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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001
COMMISSION FILE NUMBER 0-21785
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NEW VISUAL CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 95-4543704
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5920 FRIARS ROAD, SUITE 104
SAN DIEGO, CALIFORNIA 92108 (619) 692-0333
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the issuer's Common Stock, par value $.001 per
share, outstanding as of September 13, 2001 was 28,044,129.
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TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................37
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........39
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................39
Item 4. Submission of Matters to a Vote of Securities Holders................40
Item 6. Exhibits and Reports on Form 8-K ....................................40
Signatures....................................................................41
PART I - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED BALANCE SHEETS
ASSETS
------
October 31, July 31,
2000 2001
------------- -------------
(Unaudited)
Current Assets:
Cash $ 189,234 $ 253,774
Receivable from related parties 27,563 127,761
Other current assets 30,227 67,023
------------- -------------
Total Current Assets 247,024 448,558
Property and equipment - net of accumulated depreciation 393,787 313,248
Other assets 117,200 138,133
Film and video library 35,944 -
Projects under development 638,707 1,462,651
------------- -------------
Total Assets $ 1,432,662 $ 2,362,590
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 446,921 $ 699,479
------------- -------------
Total Current Liabilities 446,921 699,479
------------- -------------
Long-term debt 756,886 256,886
------------- -------------
Total Liabilities 1,203,807 956,365
------------- -------------
Commitments, Contingencies and Other Matters
(Notes 2, 6, 7, 8 and 9)
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series A junior participating preferred stock; -0- shares issued
and outstanding - -
Common stock - $0.001 par value; 100,000,000 shares
authorized; 24,072,455 and 27,107,331 shares issued and
outstanding at October 31, 2000 and July 31, 2001, respectively 24,072 27,107
Additional paid-in capital 27,813,465 36,278,756
Unearned financing fees (2,583,333) (1,833,333)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during the development stage (12,725,316) (20,766,272)
------------- -------------
Total Stockholders' Equity 228,855 1,406,225
------------- -------------
Total Liabilities and Stockholders' Equity $ 1,432,662 $ 2,362,590
============= =============
See notes to consolidated financial statements.
1
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended For the Period from
July 31, November 1, 1999 to
2000 2001 July 31, 2001
---- ---- -------------
REVENUES $ 7,700 $ - $ 12,200
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales - - 21,403
Amortization of costs of projects 51,242 - -
Projects costs written off 10,844 - 114,613
Depreciation of property and equipment 63,610 97,842 97,842
Acquired in-process research and development
expenses 6,050,000 - 6,050,000
Compensatory element of stock issuances 2,468,428 2,410,194 5,668,743
Research and development 362,906 1,190,348 2,005,710
Selling, general and administrative expenses 1,200,746 2,565,393 4,607,335
------------- ------------- -------------
TOTAL OPERATING EXPENSES 10,207,776 6,263,777 18,565,646
------------- ------------- -------------
OPERATING LOSS (10,200,076) (6,263,777) (18,553,446)
------------- ------------- -------------
OTHER EXPENSES:
Interest expense 3,806 27,179 46,159
Amortization of unearned financing costs 166,667 750,000 1,166,667
Litigation settlement in shares of common stock
(Note 7) - 1,000,000 1,000,000
------------- ------------- -------------
TOTAL OTHER EXPENSES 170,473 1,777,179 2,212,826
------------- ------------- -------------
NET LOSS $(10,370,549) $ (8,040,956) $(20,766,272)
============= ============= =============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.50) $ (0.32)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 20,700,263 25,153,198
============= =============
See notes to consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
July 31,
2000 2001
------------- -------------
REVENUES $ 900 $ -
------------- -------------
OPERATING EXPENSES:
Cost of sales - -
Amortization costs of projects 15,507 -
Depreciation of property and equipment 29,068 28,029
Acquired in-process research and development - -
Compensatory element of stock issuances 619,650 2,410,194
Research and development 182,697 528,254
Selling, general and administrative expenses 547,781 1,428,553
------------- -------------
TOTAL OPERATING EXPENSES 1,394,703 4,395,030
------------- -------------
OPERATING LOSS (1,393,803) (4,395,030)
------------- -------------
OTHER EXPENSES:
Interest expense 3,806 8,749
Amortization of unearned financing costs 166,667 250,000
------------- -------------
TOTAL OTHER EXPENSES 170,473 258,749
------------- -------------
NET LOSS $ (1,564,276) $ (4,653,779)
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.07) $ (0.18)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 22,028,085 26,230,086
============= =============
See notes to consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------ ------------ ------------
(1)
Balance - October 31, 1999 17,224,049 $ 17,224 $12,197,374
Issuance of common stock for cash
($1.00 to $4.00 per share) 805,994 805 2,733,583
Issuance of common stock for services:
($1.00 to $1.40 per share for quarter ended
January 31) 29,765 30 34,020
($1.20 to $12.00 per share for quarter ended
April 30) 1,161,065 1,161 1,813,568
($3.00 to $7.88 per share for quarter ended
July 31) 109,000 109 619,541
($.25 to $12.50 per share for quarter ended
October 31) 84,084 84 28,038
Acquisition of Impact Pictures, Inc.
($4.00 per share) 12,500 13 49,987
Acquisition of New Wheel Technology, Inc.
($2.00 per share) 3,000,000 3,000 5,997,000
Issuance of common stock under consulting
agreement ($2.00 per share) 1,500,000 1,500 2,998,500
Issuances of common stock upon exercise of
warrants ($2.40 per share) 68,750 69 164,931
Issuance of common stock in connection with
private placement ($5.00 to $5.50 per share) 77,248 77 414,923
Value assigned to issuance of 200,000 warrants - - 762,000
Amortization of unearned financing costs - - -
Net loss - - -
------------ ------------ ------------
Balance - October 31, 2000 24,072,455 $ 24,072 $27,813,465
============ ============ ============
(1) Share amounts have been restated to reflect the 1-for-4 reverse stock split
effected on June 22, 2000.
See notes to consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
Unearned Total
Financing Accumulated Stockholders'
Costs Deficit Equity
------------- ------------- -------------
Balance - October 31, 1999 $ - $(12,300,033) $ (85,435)
Issuance of common stock for cash
($1.00 to $4.00 per share) - - 2,734,388
Issuance of common stock for services:
($1.00 to $1.40 per share at January 31) - - 34,050
($1.20 to $12.00 per share at April 30) - - 1,814,729
($3.00 to $7.88 per share at July 31) - - 619,650
($.25 to $12.50 per share at October 31) - - 28,122
Acquisition of Impact Pictures, Inc.
($4.00 per share) - - 50,000
Acquisition of New Wheel Technology, Inc.
($2.00 per share) - - 6,000,000
Issuance of common stock under consulting
agreement ($2.00 per share) (3,000,000) - -
Issuances of common stock upon exercise of warrants
($2.40 per share) - - 165,000
Issuance of common stock in connection with private
placement ($5.50 per share) - - 415,000
Value assigned to issuance of 200,000 warrants - - 762,000
Amortization of unearned financing costs 416,667 - 416,667
Net loss - (12,725,316) (12,725,316)
------------- ------------- -------------
Balance - October 31, 2000 $ (2,583,333) $(25,025,349) $ 228,855
============= ============= =============
Accumulated deficit as of October 31, 1999 $(12,300,033)
Accumulated deficit during development stage
(year ended October 31, 2000) (12,725,316)
-------------
Total Accumulated Deficit as of October 31, 2000 $(25,025,349)
=============
See notes to consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
Common Stock Additional
-------------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
Balance - October 31, 1999 17,224,049 $ 17,224 $ 12,197,374
Issuance of common stock for cash
($1.00 to $4.00 per share) 770,994 771 2,593,617
Issuance of common stock for services:
($1.00 to $1.40 per share at January 31) 29,765 30 34,020
($1.20 to $12.00 per share at April 30) 1,161,065 1,161 1,813,568
($3.00 to $7.88 per share at July 31) 109,000 109 619,541
Acquisition of Impact Pictures, Inc.
($4.00 per share) 12,500 12 49,988
Acquisition of New Wheel Technology, Inc.
($2.00 per share) 3,000,000 3,000 5,997,000
Issuance of common stock under consulting
agreement ($2.00 per share) 1,500,000 1,500 2,998,500
Issuances of stock for exercise of warrants
($2.40 per share) 68,750 69 164,931
Amortization of unearned financing costs - - -
Net loss - - -
------------- ------------- -------------
Balance - July 31, 2000 23,876,123 $ 23,876 $ 26,468,539
============= ============= =============
Unearned Total
Financing Accumulated Stockholders'
Costs Deficit Equity
------------- ------------- -------------
Balance - October 31, 1999 $ - $(12,300,033) $ (85,435)
Issuance of common stock for cash
($1.00 to $4.00 per share) - - 2,594,388
Issuance of common stock for services:
($1.00 to $1.40 per share at January 31) - - 34,050
($1.20 to $12.00 per share at April 30) - - 1,814,729
($3.00 to $7.88 per share at July 31) - - 619,650
Acquisition of Impact Pictures, Inc.
($4.00 per share) - - 50,000
Acquisition of New Wheel Technology, Inc.
($2.00 per share) - - 6,000,000
Issuance of common stock under consulting
agreement ($2.00 per share) (3,000,000) - -
Issuances of stock for exercise of warrants
($2.40 per share) - - 165,000
Amortization of unearned financing costs 166,667 - 166,667
Net loss - (10,370,549) (10,370,549)
------------- ------------- -------------
Balance - July 31, 2000 $ (2,833,333) $(22,670,582) $ 988,500
============= ============= =============
See notes to consolidated financial statements.
6
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
Common Stock Additional
-------------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
(1)
Nine Months Ended July 31, 2001:
-------------------------------
Balance - October 31, 2000 24,072,455 $ 24,072 $ 27,813,465
Issuance of common stock for cash
($2.68 to $5.00 per share) 240,904 241 704,759
Issuance of common stock with attached
warrants ($4.02 per share for quarter ended
January 31) 174,714 175 489,024
Issuance of common stock with attached
warrants ($5.10 per share for quarter ended
January 31) 30,600 31 85,649
Issuance of common stock with attached
warrants ($2.80 to $5.10 per share for
quarter ended April 30) 104,571 105 292,695
Issuance of common stock in connection with
Private Placement ($4.35 to $5.50 per share
for quarter ended January 31) 32,445 32 151,968
Issuance of common stock in connection with
Private Placement($2.60 to $3.37 per share
for quarter ended April 30) 207,307 207 619,793
Issuance of common stock in connection with
Private Placement ($1.74 to $2.80 per share
for quarter ended July 31) 1,446,355 1,446 2,742,008
Issuance of common stock in connection with
litigation settlement 250,000 250 999,750
Issuance of stock to Vice-Chairperson of Board
of Directors for services ($1.8984 per share
at June 11) 500,000 500 948,700
Issuance of stock under consulting agreement
($2.90 to $3.90 per share at July 31) 50,960 51 171,693
Value assigned to warrants issued to
consultants at July 31 - - 1,289,250
Cancellation of common stock issued for cash (2,980) (3) (29,998)
Amortization of unearned financing costs - - -
Net loss - - -
------------- ------------- -------------
Balance - July 31, 2001 27,107,331 $ 27,107 $ 36,278,756
============= ============= =============
(1) Share amounts have been restated to reflect the 1-for-4 reverse stock split
effected on June 22, 2000.
See notes to consolidated financial statements.
7
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE SIX MONTHS ENDED APRIL 30, 2000 AND 2001
Unearned Total
Financing Accumulated Stockholders'
Costs Deficit Equity
------------- ------------- -------------
Nine Months Ended July 31, 2001:
-------------------------------
Balance - October 31, 2000 $ (2,583,333) $(25,025,349) $ 228,855
Issuance of common stock for cash
($2.68 to $5.00 per share) - - 705,000
Issuance of common stock with attached
warrants ($4.02 per share for quarter ended
January 31) - - 489,199
Issuance of common stock with attached
warrants ($5.10 per share for quarter ended
January 31) - - 85,680
Issuance of common stock with attached warrants
($2.80 to $5.10 per share for quarter ended
April 30) - - 292,800
Issuance of common stock in connection with
Private Placement ($4.35 to $5.50 per share
for quarter ended January 31) - - 152,000
Issuance of common stock in connection with
Private Placement ($2.60 to 3.37 per share
for quarter ended April 30) - - 620,000
Issuance of common stock in connection with
Private Placement ($1.74 to $2.80 per share
for quarter ended July 31) - - 2,743,454
Issuance of common stock in connection with
litigation settlement - - 1,000,000
Issuance of stock to Vice Chairperson of Board
of Directors for services ($1.8984 per share
at May 31) - - 949,200
Issuance of stock under consulting agreement
($2.90 to $3.90 per share at July 31) - - 171,744
Value assigned to warrants issued to consultant
at July 31 - - 1,289,250
Cancellation of common stock issued for cash - - (30,001)
Amortization of unearned financing costs 750,000 - 750,000
Net loss - (8,040,956) (8,040,956)
------------- ------------- -------------
Balance - July 31, 2001 $ (1,833,333) $(33,066,305) $ 1,406,225
============= ============= =============
Accumulated deficit as of October 31, 2000
$(12,300,033)
Accumulated deficit during development stage
(November 1, 1999 to July 31, 2001) (20,766,272)
-----------
Total accumulated deficit as of July 31, 2001 $(33,066,305)
=============
See notes to consolidated financial statements.
8
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO JULY 31, 2001 AND
THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
For the Nine Months Ended For the Period from
July 31, November 1, 1999 to
2000 2001 July 31, 2001
------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,370,549) $ (8,040,956) $(20,766,272)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensatory elements of stock issuances 2,468,428 2,410,194 5,668,743
Stock issued for acquired in-process research and
development 6,050,000 - 6,050,000
Stock issued for litigation settlement - 1,000,000 1,000,000
Projects costs written-off 10,884 - 114,613
Amortization of unearned financing costs 166,667 750,000 1,166,667
Depreciation of property and equipment 63,610 97,842 195,014
Amortization of costs of projects 51,242 - -
Increase (decrease) from changes in:
Prepaid expenses and other current assets (11,244) (36,796) (67,023)
Other assets (4,091) (20,933) (133,133)
Due from related parties 18,722 (100,198) (96,339)
Projects under development (488,901) (788,000) (1,443,519)
Accounts payable and accrued expenses (290,252) 252,557 278,780
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (2,335,484) (4,476,290) (8,032,469)
------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Capital expenditures (253,007) (17,303) (406,036)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,594,388 5,058,133 8,207,521
Proceeds from note payable 529,000 - 756,886
Repayment of note payable - (500,000) (500,000)
Proceeds from exercise of warrants 165,000 - 165,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 3,288,388 4,558,133 8,629,407
------------- ------------- -------------
INCREASE IN CASH 699,897 64,540 190,902
CASH AND CASH EQUIVALENTS - BEGINNING 62,872 189,234 62,872
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 762,769 $ 253,774 $ 253,774
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ - $ -
============= ============= =============
Income taxes $ - $ - $ 800
============= ============= =============
See notes to consolidated financial statements.
9
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are unaudited. These
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the financial statements reflect
all adjustments (which include only normal recurring
adjustments) necessary to state fairly the Company's financial
position and results of operations as of and for the periods
indicated. These financial statements should be read in
conjunction with the Company's financial statements and notes
thereto for the year ended October 31, 2000, included in the
Company's annual report on Form 10-KSB as filed with the SEC.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
New Visual Corporation ("NVC") and its operating subsidiaries,
NV Entertainment, Inc. ("NV"), Impact Multimedia, Inc. ("IP")
and NV Technology, Inc. (formerly, New Wheel Technology, Inc.)
("New Wheel") (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated.
DESCRIPTION OF BUSINESS
The Company was incorporated under the laws of the State of
Utah on December 5, 1985. Prior to June 29, 2001, the
Company's name was New Visual Entertainment, Inc.
In November of 1999, the Company began to focus its business
activities on the development of new content
telecommunications technologies. Pursuant to such plan, the
Company acquired New Wheel Technology, Inc., a development
stage, California-based, technology company in February of
2000 (Note 2). As a result of the change in business focus,
the Company became a development stage entity commencing
November 1, 1999. The Company also produces and distributes
2-D and 3-D filmed entertainment.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company
to concentrations of credit risks, are principally trade
accounts receivable. The Company maintains an allowance for
uncollectible accounts receivable and generally does not
require collateral. At July 31, 2001 and October 31, 2000, no
allowance for uncollectible accounts was deemed necessary by
management.
10
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid investments
with a maturity of three months or less when purchased to be
cash or cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
computed on a straight-line method over the estimated useful
lives of the assets, which generally range from five to seven
years. Maintenance and repair expenses are charged to
operations as incurred.
FILM AND VIDEO LIBRARY AND PROJECTS UNDER DEVELOPMENT
Film and video library and projects under development are
stated at the lower of amortized cost or market. Upon
completion, costs are amortized on an individual production
basis in the proportion that current gross revenues bear to
management's estimate of total gross revenues, with such
estimates being reviewed at least quarterly. In prior years,
several projects under development were determined to have no
estimated realizable value and were accordingly written-off.
Project costs written-off during the nine months ended July
31, 2000 and 2001, were $10,884 and $-0-, respectively. For
the nine months ended July 31, 2000 and 2001, amortization
expense related to the film and video library was $62,086 and
$-0-, respectively.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). SFAS No. 109 employs an asset and
liability method of accounting for income taxes. Under the
asset and liability method, deferred income taxes are
recognized for tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities.
Under SFAS No. 109, the effect on deferred income taxes of a
change in tax rates is recognized as income in the period that
includes the enactment date.
11
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosures 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information at July 31, 2001, as required by Statement of
Financial Accounting Standards No.107, "Disclosures about Fair
Value of Financial Instruments." Such information, which
pertains to the Company's financial instruments, is based on
the requirements set forth in that Statement and does not
purport to represent the aggregate net fair value to the
Company.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash and Cash Equivalents: The carrying amount approximates
fair value because of the short-term maturity of those
instruments.
Receivables and Payables: The carrying amounts approximate
fair value because of the short maturity of those instruments.
All of the Company's financial instruments are held for
purposes other than trading.
REVENUE RECOGNITION
Substantially all revenues are derived from the production of
multimedia content, videos and commercial films. Revenue is
recognized over the shorter of the license term or the
expected revenue term.
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.
12
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are charged to operations when incurred.
Advertising expense for the nine months ended July 31, 2000
and 2001 was $67,833 and $942, respectively.
LOSS PER SHARE
Basic earnings per share ("Basic EPS") is computed by dividing
net income available to common stockholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share ("Diluted EPS") gives effect to all
dilutive potential common shares outstanding during a period.
In computing diluted EPS, the treasury stock method is used in
determining the number of shares assumed to be purchased from
the conversion of common stock equivalents.
REVERSE STOCK SPLITS
On October 18, 1995, the Company approved a one-for-two
reverse split of its issued and outstanding common stock. On
June 22, 2000, the Company effected a one-for-four reverse
split of its issued and outstanding common stock. The
accompanying consolidated financial statements, notes and
other references to share and per share data have been
retroactively restated to reflect the reverse stock splits for
all periods presented.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company accounts for its stock-based
compensation arrangements pursuant to APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with
the provisions of SFAS No. 123, the Company discloses the pro
forma effects of accounting for these arrangements using the
Black Scholes option-pricing model to determine fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the total amount of an asset may
not be recoverable. An impairment loss is recognized when
estimated future cash flows expected to result from the use of
the asset and its eventual disposition are less than its
carrying amount.
13
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the provisions
of SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards
for the way public enterprises report information about
operating segments in annual financial statements and requires
those enterprises to report selected information about
operating segments in interim financial reports issued to
stockholders. Adoption of SFAS No. 131 did not have a material
effect on the Company's financial position or results of
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS NO.133), which establishes accounting and reporting
standards for derivative instruments and hedging activities.
It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those
instruments at fair value. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments -- Deferral of
the Effective Date of SFAS Statement No.133 and in June 2000,
the FASB issued SFAS No.138, Accounting for Certain Derivative
Instruments -- an amendment of SFAS No.133, Accounting for
Derivative Instruments and Hedging Activities. As a result of
SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective
for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company's adoption of the above Financial
Accounting Standards had no material impact on the Company's
financial statements for the nine months ended July 31, 2001.
In June 2000, the American Institute of Certified Public
Accountants issued Statement of Position 00-2, Accounting by
Producers or Distributors of Films (SOP 00-2), which
established new accounting standards for producers and
distributors of film and supersedes Statement of Financial
Accounting Standards ("SFAS") No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films." SOP 00-2
changes the accounting standards for costs to produce and
distribute film and television properties. The Company expects
to adopt the new standard effective November 1, 2001, and is
evaluating the effect that such adoption may have on its
consolidated results of operations and financial position.
In June 2000, the Financial Accounting Standards Board issued
SFAS No. 139 which rescinds SFAS No. 53 and requires public
companies to follow the guidance provided by SOP 00-2.
14
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In March 2000, the Financial Accounting Standards Board issued
FASB Interpretation No. 44 (FIN 44), Accounting for Certain
Transactions Involving Stock Compensation -- an interpretation
of APB Opinion No.25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether
a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1,
2000. The adoption of the provisions of FIN 44 did not have a
material effect on the financial position or results of
operations of the Company.
COMPREHENSIVE INCOME
The Company has no material components of other comprehensive
income and, accordingly, net loss approximates comprehensive
loss for all periods presented.
NOTE 2 - ACQUISITIONS
IMPACT PICTURES, INC.
In January 2000, the Company completed the acquisition of 100%
of the common stock of Impact Pictures, Inc. ("Impact"), a
small development-stage San Diego-based multi-media production
firm, for 12,500 shares of the Company's common stock, valued
at $50,000. The Company has accounted for this acquisition
under the purchase method of accounting. As of the acquisition
date, Impact had no tangible assets and its intangible assets
were in the development stage. Accordingly, the $50,000 was
charged to operations, under the caption "Acquired in-process
research and development expenses," during the nine months
ended July 31, 2000.
Historical and proforma information have not been provided
because the operations of the acquired business were not
material.
15
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACQUISITIONS (CONTINUED)
NEW WHEEL TECHNOLOGY, INC.
In February 2000, the Company completed the acquisition of New
Wheel Technology, Inc. ("New Wheel"), a development-stage
California-based technology company. New Wheel was merged with
the Company's Astounding Acquisition Corp. subsidiary, which
changed its name to New Wheel Technology, Inc. On July 13,
2001, New Wheel changed its name to NV Technology, Inc. An
aggregate of 3,000,000 restricted shares of common stock were
issued to the New Wheel stockholders in consideration of the
merger. Also, additional compensation would be paid to the New
Wheel stockholders if New Wheel's high speed digital
transmission technology generates revenues for the Company in
excess of $1 billion, or if there is a sale of assets or
stock, or a merger of New Visual or any of its affiliates, in
which the New Wheel technology comprises at least 15% of the
consideration. As of April 30, 2000, the Company recorded the
issuance of the full 3,000,000 shares, which were valued at
$6,000,000. The Company has accounted for this acquisition
under the purchase method of accounting. As of the acquisition
date, New Wheel had no tangible assets and its intangible
assets were in the development stage. Accordingly, the
$6,000,000 was charged to operations under the caption
"Acquired in-process research and development expenses,"
during the nine months ended July 31, 2000.
Historical and proforma information have not been provided
because the operations of the acquired business were not
material.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
October 31, July 31,
2000 2001
--------- ---------
Furniture and fixtures $ 51,584 $ 55,151
Camera equipment 544,664 544,664
Office equipment 99,658 113,394
--------- ---------
695,906 713,209
Less: Accumulated depreciation 302,119 399,961
--------- ---------
Total $393,787 $313,248
========= =========
For the nine months ended July 31, 2000 and 2001, depreciation
expense was $63,610 and $97,842, respectively.
16
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the
following:
October 31, July 31,
2000 2001
---------- ----------
Professional fees $ 300,000 $ 319,891
Payroll and related taxes 47,511 -
Interest 17,906 45,350
Miscellaneous 81,504 334,238
---------- ----------
$ 446,921 $ 699,479
========== ==========
NOTE 5 - LONG-TERM DEBT
On June 29, 2000, the Company entered into five credit
agreements, each of which granted the Company a credit
facility of up to $300,000. As of October 31, 2000, the
Company had borrowed $756,886 under these facilities, payable
on June 29, 2003 in one payment, together with all accrued and
unpaid interest at 6% per annum.
On November 13, 2000, the above five credit agreements were
amended, reducing the Company's credit facility to $756,886 in
aggregate. The credit agreements terminate on June 29, 2003
and all accrued interest and unpaid interest, along with the
principal, is due in full on June 29, 2003.
During July 2001, the Company repaid $500,000 under the above
five credit agreements.
NOTE 6 - STOCKHOLDERS' EQUITY
PREFERRED STOCK AND RIGHTS DIVIDEND
Effective June 22, 2000, the Company amended its articles of
incorporation to decrease the number of authorized shares of
preferred stock from 200,000,000 to 15,000,000 and to decrease
the par value of the preferred stock from $30.00 to $0.01 per
share.
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK AND RIGHTS DIVIDEND (CONTINUED)
The Company adopted a shareholder rights plan, in which one
right was distributed on August 21, 2000 as a dividend on each
outstanding share of common stock to shareholders of record on
that date. Each right will entitle the shareholders to
purchase 1/1000th of a share of a new series of junior
participating preferred stock of the Company at an exercise
price of $200 per right. The rights will be exercisable only
if another person acquires or announces its intention to
acquire beneficial ownership of 20% or more of the Company's
common stock. After any such acquisition or announcement, the
Company's shareholders, other than the acquirer, could then
exercise each right they hold to purchase the Company's common
stock at a 50% discount from the market price. In addition,
if, after another person becomes an acquiring person, the
Company is involved in a merger or other business combination
in which it is not the surviving corporation, each right will
entitle its holder to purchase a number of shares of common
stock of the acquiring company having a market value equal to
twice the exercise price of the right. Prior to the
acquisition by a person or group of beneficial ownership of
20% or more of the Company's common stock, at the option of
the Board of Directors, the rights are redeemable for $0.001
per right. The rights will expire on August 21, 2004.
On July 27, 2000, the Company created a series of preferred
stock, par value $0.01 per share, designated as "Series A
Junior Participating Preferred Stock." The number of shares
constituting the Series A Junior Participating Preferred Stock
is 200,000, initially reserved for issuance upon exercise of
the rights discussed in Note 6. Subject to the rights of the
holders of any shares of any series of preferred stock ranking
prior and superior to the Series A Preferred Stock with
respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of common stock,
shall be entitled to receive, when, as and if declared by the
Board of Directors, quarterly dividends payable in cash on the
last day of each quarter in each year, commencing on the first
quarterly dividend payment date after the first issuance of a
share or fraction of a share of Series A Preferred Stock, in
an amount per share equal to the greater of $1.00 or 1,000
times the aggregate per share amount of all cash and non-cash
dividends or other distributions, other than a dividend
payable in shares of common stock. Each share of Series A
Preferred Stock shall entitle the holder to 1,000 votes. Upon
any liquidation, no distribution shall be made to the holders
of shares of stock ranking junior to the Series A Preferred
Stock, unless the holders of shares of Series A Preferred
Stock shall have received $1,000 per share, plus an amount
equal to accrued and unpaid dividends and distributions
thereon. The shares of Series A Preferred Stock shall not be
redeemable.
18
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
On April 30, 2000, the Board of Directors authorized, and on
May 31, 2000, a majority vote of the shareholders approved, a
one-for-four reverse stock-split of the Company's outstanding
common stock. The reverse stock-split was effected on June 22,
2000.
COMMON STOCK ISSUANCES DURING THE YEAR ENDED OCTOBER 31, 2000
During the year ended October 31, 2000, the Company issued
805,994 shares of restricted common stock to investors for
cash proceeds of $2,734,388, as indicated below. Such sales
were sold in private transactions in reliance on various
exemptions from the registration requirements of the
Securities Act.
During the three months ended January 31, 2000, the Company
sold 177,463 shares of common stock for $211,909.
During the quarter ended April 30, 2000, the Company sold
278,699 shares of common stock for $1,318,079.
During the quarter ended July 31, 2000, the Company sold
314,832 shares of common stock for $1,064,400.
During the quarter ended October 31, 2000, the Company sold
35,000 shares of common stock for $140,000.
During the three months ended January 31, 2000, the Company
issued 29,765 shares of common stock between $1.00 and $1.40
for consulting services totaling $34,050.
During the three months ended January 31, 2000, the Company
issued 12,500 shares of common stock valued at $4.00 per share
for the acquisition of Impact Pictures, Inc. (Note 2)
On February 17, 2000, the Company issued 3,000,000 shares of
common stock valued at $2.00 per share for the acquisition of
New Wheel Technology, Inc. (Note 2)
19
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE YEAR ENDED OCTOBER 31, 2000
(CONTINUED)
In connection with the acquisition of New Wheel, the Company
entered into an agreement with lenders to provide loans of up
to $1.5 million. As consideration for these loans and other
services under the agreement, in April of 2000 the Company
issued 1,500,000 shares of its common stock to the lenders
valued at $3,000,000. The Company accounted for the $3,000,000
as unearned financing costs as a reduction of stockholders'
equity as of April 30, 2000. During the quarter ended July 31,
2000, the Company began to draw money down from the credit
facilities and accordingly, the Company at such time, began to
amortize the unearned financing costs over the three-year
period ended June of 2003. Amortization of the unearned
financing costs for the nine months ended July 31, 2001 was
$750,000.
During the quarter ended April 30, 2000, the Company issued
1,161,065 shares of common stock between $1.20 and $12.00 for
consulting and professional services totaling $1,814,729.
During the quarter ended July 31, 2000, the Company issued
109,000 shares of common stock between $3.00 and $7.88 for
consulting and professional services totaling $619,650.
On June 12, 2000, 68,750 warrants were exercised at $2.40 per
share totaling $165,000.
During the quarter ended October 31, 2000, the Company issued
84,084 shares of common stock between $.25 and $12.50 for
consulting services, totaling $28,122.
On October 31, 2000, the Company issued 77,248 shares of
common stock between $5.00 and $5.50 per share pursuant to the
Company's November 17, 2000 private placement agreement.
COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
2001
- Private Placement:
On November 17, 2000, and as amended on January 22, 2001, the
Company entered into a private placement agreement with
various investors, to sell $5,000,000 of the Company's common
stock in several tranches at a purchase price equal to 87% of
the average market price of the Company's common stock over
the five days preceding the closing of each drawdown.
20
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
2001 (CONTINUED)
- Private Placement: (Continued)
The Company can sell stock to the investors in 5-day intervals
not to exceed $500,000 per sale. The investor may refuse to
purchase the stock in the event the average purchase price is
below $2.00 per share, or if the trading volume is below a
certain number of shares within the period, or if the Company
sells capital stock in excess of $5,000,000, but exclusive of
any funding for the production project.
The Company may not apply any portion of the drawdowns towards
payment of any costs related to its production of the
Company's pending motion picture project. This agreement
terminates on November 17, 2002.
In addition, the investors received warrants to purchase
4,000,000 shares of common stock to be issued in two series
(3,000,000 Series A warrants and 1,000,000 Series B warrants).
Each Series A warrant can be exercised at a price per share
equal to the lesser of $6.00 or 50% of the average of the
closing sales price of the Company's common stock over the
five consecutive trading days immediately preceding the date
of the exercise of the warrants. Each Series B warrant can be
exercised at a price per share of $6.00. The Series B warrants
have a cashless exercise provision. The Series A and Series B
warrants expire on November 17, 2003.
As of July 31, 2001, the Company has received proceeds under
this agreement of $3,930,454 from the investors in
consideration for the purchase of 1,736,355 shares of the
Company's common stock. The following are common stock
issuances for the nine months ended July 31, 2001, pursuant to
the Company's November 17, 2001 Private Placement Agreement.
o On November 17, 2000, the Company issued 9,456 shares
of common stock for $5.50 per share.
o On November 27, 2000, the Company issued 22,989
shares of common stock for $4.35 per share.
o On March 13, 2001, the Company issued 29,639 shares
of common stock for $3.37 per share.
o On March 27, 2001, the Company issued 62,661 shares
of common stock for $3.19 per share.
21
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
2001 (CONTINUED)
- Private Placement: (Continued)
o On April 6, 2001, the Company issued 57,773 shares of
common stock for $2.60 per share.
o On April 11, 2001, the Company issued 33,287 shares
of common stock for $3.00 per share.
o On April 25, 2001, the Company issued 23,947 shares
of common stock for $2.92 per share.
o On May 1, 2001, the Company issued 14,288 shares of
common stock for approximately $2.80 per share.
o On May 2, 2001, the Company issued 34,600 shares of
common stock for approximately $2.75 per share.
o On May 6, 2001, the Company issued 23,674 shares of
common stock for approximately $2.75 per share.
o On May 13, 2001, the Company issued 22,105 shares of
common stock for approximately $2.71 per share.
o On May 29, 2001, the Company issued 120,728 shares of
common stock for approximately $2.48 per share.
o On May 31, 2001, the Company issued 41,375 shares of
common stock for approximately $2.42 per share.
o On June 12, 2001, the Company issued 63,011 shares of
common stock for approximately $1.95 per share.
o On June 7-13, 2001, the Company issued 785,000 shares
of common stock for approximately $1.74 per share.
o On July 20, 2001, the Company issued 341,574 shares
of common stock for approximately $1.74 per share.
22
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
2001 (CONTINUED)
- Other
During December 2000, the Company sold 219,904 shares of
common stock for $600,000.
In February of 2001, the Company issued 250,000 shares of
common stock valued at $1,000,000 for the litigation
settlement agreement with Astounding.com, Inc. and Jack
Robinson (Note 7). This settlement has been recorded during
the three months ended January 31, 2001.
During January 2001, the Company issued 30,600 shares of
common stock with 15,300 attached warrants with an exercise
price of $5.10 per share, expiring in 3 years for $85,680.
During January 2001, the Company issued 174,714 shares of
common stock with 87,357 attached warrants with an exercise
price of $4.02 per share, expiring in 3 years for $489,199.
During January 2001, the Company sold 21,000 shares of common
stock for $105,000.
In April of 2001, the Company cancelled 2,980 shares for which
the Company was to receive $30,001. The shares issued were
recorded by the Company but never issued to the investor.
In March of 2001, the Company issued 46,250 shares of common
stock with 23,125 attached warrants with an exercise price of
$5.10 per share, expiring in 3 years for $129,500.
During April 2001, the Company issued 58,321 shares of common
stock with 29,161 attached warrants with an exercise price of
$5.10 per share expiring in 3 years for $163,300.
In May of 2001, the Company issued 500,000 shares to its Board
of Director's Vice Chairperson for past services, which were
valued at approximately $1.89 per share.
During the quarter ended July 31, 2001, the Company issued
50,960 shares of common stock between $2.90 and $3.90 per
share for consulting services, totaling $171,744.
23
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
- 2000 Omnibus Securities Plan:
During April 2000, the Board of Directors adopted, and
subsequently on May 31, 2000, the shareholders of the Company
approved, the 2000 Omnibus Securities Plan. The 2000 Omnibus
Securities Plan authorizes the granting of stock options and
restricted stock awards. The 2000 Omnibus Securities Plan may
be administered by the Board of Directors or a committee
appointed by the Board. A total of 2,500,000 shares of common
stock are reserved for issuance under the 2000 Omnibus
Securities Plan. Options granted under the option plan may be
either (i) options intended to constitute incentive stock
options under Section 422 of the Internal Revenue Code of
1986, as amended, or any corresponding provisions of
succeeding law (the "Code"), or (ii) non-qualified stock
options.
The exercise price for each stock option is determined by the
Board. Incentive stock options must have an exercise price of
at least 100% (or at least 110% in the case of incentive stock
options granted to certain employees owning more than 10% of
the outstanding voting stock) of the fair market value of the
common stock on the date the stock option is granted. Under
the 2000 Omnibus Securities Plan, fair market value of the
common stock for a particular date will generally be the
closing sale price for the stock if the common stock is listed
on an established stock exchange. If the common stock is not
listed on an established stock exchange on a particular date,
the fair market value of the common stock will be the average
of the closing bid and asked prices per share for the stock as
quoted by The NASDAQ SmallCap market or on the OTC Bulletin
Board of the National Association of Securities Dealers or in
the NQB Pink Sheets published by the National Quotation Bureau
Incorporated.
No stock option may be exercised after the expiration of ten
years from the date of grant (or five years in the case of
incentive stock options granted to certain employees owning
more than 10% of the outstanding voting stock). Pursuant to
the 2000 Omnibus Securities Plan, the aggregate fair market
value of the common stock for which one or more incentive
stock options granted to any participant may, for the first
time, become exercisable as incentive stock options under the
federal tax laws during any one calendar year shall not exceed
$100,000.
As of July 31, 2001, the Company granted Non-Qualified Stock
options under this plan to purchase a total of 516,000 common
shares at exercise prices ranging from $3.92 to $4.00 per
share. The options are exercisable over a ten-year period.
24
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
- Options Outside of the Plan:
As of October 31, 2000, the Company granted options outside
the Plan to purchase a total of 1,563,750 common shares at
exercise prices ranging from $1.00 to $5.50 per share.
On November 13, 2000, the Company granted to a consultant
options to acquire 100,000 shares of its common stock. The
exercise price for the options is $4.00 per share. All options
became vested immediately and expire on November 13, 2010. In
addition, the consultant is additionally compensated for each
day of service up to $1,300 per day. The consulting agreement
may be terminated at any time by either party upon thirty
days' written notice to the other party.
On May 15, 2001, the Company granted an advisory board member
options to acquire 50,000 shares of its common stock. The
exercise price for the options is $3.92 per share. All options
became exercisable immediately and expire on May 15, 2011.
On June 7, 2001, the Company granted options to purchase
50,000 shares of its common stock to an advisory board member.
The exercise price is $2.30 per share, with 25,000 vesting and
exercisable immediately and the remaining 25,000 vesting and
exercisable equally on the anniversary date over the next
three years. All options expire on June 7, 2011.
Since the exercise price of the options was not less than the
fair market value of the Company's common stock on each date
of grant, no compensation expense has been recorded. If the
Company had elected to record the issuance of stock options
using the fair value method, the Company's net loss and loss
per share would be as follows:
Nine Months Ended
July 31, 2001
-------------
Net Loss:
As reported $ 8,040,956
Proforma $(8,355,956)
Loss Per Share:
As reported $ (0.32)
Proforma $ (0.33)
25
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
- Options Outside of the Plan: (Continued)
The fair value of stock options granted during the nine months
ended July 31, 2001 was estimated on the date of grant using
the Black-Scholes option-pricing model. The weighted average
fair value and related assumptions were as follows:
Grant Date
------------------------------------------------------------------
February 11, July 1, October 27, November 13, November 30,
2000 2000 2000 2001 2001
---- ---- ---- ---- ----
Expected volatility 33.0% 33.0% 33.0% 33.0% 33.0%
Risk-free interest rate 5.5% 5.5% 5.5% 5.5% 5.5%
Expected lives 3 years 3 years 3 years 3 years 3 years
Dividend yield -0- -0- -0- -0- -0-
A summary of the Company's stock option activity and related
information follows:
Weighted Weighted
In the Plan Average Outside the Plan Average
Stock Options Exercise Price Stock Options Exercise Price
------------- -------------- ------------- --------------
Outstanding - October 31, 2000 - $ - 1,563,750 $2.61
Options granted - 11/01 - 07/31/01:
In the plan 516,000 3.93 -
Options granted - 11/01 - 07/31/01:
Outside the option plan - - 200,000 3.55
Outside expired/cancelled:
In the plan 3,750 3.94 - -
------- ------ --------- -----
Outstanding - July 31, 2001 512,250 $3.94 1,763,750 $2.72
======= ===== ========= =====
Exercisable at July 31:
2001 276,188 $3.96 1,044,375 $3.29
2002 354,876 $3.95 1,354,063 $3.04
2003 433,564 $3.94 1,763,750 $2.72
2004 512,250 $3.94 1,763,750 $2.72
The exercise price for options outstanding as of July 31, 2001
ranged from $1.00 to $5.50.
26
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
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 5,557,600
Options to purchase common stock 2,276,000
---------
Total as of July 31, 2001 7,833,600
=========
Substantial issuances after July 31, 2001 through
September 14, 2001:
Options granted outside Plans 50,000
Warrants granted in connection with consulting agreement 100,000
Options granted in connection with 2001 stock incentive plan 750,000
Sale of common stock for cash 188,633
NOTE 7 - COMMITMENTS AND CONTINGENCIES
ASTOUNDING.COM, INC.
In September 1999, the Company entered into a merger agreement
with Astounding.com, Inc. The merger agreement provided for
the Company to issue 10,000,000 (pre-June 22, 2000 reverse
split) shares of its common stock for all of the outstanding
shares of Astounding. The closing of the merger was subject to
various conditions including the receipt of a debt or equity
financing of at least $1,000,000 and requisite shareholders
approval.
During the three months ended January 31, 2000, the Company
terminated its previously announced merger with
Astounding.com, Inc. because certain conditions had not been
satisfied.
27
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ASTOUNDING.COM, INC. (CONTINUED)
On March 22, 2000, the Company filed a lawsuit in the State
District Court in Dallas, Texas against Astounding.com, Inc.
and Jack Robinson. The Company's complaint alleged that, among
other things, Astounding.com, Inc. and Robinson breached
certain contractual obligations to New Visual and engaged in
negligent and/or fraudulent misrepresentation to induce New
Visual to enter into the merger agreement. New Visual sought a
court order confirming that the merger agreement was null and
void, and an award of unspecified damages, court costs and
attorneys fees. Robinson and Astounding.com filed a
counterclaim against New Visual alleging breach of contract
and unjust enrichment and seeking unspecified damages, court
costs and attorney fees. This litigation was settled in
February 2001.
Pursuant to the settlement agreement, the Company issued to
Jack D. Robinson and his attorneys 250,000 restricted shares
of its common stock, valued at $1,000,000. The Company in
return received all the issued and outstanding common stock of
Astounding.com, Inc. The Company also agreed to file a
registration statement for these 250,000 shares of its common
stock by March 31, 2001 and to cause the registration
statement to become effective and the shares to become freely
tradable no later than June 29, 2001. This settlement was
recorded during the three months ended January 31, 2001.
As of February 16, 2001, Astounding .com, Inc. had no
liabilities and was engaged in no business activities.
INTELECON SERVICES, INC.
On March 31, 2000, the Company signed a definitive merger
agreement to acquire Intelecon Services, Inc. ("Intelecon"), a
provider of entertainment and business communication
technology and value-added services, in a stock transaction.
On September 26, 2000, the Company formally terminated its
merger agreement with Intelecon.
28
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTELECON SERVICES, INC. (CONTINUED)
The Company advanced to Intelecon monies to purchase certain
equipment on behalf of the Company. Intelecon did not purchase
the equipment and, therefore, breached its contract and was
unjustly enriched. The Company brought a claim against
Intelecon for $105,000.
During April 2001, the Company reached a settlement with
Intelecon for $117,000, payable in the amount of $15,000 per
month, until $117,000 has been paid in full. As of July 31,
2001, the Company has received $35,000 under this settlement.
CONSULTING AGREEMENTS
In June 2000, the Company entered into a marketing and public
relations agreement to publicize the Company to brokers,
prospective investors, institutional investors, analysts and
others, for a term of six months. In consideration of the
above services, the Company has paid the consultant $50,000.
In addition, the consultant was issued 50,000 shares of the
Company's common stock. The consultant was also issued a
warrant entitling it to purchase, in the aggregate, up to
200,000 shares of the Company's common stock. The warrant is
divided into four tranches of fifty thousand (50,000) shares
each, with each tranche to have the following exercise prices:
Tranche 1 - $7.00 per share; Tranche 2 - $8.50 per share;
Tranche 3 - $10.00 per share; and Tranche 4 - $11.50 per
share. The consultant and the Company entered into a
registration rights agreement with respect to the registration
of the above common stock and Warrant Shares. The consultant
has not exercised any of these warrants as of April 30, 2001.
The warrants were assigned a value of $762,000, which was
charged to operations during the year ended October 31, 2000.
In March 2001, the Company entered into a consulting agreement
with a company for developing a new corporate positioning
strategy and identifying an enhanced brand platform. The
Company agreed to pay $10,000 prior to the consulting company
commencing work, $7,500 upon delivery of the first stage and
$7,500 upon fulfillment of the contract.
29
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENTS (CONTINUED)
During March 2001, the Company entered into a consulting
agreement with a company to provide financial advice and to
arrange for equity investments or other funding. The company
will pay for such services by providing the consultant with
fees equal to (i) 5% of the gross amount of any cash financing
obtained for the Company, payable in cash; (ii) a number of
shares of stock equal to 10% of the stock issued in connection
with any financing obtained for the Company; and (iii) a
number of warrants equal to 10% of the warrants issued in
connection with any financing obtained for the Company. The
term of this agreement is six months. Under the above terms,
the Company granted warrants to purchase 100,000 shares of
common stock at an exercise price from $2.50 per share to
$10.00 per share. The exercise period is five years. The fair
market value of the stock warrants are estimated on the date
of grant using the Black-Scholes option-pricing model ranging
from $.70 to $1.41.
In April 2001, the Company entered into a consulting agreement
with a company for a comprehensive level of international
communications services. The Company agreed to pay minimums of
$15,000 per month plus related hard costs for services and
expenses. During May 2001, the Company and the consulting
company mutually agreed to cancel the above agreement.
In May 2001, the Company entered into a one-year consulting
agreement with a company for providing consulting and advisory
services in connection with strategic business planning and
related matters. The Company agreed to grant warrants to
purchase 500,000 shares of common stock at an exercise price
of $2.50 per share, 250,000 shares of common stock at an
exercise price of $5.00 per share, and 250,000 shares of
common stock at an exercise price at $10.00 per share. The
exercise period is five years. The fair value of stock
warrants are estimated on the date of grant using the
Black-Scholes option-pricing model ranging from $.32 to $1.73.
30
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
On February 11, 2000, the Company entered into an employment
agreement with its current Chief Executive Officer. The
agreement, effective April 1, 2000, is a three-year employment
contract that provides for base compensation in the first
contract year of $250,000; in the second contract year, base
compensation of $300,000; and in the third year and during any
renewal term, base compensation of $350,000. The employee is
also entitled to an annual bonus based upon his performance,
which will be at the sole discretion of the Board of
Directors. The annual bonus to the CEO shall be payable in
cash or in an amount of shares of the Company's common stock
that equals the amount of the bonus based upon the market
price of the employer's common stock on the date that the
bonus is paid.
In connection with its New Wheel acquisition, in February
2000, the Company entered into two employment agreements for
executive services. The agreements provide for the Company to
pay base salaries of $208,000 each per annum and a bonus of
$12,500 each upon the execution of the agreement. The
agreements were to expire in September 2000, but have been
extended through February 2001. The above agreement was
subsequently not renewed (Note 9).
On June 20, 2000, the Company entered into a three-year
employment agreement with its Executive Vice President
commencing July 1, 2000, whereby the Executive Vice President
shall receive a base salary of $15,000 per year and options to
purchase 210,000 shares of common stock at $4.40 per share. Of
these stock options, 35,000 vested on July 1, 2000, and the
balance vests straight-line on the last day of each quarter
beginning September 30, 2000 and ending December 31, 2002, or
17,500 per quarter. The options expire on July 1, 2005.
JOINT VENTURE PRODUCTION AGREEMENT
In April 2000, the Company entered into a joint venture
production agreement to produce a feature length film for
theatrical distribution. The Company will provide the funding
for the production in the amount of $2,250,000 and, in
exchange, will receive a 50% share in all net profits from
worldwide distribution and merchandising, after receiving
funds equal to its initial investment of up to $2,250,000. The
film is to be completed and ready for a Summer 2002 release.
The Company has agreed to deposit into a separate account, on
a monthly basis, funds to assure a minimum balance of $200,000
at the beginning of each month, until the total of $2,250,000
has been deposited into the account. As of July 31, 2001, the
Company has funded approximately $1,373,000 of production and
other costs, which was included in projects under development
in the accompanying consolidated balance sheet.
31
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
On January 3, 2000, the Company entered into an operating
lease for office space in San Diego, California. The lease
commenced on February 1, 2000 and expires in January 2005. The
lease provides for a minimum annual rental of approximately
$54,000, with a 3% annual increase each year, starting on
February 1, 2001 and each year thereafter.
On May 4, 2001, the Company terminated an operating lease for
office space in Livermore, California, which commenced on
March 1, 2000. Meanwhile, the Company entered into an
operating lease for office space in Pleasanton, California.
The lease commenced on June 1, 2001 and expires on May 31,
2004. The lease provides for a minimum annual rental at
approximately $120,000 for the first year and $156,000 the
following years. During August 2001, the Company closed its
office in Pleasanton, along with other proactive measures to
re-organize its technology development efforts, and is
currently in negotiation to sublease a portion of this space.
Rent expense for the nine months ended July 31, 2000 and 2001
was $48,353 and $80,581, respectively.
ROYALTY PAYMENTS
The Company's projects under development stipulate royalty
payments which are based on percentages of revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash
equivalents. At July 31, 2001, the Company had a bank balance
in excess of federally insured limits by approximately
$126,200.
32
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - BUSINESS RISKS AND SEGMENT INFORMATION
The Company operates in two business segments, the production
of motion pictures, films and videos (entertainment segment)
and development of new content telecommunications technologies
(telecommunication segment). The success of the Company's
entertainment business is dependent on future revenues from
the Company's current joint venture production agreement to
produce a feature-length film for theatrical distribution.
The success of the Company's telecommunication segment is
dependent upon the successful completion of development and
testing of its New Wheel technology. No assurances can be
given that the Company can complete development of such
technology, or that with respect to such technology that is
fully developed, it can be commercialized on a large scale
basis or at a feasible cost. No assurance can be given that
such technology will receive market acceptance.
Until the commencement of sales from either segment, the
Company will have no operating revenues, but will continue to
incur substantial operating expenses, capitalized costs and
operating losses.
The Company funded its operations during the nine months ended
July 31, 2001 through sales of its common stock, resulting in
net proceeds to the Company of $5,058,133. Sales of common
stock during the nine months ended July 31, 2001 were sold in
private transactions in reliance on various exemptions from
the registration requirements of the Securities Act. The
Company is exploring other financing alternatives, including
private placements and public offerings.
Under an agreement which was concluded in November of 2000,
the Company has obtained an equity line of credit of up to $5
million to fund its telecommunication segment. The equity line
has various limits on amounts of drawdowns and, under certain
circumstances, the purchaser may not be obligated to purchase
stock offered for sale by the Company (Note 6).
33
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - BUSINESS RISKS AND SEGMENT INFORMATION (CONTINUED)
Summarized financial information concerning the Company's
reportable segments is shown in the following table:
For the Nine Months Ended July 31, 2001:
---------------------------------------
Telecommunication Entertainment Unallocable
Business Business Expenses Totals
-------- -------- -------- ------
Net Sales $ - $ - $ - $ -
Operating Loss $(1,190,348) $ - $(6,850,608) $(8,040,956)
Depreciation and Amortization $ 760,526 $ 12,910 $ 74,406 $ 847,842
Total Identifiable Assets $ 95,390 $ 1,590,651 $ 676,549 $ 2,362,590
For the nine months ended July 31, 2000, the Company's only
reportable segment consisted of the entertainment business.
NOTE 9 - SUBSEQUENT EVENTS
COMMON STOCK
During August 2001, the Company received approximately
$141,500 for the issuance of 188,633 shares of common stock to
investors.
PROMISSORY NOTE RECEIVABLE
On September 6, 2001, the Company converted advances of
$99,656 to an officer to a promissory note payable on demand
at a rate of seven percent per annum. The balance on July 31,
2001 was approximately $92,500, which is included in
receivables from related parties.
34
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS (CONTINUED)
EMPLOYEE TERMINATIONS/OFFICE CLOSING
On August 3, 2001, the Company terminated the employment of
the six employees located at its office in Pleasanton,
California, including the Company's former chief operating
officer and chief technology officer. The Company made $25,807
in severance payments in connection with the termination of
employees other than the former officers.
2001 STOCK INCENTIVE PLAN
During August 2001, the Board of Directors adopted the 2001
Stock Incentive Plan. The 2001 Stock Incentive Plan authorized
the granting of stock options, restricted, unrestricted and
performance stock awards, dividend equivalent rights and stock
appreciation rights. The 2001 Stock Incentive Plan may be
administered by the Board of Directors or a committee
appointed by the Board. A total of 2,500,000 shares of common
stock are reserved for issuance under the 2001 Stock Incentive
Plan. Options granted under the option plan may be either (i)
options intended to constitute incentive stock options under
Section 422 of the Code, or (ii) non-qualified stock options.
The exercise price for each stock option is determined by the
Board. Incentive stock options must have an exercise price of
at least 100% (or at least 110% in the case of incentive stock
options granted to certain employees owning more than 10% of
the outstanding voting stock) of the fair market value of the
common stock on the date the stock option is granted.
No stock option may be exercised after the expiration of ten
years from the date of grant (or five years in the case of
incentive stock options granted to certain employees owning
more than 10% of the outstanding voting stock). Pursuant to
the 2001 Stock Incentive Plan, the aggregate fair market value
of the common stock for which one or more incentive stock
options granted to any participant may, for the first time,
become exercisable as incentive stock options under the
federal tax laws during any one calendar year shall not exceed
$100,000.
35
NEW VISUAL CORPORATION AND SUBSIDIARIES
(FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS (CONTINUED)
STOCK OPTIONS
On August 3, 2001, the Company granted options to purchase
50,000 shares of its common stock to an advisory board member.
The exercise price is $1.07 per share with 25,000 vesting and
exercisable immediately and the remaining 25,000 vesting and
exercisable equally on the anniversary date over the next
three years. All options expire on August 3, 2011.
On August 30, 2001, the Company granted non-qualified stock
options under its 2001 Stock Incentive Plan to purchase
750,000 shares of common stock to a consultant for advice
regarding the Company's business strategy, organization,
business prospects and growth initiatives. The exercise price
will be 80% of the market price for the common stock on the
date the optionee elects to exercise its options. All options
expire on August 30, 2006.
CONSULTING AGREEMENT
On August 3, 2001, the Company entered into a consulting
agreement to collaborate with the Company's engineering
consultants to expedite the design and commercialization
efforts of the Company's broad-band transmission technology
over telephone wire. In consideration of the above services,
the Company has paid the consultant $50,000. The term of this
agreement is four months with the option to renew for
consecutive one-month terms.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of our results of operations
and should be read in conjunction with the financial statements and related
notes contained in this Form 10-Q.
RESULTS OF OPERATIONS
For the Nine Months Ended July 31, 2001 vs. the Nine Months Ended July 31, 2000
-------------------------------------------------------------------------------
REVENUES. Revenues for the nine months ended July 31, 2001 were $-0-.
Revenues for the nine months ended July 31, 2000 were $7,700.
OPERATING EXPENSES. Operating expenses include amortization of project
costs, writedown of project costs, depreciation of property and equipment,
compensatory element of stock issuances, acquired in-process research and
development expenses, research and development expenses, and selling, general
and administrative costs. Total operating expenses decreased to $6,263,777 for
the nine months ended July 31, 2001, from $10,207,776 for the nine months ended
July 31, 2000. The decrease was primarily related to the effect of acquired
in-process research and development costs for the nine months ended July 31,
2000 in the amount of $6,050,000. There were increases in research and
development costs and selling, general and administrative expense of $827,442
and $1,364,647, respectively, for the nine months ended July 31, 2001 resulting
from increased research and development activities and an increase in the
Company's corporate infrastructure associated with operations from two separate
office spaces.
The acquired in-process research and development costs in 2000 were
associated with the acquisitions of New Wheel Technology ($6,000,000) and Impact
Pictures ($50,000).
OTHER EXPENSES. Other expenses included amortization of unearned
financing fees, interest expense and settlement of litigation. Total other
expenses increased from $170,473 for the nine months ended July 31, 2000 to
$1,777,179 for the nine months ended July 31, 2001. The increase was principally
related to an increase of $583,333 in amortization of unearned financing fees
and a settlement of litigation for shares of common stock amounting to
$1,000,000. The Company issued 250,000 shares of common stock valued at
$1,000,000 for the February 16, 2001 settlement reached with Astounding.com,
Inc. and Jack Robinson in connection with certain disputes arising from a
non-consummated merger between us and Astounding.com, Inc.
For the Three Months Ended July 31, 2001 vs. the Three Months Ended July 31,
-----------------------------------------------------------------------------
2000
----
REVENUES. Revenues for the three months ended July 31, 2001 were $-0-.
Revenues for the three months ended July 31, 2000 were $900.
OPERATING EXPENSES. Operating expenses include amortization of project
costs, depreciation of property and equipment, compensatory element of stock
issuances, acquired in-process research and development expenses, and selling,
general and administrative costs. Total operating expenses increased from
$1,394,703 for the three months ended July 31, 2000 to $4,395,030 for the three
months ended July 31, 2001. The increase was principally related to an increase
of $1,790,544 in the compensatory element of stock issuances, an increase of
$345,557 in research and development costs and an increase of $880,772 in
selling, general and administrative expense. The increase in selling, general
and administrative expense was due to an increase in the Company's corporate
infrastructure, which includes two separate office spaces.
37
OTHER EXPENSES. Other expenses included amortization of unearned
financing fees and interest expense. Total other expenses increased from
$170,473 for the three months ended July 31, 2000 to $258,749 for the three
months ended July 31, 2001 due primarily to an increase of $83,333 in
amortization of unearned financing costs.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2001, we had cash of approximately $254,000 compared to
approximately $189,000 at October 31, 2000. We had accounts payable and accrued
expenses of approximately $699,500 at July 31, 2001 and $447,000 at October 31,
2000.
We operate in two business segments - an entertainment segment
involving the production of motion pictures, films and videos, and a
telecommunications segment involving the development of transmission
technologies. The success of our entertainment segment is dependent on future
revenues from a feature-length film for theatrical distribution that is the
subject of the joint venture production agreement discussed below. The success
of our telecommunications segment is dependent upon the successful completion of
development and testing of, and the receipt of future revenues derived from, our
transmission technology.
During the nine months ended July 31, 2001, we incurred operating
expenses of approximately $6.3 million, of which approximately $3.9 million were
cash expenses and $2.4 million were non-cash expenses relating to compensatory
charges for stock issuances. Until we begin to receive revenues from our
business segments, we will have no operating revenues, but will continue to
incur substantial operating expenses, capitalized costs and operating losses.
Operations have been financed through private sales of common stock and
loans, resulting in net proceeds of approximately $5,058,000 and $2,594,000 for
the nine months ended July 31, 2001 and July 31, 2000, respectively. In
addition, during the nine months ended July 31, 2000, a portion of expenses was
paid by the issuance of stock.
Management is exploring a variety of financing alternatives in order to
fund operations, and presently intends to raise additional funds through private
equity and/or debt financings. While we believe that we will be able to secure
such additional financing, we cannot be certain that we will be able to find
such financing on reasonable terms. If we are unable to obtain additional
financing, we would be required to decrease expenses and otherwise modify our
business plan in accordance with the extent of available financing.
In April 2000, we entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. Under the agreement,
we will provide the funding for the production in the amount of $2,250,000 and,
in exchange, we will receive a 50% share in all net profits from worldwide
distribution and merchandising, after receiving funds equal to our initial
investment of up to $2,250,000. The film is to be completed and ready for a
Summer 2002 release. We have agreed to deposit into a separate account, on a
monthly basis, funds to assure a minimum balance of $200,000 at the beginning of
each month, until the total of $2,250,000 has been deposited into the account.
As of July 31, 2001, we had funded approximately $1,404,287 of the production
costs towards this project.
Research and development expenses for the Company amounted to
$1,190,348 and $362,906 for the nine months ended July 31, 2001 and the nine
months ended July 31, 2000, respectively.
On November 17, 2000, and as amended on January 22, 2001, we entered
into a private placement agreement with various investors, to sell $5,000,000 of
our common stock in several tranches at a purchase price equal to 87% of the
average market price of our common stock over the five days preceding the
closing of each draw down. We can sell stock to the investors in 5-day intervals
not to exceed $500,000 per sale. The investor may refuse to purchase the stock
in the event the average purchase price is below $2.00 per share, or if the
trading volume of our common stock is below a certain number of shares within
the period, or if we sell capital stock in excess of $5,000,000, exclusive of
any funding for our pending motion picture project. We may not apply any portion
of the draw downs towards payment of any costs related to the production of our
pending motion picture project. In May 2001, the original investors assigned
their rights and obligations under the agreement to two institutional investors.
This agreement terminates on November 17, 2002.
In addition, the investors received warrants to purchase 4,000,000
shares of common stock to be issued in two series (Series A warrants and Series
B warrants). Each Series A warrant can be exercised at a price per share equal
to the lesser of $6.00 or 50% of the average of the closing sales price of our
common stock over the five consecutive trading days immediately preceding the
date of the exercise of the warrants. Each Series B warrant can be exercised at
a price per share of $6.00. The Series B warrants have a cashless exercise
provision. The warrants expire on November 17, 2003.
Through July 31, 2001, we received proceeds under this agreement of
$3,930,454 from the investors in consideration of the purchase of 1,736,355
shares of our common stock.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
-- Deferral of the Effective Date of SFAS Statement No. 133" and in June 2000,
the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments -- an
amendment of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities". As a result of SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not expect that the adoption of this standard will have a material
impact on our financial position and results of operations.
38
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 138 will be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect that the adoption of this standard will have a material impact on our
financial position and results of operations.
In June 2000, the Financial Accounting Standards Board issued SFAS No.
139, which rescinds SFAS No. 53 and requires public companies to follow the
guidance provided by SOP 00-2.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No. 25". FIN 44 clarifies the application of
Opinion 25 with respect to (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. We adopted FIN 44 effective July 1, 2000. The adoption of the
provisions of FIN 44 did not have a material effect on our financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the Company's market risk for
the nine months ended July 31, 2001. See the Company's Annual Report on Form
10-KSB for the fiscal year ended October 31, 2000 for additional discussions
regarding quantitative and qualitative disclosures about market risk.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) During the three months ended July 31, 2001, the Company sold
unregistered securities as follows:
1. On Noveber 17, 2000, the Company entered into a Securities Purchase
Agreement with eight investors to sell up to $5,000,000 of the
Company's common stock in several tranches over the next two years. On
May 22, 2001, we entered into an Assignment and Assumption Agreement in
which the eight investors assigned their rights and obligations to
purchase the Company's common stock under the Securities Purchase
Agreement to two of the original investors. During the three months
ended July 31, 2001, the Company received approximately $2,743,000
under this agreement in consideration for the issuance of 1,653,662
shares of common stock.
2. In May and June 2001, the Company issued 50,960 shares of common stock
valued at $171,744 to Strategica Services Corporation for consulting
services.
3. On June 2, 2001, the Company issued 500,000 shares of common stock to
Ivan Berkowitz, a director of the Company, in consideration of Mr.
Berkowitz's services to the Company. The shares had a value at the time
of issuance of $945,000.
All transactions described above were deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of such Securities
Act as transactions by an issuer not involving any public offering. All
purchasers were "accredited investors" within the meaning of Regulation D under
the Securities Act of 1933. All of the securities issued in these transactions
contained a restrictive legend to the effect that they could not be sold or
transferred without registration or an applicable exemption.
39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The Company submitted the following matters to a vote of its
shareholders at its annual meeting, which was held June 27, 2001.
(a) The Company's shareholders were asked to vote for the election of
Ivan Berkowitz, Lilly Beter, Allan Blevins, Bruce Brown, John Howell, Celso B.
Suarez, Jr., Ray Willenberg, Jr. and C. Rich Wilson III to the Board of
Directors of the Company, to hold office until the 2002 Annual Meeting of
Shareholders. The shareholders elected each director with 21,524,369 votes cast
for, 1,704,140 votes cast against, and 54,902 abstentions.
(b) The Company's shareholders were asked to approve an amendment to
Article I of the Company's Articles of Incorporation to change the name of the
Company from New Visual Entertainment, Inc. to New Visual Corporation. This
amendment to the Company's Articles of Incorporation was approved with
23,259,347 votes cast for, 19,753 votes cast against, and 4,311 abstentions.
(c) The Company's shareholders were asked to ratify the selection of
Grassi & Co., CPAs, P.C. as the Company's independent auditors for the fiscal
year ending October 31, 2001. The shareholders ratified the selection of the
independent auditors with 23,259,010 votes cast for, 36,100 votes cast against,
and 18,301 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Articles of Amendment to the Articles of Incorporation of New
Visual Entertainment, Inc., as filed on July 3, 2001.
(b) Reports on Form 8-K:
None
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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, 2001 By: /s/ RAY WILLENBERG, JR.
-------------------------------------
RAY WILLENBERG, JR.
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Dated: September 14, 2001 By: /s/ THOMAS J. SWEENEY
-------------------------------------
THOMAS J. SWEENEY
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
41