10-Q 1 0001.txt FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2000 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 INDEX
Page Number ------ 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
2 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 USA VIDEO INTERACTIVE CORP. CONSOLIDATED BALANCE SHEETS June 30, 2000 and December 31, 1999 (Unaudited) (Stated in US Dollars) --------------------
ASSETS June 30, December 31, ------ 2000 1999 ---- ---- 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 ============ ============
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 USA VIDEO INTERACTIVE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS for the six months ended June 30, 2000 and 1999 (Unaudited) (Stated in US Dollars) --------------------
Three months ended June 30, Six months ended June 30, --------------------------- ---------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- 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 ============ ============ ========== ===========
SEE ACCOMPANYING NOTES 5 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) --------------------
Common Common Date Number Stock Share of Issuance of Shares Price Amount Subscriptions Deficit Total ----------- --------- ----- ------ ------------- ------- ----- 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 ============ ============ =========== ============ ============
SEE ACCOMPANYING NOTES 6 USA VIDEO INTERACTIVE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 2000 and 1999 (Unaudited) (Stated in US Dollars) -------------------- 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 ============ ==========
7 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) --------------------
Three months ended June 30, Six months ended June 30, ---------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- 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 ========== ========== ========== ==========
SEE ACCOMPANYING NOTES 8 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:
Number of Exercise Price Options Per Share Expiry Date 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 ---------
/(1)/ Granted during period and are subject to regulatory acceptance. 9 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:
Number Exercise Price of Warrants Per Share Expiry Date ----------- --------- ----------- 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 =========
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 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 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 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 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 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 ------------------------------------------------------------------------ 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 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 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 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.
Matter Voted Upon No. of Votes For No. of Votes Against No. of Votes Withheld ----------------- ---------------- -------------------- --------------------- 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
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