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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003
COMMISSION FILE NUMBER 0-21785
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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)
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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 June 12, 2003, was 64,593,351.
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
INDEX TO FORM 10-Q
APRIL 30, 2003
Page Nos.
---------
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 2
At April 30, 2003 (Unaudited) and October 31, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) 3
For the Six Months Ended April 30, 2003 and 2002
For the Period from November 1, 1999 to April 30, 2003
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) 4
For the Three Months Ended April 30, 2003 and 2002
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) 5 - 6
For the Six Months Ended April 30, 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 7 - 8
For the Six Months Ended April 30, 2003 and 2002
For the Period from November 1, 1999 to April 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9 - 28
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 29
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
ITEM 4 - CONTROLS AND PROCEDURES 34
PART II - OTHER INFORMATION 34
ITEM 2 - CHANGES IN SECURITIES 34
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 35
1
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
April 30, October 31,
2003 2002
------------- -------------
(Unaudited)
Current Assets:
Cash $ 183,523 $ 311,577
Other receivable from officers 9,324 10,032
Other current assets 27,614 1,650
------------- -------------
Total Current Assets 220,461 323,259
Property and Equipment - Net of accumulated depreciation of $415,406
at April 30, 2003 and $397,159 at October 31, 2002, respectively 46,286 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 $ 8,211,257 $ 8,332,302
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable $ 965,000 $ 954,500
Notes payable 740,311 971,407
Accounts payable and accrued expenses 1,817,173 2,247,698
License and development fees payable 243,000 734,000
------------- -------------
Total Liabilities 3,765,484 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;
63,009,122 and 49,787,069 shares issued and outstanding at
April 30, 2003 and October 31, 2002, respectively 63,009 49,787
Additional paid-in capital 49,867,515 47,097,830
Unearned financing fees (53,738) (214,952)
Unearned compensation (999,818) (331,581)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during the development stage (35,323,162) (34,068,354)
------------- -------------
Total Stockholders' Equity 1,253,773 232,697
------------- -------------
Total Liabilities and Stockholders' Equity $ 8,211,257 $ 8,332,302
============= =============
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 Six Months Ended For the Period from
April 30, November 1,
------------------------------- 1999 to
2003 2002 April 30, 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 1,332,993 1,462,153 10,609,587
Research and development 71,401 1,278,931 3,024,725
Selling, general and administrative expenses 990,143 1,409,940 10,674,634
Litigation settlement -- -- 1,000,000
Loss on disposal of equipment -- -- 7,500
------------- ------------- -------------
TOTAL OPERATING EXPENSES 2,394,537 4,151,024 31,502,462
------------- ------------- -------------
OPERATING LOSS (2,394,537) (4,151,024) (31,490,262)
------------- ------------- -------------
OTHER (INCOME) EXPENSES:
Interest expense 124,120 449,309 1,516,912
Amortization of unearned financing costs 210,151 523,312 3,789,988
Gain on litigation settlement (1,474,000) -- (1,474,000)
------------- ------------- -------------
TOTAL OTHER EXPENSES (INCOME) (1,139,729) 972,621 3,832,900
------------- ------------- -------------
NET LOSS $ (1,254,808) $ (5,123,645) $(35,323,162)
============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.14)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 54,304,668 35,487,526
============= =============
See notes to condensed consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
April 30,
-------------------------------
2003 2002
------------- -------------
REVENUES $ -- $ --
------------- -------------
OPERATING EXPENSES:
Compensatory element of stock issuances 727,838 759,746
Research and development 31,401 949,818
Selling, general and administrative expenses 491,415 738,326
------------ ------------
TOTAL OPERATING EXPENSES 1,250,654 2,447,890
------------ ------------
OPERATING LOSS (1,250,654) (2,447,890)
------------ ------------
OTHER EXPENSES:
Interest expense 62,729 291,466
Amortization of unearned financing costs 116,659 442,705
------------ ------------
TOTAL OTHER EXPENSES 179,388 734,171
------------ ------------
NET LOSS $ (1,430,042) $ (3,182,061)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.08)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 59,031,251 39,967,547
============ ============
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 SIX MONTHS ENDED APRIL 30, 2003
Common Stock Additional
------------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
Six Months Ended April 30, 2003:
Balance - October 31, 2002 49,787,069 $ 49,787 $ 47,097,830
Issuance of common stock for cash ($.15 to $.35 per share) 10,996,926 10,997 2,013,710
Issuance of common stock for conversion of promissory notes
and interest ($.39 to $1.00 per share) 674,066 674 255,576
Issuance of common stock for deferred payroll 88,710 89 54,911
Issuance of common stock under consulting agreements
($.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 -- -- (129,217)
Value assigned to beneficial conversion feature -- -- 48,937
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 - April 30, 2003 63,009,122 $ 63,009 $ 49,867,515
============= ============= =============
Unearned Unearned
Financing Compensation
Costs Expense
------------- -------------
Six Months Ended April 30, 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 (48,937) --
Value assigned to warrants issued to consultant -- (454,380)
Value assigned to options issued to consultant -- (7,600)
Amortization of unearned compensation expense -- 1,087,743
Amortization of unearned financing cost 210,151 --
Net loss -- --
------------- -------------
Balance - April 30, 2003 $ (53,738) $ (999,818)
============= =============
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED APRIL 30, 2003
Total
Accumulated Stockholders'
Deficit Equity
------------- -------------
Six Months Ended April 30, 2003:
Balance - October 31, 2002 $(46,368,387) $ 232,697
Issuance of common stock for cash ($.15 to $.35 per
share) -- 2,024,707
Issuance of common stock for conversion of promissory
notes and interest ($.39 to $1.00 per share) -- 256,250
Issuance of common stock for deferred payroll
($.62 per share) -- 55,000
Issuance of common stock under consulting agreements
($.41 to $.64 per share) -- 245,250
Cashless exercise of warrants -- --
Cancellation of shares under legal settlement -- (1,474,000)
Stock offering costs -- (129,217)
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 -- 1,087,743
Amortization of unearned financing cost -- 210,151
Net loss (1,254,808) (1,254,808)
------------- -------------
Balance - April 30, 2003 $(47,623,195) $ 1,253,773
============= =============
Accumulated deficit as of November 1, 1999 $(12,300,033)
Accumulated deficit during development stage (November 1, 1999
to April 30, 2003) (35,323,162)
-------------
Total Accumulated Deficit as of April 30, 2003 $(47,623,195)
=============
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)
For the Six Months Ended For the Period from
April 30, November 1,
------------------------------- 1999 to
2003 2002 April 30, 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,254,808) $ (5,123,645) $(35,323,162)
Adjustments to reconcile net loss to net cash used
in operating activities:
Consulting fees and other compensatory
elements of stock issuances 1,332,993 1,462,153 10,609,587
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 210,151 523,312 3,789,988
Depreciation 18,247 75,683 311,372
Loss on disposal of equipment -- 3,596 7,500
Interest charges related to convertible notes -- 403,125 --
Unusual item - gain on litigation settlement (1,474,000) -- (1,474,000)
Changes in Assets (Increase) Decrease:
Other current assets (25,964) 66,977 (70,234)
Due from related parties 707 (40,530) 64,717
Projects under development -- (124,160) --
Other assets -- -- (9,679)
Changes in Liabilities Increase (Decrease):
Accounts payable and accrued expenses (296,774) (344,930) 2,272,626
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (1,489,448) (3,098,419) (12,656,672)
------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment -- (2,513) (408,548)
Acquisition of license (491,000) (250,000) (1,566,000)
Proceeds from sale of equipment -- -- 145,616
Project under development -- -- (2,159,699)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (491,000) (252,513) (3,988,631)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,024,707 1,788,725 12,825,124
Proceeds from loan payable -- -- 1,456,886
Proceeds from exercise of warrants -- 728,000 993,000
Proceeds from convertible notes payable 188,000 893,750 2,598,250
Repayments of notes payable (231,096) -- (731,096)
Offering costs related to stock issuances (129,217) -- (376,210)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,852,394 3,410,475 16,765,954
------------- ------------- -------------
(DECREASE) INCREASE IN CASH (128,054) 59,543 120,651
CASH AND CASH EQUIVALENTS - BEGINNING 311,577 294,802 62,872
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 183,523 $ 354,345 $ 183,523
============= ============= =============
See notes to condensed consolidated financial statements.
7
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 Six Months Ended For the Period from
April 30, November 1,
-------------------------------- 1999 to
2003 2002 April 30, 2003
-------------- -------------- --------------
Cash paid during the period for:
Interest $ 18,904 $ -- $ 19,430
============== ============== ==============
Income taxes $ -- $ -- $ --
============== ============== ==============
Non-Cash Investing and Financing Activities:
Shares of stock issued in the conversion of notes
payable and accrued interest $ 256,250 $ 1,171,250 $ 2,439,876
============== ============== ==============
Common stock issued in the acquisition of license $ -- -- $ 750,000
============== ============== ==============
Redeemable Series B Preferred stock issued in
the acquisition of license $ -- $ -- $ 3,192,000
============== ============== ==============
See notes to condensed consolidated financial statements.
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
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 six months ended April 30, 2003, the Company
incurred a net operating loss of approximately $1,255,000 and
had a working capital deficiency of $3,545,000. 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 to
produce a feature-length film for theatrical distribution.
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)
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 six months ended April
30, 2003, the Company borrowed $188,000 represented by
convertible promissory notes.
During the six months ended April 30, 2003, the Company
received $2,024,707 from the sale of 10,996,926 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
six-month period ended April 30, 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.
10
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.
11
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.
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)
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 six months
ended April 30, 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 six months ended April 30, 2003.
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)
STOCK-BASED COMPENSATION (CONTINUED)
The additional disclosures required by SFAS No. 148 are as follows:
Six Months Ended
April 30,
2003 2002
------------ ------------
Net loss attributable to common stockholders, as
reported $(1,254,808) $(5,123,645)
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) (2,399,750)
------------ ------------
Proforma net loss attributable to common
stockholders $(1,968,182) $(7,523,395)
============ ============
Basic and Diluted Net Loss Attributable to
Common Stockholders:
As reported $ (0.02) $ (0.14)
============ ============
Proforma $ (0.04) $ (0.21)
============ ============
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.
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)
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.
15
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.
16
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 April 30, 2003, $243,000 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.
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - PROJECT UNDER DEVELOPMENT
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.
The Company has an agreement in principle with Artisan
Entertainment to distribute its feature length film within the
US and Canada. This agreement in principle contemplates a
release of the film in August 2003. The definitive agreement
is currently being finalized and 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 January 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 April 30, 2003, the film was completed.
Management of the Company expects to sign the final
distribution agreement during the fiscal period ended July 31,
2003. No amortization of the capitalized film cost was
necessary for the six months periods ended April 30, 2003 and
2002.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the
following:
At At
April 30, October 31,
2003 2002
----------- -----------
Deferred officers compensation $ 106,602 $ 181,596
Accrued bonuses and payroll 436,692 334,307
Professional fees 396,454 623,044
Interest payable 560,212 541,350
Consulting fees 3,500 62,018
Miscellaneous 313,713 505,383
----------- -----------
$1,817,173 $2,247,698
========== ==========
18
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 April 30, 2003, the outstanding amount for all notes was
$1,447,500, of which $482,500 was recorded as interest
expense.
During the six months ended April 30, 2003, the Company
entered into four convertible promissory note agreements,
totaling $188,000. The Company agreed to pay the principal and
an amount equal 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 $0.32 to
$0.43. During the six months ended April 30, 2003, nine
convertible promissory notes were converted to 674,066 shares
of the Company's common stock, totaling $256,250, of which
$78,750 represented accrued interest.
Four of the above convertible notes that were entered into
during the six months ended April 30, 2003 are convertible
into common stock at conversion rates lower than the market
price at the issuance of the convertible notes. Therefore, as
of April 30, 2003, the value of such beneficial conversion
feature was $48,937 and such amount was charged to financing
costs during the six months ended April 30, 2003.
NOTE 7 - NOTES PAYABLE
On November 4, 2002, the Company repaid $200,000 under its
promissory note agreement entered on October 29, 2002
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.
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.
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)
(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.
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
April 30, 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.
20
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)
SERIES C AND SERIES D 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, 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. All of the
designated Series C Preferred Stock and Series D Preferred
Stock were issued in May and June 2003, respectively, to
collateralize proposed loans to the Company of approximately
$1,500,000 and $400,000.
The terms of the Series C and Series D 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 C or
Series D Preferred Stock, as applicable, can be converted into
common stock of the Company to liquidate the unpaid balance of
the loan and related interest.
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. Only 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 April
30, 2003, no options have 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 April 30,
2003, 1,349,664 shares were sold under this agreement,
resulting in total proceeds of $194,673.
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)
SIGNIFICANT COMMON STOCK ISSUANCES DURING THE SIX MONTHS ENDED
APRIL 30, 2003
During the six months ended April 30, 2003, the Company
received $2,024,707 from the sale of 10,996,926 shares of
common stock to investors.
During the six months ended April 30, 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 six
months ended April 30, 2003, $1,539,250 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.
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 - 04/30/03:
In the Plans -- -- -- --
Options granted - 11/02 - 04/30/03:
Outside the Plans -- -- 1,540,000 .63
Options expired/cancelled:
In the Plans -- -- -- --
Outside the Plans -- -- (1,500,000) 1.02
------------- --------- ------------ ---------
Outstanding - April 30, 2003 2,168,750 $ 1.29 4,232,500 $ 2.01
============= ========= ============ =========
Exercisable at April 30:
2003 1,668,125 $ 1.01 2,784,167 $ 2.72
2004 1,949,688 $ 1.22 3,314,167 $ 2.39
2005 2,168,750 $ 1.29 4,219,167 $ 2.02
2006 2,168,750 $ 1.29 4,232,500 $ 2.01
The exercise price for options outstanding as of April 30,
2003 ranged from $0.31 to $4.40.
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
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 $.37 per share, or $37,000, which was recorded as an
operating expense during the six months ended April 30, 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 six months ended
April 30, 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.
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 expenses during
the six months ended April 30, 2003.
23
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At April 30, 2003, the Company had outstanding warrants to
purchase shares of common stock as follows:
Number of Exercise Expiration
Grant Date Shares Price Date
------------------- --------------- --------------- ------------------
June 7, 2000 50,000 $ 7.00 June 7, 2003
June 7, 2000 50,000 8.50 June 7, 2003
June 7, 2000 50,000 10.00 June 7, 2003
June 7, 2000 50,000 11.50 June 7, 2003
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 04/30/03)
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
------------- -------------
3,542,943 $0.06-$11.50 June 7, 2003 - October 1, 2006
============= =============
Exercisable at
April 30, 2003 3,542,943
=============
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 3,542,943
Options to purchase common stock 6,401,250
Convertible notes payable and accrued interest 2,498,110
Series B Preferred stock ($0.34 at April 30, 2003) 9,388,235
------------
Total as of April 30, 2003 21,830,538
============
Substantial issuance after April 30, 2003 through June
12, 2003:
Sale of common stock for cash 1,749,397
============
Convertible notes payable and accrued interest 46,875
============
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)
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 $102,500 was
recorded as an operating expenses for the six months ended
April 30, 2003.
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 $205,000 was
recorded as an operating expenses for the six months ended
April 30, 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.
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
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 as of January 31,
2003.
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 was made in the six
months ending April 30, 2003, and ends all claims associated
with this matter.
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 Company has agreed to issue 150,000
shares of common stock in three equal installments due on
January 15, February 10 and March 10, 2003. 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.
26
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 - SEGMENT INFORMATION
Summarized financial information concerning the Company's
reportable segments is shown in the following table:
For the Six Months Ended April 30, 2003:
Telecom-
munication Entertainment Unallocable
Business Business Totals
----------- ----------- ----------- -----------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $ 71,401 $ -- $1,183,407 $1,254,808
Depreciation and
Amortization $ 168,655 $ 9,598 $ 1,208 $ 179,461
Total Identifiable Assets $5,765,459 $2,243,154 $ 202,644 $8,211,257
For the Six Months Ended April 30, 2002:
Telecom-
munication Entertainment Unallocable
Business Business Totals
----------- ----------- ----------- -----------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $1,278,931 $ -- $3,844,714 $5,123,645
Depreciation and
Amortization $ 202,887 $ 369,747 $ 26,361 $ 598,995
Interest Expenses $ -- $ 449,309 $ -- $ 449,309
Total Identifiable Assets $5,769,651 $2,192,313 $ 660,823 $8,622,787
NOTE 12 - SUBSEQUENT EVENTS
COMMON STOCK
As of May 23, 2003, the Company has received approximately
$264,000 from the sale of 1,749,397 shares of common stock to
investors.
CONVERTIBLE PROMISSORY NOTES
On May 21, 2003, the Company exchanged four of its 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 the Company's receipt of proceeds
from its feature film. As of May 23, 2003, the Company had
repaid $36,000 of these new notes.
27
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
On May 30, 2003, the Company issued 31,250 shares of common
stock upon conversion of a convertible promissory note,
resulting in the cancellation of $10,000 that would have been
outstanding under the note.
On June 5, 2003, the Company issued 15,625 shares of common
stock upon conversion of a convertible promissory note,
resulting in the cancellation of $5,000 that would have been
outstanding under the note.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes contained in this Quarterly
Report on Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2003 AND SIX MONTHS ENDED APRIL,
30, 2002
REVENUES. We are a development-stage company. There were no revenues
for the six months ended April 30, 2003 or the six months ended April 30, 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
$2,395,000 for the six months ended April 30, 2003, from approximately
$4,151,000 for the six months ended April 30, 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 $1,279,000 for the six months ended April 30, 2002
to approximately $71,000 for the six months ended April, 30, 2003, the Company
also paid, during the six months ended April 30, 2003, approximately $491,000 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 $1,410,000 for
the six months ended April, 30, 2002 to approximately $990,000 for the six
months ended April 30, 2003 resulted principally from reductions in legal
expenses and travel expenses. The compensatory element of stock issuances
related to selling, general and administrative expenses declined from
approximately $1,462,000 for the six months ended April 30, 2002 to
approximately $1,333,000 for the six months ended April 30, 2003.
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 $973,000 for the six months
ended April 30, 2002 to a gain of approximately $1,140,000 for the six months
ended July 31, 2003. A gain of approximately $1,474,000 was recorded during the
six months ended April 30, 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 $449,000 for the six months ended April 30, 2002 to approximately
$124,000 for the six months ended April 30, 2003. In the 2002 fiscal period the
Company recognized interest expense related to the issuance of approximately
$894,000 of convertible notes payable. Because the Company issued only $188,000
of convertible notes payable during the six months ended April 30, 2003,
interest expense was less during this period. Also, amortization of unearned
financing costs decreased from approximately $523,000 for the six months ended
April 30, 2002 to approximately $210,000 for the six months ended April 30, 2003
largely as a result of the reduction in the issuance of convertible notes
payable from the six months ended April 30, 2002 to the six months ended April
30, 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 $362,000 for the six months ended April 30,
2002.
NET LOSS. The Company's net loss was approximately $1,255,000, or $0.02
per common share, for the six months ended April 30, 2003, a decrease from the
net loss of approximately $5,124,000 or $0.14 per common share, for the six
months ended April 30, 2002.
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2003 AND THREE MONTHS ENDED APRIL
30, 2002
29
REVENUES. There were no revenues for the three months ended April 30,
2003 or the six months ended April 30, 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
$1,251,000 for the three months ended April 30, 2003, from approximately
$2,448,000 for the three months ended April 30, 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 $950,000 for the three months ended April 30, 2002
to approximately $31,000 for the three months ended April, 30, 2003, the Company
also paid, during the three months ended April 30, 2003, approximately $300,000
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 $738,000 for the
three months ended April, 30, 2002 to approximately $491,000 for the three
months ended April 30, 2003 resulted from decreases in legal fees, travel and
marketing and promotion costs. The compensatory element of stock issuances
related to selling, general and administrative expenses declined from
approximately $760,000 for the three months ended April 30, 2002 to
approximately $728,000 for the three months ended April 30, 2003.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses decreased to
approximately $179,000 for the three months ended April 30, 2003 from
approximately $734,000 for the three months ended April 30, 2002. The decrease
principally resulted from a decline in convertible notes payable transactions
from approximately $581,000 for the three months ended April 30, 2002 to
approximately $103,000 for the three months ended April 30, 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
$362,000 for the three months ended April 30, 2002. Interest expense of
approximately $12,500 was also associated with these convertible note
transactions.
NET LOSS. The Company's net loss was approximately $1,430,000, or $0.02
per common share, for the three months ended April 30, 2003, a decrease from the
net loss of approximately $3,182,000, or $0.08 per common share, for the three
months ended April 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $1,489,000 and
$3,098,000 for the six months ended April 30, 2003 and April 30, 2002,
respectively. Cash balances totaled approximately $312,000 as of October 31,
2002 and $184,000 as of April 30, 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 $1,852,000 for the
six months ended April 30, 2003, including sales of common stock net of offering
costs of approximately $1,896,000 and the issuance of convertible notes payable
of approximately $188,000. Notes payable balances of approximately $231,000 were
repaid during the period. Net proceeds from financing activities amounted to
approximately $3,410,000 for the six months ended April 30, 2002, including
sales of common stock of approximately $1,789,000, proceeds from the exercise of
warrants of $728,000 and proceeds from convertible notes payable of
approximately $894,000.
Stock was issued in payment of expenses amounting to approximately
$1,333,000 and $1,462,000 for the six-month periods ended April 30, 2003 and
April 30, 2002, respectively.
In April 2000, we entered into a joint venture production agreement to
produce "STEP INTO LIQUID," a feature length film for theatrical distribution.
Under the agreement, we are providing the funding for the production in the
amount of up to $2,250,000 and, in exchange, we will receive a 50% share in all
net profits from worldwide distribution and merchandising, after receiving funds
equal to our initial investment of up to $2,250,000. As of April 30, 2003, we
had funded approximately $2,179,000 of the production costs towards this
project. The Company has an agreement in principle with Artisan Entertainment to
distribute STEP INTO LIQUID within the US and Canada. This agreement
contemplates a release of the film in August 2003, and includes a substantial
print and advertising promotional commitment for the theatrical release,
30
distribution fees, performance-driven minimum guarantees for both the theatrical
and video/DVD releases, a modest cash advance and a 10 year license. The parties
are currently finalizing the definitive agreement.
Research and development expenses totaled approximately $71,000 and
$1,279,000 for the six months ended April 30, 2003 and the nine months ended
July 31, 2002, respectively. In addition, $491,000 in development fees were paid
to Adaptive Networks, Inc. during the six months ended April 30, 2003, which are
being capitalized.
During the fiscal years ended October 31, 2001 and October 31, 2002 and
during the six months ended April 30, 2003 the Company issued convertible notes
payable totaling approximately $2,598,000. 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 $0.38 to $1.00 per share. As
of April 30, 2003 the Company's liability associated with convertible notes
payable that remained outstanding was $965,000. 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 of 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 will be
due June 29, 2003.
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 April 30, 2003, the remaining balance due to Adaptive
under the license and development agreement was $243,000.
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.
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 April
30, 2003, the amount outstanding to Mr. Cooper in connection with the separation
agreement was $20,000.
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 April 30, 2003, the remaining balance of these
executive salary deferrals amounted to approximately $107,000.
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
31
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 $12,825,000 through sales of common stock and $4,055,000
from borrowings from November 1, 1999 through April 30, 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.
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
32
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.
CONTINGENCIES AND LITIGATION. The Company makes an assessment of the
probability of an adverse judgment resulting from current and threatened
litigation. The Company accrues the cost of an adverse judgment if, in our
estimation, an adverse settlement is probable and the Company can reasonably
estimate the ultimate cost of such litigation.
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.
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
33
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 April 30, 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 April 30, 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) During the three months ended April 30, 2003, the Company sold or issued
unregistered securities as follows:
In February 2003, we:
o sold an aggregate of 1,220,827 shares of common stock
to 21 investors for total proceeds of $267,643; and
o sold 1,652,361 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 $249,016.
In March 2003, we:
o sold an aggregate of 954,107 shares of common stock
to ten investors for total proceeds of $176,860;
o issued 40,476 shares of common stock valued at
$17,000 to a company upon its cashless exercise of a
warrant; and
o sold 1,039,848 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 $132,148.
In April 2003, we:
o sold an aggregate of 806,473 shares of common stock
to eight investors for total proceeds of $121,971;
and
o sold 1,349,664 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 $194,673.
Following the quarter ended April 30, 2003, we sold or issued the
following unregistered securities:
In May 2003, we:
o sold an aggregate of 756,166 shares of common stock
to nine investors for total proceeds of $113,425;
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;
34
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 473,333 shares of common stock to
five investors for total proceeds of $66,000; 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.
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 Designation of Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Report on
Form 10-Q for the period ended January 31, 2003 (the "January 2003
10-Q")).
4.2 Certificate of Amendment to Certificate of Designation of Series C
Convertible Preferred Stock.*
4.3 Amendment to Rights Agreement between New Visual Corporation and
Wachovia Bank, N.A, dated effective May 18, 2003.*
4.4 Certificate of Designation of Series D Convertible Preferred Stock.*
10.1 Convertible Promissory Note dated February 10, 2003 by New Visual
Corporation in favor of James Warren.*
10.2 Warrant Certificate dated February 12, 2003, issued by New Visual
Corporation to Dan Lombardi (incorporated by reference to Exhibit 10.7
of the January 2003 10-Q).
10.3 Regulation S Stock Purchase Agreement, dated as of April 15, 2003,
between New Visual Corporation and Californian Securities S.A.*
99.1 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.*
________________
* Filed herewith.
(b) Reports on Form 8-K: None.
35
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: June 16, 2003 By: /s/ Brad Ketch
BRAD KETCH
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Dated: June 16, 2003 By: /s/ Thomas J. Sweeney
THOMAS J. SWEENEY
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
36
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brad Ketch, President and Chief Executive Officer of New Visual Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Visual
Corporation;
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 statement 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 officer 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 entities, 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 filling 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 officer 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 officer 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.
Date: June 16, 2003 /s/ Brad Ketch
Brad Ketch
President and Chief Executive Officer
37
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas J. Sweeney, Chief Financial Officer of New Visual Corporation, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of New Visual
Corporation;
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 statement 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 officer 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 entities, 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 filling 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 officer 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):
d) 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
e) 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 officer 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.
Date: June 16, 2003 /s/ Thomas J. Sweeney
Thomas J. Sweeney
Chief Financial Officer
38
EXHIBIT INDEX
4.1 Certificate of Designation of Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 of the Company's Report on
Form 10-Q for the period ended January 31, 2003 (the "January 2003
10-Q")).
4.2 Certificate of Amendment to Certificate of Designation of Series C
Convertible Preferred Stock.
4.3 Amendment to Rights Agreement between New Visual Corporation and
Wachovia Bank, N.A, dated effective May 18, 2003.
4.4 Certificate of Designation of Series D Convertible Preferred Stock.
10.1 Convertible Promissory Note dated February 10, 2003 by New Visual
Corporation in favor of James Warren.*
10.2 Warrant Certificate dated February 12, 2003, issued by New Visual
Corporation to Dan Lombardi (incorporated by reference to Exhibit 10.7
of the January 2003 10-Q).
10.3 Regulation S Stock Purchase Agreement, dated as of April 15, 2003,
between New Visual Corporation and Californian Securities S.A.
99.1 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.