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 June 30, 2002
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 August 13, 2002, there were 101,745,089 shares of the registrant's common
stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
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. ("USA Video" or the "Company") designs and markets
to business customers streaming video and video-on-demand systems, services 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, multi-mode content
distribution, transaction data capture and reporting, e-commerce, specialized
engineering services, and Internet streaming hardware.
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 anticipates actively engaging 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 solutions. With this
approach, called StreamHQ , customers can leverage USVO's infrastructure and
technical expertise, while focusing on their own core business competencies.
StreamHQ 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 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 achieve a
return on investment in streaming media expenditures.
StreamHQ encompasses an end-to-end process 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 tailored an initial deployment product, Zmail, which uses StreamHQ 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.
3
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 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 can also be rapidly replicated to provide a
streaming utility in multiple Internet Data Centers around the world.
StreamHQ 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 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 technology that will help protect the
intellectual property of content owners. USVO also has a proprietary
still-image wavelet compression technology.
BUSINESS OBJECTIVES:
USVO has established the following near-term business objectives:
1. Establish StreamHQ 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 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 system,
including intellectual property licensing and operational support;
6. Expand StreamHQ 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 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
five wholly-owned subsidiaries: USA Video (California) Corp., USA Video Corp.,
USA Video Productions Inc., USA Video Technologies, Inc., and USVO, Inc. USA
Video's executive and corporate offices are located in Mystic, Connecticut, and
its Canadian offices are located in Vancouver, British Columbia.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to customer
programs and incentives, bad debts, inventories, investments, intangible assets,
4
income taxes, warranty obligations, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
We consider the following accounting policies to be both those most important to
the portrayal of our financial condition and the require the most subjective
judgment:
- Revenue recognition;
- Accounting for marketable securities; and
- Inventory valuation and related reserves.
Revenue recognition. Software revenue and other services are recognized in
accordance with the terms of the specific agreement, which is generally upon
delivery. Maintenance, support and service revenue are recognized ratably over
the term of the related agreement.
Accounting for marketable securities. We classify our investments in marketable
securities as "available for sale." We carry these investments at fair value,
based on quoted market prices, and unrealized gains and losses are included in
accumulated other comprehensive income (loss), which is reflected upon the sale
of our marketable securities in our statements of operations.
Inventory valuation and related reserves. Inventories are valued at the lower
of cost or market on a first-in, first-out basis. We use a standard cost system
for purposes of determining cost; the standards are adjusted as necessary to
ensure they approximate actual costs. We write down or reserve for estimated
obsolete or excess inventory based upon assumptions about future demand and
market conditions. We compare current inventory levels on a product basis to
our current sales forecast in order to assess our inventory reserve balance.
Our sales forecasts are based on economic conditions and trends (both current
and projected), anticipated customer demand and acceptance of our products,
current products, expected future products and various other assumptions. If
actual market conditions are less favorable than those projected by management,
additional write-downs may be required.
RESULTS OF OPERATIONS
Sales
Sales for the six-month period ended June 30, 2002 were $89,576, compared to
revenue of $34,235 for the six-month period ended June 30, 2001. Sales for the
three-month period ended June 30, 2002 were $63,323 compared to $33,175
three-month period ended June 30, 2001. The increase in revenue for the three
month ended June 30, 2002 is attributable to the proceeds from a government
program based on product and services provided on a December 31, 2000 project.
Starting in the fourth quarter of 2000 and continuing during the next 24 months,
the Company concentrated its managerial and technical efforts on the remaining
critical stages of developing and refining its new web and content delivery
infrastructure (StreamHQ).
Services and/or systems based on this infrastructure are intended to become the
Company's core business in place of its custom-built systems for video encoding,
decoding and streaming, the market for which has diminished significantly in the
last 18 to 21 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 single-purpose hardware systems of this type. As a result, profit
margins on the Company's media systems have continued to decline, and the
Company has lowered prices in the face of declining demand. A change in focus
was necessary to capture the market for a more diverse multi-purpose
infrastructure.
This change in focus required shifting technical and managerial resources from
sales of the old line of products to systems/services offerings based on the new
infrastructure. Additionally, the Company was required to make a significant
investment in the computer hardware and development of the software
functionality that are at the core of this infrastructure.
5
Recently, due to the change in capital markets, funding for an internal sales
and marketing team was unable to be maintained. Therefore, the Company has
focused on partnering relationships with other companies to complete the
execution of it StreamHQ -based business plan.
Cost of Sales
The cost of sales for the six months ended June 30, 2002 was $57,542, as
compared to $20,566 for the comparable period of 2001. For the three-month
period ended June 30, 2002, the cost of sales was $45,470 as compared to $19,843
for the comparable period 2001. The increase in cost of sales is directly
attributable to the increase 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. Due to
market conditions, Management has implemented consolidation procedures to reduce
the daily cost of Selling, General and Administrative expenses.
Selling, General and Administrative expenses for the three months ended June 30,
2002 decreased $341,971 to $296,519 from $638,490 for the three months ended
June 30, 2001. The six months ended June 30, 2002 these cost decreased by
$413,249 to $647,747 from $1,060,996 for the comparable period. The reduction
was due to consolidation efforts of management.
Professional expense for the three months ended June 30, 2002, decreased to
$30,856 from $104,892 for the comparable period of 2001. The six months ended
June 30, 2002 these cost decreased to $71,804 from $175,133 for the comparable
period. The Company utilized its staff to perform tasks previously outsourced.
Product marketing expenses for the three months ended June 30, 2002, decreased
to $29,634 from $200,170 for the comparable period of 2001. The six months
ended June 30, 2002 these cost decreased to $93,137 from $314,092 for the
comparable period. The reduction was due to consolidation efforts of
management.
Administrative/Office expenses for the three months ended June 30, 2002,
decreased to $100,890 from $189,378 for the comparable period of 2001. The six
months ended June 30, 2002 these cost decreased to $185,419 from $274,559 for
the comparable period. The reduction was due to consolidation efforts of
management.
The Company has arranged for additional staff/consultants to 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 . Research and development expenses decreased by 46% to
$235,581 for the six months ended June 30, 2002, from $439,609 for the
comparable period in 2001 and by 91% to $17,436 for the three months ended June
30, 2002 from $204,375 for the comparable period in 2001. The reduction was due
to consolidation efforts of management.
As the Company consolidates its business, its product development, product
marketing, and other general and administrative expenses will continue to
decrease.
Non-Cash Compensation Charges
Non-cash compensation charges for the six months ended June 30, 2002 reflected
charges in the first quarter of 2002 of $12,718 and the second quarter of 2002
of $19,077 was due to the amortization of a portion of the options issued to
consultants. Non-cash compensation charges for the six months ended June 30,
2001 reflected charges in the first quarter of 2001 of $565,597. Of this amount,
$462,097 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 Toronto 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
6
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 during the six months ended June 30, 2001. The
Company also incurred a charge of $6,000 for the issuance of employee stock
options.
Other Expense
The Company sold the stock of related registered companies for the three months
ended June 30, 2002 for a loss of $93,319. As of December 31, 2001, the Company
reported change in unrealized loss on investments for $86,487.
Net Losses
To date, the Company has not achieved profitability and, in fact, expects to
incur substantial net losses for at least the remainder of 2002. The Company's
net loss for the six months ended June 30, 2001 was $1,241,537 as compared with
a net loss of $2,217,876 for the six months ended June 30, 2001 and for the
three months ended June 30, 2002 was $564,757 as compared to $919,808 for the
comparable period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's had a cash position of $125,212, compared to
$104,238 at December 31, 2001. The Company's principal sources of cash during
the three months ended June 30, 2002, were proceeds of $700,000 from the
issuance of stock in a private placement. This was substantially offset by
$714,810 of cash used in operating activities.
The Company will require additional financing to fund current operations through
the remained of 2002. The Company has historically satisfied its capital needs
primarily by issuing equity securities. The Company will require an additional
$1.5 million to $2.0 million to finance operations for the rest of fiscal 2002
and intends to seek such financing through sales of its equity securities.
Assuming the aforementioned $1.5 million to $2.0 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 $1.5 million to $2.0 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 second quarter of 2002. 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.
7
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 June 30, 2002, the Company completed an offering, which
it commenced in May 2002, of units. Each unit consisted of one share of common
8
stock and one warrant to acquire an additional share at $0.085 per share ($0.13
CN) by June 2004. On completion of the offering, a total of 10,000,000 units
were issued at $0.07 per unit ($0.11 CN) for total proceeds of $700,000
(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. Three officers and directors of the Company, one employee of the
Company, six (6) additional unaffiliated nonaccredited investors, and eleven
(11) 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.
The Company held an annual meeting of shareholders on June 28, 2002, at Groton,
Connecticut. At the meeting the shareholders voted to retain Anton Drescher,
Edwin Molina and Robert Smith as Directors of the Company.
Also at the meeting, the shareholders approved the appointment of Goldstein
Golub Kessler LLP as auditors for the year ending December 31, 2002.
Matter Voted Upon No. of Votes For No. of Votes Against No. of Votes Withheld
- ----------------- ---------------- -------------------- ---------------------
1. Election of Directors 51,486,814 nil 543,723
2. Appoint Goldstein Golub
Kessler LLP as auditors
of the Company for the
year ending
December 31, 2002 51,629,330 336,556 64,908
1. Any other matters 50,820,355 1,004,913 205,519
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit(s)
Exhibit 1 - Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(i) On April 15, 2002, the registrant filed a report on Form 8-K
wherein the registrant reported that it had placed eight of
its twenty employees in the Connecticut office on a
temporary furlough.
(ii) On May 14, 2002, the registrant filed a report on Form 8-K
wherein the registrant reported that the prominent
intellectual property and technology law firm Fish &
Richardson P.C. (www.fr.com) will commence protection of the
registrant's store-and-forward video-on-demand U.S. patent
(number 5,130,792), beginning with an aggressive licensing
program.
(iii) On May 17, 2002, the Registrant announced that Daniel
Kinnaman and the Company have mutually agreed to terminate
Mr. Kinnaman's employment as Vice President of Sales and
Marketing, effective immediately.
9
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: August 13, 2002 By: /s/ Anton J. Drescher
--------------------------------
Name: Anton J. Drescher
Title: Chief Financial Officer
10
Exhibit 1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Edwin Molina, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of USA Video Interactive Corp on Form 10-Q for the quarterly period ended
June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form
10-Q fairly presents in all material respects the financial condition and
results of operations of USA Video Interactive Corp.
By: /s/ Edwin Molina
-----------------------------------
Name: Edwin Molina
Title: President and Chief Executive
Officer
Date: August 13, 2002
I, Anton J. Drescher, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of USA Video Interactive Corp on Form 10-Q for the quarterly period ended
June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form
10-Q fairly presents in all material respects the financial condition and
results of operations of USA Video Interactive Corp.
By: /s/ Anton J. Drescher
------------------------------------
Name: Anton J. Drescher
Title: Secretary and Chief Financial
Officer
Date: August 13, 2002
F1
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
F2
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATED IN US DOLLARS)
JUNE 30, DECEMBER 31,
2002 2001
------------- --------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 125,212 $ 104,238
Marketable securities - related parties . . . . . . . . . . . . . . . . . - 42,616
Accounts receivable, net of allowance for doubtful accounts $-0-. . . . . 22,671 30,900
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,322 12,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . 13,122 21,613
------------- --------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 197,327 211,367
Property and Equipment - at cost, net of accumulated
depreciation of $836,603 and $573,015, respectively . . . . . . . . . . . 836,751 1,100,339
Other Assets, net of accumulated amortization of $9,677
and $8,016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . 68,811 70,472
Deferred Tax Assets, net of valuation allowance
of $7,667,000 and $7,215,000, respectively. . . . . . . . . . . . . . . . - -
------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,102,889 $ 1,382,178
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . $ 1,140,446 $ 948,417
Due to related parties. . . . . . . . . . . . . . . . . . . . . . . . . . 75,212 91,480
------------- --------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . 1,215,658 1,039,897
------------- --------------
Commitments and Contingencies
Stockholders' Equity (Deficiency):
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 101,745,088 and 91,745,088 shares, respectively. 30,192,071 29,492,071
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . - (86,487)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,304,840) (29,063,303)
------------- --------------
STOCKHOLDERS' EQUITY (DEFICIENCY). . . . . . . . . . . . . . . . . . . (112,769) 342,281
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY). . . . . . . . $ 1,102,889 $ 1,382,178
============= ==============
SEE ACCOMPANYING NOTES
F3
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN US DOLLARS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Revenue. . . . . . . . . . . . . . . . . $ 63,323 $ 33,175 $ 89,576 $ 34,235
--------------- --------------- --------------- ---------------
Expenses:
Cost of sales. . . . . . . . . . . . . 45,470 19,843 57,542 20,566
Research and development . . . . . . . 17,436 204,375 235,581 439,609
Selling, general and administrative. . 296,519 638,490 647,747 1,060,996
Depreciation and amortization. . . . . 156,313 91,429 265,250 171,977
Noncash compensation charges . . . . . 19,077 - 31,795 565,597
--------------- --------------- --------------- ---------------
Total expenses . . . . . . . . . . . . . 534,815 954,137 1,237,915 2,258,745
--------------- --------------- --------------- ---------------
Loss from operations . . . . . . . . . . (471,492) (920,962) (1,148,339) (2,224,510)
--------------- --------------- --------------- ---------------
Other income (expense)
Interest income. . . . . . . . . . . . 54 1,443 121 5,034
Other. . . . . . . . . . . . . . . . . (93,319) (289) (93,319) 1,600
--------------- --------------- --------------- ---------------
(93,265) 1,154 (93,198) 6,634
--------------- --------------- --------------- ---------------
Net loss . . . . . . . . . . . . . . . . $ (564,757) $ (919,808) $ (1,241,537) $ (2,217,876)
=============== =============== =============== ===============
Net loss per share - basic and diluted . $ (.01) $ (.01) $ (.01) $ (.03)
=============== =============== =============== ===============
Weighted-average number of common
shares outstanding - basic and diluted. 92,074,758 84,373,990 91,910,834 83,331,719
=============== =============== =============== ===============
SEE ACCOMPANYING NOTES
F4
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(STATED IN US DOLLARS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2002 2001 2002 2001
---------------------------- --------------- --------------- ---------------
Net loss. . . . . . . . . . . . . . . . . $ (564,757) $ (919,808) $ (1,241,537) $ (2,217,876)
Other comprehensive income:
Change in unrealized loss on marketable
securities. . . . . . . . . . . . . 81,811 (64,684) 86,487 (97,796)
---------------------------- --------------- --------------- ---------------
Comprehensive loss. . . . . . . . . . . . $ (482,946) $ (984,492) $ (1,155,050) $ (2,315,672)
============================ =============== =============== ===============
SEE ACCOMPANYING NOTES
F5
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(STATED IN US DOLLARS)
(UNAUDITED)
COMMON STOCK ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT LOSS DEFICIT EQUITY (DEFICIENCY)
----------- ----------- --------------- ------------- ---------------------
Balance at December 31, 2001. . . . . . 91,745,088 $29,492,071 $ (86,487) $(29,063,303) $ 342,281
Issuance of common stock and
common stock warrants for cash . . . . 10,000,000 700,000 - - 700,000
Change in unrealized loss on marketable
securities. . . . . . . . . . . . . . - - 86,487 - 86,487
Net loss. . . . . . . . . . . . . . . . - - - (1,241,537) (1,241,537)
Balance at June 30, 2002. . . . . . . . 101,745,088 $30,192,071 $ - $(30,304,840) $ (112,769)
=========== =========== =============== ============= =====================
SEE ACCOMPANYING NOTES
F6
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN US DOLLARS)
SIX MONTHS ENDED JUNE 30, 2002 2001
(UNAUDITED)
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,241,537) $(2,217,876)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 265,249 171,977
Noncash compensation charge . . . . . . . . . . . . . . . . . . . . . 31,795 565,597
Realized loss on sale of marketable securities - related parties. . . 93,319 -
Changes in operating assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . . . . . . . . 8,229 102,753
Increase in inventory . . . . . . . . . . . . . . . . . . . . . . . (24,322) -
Decrease in prepaid expenses and other current assets . . . . . . . 8,491 82,337
Increase in other assets (4,000)
Increase (decrease) in accounts payable and accrued expenses. . . . 160,234 (115,586)
Decrease in accounts payable and accrued expenses -
related parties. . . . . . . . . . . . . . . . . . . . . . . . . - (20,830)
Increase (decrease) in due to related parties . . . . . . . . . . . (16,268) 42,348
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . (714,810) (1,393,280)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net. . . . . . . . . . . . . . . - (422,492)
Proceed from sale of marketable securities - related parties. . . . . 35,784 -
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . . . . . . . 35,784 (422,492)
------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock. . . . . . . . . . . . . . 700,000 1,333,260
Proceeds from the issuance of common stock upon exercise of warrants
warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 60,859
Loans from related parties. . . . . . . . . . . . . . . . . . . . . . - 299,916
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . 700,000 1,694,035
------------ ------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . 20,974 (121,737)
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . 104,238 231,197
------------ ------------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . $ 125,212 $ 109,460
============ ============
SEE ACCOMPANYING NOTES
F7
USA VIDEO INTERACTIVE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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, 2001.
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 June 30, 2002 and
2001.
NOTE C - COMMON STOCK
On June 28, 2002, the Company issued 7,085,000 units to investors at $.07 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.085 per share.
On June 28, 2002, the Company issued 2,915,000 units to employees at $.07 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.085 per share.
NOTE D - STOCKHOLDERS' EQUITY (DEFICIENCY)
During January 2002 the Company issued 925,000 options to purchase common stock
to certain service providers of the Company under the 2001 Plan. The stock
options are exercisable at a price of $0.50 (U.S.) per share for a term of two
F8
USA VIDEO INTERACTIVE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
years from the date of grant. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") 123, the Company has charged to
operations for the six-months and three-month period ended June 30, 2002,
respectively, approximately $32,000 and 19,000 which is based on the fair value
of the stock options as services are provided. At June 30, 2002 since such
options have not yet vested, this amount is included in accounts payable and
accrued expenses in the accompanying consolidated balance sheet.
NOTE E - 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.