - - -
Corporate promotion 278,637 18,518 30,753 103 7,464
General corporate expenses 188,432 13,033 29,607 2,805 7,629
Interest expense 736,048 345,031 - 148,416 -
Management and consulting fees 1,325,754 112,016 288,165 58,729 144,196
Office expenses 212,413 23,752 39,011 4,633 25,600
Professional fees 405,335 58,138 60,041 36,504 44,394
Rent 170,686 35,954 31,558 18,203 14,795
Royalties 250,000 - 104,167 - 64,950
Travel 200,715 20,901 23,601 10,142 17,570
--------------- ----------- ----------- ----------- ----------
4,828,523 708,450 763,132 324,042 404,941
--------------- ----------- ----------- ----------- ----------
Write-off software development
costs (Note 3) 1,316,935 - - - -
Interest income (11,374) - - - -
--------------- ----------- ----------- ----------- ----------
Net loss $ 6,094,084 $ 668,450 $ 763,132 $ 304,042 $ 404,941
=============== =========== =========== =========== ==========
Weighted average number of
common shares outstanding 28,031,593 15,217,179 27,668,238 16,757,072
=========== =========== ========== ==========
Net loss per share, basic and
diluted $ 0.02 $ 0.05 $ 0.01 $ 0.02
=========== =========== ========== ==========
========================================================================================================
See accompanying notes to the consolidated financial statements.
e-VideoTV, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
Cumulative Six Months Six Months
March 5, 1999 Ended Ended
to June 30 June 30 June 30
2002 2002 2001
==================================================================================================================
Cash derived from (applied to)
Operating
Net loss for period $ (6,133,441) $ (668,450) $ (763,132)
Compensation expense for stock options 408,583 16,000 -
Write-off of distribution rights and software development costs 1,316,935 - -
Depreciation and amortization 701,211 65,107 156,229
Amortization of debenture discount 663,762 311,272 -
Debenture Interest paid in shares 4,433 3,158 -
Management fee paid in shares 238,000 - -
Subscription of shares for services 25,200 - -
Deferred revenue (40,000) (40,000) -
Change in non-cash operating working capital
Receivables and prepaids 14,736 6,357 9,176
Prepaid royalties - - (148,283)
Payables and accruals 392,504 137,393 260,388
-------------- ------------ ------------
(2,408,077) (169,163) (485,622)
-------------- ------------ ------------
Financing
Proceeds from issuance of common shares 1,538,101 - -
Shares subscribed - - 425,000
Convertible debentures issued 1,000,000 - -
Convertible debenture issue costs (163,250) - -
Loans from related parties 139,979 (22,234) 71,677
Loans from parent company prior to acquisition 115,000 - -
Loan payable - (100,139) -
Cash acquired on acquisition of parent company 1,001,481 - -
-------------- ------------ ------------
3,631,311 (122,373) 496,677
-------------- ------------ ------------
Investing
Advances to Ziracom Digital Communications, Inc. 76,843 346,587 -
Non-current receivables (80,500) (48,000) -
Computer equipment (50,078) (6,583) (8,149)
Distribution rights (300,000) - -
License (445,000) - -
Software development (424,031) - -
-------------- ------------ ------------
(1,222,766) 292,004 (8,149)
-------------- ------------ ------------
Net increase in cash 468 468 2,906
Cash, beginning of period - - 2,276
-------------- ------------ ------------
Cash, end of period $ 468 $ 468 $ 5,182
============== ============ ============
Non-cash activities not included in cash flows
Shares issued to pay management fees $ 238,000 $ - $ -
Shares issued on conversion of debentures $ 126,758 $ 61,403 $ -
Debenture interest paid in shares $ 4,433 $ 3,158 $ -
Shares issued to settle loan from related party $ 59,500 $ - $ -
Shares subscribed to settle trade payables $ 54,000 $ - $ 292,000
Shares cancelled on termination of license $ 30,163 $ - $ -
Shares issued to acquire license $ 791,773 $ - $ -
Compensation expense for stock options $ 408,583 $ 16,000 $ -
Cancellation of loans from parent company on acquisition $ 115,000 $ - $ -
Value of shares issued in excess of cash acquired on
acquisition of parent company $ 95,374 $ - $ -
Shares issued to acquire Ziracom (Note 3) $ 259,654 $ 259,654 $ -
==================================================================================================================
See accompanying notes to the consolidated financial statements.
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
1. BASIS OF PRESENTATION
The company was incorporated in the state of Delaware, U.S.A. on July 25, 1997
under the name Oro Rico Mining Corporation. On August 25, 1997, ORM, Inc., an
inactive company incorporated in Colorado on July 25, 1997, was merged into the
company. The name of the company was changed to Asia Pacific Enterprises, Inc.
on October 16, 1997 and to e-VideoTV, Inc. on August 6, 1999.
On June 23, 1999 the company acquired all of the outstanding shares of e-Video
U.S.A., Inc. This business combination has been accounted for as an acquisition
of the company by e-Video U.S.A., Inc.
The company had previously commenced its planned principal operations although
it had not yet earned any revenue. The company's previous operational focus was
to secure licensing operators for its Faster-Than-Real-Time ("FTRT") video on
demand service. To that end, management devoted substantially all of the
company's resources to the identification and qualification of such potential
licenses.
In November 2001, the company changed its operational focus from the licensing
of FTRT video on demand service to focus on the acquisition of technologies,
especially in the field of video compression, and sell these technologies to
interested parties and/or enter into reseller agreements. The company has sold
its exclusive license rights in the U.S.A. for analog copy protection for video
transmissions received in FTRT back to Macrovision Corporation. The company
still has its agreement with U.S.A. Video Interactive Corp. to exclusively
sub-license their "Store and Forward Video System" patent in areas related to
digital set-top boxes with hard-drives in the U.S.A. (Note 11). This agreement
has yet to be completed.
The company has acquired, through its acquisition of Ziracom Digital
Communications, Inc. ("Ziracom") (Note 3), video compression technology. The
Alpha-Omega CODEC uses a set of proprietary algorithms to analyse a video signal
and determine how best to apply its selection of compression techniques. The
compression techniques utilized in Alpha-Omega include MPEG-Discrete Cosine
Transforms, Wavelet Transforms, Color Tables, Color Quantization, and Video
Masking. The company has commenced its new planned principal operations and has
generated revenues in the first two quarters of $40,000. This is revenue earned
from the sale of a five (5) year license for a total consideration of $400,000.
All funds were paid in January 2002.
The company's consolidated financial statements for the period ended June 30,
2002 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business for the foreseeable future. The company incurred a
net loss of $668,450 for the six months ended June 30, 2002 and has a working
capital deficiency of $1,095,588 and accumulated deficit of $6,133,441 at June
30, 2002. These factors raise substantial doubt about the company's ability to
continue as a going concern. The ability of the company to continue as a going
concern is dependent upon its ability to achieve profitable operations and to
obtain additional capital. Management expects to raise additional capital
through private placements and other types of venture fundings and through
financing agreements with its clients. The outcome of these matters cannot be
predicted at this time. No assurances can be given that the company will be
successful in raising sufficient additional capital. Further, there can be no
assurance, assuming the company successfully raises additional funds, that the
company will achieve positive cash flow. If the company is unable to obtain
adequate additional financing, management will be required to curtail the
company's operating expenses. These consolidated financial statements do not
include any adjustments to the specific amounts and classifications of assets
and liabilities which might be necessary should the company be unable to
continue in business.
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These unaudited consolidated financial statements are presented in U.S. dollars
in accordance with accounting principles generally accepted in the United States
of America and have been prepared on the same basis as the annual audited
consolidated financial statements.
In the opinion of management, these audited consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation for each of the periods presented. The results of
operations for interim periods are not necessarily indicative of results to be
achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01
of Regulation S-X, the accompanying consolidated financial statements and
related footnotes have been condensed and do not contain certain information
that will be included in the company's annual consolidated financial statements
and footnotes. For further information, refer to the consolidated financial
statements and related footnotes for the years ended December 31, 2001 and 2000
included in the company's Annual Report on Form 10-KSB.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (FAS) 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, the company has capitalized certain computer software development
costs upon the establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of a detailed program
design which has been confirmed by documenting and tracing the detail program
design to product specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization is provided based on the
greater of the ratios that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product, or the
straight line method over the estimated useful life of the product commencing
upon technological feasibility. The estimated useful life for the straight-line
method is determined to be five years.
Management regularly reviews the carrying value of its software development
costs to assess whether or not there has been an impairment in its carrying
value. When the carrying values of these assets exceed their estimated net
recoverable amounts, an impairment provision is recorded.
DEFERRED REVENUE
In January 2002, the company executed a five- year licensing agreement with a
third party for the non-exclusive use of its Alpha-Omega CODEC. This license
was fully prepaid for the five- year period and the company will recognize the
revenue at $80,000 per year starting in its 2002 fiscal year.
LOSS PER COMMON SHARE
The basic loss per common share is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
for the year. During 2001, the 6,623,016 contingently issuable shares were
excluded from the calculation of weighted average common shares outstanding
until they were released from escrow. Diluted loss per common share is computed
giving effect to all potential dilutive options and warrants that were
outstanding during the year. For all periods presented, all outstanding options
and warrants were anti-dilutive.
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 141 and 142
On July 20 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 142 is effective for fiscal
years beginning after December 15 2001; however, certain provisions of this
statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the company are as follows:
- all business combinations initiated after June 30 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July
1 2001;
- intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability;
- effective January 1 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator;
- all acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
The company has followed SFAS 141 and 142 in accounting for its acquisition of
Ziracom Digital Communications Inc. (Note 3).
SFAS 143 and 144
In July 2001, FASB issued SFAS No 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assts and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development, and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15 2002.
In August 2001, the FASB issued SFAS No 144, Accounting for the impairment or
Disposal of Long-Lived Assets. The statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No 121, Accounting for the impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15 2001.
The Company is evaluating the impact of the adoption of these standards and has
not yet determined the effect of adoption on its financial position and results
of operations.
================================================================================
3. ACQUISITION
Pursuant to a Share Purchase Agreement entered into between the Company, Ziracom
Digital Communications Inc, and its shareholders, the company agreed to purchase
all of Ziracoms' outstanding common shares for 8,655,139 of the Company's common
shares.
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
3. ACQUISITION (Continued)
Ziracom shareholders will also receive additional shares should earnings before
interest, taxes, depreciation and amortization exceed $500,000 for the period
August 1 2001 and August 31 2002. Shares priced at their closing bid price on
August 31 2002 would be issued in an amount that equalled the amount of Ziracom
earnings as determined above.
As a result of this transaction, Ziracom became a subsidiary of e-VideoTV, Inc.
The transaction has been accounted for by the purchase method with the company
as the acquirer. The results of Ziracom's operations are included subsequent to
its acquisition date.
Net identifiable assets acquired:
Receivables $ 6,432
Due from Ziracom Digital Communications Inc. 76,843
Capital assets 25,724
Software development costs 670,086
Payables and accruals (119,431)
Deferred revenue (400,000)
--------
$259,654
=======
Consideration
8,655,139 common shares $259,654
=======
================================================================================
4. NON-CURRENT RECEIVABLES
As at June 30 2002, the company had advanced $80,500 (December 31 2001: $32,500)
to companies that it is considering either acquiring or entering into a business
relationship with. These loans do not bear interest and do not have set terms of
repayment.
================================================================================
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
June December 31
2002 2001
-------- -----------
Accrued management fees (Note 10) $125,965 $ 70,000
Trade payables and accrued liabilities 364,200 163,341
-------- ------------
$490,165 $ 233,341
======== ============
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
6.LOANS FROM RELATED PARTIES
June 30 December 31
2002 2001
-------- ------------
Loans from directors with no specific terms of repayment $ 56,479 $ 78,713
Loans from shareholders bearing no interest, unsecured
and repayable at $3,000 per month. At June 30 2002,
the company's payments under this loan are ten months
in arrears 24,000 24,000
-------- ------------
$ 80,479 $ 102,713
======== ============
================================================================================
7. CONVERTIBLE DEBENTURES
On July 6 2001, the company received $1,000,000 from the sale of convertible
debentures and warrants to purchase up to 666,666 shares of the company's common
stock (Note 8). The principal on the debentures is due June 6, 2003. Interest
at 8% per annum on the debenture principal outstanding is due quarterly
commencing September 30 2001. The debentures and any unpaid and accrued
interest may be converted at the option of the holder into common shares of the
company. The conversion price per share is the lesser of $0.4747 and 80% of the
average of the three lowest closing prices of the common shares on the principal
market where the shares trade for the sixty trading days prior to conversion.
The company may redeem the convertible debentures on five days notice by paying
the holders 190% of the principal outstanding plus accrued interest. Upon
receiving the repayment notice, the debenture holders have the option of
converting the debentures to common shares within five days.
The company has determined the fair value of the warrants to be $486,600, using
the Black Scholes option-pricing model. This warrant value is reflected as an
addition to paid-in capital and a discount to the debenture principal.
The debentures contain a "beneficial conversion" feature as the fair value of
the underlying stock was greater than the fair value of the debenture at the
date of issuance. The value of the beneficial conversion feature has been
calculated as $513,400, which has been recognized as an addition to paid-in
capital and a discount to the debenture principal.
The discounts to the debenture principal are amortized over the life of the
debentures as interest expense. Any unamortized discounts related to debentures
converted to common stock are written off as interest expense at the conversion
date.
The company incurred $163,750 in cash commissions and expenses related to the
issuance of the debentures, which has been recognized as a deferred cost to be
amortized by the interest method over the term of the debt. Any unamortized
issue costs related to debentures converted to common stock are written off as
interest expense at the conversion date.
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
7. CONVERTIBLE DEBENTURES (Continued)
The following table summarizes the activity in the debentures to June 30 2002.
Convertible Debentures
--------------------------------------
Deferred
Original Unamortized Net Book Issue
Principal Discounts Value Costs
----------- ------------- ---------- ----------
DURING THE YEAR ENDED DECEMBER 31 2001
Debentures issued on July 6,2001 $1,000,000 $ 1,000,000 $ - $ 163,250
Debentures converted to common stock (65,354) (59,251) (6,103) (9,673)
Amortization of discounts - (243,770) 243,770 (39,795)
----------- ------------- ---------- ----------
Balance, December 31 2001 934,646 696,979 237,667 113,782
DURING THE SIX MONTHS ENDED JUNE 30 2002
Debentures converted to common stock (61,403) (45,789) (15,614) (7,474)
Amortization of discounts - (227,659) 227,659 (30,350)
----------- ------------- ---------- ----------
Balance, June 30 2002 $ 873,243 $ 423,531 $ 449,712 $ 75,958
=========== ============= ========== ==========
The company has not made interest payments as required under the terms of the
convertible debenture agreements. At June 30 2002, $66,116 in interest on these
convertible debentures has been accrued but is unpaid. Notwithstanding this
technical default, the creditor has agreed not to demand repayment of the loan.
================================================================================
8. CAPITAL STOCK
AUTHORIZED CAPITAL
100,000,000 shares of common stock with a par value of $0.0001
5,000,000 shares of preferred stock with a par value of $0.0001
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
8. CAPITAL STOCK (Continued)
STOCK OPTIONS
The company accounts for the options issued to directors and employees in
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Options Issued to Employees. Had compensation cost for the stock option plan
been determined based on the fair value at the grant date consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the company's
net loss and net loss per share would have been the pro forma amounts indicated
below:
June 30 December 31
2002 2001
---------- ------------
NET LOSS:
Actual net loss $(668,450) $ (2,756,522)
Pro forma net loss $(706,450) $ (3,300,362)
LOSS PER SHARE:
Actual net loss per share $ (0.02) $ (0.16)
Pro forma net loss per share $ (0.02) $ (0.19)
The fair value of each option grant was estimated at the grant date using the
Black-Scholes option-pricing model for the period ended June 30, 2002, assuming
a risk-free interest rate of 4.88%, volatility of 2.16%, zero dividend yield,
and an expected life of 5.00 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price volatility.
Because the company's employee stock options and warrants have characteristics
significantly different from traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.
The company granted options to purchase 4,100,000 shares of the company's common
stock to directors during the period ended June 30, 2002.
During the period ended June 30, 2002, the company granted 800,000 options to
purchase shares to consultants and recognized expense related to these options
of $16,000. The expense amount was determined by the fair value of the options
issued calculated using the Black-Scholes model.
E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
June 30, 2002
(Unaudited)
================================================================================
8. CAPITAL STOCK (Continued)
SHARES ISSUABLE UNDER CONVERTIBLE DEBENTURES
Based on an estimate of the company's share price at June 30 2002, the terms of
the company's convertible debenture (Note 7) would enable the debenture holder
to exercise its conversion rights in the amount of approximately 88,000,000
common shares.
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9. INCOME TAXES
At June 30 2002, the company had net operating losses carried forward of
approximately $5,800,000 (December 31 2001: $5,140,000) that may offset against
future taxable income until 2020. The potential tax benefits of the losses
carried forward are offset by a valuation allowance of the same amount as there
is substantial uncertainty that the losses will be used before they expire.
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10. RELATED PARTY TRANSACTIONS
During the period ending June 30 2002 consulting fees of $32,500 (2001:
$249,000) have been paid to other companies that employ other current and former
directors and officers of the company. Accrued liabilities at March 31 2002
include $82,500 (2001: $70,000) of amounts due to related parties under
management or consulting agreements.
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11. COMMITMENT
PATENT LICENSING AGREEMENT
On June 27 2001, the company entered into a short form sub-licensing agreement
for certain digital video delivery technology with an international designer and
supplier of high-tech internet streaming video and video-on-demand systems,
services and innovative end-to-end solutions.
In consideration of this sub-license, the company has agreed to issue $300,000
of its common shares on the date a long form agreement is signed. The parties
have yet to finalize this long form agreement. Based on an estimate of the
company's share price at December 31, 2001, the company would be required to
issue 6,000,000 shares upon finalization of a long form agreement.
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12. CONTINGENCY
On January 8 2002, the company was served with a writ regarding allegations of
intentional and negligent interference with business relationships. This writ
was also served to Ziracom Digital Communications, Inc., and three of its
directors. The plaintiffs in the lawsuit have claimed damages of approximately
$2,000,000. Company's counsel has concluded that it is reasonably possible that
an agreement on the amount of damages exigible will be met. The amount of
damages to be awarded (if any) however, is not determinable at this time and as
such, no amounts have been recorded in these financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the quarter ending June 30,2002, the company finalized its Alpha
- -Omega" Video Compression CODEC and commenced internal testing of its finished
product. While the acquisition of Ziracom Digital Communications Inc ("Ziracom")
was completed February 14, 2002, the Alpha-Omega software version 4+ for
streaming was not finished and required 5 months of additional development. The
acquisition on February 14, 2002 was completed by issuance of 8,655,139
restricted common shares of the Company for 100% of the issued and outstanding
shares of Ziracom.
Ziracom's primary asset is its "Alpha-Omega" Video Compression CODEC, which
offers a powerful solution to users needing high compression rates while
maintaining excellent video quality for video streaming applications, video file
downloads, and two way video conferencing.
This acquisition continues the company's focus on video compression technologies
to electronically deliver video signals for remote video surveillance, education
and entertainment, wireless hand-held computers, and video cell phones.
The Company has completed negotiations for a non-exclusive Marketing Agreement
with another company that has existing clients interested in the Alpha-Omega
software. This contract is expected to be executed before the end of August
2002. The Alpha-Omega software has a number of proprietary techniques to perform
video compression using an automated intelligent algorithm that selects in
real-time the most efficient combinations of its internal compression methods
for each scene and frame. The Alpha-Omega also incorporates additional
proprietary methods to reduce image macro blocking in low bandwidth
applications. The Alpha-Omega supports file formats of type ASF (streaming) and
AVI (video files).
In January 2002, the Company completed a 5-year licensing agreement with a
customer for $400,000. The Company received the entire $400,000 in January 2002,
and has recognized $40,000 of this as revenue in its financial statements for
the six months ending June 30, 2002. The remaining funds received will be
recognized over the remaining period of the license.
The Company intends to market the Alpha-Omega technology through its
contemplated Marketing Agreement and through its own in-house personnel. The
Company has interested parties who are currently assessing the Alpha-Omega
software. The applications for the Alpha-Omega include internet video streaming,
wireless video devices, video cell phones, cable & satellite television
broadcasts, remote security devices, remote news gathering, and downloading of
movies. Both the encoder and decoder can be customized to be compatible with
alternate platforms, custom solutions, and stand-alone solutions.
The Company will continue its research and development program to extend
this technology to include handheld PDA devices, and fully intends to license
the Alpha-Omega to semiconductor companies for embedding into their devices.
This research will continue to be carried out in Scottsdale, Arizona.
The Company recognizes that it will require additional financing even
though its Alpha-Omega software is now ready for market. Additional funding will
be required for continued development of its Alpha-Omega software, doing product
demonstrations, as well as general operating expenses for the Company. The
Company acknowledges that it currently does not have sufficient funds to carry
on its operation but management intends to seek financial assistance through
private loans from existing directors, shareholders and outside parties although
there can be no assurance that the Company will be able to secure this financial
assistance. As well, the Company anticipates revenue from its technology in the
next 60 days.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ending June 30, 2002, the Company had revenue of
$20,000, while the six-month results show revenue of $40,000. This represents
the first six months of a five (5) year license agreement for a total of
$400,000. These funds were all received in January 2002, but the revenue
recognition is being recorded over the five-year life of the license. During the
quarter ending June 30, 2002, the Company incurred losses of $304,042. For the
six months ended June 30, 2002, these losses amounted to $668,450. The losses
for the six-month period ending June 30, 2002 include depreciation and
amortization of $65,107 and amortization of debenture discount of $311,272. As
these are not cash expenses, the actual cash loss was significantly lower.
General and administrative expenses have been reduced to $25,750 for the six
months ending June 30, 2002, compared to $156,229 for the same period to June
30, 2001. Management and consulting fees have reduced to $112,016 at June 30,
2002, from $288,165 at June 30, 2001.
Operating expenses have been reduced significantly and will continue to decline
as most of the marketing activities are being conducted by another company on a
revenue sharing basis.
The 8% convertible debenture closed on July 6,2001, with the Company
receiving $1,000,000 less issue costs. Interest is payable quarterly and to
date, this interest has accrued and not been paid. At June 30, 2002, the accrued
interest amounted to $83,999. This includes $32,743 in the quarter ending June
30, 2002. The debenture is due June 6, 2003. The unconverted balance of this
debenture at June 30, 2002 is $873,242. The Lender has provided a waiver re
default on the outstanding interest. The debenture is convertible based on a
conversion formula. In addition to the debenture, the fund received warrants of
666,666 to purchase additional shares in the Company. These warrants have an
exercise price of approximately $0.40 per share. The Company is in discussions
with the Lender regarding the debt and both parties are actively working towards
a mutually satisfactory option to the ultimate repayment of this debt.
The floating conversion price for the convertible debentures is the lesser
of (i) 80% of the average of the three lowest closing bid prices of the common
stock for the twenty (20) trading days prior to the closing date, or (ii) 80% of
the average of the three lowest closing bid prices of the common stock for the
sixty (60) trading days prior to the conversion date, as defined in the
convertible debenture. The maximum number of shares of common stock that the
subscriber or group of affiliated subscribers may own after conversion at any
given time is 4.99%. In connection with the financing, the company entered into
certain covenants including, but not limited to, the following: (i) the company
may not redeem the convertible debentures without the consent of the holder;
(ii) the company will pay to certain finders a cash fee of ten percent (10%) of
the principal amount of the convertible debentures for location of the
financings; (iii) the company has agreed to incur certain penalties for untimely
delivery of the shares.
The Company further recognizes that its development schedule will be
delayed unless additional capital required is available when needed. The Company
anticipates revenue from licensing of its Alpha-Omega software in the next Sixty
days. In addition to this, the Company is exploring loans from private
investors, and additional loans from directors and/or existing shareholders
although there can be no assurance that these loans will be successfully
obtained. In the event that the Company is not able to obtain these loans
Inflation has not been a factor during the quarter ending March 31, 2002.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 8, 2002, the company was served with a writ regarding
allegations of intentional and negligent interference with business
relationships. This writ was also served to Ziracom Digital Communications,
Inc., and three of its directors. The plaintiffs in the lawsuit have
claimed damages of approximately $2,000,000.
The amount of damages to be awarded (if any) however, is not determinable
at this time and as such, no amounts have been recorded in these financial
statements.
ITEM 2. CHANGES IN SECURITIES.
There are no changes in the Company's securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults upon senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the six
months ended June 30, 2002.
ITEM 5. OTHER INFORMATION.
The Company has no other information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Company filed a Form 8-K in October 2001 re the acquisition of Ziracom
Digital Communications Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
E-VIDEOTV, INC.
Date August 19, 2002 By /s/ Robert G. Dinning
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Robert G. Dinning
Chairman and Chief Financial Officer
Date August 19, 2002 By /s/ Gianfranco Fiorio
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Gianfranco Fiorio
Chief Executive Officer