UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
COMMISSION FILE NUMBER 0-21785
NEW VISUAL CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 95-4545704
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5920 FRIARS ROAD, SUITE 104
SAN DIEGO, CALIFORNIA 92108 (619) 692-0333
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's Common Stock, par value $.001 per share,
outstanding as of September 14, 2004, was 81,631,113.
FORM 10-QSB
NEW VISUAL CORPORATION
JULY 31, 2004
TABLE OF CONTENTS
PART ITEM PAGE
I Financial Information:
1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEET
At July 31, 2004 (Unaudited) 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Nine and Three Months Ended July 31, 2004 and 2003 3-4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended July 31, 2004 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended July 31, 2004 and 2003 6-7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 21
3. CONTROLS AND PROCEDURES 25
II OTHER INFORMATION:
1. LEGAL PROCEEDINGS 26
2. CHANGES IN SECURITIES 27
6. EXHIBITS AND REPORTS ON FORM 8-K 27
1
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
------
July 31, 2004
-------------
Current Assets:
Cash $ 4,894
Other current assets 3,340
-------------
Total Current Assets 8,234
Property and equipment - net of accumulated
depreciation of $433,525 28,196
Technology license and capitalized software
development fee 5,751,000
Film in distribution - net 2,026,547
Deferred financing costs 191,716
Other assets 13,435
-------------
$ 8,019,128
Total Assets =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank overdraft $ 45,636
Convertible notes payable 853,000
Notes payable 752,310
Accounts payable and accrued expenses 1,830,754
-------------
Total Current Liabilities 3,481,700
Convertible debentures, less debt discount of $1,033,331 216,669
Redeemable Series B preferred stock 3,192,000
-------------
Total Liabilities 6,890,369
-------------
Commitments, Contingencies and Other Matters
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares
authorized; Series A junior participating preferred
stock; -0- shares issued and outstanding --
Common stock - $0.001 par value; 500,000,000 shares
authorized; 79,295,124 issued and outstanding 79,295
Additional paid-in capital 54,464,349
Unearned compensation (350,000)
Accumulated deficit (53,064,885)
-------------
Total Stockholders' Equity 1,128,759
-------------
Total Liabilities and Stockholders' Equity $ 8,019,128
=============
See notes to condensed consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
July 31,
-----------------------------
2004 2003
------------- -------------
REVENUES: $ 231,292 $ --
------------- -------------
OPERATING EXPENSES:
Cost of sales 115,665 --
Research and development 10,000 71,401
Compensatory element of stock issuances
for selling, general and administrative expenses 1,241,146 1,659,429
Selling, general and administrative expenses 1,508,171 1,523,308
------------- -------------
TOTAL OPERATING EXPENSES 2,874,982 3,254,138
------------- -------------
OPERATING LOSS (2,643,690) (3,254,138)
------------- -------------
OTHER (INCOME) EXPENSES:
Interest expense 595,478 235,730
Non-cash gain- litigation settlement -- (1,474,000)
Amortization of deferred financing costs 41,802
Amortization of unearned financing costs 99,933 261,327
Other (905) --
------------- -------------
TOTAL OTHER (INCOME) EXPENSES 736,308 (976,943)
------------- -------------
NET LOSS $ (3,379,998) $ (2,277,195)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON STOCK $ (0.04) $ (0.04)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 76,689,939 57,206,153
============= =============
See notes to condensed consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
July 31,
-----------------------------
2004 2003
------------- -------------
REVENUES: $ 60,449 $ --
------------- -------------
OPERATING EXPENSES:
Cost of sales 29,451 --
Research and development -- --
Compensatory element of stock issuances for
selling, general and administrative expenses 175,000 326,436
Selling, general and administrative expenses 386,059 533,165
------------- -------------
TOTAL OPERATING EXPENSES 590,510 859,601
------------- -------------
OPERATING LOSS (530,061) (859,601)
------------- -------------
OTHER (INCOME) EXPENSES:
Interest expense 411,075 111,610
Amortization of deferred financing costs 18,930
Amortization of unearned financing costs 5,224 51,176
------------- -------------
TOTAL OTHER (INCOME) EXPENSES 435,229 162,786
------------- -------------
NET LOSS $ (965,290) $ (1,022,387)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON STOCK $ (0.01) $ (0.02)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 78,719,909 65,114,315
============= =============
See notes to condensed consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) FOR THE NINE MONTHS
ENDED JULY 31, 2004
Common Stock Additional Unearned Total
-------------------------- Paid-In Financing Unearned Accumulated Stockholders'
Shares Amount Capital Costs Compensation Deficit Equity
----------- ------------- ------------- ------------ ------------- ------------- -------------
Balance- November 1, 2003 70,676,682 $ 70,677 $ 51,131,622 $ (15,674) $ (404,582) $(49,684,887) $ 1,097,156
Issuance of common stock
for cash 2,225,835 2,226 377,274 -- -- -- 379,500
Issuance of common stock
for extension of
promissory notes and
interest 280,003 280 67,987 (68,267) -- -- --
Issuance of common stock
for deferred payroll 527,892 528 130,012 -- -- -- 130,540
Issuance of common stock
for compensation 1,049,999 1,050 244,949 -- (245,999) -- --
Issuance of common stock
under consulting
agreements 3,800,000 3,800 926,200 -- (930,000) -- --
Issuance of common stock
for services 44,455 44 10,521 -- (10,565) -- --
Issuance of common stock
for conversion of notes
payable 690,258 690 102,849 -- -- -- 103,539
Stock offering costs -- -- (14,075) -- -- -- (14,075)
Warrants issued with
convertible debentures -- -- 577,896 -- -- -- 577,896
Value assigned to
beneficial conversion feature -- -- 772,104 -- -- -- 772,104
Warrants issued to
placement agent -- -- 121,018 -- -- -- 121,018
Value assigned to
warrants issued for
extension of convertible
notes -- -- 15,992 (15,992) -- -- --
Amortization of unearned
compensation expense -- -- -- -- 1,241,146 -- 1,241,146
Amortization of unearned
financing costs -- -- -- 99,933 -- -- 99,933
Net loss -- -- -- -- -- (3,379,998) (3,379,998)
----------- ------------- ------------- ------------ ------------- ------------- -------------
79,295,124 $ 79,295 $ 54,464,349 $ -- $ (350,000) $(53,064,885) $ 1,128,759
=========== ============= ============= ============ ============= ============= =============
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
JULY 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,379,998) $(2,277,195)
Adjustments to reconcile net loss to net
cash used in operating activities:
Consulting fees and other compensatory
elements of stock issuances 1,241,146 1,659,429
Unusual item - gain on Litigation Settlement -- (1,474,000)
Amortization of unearned financing costs 99,933 261,327
Amortization of deferred financing costs 41,802
Amortization of film production costs 115,665 --
Amortization on debt discount on notes payable 316,669 --
Depreciation 13,105 18,721
Change in Assets (Increase) Decrease:
Other current assets 1,673 (59,912)
Other assets (399) 877
Change in Liabilities Increase (Decrease): --
Accounts payable and accrued expenses 219,951 (272,006)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,330,453) (2,142,759)
CASH USED IN INVESTING ACTIVITIES
Acquisition of license (95,000) --
Proceeds from sale of equipment -- (596,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (95,000) (596,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 45,636
Proceeds from issuance of common stock 379,500 2,657,813
Offering costs related to stock issuances (14,075) (159,017)
Proceeds from convertible debentures 1,350,000 --
Conversion of note payable to stock -- --
Proceeds from note payable 12,000 --
Proceeds from convertible notes payable -- 287,000
Capitalized financing costs (112,500) --
Repayments of convertible debentures (300,000) --
Repayments of notes payable -- (241,096)
Repayments of convertible notes payable (250,000) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,110,561 2,544,700
DECREASE IN CASH AND CASH EQUIVALENTS (314,892) (194,059)
CASH AND CASH EQUIVALENTS - BEGINNING 319,786 311,577
------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 4,894 $ 117,518
============ ============
See notes to condensed consolidated financial statements.
6
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
JULY 31,
2004 2003
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,940 $ 54,904
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for notes payable and accrued
interest $ 68,267 $ 287,750
=========== ===========
Common stock issued for extension of convertible
notes payable $ 15,992 $ --
=========== ===========
Value assigned to warrants issued to placement
agent $ 138,713 $ --
=========== ===========
Accounts payable and accrued expenses satisfied by
issuance of common stock $ 130,011 $ --
=========== ===========
Value assigned to beneficial conversion in
connection with the 7% convertible debenture $ 772,104 $ --
=========== ===========
Common stock issued for conversion of 7% Convertible
Debenture plus accrued interest $ 103,539 $ --
=========== ===========
Value assigned to warrants issued to purchasers
of convertible debentures $ 577,896 $ --
=========== ===========
See notes to condensed consolidated financial statements.
7
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
The condensed consolidated financial statements include the accounts of New
Visual Corporation and its wholly owned operating subsidiaries, NV
Entertainment, Inc. (including its 50% owned subsidiary Top Secret Productions,
LLC), Impact Multimedia, Inc. and NV Technology, Inc. (formerly New Wheel
Technology, Inc.) ("New Wheel") (collectively, the "Company"). All significant
inter-company balances and transactions have been eliminated. The Company
consolidates its 50% owned subsidiary Top Secret Productions, LLC due to the
Company's control of management, board of directors and financial matters.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
Unites States of America ("US GAAP"). In the opinion of management, the
accompanying unaudited financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements should be read
in conjunction with the financial statements and notes related thereto, included
in the Annual Report on Form 10-K for year ended October 31, 2003.
These results for the period ended July 31, 2004 are not necessarily indicative
of the results to be expected for the full fiscal year. The preparation of the
consolidated financial statements in conformity with US GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Visual Corporation was incorporated under the laws of the State of Utah on
December 5, 1985. In November of 1999, the Company began to focus its business
activities on the development of new content telecommunications technologies.
Pursuant to such plan, in February of 2000, the Company acquired New Wheel
Technology, Inc., a development stage, California-based, technology company,
which now operates as the Company's wholly-owned subsidiary, NV Technology,
Inc., a Delaware corporation. As a result of the change in business focus, the
Company became a development stage entity commencing November 1, 1999. With the
completion of the film "Step Into Liquid" and its revenue generation during the
fourth quarter of fiscal 2003 the Company was no longer considered a development
stage entity.
The Company operates in two business segments, the production of motion
pictures, films and videos (the "Entertainment Segment") and development of new
content telecommunications technologies (the "Telecommunication Segment"). The
success of the Company's Entertainment Segment is dependent on future revenues
from the film "Step Into Liquid." The success of the Telecommunications Segment
is dependent on the Company's ability to successfully commercialize its
semiconductor technology.
Through its subsidiary NV Entertainment the Company recorded operating revenues
for its Entertainment Segment, but may continue to report operating losses for
this segment. The Telecommunications Segment will have no operating revenues
until successful commercialization of its developed technology, but will
continue to incur substantial operating expenses, capitalized costs and
operating losses.
8
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
(Continued)
Going Concern
-------------
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going-concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. However, for the nine and three months ended July 31, 2004,
the Company incurred net losses of $3,379,998 and $965,290 respectively. In
addition, the Company had a working capital deficiency of $3,473,466 as of July
31, 2004. The Company has limited capital resources and requires additional
funding in order to sustain its operations, accomplish its growth objectives and
market its planned products and services. There is no assurance that the Company
can reverse its operating losses, or that it can raise additional capital to
allow it to maintain operations or expand its planned operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
In December 2003, the Company completed a private placement of $1,000,000 of its
three-year 7% Convertible Debentures (the "Debentures"). Following the repayment
of the outstanding principal and accrued interest on short-term funding that was
to become due in April 2004 and other offering related expenses, the Company
received net proceeds of approximately $584,000. In addition the Company signed
commitments to place an additional $1,000,000 of Debentures following such time,
as the Securities and Exchange Commission declares the registration statement
covering the common stock underlying the Debentures, which the Company
filed in February 2004, effective. In April and May 2004, certain holders of the
Debentures waived the registration statement effectiveness condition and
purchased an aggregate of $350,000 of Debentures, thus satisfying their post
effectiveness commitments. The registration statement was declared effective in
August 2004 with respect to the Common Stock underlying the Debentures and
related securities issued as of December 2003. As the registration statement was
not declared effective by a specified required date, the Debenture holders were
not required to close on the remaining $650,000 of their commitments.
Additionally, in July 2004, the Company entered into a revolving line of credit
agreement with Wells Fargo Bank, N. A. which allows it to borrow
up to $100,000 on a revolving basis until August 10, 2005. Interest on any
amount the Company borrows under the line of credit accrues at a floating rate
equal to the prime rate set by the bank plus a margin of .5% and is payable
monthly beginning in September 2004.
The Company's ability to continue to operate as a going concern is dependent on
its ability to generate sufficient cash flows to meet its obligations on a
timely basis, to obtain additional financing and to ultimately attain
profitability. The Company needs to raise approximately $325,000 on an immediate
basis in order to keep current essential vendors and suppliers and to maintain
its operations as presently conducted through fiscal 2004. The Company is
actively pursuing and exploring financing options, including the issuance of
debt or equity securities in a private placement. The process of developing
commercial products will require significant additional expenditures for beta
versions, pilot testing and commercial trials. These activities, together with
general and administrative expenses, are expected to result in substantial
operating losses in the foreseeable future. The Company currently has no
commitments for any funding and no assurance can be provided that the Company
will be successful in raising any of the needed funds. The inability to obtain
needed funding will have a material adverse effect on the Company. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty and these adjustments may be
material.
9
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Film In Distribution
--------------------
Statement of Position 00-2, "Accounting by Producers or Distributors of Films"
("SOP-00-2") requires that film costs be capitalized and reported as a separate
asset on the balance sheet. Film costs include all direct negative costs
incurred in the production of a film, as well as allocations of production
overhead and capitalized interest. Direct negative costs include cost of
scenario, story, compensation of cast, directors, producers, writers, extras and
staff, cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2 also
requires that film costs be amortized and participation costs accrued, using the
individual-film-forecast-method-computation method, which amortizes or accrues
such costs in the same ratio that the current period actual revenue (numerator)
bears to the estimated remaining unrecognized ultimate revenue as of the
beginning of the fiscal year (denominator). The Company makes certain estimates
and judgments of its future gross revenue to be received for each film based on
information received by its distributors, historical results and management's
knowledge of the industry. Revenue and cost forecasts are continually reviewed
by management and revised when warranted by changing conditions. A change to the
estimate of gross revenues for an individual film may result in an increase or
decrease to the percentage of amortization of capitalized film costs relative to
a previous period.
In addition, SOP-00-2 also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of a film is less
than its unamortized film costs, then an entity should determine the fair value
of the film and write-off to the statement of operations the amount by which the
unamortized capital costs exceeds the film's fair value.
The Company commences amortization of capitalized film costs and accrues
(expenses) participation costs when a film is released and it begins to
recognize revenue from the film. The Company incurred amortization costs of
$29,451 and $115,655 for the three and nine months ended July 31, 2004,
respectively.
The Company did not amortize any production costs during the three or nine
months ended July 31, 2003 since the film was not in distribution.
10
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
The Company recognizes film revenue from the distribution of its feature film
and related products when earned and reasonably estimable in accordance with SOP
00-2 -- "Accounting by Producers or Distributors of Films." The following
conditions must be met in order to recognize revenue in accordance with SOP
00-2:
o persuasive evidence of a sale or licensing arrangement with a customer
exists;
o the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate and
unconditional delivery;
o the license period of the arrangement has begun and the customer can
begin its exploitation, exhibition or sale;
o the arrangement fee is fixed or determinable; and
o collection of the arrangement fee is reasonably assured.
Under a rights Agreement with Artisan Pictures, Inc. ("Artisan"), the Company's
domestic distributor for its feature length film entitled "Step into Liquid",
the Company shares with Artisan in the profits of STEP INTO LIQUID after Artisan
recovers its marketing, distribution and other predefined costs and fees. The
agreement provides for the payment of minimum guaranteed license fees, usually
payable on delivery of the respective completed film, that are subject to
further increase based on the actual distribution results in the respective
territory. The Company recorded revenues of $60,449 and $231,292 for the three
months ended and nine months ended July 31, 2004. There were no revenues for the
quarter and nine months ended July 31, 2003.
Research and Development
------------------------
Research and development costs are charged to expense as incurred. Amounts
allocated to acquired-in-process research and development costs, from business
combinations, are charged to earnings at the consummation of the acquisition.
Capitalized Software Development Costs
--------------------------------------
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high-risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
11
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized Software Development Costs (Continued)
--------------------------------------------------
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product-by-product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
revenue for a product bears to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, the capitalized costs of each software product is
then valued at the lower of its remaining unamortized costs or net realizable
value.
The Company has no amortization expense for the nine months ended July 31, 2004
and 2003 for its capitalized software development costs as the technology was
not available for commercial distribution.
Series B Redeemable Preferred Stock
-----------------------------------
Series B Redeemable Preferred Stock, which includes characteristics of both
liabilities and equity, is classified as a long-term liability in accordance
with the provisions of SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity."
Net Income (Loss) Per Common Share
----------------------------------
Basic net loss per share of common stock is computed based on the weighted
average shares outstanding and excludes any potential dilution. Diluted loss per
share reflects the potential dilution from the exercise or conversion of all
dilutive securities into common stock based on the average market price of
common shares outstanding during the period. For the period ended July 31, 2004
and 2003, no effect has been given to outstanding options, warrants or
convertible debentures in the diluted computation, as their effect would be
anti-dilutive.
Stock-Based Compensation
------------------------
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 establishes accounting and reporting standards for stock-based
employee compensation plans. This statement allows companies to choose between
the fair value-based method of accounting as defined in this statement and the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees."
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
12
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
------------------------------------
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure -
an Amendment of FASB Statement No. 123". This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures.
For the Nine Months Ended For the Three Months Ended
July 31, July 31,
--------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ --------------
Net loss, as reported $(3,379,998) $(2,277,195) $ (965,290) $ (1,022,387)
Add: Stock-based employee
compensation expense included
in reported net loss -- -- -- --
Less: Total stock-based employee
compensation expense
determined under the fair
value-based method of all
awards (80,000) (713,374) -- --
------------ ------------ ------------ --------------
Proforma net loss $(3,459,998) $(2,990,569) $ (965,290) $ (1,022,387)
============ ============ ============ ==============
Basic and Diluted Net Loss per
Common Stock:
As reported $ (0.04) $ (0.04) $ (0.01) $ (0.02)
============ ============ ============ ==============
Proforma $ (0.04) $ (0.05) $ (0.01) $ (0.02)
============ ============ ============ ==============
13
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards
----------------------------------------------
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46(R),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46(R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46(R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public small business issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004. The adoption of FIN No. 46(R) is not expected to have an
impact on the Company's consolidated financial position, results of operations
or cash flows.
NOTE 3 - FILM IN DISTRIBUTION
In April 2000, the Company entered into a joint venture production agreement to
produce a feature length film ("Step Into Liquid") for theatrical distribution.
The Company agreed to provide the funding for the production in the amount of up
to $2,250,000 and, in exchange, received a 50% share in all net profits from
worldwide distribution and merchandising, after receiving funds equal to its
initial investment of up to $2,250,000. As of July 31, 2004 the Company has
funded a net of $2,335,101 for completion of the film. The film is currently in
distribution. The Company has recognized revenues of $60,449 and $231,292 for
the three months and nine months ended July 31, 2004, respectively. The
Company's management believes revenues from the film will be more than adequate
to cover the capitalized production costs. The Company had amortization costs of
$29,451 and $115,665 for the three months and nine months ended July 31, 2004,
respectively, for the film. The total film production costs and related amounts
capitalized are as follows:
As of
July 31, 2004
-------------
Released films $ 2,335,101
Less: Cumulative amortization of film production costs 308,554
-------------
Total film production costs capitalized for released films 2,026,547
Films in production --
Films in development or pre-production --
-------------
Total Film Production Costs Capitalized $ 2,026,547
=============
14
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - FILM IN DISTRIBUTION (Continued)
Based on anticipated future revenues, amortization of the costs of the films in
distribution are estimated to be:
For the years ending
October 31, Amount
------------------------- ------------
2004 (3 months) $ 745,824
2005 1,026,908
2006 101,526
2007 152,289
------------
Total $ 2,026,547
============
NOTE 4 - DEFERRED FINANCING COST
At July 31, 2004, deferred financing cost consists of costs incurred in
connection with the sale of $1,100,000 of 7% convertible debentures (Note 6).
Deferred financing cost $233,518
Less : Accumulated amortization (41,802)
---------
Deferred Financing Cost, net $191,716
=========
Amortization of deferred financing cost for the three and nine months ended July
31, 2004 was $18,430 and $41,802, respectively.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
The Company entered into several convertible promissory note agreements with
various trusts and individuals, in which it agreed to pay the principal and an
additional amount equal to 50% of the principal. The notes are due when the
Company reaches certain milestones from the distribution of its motion picture
(Note 3). The notes may be converted at any time, in whole or in part, into that
number of fully paid and non-assessable shares of common stock at conversion
prices ranging from $.33 to $1.00. These and the Company's other notes are
summarized in the table below:
July 31, 2004
--------------
Note payable (1) $ 180,000
Notes payable (ten notes) (2) 483,000
Note payable, 9% interest (3) 10,000
Notes payable (four notes), 12% interest (4) 180,000
-----------
Total $ 853,000
===========
(1) Due when receipts received by the Company from the joint venture exceed
$375,000.
(2) Due when receipts received by the Company from the joint venture exceed
$2,250,000.
(3) Due when receipts received by the Company from the joint venture exceed
$750,000.
(4) Notes had an original due date of November 21, 2003. The note holders
extended the due date to January 7, 2004 in exchange for 160,000 shares
of common stock. In January 2004 the Company paid $180,000 of principal
payments and issued 120,003 of shares of common stock in exchange for
further extending the due date of the notes until the next round of
financing is completed. In addition the Company granted warrants to
purchase 120,003 shares of common stock (see Note 7)
15
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - 7% CONVERTIBLE DEBENTURES
In December 2003, the Company completed a private placement to certain private
and institutional investors of $1 million in principal amount of its three year
7% Convertible Debentures (the "Debentures") and signed commitments to place an
additional $1,000,000 of such Debentures (the "Additional Debentures") upon the
effectiveness of the Company's registration statement (the "Registration
Statement") covering the Common Stock underlying the Debentures. The
Registration Statement was originally filed on February 11, 2004. In April and
May 2004, certain holders of the Debentures waived the registration statement
effectiveness condition and purchased an aggregate of $350,000 in principal
amount of Debentures, satisfying their post effectiveness commitments. The
Registration Statement, as amended from time to time, was declared effective by
the Securities and Exchange Commission on August 16, 2004 solely with respect to
the Common Stock underlying the $1 million in principal amount of Debentures and
related securities issued as of December 2003. As the registration statement
covering the Common Stock underlying the Additional Debentures was not declared
effective by the specified date of June 28, 2004, the Company will not be
issuing Additional Debentures for the remaining $650,000 under this transaction.
In connection with the issuance of the Debentures in December 2003, the Company
issued five-year warrants to purchase up to 6,666,667 shares of the Company's
Common Stock, at a per share exercise price of $0.25, subject to cashless
exercise provisions. In connection with the issuance of the Debentures in April
and May 2004, the Company issued five-year warrants to purchase up to 2,333,332
shares of the Company's Common Stock, at a per share exercise price of $0.25,
subject to cashless exercise provisions.
The holders of the Debentures can convert their debt into shares of the
Company's common stock at $.15 per share subject to certain dilution
adjustments.
Accrued interest under the Debentures may be paid in cash or Common Stock. In
the event of an uncured default, as defined, or a non-permitted sale of
securities, the holders of the Debenture can require the Company to redeem their
Debentures. Providing that the certain conditions are met, the Debentures
automatically convert into common shares on the third anniversary of issuance.
In addition, under certain circumstances, the Company can require the conversion
of the Debentures before such time.
The gross proceeds of the $1,000,000 in December of 2003 were allocated 57.73%
or $577,259 to the debenture and 42.27% or 422,741 to the warrants. The
conversion price of the debentures was below the market price of the Company's
common stock at December 31, 2003, which resulted in a beneficial conversion
feature relating to the first $1,000,000 of $577,259. In Accordance with EITF
00-27 the amount allocated to the beneficial conversion feature was limited to
the net proceeds of the offering less the value allocated to the warrants issued
to the purchasers.
The gross proceeds of the $100,000 in April of 2004 were allocated 52.66% or
$52,659 to the debenture and 47.34% or 47,341 to the warrants. The conversion
price of the debentures was below the market price of the Company's common stock
at April 20, 2004, which resulted in a beneficial conversion feature of $52,659.
In Accordance with EITF 00-27 the amount allocated to the beneficial conversion
feature was limited to the net proceeds of the offering less the value allocated
to the warrants issued to the purchasers.
16
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - 7% CONVERTIBLE DEBENTURES DUE DECEMBER 31, 2006 (Continued)
The gross proceeds of the $250,000 in May of 2004 were allocated 56.87% or
$142,186 to the debenture and 43.13% or $107,814 to the warrants. The conversion
price of the debentures was below the market price of the Company's common stock
at May 7, 2004, which resulted in a beneficial conversion feature of $142,186.
In Accordance with EITF 00-27 the amount allocated to the beneficial conversion
feature was limited to the net proceeds of the offering less the value allocated
to the warrants issued to the purchasers.
The amount allocated to the warrants of $577,896 and the amount of the
beneficial conversion feature of $772,104 were both recorded as a debt discount
and are being charged to interest expenses over the term of the Debentures.
In June 2004, $100,000 of convertible debentures plus interest was converted
into 690,258 shares of the Company's common stock.
In connection with this private placement, the Company issued to the placement
agent warrants to purchase 900,000 shares of the Company's Common Stock valued
at $138,713 and incurred $112,500 of other debt issuance costs. Such amount was
recorded as deferred financing costs and is being charged to interest expense
over the term of the loan. The warrants to purchase 666,667 shares of common
stock expire on December 31, 2008 and the warrants to purchase 66,666 shares of
common stock expire on April 20, 2009 and the warrants to purchase 166,667
shares of Common Stock expire on May 7, 2009. In each case, the warrants are
exercisable at $.15 per share.
The Company paid in full ($300,000 plus $3,540 of accrued interest) the 7%
convertible debenture due April 30, 2004 out of the proceeds it received from
the above December 31, 2003 private placement.
During April and May 2004, the Company sold to investors convertible debentures
totaling $350,000 which may have been sold in violation of Section 5 of the
Securities Exchange Act of 1933 as amended. If the purchasers of the Convertible
Debentures issued in April and May 2004 demand that the Company rescind these
sales, then the Company, subject to a final determination, may be required to
remit to these purchasers an aggregate amount of $350,000.
Under the agreements with the purchasers of the Debentures, the Company is
obligated to pay to the Debenture holders liquidated damages associated with the
late filing of the Registration Statement and the missed Registration Statement
required effective date of March 30, 2004. Liquidated damages are equal to (x)
2% of the principal amount of all the Debentures during the first 30-day period
following late filing or effectiveness and (y) 3% of the principal amount of all
Debentures for each subsequent 30-day period (or part thereof). These liquidated
damages aggregate to $160,000. At their option, the Debenture holders are
entitled to be paid such amount in cash or shares of Common Stock at a per share
rate equal to the effective conversion price of the Debentures, which is
currently $0.15. The Registration Statement includes an additional 1,066,667
shares of Common Stock, representing additional shares issuable to the holders
of the Debentures in respect of these liquidated damages.
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock Issuances During the Nine Months Ended July 31, 2004:
------------------------------------------------------------------
During the nine months ended July 31, 2004, the Company:
o issued 280,003 shares of common stock valued at $68,267 as
consideration for the extension of the due date of certain convertible
notes payable;
o issued 527,892 shares of common stock for deferred compensation of
$130,540;
o issued 1,049,999 shares of common stock for compensation to four
officers valued at $245,999;
o issued 3,800,000 shares of common stock for consulting services valued
at 930,000; and
o issued 44,455 shares of common stock to a vendor for services valued at
$10,565.
o issued 2,225,835 shares to various investors for cash proceeds of
$379,500.
o issued 690,258 shares of common stock to convert $100,000 of
convertible debentures plus $3,539 of accrued interest.
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
Warrants Granted
----------------
On December 31, 2003 the Company issued warrants to purchase 6,666,667 shares of
its Common Stock at an exercise price of $.25 in connection with the placement
of $1,000,000 of Debentures (see note 6).
On December 31, 2003 the Company issued a warrant to purchase 666,667 shares of
its Common Stock at an exercise price of $.15 to the placement agent in
connection with the placement of $1,000,000 of Debentures. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model is $.14 per share or $93,333 (see note 6).
The Company granted to four convertible note holders warrants to purchase
120,003 shares of its Common Stock at an exercise price of $.25 in connection
with the extension of the convertible notes due date. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model is $.13 per share or $15,992.
On April 20, 2004 the Company issued warrants to purchase 666,666 shares of its
Common Stock at an exercise price of $.25 in connection with the $100,000 of
Debenture (see note 6).
On April 20, 2004, the Company granted a warrant to purchase 66,666 shares of
its Common Stock at the exercise price of $.15 to the placement agent in
connection with the placement of $100,000 of Debenture. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model is $.15 per share or $9,990.
On May 7, 2004 the Company issued warrants to purchase 1,666,666 shares of its
Common Stock at an exercise price of $.25 in connection with the $250,000 of
Debenture (see note 6).
On May 7, 2004, the Company granted a warrant to purchase 166,667 shares of its
Common Stock at the exercise price of $.15 to the placement agent in connection
with the placement of $250,000 of Debenture. The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model is $.15 per share or $17,695.
NOTE 8 - LINE OF CREDIT
On July 21, 2004, the Company entered into a one-year $100,000 revolving line of
credit with a bank. The line credit has a floating interest rate of the prime
rate set by the bank plus a margin of .500%. The initial interest rate is
approximately 4.75%. Ray Willenberg, Jr, Chairman of the Company, has guaranteed
the repayment of the line of credit. As of July 31, 2004, no money was borrowed
under the line of credit.
18
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Net Loss Per Share
------------------
Securities that could potentially dilute basic earnings per share ("EPS") in the
future that were not included in the computation of diluted EPS because to do so
would have been anti-dilutive for the periods presented consist of the
following:
Warrants to purchase common stock 11,719,999
Options to purchase common stock 6,378,750
Convertible notes payable and accrued interest 2,675,055
7% convertible debenture due December 31, 2006 8,333,333
Series B Preferred stock (based on a floor conversion
price of $.15 at July 31, 2004) 21,280,000
-----------
Total as of July 31, 2004 50,387,137
===========
Substantial issuance after July 31, 2004 through
September 8, 2004: Common Stock issuable upon the
effectiveness of registration Statement and conversion
of convertible notes and warrants 1,900,256
===========
Common Stock issued for cash 825,000
===========
Legal Disputes
--------------
The Company has been served with the following three summonses and complaints,
each filed on July 26, 2004 in the Superior Court of California (San Diego
County): Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New
Visual Corporation, Top Secret Surf Productions, LLC and Does 1 through 100;
Gerald Handler, Trustee of the Handler Children Trust v. New Visual Corporation,
Top Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr.,
Trustee of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by the Company in December 2001 and payable,
according to its terms, out of film distributions that the Company receives.
Each complaint alleges, among other things: that the Company has failed to pay
the amount due and owing under the convertible promissory note issued to the
plaintiff despite demands for payment; that the Company's management has acted
to forestall payments to our creditors, including the plaintiff; and that the
Company fraudulently induced the plaintiff to enter into the convertible
promissory note. The plaintiffs are seeking: money damages in the aggregate
amount of $375,000, plus interest; an accounting; an order compelling the
conveyance of monies to the plaintiffs and punitive damages.
The Company has been served with the following additional summons and complaint,
filed on July 30, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of
the Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks:
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
The three complaints filed on July 26th were dismissed without prejudice.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that the
Company has actually received. The convertible promissory notes underlying these
claims were converted by the plaintiffs into shares of our common stock in March
2002.
19
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
On July 30, 2004, the Company filed an answer to the complaints.
The Company believes that the Company has meritorious defenses to these claims
and, if necessary, intend to vigorously defend this matter, although the
ultimate outcome cannot be determined at this time. The Company's current
limited financial resources may have a material adverse effect on our ability to
adequately defend the Company against these claims, prosecute any counterclaims
that may be available to the Company or satisfy any judgment in the event that
any of these claims is determined adversely to the Company.
NOTE 10 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
For the nine months ended July 31, 2004:
Telecommunications Entertainment
Business Business Unallocable Totals
-------------- -------------- -------------- ------------
Net Sales $ -- $ 231,292 $ -- $ 231,292
============== ============== ============== ============
Operating loss (Income) $ 326,500 $ (8,990) $ 2,326,180 $ 2,643,690
============== ============== ============== ============
Depreciation $ 2,829 $ 10,276 $ -- $ 13,105
============== ============== ============== ============
Total Identifiable Assets at
July 31, 2004 $ 5,923,761 $ 2,071,579 $ 23,788 $ 8,019,128
============== ============== ============== ============
For the nine months ended July 31, 2003:
Telecommunications Entertainment
Business Business Unallocable Totals
-------------- -------------- -------------- ------------
Net Sales $ -- $ -- $ -- $ --
============== ============== ============== ============
Operating loss (Income) $ 123,750 $ -- $ 3,130,388 $ 3,254,138
============== ============== ============== ============
Depreciation $ 268,379 $ 10,397 $ 1,272 $ 280,048
============== ============== ============== ============
Total Identifiable Assets at
July 31, 2003 $ 5,765,459 $ 2,319,995 $ 93,162 $ 8,178,616
============== ============== ============== ============
For the three months ended July 31, 2004:
Telecommunications Entertainment
Business Business Unallocable Totals
-------------- -------------- -------------- ------------
Net Sales $ -- $ 60,449 $ -- $ 60,449
============== ============== ============== ============
Operating loss (Income) $ 153,939 $ (4,558) $ 380,680 $ 530,061
============== ============== ============== ============
Depreciation $ 835 $ 3,487 $ -- $ 4,322
============== ============== ============== ============
Total Identifiable Assets at
July 31, 2004 $ 5,923,761 $ 2,071,579 $ 23,788 $ 8,019,128
============== ============== ============== ============
20
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - SEGMENT INFORMATION (Continued)
For the three months ended July 31, 2003:
Telecommunications Entertainment
Business Business Unallocable Totals
-------------- -------------- -------------- ------------
Net Sales $ -- $ -- $ -- $ --
============== ============== ============== ============
Operating loss (Income) $ 1,077,782 $ (9,598) $ 1,946,981 $ 859,601
============== ============== ============== ============
Depreciation $ 99,724 $ 799 $ 64 $ 100,587
============== ============== ============== ============
Total Identifiable Assets at
October 31, 2003 $ 5,765,459 $ 2,319,995 $ 93,162 $ 8,178,616
============== ============== ============== ============
NOTE 11 - SUBSEQUENT EVENTS
Extension of Notes Payable
In August 2004 the Company informally extended its five individual unsecured
notes payable in the amount of $256,886. The notes became due on June 29, 2004
and were extended to November 2004. The notes continue to accrue interest at 6%
per annum.
In September 2004 the Company extended its unsecured note payable in the amount
of $12,000. The note became due on July 26, 2004 and were extended to November
15, 2004. The note continues to accrue interest at 5% per annum.
Common Stock issuances
From August 1, 2004 to September 9, 2004 the Company issued 825,000 shares of
common stock for $58,000
From August 1, 2004 to September 9, 2204 several convertible debentures
converted $147,500 of principal and $6,816 of accrued interest into 1,028,776
shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and the notes thereto included elsewhere herein. All statements in
this Form 10-QSB related to New Visual Corporation and Subsidiaries ongoing
financial operations and expected future results constitute forward-looking
statements. The actual results may differ materially from those anticipated or
expressed in such statements.
OVERVIEW
New Visual Corporation ("New Visual" or the "Company") is developing advanced
transmission technology designed to enable data to be transmitted across copper
wire at speeds and over distances that exceed those offered by existing forms of
broadband technologies, such as digital subscriber lines (collectively, the
"Semiconductor Technologies"). The Semiconductor Technologies are designed to
dramatically increase the capacity of the copper telephone network, enabling
telephone companies to leverage their existing copper wiring infrastructure and
provide enhanced video, data and voice services over the existing copper
telecommunications infrastructure. The Company conducts the Semiconductor
Technologies activities through our wholly owned subsidiary NV Technology, Inc.,
a Delaware corporation ("NV Technology").
In April 2000, our wholly owned subsidiary, NV Entertainment, Inc. a Delaware
company ("NV Entertainment") entered into a joint venture production agreement
to produce "STEP INTO LIQUID", a feature length surfing documentary for
theatrical distribution (the "Film"). NV Entertainment is a fifty-percent owner
of Top Secret Productions, LLC, the producer of the Film. The Film opened in
Hawaii, New York and Los Angeles on August 8, 2003 and played in more than 100
theaters across the United States during its 5-month theatrical run. With the
completion of the film "Step Into Liquid" and its revenue generation during the
fourth quarter of fiscal 2003 we are no longer considered a development stage
entity. Our Semiconductor Technologies have generated no revenues to date.
21
FILM. The Film has completed its domestic theater run grossing approximately
$3.7 million in box office revenues. As of July 31, 2004, the Company has
received revenue distributions in the aggregate amount of approximately
$231,292. The Film is currently being distributed to foreign markets. The DVD
was released in the United States in April 2004 and cable TV and broadcast
television releases are presently scheduled for October 2004 and Summer 2005,
respectively. The Film's foreign theatrical run began in Australia and New
Zealand in January 2004 and will continue throughout 2004 in Japan Brazil,
Norway and Sweden. Based on the actual receipt of Film distributions through the
nine months ended July 31, 2004, the rate at which such distributions are being
made and information supplied by the Film's distributor in June 2004, management
is currently unable to estimate or project any specific estimate of Film
distributions during fiscal 2004. All references henceforth to our business
relating to the Film will sometimes be referred to in this report as the
"Entertainment Business."
SEMICONDUCTOR TECHNOLOGIES. We continue to work on a beta version of our
Semiconductor Technologies. Currently, we estimate that we will need to raise an
additional $3 million to $4 million in order to complete the design and
commercialization of the Semiconductor Technologies, complete a commercially
deployable version of the semiconductor chip and market the chip. We currently
have no commitments for the additional amounts and no assurance can be given
that we will be able to raise these amounts on commercially acceptable terms or
on any terms.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTHS ENDED JULY 31, 2004 AND THE THREE AND
NINE MONTHS ENDED JULY 31, 2003
REVENUES.
Revenues for the quarter and nine months ended July 31, 2004 of $60,449 and
$231,292 respectively, were from guarantee fees from foreign distribution of the
Film. There were no revenues for the quarter and nine months ended July 31,
2003.
OPERATING EXPENSES.
Operating expenses decreased $269,091 to $590,510 for the quarter ended July 31,
2004 as compared to the corresponding quarter in 2003, primarily as a result of
a decrease in the compensatory element of stock issuances for selling, general
and administrative expenses ($151,436), decrease in selling, general and
administrative expenses ($147,106), partially offset by an increase in cost of
sales ($29,451). Operating expenses decreased approximately $379,156 to
$2,874,982 for the nine months ended July 31, 2004 as compared to the
corresponding nine months in 2003, primarily as a result of a decrease in the
compensatory element of stock issuances for selling, general and administrative
expenses ($418,283), decrease in selling, general and administrative expenses
($15,137), decrease in research and development ($61,401), offset by an increase
in cost of sales ($115,665).
OTHER (INCOME) EXPENSES.
Other (Income) Expenses increased by $272,443 for the quarter ended July 31,
2004 from the corresponding quarter in 2003 primarily as a result of a decrease
in the amortization of unearned financing costs ($45,952), offset by an increase
in interest expense ($299,465), and an increase in amortization of deferred
financing costs ($18,930). The nine months ended July 31, 2003 included a
non-recurring gain in litigation settlement of $1,474,000. Excluding this
settlement, other expenses for the comparable nine month period ended July 31,
2004 increased by ($239,251). The increase is primarily as result of an increase
in interest expense ($359,748) and an increase in amortization of deferred
financing costs ($41,802), offset by a decrease in amortization of unearned
financing costs ($161,394).
22
NET INCOME (LOSS)
The Company generated net loss for the nine months ended July 31, 2003 of
$2,277,195 as a result of the litigation settlement of $1,474,000 discussed
above. Excluding this litigation settlement, the Company lost $3,751,195 for the
nine month period ended July 31, 2003, compared to a loss of $3,379,998 for the
same nine month period ended July 31, 2004. The Company generated net loss for
the quarter ended July 31, 2004 of $965,290 compared to a loss for the quarter
ended July 31, 2003 of $1,022,387.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $1,330,000 for the nine
months ended July 31, 2004 and $2,150,00 for the nine months ended July 31,
2003. Cash balances totaled $4,894 as of July 31, 2004 and $320,000 as of
October 31, 2003.
Since November 1, 1999, operations have been financed principally through sales
of Common Stock, the exercise of warrants and options to purchase common stock,
and the issuance of convertible notes payable and notes payable. Net proceeds
from financing activities amounted to approximately $1,110,000 for the nine
months ended July 31, 2004, primarily due to proceeds from convertible
debentures amounting to $1,350,000. The Company also repaid $550,000 of debt
during the first nine months of fiscal 2004 and incurred approximately $14,000
in offering costs related to stock issuances. Net proceeds from financing
activities amounted to $2,545,000 for the nine months ended July 31, 2003. The
Company also incurred $112,500 of capitalized financing costs related to the
$1,000,000 convertible debentures.
Stock was issued in the payment of selling, general and administrative expenses
amounting to approximately $1,241,000 for the nine months ended July 31, 2004
and approximately $1,660,000 for the nine months ended July 31, 2003.
Research and development expenses totaled $ 10,000 for the nine months ended
July 31, 2004 and $71,401 for the nine months ended July 31, 2003.
In December 2003, the Company completed a private placement to certain private
and institutional investors of $1 million in principal amount of its three year
7% Convertible Debentures (the "Debentures") and signed commitments to place an
additional $1 million of such Debentures (the "Additional Debentures") upon the
effectiveness of the Company's registration statement (the "Registration
Statement") covering the Common Stock underlying these debentures. The
Registration Statement was originally filed on February 11, 2004. In connection
with the issuance of the Debentures, the Company issued five-year warrants (the
"Warrants") to purchase up to 6,666,667 shares of the Company's Common Stock. In
April and May 2004, certain holders of the Debentures waived the Registration
Statement effectiveness condition and purchased an aggregate of $350,000 in
principal amount of Additional Debentures. In connection with these post filing
Additional Debenture purchases, the Company issued warrants for 2,333,334 shares
of the Company's Common Stock. In each case, the Warrants are at a per share
exercise price of $0.25, subject to cashless exercise provisions; provided that
the exercise period may be reduced under certain conditions (primarily relating
to the effectiveness of the Registration Statement and the closing bid price of
the Common Stock exceeding $1.00 for each of 20 consecutive trading days). The
registration statement was declared effective in August 2004 solely with respect
to the shares of Common Stock underlying the $1 million in principal amount of
Debentures issued as of December 2003 and the related Warrants. As such
registration statement also covering the Common Stock underlying the Additional
Debentures and the Warrants issuable in connection therewith was not declared
effective by the specified date of June 28, 2004, the Company will not be
issuing Additional Debentures for the remaining $650,000 under this transaction.
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In July 2004, we entered into a revolving line of credit agreement with Wells
Fargo Bank, National Association which allows us to borrow up to $100,000 on a
revolving basis. Interest on any amount we borrow under the line of credit
accrues at a floating rate equal to the prime rate set by the bank plus a margin
of .500% and is payable monthly beginning in September 2004. The line of credit
terminates on August 10, 2005, at which time any outstanding principal and any
accrued and unpaid interest is due and payable. Our obligations under the line
of credit are secured by funds deposited with the bank by one of our officers
and directors. We have agreed to indemnify that officer and director for any
losses or expenses he may incur as a result of providing security for our line
of credit.
Notwithstanding the availability of the revolving line of credit, the Company
needs to raise a minimum of $325,000 on an immediate basis in order to maintain
its operations as presently conducted through fiscal 2004. The Company has no
commitments for any such financing, and there can be no assurance that the
financing will be available to us on commercially acceptable terms or at all.
The inability to obtain such financing will have a material adverse effect on
our business, its operations and future business prospects. It is also
anticipated that any successful financing will have a significant dilutive
effect on existing stockholders.
GOING CONCERN CONSIDERATION
The Company has incurred losses in each of its years of operation, negative cash
flow and liquidity problems. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability of reported assets or liabilities should the Company be unable to
continue as a going concern.
The Company has been able to continue based upon its receipt of funds from the
issuance of equity securities and borrowings, including the additional
Debentures purchased following the filing of the registration statement in
February 2004, and by acquiring assets or paying expenses by issuing stock. In
May 2004, the Company raised net proceeds of approximately $218,220 upon the
purchase by holders of the Debentures of an aggregate of $250,000 in principal
amount of Debentures. In July 2004, the Company entered into a revolving line of
credit agreement with Wells Fargo Bank, National Association which allows it to
borrow up to $100,000 on a revolving basis until August 10, 2005. The Company's
continued existence is dependent upon its continued ability to raise funds
through the issuance of its securities or borrowings, and its ability to acquire
assets or satisfy liabilities by the issuance of stock. Management's plans in
this regard are to obtain other debt and equity financing until profitable
operation and positive cash flow are achieved and maintained. There can be no
guarantee that financing will be available on commercially acceptable terms, or
at all.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46(R),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46(R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46(R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public small business issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004. The adoption of FIN No. 46(R) is not expected to have an
impact on the Company's consolidated financial position, results of operations
or cash flows.
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ITEM 3. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to the Company's management, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Principal
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING . During the quarter ended
July 31, 2004, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We have been served with the following three summonses and complaints, each
filed on July 26, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New Visual
Corporation, Top Secret Surf Productions, LLC and Does 1 through 100; Gerald
Handler, Trustee of the Handler Children Trust v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr., Trustee
of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top Secret
Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by us in December 2001 and payable, according
to its terms, out of film distributions that we receive. Each complaint alleges,
among other things: that we have failed to pay the amount due and owing under
the convertible promissory note issued to the plaintiff despite demands for
payment; that our management has acted to forestall payments to our creditors,
including the plaintiff; and that we fraudulently induced the plaintiff to enter
into the convertible promissory note. The plaintiffs are seeking: money damages
in the aggregate amount of $375,000, plus interest; an accounting; an order
compelling the conveyance of monies to the plaintiffs and punitive damages.
We have been served with the following additional summons and complaint, filed
on July 30, 2004 in the Superior Court of California (San Diego County): Gerald
Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of the
Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks:
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
The three complaints filed on July 26th were dismissed without prejudice on
August 11, 2004.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
On July 30, 2004, we filed an answer to the complaints.
We believe we have meritorious defenses to these claims and, if necessary,
intend to vigorously defend this matter, although the ultimate outcome cannot be
determined at this time. Our current limited financial resources may have a
material adverse effect on our ability to adequately defend ourselves against
these claims, prosecute any counterclaims that may be available to us or satisfy
any judgment in the event that any of these claims is determined adversely to
us.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended July 31, 2004, the Company issued
unregistered securities as follows:
(i) In May 2004, the Company issued to two of the Debenture Holders
$250,000 in principal amount of our three-year 7% Convertible Debentures,
following such holders' waiver of the registration statement effectiveness
condition.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or Regulation S under such
Securities Act. Except with respect to securities sold under Regulation S, the
recipients of securities in each such transaction acquired the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access, through
their relationships with the Company and its officers and directors, to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
31. Rule 13a-14(a) / 15d-14(a) Certification
32. Section 1350 Certification
(b) Reports on Form 8-K:
8-K filed on May 13, 2004 announcing that certain investors have waived the
registration statement effectiveness requirement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VISUAL CORPORATION
(Registrant)
DATED: SEPTEMBER 14, 2004 BY: /S/ BRAD KETCH
--------------------------------------------
BRAD KETCH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(CHIEF EXECUTIVE AND PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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