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 June 30, 2003
Commission file number: 0-29651
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
WYOMING 06-1576391
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
83 Halls Road, Old Lyme, Connecticut 06355
(Address of principal executive offices) (ZIP code)
(860) 434-5535
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
At August 1, 2003, there were 111,337,089 shares of the registrant's common
stock outstanding.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F1
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
F2
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATED IN US DOLLARS)
JUNE, 30 DECEMBER 31,
2003 2002
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 50,942 $ 48,708
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 1,400 1,400
Prepaid expenses and other current assets. . . . . . . . . . . 24,686 10,573
------------- --------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . 77,028 60,681
Property and Equipment - at cost, net of accumulated
depreciation of $8,034 and $-0-, respectively. . . . . . . . . 83,035 211,314
Other Assets, net of accumulated amortization of $13,000
and $11,339, respectively . . . . . . . . . . . . . . . . . . . 43,488 45,149
Deferred Tax Assets, net of valuation allowance
of $8,045,000 and $7,950,000, respectively . . . . . . . . . . - -
------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 203,551 $ 317,144
============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses. . . . . . . . . . . . . $ 689,433 $ 1,082,499
Due to related parties . . . . . . . . . . . . . . . . . . . . 41,462 53,180
------------- --------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . 730,895 1,135,679
------------- --------------
Commitments and Contingencies
Stockholders' Deficiency:
Preferred stock - no par value; authorized 250,000,000 shares,
none issued
Common stock and additional paid-in capital -
no par value; authorized 250,000,000 shares,
issued and outstanding 111,337,088 and
103,745,088, respectively. . . . . . . . . . . . . . . . . . . 30,937,900 30,357,906
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (31,465,244) (31,176,441)
------------- --------------
STOCKHOLDERS' DEFICIENCY . . . . . . . . . . . . . . . . . . (527,344) (818,535)
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY . . . . . . . $ 203,551 $ 317,144
============= ==============
SEE ACCOMPANYING NOTES
F3
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN US DOLLARS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
--------------- ------------ -------------- ------------
Revenue. . . . . . . . . . . . . . . . . . $ - $ 63,323 $ - $ 89,576
--------------- ------------ -------------- ------------
Expenses:
Cost of sales. . . . . . . . . . . . . - 45,470 - 57,542
Research and development . . . . . . . - 17,436 - 235,581
Selling, general and administrative. . 213,692 296,519 333,237 647,747
Depreciation and amortization. . . . . 4,847 156,313 9,695 265,250
Impairment loss on long-lived assets . - - 25,246 -
Noncash compensation charges . . . . . 11,430 19,077 11,430 31,795
--------------- ------------ ------------- ------------
Total expenses . . . . . . . . . . . . . . 229,969 534,815 379,608 1,237,915
--------------- ------------ ------------- ------------
Loss from operations . . . . . . . . . . . (229,969) (471,492) (379,608) (1,148,339)
--------------- ------------ ------------- ------------
Other income (expense)
Interest income (expense). . . . . . . (2,296) 54 (8,643) 121
Other. . . . . . . . . . . . . . . . . 84,152 (93,319) 99,448 (93,319)
--------------- ------------ ------------- ------------
81,856 (93,265) 90,805 (93,198)
--------------- ------------ ------------- ------------
Net loss . . . . . . . . . . . . . . . . . $ (148,113) $ (564,757) $ (288,803) $(1,241,537)
=============== ============ ============= ============
Net loss per share - basic and diluted . . $ (.00) $ (.01) $ (.00) $ (.01)
=============== ============ ============= ============
Weighted-average number of common
shares outstanding - basic and diluted. 108,637,518 92,074,758 106,903,713 91,910,834
=============== ============ ============= ============
SEE ACCOMPANYING NOTES
F4
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(STATED IN US DOLLARS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
Net loss. . . . . . . . . . . . . . . . . . . $ (148,113) $ (564,757) $ (288,803) $ (1,241,537)
Other comprehensive income:
Change in unrealized loss on marketable
securities. . . . . . . . . . . . - 81,811 - 86,487
--------------- --------------- ------------------ ---------------
Comprehensive loss. . . . . . . . . . . . . . $ (148,113) $ (482,946) $ (288,803) $ (1,155,050)
=============== =============== ================== ===============
SEE ACCOMPANYING NOTES
F5
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(STATED IN US DOLLARS)
(UNAUDITED)
COMMON STOCK
ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIENCY
Balance at December 31, 2002. . . . 103,745,088 $30,357,906 $(31,176,441) $ (818,535)
Issuance of common stock and common
stock warrants for cash . . . . . . 5,750,000 415,876 - 415,876
Issuance of common stock upon
exercise of warrants . . . . . . . 1,842,000 152,688 - 152,688
Noncash compensation charges. . . . - 11,430 - 11,430
Net loss. . . . . . . . . . . . . . - - (288,803) (288,803)
----------- ----------- ------------- ---------------
Balance at June 30, 2003. . . . . . 111,337,088 $30,937,900 $(31,465,244) $ (527,344)
=========== =========== ============= ===============
SEE ACCOMPANYING NOTES
F6
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN US DOLLARS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ------------
2002 2001
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(148,113) $(564,757) $(288,803) $(1,241,537)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 4,848 156,313 9,694 265,249
Impairment loss on long-lived assets . . . . . . . . . . . . . . . - - 25,246 -
Gain on sale of equipment. . . . . . . . . . . . . . . . . . . . . (19,634) - (19,634) -
gain on settlement of accounts payable . . . . . . . . . . . . . . (59,024) - (59,024) -
Noncash compensation charge. . . . . . . . . . . . . . . . . . . . 11,430 19,077 11,430 31,795
Realized loss on sale of marketable securities -
related parties . . . . . . . . . . . . . . . . . . . . . . . . - 93,319 - 93,319
Changes in operating assets and liabilities:
Decrease in accounts receivable . . . . . . . . . . . . . . . . - 5,485 - 8,229
Increase in inventory . . . . . . . . . . . . . . . . . . . . . - (24,322) - (24,322)
(Increase) decrease in prepaid expenses
and other current assets. . . . . . . . . . . . . . . . . . . (1,519) 2,914 (14,113) 8,491
Increase (decrease) in accounts payable and
accrued expenses. . . . . . . . . . . . . . . . . . . . . . (179,873) 9,197 (334,042) 160,234
Decrease in due to related parties. . . . . . . . . . . . . . . . (1,000) (378,320) (11,718) (16,268)
---------- ---------- ---------- ------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . (392,885) (681,094) (680,964) (714,810)
---------- ---------- ---------- ------------
Cash flows from investing activities:
Proceeds from equipment sales. . . . . . . . . . . . . . . . . . . . 19,634 - 114,634 -
Proceed from sale of marketable securities -
related parties . . . . . . . . . . . . . . . . . . . . . . . . . - 35,784 - 35,784
---------- ---------- ---------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES. . . . . . . . . . . . . . . 19,634 35,784 114,634 35,784
---------- ---------- ---------- ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock
and warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,201 700,000 415,876 700,000
Proceeds from the issuance of common stock upon exercise of warrants
warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,688 - 152,688 -
---------- ---------- ---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . 387,889 700,000 568,564 700,000
Net increase in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,638 54,690 2,234 20,974
Cash and cash equivalents at beginning of period . . . . . . . . . . . 36,304 70,522 48,708 104,238
---------- ---------- ---------- ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 50,942 $ 125,212 $ 50,942 $ 125,212
========== ========== ========== ============
SEE ACCOMPANYING NOTES
F7
USA VIDEO INTERACTIVE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01(a)(5) of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. The results for the interim periods are
not necessarily indicative of the results that may be attained for an entire
year or any future periods. For further information, refer to the Financial
Statements and footnotes thereto in the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2002.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the financial
statements, the Company has incurred losses of $288,803 for the six month period
ended June 30, 2003 and $2,113,138, $3,760,821 and $4,661,652 for the years
ended December 31, 2002, 2001 and 2000, respectively. These conditions raise
doubt about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations as they come due which management
believes it will be able to do. To date, the Company has funded operations
primarily through the issuance of common stock and warrants to outside investors
and the Company's management. The Company believes that its operations will
generate additional funds and that additional funding from outside investors and
the Company's management will continue to be available to the Company when
needed. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue as a going concern.
Basic loss per common share ("EPS") is computed as net loss divided by the
weighted-average number of common shares outstanding during the period. Diluted
EPS includes the impact of common stock potentially issuable upon the exercise
of options and warrants. Potential common stock has been excluded from the
computation of diluted net loss per share as their inclusion would be
antidilutive.
The assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at current exchange rates, and revenue and expenses are
translated at average rates of exchange prevailing during the period. The
aggregate effect of translation adjustments is immaterial at June 30, 2003 and
2002.
F8
USA VIDEO INTERACTIVE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
NOTE C - COMMON STOCK
On February 14, 2003, the Company issued 2,200,000 units to investors at $.0657
per unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.0657 per share.
On February 14, 2003, the Company issued 550,000 units to employees at $.0657
per unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.0657 per share. The Company
charged operations for approximately $2,400 representing the differential
between the fair value and the purchase price of the common stock and for
approximately $2,400 representing the differential between the fair value of the
underlying common stock and the exercise price of the warrants.
On April 7, 2003, the Company issued 1,200,000 units to investors at $.068 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.075 per share.
On April 7, 2003, the Company issued 300,000 units to employees at $.068 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.075 per share. The Company
charged operations for approximately $3,000 representing the differential
between the fair value and the purchase price of the common stock and for
approximately $900 representing the differential between the fair value of the
underlying common stock and the exercise price of the warrants.
On May 30, 2003, the Company issued 1,300,000 units to investors at $.088 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.1175 per share. The Company
charged operations for approximately $2,800 representing the differential
between the fair value and the purchase price of the common stock.
On May 30, 2003, the Company issued 200,000 units to employees at $.088 per
unit. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock at $.1175 per share.
From January 1, 2003 to June 30, 2003, the Company issued 1,842,000 shares of
common stock upon the exercising of warrants with exercise prices ranging from
$.0640 to $.1000 per common share.
NOTE D CONTINGENT LIABILTIY
The Company is party to a default judgement entered against one of the Company's
subsidiaries. During the year ended December 31, 1995, a claim was made to the
Company for the total amount payable under the terms of the lease with the
F9
USA VIDEO INTERACTIVE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
Company's subsidiaries for office space in Dallas Texas through 2002. The
Company's management is of the opinion that the amount payable under the terms
of this judgement is not estimable or determinable at this time and may be
substantially mitigated by the landlord renting the property to another party.
The range of possible loss is from $-0- to approximately $500,000. Any
settlement resulting from the resolution of this contingency will be accounted
for in the period of settlement when such amounts are estimable or determinable.
NOTE E - IMPAIRMENT OF LONG-LIVED ASSETS
As the result of the Company's inability to raise revenues in accordance with
the corporate business plan, the Company continued operating at a loss for the
six month period ended June 30, 2003. As a result, the Company commenced an
impairment review of its long-lived assets in accordance with Statement of
Financial Accounting Standard ('SFAS") 144 "Accounting of the Impairment or
Disposal of Long-Lived Assets". As an result of this impairment review, the
Company recorded an impairment loss of approximately $25,000 during the six
month period ended June 30, 2003, to reduce the carrying value of these assets
to its estimated fair value.
NOTE F - PRO FORMA CALCULATION
The Company has elected to apply APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for its stock options
and has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by SFAS No. 123,
the Company's net loss and net loss per common share for the three month periods
ended June 30, 2003 and 2002 would have been as follows:
F10
USA VIDEO INTERACTIVE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(STATED IN US DOLLARS)
--------------------
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ------------
Net loss:
As reported. . . . . . . . . . . . . $(148,113) $(564,757) $(288,803) $(1,241,537)
Add: Stock-based compensation expense
included in reported net loss. . . . - 19,077 - 31,795
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards. . . . . (35,930) (160,953) (69,755) (268,256)
---------- ---------- ---------- ------------
Pro forma. . . . . . . . . . . . . . . . $(184,043) $(706,633) $(358,558) $(1,477,998)
========== ========== ========== ============
Loss per common share-basic and diluted:
As reported. . . . . . . . . . . . . $ (0.00) $ (0.01) $ (0.00) $ (0.02)
========== ========== ========== ============
Pro forma. . . . . . . . . . . . . . . . $ (0.00) $ (0.01) $ (0.00) $ (0.02)
========== ========== ========== ============
3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY STATEMENT
Certain statements contained in this Quarterly Report on Form 10-Q ("Report"),
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, constitute
"forward-looking statements." Readers should not place undue reliance on these
forward-looking statements. USA Video's actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including risks and uncertainties set forth in USA Video Interactive Corp.'s
Annual Report on Form 10-K, the most important of which are summarized below
under Factors Which May Affect Future Results of Operations, as well as in other
documents USA Video files with the Securities and Exchange Commission ("SEC").
The following information has not been audited. You should read this
information in conjunction with the unaudited financial statements and related
notes to financial statements included in this report.
OVERVIEW OF THE COMPANY
USA Video Interactive Corp. ("USA Video" or the "Company") designs and markets
to business customers streaming video and video-on-demand systems, services and
source-to-destination digital media delivery solutions that allow live or
recorded digitized and compressed video to be transmitted through Internet,
intranet, satellite or wireless connectivity. The Company's systems, services
and delivery solutions include video content production, content encoding, media
asset management, media and application hosting, multi-mode content
distribution, transaction data capture and reporting, e-commerce, specialized
engineering services, and Internet streaming hardware.
Although the Company has not generated any sales for the 2003 year, it continues
to explore opportunities that will result in new products for new revenue
streams, but there can be no assurances that such efforts will be successful.
USVO holds the patent for Store-and-Forward Video-on-Demand (#5,130,792), filed
in 1990 and issued by the United States Patent and Trademark Office on July 14,
1992. It has been cited by at least 145 subsequent patents. USVO holds similar
patents in England, France, Spain, Italy, Germany, and Canada, and has a patent
pending in Japan. USVO anticipates actively engaging in licensing this patent.
The Company's products and services are based on its proprietary Store and
Forward Video-on-Demand ("VoD"). USA Video's Store and Forward VoD is a
patented technique for transmitting video over switched (telephone-like)
networks and allowing the user to view the video using videocassette recorder
(VCR)-like controls (play, pause, stop, etc.). Store and Forward VoD is the
mechanism by which the delivery of compressed video is managed and, together
with compression technology, facilitates the delivery of video to an end user in
a timely and interactive fashion.
USA Video has developed a number of specific products and services based on
these technologies. These include StreamHQ(TM), a collection of
source-to-destination media delivery services marketed to businesses;
EncodeHQ(TM), a service that digitizes and compresses analog-source video;
hardware server and encoder system applications under the brand name Hurricane
Mediacaster(TM); ZMail(TM), a service that delivers web and rich media content
to targeted audiences; mediaClix(TM), a service that delivers content similar to
Zmail but originating from an existing web presence; and Video's patent-pending
Digital Fingerprinting, a Digital Rights Management ("DRM") technology, is to
deter digital video piracy once a user has been authorized to view a video.
The Company was incorporated on April 18, 1986, as First Commercial Financial
Group Inc. in the Province of Alberta, Canada. In 1989,its name was changed to
Micron Metals Canada Corp., which purchased 100% of the outstanding shares of
USA Video Inc., a Texas corporation, in order to focus on the digital media
business. In 1995, the Company changed its name to USA Video Interactive Corp.
and continued its corporate existence to the State of Wyoming. The Company has
five wholly-owned subsidiaries: USA Video (California) Corp., USA Video Corp.,
Old Lyme Productions Inc., USA Video Technologies, Inc., and USVO, Inc. USA
Video's executive and corporate offices are located in Old Lyme, Connecticut,
and its Canadian offices are located in Vancouver, British Columbia.
BUSINESS OBJECTIVES:
USVO has established the following near-term business objectives:
4
1. Leverage USVO's digital video patent for licensing fees and partnerships in
the United States and internationally;
2. Patent and license new technology developed within the corporate research
and development program;
3. Establish StreamHQ(TM)as the industry standard in the streaming video and
rich media marketplace;
4. Attain industry recognition for the superior architectural, functional, and
business differentiators of the StreamHQ(TM) architecture;
5. Develop at least one client per year for a complete StreamHQ(TM) system,
including intellectual property licensing and operational support;
6. Expand StreamHQ(TM)functionality to provide enhanced support for corporate
training and education markets.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to customer
programs and incentives, bad debts, inventories, investments, intangible assets,
income taxes, warranty obligations, impairment or disposal of long-lived assets,
contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We consider the following accounting policies to be both those most important to
the portrayal of our financial condition and the require the most subjective
judgment:
- Revenue recognition;
- Accounting for marketable securities;
- Impairment or disposal of long-lived assets;
- Inventory valuation and related reserves; and
- Deferred taxes.
REVENUE RECOGNITION. Software revenue and other services are recognized in
accordance with the terms of the specific agreement, which is generally upon
delivery. Maintenance, support and service revenue are recognized ratably over
the term of the related agreement.
ACCOUNTING FOR MARKETABLE SECURITIES. We classify our investments in marketable
securities as "available for sale." We carry these investments at fair value,
based on quoted market prices, and unrealized gains and losses are included in
accumulated other comprehensive income (loss), which is reflected upon the sale
of our marketable securities in our statements of operations.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Long-lived assets are reviewed in
accordance with Statement of Financial Accounting Standard ("SFAS") 144.
Impairment or disposal of long-lived assets losses are recognized in the period
the impairment or disposal occurs. Long-lived assets are reduced to their
estimated fair value.
INVENTORY VALUATION AND RELATED RESERVES. Inventories are valued at the lower
of cost or market on a first-in, first-out basis. We use a standard cost system
for purposes of determining cost; the standards are adjusted as necessary to
ensure they approximate actual costs. We write down or reserve for estimated
obsolete or excess inventory based upon assumptions about future demand and
market conditions. We compare current inventory levels on a product basis to
our current sales forecast in order to assess our inventory reserve balance.
Our sales forecasts are based on economic conditions and trends (both current
and projected), anticipated customer demand and acceptance of our products,
current products, expected future products and various other assumptions. If
actual market conditions are less favorable than those projected by management,
additional write-downs may be required.
5
DEFERRED TAXES. We record a valuation allowance to reduce deferred tax assets
when it is more likely than not that some portion of the amount may not be
realized. During 2003, we determined that it was no longer more likely than not
that we would be able to realize all or part of our net deferred tax asset in
the future, and an adjustment to provide a valuation allowance against the
deferred tax asset that as charged to income.
RESULTS OF OPERATIONS
Sales
Sales for the six-month period ended June 30, 2003 were $-0-, compared to
revenue of $89,576 for the six-month period ended June 30, 2002. Sales for the
three-month period ended June 30, 2003 were $-0- compared to $63,323 three-month
period ended June 30, 2002. USA Video discontinued the sale of select services
from its prototype StreamHQ(TM) after customers' satisfaction and proof of
concept. The Company no longer sells its individual functions of StreamHQ(TM).
USA Video intends to continue to develop and expand its StreamHQ(TM) services
business, while pursuing opportunities to sell replicated StreamHQ(TM) systems
to corporations and organizations that prefer systems solutions to services
solutions.
Recently, due to the change in capital markets, plans to seek funding for an
internal sales and marketing team was put on hold indefinitely. Since then the
Company has focused on partnering relationships with other companies to complete
the execution of it StreamHQ -based business plan.
Cost of Sales
The cost of sales for the six months ended June 30, 2003 was $-0-, as compared
to $57,542 for the comparable period of 2002. For the three-month period ended
June 30, 2003, the cost of sales was $-0- as compared to $45,470 for the
comparable period 2002. The decrease in cost of sales is directly attributable
to the decrease in sales.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses consisted of product marketing
expenses, consulting fees, office, professional fees and other expenses to
execute the business plan and for day-to-day operations of the Company. Due to
market conditions, Management has implemented consolidation procedures to reduce
the daily cost of Selling, General and Administrative expenses.
Selling, General and Administrative expenses for the three months ended June 30,
2003 decreased $82,827 to $213,692 from $296,519 for the three months ended June
30, 2002. The six months ended June 30, 2003 these cost decreased by $314,510
to $333,237 from $647,747 for the comparable period. The reduction was due to a
reduction in the Company's operation.
Professional expense for the three months ended June 30, 2003, increased to
$61,218 from $30,856 for the comparable period of 2002. The six months ended
June 30, 2003 these cost increased to $106,108 from $71,804 for the comparable
period. The increase was due to the Company performing due diligence in
preparation of a patent infringement suit.
Depreciation and amortization expense for the six months ended June 30, 2003 was
$9,695, as compared to $265,250 for the comparable period of 2002. For the
three-month period ended June 30, 2003, the cost of sales was $4,847 as compared
to $156,313 for the comparable period 2002. The decrease was use to the
impairment of long-lived assets in 2002.
The Company has arranged for additional staff/consultants to engage in marketing
activities in an effort to identify and assess appropriate market segments,
develop business arrangements with prospective partners, create awareness of new
products and services, and communicate to the industry and potential customers.
Other components of Selling, General and Administrative expense did not change
significantly.
Research and Development Expenses
Research and development expenses consisted primarily of compensation, hardware,
software, licensing fees, and new product applications for the Company's
proprietary StreamHQ . Research and development expenses decreased to $-0- for
the six months ended June 30, 2003, from $235,581 for the comparable period in
2002 and to $-0- for the three months ended June 30, 2003 from $17,436 for the
comparable period in 2002. The reduction was due to the suspension of research
and development activities until additional capital becomes available.
6
Other Income
During the six months ended June 30, 2003, the Company settled debt of
approximately $190,000 for $131,000 at a gain of $59,000, and sold fixed assets
with a $95,000 book value for $115,000 realizing of $20,000. During the six
months ended June 30, 2003, the Company sold stock of related registered
companies for a loss of $93,519.
Impairment Loss on Long-Lived Assets
As the result of the Company's inability to raise revenues in accordance with
the corporate business plan, the company continued operating at a loss of the
six month period ended June 30, 2003. As a result, the Company commenced an
impairment review of its long-lived assets in accordance with Statement of
Financial Accounting Standard ("SFAS")144 "Accounting of the Impairment or
Disposal of Long-Lived Assets". As an result of this impairment review, the
Company recorded an impairment loss of approximately $25,000 during the six
month period ended June 30, 2003, to reduce the carrying value of these assets
to its estimated fair value.
Net Losses
To date, the Company has not achieved profitability and, in fact, expects to
incur substantial net losses for at least the remainder of 2003. The Company's
net loss for the three months ended June 30, 2003 was $148,113 as compared with
a net loss of $564,757 for the three months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company's had a cash position of $50,942, compared to
$48,708 at December 31, 2002.
The Company will require additional financing to fund current operations through
the remainder of 2003. The Company has historically satisfied its capital needs
primarily by issuing equity securities. The Company will require an additional
$1.0 million to $1.5 million to finance operations through fiscal 2003 and
intends to seek such financing through sales of its equity securities.
Assuming the aforementioned $1.0 million to $1.5 million in financing is
obtained, the Company believes that continuing operations for the longer term
will be supported through anticipated licensing revenues and through additional
sales of the Company's securities. Although longer-term financing requirements
may vary depending upon the Company's sales performance, management expects that
the Company will require additional financing of $1.0 million to $1.5 million
through fiscal 2003. The Company has no binding commitments or arrangements for
additional financing, and there is no assurance that management will be able to
obtain any additional financing on terms acceptable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain risks and uncertainties could cause actual results to differ materially
from the results contemplated by the forward-looking statements contained in
this Report. Risks and uncertainties have been set forth in the Company's Annual
Report on Form 10-K, as well as in other documents the Company files with the
SEC. These risk factors include the following:
THE COMPANYS ABILITY TO CONTINUE AS AGIONG CONCERN: THE COMPANY HAS INCURRED
SUBSTANTIAL LOSSES; IT EXPECTS TO INCUR LOSSES IN THE FUTURE, AND MAY NEVER
ACHIEVE PROFITABILITY.
To date, USA Video has not been profitable, has not generated significant
revenue from operations, and has incurred substantial losses. For the six months
ended June 30, 2003, USA Video had a net loss of $288,803. As of June 30, 2003,
the Company had an accumulated deficit of $31,465,244 and a working capital
deficit of $653,867. The Company intends to continue to expend significant
financial and management resources on the development of its proposed products
and services, and other aspects of its business. As a result, the Company
expects operating losses and negative cash flows to increase for the foreseeable
future. Consequently, USA Video will need to generate significant revenues to
achieve and maintain profitability. The Company may be unable to do so. If USA
Video's revenues grow more slowly than anticipated or if operating expenses
increase more than expected, or are not reduced sufficiently, it may never
achieve profitability. Because of factors discussed in this paragraph, USA
Video's auditors, in their report on the Company's financial statements, have
expressed substantial doubt concerning the Company's ability to continue as a
going concern.
7
THE COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE ITS
BUSINESS AND PROSPECTS.
The Company's business and prospects must be considered in light of the risks
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as streaming media.
IF THE COMPANY IS UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING IN THE NEXT
FEW MONTHS IT MAY NOT BE ABLE TO MAINTAIN OPERATIONS AT CURRENT LEVELS.
The Company requires substantial additional financing to maintain operations at
current levels beyond the second quarter of 2003. Financing may not be available
when needed on terms favorable to the Company, or at all. If adequate funds are
not available or are not available on acceptable terms, the Company may be
unable to further develop or enhance its products and services, take advantage
of future opportunities or respond to competitive pressures, or ultimately, to
continue in business.
CONTINUATION OF THE CURRENT SLUMP IN THE TECHNOLOGY SECTOR WILL ADVERSELY AFFECT
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES.
The Company's sales have been adversely affected by the ongoing slump in the
technology industry segment and the continuation of these market conditions can
be expected to result in depressed demand for the Company's products and
services.
THE COMPANY'S OPERATING RESULTS IN FUTURE PERIODS ARE EXPECTED TO BE SUBJECT TO
SIGNIFICANT FLUCTUATIONS, WHICH WOULD LIKELY AFFECT THE TRADING PRICE OF ITS
COMMON SHARES.
Factors that could cause such fluctuations include the Company's ability to
attract and retain customers; the introduction of new video transmission
services or products by others; price competition; the continued development of
and changes in the streaming media market; its ability to remain competitive in
its product and service offerings; its ability to attract new personnel; and
potential U.S. and foreign regulation of the Internet.
THE COMPANY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER THE
COMPANY'S PRODUCTS AND SERVICES OBSOLETE.
Keeping pace with the technological advances may require substantial
expenditures and lead time, particularly with respect to acquiring updated
hardware and infrastructure components of its systems. The Company may require
additional financing to fund such acquisitions. Any such financing may not be
available on commercially reasonably terms, if at all, when needed.
IF THE COMPANY DOES NOT CONTINUOUSLY IMPROVE ITS TECHNOLOGY IN A TIMELY MANNER,
ITS PRODUCTS COULD BE RENDERED OBSOLETE.
These changes and developments may render the Company's products and
technologies obsolete in the future. As a result, the Company's success depends
on its ability to develop or adapt products and services or to acquire new
products and services that can compete successfully. There can be no assurance
that the Company will be successful in these efforts.
THE COMPANY INTENDS TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE
INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE
COMMON SHARES.
Accordingly, existing shareholders may experience additional dilution of their
percentage ownership interest in the Company. In addition, the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of the Company's common shares.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes its exposure to overall foreign currency risk is not
material. The Company does not manage or maintain market risk sensitive
instruments for trading or other purposes and is not exposed to the effects of
interest rate fluctuations as it does not carry any long-term debt.
The Company reports its operations in US dollars and its currency exposure,
although considered by the Company as immaterial, is primarily between the US
and Canadian dollars. Exposure to other currency risks is also not material as
international transactions are settled in US dollars. Any future financing
undertaken by the Company will be denominated in US dollars. As the Company
increases its marketing efforts, the related expenses will be primarily in US
dollars. In addition, 90% of the Company's bank deposits are in US dollars.
8
Item 4. Controls and Procedures
Based on their evaluation of the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report, the undersigned officers of the Company have concluded
that such disclosure controls and procedures are adequate. There were no
significant changes in internal controls or in other factors that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, subsequent to the
date of the most recent evaluation by the undersigned officers of the Company of
the design and operation of internal controls which could adversely affect the
Company's ability to record, process, summarize and report financial data.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 10, 2003, the Registrant announced that its subsidiary, USA Video
Technology Corporation, had filed a lawsuit in the U.S. District Court for the
District of Delaware against Movielink, LLC. The Registrant alleges that
Movielink, a Delaware company, has infringed and continues to infringe on the
Registrant's patented online movie delivery system.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 2003, the Company completed an offering of
1,500,000 units at a price of $0.068 per unit for total proceeds of $103,200.
Each unit consisted of one share of common stock and one warrant to acquire one
additional share at $0.075 per share, exercisable on or before April 7, 2005.
The offer and sale of the units were exempt from registration under Rule 506 of
Regulation D of the Securities Act. The Company limited the manner of the
offering and provided disclosure regarding the offering and the Company to the
investors. Two officers and directors of the Company, one employee of the
Company, three additional unaffiliated non-accredited investors, and six
additional unaffiliated accredited investors purchased the securities. The
Company believes that a portion of these sales were also exempt under Regulation
S under the Securities Act, as the sales were made in offshore transactions to
non-U.S. persons.
During the quarter ended June 30, 2003, the Company completed an offering of
1,500,000 units at a price of $0.088 per unit for total proceeds of $132,000.
Each unit consisted of one share of common stock and one warrant to acquire one
additional share at $0.1175 per share, exercisable on or before May 30, 2005.
The offer and sale of the units were exempt from registration under Rule 506 of
Regulation D of the Securities Act. The Company limited the manner of the
offering and provided disclosure regarding the offering and the Company to the
investors. Two officers and directors of the Company, one employee of the
Company, one additional unaffiliated non-accredited investors, and six
additional unaffiliated accredited investors purchased the securities. The
Company believes that a portion of these sales were also exempt under Regulation
S under the Securities Act, as the sales were made in offshore transactions to
non-U.S. persons.
During the quarter ended June 30, 2003, 1,842,000 common shares were issued
pursuant to warrants exercised for total proceeds of $152,688. The issuance of
the shares was exempt from registration under Rules 504 and 506 of Regulation D
under the Securities Act of 1933 ("Securities Act"). The Company has made
publicly available financial and disclosure information with its filings to the
Canadian Venture Exchange, and provided disclosure regarding the offering and
the Company to the investors. The Company limited the manner of the offering.
The purchasers included an executive officer/director and two non-affiliated
investors.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held an annual meeting of shareholders on June 12, 2003, at Calgary,
Alberta, Canada. At the meeting the shareholders voted to retain Anton Drescher
and Edwin Molina and elect Maurice Loverso as Directors of the Company.
Also at the meeting, the shareholders approved the appointment of Goldstein
Golub Kessler LLP as auditors for the year ending December 31, 2003.
9
Matter Voted Upon No. of Votes For No. of Votes Against No. of Votes Withheld
- ----------------- ---------------- -------------------- ---------------------
1. Election of Directors 66,721,769 nil 231,447
2. Appoint Goldstein Golub
Kessler LLP as auditors
of the Company for the
year ending
December 31, 2003 66,725,549 152,746 63,210
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit(s)
Exhibit 1 - Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(i) On July 2, 2003, the Registrant announced that effective
July 8, 2003, Computershare Trust Company, Inc. of 350
Indiana Street, Suite 800, Golden, Colorado, U. S. A., 80401
(telephone (303) 262-0600 and Fax (303) 262-0700 and e-mail
www.computershare.com) will be the Registrant's registrar
and transfer agent, replacing CIBC Mellon Trust Company of
Calgary, Alberta, Canada. Computershare Trust Company has an
office at 600, 530-8th Avenue S. W., Calgary Alberta, Canada
T2P 3S8(telephone (403)267-6800).
(ii) On May 7, 2003, the Registrant announced that Maurice
Loverso was appointed as a director of the Registrant and
that Robert D. Smith had resigned as director in order to
pursue other employment opportunities.
(iii) On April 10, 2003, the Registrant announced that its
subsidiary, USA Video Technology Corporation, had today
filed a lawsuit in the U.S. District Court for the District
of Delaware against Movielink, LLC. The Registrant alleges
that Movielink, a Delaware company, has infringed and
continues to infringe on the Registrant's patented online
movie delivery system.
(iv) On March 4, 2003, the Registrant announced that it had
entered into an agreement with Engle Group LLC to undertake
investor and media relations services for the registrant and
to assist the Registrant in developing and implementing a
strategic communications plan.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USA Video Interactive Corp.
Dated: August 8, 2003 By: /s/ Anton J. Drescher
--------------------------------
Name: Anton J. Drescher
Title: Chief Financial Officer
10
Exhibit 1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
SECTION 906 CERTIFICATION BY EDWIN MOLINA
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002,
Edwin Molina, hereby certifies that:
1. this report fully complies with the requirements of Sections 13(a) or 15(d)
of the 1934 Act, and
2. the information contained in this report fairly presents, in all material
respects, the registrant's financial condition and results of operations of
the registrant.
By: /s/ Edwin Molina
-----------------------------------
Name: Edwin Molina
Title: President and Chief Executive
Officer
Date: August 8, 2003
SECTION 906 CERTIFICATION BY ANTON J. DRESCHER
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002,
Anton J. Drescher, hereby certifies that:
1. this report fully complies with the requirements of Sections 13(a) or 15(d)
of the 1934 Act, and
2. the information contained in this report fairly presents, in all material
respects, the registrant's financial condition and results of operations of
the registrant.
By: /s/ Anton J. Drescher
------------------------------------
Name: Anton J. Drescher
Title: Secretary and Chief Financial
Officer
Date: August 8, 2003
CERTIFICATIONS
I, Edwin Molina, certify that:
1. I have reviewed this quarterly report on Form 10-Q of USA Video Interactive
Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Edwin Molina
-----------------------------------
Name: Edwin Molina
Title: President and Chief Executive
Officer
Date: August 8, 2003
I, Anton J. Drescher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of USA Video Interactive
Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Anton J. Drescher
------------------------------------
Name: Anton J. Drescher
Title: Secretary and Chief Financial
Officer
Date: August 8, 2003