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UNITED STATES
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 JULY 31, 2003
COMMISSION FILE NUMBER 0-21785
___________________
NEW VISUAL CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 95-4543704
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5920 FRIARS ROAD, SUITE 104
SAN DIEGO, CALIFORNIA 92108 (619) 692-0333
(Address of principal executive offices, (Registrant's telephone number,
including zip code) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the issuer's Common Stock, par value $.001 per
share, outstanding as of September 12, 2003, was 68,824,080.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ITEM I - FINANCIAL STATEMENTS
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
INDEX TO FORM 10-Q
JULY 31, 2003
Page Nos.
---------
PART I - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 1
At July 31, 2003 (Unaudited) and October 31, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) 2
For the Nine Months Ended July 31, 2003 and 2002
For the Period from November 1, 1999 to July 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) 3
For the Three Months Ended July 31, 2003 and 2002
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' 4 - 5
EQUITY (Unaudited)
For the Nine Months Ended July 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 6 - 7
For the Nine Months Ended July 31, 2003 and 2002
For the Period from November 1, 1999 to July 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8 - 27
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 28 - 33
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 33
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 33
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 34 - 35
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 35 - 36
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
July 31, October 31,
2003 2002
------------- -------------
(Unaudited)
Current Assets:
Cash $ 117,578 $ 311,577
Other receivable from officers 9,154 10,032
Other current assets 61,562 1,650
------------- -------------
Total Current Assets 188,294 323,259
Property and Equipment - Net of accumulated depreciation of $415,880
at July 31, 2003 and $397,159 at October 31, 2002, respectively 45,812 64,533
Technology License and Capitalized Software Development Fee 5,751,000 5,751,000
Projects under Development 2,178,831 2,178,831
Other Assets 14,679 14,679
------------- -------------
Total Assets $ 8,178,616 $ 8,332,302
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable $ 1,163,000 $ 954,500
Notes payable 730,311 971,407
Accounts payable and accrued expenses 1,711,499 2,247,698
License and development fees payable 138,000 734,000
------------- -------------
Total Liabilities 3,742,810 4,907,605
------------- -------------
Redeemable Series B Preferred Stock 3,192,000 3,192,000
------------- -------------
Commitments, Contingencies and Other Matters
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series A junior participating preferred stock; -0- shares
issued and outstanding -- --
Common stock - $0.001 par value; 100,000,000 shares authorized;
67,367,482 and 49,787,069 shares issued and outstanding at
July 31, 2003 and October 31, 2002, respectively 67,367 49,787
Additional paid-in capital 50,517,794 47,097,830
Unearned financing fees (22,391) (214,952)
Unearned compensation (673,382) (331,581)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during the development stage (36,345,549) (34,068,354)
------------- -------------
Total Stockholders' Equity 1,243,806 232,697
------------- -------------
Total Liabilities and Stockholders' Equity $ 8,178,616 $ 8,332,302
============= =============
See notes to condensed consolidated financial statements.
1
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
July 31, For the Period from
----------------------------- November 1, 1999 to
2003 2002 July 31, 2003
------------- ------------- -------------
REVENUES $ -- $ -- $ 12,200
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales -- -- 21,403
Projects costs written-off -- -- 114,613
Acquired in-process research and
development expenses -- -- 6,050,000
Compensatory element of stock issuances
related to selling, general and
administrative expenses 1,659,429 1,601,295 10,936,023
Research and development 71,401 1,400,019 3,024,725
Selling, general and administrative expenses 1,523,308 2,504,605 11,207,799
Litigation settlement -- -- 1,000,000
Loss on disposal of equipment -- -- 7,500
------------- ------------- -------------
TOTAL OPERATING EXPENSES 3,254,138 5,505,919 32,362,063
------------- ------------- -------------
OPERATING LOSS (3,254,138) (5,505,919) (32,349,863)
------------- ------------- -------------
OTHER (INCOME) EXPENSES:
Interest expense 235,730 1,004,986 1,628,522
Amortization of unearned financing costs 261,327 861,040 3,841,164
Gain on litigation settlement (1,474,000) -- (1,474,000)
------------- ------------- -------------
TOTAL OTHER EXPENSES (INCOME) (976,943) 1,866,026 3,995,686
------------- ------------- -------------
NET LOSS $ (2,277,195) $ (7,371,945) $(36,345,549)
============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.19)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 57,206,153 39,398,658
============= =============
See notes to condensed consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
July 31,
-----------------------------
2003 2002
------------- -------------
REVENUES $ -- $ --
------------- -------------
OPERATING EXPENSES:
Compensatory element of stock issuances related to
selling, general and administrative expenses 326,436 139,142
Research and development -- 121,088
Selling, general and administrative expenses 533,165 1,128,897
------------- -------------
TOTAL OPERATING EXPENSES 859,601 1,389,127
------------- -------------
OPERATING LOSS (859,601) (1,389,127)
------------- -------------
OTHER EXPENSES:
Interest expense 111,610 555,677
Amortization of unearned financing costs 51,176 337,728
------------- -------------
TOTAL OTHER EXPENSES 162,786 893,405
------------- -------------
NET LOSS $ (1,022,387) $ (2,282,532)
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.05)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 65,114,315 47,470,923
============= =============
See notes to condensed consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2003
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
Nine Months Ended July 31, 2003:
- --------------------------------
Balance - October 31, 2002 49,787,069 $ 49,787 $ 47,097,830
Issuance of common stock for cash ($.15 to $.35 per share) 15,253,411 15,253 2,642,562
Issuance of common stock for conversion of promissory notes
and interest ($.39 to $1.00 per share) 775,941 776 286,974
Issuance of common stock for deferred payroll 88,710 89 54,911
Issuance of common stock under consulting agreements
($.41 to $.64 per share) 3,621,875 3,622 1,535,628
Cashless exercise of warrants 40,476 40 (40)
Cancellation of shares under legal settlement (2,200,000) (2,200) (1,471,800)
Stock offering costs -- -- (159,017)
Value assigned to beneficial conversion feature -- -- 68,766
Value assigned to warrants issued to consultant -- -- 454,380
Value assigned to options issued to consultant -- -- 7,600
Amortization of unearned compensation expense -- -- --
Amortization of unearned financing cost -- -- --
Net loss -- -- --
------------- ------------- -------------
Balance - July 31, 2003 67,367,482 $ 67,367 $ 50,517,794
============= ============= =============
Unearned Unearned
Financing Compensation
Costs Expense
------------- -------------
Nine Months Ended July 31, 2003:
- --------------------------------
------------- -------------
Balance - October 31, 2002 $ (214,952) $ (331,581)
Issuance of common stock for cash ($.15 to $.35 per share) -- --
Issuance of common stock for conversion of promissory notes
and interest ($.39 to $1.00 per share) -- --
Issuance of common stock for deferred payroll -- --
Issuance of common stock under consulting agreements
($.41 to $.64 per share) -- (1,294,000)
Cashless exercise of warrants -- --
Cancellation of shares under legal settlement -- --
Stock offering costs -- --
Value assigned to beneficial conversion feature (68,766) --
Value assigned to warrants issued to consultant -- (454,380)
Value assigned to options issued to consultant -- (7,600)
Amortization of unearned compensation expense -- 1,414,179
Amortization of unearned financing cost 261,327 --
Net loss -- --
------------- -------------
Balance - July 31, 2003 $ (22,391) $ (673,382)
============= =============
See notes to condensed consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2003
Total
Accumulated Stockholders'
Deficit Equity
------------- -------------
Nine Months Ended July 31, 2003:
Balance - October 31, 2002 $(46,368,387) $ 232,697
Issuance of common stock for cash ($.15 to $.35 per share) -- 2,657,815
Issuance of common stock for conversion of promissory notes
and interest ($.39 to $1.00 per share) -- 287,750
Issuance of common stock for deferred payroll
($.62 per share) --
Issuance of common stock under consulting agreements -- 55,000
($.41 to $.64 per share) -- 245,250
Cashless exercise of warrants -- --
Cancellation of shares under legal settlement -- (1,474,000)
Stock offering costs -- (159,017)
Value assigned to beneficial conversion feature -- --
Value assigned to warrants issued to consultant -- --
Value assigned to options issued to consultant -- --
Amortization of unearned compensation expense -- 1,414,179
Amortization of unearned financing cost -- 261,327
Net loss (2,277,195) (2,277,195)
------------- -------------
Balance - July 31, 2003 $(48,645,582) $ 1,243,806
============= =============
Accumulated deficit as of November 1, 1999 $(12,300,033)
Accumulated deficit during development stage (November 1, 1999 to July 31, 2003) (36,345,549)
-------------
Total Accumulated Deficit as of July 31, 2003 $(48,645,582)
=============
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
July 31, For the Period from
----------------------------- November 1, 1999 to
2003 2002 July 31, 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,277,195) $ (7,371,945) $(36,371,205)
Adjustments to reconcile net loss to net cash used
in operating activities:
Consulting fees and other compensatory
elements of stock issuances 1,659,429 1,601,295 10,936,023
Stock issued for acquired in-process
research and development -- -- 6,050,000
Stock issued for litigation settlement -- -- 1,000,000
Projects costs written-off -- -- 114,613
Amortization of unearned financing costs 261,327 861,040 3,841,164
Depreciation 18,721 61,937 311,846
Loss on disposal of equipment -- 3,596 7,500
Interest charges related to convertible notes -- 497,375 --
Unusual item - gain on litigation settlement (1,474,000) -- (1,474,000)
Changes in Assets (Increase) Decrease:
Other current assets (59,912) 70,979 (104,182)
Due from related parties 877 (42,435) 64,887
Projects under development -- (133,659) (2,159,699)
Other assets -- 19,502 (9,679)
Changes in Liabilities Increase (Decrease):
Accounts payable and accrued expenses (272,006) 790,965 2,383,050
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (2,142,759) (3,641,350) (15,409,682)
------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment -- (2,513) (408,548)
Acquisition of license (596,000) (965,000) (1,671,000)
Proceeds from sale of equipment -- -- 145,616
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (596,000) (967,513) (1,933,932)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,657,813 1,978,925 13,458,230
Proceeds from loan payable -- 500,000 1,456,886
Proceeds from exercise of warrants -- 728,000 933,000
Proceeds from convertible notes payable 287,000 1,507,750 2,697,250
Repayments of notes payable (241,096) -- (741,096)
Offering costs related to stock issuances (159,017) (241,518) (406,010)
Purchase of treasury stock -- (82,000) --
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,544,700 4,391,157 17,398,260
------------- ------------- -------------
(DECREASE) INCREASE IN CASH (194,059) (217,706) 54,646
CASH AND CASH EQUIVALENTS - BEGINNING 311,577 294,802 62,872
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 117,518 $ 77,096 $ 117,518
============= ============= =============
See notes to condensed consolidated financial statements.
6
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
For the Nine Months Ended
July 31, For the Period from
----------------------------- November 1, 1999 to
2003 2002 July 31, 2003
------------- ------------- -------------
Cash paid during the period for:
Interest $ 54,904 $ -- $ 55,430
============= ============= =============
Income taxes $ -- $ -- $ --
============= ============= =============
Non-Cash Investing and Financing Activities:
Principal and interest on convertible notes
satisfied by issuance of common stock $ 287,750 $ 2,039,625 $ 2,471,376
============= ============= =============
Common stock issued in the acquisition of license $ -- $ 750,000 $ 750,000
============= ============= =============
Redeemable Series B Preferred stock issued in
the acquisition of license $ -- $ 3,192,000 $ 3,192,000
============= ============= =============
See notes to condensed consolidated financial statements.
7
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
New Visual Corporation and its wholly owned operating subsidiaries, NV
Entertainment, Inc., Impact Multimedia, Inc. and NV Technology, Inc.
(formerly New Wheel Technology, Inc.) ("New Wheel") (collectively, the
"Company"). All significant intercompany balances and transactions have
been eliminated.
BUSINESS AND CONTINUED OPERATIONS
New Visual Corporation was incorporated under the laws of the State of
Utah on December 5, 1985.
In November of 1999, the Company began to focus its business activities
on the development of telecommunications technologies. Pursuant to such
plan, in February of 2000, the Company acquired New Wheel Technology,
Inc., a development stage, California-based, technology company, which
now operates as the Company's wholly-owned subsidiary, NV Technology,
Inc., a Delaware corporation. As a result of the change in business
focus, the Company became a development stage entity commencing
November 1, 1999.
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America, which contemplate continuation of the
Company as a going concern. However, for the nine months ended July 31,
2003, the Company incurred a net operating loss of approximately
$2,277,000 and had a working capital deficiency of $3,554,516. The
Company has limited finances and requires additional funding in order
to accomplish its growth objectives and marketing of its products and
services. There is no assurance that the Company can reverse its
operating losses, or that it can raise additional capital to allow it
to expand its planned operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
The Company operates in two business segments, the production of motion
pictures, films and videos (entertainment segment) and development of
telecommunications technologies (telecommunication segment). The
success of the Company's entertainment business is dependent on future
revenues from the Company's current joint venture production agreement
8
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
(CONTINUED)
BUSINESS AND CONTINUED OPERATIONS (CONTINUED)
The success of the Company's telecommunication segment is dependent
upon the successful completion of development and marketing of its
broadband technology. No assurance can be given that the Company can
complete such technology, or that it can commercialize it on a
large-scale basis or at a feasible cost. No assurance can be given that
such technology will receive market acceptance.
Until the commencement of sales from either segment, the Company will
have no operating revenues, but will continue to incur substantial
operating expenses, capitalized costs and operating losses.
Management's business plan will require additional financing. To
support its operations during the nine months ended July 31, 2003, the
Company borrowed $287,000 represented by convertible promissory notes.
During the nine months ended July 31, 2003, the Company received
$2,657,813 from the sale of 15,233,411 shares of its common stock. The
Company is exploring other financing alternatives, including private
placements and public offerings.
The Company's ability to continue as a going concern is dependent upon
obtaining additional financing. These consolidated financial statements
do not include any adjustments relating to the recoverability of
recorded asset amounts that might be necessary as a result of the above
uncertainty.
The accompanying unaudited condensed 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 Article 10 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 management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation, have
been included. Operating results for the nine-month period ended July
31, 2003 are not necessarily indicative of the results that may be
expected for the year ending October 31, 2003.
The condensed consolidated balance sheet at October 31, 2002 has been
derived from the audited consolidated financial statements at that
date, but does not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
9
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
(CONTINUED)
BUSINESS AND CONTINUED OPERATIONS (CONTINUED)
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant's Annual Report on
Form 10-K for the year ended October 31, 2002.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PROJECT UNDER DEVELOPMENT
Statement of Positions SOP-00-2, "Accounting by Producers or
Distributors of Films" ("SOP-00-2"), requires that film costs be
capitalized and reported as a separate asset on the balance sheet. Film
costs include all direct negative costs incurred in the production of a
film, as well as allocations of production overhead and capitalized
interest. Direct negative costs include cost of scenario, story,
compensation of cast, directors, producers, writers, extras and staff,
cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2
also requires that film costs be amortized and participation costs
accrued, using the individual-film-forecast-method-computation method,
which amortizes or accrues such costs in the same ratio that the
current period actual revenue (numerator) bears to the estimated
remaining unrecognized ultimate revenue as of the beginning of the
fiscal year (denominator).
In addition, SOP-00-2 also requires that if an event or change in
circumstances indicates that an entity should assess whether the fair
value of a film is less than its unamortized film costs, then an entity
should determine the fair value of the film and write-off to the
statement of operations the amount by which the unamortized capital
costs exceeds the film's fair value. The Company adopted the standard
effective November 1, 2001, which did not have a material effect on the
Company's financial position or results of operations.
The Company commences amortization of capitalized film costs and
accrues expenses of participation costs when a film is released and it
begins to recognize revenue from the film.
10
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES CONDENSED TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
Amounts allocated to acquired-in-process research and development costs
from business combinations are charged to earnings at the consummation
of the acquisition.
NET LOSS PER COMMON SHARE
Basic net loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the periods
presented.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility
for the Company's computer software is generally based upon achievement
of a detail program design free of high-risk development issues and the
completion of research and development on the product hardware in which
it is to be used. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized computer
software development costs requires considerable judgment by management
with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware
technology.
Amortization of capitalized computer software development costs
commences when the related products become available for general
release to customers. Amortization is provided on a product-by-product
basis. The annual amortization is the greater of the amount computed
using (a) the ratio that current gross revenue for a product bears to
the total of current and anticipated future gross revenue for that
product, or (b) the straight-line method over the remaining estimated
economic life of the product.
11
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (CONTINUED)
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, the capitalized
costs of each software product is then valued at the lower of its
remaining unamortized costs or net realizable value.
The Company has no amortization expense for the nine months ended July
31, 2003 and 2002 for its capitalized software development costs.
STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting
standards for stock-based employee compensation plans. This statement
allows companies to choose between the fair value-based method of
accounting as defined in this statement and the intrinsic value-based
method of accounting as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance
provided by APB 25, as permitted for stock-based compensation relative
to the Company's employees. Stock and options granted to other parties
in connection with providing goods and services to the Company are
accounted for under the fair value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of SFAS Statement No. 123".
This statement amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148
also requires that those effects be disclosed more prominently by
specifying the form, content, and location of those disclosures. The
Company has adopted the increased disclosure requirements of SFAS No.
148 for the nine months ended July 31, 2003.
12
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The additional disclosures required by SFAS No. 148 are as follows:
Nine Months Ended
July 31,
-----------------------------
2003 2002
------------- -------------
Net loss attributable to common stockholders, as
reported $ (2,277,195) $ (7,371,945)
Add: Stock-based employee compensation
expense included in reported net loss
applicable to common stockholders -- --
Less: Total stock-based employee
compensation expense determined under the
fair value-based method of all awards (713,374) (3,335,228)
------------- -------------
Proforma net loss attributable to common
stockholders $ (2,990,569) $(10,707,173)
============= =============
Basic and Diluted Net Loss Attributable to
Common Stockholders:
As reported $ (0.04) $ (0.19)
============= =============
Proforma $ (0.05) $ (0.27)
============= =============
IMPAIRMENT OF LONG-LIVED ASSETS
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company evaluates its long-lived assets
for financial impairment, and continues to evaluate them as events or
changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way public
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to stockholders.
13
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will
distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent that meet the
criteria for classification as an extraordinary item. The Company
adopted SFAS No. 145 as of the six months ended April 30, 2003,. The
adoption had no significant impact on its financial position and
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146
has been adopted as of April 30, 2003 and had no significant impact on
its financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires a company, at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN
45 are effective for guarantees issued or modified after December 31,
2002 and adoption of the disclosure requirements are effective for the
Company during the first quarter ending January 31, 2003. The adoption
of FIN 45 had no significant impact on its consolidated financial
position or results of operations.
14
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial condition.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. This Statement is effective for
contracts entered into or modified after June 30, 2003, except as
stated below and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The provisions of
this Statement that relate to Statement 133 Implementation Issues that
have been effective for fiscal quarters that began prior to June 15,
2003 should continue to be applied in accordance with their respective
effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as
new contracts entered into after June 30, 2003. The Company has not yet
evaluated the impact from SFAS No. 149 on its financial position and
results of operations, if any.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for classification and
measurement in the statement of financial position of certain financial
instruments with characteristics of both liabilities and equity. It
requires classification of a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS No. 150
is effective for financial instruments entered into or modified after
May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of SFAS No. 150 will have on
its financial position and results of operations.
15
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT
On April 17, 2002, the Company entered into a development and license
agreement with Adaptive Networks, Inc. ("ANI") to acquire a worldwide,
perpetual license to ANI's Powerstream technology, intellectual
property, and patent portfolio for use in products relating to all
applications in the field of the copper telephone wire
telecommunications network. In consideration of the grant of the
license, the Company assumed certain debt obligations of ANI to Zaiq
Technologies, Inc. ("Zaiq") and TLSI, Inc. ("TLSI"). The Company then
issued 3,192 shares of its Series B Preferred Stock, valued at
$3,192,000, with a liquidation preference of $1,000 per share and paid
$250,000 in cash to Zaiq in satisfaction of the Zaiq debt. The Company
also issued 624,480 shares of common stock, valued at $750,000, to TLSI
in satisfaction of the TLSI debt. The value of the consideration issued
by the Company in connection with the license agreement totaled
$4,192,000.
The Company also agreed to pay ANI a development fee of $1,559,000 for
software development services and to pay ANI a royalty equal to a
percentage of the net sales of products sold by the Company and license
revenue received by the Company. As of July 31, 2003, $138,000 of this
development fee was outstanding.
The Company capitalized the consideration issued in connection with the
license fee and development fee totaling $5,751,000. The Company's
technical employees and advisors concluded that, as of March 2002, the
Company had established technological feasibility for its ultimate
telecommunication product to be marketed. Additional development
services and testing, to be performed principally by ANI, are necessary
to complete the product development.
The success of the Company's telecommunication segment is dependent
upon the successful completion of development and testing of its
broadband technology currently under development by its wholly owned
subsidiary, NV Technology, Inc. No assurance can be given that the
Company can complete development of such technology, or that with
respect to such technology that is fully developed, it can be
commercialized on a large-scale basis or at a feasible cost. No
assurance can be given that such technology will receive market
acceptance.
16
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - "STEP INTO LIQUID" - FEATURE LENGTH FILM
In April 2000, the Company entered into a joint venture production
agreement to produce a feature length film for theatrical distribution.
The Company agreed to provide the funding for the production in the
amount of up to $2,250,000 and, in exchange, received a 50% share in
all net profits from worldwide distribution and merchandising, after
receiving funds equal to its initial investment of up to $2,250,000.
Artisan Entertainment is distributing the Company's feature length film
within the US and Canada. The film was released in August 2003. The
definitive agreement includes a substantial print and advertising
promotional commitment for the theatrical release, distribution fees,
performance-driven minimum guarantees for both the theatrical and
video/DVD releases, a modest cash advance and a 10-year license.
As of July 31, 2003, the Company has funded approximately $2,179,000 of
production and other costs, which was included in projects under
development in the accompanying consolidated balance sheet. As of July
31, 2003, the film was completed. No amortization of the capitalized
film cost was necessary for the nine-month periods ended July 31, 2003
and 2002.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
At July 31, At October 31,
2003 2002
------------ ------------
Deferred officers compensation $ 66,601 $ 181,596
Accrued bonuses and payroll 498,037 334,307
Professional fees 409,317 623,044
Interest payable 490,101 541,350
Consulting fees 2,500 62,018
Miscellaneous 244,943 505,383
------------ ------------
$ 1,711,499 $ 2,247,698
============ ============
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - CONVERTIBLE NOTES PAYABLE
As of July 31, 2003, the outstanding amount for all notes was
$1,559,575, of which $396,575 was recorded as interest expense.
During the nine months ended July 31, 2003, the Company entered into
seven new convertible promissory note agreements, totaling $287,000.
The Company agreed to pay the principal and an amount equal up to 50%
of the principal sum if the Company reaches certain milestones from the
distribution of its motion picture (see Note 4). The notes may be
converted at any time, in whole or in part, into fully paid and
non-assessable shares of common stock at conversion prices ranging from
$0.15 to $1.00. During the nine months ended July 31, 2003, twelve
convertible promissory notes were converted to 775,941 shares of the
Company's common stock, totaling $287,750, of which $89,250 represented
accrued interest.
During the nine months ended July 31, 2003, four convertible notes,
totaling $240,000, plus accrued interest of $156,000, were converted
into four new convertible promissory note agreements with the principal
amount of $396,000. During the nine months ended July 31, 2003, the
Company repaid $36,000 of principal on these notes. The notes accrue
interest at a rate of 1% per month. The notes are to be repaid the
earlier of November 21, 2003, or upon the Company reaching certain
milestones from the distribution of its motion picture.
Six of the above convertible notes that were entered into during the
nine months ended July 31, 2003 are convertible into common stock at
conversion rates lower than the market price at the issuance of the
convertible notes. Therefore, as of July 31, 2003, the value of such
beneficial conversion feature was $68,766 and such amount was charged
to financing costs during the nine months ended July 31, 2003.
NOTE 7 - NOTES PAYABLE
On November 4, 2002, the Company repaid $200,000 under a promissory
note agreement entered into on October 29, 2002.
In June 2000, the Company entered into five long-term credit
facilities, pursuant to which it borrowed $750,000. The Company repaid
$500,000 of these borrowings during fiscal 2001. The remaining
principal and interest at 6% per year was originally due June 29, 2003,
but has been extended to June 29, 2004.
NOTE 8 - PREFERRED STOCK
REDEEMABLE SERIES B PREFERRED STOCK
On April 10, 2002, the Company amended its Articles of Incorporation
and designated 4,000 of its authorized preferred stock as a Series B
Preferred Stock, par value $.01 per share, with a liquidation
preference of $1,000 per share.
18
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - PREFERRED STOCK (CONTINUED)
REDEEMABLE SERIES B PREFERRED STOCK (CONTINUED)
The Series B Preferred Stock is mandatorily redeemable by the Company
at the liquidation preference as follows:
(i) Closing of financing transaction of at least $15 million.
(ii) Closing of a corporate transaction, (such as a merger,
consolidation, reorganization, sale of significant assets,
etc.) resulting in a change of control.
(iii) In the event the Company completes a financing, which is at
least $3 million but less than $15 million, the Company must
partially redeem the Series B Preferred Stock based on a
fraction, the numerator of which is the net cash proceeds
received by the Company, as a result of the financing
transaction, and the denominator of which is $15 million.
(iv) The Company is obligated to redeem any outstanding Series B
Preferred Stock at its liquidation preference, in eight equal
quarterly payments, commencing on March 31, 2005 and ending on
December 31, 2006.
Holders of Series B Preferred Stock are entitled to receive dividends
if, as and when declared by the Company's Board of Directors in
preference to the holders of its common stock and of any other stock
ranking junior to the Series B Preferred Stock with respect to
dividends.
The Company cannot declare or pay any dividend or make any distribution
on its common stock unless a dividend or distribution of at least two
times the dividend paid on the common stock is also paid on the Series
B Preferred Stock. Holders of Series B Preferred Stock are also
entitled to share pro-rata (based on the aggregate liquidation
preference) in any dividend, redemption or other distribution made to
any other series of the Company's preferred stock. The Series B
Preferred Stock does not have voting rights, except as required by law.
Each share of the Series B Preferred Stock is convertible into shares
of the Company's common stock by dividing $1,000 by the conversion
price. The conversion price is the fair market value of the Company's
common stock at the time of conversion, but not to be less than $.34
per share, subject to adjustment, and not to exceed $4.00 per share,
subject to adjustment. Holders of the Series B Preferred Stock were
granted piggy-back registration rights to register common shares
reserved for such conversion.
19
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - PREFERRED STOCK (CONTINUED)
REDEEMABLE SERIES B PREFERRED STOCK (CONTINUED)
In April 2002, the Company issued 3,192 shares of its Series B
Preferred Stock, with redemption and liquidation preference of
$3,192,000, in connection with a development and license agreement
discussed in Note 3. As of October 31, 2002 and July 31, 2003, there
were 4,000 authorized shares Series B Preferred Stock and 3,192 shares
issued and outstanding. Based on the redemption term, the Series B
Preferred Stock is not included in stockholders' equity.
SERIES C, SERIES D, AND SERIES E CONVERTIBLE PREFERRED STOCK
On February 24, 2003 the Company amended its Articles of Incorporation
and designated 100,000 shares of its authorized preferred stock as
Series C Preferred Stock, par value $0.01 per share. On May 16, 2003,
the Company amended this designation and fixed the number of shares
designated as Series C Preferred Stock as 57,894.201. On June 13, 2003
and June 27, 2003, the Company amended its Articles of Incorporation
and designated 5,882.353 shares of its authorized preferred stock as
Series D Preferred Stock, par value $0.01 per share and 25,000 shares
of its authorized preferred stock as Series E Preferred Stock, par
value $0.01 per share. All of the designated Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock were issued in
May and June 2003, to collateralize proposed loans to the Company of
approximately $1,500,000, $400,000 and $500,000.
The shares are returnable to the Company upon demand in the event the
proposed loans are not completed. As of September 12, 2003 the Company
has not received any monies from the proposed loans.
The terms of the Series C, Series D and Series E Preferred Stock are
substantially the same. None of the series is entitled to receive
dividends or to vote, except as required by Utah law, and none of the
series is subject to mandatory redemption. The aggregate liquidation
preference of each series is equal to the unpaid balance of principal
and interest on the proposed loan to be collateralized by the shares of
such series. In the event of a default under such proposed loan, the
Series C, Series D or Series E Preferred Stock, as applicable, can be
converted into common stock of the Company to liquidate the unpaid
balance of the loan and related interest.
20
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY
2003 CONSULTANT STOCK PLAN
On January 30, 2003, the Company adopted its 2003 Consultant Stock Plan
to promote the interests of the Company, its affiliated entities and
its stockholders by using investment interests in the Company to
attract, retain and motivate certain outside consultants. The Company's
employees, officers and directors are not eligible to receive awards
under this plan. The maximum number of shares of common stock reserved
and available for issuance under this plan is 6,000,000, subject to
adjustment. The 2003 Consultant Stock Plan is administered by the Board
of Directors. Stock and non-qualified stock options may be issued under
this plan. The exercise price for each stock option is determined by
the Board of Directors as of the date such stock option is granted. The
Board of Directors may grant stock options under the plan that may be
exercised for a period of up to ten years. As of July 31, 2003,
3,200,000 shares of stock and no options had been granted under this
plan.
STOCK PURCHASE AGREEMENT
On April 15, 2003, the Company entered into a stock purchase agreement
that agreed to sell up to 1,600,000 shares of the Company's common
stock at $.145 per share. The shares sold pursuant to this agreement
were sold pursuant to Regulation S of the Securities Act of 1933, as
amended. As of July 31, 2003, 1,349,664 shares were sold under this
agreement, resulting in total proceeds of $195,701.
SIGNIFICANT COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY
31, 2003
During the nine months ended July 31, 2003, the Company received
$2,464,170 from the sale of 13,903,747 shares of common stock to
investors.
During the nine months ended July 31, 2003, the Company issued
$3,621,875 shares of its common stock, valued at $1,539,250, in
connection with various consulting agreements. During the nine months
ended July 31, 2003, $876,250 was charged to operations.
During the quarter ended January 31, 2003, the Company issued 88,710
shares of common stock to two officers of the Company in satisfaction
of $55,000 of accrued compensation.
During the quarter ended January 31, 2003, 2.2 million shares of the
Company's common stock previously issued to the former owners of New
Wheel and former officers of the Company were returned to the Company,
resulting in a non-cash gain of $1,474,000.
21
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
A summary of the Company's stock option activity and related
information follows:
Weighted Weighted
In the Plan Average Outside the Plan Average
Stock Options Exercise Price Stock Options Exercise Price
------------- -------------- ------------- --------------
Outstanding - October 31, 2002 2,168,750 $ 1.29 4,192,500 $ 2.16
Options granted - 11/02 - 07/31/03:
In the Plans -- -- -- --
Options granted - 11/02 - 07/31/03:
Outside the Plans -- -- 1,540,000 .63
Options expired/cancelled:
In the Plans -- -- -- --
Outside the Plans -- -- (1,500,000) 1.02
------------- -------------- ------------- --------------
Outstanding - July 31, 2003 2,168,750 $ 1.29 4,232,500 $ 2.01
============= ============== ============= ==============
Exercisable at July 31:
2003 1,837,188 $ 1.22 2,800,833 $ 2.71
2004 2,028,750 $ 1.32 3,330,834 $ 2.39
2005 2,180,000 $ 1.31 4,219,167 $ 2.02
2006 2,217,500 $ 1.30 4,232,500 $ 2.01
The exercise price for options outstanding as of July 31, 2003 ranged
from $0.31 to $4.40.
WARRANTS
On November 21, 2002, the Company granted a company warrants to
purchase 100,000 shares of its common stock at an exercise price of
$.25. The warrants vested immediately and expire on November 21, 2007.
The fair value of stock warrants estimated on the date of grant using
the Black-Scholes option pricing model is $0.37 per share, or $37,000,
which was recorded as an operating expense during the nine months ended
July 31, 2003
On February 13, 2003, the Company granted an individual warrants to
purchase 500,000 shares of its common stock at an exercise price of
$0.40. The warrants vested immediately and expire on February 13, 2005.
The fair value of stock warrants estimated on the date of grant using
the Black-Scholes option pricing model is $0.29 per share, or $173,919,
which was recorded as an operating expense during the nine months ended
July 31, 2003.
On February 3, 2003, warrants to purchase 100,000 shares of common
stock were exercised on a cashless basis, for which the Company issued
40,476 shares of common stock.
22
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
On April 29, 2003, the Company granted a consulting firm warrants to
purchase 1,000,000 shares of its common stock at an exercise price of
$0.06. The warrants vested immediately and expire on May 3, 2006. In
exchange for the issuance, the Company cancelled warrants to purchase
1,000,000 shares of its common stock, which were issued on July 30,
2002 at an exercise price of $0.75. The fair value of stock warrants of
$243,461 was determined by using the Black-Scholes option pricing model
and was recorded as an operating expense during the nine months ended
July 31, 2003.
At July 31, 2003, the Company had outstanding warrants to purchase
shares of common stock as follows:
Number of Exercise Expiration
Grant Date Shares Price Date
----------------- ------------ ------------- ------------------
November 17, 2000 1,000,000 $ 6.00 November 17, 2003
November 17, 2000 88,000 Lesser of $6.00 November 17, 2003
or 50% of
market ($.32
at 07/31/03)
March 12, 2001 67,586 5.10 March 12, 2004
March 12, 2001 87,357 4.02 March 12, 2004
June 14, 2001 50,000 2.50 June 14, 2006
June 14, 2001 25,000 5.00 June 14, 2006
June 14, 2001 25,000 10.00 June 14, 2006
November 5, 2001 200,000 .51 November 5, 2005
February 11, 2002 50,000 .75 February 11, 2004
February 11, 2002 50,000 1.25 February 11, 2004
February 11, 2002 100,000 1.75 February 11, 2004
February 11, 2002 100,000 2.25 February 11, 2004
February 13, 2003 500,000 .40 February 13, 2005
April 29, 2003 1,000,000 .06 May 3, 2006
------------ -------------
3,342,943 $0.06-$10.00 June 7, 2003 - October 1, 2006
============
Exercisable at
July 31, 2003 3,342,943
============
23
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
NET LOSS PER SHARE
Securities that could potentially dilute basic earnings per share
("EPS") in the future that were not included in the computation of
diluted EPS because to do so would have been anti-dilutive for the
periods presented consist of the following:
Warrants to purchase common stock 3,342,943
Options to purchase common stock 6,401,250
Convertible notes payable and accrued interest 1,559,575
Series B Preferred stock ($0.34 at July 31, 2003) 9,388,235
------------
Total as of July 31, 2003 20,692,003
============
Substantial issuance after July 31, 2003 through
September 4, 2003:
Sale of common stock for cash 613,766
============
Shares issued for services 28,000
============
NEW EMPLOYMENT AGREEMENTS
On December 2, 2002, the Company entered into a new three-year
employment agreement with its Chief Marketing Officer replacing the
executive's former employment agreement. Under the terms of the new
agreement, the executive will become the Company's President and Chief
Executive Officer and receive a base salary of $20,833 per month. In
addition, the employment agreement provides that the executive will be
entitled to receive an annual bonus at the discretion of the Board of
Directors of the Company. Pursuant to the terms of the agreement, the
executive was issued options to purchase 1,500,000 shares of the
Company's common stock at $.64 per share. The options vest in twelve
equal, quarterly installments starting March 1, 2003. The options
expire on December 2, 2012.
NEW CONSULTING AGREEMENTS
In January 2003, the Company entered into a one-year consulting
agreement for financial consulting services, pursuant to which the
Company agreed to issue 1,000,000 shares of the Company's common stock
to a principal of the consultant. The consulting agreement provides
that either party may terminate the consulting services at any time
upon thirty days' written notice to the other party. On February 4,
2003, 1,000,000 shares of the Company's common stock were issued with a
value of $410,000, of which $205,000 was recorded as an operating
expense for the nine months ended July 31, 2003.
24
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In January 2003, the Company entered into a one-year consulting
agreement for financial consulting services, pursuant to which the
Company agreed to issue to each of two principals of the consultant
1,000,000 shares of the Company's common stock. The consulting
agreement provides that either party may terminate the consulting
services at any time upon thirty days' written notice to the other
party. On February 5, 2003, 2,000,000 shares of the Company's common
stock were issued with a value of $820,000, of which $410,000 was
recorded as an operating expense for the nine months ended July 31,
2003.
In April 2003, the Company entered into a one-year consulting agreement
for financial consulting services, pursuant to which the Company agreed
to issue 200,000 shares of the Company's common stock to a principal of
the consultant. The consulting agreement provides that either party may
terminate the consulting services at any time upon thirty days' written
notice to the other party. On April 28, 2003, 200,000 shares of the
Company's common stock were issued with a value of $64,000.
LEGAL DISPUTES
Gary Tomsic Dispute
In August 1998, the Company authorized the issuance to Gary Tomsic of
an option to purchase 130,000 shares of the Company's common stock in
satisfaction of monies owed to Tomsic for services rendered to the
Company. Tomsic exercised the option in 1999 and 55,000 shares were
delivered. A dispute arose between the parties concerning their
respective obligations, but did not result in litigation. In December
2002, the Company and Tomsic entered into a settlement agreement and
mutual release. In accordance with the settlement agreement, the
Company paid $15,000 to Tomsic and issued to him 51,562 shares of
common stock valued at $23,203 during the quarter ended January 31,
2003.
Brad Lundahl Dispute
On August 2, 2002, a lawsuit was filed in California Superior Court in
Santa Clara County against New Visual Corporation and NV Technology, by
Brad Lundahl (d/b/a Lundahl Engineering) alleging that the Company
breached a contract for consulting services it entered into with Mr.
Lundahl in July 2000, by failing to pay Mr. Lundahl for his services as
provided under the agreement. The lawsuit sought to compel arbitration
based upon a provision mandating arbitration contained in the contract
in question. On February 10, 2003, the Company agreed to a settlement
of litigation. The settlement called for payments to the plaintiff
totaling $40,000. These payments were was made in the six months ending
April 30, 2003, and end all claims associated with this matter.
25
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL DISPUTES (CONTINUED)
Douglas Furth Dispute
In September 2002, the Company entered into a consulting agreement with
an individual, pursuant to which, among other things, the individual
agreed to provide certain consulting services and the Company agreed to
pay for these services by, among other things, issuing 200,000 shares
of common stock. A dispute arose between the parties concerning their
respective obligations, but did not result in litigation. In December
2002, the Company and the individual entered into a settlement
agreement and mutual release. In accordance with the settlement
agreement, the individual received 150,000 shares of common stock in
three equal installments. The settlement agreement cancelled the
consulting agreement and provided for additional shares to be issued in
the event of any failure to perform by the Company.
NOTE 11 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
For the Nine Months Ended July 31, 2003:
Telecommunication Entertainment Unallocable
Business Business Totals
------------ ------------ ------------ ------------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $ (123,750) $ -- $(3,130,388) $(3,254,138)
Depreciation and
Amortization $ 268,379 $ 10,397 $ 1,272 $ 280,048
Total Identifiable Assets $ 5,765,459 $ 2,319,995 $ 93,162 $ 8,178,616
For the Nine Months Ended July 31, 2002:
Telecommunication Entertainment Unallocable
Business Business Expenses Totals
------------ ------------ ------------ ------------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $(1,400,019) $ -- $(4,105,900) $(5,505,919)
Depreciation and
Amortization $ 872,202 $ 11,250 $ 39,525 $ 922,977
Total Identifiable Assets $ 5,856,372 $ 2,197,076 $ 293,736 $ 8,347,184
26
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 - SUBSEQUENT EVENTS
COMMON STOCK
As of September 4, 2003, the Company has received approximately $92,065
from the sale of 613,766 shares of common stock to investors.
The Company also received $60,000 upon the exercise of warrants to
purchase 1,000,000 shares of common stock.
During August 2003, the Company issued 28,000 shares of common stock to
four individuals valued at $10,360.
MOVIE RELEASE
On August 8, 2003 the Company's feature length film, STEP INTO LIQUID,
was released by Artisan Entertainment, opening in 5 theaters in Hawaii,
New York and Los Angeles. As of September 12, 2003 the film was showing
in approximately 90 theaters across the United States.
SERIES F AND SERIES G CONVERTIBLE PREFERRED STOCK
On August 7, 2003 the Company amended its Articles of Incorporation and
designated 10,297.118 shares of its authorized preferred stock as
Series F Preferred Stock, par value $0.01 per share, and 10,297.118
shares of its authorized preferred stock as Series G Preferred Stock,
par value $0.01 per share. All of the designated Series F Preferred
Stock and Series G Preferred Stock were issued in August 2003, to
collateralize proposed loans to the Company of approximately
$1,000,000.
The terms of the Series F and Series G Preferred Stock are
substantially the same. Neither series is entitled to receive dividends
or to vote, except as required by Utah law, and neither series is
subject to mandatory redemption. The aggregate liquidation preference
of each series is equal to the unpaid balance of principal and interest
on the proposed loan to be collateralized by the shares of such series.
In the event of a default under such proposed loan, the Series F or
Series G Preferred Stock, as applicable, can be converted into common
stock of the Company to liquidate the unpaid balance of the loan and
related interest.
CHANGE IN COMPANY'S NAME AND INCREASE IN AUTHORIZED SHARES OF COMMON
STOCK
On August 25, 2003 the Annual Meeting of Shareholders of New Visual
Corporation was held in Portland, Oregon. In connection with that
meeting the shareholders voted to increase the number of authorized
shares of common stock of the company from 100 million to 500 million.
The shareholders also voted to amend the Articles of Incorporation to
change the name of the company to Rim Semiconductor Company. Both of
these changes will be effective upon the filing of Articles of
Amendment with the office of the Secretary of State of Utah.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and related notes contained in this
Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2003 AND NINE MONTHS ENDED JULY 31,
2002
REVENUES. There were no revenues for the nine months ended July 31,
2003 or the nine months ended July 31, 2002.
OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances related to selling, general and administrative
expenses, research and development expenses and selling, general and
administrative expenses. Total operating expenses decreased to approximately
$3,254,000 for the nine months ended July 31, 2003, from approximately
$5,506,000 for the nine months ended July 31, 2002. The decrease primarily
resulted from reductions in research and development expenses and selling,
general and administrative expenses. Although research and development expenses
decreased from approximately $1,400,000 for the nine months ended July 31, 2002
to approximately $71,000 for the nine months ended July 31, 2003, the Company
also paid, during the nine months ended July 31, 2003, approximately $546,000 to
Adaptive Networks, Inc. for development fees that had been previously accrued
and, therefore, were not included in operating expenses. The decrease in
selling, general and administrative expenses from approximately $2,505,000 for
the nine months ended July 31, 2002 to approximately $1,523,000 for the nine
months ended July 31, 2003 resulted principally from reductions in salary
expenses, legal expenses and travel expenses.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs, interest expense and a gain on the settlement of litigation.
Total other expenses decreased from approximately $1,866,000 for the nine months
ended July 31, 2002 to a gain of approximately $977,000 for the nine months
ended July 31, 2003. A gain of approximately $1,474,000 was recorded during the
nine months ended July 31, 2003 in connection with the settlement of litigation
between the Company and Allan Blevins and Michael Shepperd, former officers of
the Company. The gain resulted from the return to the Company and the
cancellation of 2.2 million shares of common stock that had previously been
issued to Messrs. Blevins and Shepperd. Interest expense decreased from
approximately $1,005,000 for the nine months ended July 31, 2002 to
approximately $236,000 for the nine months ended July 31, 2003. In the 2002
fiscal period the Company recognized interest expense related to the issuance of
approximately $1,508,000 of convertible notes payable. Because the Company
issued only $283,000 of convertible notes payable during the nine months ended
July 31, 2003, interest expense was less during this period. Also, amortization
of unearned financing costs decreased from approximately $861,000 for the nine
months ended July 31, 2002 to approximately $261,000 for the nine months ended
July 31, 2003 largely as a result of the reduction in the issuance of
convertible notes payable from the nine months ended July 31, 2002 to the nine
months ended July 31, 2003. Several of these convertible notes were convertible
into common stock at a conversion rate lower than the market price at the time
of issuance of the notes. As a result, there was an additional charge to
amortization of unearned financing costs of approximately $766,000 for the nine
months ended July 31, 2002.
NET LOSS. The Company's net loss was approximately $2,277,000, or $0.04
per common share, for the nine months ended July 31, 2003, a decrease from the
net loss of approximately $7,372,000, or $0.19 per common share, for the nine
months ended July 31, 2002.
28
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2003 AND THREE MONTHS ENDED JULY
31, 2002
REVENUES. There were no revenues for the three months ended July 31,
2003 or the three months ended July 31, 2002.
OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances related to selling, general and administrative
expenses, research and development expenses and selling, general and
administrative expenses. Total operating expenses decreased to approximately
$860,000 for the three months ended July 31, 2003, from approximately $1,389,000
for the three months ended July 31, 2002. The decrease primarily resulted from
reductions in research and development expenses and selling, general and
administrative expenses. Although research and development expenses decreased
from approximately $121,000 for the three months ended July 31, 2002 to $0.00
for the three months ended July 31, 2003, the Company also paid, during the
three months ended July 31, 2003, approximately $105,000 to Adaptive Networks,
Inc. for development fees that had been previously accrued and, therefore, were
not included in operating expenses. The decrease in selling, general and
administrative expenses from approximately $1,129,000 for the three months ended
July 31, 2002 to approximately $533,000 for the three months ended July 31, 2003
resulted from decreases in legal fees, travel and marketing and promotion costs.
Expenses related to the compensatory element of stock issuances related to
selling, general and administrative expenses increased from approximately
$139,000 for the three months ended July 31, 2002 to approximately $326,000 for
the three months ended July 31, 2003.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses decreased to
approximately $163,000 for the three months ended July 31, 2003 from
approximately $893,000 for the three months ended July 31, 2002. The decrease
principally resulted from a decline in convertible notes payable transactions
from approximately $614,000 for the three months ended July 31, 2002 to
approximately $98,000 for the three months ended July 31, 2003. Because many of
the convertible notes were convertible into common stock at a conversion rate
lower than the market price at the time of issuance of the notes, there was an
additional charge to amortization of unearned financing costs of approximately
$404,000 for the three months ended July 31, 2002. In addition, interest expense
associated with these convertible notes payable transactions for the three month
ended July 31, 2003 amounted to approximately $307,000. Interest expense
associated with the issuance of convertible notes payable for the three months
ended July 31, 2003 amounted to approximately $44,000.
NET LOSS. The Company's net loss was approximately $1,022,000, or $0.02
per common share, for the three months ended July 31, 2003, a decrease from the
net loss of approximately $2,283,000, or $0.05 per common share, for the three
months ended July 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $2,143,000 and
$3,641,000 for the nine months ended July 31, 2003 and July 31, 2002,
respectively. Cash balances totaled approximately $312,000 as of October 31,
2002 and $118,000 as of July 31, 2003.
Since November 1, 1999 operations have been financed principally
through sales of common stock, the exercise of warrants to purchase common
stock, loans, the issuance of convertible notes payable and notes payable. Net
proceeds from financing activities amounted to approximately $2,545,000 for the
nine months ended July 31, 2003, including sales of common stock net of offering
costs of approximately $2,499,000 and the issuance of convertible notes payable
of approximately $287,000. Notes payable and convertible notes payable balances
of approximately $277,000 were repaid during the period. Net proceeds from
financing activities amounted to approximately $4,391,000 for the nine months
ended July 31, 2002, including sales of common stock net of offering costs of
approximately $1,737,000, proceeds from the exercise of warrants of $728,000,
proceeds from loans and convertible notes payable of approximately $2,008,000.
29
Stock was issued in payment of expenses amounting to approximately
$1,659,000 and $1,601,000 for the nine-month periods ended July 31, 2003 and
April 30, 2002, respectively.
In April 2000, the Company entered into a joint venture production
agreement to produce "STEP INTO LIQUID," a feature length surfing adventure film
for theatrical distribution. Under the agreement, the Company is providing the
funding for the production in the amount of up to $2,250,000 and, in exchange,
the Company will receive a 50% share in all net profits from worldwide
distribution and merchandising, after receiving funds equal to the Company's
initial investment of up to $2,250,000. As of July 31, 2003, the Company had
funded approximately $2,122,000 of the production costs towards this project.
Artisan Entertainment is distributing STEP INTO LIQUID within the US and Canada
with a commitment for print and advertising support for the theatrical release
as well as distribution fees, performance-driven minimum guarantees for both the
theatrical and video/DVD releases, a modest cash advance and a 10 year license.
STEP INTO LIQUID opened in 5 theaters in Hawaii, New York and Los
Angeles on August 8, 2003 and was playing in approximately 90 theaters across
the United States at September 12, 2003. The first weekend's box office revenues
are estimated at $135,985. The estimated cumulative total box office revenues
for the film's first six weeks, generated by widening the release to more
theaters, amounted to an estimated $2,800,000. Based on the performance of the
first six weeks, management believes that the film will gross approximately $40
million worldwide in the next twelve to fourteen months from all sources of
potential revenue. Under the joint venture production agreement, the Company's
distribution agreement with Artisan Entertainment and pending and customary
agreements with other distributors and merchandisers, management believes that
the Company will realize approximately $7 million from these sources.
Research and development expenses totaled approximately $71,000 and
$1,400,000 for the nine months ended July 31, 2003 and the nine months ended
July 31, 2002, respectively. In addition, $546,000 in development fees were paid
to Adaptive Networks, Inc. during the nine months ended July 31, 2003, which are
being capitalized.
During the fiscal years ended October 31, 2001 and October 31, 2002 and
during the nine months ended July 31, 2003 the Company issued convertible notes
payable totaling approximately $2,697,000. The Company agreed to pay the
principal and interest in an amount equal to 50% of the principal if certain
milestones are reached from the distribution of STEP INTO LIQUID. The notes that
remain outstanding are convertible at any time, in whole or in part, into shares
of common stock at conversion prices ranging from $0.33 to $1.00 per share. As
of July 31, 2003 the Company's liability associated with convertible notes
payable that remained outstanding was $1,163,000. In May 2003, we exchanged
several of our outstanding convertible notes due in May 2003 for new notes
totaling $396,000. The new notes, which bear interest at 1% of the outstanding
principal owed per month, replaced four notes with principal and interest owed
totaling $360,000. The new notes are due on November 21, 2003, and are subject
to prepayment in whole or in part upon the completion of a significant financing
transaction or our receipt of proceeds from STEP INTO LIQUID. As of the date of
this report, we have repaid $36,000 of these new notes.
In June 2000, we entered into five long-term credit facilities,
pursuant to which we borrowed $750,000. We repaid $500,000 of these borrowings
during fiscal 2001. The remaining principal and interest at 6% per year was
originally due June 29, 2003, but has been extended to June 29, 2004.
In April 2002, we entered into a license and development agreement with
Adaptive Networks, Inc. that included development services relating to our
FPGA-based prototype. We agreed to pay Adaptive an aggregate of $1,559,000 for
these services. As of July 31, 2003, the remaining balance due to Adaptive under
the license and development agreement was $138,000.
In April 2002, in consideration of the grant of a technology license
from Adaptive Networks, Inc., we assumed certain debt obligations of Adaptive to
Zaiq Technologies, Inc. ("Zaiq"). We then issued 3,192 shares of Series B
Preferred Stock, valued at $3,192,000, with a liquidation preference of $1,000
per share, and paid $250,000 in cash to Zaiq in satisfaction of the Zaiq debt.
We must offer to redeem all of the Series B Preferred Stock if we close a
corporate transaction resulting in a change of control or a financing
transaction of at least $15 million. If we close a financing transaction of at
least $3 million but less than $15 million, we must offer to redeem a portion of
the Series B Preferred Stock based on a fraction, the numerator of which is the
cash proceeds we receive in the financing transaction and the denominator of
which is $15 million. We are also required to offer to redeem the outstanding
Series B Preferred Stock in eight equal quarterly payments beginning March 31,
2005 and ending December 31, 2006.
30
In July 2002, the Company borrowed $500,000 from the Charles R. Cono
Trust. These borrowings are unsecured and bear interest at 10% per annum.
Principal and accrued interest are payable three days after written demand by
the payee.
On December 2, 2002 a separation agreement was signed with Thomas
Cooper, our former President and Chief Executive Officer. One of the terms of
the agreement obligates the Company to pay Mr. Cooper $57,692 in accrued salary
that was voluntarily deferred by Mr. Cooper during his employment. As of July
31, 2003, the amount outstanding to Mr. Cooper in connection with the separation
agreement was $10,000.
For a period between August and December, 2002, the Company's
management team temporarily deferred a portion of executive salaries in order to
reduce monthly expenses. As of July 31, 2003, the remaining balance of these
executive salary deferrals amounted to approximately $80,000.
Management believes funds on hand and available sources of financing
will enable the Company to meet its liquidity needs for at least the next three
months. However, funding for the Company's operations has become more difficult
to secure and more expensive than in prior periods due to the current economic
and stock market climate, the Company's recent stock price and market
volatility, and general market conditions in the semiconductor and
telecommunications industries. Management is presently taking steps to reduce
monthly cash outlays through arrangements with vendors to accept longer payment
terms and reductions of recurring expenses, when possible, including potential
staff and management changes. However, additional cash must be raised in order
to continue to meet liquidity needs and satisfy the Company's proposed business
plan. Management is presently investigating potential financing transactions
that it believes can provide additional cash for operations and lead to
profitability in both the short and long-term. Management also intends to
attempt to raise funds through private sales of common stock and borrowings.
Although management believes these efforts will enable us to meet liquidity
needs in the future, there can be no assurance that these efforts will be
successful.
GOING CONCERN CONSIDERATION
We have continued losses in each of our years of operation, negative
cash flow and liquidity problems. These conditions raise substantial doubt about
our ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability of reported assets or liabilities should we be unable to continue
as a going concern.
We have been able to continue based upon our receipt of funds from the
issuance of equity securities and borrowings, and by acquiring assets or paying
expenses by issuing stock. Our continued existence is dependent upon our
continued ability to raise funds through the issuance of our securities or
borrowings, and our ability to acquire assets or satisfy liabilities by the
issuance of stock. Management's plans in this regard are to obtain other debt
and equity financing until profitable operation and positive cash flow are
achieved and maintained. Although management believes, based on the fact that it
raised approximately $13,052,000 through sales of common stock and $4,154,000
from borrowings from November 1, 1999 through July 31, 2003, that it will be
able to secure suitable additional financing for the Company's operations, there
can be no guarantee that such financing will continue to be available on
reasonable terms, or at all.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States of
America requires management to make judgments, assumptions, and estimates that
affect amounts reported in the consolidated financial statements and
accompanying notes. Note 2 to the consolidated financial statements in our
Annual Report on Form 10-K for the year ended October 31, 2002, describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the Company in the future, actual results may differ
from these estimates and assumptions. Our critical accounting policies are those
that affect our financial statements materially and involve difficult,
subjective or complex judgments by management. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates used
in the preparation of the consolidated financial statements.
31
PROJECT UNDER DEVELOPMENT. The Company capitalizes costs of production
to investment in films. These costs are amortized to direct operating expenses
in accordance with SOP-00-2. These costs are stated at the lower of unamortized
film costs and fair value. These costs for an individual film are amortized in
the proportion that current period actual revenues bear to management's
estimates of the total revenue expected to be received from such film. As a
result, if revenue estimates change with respect to a film, the Company may be
required to write down all or a portion of the unamortized costs of such file.
No assurance can be given that unfavorable changes to revenue estimates will not
occur, which may result in significant write-downs affecting our results of
operations and financial condition.
Revenue is driven by audience acceptance of a film, which represents a
response not only to artistic merits but also to critics' reviews, marketing and
the competitive market for entertainment, general economic conditions, and other
intangible factors, all of which can change rapidly.
RESEARCH AND DEVELOPMENT. Research and development expenses relate to
the design and development of new telecommunications products. Payments made to
independent software developers under development agreements are capitalized to
software development costs once technological feasibility is established or if
the development costs have an alternative future use. Prior to establishing
technological feasibility, software development costs are expensed to research
and development costs and to cost of revenues subsequent to confirmation of
technological feasibility. Internal development costs are capitalized to
software development costs once technological feasibility is established.
Technological feasibility is evaluated on a product-by-product basis.
Research and development expenses generally consist of salaries,
related expenses for engineering personnel and third-party development costs.
STOCK-BASED COMPENSATION. The Company has elected to account for fixed
award stock options and nonemployee directors' options under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." As such, no compensation
cost has been recorded in the financial statements relative to these options.
The Company utilizes the Black-Scholes option pricing model to estimate the fair
value of these options for disclosure purposes. Stock compensation issued to
non-employees/directors is accounted for in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). In December 2002, the
Financial Accounting Standards Board ("FASB") issued Statement of Accounting
Standards No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of SFAS 123" ("SFAS 148"). This statement amends SFAS
123 to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. We adopted the annual disclosure provisions of
SFAS 148 in our financial reports beginning with the year ended October 31, 2003
and the interim disclosure provisions for financial reports beginning with the
quarter ended April 30, 2003. As our adoption of this standard involves
disclosures only, it has not had a significant impact on our consolidated
financial position, results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 addresses
consolidation by business enterprises of variable interest entities. Under that
interpretation, certain entities known as Variable Interest Entities ("VIEs")
must be consolidated by the primary beneficiary of the entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIEs in which a significant (but not majority)
variable interest is held, certain disclosures are required. It applies
immediately to variable interest entities created after January 31, 2003, and
applies in the first year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. We are currently assessing the impact the
adoption of this interpretation will have on our consolidated financial
position, results of operations or cash flows.
32
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provision of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provision relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the Company's market risk for
the three months ended July 31, 2003. See the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2002 for additional discussions
regarding quantitative and qualitative disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES.
As indicated in the certifications contained in this report, the
principal executive officer, principal financial officer and principal
accounting officer of New Visual Corporation have evaluated the Company's
disclosure controls and procedures as of July 31, 2003. Based on that
evaluation, these officers have concluded that the Company's disclosure controls
and procedures are effective for the purpose of ensuring that material
information required to be in this quarterly report is made known to them by
others on a timely basis. There have not been changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of this evaluation.
33
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) During the three months ended July 31, 2003, the Company sold or issued
unregistered securities as follows:
In May 2003, we:
o sold an aggregate of 756,166 shares of common stock to nine
investors for total proceeds of $113,425; and
o sold 473,023 shares of common stock to a "non-US Person" (as
such term is defined in Regulation S under the Securities Act
of 1933) for total proceeds of $69,588;
o issued an aggregate of $396,000 principal amount of
convertible promissory notes to four investors, which notes
are convertible into shares of our common stock at a
conversion price of $1.00 per share and which were issued in
exchange for four convertible promissory notes issued in May
2002 with aggregate principal and interest due at the time of
the exchange of $360,000; and
o issued 31,250 shares of common stock upon conversion of a
convertible note held by one investor, resulting in the
cancellation of $10,000 that would have been outstanding under
the note.
In June 2003, we:
o sold an aggregate of 1,559,896 shares of common stock to
thirteen investors for total proceeds of $229,985; and
o issued 15,625 shares of common stock upon conversion of a
convertible note held by one investor, resulting in the
cancellation of $5,000 that would have been outstanding under
the note.
In July 2003, we:
o sold an aggregate of 1,447,400 shares of common stock to
fifteen investors for total proceeds of $217,110;
o issued 55,000 shares of common stock upon conversion of a
convertible note held by one investor, resulting in the
cancellation of $16,500 in principal and interest that would
have been outstanding under the note; and
34
o issued an aggregate of $98,000 principal amount in convertible
promissory notes to two investors, which notes are convertible
into our common stock at conversion prices of $0.33 and $0.60
per share.
Following the quarter ended July 31, 2003, we sold or issued the
following unregistered securities:
In August 2003, we:
o sold an aggregate of 450,100 shares of common stock to seven
investors for total proceeds of $67,515;
o issued 300,000 shares of common stock upon exercise of a
warrant held by one person for which we received an aggregate
exercise price of $18,000; and
o issued an aggregate of 28,000 shares of common stock to four
persons for services valued at $10,360.
In September 2003, we:
o sold an aggregate of 163,666 shares of common stock to seven
investors for total proceeds of $24,550; and
o issued 700,000 shares of common stock upon exercise of a
warrant held by one person for which we received an aggregate
exercise price of $42,000.
All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemptions provided in Section 4(2) of the Securities Act or Regulation S under
such Securities Act. Except with respect to securities sold under Regulation S,
the recipients of securities in each such transaction acquired the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access, through
their relationships with the Company and its officers and directors, to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4.1 Certificate of Amendment to Certificate of Designation of Series C
Convertible Preferred Stock (incorporated by reference to Exhibit 4.2
of the Company's Report on Form 10-Q for the period ended April 30,
2003 (the "April 2003 10-Q")).
4.2 Certificate of Designation of Series D Convertible Preferred Stock
(incorporated by reference to Exhibit 4.4 of the April 2003 10-Q).
4.3 Certificate of Designation of Series E Convertible Preferred Stock.*
4.4 Certificate of Designation of Series F Convertible Preferred Stock.*
4.5 Certificate of Designation of Series G Convertible Preferred Stock.*
4.6 Amendment to Rights Agreement between New Visual Corporation and
Wachovia Bank, N.A., dated effective May 18, 2003 (incorporated by
reference to Exhibit 4.3 of the April 2003 10-Q).
4.7 Second Amendment to Rights Agreement between New Visual Corporation and
Wachovia Bank, N.A., dated effective June 18, 2003.*
35
10.1 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of John Marsden.*
10.2 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of Randy Arnett.*
10.3 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of ARJO Enterprises.*
10.4 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of Tim Eide.*
10.5 Convertible Promissory Note dated July 23, 2003 by New Visual
Corporation in favor of Johnnie R. Keith.*
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32 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.*
_______________
* Filed herewith.
(b) Reports on Form 8-K:
None.
36
SIGNATURES
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.
NEW VISUAL CORPORATION
(Registrant)
Dated: September 15, 2003 By: /s/ BRAD KETCH
BRAD KETCH
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Dated: September 15, 2003 By: /s/ THOMAS J. SWEENEY
THOMAS J. SWEENEY
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
37
EXHIBIT INDEX
4.1 Certificate of Amendment to Certificate of Designation of Series C
Convertible Preferred Stock (incorporated by reference to Exhibit 4.2
of the Company's Report on Form 10-Q for the period ended April 30,
2003 (the "April 2003 10-Q")).
4.2 Certificate of Designation of Series D Convertible Preferred Stock
(incorporated by reference to Exhibit 4.4 of the April 2003 10-Q).
4.3 Certificate of Designation of Series E Convertible Preferred Stock.*
4.4 Certificate of Designation of Series F Convertible Preferred Stock.*
4.5 Certificate of Designation of Series G Convertible Preferred Stock.*
4.6 Amendment to Rights Agreement between New Visual Corporation and
Wachovia Bank, N.A., dated effective May 18, 2003 (incorporated by
reference to Exhibit 4.3 of the April 2003 10-Q).
4.7 Second Amendment to Rights Agreement between New Visual Corporation and
Wachovia Bank, N.A., dated effective June 18, 2003.*
10.1 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of John Marsden.*
10.2 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of Randy Arnett.*
10.3 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of ARJO Enterprises.*
10.4 Amended and Restated Convertible Promissory Note dated May 21, 2003 by
New Visual Corporation in favor of Tim Eide.*
10.5 Convertible Promissory Note dated July 23, 2003 by New Visual
Corporation in favor of Johnnie R. Keith.*
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
32 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.*
_________________
* Filed herewith.