<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000
-------------
[_] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File number 0-29651
-----------------------
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
Wyoming 06-15763-91
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Essex Street
Mystic, Connecticut, USA 06355
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(800) 625-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
__________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 ___
-----
Applicable only to corporate issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2000
------------------------------- ------------------------------
Common Stock, $0.001 per share 75,027,088
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - Financial Statements
Item 1. Financial Statements................................................................... 3
Independent Accountants' Report........................................................ 3
Consolidated Balance Sheets as at June 30, 2000 (unaudited) and December 31, 1999...... 4
Consolidated Statements of Operations for the six months ended June 30, 2000
and 1999 (unaudited)................................................................... 5
Consolidated Statement of Stockholders Equity (Deficiency) for the period ended
December 31, 1998 to June 30, 2000 (unaudited)......................................... 6
Consolidated Statement of Cash Flows for the six months ended June 30, 2000
and 1999 (unaudited)................................................................... 7
Consolidated Schedule of General and Administrative Expenses for the six months
ended June 30, 2000 and 1999 (unaudited)............................................... 8
Notes to Consolidated Financial Statements (unaudited) for period ended June 30, 2000.. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation........................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 16
PART II - Other Information
Item 1. Legal Proceedings...................................................................... 16
Item 2. Changes in Securities and Use of Proceeds.............................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
Item 6. Exhibits............................................................................... 18
SIGNATURES............................................................................. 18
</TABLE>
2
<PAGE>
PART 1 - Financial Information
Item 1. Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders,
USA Video Interactive Corp.
We have reviewed the accompanying consolidated balance sheet of USA Video
Interactive Corp. as of June 30, 2000, and the consolidated statements of
operations, stockholders' equity and cash flows for the six month period then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the Company's consolidated balance sheet as of December 31, 1999 (presented
herein), and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein). In our
report dated March 13, 2000 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 1999,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived. The comparative figures for the
six months ended June 30, 1999 were prepared by management and were neither
audited nor reviewed, and accordingly, we do not express an opinion or any other
form of assurance on them.
Vancouver, Canada "AMISANO HANSON"
July 31, 2000 Chartered Accountants
3
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(Unaudited)
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
------ 2000 1999
---- ----
<S> <C> <C>
Current
Cash and cash equivalents $ 618,264 $ 417,666
Marketable securities 20,700 20,700
Accounts receivable 152,382 17,661
Prepaid expenses 22,691 43,841
Loan receivable 100,000 -
------------ ------------
914,037 499,868
Capital assets - Note 3 560,116 436,417
Patents 59,767 59,066
------------ ------------
$ 1,533,920 $ 995,351
============ ============
LIABILITIES
-----------
Current
Accounts payable $ 640,731 $ 497,163
Due to related parties 246,871 188,866
------------ ------------
887,602 686,029
------------ ------------
STOCKHOLDERS' EQUITY
--------------------
Common stock - Notes 2 and 4 21,897,274 20,950,152
Common stock subscribed - Note 2 803,643 -
Deficit (22,054,599) (20,640,830)
------------ ------------
646,318 309,322
------------ ------------
$ 1,533,920 $ 995,351
============ ============
</TABLE>
Commitments - Note 2
Subsequent events - Note 4
Contingent Liability - Note 5
APPROVED BY THE DIRECTORS:
/s/ Anton J. Drescher , Director /s/ Edwin Molina , Director
----------------------------- ---------------------------
SEE ACCOMPANYING NOTES
4
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 75,000 $ 10,000 $ 238,600 $ 10,000
Cost of goods sold (50,641) - (152,583) -
----------- ---------- ---------- -----------
Gross Profit 24,359 10,000 86,017 10,000
General and Administrative Expenses
- Schedule I (1,019,833) (367,512) (1,603,814) (583,039)
Provision for Doubtful Accounts - - (4,465) -
Non-operating Income
Interest income 3,594 - 7,739 -
Foreign exchange gain (loss) 1,265 (7,202) 754 9,983
Finders fees 100,000 - 100,000 -
---------- ----------- ----------- -----------
Loss before Other Items (890,615) (364,714) (1,413,769) (563,056)
Cumulative effect on prior years of
changing to a different amortization
Method - Note 3 - (27,390) - (27,390)
----------- ----------- ----------- -----------
Net loss $ (890,615) $ (392,104) (1,413,769) $ (590,446)
=========== =========== ============ ===========
Basic loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.01)
=========== ============ =========== ===========
Weighted average shares outstanding 74,162,088 62,406,754 74,162,088 62,406,754
============ ============ ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
for the period ended December 31, 1998 to June 30, 2000
(Unaudited)
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Common Common
Date Number Stock Share
of Issuance of Shares Price Amount Subscriptions Deficit Total
----------- --------- ----- ------ ------------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 58,756,088 18,722,966 - (18,956,362) ( 233,396)
Issued for cash:
Private placement Feb. 24, 1999 2,000,000 $0.067 133,574 133,574
Private placement Apr. 17, 1999 1,000,000 $0.114 114,293 114,293
Private placement Jun. 28, 1999 500,000 $0.395 197,400 197,400
Private placement Sept. 1, 1999 750,000 $1.00 750,000 750,000
Stock purchase warrants Various 3,820,000 $0.067 255,940 255,940
Stock purchase warrants Jul. 12, 1999 25,000 $0.128 3,190 3,190
Stock purchase warrants Various 1,250,000 $0.294 366,894 366,894
Stock purchase options Various 4,265,000 $0.067 287,755 287,755
Stock purchase options Various 550,000 $0.095 52,140 52,140
Stock purchase options Various 66,000 $1.00 66,000 66,000
Net loss for the year ( 1,684,468) ( 1,684,468)
------------ ------------ ------------ ------------
Balance, December 31, 1999 72,982,088 20,950,152 - (20,640,830) 309,322
Issued for cash:
Stock purchase options Various 550,000 0.095 52,140 - - 52,140
Stock purchase options Various 50,000 1.00 50,000 - - 50,000
Stock purchase options Various 430,000 0.068 29,118 - - 29,118
Stock purchase warrants Various 825,000 0.068 55,864 - - 55,864
Private placement April 10,2000 190,000 4.00 760,000 - - 760,000
Common stock subscribed - 803,643 - 803,643
Net loss for the period ( 1,413,769) ( 1,513,769)
------------ ------------ ----------- ------------ ------------
Balance, June 30, 2000 75,027,088 $ 21,897,274 $ 803,643 $(22,054,599) $ 646,318
============ ============ =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
6
<PAGE>
USA VIDEO INTERACTIVE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
--------------------
<TABLE>
<S> <C> <C>
2000 1999
---- ----
Cash flow from operating activities:
Net loss $ ( 1,413,769) $ ( 590,446)
Adjustments to reconcile net loss to net cash used in operations:
Amortization of capital assets 112,096 22,302
Amortization of patents 1,227 524
Cumulative effect on prior years amortization of changing to a
different amortization method - 27,390
Accounts receivable ( 134,721) ( 18,629)
Loan receivable ( 100,000) -
Prepaid expenses 21,150 12,983
Accounts payable 143,568 ( 4,148)
Due to related parties 58,005 ( 156,697)
------------ ----------
Net cash used in operating activities ( 1,312,444) ( 706,721)
------------ ----------
Cash flow used in investing activities:
Purchase of marketable securities - ( 3,679)
Purchases of capital assets ( 235,795) ( 59,199)
Patent fees ( 1,928) ( 11,783)
------------ ----------
Net cash used in investing activities ( 237,723) ( 74,661)
------------ ----------
Cash flow provided by financing activities:
Common stock issued for cash 947,122 1,139,201
Common stock subscriptions 803,643 -
------------ ----------
Net cash provided by financing activities 1,750,765 1,139,201
------------ ----------
Net increase in cash 200,598 357,819
Cash, beginning of the period 417,666 2,618
------------ ----------
Cash and cash equivalents, end of the period $ 618,264 $ 360,437
============ ==========
</TABLE>
7
<PAGE>
USA VIDEO INTERACTIVE CORP. Schedule I
CONSOLIDATED SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
for the six months ended June 30, 2000 and 1999
(Unaudited)
(Stated in US Dollars)
--------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Amortization of capital assets $ 59,579 $ 12,333 $ 112,096 $ 22,302
Amortization of patents 1,194 ( 277) 2,312 524
Advertising 46,670 - 60,822 -
Consulting 64,000 34,507 103,000 63,007
Filing 2,121 3,025 7,820 11,225
Interest expense - (1,286) - 849
License fee - 7,347 - 9,847
Management fees 6,000 7,451 12,000 14,951
Membership fees 6,233 - 12,466 -
Office and general 235,376 47,686 318,928 77,899
Printing 46,902 27,475 57,440 34,422
Product development 185,232 14,673 250,490 28,923
Product marketing 180,792 79,860 333,630 143,802
Professional fees 82,974 28,755 138,532 33,794
Public relations 2,000 26,488 5,000 30,459
Rent 14,977 12,221 39,927 20,917
Telephone and utilities 18,148 17,908 32,234 32,482
Transfer agent 1,682 2,956 4,794 5,137
Travel 46,733 29,848 80,997 31,033
Website expenses 19,220 16,542 31,326 21,466
---------- ---------- ---------- ----------
Basic loss per share $1,019,833 $367,512 $1,603,814 $583,039
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
8
<PAGE>
USA VIDEO INTERACTIVE CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
(Stated in U.S. Dollars)
----------------------
Note 1 Interim Reporting
-----------------
While the information presented in the accompanying interim six months
financial statements is unaudited (except for as indicated in
Independent Accountants' Report), it includes all adjustments which are,
in the opinion of management, necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. All adjustments are of a normal recurring nature. It is
suggested that these interim financial statements be read in conjunction
with the Company's December 31, 1999 annual financial statements.
Note 2 Common Stock - Note 4
---------------------
Authorized:
250,000,000 common stock without par value
250,000,000 preferred stock without par value
Commitments:
Common Stock Purchase Options
The following common stock purchase options were outstanding at June 30,
2000 entitling the holders thereof the right to purchase one common
share for each option held:
<TABLE>
<CAPTION>
Number of Exercise Price
Options Per Share Expiry Date
<S> <C> <C> <C>
Directors 2,300,000 $1.00 July 16, 2001
100,000 $2.00 /(1)/ June 16, 2002
Employees 65,000 $ 0.067 (CDN$0.10) October 20, 2000
875,000 $ 0.067 (CDN$0.10) January 31, 2001
10,000 $ 0.47 (CDN$0.70) May 19, 2001
640,000 $1.00 July 16, 2001
669,000 $1.00 November 25, 2001
750,000 $1.00 December 22, 2001
900,000 $5.00 /(1)/ February 17, 2002
425,000 $2.00 /(1)/ June 16, 2002
75,000 $2.50 /(1)/ June 30, 2002
625,000 $2.00 April 28, 2005
---------
7,434,000
---------
</TABLE>
/(1)/ Granted during period and are subject to regulatory acceptance.
9
<PAGE>
Note 2 Common Stock - Note 4 - (cont'd)
------------
Common Stock Purchase Warrants
The following stock purchase warrants were outstanding at June 30, 2000
entitling the holders thereof the right to acquire one common share for
each warrant held:
<TABLE>
<CAPTION>
Number Exercise Price
of Warrants Per Share Expiry Date
----------- --------- -----------
<C> <S> <C>
2,275,000 $0.067(CDN$0.10) September 30, 2000
925,000 $0.067(CDN$0.10) January 31, 2001
975,000 $0.128(CDN$0.19) March 23, 2001
500,000 $0.493(CDN$0.73) May 19, 2001
750,000 $1.10 July 15, 2001
190,000 $4.00 January 26, 2002
---------
5,615,000
=========
</TABLE>
Common Stock Subscribed
On June 1, 2000, the Company entered into a private placement agreement
to sell 1,000,000 units at $1.50 per unit. Each unit consists of 1
common share and 1 common share purchase warrant, exercisable at $1.50
for 2 years from the date of payment for the unit. The total proceeds of
$1.50 per unit will be applied to the common shares only. At June 30,
2000, the company had received $710,000 as stock subscriptions in
respect to this placement.
Also at June 30, 2000, the Company had received $54,000 as payment for
common stock subscriptions for the exercise of 54,000 stock purchase
options at $1.00 per share and $39,643 as payment for the exercise of
approximately 20,000 stock purchase warrants.
Note 3 Change in Accounting Principle
------------------------------
Amortization of capital assets acquired in prior years was previously
calculated using the graduated straight-line method over 7 years for all
classes of capital assets. The new method using straight-line
amortization over various periods for different classes was adopted to
recognize amortization over a shorter period in order to reflect the
rapid pace of technological change. This change has been applied
retroactively to capital asset acquisitions of prior years, and is
treated as a change in accounting principle due to the change in method
of amortization for previously recorded assets.
10
<PAGE>
Note 3 Change in Accounting Principle - (cont'd)
------------------------------
The effect of the change in amortization policy decreased the
amortization expense and the loss for the six months ended March 31,
1999 by $2,153. The cumulative effect on prior years of changing to a
different amortization method of $27,390 is included in the statement of
operations for the six months ended June 30, 2000. The corresponding
amount has been reflected in increased accumulated amortization of the
capital assets.
Note 4 Subsequent Events
-----------------
Subsequent to June 30, 2000, the company received $790,000 toward its
private placement of 1,000,000 units at $1.50 per unit (Note 2) and
received $31,000 pursuant to the exercise of approximately 97,000 stock
purchase options.
Note 5 Contingent Liability
--------------------
There is a contingent liability in respect to a default judgement
entered against the Company's subsidiary in the State of Texas with
respect to the lease of premises in Dallas, Texas in the amount of
$505,169 ($25,399 included in accounts payable at December 31, 1999).
The subsidiary vacated its premises in Dallas, Texas during the year
ended December 31, 1995 and was sued for the total amount payable under
the terms of the lease through the term of the lease, ended in 2002.
Management of the Company is of the opinion that the amounts payable
under the terms of this judgement is not determinable at this time as
the damages may be substantially mitigated by the landlord renting the
property to another party. Any settlement resulting from the resolution
of this contingency will be accounted for during the period of
settlement. The range of possible loss is NIL to $505,169.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
CAUTIONARY STATEMENT
USA Video Interactive Corp.'s (the "Company") Form 10-Q contains forward-looking
statements that are subject to risks and uncertainties, which could cause actual
results to differ materially from those expressed or implied in the statements.
Forward-looking statements (including oral representations) are statements about
future performance or results, and include any statements using the words
"believe," "expect," "anticipate" or similar words. All forward-looking
statements are only predictions or statements of current plans, which the
Company is constantly reviewing. All forward-looking statements may differ from
actual future results due to, but not limited to, changes in the overall
economy, the nature and pace of technological changes, the number and
effectiveness of competitors in the Company's markets, success in overall
strategy, changes in legal and regulatory policy, the Company's ability to
identify future markets and successfully expand existing ones and the mix of
products and services offered in the Company's target markets. You should
consider these important factors in evaluating any statement contained in this
report and/or made by the Company or on its behalf. The Company has no
obligation to update or revise forward-looking statements.
The following information has not been audited. You should read this information
in conjunction with the condensed financial statements and related notes to
financial statements included in this report.
11
<PAGE>
OVERVIEW OF THE COMPANY
The Company is a public company emerging from the development stage. The Company
is listed on the Canadian Venture Exchange under the trading symbol "US" and on
the pink sheets operated by the National Quotation Bureau under the trading
symbol "USVO". A development stage company is one where substantial efforts are
devoted to establishing a new business but the planned principal business has
not commenced or has commenced but has not generated significant revenues. This
describes the Company through the year ended 1999. However, a shift has occurred
and the Company is now focused on marketing and selling its products and
services and as such it expects to generate revenues in 2000. The Company is
essentially "emerging" from its development stage by fully implementing its
principal business.
The Company provides an array of products and services that allow businesses and
individuals to transmit video data through the Internet and other local and wide
area networks, while maintaining superior video quality at the receiving end.
The Company's goal is to exploit the market opportunity of customized system
solutions. Although there are many companies developing system components, such
as video servers, compression methods and delivery infrastructure, the Company's
engineers and system architects design and develop video streaming systems to
meet the needs of its clients and integrate these systems into the clients'
business models and infrastructure. There is a very large market for this
expertise as many diverse customers convert to digital content formats.
Key Products and Services
-------------------------
The Company's key technologies are the following:
Video Compression - an array of compression techniques which allow large
video files to be greatly reduced in size to allow customers to optimize use of
available bandwidth;
Store and Forward Video-on-Demand ("VoD") - a patented technique for
transmitting video over switched (telephone-like) networks, allowing the user to
view the video using VCR-like controls (play, pause, stop, etc.); and
Engineering and Scientific Expertise - used to develop a patentable Wavelet
compression technique to complement standard MPEG formats; enables the Company
to integrate and employ its technologies for various system and service related
applications.
The revenue-generating applications include high-quality, end-to-end video
distribution systems that process video content from its source to its display
on a remote user's computer screen or TV. The Company is focusing on large-
scale systems that will drive revenues through economies of scale and the
inclusion of management and other fees. Significant revenues also are being
targeted through the sale of a basic set of standard system configurations that
can be constructed, delivered and billed efficiently and cost-effectively.
Intellectual property licensing will provide another significant revenue stream
for the Company as it seeks to establish its technology as a standard component
of the products and services of major industry players. In addition, the
Company is developing and expects to gain significant revenues from content
licensing, management and encoding, hosting for Web-based video delivery,
services to support webcast events, end-to-end production services, and
advertising contained within content and associated with web hosting and event
support.
RESULTS OF OPERATIONS
Revenues
Revenues recognized during the six month period ended June 30, 2000 were
$238,600, as compared to $10,000 during the six month period ended June 30,
1999. Approximately fifty percent (50%) of these revenues were attributable to
sales of the Company's hardware and software systems and approximately fifty
percent (50%) were attributable to sales of engineering services.
12
<PAGE>
Cost of Goods Sold
The cost to the Company of goods sold during the six months ended June 30, 2000
was $152,583 for a gain of $86,017.
Net Losses
At this time, the Company has not achieved profitability and, in fact, expects
to incur net losses for the foreseeable future. The Company's net losses for
the six months ended June 30, 2000, were $1,413,769 as compared with net losses
of $590,446 for the six months ended June 30, 2000. As a percentage of
revenues, net losses were 592% in the six months ended June 30, 2000. No
revenue was generated in the comparable period of 1999.
General and Administrative Expenses
General and Administrative (Operating) expenses consisted of research and
development, product marketing, amortization of capital assets, consulting fees,
office, professional fees and other expenses to execute the business plan and
for day-to-day operations of the Company.
General and Administrative expenses for the six months ended June 30, 2000
increased $1,020,775 to $1,603,814 as compared to General and Administrative
expenses of $1,019,833 during the six months ended June 30, 1999.
A number of General and Administrative expenses exhibited an upward trend in the
six months ended June 30, 2000 compared to the year-earlier period, in response
to the need to target additional resources in support of the Company's increased
effort to bring products to market.
Product Development Expenses: Product development expenses consisted
----------------------------
primarily of compensation, hardware, software and licensing fees. Product
development expenses were $250,490 for the six months ended June 30, 2000
compared with $28,923, an increase of $221,567 or 866% reflecting development of
new technology and refinement and enhancement of product offerings to ensure
competitiveness in the market and support the overall business plan. Product
development expenses are impacted by increased salaries and consulting costs as
well as the timing of the development of products. The Company is developing a
patentable Wavelet compression technique for Windows and MacIntosh platforms and
adapting it to other operating systems and hardware. During the first half of
2000, additional staff was engaged to accelerate these efforts. No assurance can
be given that these efforts will result in a competitively marketable product.
Product Marketing Expenses: Product marketing expenses for the three months
--------------------------
ended June 30, 2000, increased $189,828 or 232% from the year earlier period as
the Company hired additional staff and engaged in marketing activities related
to its efforts to identify and assess appropriate market segments, develop
business arrangements with prospective partners, create awareness of new
products and services, and communicate to the industry and potential customers.
These expenses are expected to increase as the Company builds its business.
Office and General Expenses: Office expenses increased $241,029 or 410%,
---------------------------
mainly for administrative support resources and annual meeting expenses.
Printing expenses rose $23,018 or 250% to $57,440 for marketing and investor
relations materials. Professional fees increased by $104,738 or 410% as the
Company fulfilled new federal reporting requirements, requiring a new level of
accounting and legal services. Rent increased $19,010 or 190% to expand
headquarters office space. Travel and promotional expenses increased $49,964 or
260% due to the necessity of meeting with suppliers and potential customers.
Amortization of capital assets increased $89,794 or 503% reflecting the increase
in the level of depreciable capital assets.
Interest Expense: Interest expense for the six months ended June 30, 2000
----------------
was $nil compared with $849 during the year-earlier period.
13
<PAGE>
As the company expands its business in 2000 and beyond, its research and
development, sales and marketing, and general and administrative expenses will
continue to increase. Research and development expenses will increase as the
Company adds engineering resources to its technology and Web development teams.
Sales and marketing expenses will increase as the Company adds business
development, sales, and marketing personnel to build business relationships,
sell advertising time and build brand awareness. Advertising and public
relations expenses will increase as the Company invests to grow its business.
General and administrative expenses will grow as the Company continues to build
its management infrastructure, including additional personnel, office space and
internal information systems.
Employees
The Company currently has 25 employees as compared to less than 20 during the
six months ended June 30, 1999.
Other
The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its sales to date have been billed and
collected in U.S. dollars. The Company pays the expenses of its Canadian
operations in Canadian currency. Foreign currency exchange gain or loss for the
six months ended June 30, 2000 was $754 compared with $9,983 during the
year-earlier period.
Liquidity And Capital Resources
For the six-month period ended June 30, 2000, the Company's cash position was
$618,264, an increase of $257,827 from $360,437 in the year-earlier period.
The principal sources of cash were $947,112 that was generated from the issuance
of stock due to the exercise of options and warrants (see Note 2 to Financial
Statements) and $803,643 from a private placement, which was subsequently
closed (see Note 4 to Financial Statements). This was offset by $1,312,444 of
cash used in operating activities.
From March 31, 2000 through the date of this report, the Company conducted one
private placement. This consisted of 1,000,000 units at US$1.50 per unit. Each
unit consisted of one (1) common share and one (1) share purchase warrant to
purchase one (1) common share at US$4.00 per share, exercisable until June,
2002. Total proceeds of US$1.50 per unit will be applied to the common shares
only.
The independent accountants have expressed the opinion that the Company may not
be capable of continuing its existence as a going concern. Management
understands and acknowledges that it will be necessary to raise approximately
$3.5 million to $4 million of working capital over the next 12 months in order
to continue in business as a going concern. The threat to the Company's
continuation in business as a going concern will only be removed when revenues
have reached a level that sustains the Company's business operations.
The Company has historically satisfied its capital needs primarily by issuing
equity securities.
During the 2000 and 1999 periods, the Company's operating activities used
$1,312,444 and $706,721, respectively. To fund its operations, the Company
generated $947,122 in the first six months of 2000 through sales of its common
stock, as well as $803,643 subscribed to during the period.
As of June 30, 2000, the Company had approximately $618,264 in cash and
liquid assets on hand - which together with the balance of proceeds from the
private placements is sufficient to fund current operations for three to four
months. Subsequently, management currently anticipated raising an additional
$3.5 million to $4 million through private offerings -- sufficient to finance
operations for the next 12 months.
Management's current expectation is that, assuming it can raise the
aforementioned $3.5 million to $4 million through private offerings, continuing
operations for the longer-term will be supported either through growth in
revenues from sales of products and services, or through a return to the equity
markets for additional funding, the level of which management cannot accurately
anticipate at this time due to the unpredictability of longer-term sales
performance. However, management would expect such additional funding
requirements to exceed $4 million.
14
<PAGE>
There is no guarantee that management will be able to raise equity funds on
terms acceptable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Potential Fluctuations in Quarterly Results - The Company's quarterly
-------------------------------------------
operating results have in the past and may in the future vary significantly
depending on factors including the timing of customer development projects and
purchase orders, new product announcements and releases by the Company and other
companies, gain or loss of significant customers, price discounting of the
Company's products, the timing of expenditures, customer product delivery
requirements, availability and cost of components or labor and economic
conditions generally and in the electronics industry specifically. Any
unfavorable change in these or other factors could have a material adverse
effect on the Company's operating results for a particular quarter. Many of the
Company's customers order on an as-needed basis and often delay issuance of firm
purchase orders until their project commencement dates are determined. Quarterly
revenue and operating results will therefore depend on the volume and timing of
orders received during the quarter, which are difficult to forecast accurately.
New Product Development - To obtain the expected revenue growth, the
-----------------------
Company needs to continue to invest in new product development.
Competition - The Company may not be able to compete effectively against
-----------
intense competition from a multitude of competitors which will limit the amount
of market share the Company captures. It is impossible to project the market
share that the Company currently holds. In addition, the Company may not be
able to maintain a competitive position due to the pace at which the marketplace
is changing. The demand for its products and services may rapidly decline if the
marketplace for its products and services changes. The Company's success is
dependent on its ability to adjust to change and meet new demands.
New Products and Technological Change - The industry is characterized by
-------------------------------------
extremely rapid technological change in both hardware and software development,
frequent new product introductions, evolving industry standards and changing
customer requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current series of simulation and emulation systems and to
design, develop and support its future simulation and emulation products on a
timely basis. These efforts require a high level of expenditures for research
and development by the Company to address the increasingly sophisticated needs
of the customers. There can be no assurance that the Company will be successful
in developing and marketing product enhancements or new products that respond to
technological change or evolving industry standards or changing customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of those
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality or will
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company may announce new products or
technologies that have the potential to replace the Company's existing product
offerings.
The Company Has Not Produced a Profit and Cannot Be Certain That It Will
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Produce a Profit or Remain Profitable If It Does Generate a Profit - The
------------------------------------------------------------------
Company's auditors have expressed doubt about the company's ability to continue
as a going concern. At this time, the Company has not achieved profitability
and, in fact, expects to incur net losses for the foreseeable future. The
Company's limited operating history contributes to the difficulty of predicting
its potential to generate a profit. The Company expects to continue to increase
its marketing and sales. As a result, it will need to generate significant
additional revenue and/or raise funds to achieve profitability.
Key Personnel - The Company depends upon a small number of key persons to
-------------
implement its business plan. The Company may not be able to retain its key
personnel if it is unable to adequately compensate them which could affect its
competitive position and business operations.
15
<PAGE>
Implementation of the Company's Marketing Plan - The Company's marketing
----------------------------------------------
plan is based upon a number of assumptions which if invalid could result in
lower revenues than anticipated. The assumptions of the marketing plan are as
follows:
. The appeal of Company's end-to-end video distribution systems will continue
to generate client interest;
. Market size estimates cited in the "Evolution of the Industry" section are
valid;
. Competition is not suppressed by an overwhelming technical breakthrough by
one of the major players in the field; and
. The Company's technology continues to keep pace with industry standards and
with the products of its competitors.
Need for Capital to Continue as a Going Concern - If the Company is unable
-----------------------------------------------
to raise additional capital, it may not be able to continue as a going concern.
The Company typically needs more capital than it has available to it or can
expect to generate through the sale of its products and services. At this time,
the Company does not have sufficient cash resources to continue its operations
for the next twelve months. The Company has had to raise and will continue to
need to raise, by way of debt and equity financing, $3.5 million to $4 million
to meet its needs over the next 12 months. There is no guarantee that it will be
able to continue to raise the funds needed for its business. Failure to raise
the necessary funds in a timely fashion will limit its ability to sustain its
business.
Protection of the Company's Proprietary Technology - There can be no
--------------------------------------------------
assurance that the Company will be able to maintain the confidentiality of any
of its proprietary technology, know-how or trade secrets, or that others will
not independently develop substantially equivalent technology. The failure or
inability to protect these rights could have a material adverse effect on the
Company's operations. Additionally, the Company may not receive a favorable
ruling on the reinstatement of its lapsed patent for its Store and Forward VoD.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe our exposure to overall foreign currency risk is immaterial. The
Company does not manage or maintain market risk sensitive instruments for
trading or other purposes and is, therefore, not subject to multiple foreign
exchange rate exposures.
We report our operations in US dollars and our currency exposure, although
considered by us to be immaterial, is primarily between US and Canadian dollars.
Exposure to the currencies of other countries is also immaterial as
international transactions are settled in US dollars. Any future financing
undertaken by the Company will be denominated in US dollars. As we increase our
marketing efforts, the related expenses are primarily in US dollars except for
the marketing efforts in Canada. The Company is not exposed to the effects of
interest rate fluctuations as it does not carry any long-term debt.
From a quantitative point of view, the Company has had a foreign exchange gain
of $15,308, $70,328 and $5,074 in 1999, 1998 and 1997, respectively. In
addition, there is no material foreign exchange market risk exposure because,
although held in Canadian bank accounts, 90% of the Company's cash deposits are
in US currency.
PART II - Other Information
Item 1. Legal Proceedings
The pending legal proceedings in which the Company is a party were reported in
the Form 10-Q for the period ended March 31, 2000 filed with the Commission on
June 12, 2000.
In the case of USA Video Interactive Corp. v. Wegener Communications, Inc., the
-----------------------------------------------------------
Company reached a settlement with Wegener Communications on July 12, 2000. The
Company signed a Settlement Agreement and General Release which requires that
the terms of the settlement remain confidential.
16
<PAGE>
To the knowledge of the Company's Executive Officers and Directors, the Company
is not a party to any other legal proceeding or litigation and none of its
property is the subject of a pending legal proceeding. Further, the Officers and
Directors know of no other threatened legal proceedings or litigation.
Item 2. Changes in Securities and Use of Proceeds
SALES OF UNREGISTERED SECURITIES IN THE SECOND QUARTER OF 2000
(1) In June, 2000, the Company conducted an offering of units. Each unit
consisted of one common share and one warrant to acquire an additional share at
$1.50 per share by June, 2002. On completion of the offering, a total of
1,000,000 units were issued at $1.50 per unit for total proceeds of
$1,500,000.00. The offer and sale of the units were exempt from registration
under Rule 506 of Regulation D and under Section 4(2) of the Securities Act of
1933. The Company limited the manner of the offering and provided investors
with an Offering Memorandum. The following investors purchased the securities:
Anton Drescher, executive officer and director and resident of Canada, 200,000
units; Edwin Molina, executive officer and director, 200,000 units; Tony
Castagno, executive officer and director, 50,000 units; Dan Sciro, executive
officer and director, 10,000 units; Kevin Yorio, employee and sophisticated
individual investor, 60,000 units; Michael Rowe, accredited individual investor,
20,000 units; Paul Brandon, accredited individual investor, 17,000 units;
Michael Carbone, accredited individual investor, 20,000 units; George Cyrenne,
sophisticated individual investor and resident of Canada, 7,500 units; Mark
Drazak, sophisticated individual investor, 20,000 units; Linda Drescher,
sophisticated individual investor and resident of Canada, 32,699 units; David
Hersant, sophisticated individual investor, 10,000 units; William Hood,
accredited individual investor, 16,667 units; Norine C. Lozon & Group,
accredited investor located in Canada, 90,800 units; Ralph McNelis, accredited
individual investor, 20,000 units; Joe Nelligan, accredited individual investor
and resident of Canada, 25,000 units; Jan Edward Ostrander, accredited
individual investor, 20,000 units; Resources Trust Co., accredited investor,
66,667 units; Wyatt and Thompson, accredited investor, 66,667 units; Michael
Wynnyezuk, accredited individual investor and resident of Canada, 35,000 units;
and Gabriel Yorio, sophisticated individual investor, 12,000 units. If the
foregoing exemptions are not available, the Company believes that 390,999 units
or $586,498.50 of these sales were also exempt under Regulation S under the
Securities Act of 1933, as amended, due to the foreign nationality of the
relevant purchaser.
(2) During the period ended June 30, 2000, the Company issued 1,030,000 shares
of common stock pursuant to options exercised at between $0.067 and $1.00 per
share for total proceeds of $1,050,000.00. The sale of the shares was exempt
from registration under Rule 701 under the Securities Act of 1933. The following
persons exercised options in 2000: Rowland Perkins, employee, 550,000 shares;
Mark Princevalle, employee, 8,000 shares; John Gustavsen, employee, 16,000
shares; Sandy Princevalle, employee, 3,000 shares; John Cullen, employee, 30,000
shares; Diane Costick, employee, 3,000 shares; Maurice Loversol, consultant,
20,000 shares; and Ronald Patton, executive officer, 400,000 shares. The sales
were made on exercise of grants by employees under the Company's written share
option plan, a copy of which the Company has provided to its participants.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held an annual meeting on June 5, 2000. At the meeting the
shareholders voted to elect Daniel Sciro and Anthony Castagno as Directors of
the Company and to retain Anton Drescher and Edwin Molina as Directors of the
Company.
<TABLE>
<CAPTION>
Matter Voted Upon No. of Votes For No. of Votes Against No. of Votes Withheld
----------------- ---------------- -------------------- ---------------------
<S> <C> <C> <C>
Election of Directors
Edwin Molina 41,110,971 nil 46,764
Anton Drescher 41,116,805 nil 40,930
Anthony Castagno 41,116,605 nil 41,130
Daniel Sciro 41,116,605 nil 40,130
Appoint Amisano
Hansen as auditors of
the Company for the
year ending
December 31, 2000 40,928,802 nil 228,853
</TABLE>
Item 6. Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
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.
USA VIDEO INTERACTIVE CORP.
Dated: August 16, 2000
By: /s/ Edwin Molina
-------------------------------
Name: Edwin Molina
Title: President
18
