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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, 2002
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 12, 2002 was 48,433,938.
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PART I - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
INDEX TO FORM 10-Q
JULY 31, 2002
Page Nos.
---------
CONDENSED CONSOLIDATED BALANCE SHEETS 1
At July 31, 2002 (Unaudited) and October 31, 2001
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2
For the Nine Months Ended July 31, 2002 and 2001
For the Period from November 1, 1999 to July 31, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended July 31, 2002 and 2001
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) 4-5
For the Nine Months Ended July 31, 2002
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 6-7
For the Nine Months Ended July 31, 2002 and 2001
For the Period from November 1, 1999 to July 31, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8-27
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 28
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 31
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
At July 31, At October 31,
2002 2001
------------- -------------
(Unaudited)
Current Assets:
Cash $ 77,096 $ 294,802
Notes receivable from related party 176,332 100,708
Other receivable from officers 36,994 70,183
Other current assets 23,437 94,416
------------- -------------
Total Current Assets 313,859 560,109
Property and Equipment - Net 221,876 284,896
Technology License 5,751,000 --
Other assets 14,140 33,642
Projects under development 2,046,309 1,912,650
------------- -------------
Total Assets $ 8,347,184 $ 2,791,297
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable $ 763,000 $ 615,000
Accounts payable and accrued expenses 2,043,489 1,435,024
License and development fees payable 844,000 --
Notes payable 756,886 --
------------- -------------
Total Current Liabilities 4,407,375 2,050,024
Notes payable -- 256,886
------------- -------------
Total Liabilities 4,407,375 2,306,910
------------- -------------
Redeemable Series B Preferred Stock (Note 8) 3,192,000 --
------------- -------------
Commitments, Contingencies and Other Matters (Notes 6, 7, 8, 9 and 10)
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;
48,234,237 shares issued and 48,124,904 shares outstanding at July 31,
2002 and 30,003,681 shares issued and outstanding at October 31, 2001,
respectively 48,233 30,003
Additional paid-in capital 45,900,953 38,478,279
Subscription receivable -- (103,500)
Unearned financing fees (295,559) (537,380)
Unearned compensation (550,609) (481,751)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during the development stage (31,973,176) (24,601,231)
Treasury stock, at cost, 109,333 shares at July 31, 2002 and -0- at
October 31, 2001 (82,000) --
------------- -------------
Total Stockholders' Equity 747,809 484,387
------------- -------------
Total Liabilities and Stockholders' Equity $ 8,347,184 $ 2,791,297
============= =============
See notes to condensed consolidated financial statements.
1
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
July 31, For the Period from
----------------------------- November 1, 1999 to
2002 2001 July 31, 2002
------------- ------------- -------------
REVENUES $ -- $ -- $ 12,200
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales -- -- 21,403
Project costs written-off -- -- 114,613
Acquired in-process research and
development expenses -- -- 6,050,000
Compensatory element of stock issuances 1,601,295 2,410,194 8,418,731
principally related to selling and
general and administrative expenses
Research and development 1,400,019 1,190,348 3,054,783
Selling, general and administrative expenses 2,504,605 2,663,235 8,633,342
Litigation settlement -- 1,000,000 1,000,000
Loss on disposal of equipment -- -- 7,500
------------- ------------- -------------
TOTAL OPERATING EXPENSES 5,505,919 7,263,777 27,300,372
------------- ------------- -------------
OPERATING LOSS (5,505,919) (7,263,777) (27,288,172)
------------- ------------- -------------
OTHER EXPENSES:
Interest expense 1,004,986 27,179 1,361,344
Amortization of unearned financing costs 861,040 750,000 3,323,660
------------- ------------- -------------
TOTAL OTHER EXPENSES 1,866,026 777,179 4,685,004
------------- ------------- -------------
NET LOSS $ (7,371,945) $ (8,040,956) $(31,973,176)
============= ============= =============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.19) $ (0.32)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 39,398,658 25,153,198
============= =============
See notes to condensed consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
July 31,
-----------------------------
2002 2001
------------- -------------
REVENUES $ -- $ --
------------- -------------
OPERATING EXPENSES:
Compensatory element of stock issuances principally related to 139,142 2,410,194
selling and general and administrative expenses
Research and development 121,088 528,254
Selling, general and administrative expenses 1,128,897 1,456,582
TOTAL OPERATING EXPENSES 1,389,127 4,395,030
------------- -------------
OPERATING LOSS (1,389,127) (4,395,030)
------------- -------------
OTHER EXPENSES:
Interest expense 555,677 8,749
Amortization of unearned financing costs 337,728 250,000
------------- -------------
TOTAL OTHER EXPENSES 893,405 258,749
------------- -------------
NET LOSS $ (2,282,532) $ (4,653,779)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.05) $ (0.18)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 47,470,923 26,230,086
============= =============
See notes to condensed consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2002
Common Stock Treasury Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Nine Months Ended July 31, 2002:
-------------------------------
Balance - November 1, 2001 30,003,681 $ 30,003 -- $ --
Issuance of common stock under consulting
agreement ($.40 to $.66 per share) 1,256,250 1,256 -- --
Issuance of common stock for cash
($.25 to $1.00 per share) 5,569,004 5,569 -- --
Cash received for subscription receivable -- -- -- --
Issuance of common stock in connection with the
exercise of warrants ($.25 per share) 2,912,000 2,912 -- --
Cashless exercise of warrants 736,008 736 -- --
Issuance of common stock for conversion of
promissory notes ($.40 to $.70 per share) 3,797,322 3,797 -- --
Issuance of common stock for release of claims 1,261,946 1,262 -- --
Issuance of common stock for technology
license acquisition 624,480 624 -- --
Issuance of common stock for consideration of
services 985,000 985 -- --
Issuance of common stock under consulting
agreement ($.95 to $1.24 per share) 359,500 360 -- --
Issuance of common stock for cash
($.60 to $.83 per share) 284,671 285 -- --
Issuance of common stock for conversion of
promissory notes ($.40 to $1.00 per share) 444,375 444 -- --
Stock offering costs -- -- -- --
Value assigned to beneficial conversion -- -- -- --
Value assigned to warrants issued to consultants -- -- -- --
Value assigned to options issued to consultants -- -- -- --
Shares repurchased -- -- 109,333 (82,000)
Amortization of unearned compensation expense -- -- -- --
Amortization of unearned financing cost -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance - July 31, 2002 48,234,237 $ 48,233 109,333 $ (82,000)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2002
Additional Unearned Unearned
Paid-in Subscription Financing Compensation
Capital Receivable Costs Expense
------------- ------------- ------------- -------------
Nine Months Ended July 31, 2002:
-------------------------------
Balance - November 1, 2001 $ 38,478,279 $ (103,500) $ (537,380) $ (481,751)
Issuance of common stock under consulting
agreement ($.40 to $.66 per share) 625,142 -- -- --
Issuance of common stock for cash
($.25 to $1.00 per share) 1,679,156 -- -- --
Cash received for subscription receivable -- 103,500 -- --
Issuance of common stock in connection with the
exercise of warrants ($.25 per share) 725,088 -- -- --
Cashless exercise of warrants (736) -- -- --
Issuance of common stock for conversion of
promissory notes ($.40 to $.70 per share) 1,753,078 -- -- --
Issuance of common stock for release of claims (1,262) -- -- --
Issuance of common stock for technology
license acquisition 749,376 -- -- --
Issuance of common stock for consideration of
services 402,753 -- -- (100,000)
Issuance of common stock under consulting
agreement ($.95 to $1.24 per share) 343,920 -- -- (344,280)
Issuance of common stock for cash
($.60 to $.83 per share) 189,915 -- -- --
Issuance of common stock for conversion of
promissory notes ($.40 to $1.00 per share) 282,306 -- -- --
Stock offering costs (241,518) -- -- --
Value assigned to beneficial conversion 619,219 -- (619,219) --
Value assigned to warrants issued to consultants 112,737 -- -- (46,737)
Value assigned to options issued to consultants 183,500 -- -- --
Shares repurchased -- -- -- --
Amortization of unearned compensation expense -- -- -- 422,159
Amortization of unearned financing cost -- -- 861,040 --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance - July 31, 2002 $ 45,900,953 $ -- $ (295,559) $ (550,609)
============= ============= ============= =============
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2002
Total
Accumulated Stockholders'
Deficit Equity
------------- -------------
Nine Months Ended July 31, 2002:
-------------------------------
Balance - November 1, 2001 $(36,901,264) $ 484,387
Issuance of common stock under consulting agreement
($.40 to $.66 per share) -- 626,398
Issuance of common stock for cash ($.25 to $1.00 per share) -- 1,684,725
Cash received for subscription receivable -- 103,500
Issuance of common stock in connection with the exercise
of warrants ($.25 per share) -- 728,000
Cashless exercise of warrants -- --
Issuance of common stock for conversion of promissory
notes ($.40 to $.70 per share) -- 1,756,875
Issuance of common stock for release of claims -- --
Issuance of common stock for technology license acquisition -- 750,000
Issuance of common stock for consideration of services -- 303,738
Issuance of common stock under consulting
agreement ($.95 to $1.24 per share) -- --
Issuance of common stock for cash
($.60 to $.83 per share) -- 190,200
Issuance of common stock for conversion of
promissory notes ($.40 to $1.00 per share) -- 282,750
Stock offering costs -- (241,518)
Value assigned to beneficial conversion -- --
Value assigned to warrants issued to consultants -- 66,000
Value assigned to options issued to consultants -- 422,159
Shares repurchased -- (82,000)
Amortization of unearned compensation expense -- 183,500
Amortization of unearned financing cost -- 861,040
Net loss (7,371,945) (7,371,945)
------------- -------------
Balance - July 31, 2002 $(44,273,209) $ 747,809
============= =============
Accumulated deficit as of October 31, 1999 $(12,300,033)
Accumulated deficit during development stage (November 1,
1999 to July 31, 2002) (31,973,176)
-------------
Total accumulated deficit as of July 31, 2002 $(44,273,209)
=============
See notes to condensed consolidated financial statements.
6
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
AND THE PERIOD FROM NOVEMBER 1, 1999 TO JULY 31, 2002
For the Nine Months Ended
July 31, For the Period from
--------------------------------- November 1, 1999 to
2002 2001 July 31, 2002
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,371,945) $ (8,040,956) $(31,973,176)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensatory elements of stock issuances 1,601,295 2,410,194 8,418,731
Stock issued for acquired in-process research
and development -- -- 6,050,000
Stock issued for litigation settlement -- 1,000,000 1,000,000
Project costs written-off -- -- 114,613
Amortization of unearned financing costs 861,040 750,000 3,323,660
Depreciation of property and equipment 61,937 97,842 277,802
Disposal of property and equipment 3,596 -- 3,596
Loss on disposal of equipment -- -- 7,500
Accrued interest related to convertible notes 497,375 -- 497,375
Changes in Assets (Increase) Decrease:
Other current assets 70,979 (36,796) (23,437)
Due from related party (42,435) (100,198) (181,904)
Projects under development (133,659) (788,000) (2,027,177)
Other assets 19,502 (20,933) (9,140)
Changes in Liabilities Increase (Decrease):
Accounts payable and accrued expenses 790,965 252,557 1,805,291
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,641,350) (4,476,290) (12,716,266)
------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (2,513) -- (408,548)
Acquisition of license and related development fee (965,000) (17,303) (965,000)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (967,513) (17,303) (1,373,548)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,978,925 5,058,133 10,554,920
Offering costs related to stock issuances (241,518) -- (241,518)
Proceeds from notes payable 500,000 -- 1,256,866
Repayment of note payable -- (500,000) (500,000)
Proceeds from exercise of warrants 728,000 -- 993,000
Proceeds from convertible notes payable 1,507,750 -- 2,134,500
Purchase of treasury stock (82,000) -- (93,750)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 4,391,157 4,558,133 14,104,038
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH (217,706) 64,540 14,224
CASH AND CASH EQUIVALENTS - BEGINNING 294,802 189,234 62,872
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 77,096 $ 253,774 $ 77,096
============= ============= =============
See notes to condensed consolidated financial statements.
7
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
AND THE PERIOD FROM NOVEMBER 1, 1999 TO JULY 31, 2002
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
For the Nine Months Ended
July 31, For the Period from
--------------------------------- November 1, 1999 to
2002 2001 July 31, 2002
-------------- -------------- --------------
Cash paid during the period for:
Interest $ -- $ -- $ 526
============== ============== ==============
Income taxes $ -- $ -- $ --
============== ============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Principal and interest on convertible notes satisfied by
issuance of common stock $ 2,039,625 $ -- $ 2,039,625
============== ============== ==============
Issuance of 3,192 shares of series B preferred stock
and 624,480 shares of common stock for the
acquisition of license $ 3,942,000 $ -- $ 3,942,000
============== ============== ==============
See notes to condensed consolidated financial statements.
8
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED
OPERATIONS
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the
accounts of New Visual Corporation and its wholly-owned
operating subsidiaries, NV Entertainment, Inc., Impact
Multimedia, Inc. and NV Technology, Inc. (formerly New Wheel
Technology, Inc.) ("New Wheel") (collectively, the "Company").
All significant intercompany balances and transactions have
been eliminated.
BUSINESS AND CONTINUED OPERATIONS
New Visual Corporation was incorporated under the laws of the
State of Utah on December 5, 1985.
In November of 1999, the Company began to focus its business
activities on the development of new content
telecommunications technologies. Pursuant to such plan, in
February of 2000, the Company acquired New Wheel Technology,
Inc., a development stage, California-based, technology
company, which now operates as the Company's wholly-owned
subsidiary, NV Technology, Inc., a Delaware corporation. As a
result of the change in business focus, the Company became a
development stage entity commencing November 1, 1999. The
Company also produces and distributes 2-D and 3-D filmed
entertainment.
The accompanying condensed consolidated financial statements
have been prepared in conformity with accounting principles
generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern.
However, for the nine months ended July 31, 2002, the Company
incurred a net loss of $7,371,945 and, as of July 31, 2002,
had a working capital deficiency of $4,093,516. The Company
has limited finances and requires additional funding in order
to accomplish its growth objectives and marketing of its
products and services. There is no assurance that the Company
can reverse its operating losses, or that it can raise
additional capital to allow it to expand its planned
operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
The Company operates in two business segments, the production
of motion pictures, films and videos (entertainment segment)
and development of 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.
9
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED
OPERATIONS (CONTINUED)
BUSINESS AND CONTINUED OPERATIONS (CONTINUED)
The success of the Company's telecommunication segment is
dependent upon the successful completion of development and
testing of its broadband technology currently under
development by its wholly-owned subsidiary, NV Technology,
Inc. No assurance can be given that the Company can complete
development of such technology, or that with respect to such
technology that is fully developed, it can be commercialized
on a large scale basis or at a feasible cost. No assurance can
be given that such technology will receive market acceptance.
Until the commencement of sales from either segment, the
Company will have no operating revenues, but will continue to
incur substantial operating expenses, capitalized costs and
operating losses.
Management's business plan will require additional financing.
To support its operations during the nine months ended July
31, 2002, the Company borrowed $2,007,750 from various trusts
and individuals and issued convertible promissory notes.
During the nine months ended July 31, 2002, the Company
received $1,978,925 from the sale of 5,853,675 shares of its
common stock and $728,000 from the exercise of 2,912,000
warrants. The Company is exploring other financing
alternatives, including private placements and public
offerings.
The Company's ability to continue as a going concern is
dependent upon obtaining additional financing. These
consolidated financial statements do not include any
adjustments relating to the recoverability of recorded asset
amounts that might be necessary as a result of the above
uncertainty.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation, have been included. Operating results for the
nine-month period ended July 31, 2002 are not necessarily
indicative of the results that may be expected for the year
ending October 31, 2002.
The condensed consolidated balance sheet at October 31, 2001
has been derived from the audited consolidated financial
statements at that date, but does not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements.
10
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED
OPERATIONS (CONTINUED)
BUSINESS AND CONTINUED OPERATIONS (CONTINUED)
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended October 31,
2001.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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.
LOSS PER SHARE
Basic earnings per share 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 gives effect to all dilutive potential
common shares outstanding during a period. No effect has been
given to outstanding options, warrants or convertible notes in
the diluted computation, as their effect would be
antidilutive.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards
(`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.
11
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform
with the current year presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires that gains and
losses from extinguishment of debt be classified as
extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations
from those that are unusual and infrequent that meet the
criteria for classification as an extraordinary item. The
Company is required to adopt SFAS No. 145 no later than the
first quarter of fiscal 2003, although early adoption is
allowed. The Company has not yet evaluated the impact from
SFAS No. 145 on its financial position and results of
operations.
12
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No.
146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullified
Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including certain costs
incurred in a restructuring."" SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. These
costs include lease, costs to consolidate facilities or
relocate employees, and certain termination benefits provided
to employees that are involuntarily terminated under the terms
of a one-time benefit arrangement. A fundamental conclusion
reached by the FASB in this statement is that an entity's
commitment to a plan, by itself, does not create a present
obligation to others that meets the definition of a liability.
SFAS No. 146 also establishes that fair value is the objective
for initial measurement of the liability. The provisions of
this statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early
application encouraged. The Company has not yet determined the
impact of SFAS No. 146 on its financial position and results
of operations.
NOTE 3 - NOTES RECEIVABLE FROM RELATED PARTY
On September 6, 2001, the Company converted advances made to
an officer in the amount of $99,656 into a promissory note,
which is payable on demand and bears an interest rate of 7.0%
per annum.
On January 1, 2002, the Company converted advances made to an
officer in the amount of $67,631 into a promissory note, which
is payable on demand and bears an interest rate of 7.0% per
annum.
As of July 31, 2002, the outstanding amount from the above
notes was $176,332, of which $9,045 represented accrued
interest.
13
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
At July 31, At October 31,
2002 2001
---------------- ----------------
Furniture and fixtures $ 54,097 $ 51,584
Camera equipment 540,169 544,664
Office equipment 109,430 109,460
---------------- ----------------
703,696 705,708
Less: Accumulated depreciation 481,820 420,812
---------------- ----------------
Total $ 221,876 $ 284,896
================ ================
For the nine months ended July 31, 2002 and 2001, depreciation
expense was $61,937 and $97,842, respectively.
NOTE 5 - DEVELOPMENT AND LICENSE AGREEMENT
On April 17, 2002, the Company entered into a development and
license agreement with Adaptive Networks, Inc. ("ANI") to
acquire a worldwide, perpetual license to ANI's Powerstream
technology, intellectual property, and patent portfolio for
use in products relating to all applications in the field of
the copper telephone wire telecommunications network. In
consideration of the grant of the license, the Company assumed
certain debt obligations of ANI to Zaiq Technologies, Inc.
("Zaiq") and TLSI, Inc. ("TLSI"). The Company then issued
3,192 shares of its Series B Preferred Stock, valued at
$3,192,000, with a liquidation preference of $1,000 per share
and paid $250,000 in cash to Zaiq in satisfaction of the Zaiq
debt. The Company also issued 624,480 shares of common stock,
valued at $750,000, to TLSI in satisfaction of the TLSI debt.
The value of the consideration issued by the Company in
connection with the license agreement totaled $4,192,000.
The Company also agreed to pay ANI a development fee of
$1,559,000 for additional development services and to pay ANI
a royalty equal to a percentage of the net sales of products
sold by the Company and license revenue received by the
Company. Through July 31, 2002, $844,000 of this development
fee remained to be paid.
14
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - DEVELOPMENT AND LICENSE AGREEMENT (CONTINUED)
The Company capitalized the consideration issued in connection
with the license fee and development fee totalling $5,751,000.
The Company is in the process of selecting a firm to complete
a valuation of such license and development agreement.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the
following:
At July 31, At October 31,
2002 2001
---------------- ---------------
Accrued bonuses $ 340,955 $ --
Professional fees 509,403 606,807
Interest payable 590,268 356,601
Consulting fees 71,855 204,192
Miscellaneous 531,008 267,424
---------------- ---------------
$ 2,043,489 $ 1,435,024
================ ===============
NOTE 7 - CONVERTIBLE NOTES PAYABLE AND LOAN PAYABLE
During 2001 and 2002, the Company entered into several
convertible promissory note agreements with various trusts and
individuals, totalling $2,134,500. The Company agreed to pay
the principal and an additional amount equal to 50% of the
principal. The notes are due when the Company reaches certain
milestones from the distribution of its motion picture, which
is currently in production. The notes may be converted at any
time, in whole or in part, into that number of fully paid and
non-assessable shares of common stock at a conversion price
ranging from $.40 to $1.00. During the nine months ended July
31, 2002, principal and unpaid interest on eighteen
convertible promissory notes, totalling $2,039,625, of which
$679,875 represented accrued interest, were converted into
4,241,697 shares of the Company's common stock. The remaining
principal balance was $763,000 at July 31, 2002.
Several of the above convertible note agreements, that were
entered into during the nine months ended July 31, 2002, were
convertible into common stock at a conversion rate lower than
the market price at the issuance of the convertible notes. The
value of such beneficial conversion features was $765,719 and
such amount was charged to financing costs during the nine
months ended July 31, 2002.
On July 17, 2002, the Company entered into a promissory note
agreement with an individual totalling $500,000. The Company
agreed to pay the principal and interest at 10% per annum on
November 1, 2002.
15
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - REDEEMABLE SERIES B PREFERRED STOCK
On April 10, 2002, the Company amended its Articles of
Incorporation and designated 4,000 of its authorized preferred
stock as Series B Preferred Stock, par value $.01 per share,
with a liquidation preference of $1,000 per share.
The Series B Preferred Stock is mandatorily redeemable by the
Company at the liquidation preference as follows:
(i) Closing of a financing transaction of at least $15
million.
(ii) Closing of a corporate transaction (such as a merger,
consolidation, reorganization, sale of significant
assets, etc.) resulting in a change of control.
(iii) In the event the Company completes a financing, which
is at least $3 million but less than $15 million, the
Company must partially redeem the Series B Preferred
Stock based on a fraction, the numerator of which is
the net cash proceeds received by the Company, as a
result of the financing transaction, and the
denominator of which is $15 million.
(iv) The Company is obligated to redeem any outstanding
Series B Preferred Stock at its liquidation
preference, in eight equal quarterly payments,
commencing on March 31, 2005 and ending on December
31, 2006.
Holders of Series B Preferred Stock are entitled to receive
dividends if, as and when declared by the Company's Board of
Directors in preference to the holders of its common stock and
of any other stock ranking junior to the Series B Preferred
Stock with respect to dividends.
The Company cannot declare or pay any dividend or make any
distribution on its common stock unless a dividend or
distribution of at least two times the dividend paid on the
common stock is also paid on the Series B Preferred Stock.
Holders of Series B Preferred Stock are also entitled to share
pro-rata (based on the aggregate liquidation preference) in
any dividend, redemption or other distribution made to any
other series of the Company's preferred stock. The Series B
Preferred Stock does not have voting rights, except as
required by law.
16
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - REDEEMABLE SERIES B PREFERRED STOCK (CONTINUED)
Each share of the Series B Preferred stock is convertible into
shares of the Company's common stock by dividing $1,000 by the
conversion price. The conversion price is the fair market
value of the Company's common stock at the time of conversion,
but not to be less than $.34 per share, subject to adjustment,
and not to exceed $4.00 per share, subject to adjustment.
Holders of the Series B Preferred Stock were granted
piggy-back registration rights to register common shares
reserved for such conversion.
In April 2002, the Company issued 3,192 shares of its Series B
Preferred Stock, with redemption and liquidation preference of
$3,192,000, in connection with a development and license
agreement discussed in Note 5. As of July 31, 2002, there were
4,000 authorized shares Series B Preferred Stock and 3,192
issued and outstanding. Based on the redemption term, the
Series B Preferred Stock is not included in stockholders'
equity.
NOTE 9 - STOCKHOLDERS' EQUITY
SIGNIFICANT COMMON STOCK ISSUANCES DURING THE NINE MONTHS
ENDED JULY 31, 2002
In February 2002, the Company issued an aggregate of 1,261,946
restricted shares of its common stock to seven individuals who
purchased common stock of the Company in a private placement
completed in March 2001 and contended that they were entitled
to receive these additional shares in connection with their
initial purchase agreements. The parties reached an amicable
resolution of the matter and the Company received a full and
complete release from each investor.
On February 25, 2002, the Company issued a restricted stock
award of 500,000 shares of common stock to an executive
officer in consideration of his services to the Company. The
restricted stock award was granted pursuant to the Company's
2000 Plan. The executive officer purchased the shares for
$.001 per share, which are subject to a risk of forfeiture
until they vest. The executive officer will not receive
possession of the certificates representing the shares, and
may not sell any of the shares until such shares vest, which
will occur quarterly, 125,000 shares per quarter, beginning
April 30, 2002. The Company has the right, pursuant to the
terms of the restricted stock award, to repurchase any
unvested shares issued pursuant to the award for $.002 per
share in the event the executive officer is terminated, or if
there is a change of control of the Company. The compensatory
value recognized during the nine months ended July 31, 2002
was $125,000.
On February 25, 2002, the Company issued 485,000 shares of
restricted common stock to two employees in consideration of
their services to the Company. The value assigned to the
common stock totaled $178,238.
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
SIGNIFICANT COMMON STOCK ISSUANCES DURING THE NINE MONTHS
ENDED JULY 31, 2002 (CONTINUED)
During the nine months ended July 31, 2002, the Company issued
1,615,750 shares of its common stock as consideration for
consulting services performed by various consultants at prices
ranging from $.40 to $1.24 per share, totalling $970,678.
During the nine months ended July 31, 2002, the Company issued
5,853,675 shares of restricted common stock to investors for
cash proceeds of $1,874,925.
STOCK OPTION PLANS
During 2000, the Board of Directors and the stockholders of
the Company approved the 2000 Omnibus Securities Plan (the
"2000 Plan"), which provides for the granting of incentive and
non-statutory options and restricted stock for up to 2,500,000
shares of common stock to officers, employees, directors and
consultants of the Company.
During August of 2001, the Board of Directors of the Company
approved the 2001 Stock Incentive Plan (the "2001 Plan" and
together with the 2000 Plan, the "Plans"), which provides for
the granting of incentive and non-statutory options,
restricted stock, dividend equivalent rights and stock
appreciation rights for up to 2,500,000 shares of common stock
to officers, employees, directors and consultants of the
Company.
On February 25, 2002, the Company granted non-qualified stock
options under its 2000 Plan to purchase 862,500 shares of
common stock to employees and employee directors of the
Company at an exercise price of $.42 per share. The options
vest in four equal quarterly installments starting April 30,
2002. All options expire on February 25, 2012.
On February 25, 2002, the Company granted two directors
options under its 2000 Plan to purchase 400,000 shares of its
common stock at an exercise price of $.42. The options vest in
four equal quarterly installments starting April 30, 2002.
These options also expire on February 25, 2012.
18
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
On February 25, 2002, the Company granted its new Chief
Executive Officer options outside the Company's stock option
plans to purchase 500,000 shares of its common stock at $.39.
The options vest in four equal quarterly installments starting
April 30, 2002. These options expire on February 25, 2012.
On February 25, 2002, the Company granted an advisory board
member options under the Company's 2000 Omnibus Securities
Plan to purchase 40,000 shares of its common stock at $.42.
The options vest immediately and expire ten years from the
grant date. The fair value of stock options estimated on the
date of grant using the Black-Scholes option pricing model was
$.30, or $12,000.
On February 22, 2002, the Company granted non-qualified stock
options to purchase 250,000 shares of common stock to a
consultant at an exercise price of $.40 per share. The options
vest in five equal quarterly installments starting February
22, 2002. These options expire on February 22, 2012. The fair
value of stock options estimated on the date of grant using
the Black-Scholes option pricing model was $.32, or $80,000.
On March 22, 2002, the Company granted outside the Company's
stock option plans to a director and employee who became its
Chief Executive Officer on June 1, 2002, options to purchase
1,500,000 shares of its common stock at $1.02. The options
vest in four equal quarterly installments starting June 1,
2002. These options expire on March 22, 2012.
On March 22, 2002, the Company granted its Chief Executive
Officer on that date options outside the Company's stock
option plans to purchase 100,000 shares of its common stock at
$1.02. The options vest immediately and expire on March 22,
2012.
On March 22, 2002, the Company granted two consultants options
outside the Company's stock option plans to purchase 75,000
shares of its common stock at $1.02. The options vest
immediately and expire on March 22, 2012. The fair value of
stock options estimated on the date of grant using the
Black-Scholes option pricing model was $1.16, or $87,000.
On July 1, 2002, the Company granted its Chief Marketing
Officer non-qualified stock options under its 2000 Plan to
purchase 405,000 shares of common stock at an exercise price
of $1.09 per share. Options covering 105,000 shares are
exercisable immediately and the remaining vest in eight equal
quarterly installments starting May 31, 2003. These options
expire on July 1, 2012.
19
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
A summary of the Company's stock option activity and related
information follows:
Weighted Weighted
In the Plan Average Outside the Plan Average
Stock Options Exercise Price Stock Options Exercise Price
------------- -------------- ------------- --------------
Outstanding - November 1, 2001 512,250 $ 3.92 1,938,750 $ 3.96
Options granted - 11/01 - 07/31/02:
In the Plans 1,707,500 .58 -- --
Options granted - 11/01 - 07/31/02:
Outside the Plans -- -- 2,425,000 .83
Options expired/cancelled:
In the Plans (28,500) 3.92 -- --
Outside the Plans -- -- (120,000) 4.86
------------ --------- ----------- ---------
Outstanding - July 31, 2002 2,191,250 $ 1.32 4,243,750 $ 2.15
============ ========= =========== =========
Exercisable at July 31:
2002 1,054,375 $ 1.41 2,232,396 $ 2.90
2003 1,875,188 $ 1.25 3,335,416 $ 2.45
2004 2,003,750 $ 1.36 3,868,750 $ 2.25
2005 2,191,250 $ 1.32 4,243,750 $ 2.15
The exercise price for options outstanding as of July 31, 2002
ranged from $.39 to $4.40.
Had the Company elected to recognize compensation cost based
on the fair value of the options at the date of grant, as
prescribed by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," net loss as of
July 31, 2002 would have been $10,707,173, or $0.27 per share.
EXPIRED OPTIONS
In November 2001, an aggregate of 78,500 options to purchase
the Company's common stock held by four former employees of NV
Technology, Inc. were terminated. Under the terms of the
option agreements with these employees, the options terminated
three months after the employees were terminated.
In January 2002, the Company cancelled its employment
agreement with an Executive Vice President, which in turn
cancelled 70,000 unvested options.
20
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
At July 31, 2002, the Company had outstanding warrants to
purchase shares of common stock as follows:
Number of Exercise Expiration
Grant Date Shares Price Date
------------ ------------ ------------ ------------
June 7, 2000 50,000 $ 7.00 June 7, 2003
June 7, 2000 50,000 8.50 June 7, 2003
June 7, 2000 50,000 10.00 June 7, 2003
June 7, 2000 50,000 11.50 June 7, 2003
November 17, 2000 1,000,000 6.00 November 17, 2003
November 17, 2000 88,000 Lesser of $6.00 November 17, 2003
or 50% of
market ($.72
at 07/31/02)
March 12, 2001 67,586 5.10 March 12, 2004
March 12, 2001 87,357 4.02 March 12, 2004
June 14, 2001 50,000 2.50 June 14, 2006
June 14, 2001 25,000 5.00 June 14, 2006
June 14, 2001 25,000 10.00 June 14, 2006
November 5, 2001 200,000 .51 November 5, 2005
February 11, 2002 50,000 .75 February 11, 2004
February 11, 2002 50,000 1.25 February 11, 2004
February 11, 2002 100,000 1.75 February 11, 2004
February 11, 2002 100,000 2.25 February 11, 2004
July 30, 2002 1,000,000 .75 July 30, 2007
------------ ------------
3,042,943 $0.20-$11.50 June 7, 2003 - July 30, 2007
============ ============
Exercisable at
July 31, 2002 3,042,943
============
WARRANTS EXERCISED
During the nine months ended July 31, 2002, 2,912,000 warrants
were exercised at $.25 per share, totaling $728,000.
During March 2002, 1,000,000 warrants were exercised on a
cashless basis and the Company issued 736,008 shares of common
stock.
21
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
WARRANTS GRANTED
On November 5, 2001, the Company granted two companies
warrants to purchase 200,000 shares of its common stock at an
exercise price of $.51. The warrants vested immediately and
expire on November 5, 2005. The fair value of stock warrants
estimated on the date of grant using the Black-Scholes option
pricing model is $.33, or $66,000.
On February 11, 2002, the Company granted a company warrants
to purchase 300,000 shares of its common stock at an exercise
price ranging from $.75 to $2.25. The fair value of stock
warrants estimated on the date of grant using the
Black-Scholes option pricing model is $4,500.
On July 30, 2002, the Company granted a consulting company
warrants to purchase 1,000,000 shares of its common stock at
an exercise price of $.75. These warrants replaced warrants
covering 1,000,000 shares of common stock issued to the
consulting company in May 2001 that had exercise prices of
$2.50 (as to 500,000 shares), $5.00 (as to 250,000 shares) and
$10.00 (as to 250,000 shares). The fair value of stock
warrants estimated on the date of grant using the Black-
Scholes option pricing model is $.047, or $46,737.
NET LOSS PER SHARE
Securities that could potentially dilute basic earnings per
share ("EPS") in the future that were not included in the
computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented consist of the
following:
Warrants to purchase common stock 3,042,943
Options to purchase common stock 6,435,000
Convertible notes payable and accrued interest 2,332,167
Series B Preferred stock 4,161,700
------------
Total as of July 31, 2002 15,971,810
============
NEW EMPLOYMENT AGREEMENTS
On January 1, 2002, the Company entered into a new one-year
employment agreement with an Executive Vice President,
replacing the Executive Vice President's former employment
agreement. Under the terms of the new agreement, the Executive
Vice President receives a base salary of $10,417 per month. In
addition, the employment agreement provides that the Executive
Vice President will receive an annual bonus that will be
applied to two promissory notes he made in favor of the
Company. The Executive Vice President owed $100,708 under the
first promissory note at October 31, 2001. The second note was
issued to the Company on January 1, 2002 for $67,631. All
options granted and vested to the Executive Vice President
under the former agreement were retained (140,000 options) and
all unvested options granted under the former agreement were
cancelled.
22
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
NEW EMPLOYMENT AGREEMENTS (CONTINUED)
On February 25, 2002, the Company entered into a one year
employment agreement with its Vice President and Secretary.
The agreement provides for the Company to pay a base salary of
$13,383.33 per month. The employee may receive an annual bonus
to be determined at the sole discretion of the Board of
Directors.
On March 22, 2002, the Company entered into a new three-year
employment agreement with its Chief Executive Officer at the
time, Ray Willenberg, Jr. Pursuant to the agreement, Mr.
Willenberg continued to serve as the Company's Chief Executive
Officer until June 1, 2002, at which time Mr. Willenberg
stepped down as CEO and became an Executive Vice President of
the Company. In addition, the employment agreement provides
for a base salary of $14,583 per month and options to purchase
100,000 shares of common stock at $1.02 per share. All options
are exercisable immediately and expire ten years from the
grant date.
On March 22, 2002, the Company entered into a three-year
employment agreement with its current Chief Executive Officer,
Thomas Cooper. Pursuant to the agreement, Mr. Cooper worked
part-time until June 1, 2002, at which time he assumed the
role of Chief Executive Officer. The Company agreed to pay a
base salary of $10,417 per month prior to June 1, 2002 and
$20,833 per month after June 1, 2002. In addition, Mr. Cooper
may receive an annual bonus based on his performance as
determined at the sole discretion of the Board of Directors.
Pursuant to the terms of the agreement, Mr. Cooper was issued
options to purchase 1,500,000 shares of the Company's common
stock at $1.02 per share. The options vest in twelve equal
quarterly installments starting June 1, 2002. These options
expire on March 22, 2012.
On July 1, 2002, the Company entered into a three-year
employment agreement with its Chief Marketing Officer, Brad
Ketch. Pursuant to the agreement, the Company will pay Mr.
Ketch a base salary at the rate of $15,000 per month, and an
annual bonus based upon his performance, as determined at the
sole discretion of the Board of Directors. In addition, the
employment agreement provides non-qualified stock options to
purchase 405,000 shares of common stock at $1.09 per share.
Options with respect to 105,000 shares are exercisable
immediately and the remaining vest in eight equal quarterly
installments, starting May 31, 2003. These options expire on
July 1, 2012.
23
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENT
On February 11, 2002, the Company entered into a one-year
consulting agreement for financial communications services,
pursuant to which the Company agreed to pay the consultant
$10,000 in cash per month. The consulting agreement provides
that the Company may terminate the consulting services at any
time following 90 consecutive days of representation by the
consultant. Pursuant to the agreement, the Company granted the
consultant warrants to purchase 300,000 shares of its common
stock at exercise prices ranging from $.75 to $2.25. All of
the warrants are exercisable immediately, hold piggy-back
registration rights and expire two years from the grant date.
The fair value of stock options estimated on the date of grant
using the Black-Scholes option pricing model is $4,500.
On March 22, 2002, the Company entered into a consulting
agreement with an individual for advisory services relating to
the Company's technology for transmitting high speed data over
extended ranges of copper telephone wire. The Company agrees
to pay the consultant $15,000 per month and options to
purchase 50,000 shares of its common stock at an exercise
price of $1.02. All of the options are exercisable immediately
and expire ten years from the grant date. The fair value of
stock options estimated on the date of grant using the
Black-Scholes option pricing model is $1.16, or $58,000.
On July 17, 2002, the Company entered into a one-year
consulting agreement with an individual for consulting,
advisory and related services. The Company agreed to pay the
consultant a one-time payment of $250,000 in the event the
Company receives gross revenue in the amount of at least
$2,250,000 from the distribution of the Company's motion
picture.
On July 30, 2002, the Company entered into a five-month
consulting agreement with a consulting company for consulting
and advisory services in connection with strategic business
planning. The Company agreed to issue 350,000 restricted
shares of the Company's common stock and warrants to purchase
an aggregate of 1,000,000 shares of the Company's common stock
at an exercise price of $.75 per share. All of the warrants
are exercisable immediately and expire five years from the
grant date. The fair value of warrants estimated on the date
of grant using the Black-Scholes option pricing model is
$46,737.
24
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ROYALTY PAYMENTS
The Company's projects under development stipulate royalty
payments that are based on percentages of revenue.
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
Company's management currently expects to receive revenue from
the film in three categories. These categories are upfront
distribution licenses, product or title sponsorships, and, of
course, box-office ticket sales. Initial revenues are expected
late in calendar 2002 or early 2003. 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, 2002, the Company has funded
approximately $1,980,000 of production and other costs, which
was included in projects under development in the accompanying
consolidated balance sheet. In addition, approximately
$266,000 was funded to purchase camera equipment.
25
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS AND SETTLEMENT
On February 4, 2002, a lawsuit was filed against the Company
by Creditors Adjustment Bureau, Inc., a California
corporation, who was allegedly assigned rights to any
judgement collected on amounts allegedly owed to Arter &
Hadden, LLP, the Company's former legal counsel. The plaintiff
seeks damages in the amount of $110,559.86, plus 10% interest,
costs of the suit and reasonable attorney's fees. The Company
does not believe the resolution of this matter will have a
material adverse effect on the Company's financial position or
results of operation.
Subsequent to July 31, 2002, the Company reached an agreement
to settle the above lawsuit. The Company agreed to pay
Creditors Adjustment Bureau, Inc. an aggregate of $80,000 in
eight monthly installments beginning in October 2002, or an
aggregate of $70,000 if the Company pays the entire amount due
on or before December 31, 2002.
On June 28, 2002, the Company entered into a settlement
agreement and mutual release in certain litigation filed by
Allan Blevins and Michael Shepperd, former officers of the
Company. Under the terms of settlement, Blevins and Shepperd
will return to the Company 2.2 million shares of its common
stock, which will then be cancelled by the Company. The
parties agreed that a total of 500,000 shares of the Company's
common stock would be purchased from Blevins and Shepperd for
$375,000 ($.75 per share), payable in four equal installments
of $93,750, due on August 1, September 15, November 1 and
December 15, 2002. The Company retained the right to purchase
the 500,000 shares or to assign such right to a third party.
The Company also agreed to pay the attorney for Blevins and
Shepperd $75,000 in four equal installments payable on August
1, September 15, November 1 and December 15, 2002. The Company
has entered into an agreement with an entity to purchase at
least $293,000 of the shares to be purchased from Blevins and
Shepperd. Accordinagly, the accompanying financial statements
reflect the Company's remaining obligation to purchase 109,333
shares of stock from Blevins and Shepperd for $82,000. The
legal fees have been accrued in full at July 31, 2002 and the
accounting for the stock transaction will be determined at the
time of settlement
Blevins and Shepperd will continue to hold a total of 300,000
shares of the Company's common stock issued at the time of a
February 2000 merger. They have contractually agreed that
these shares will be subject to a lockup and will only become
available for public sale at specified dates and amounts
between now and January 2004.
26
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On August 2, 2002, a lawsuit was filed in California Superior
Court in Santa Clara County against New Visual Corporation and
NV Technology, by Brad Lundahl (d/b/a Lundahl Engineering)
alleging that the Company breached a contract for consulting
services it entered into with Mr. Lundahl in July 2000, by
failing to pay Mr. Lundahl for his services as provided under
the agreement. The lawsuit sought to compel arbitration based
upon a provision mandating arbitration contained in the
contract in question. The Company has agreed to arbitrate and
intends to vigorously dispute whether any amount is due to Mr.
Lundahl. The amount in controversy is not stipulated in the
lawsuit, but is believed to be approximately $40,000. The
Company does not believe that the resolution of this matter
will have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 11 - SEGMENT INFORMATION
Summarized financial information concerning the Company's
reportable segments is shown in the following table:
For the Nine Months Ended July 31, 2002:
Telecommunication Entertainment Unallocable
Business Business Expenses Totals
------------ ------------ ------------ ------------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $(1,400,019) $ -- $(4,105,900) $(5,505,919)
Depreciation and
Amortization $ 872,202 $ 11,250 $ 39,525 $ 922,977
Interest Expense $ -- $ 1,004,986 $ -- $ 1,004,986
Total Identifiable Assets $ 5,856,372 $ 2,197,076 $ 293,736 $ 8,347,184
For the Nine Months Ended July 31, 2001:
Telecommunication Entertainment Unallocable
Business Business Expenses Totals
------------ ------------ ------------ ------------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $(1,190,348) $ -- $(6,073,429) $(7,263,777)
Depreciation and
Amortization $ 760,526 $ 12,190 $ 74,406 $ 847,842
Interest Expense $ -- $ 27,179 $ -- $ 27,179
Total Identifiable Assets $ 95,390 $ 1,590,651 $ 676,549 $ 2,362,590
NOTE 12 - SUBSEQUENT EVENTS
On September 4, 2002, a total of 225,000 shares of the
Company's common stock was sold for gross proceeds of
$150,000.
27
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
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2002 AND 2001.
REVENUES. We are a development-stage company. There were no revenues
for the nine months ended July 31, 2002 or the nine months ended July 31, 2001.
OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances, research and development expenses, the costs of a
litigation settlement and selling, general and administrative expenses. Total
operating expenses decreased to approximately $5,506,000 for the nine months
ended July 31, 2002, from approximately $7,264,000 for the nine months ended
July 31, 2001. The larger expense in 2001 resulted primarily from a $1,000,000
charge relating to stock issued in a litigation settlement during the nine
months ended July 31, 2001. The Company issued 250,000 shares of common stock
valued at $1,000,000 in a February 2001 settlement with Astounding.com, Inc. and
Jack Robinson in connection with certain disputes arising from a non-consummated
merger between New Visual Corporation and Astounding.com, Inc. There was no
similar event during the nine months ended July 31, 2002. Also, the issuance of
common stock for consulting services declined from approximately $2,410,000 for
the nine months ended July 31, 2001 to approximately $1,601,000 for the nine
months ended July 31, 2002. Selling, general and administrative expenses
amounted to approximately $2,505,000 and $2,663,000 for the nine-month periods
ended July 31, 2002 and July 31, 2001, respectively. The decreases in operating
expenses were offset by an increase in research and development expenses from
approximately $1,190,000 for the nine months ended July 31, 2001 to
approximately $1,400,000 for the nine months ended July 31, 2002.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses increased to
approximately $1,866,000 for the nine months ended July 31, 2002 from
approximately $777,000 for the nine months ended July 31, 2001. The increase was
primarily due to an increase in interest expense of approximately $900,000
resulting from the interest component of convertible notes payable issued during
the nine months ended July 31, 2002. In addition, several of these convertible
notes were convertible into common stock at a conversion rate lower than the
market price at the time of issuance of the notes. As a result, there was an
additional charge to amortization of unearned financing costs of approximately
$766,000. The increases in these expenses were offset by a reduction in the
costs of amortization of unearned financing costs of approximately $508,000 in
connection with a long-term debt financing arrangement. During the year ended
October 31, 2001 the Company paid down long-term debt in connection with this
financing arrangement amounting to $500,000.
NET LOSS. Our net loss was approximately $7,372,000, or $0.19 per
common share, for the nine months ended July 31, 2002, a decrease from our net
loss of approximately $8,041,000, or $0.32 per common share, for the same period
last year.
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2002 AND 2001.
REVENUES. We are a development-stage company. There were no revenues
for the three months ended July 31, 2002 or the three months ended July 31,
2001.
28
OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances, research and development expenses and selling,
general and administrative expenses. Total operating expenses decreased to
approximately $1,389,000 for the three months ended July 31, 2002, from
approximately $4,395,000 for the three months ended July 31, 2001. The decrease
resulted primarily from a reduction in the issuance of common stock for
consulting services from approximately $2,410,000 for the three months ended
July 31, 2001 to approximately $139,000 for the three months ended July 31,
2002. Research and development expenses decreased by approximately $407,000 to
approximately $121,000 for the three-month period ended July 31, 2002 compared
to the prior year. This amount does not include $615,000 of development fees
paid to Adaptive Networks during this period, which are being capitalized.
Selling, general and administrative expenses decreased to approximately
$1,129,000 for the three months ended July 31, 2002 from approximately
$1,457,000 for the three months ended July 31, 2001.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses increased to
approximately $893,000 for the three months ended July 31, 2002 from
approximately $259,000 for the three months ended July 31, 2001. The increase
was principally due to an increase in interest expense of approximately $454,000
resulting from the interest component of convertible notes payable issued during
the three months ended July 31, 2002. In addition, several of these convertible
notes were convertible into common stock at a conversion rate lower than the
market price at the time of issuance of the notes. As a result, there was an
additional charge to amortization of unearned financing costs of approximately
$404,000. The increases in these expenses were offset by a reduction in the
costs of amortization of unearned financing costs of approximately $169,000 in
connection with a long-term debt financing arrangement. During the year ended
October 31, 2001 we paid down long-term debt in connection with this financing
arrangement amounting to $500,000.
NET LOSS. Our net loss was approximately $2,283,000, or $0.05 per
common share, for the three months ended July 31, 2002, a decrease from our net
loss of approximately $4,654,000, or $0.18 per common share, for the same period
last year.
LIQUIDITY AND CAPITAL RESOURCES.
Net cash used in operating activities was approximately $3,641,000 and
$4,476,000 for the nine months ended July 31, 2002 and July 31, 2001,
respectively. Cash balances totaled approximately $295,000 as of October 31,
2001 and $77,000 as of July 31, 2002.
Operations have been financed principally through sales of common
stock, the exercise of warrants to purchase common stock, loans, the issuance of
convertible notes payable and notes payable. Net proceeds from financing
activities amounted to approximately $4,391,000 for the nine months ended July
31, 2002, including sales of common stock of approximately $1,979,000, exercise
of warrants of approximately $728,000, the issuance of notes payable of
approximately $500,000 and the issuance of convertible notes payable of
approximately $1,508,000. Net proceeds from financing activities amounted to
approximately $4,558,000 for the nine months ended July 31, 2001. During the
nine-month period ended July 31, 2001 sales of common stock amounted to
approximately $5,058,000 and notes payable amounting to approximately $500,000
were repaid.
Stock was issued in payment of expenses amounting to approximately
$1,601,000 and $2,410,000 for the nine-month periods ended July 31, 2002 and
July 31, 2001, respectively. Stock was issued in settlement of litigation in the
amount of $1,000,000 during the nine months ended July 31, 2001.
In April 2000, we entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. Under the agreement,
we are providing 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. As of July 31, 2002, we had funded approximately
$2,246,000 of the production costs towards this project, which included the
purchase of camera equipment of approximately $266,000.
29
Research and development expenses totaled approximately $1,400,000 and
$1,190,000 for the nine months ended July 31, 2002 and the nine months ended
July 31, 2001, respectively. This amount does not include $715,000 of
development fees paid to Adaptive Networks during this period, which are being
capitalized.
During the nine months ended July 31, 2002, we issued convertible notes
payable totaling approximately $1,508,000. We agreed to pay the principal and
interest in an amount equal to 50% of the principal if certain milestones are
reached from the distribution of the feature length film currently in
production. Because several of the notes were convertible into common stock at a
conversion rate lower than the market price at the time of issuance of the
notes, additional expense was recorded in the approximate amount of $766,000.
The notes are convertible at any time, in whole or in part, into shares of
common stock at conversion prices ranging from $0.40 to $1.00 per share. During
the three months ended July 31, 2002, four convertible notes were converted into
210,000 shares of our common stock, resulting in the cancellation of $189,000 in
principal and interest that would have been outstanding under the notes.
In June 2000, we entered into five long-term credit facilities,
pursuant to which we borrowed $750,000. We repaid $500,000 of these borrowings
during fiscal 2001. The remaining principal and interest at 6% per year will be
due in June 2003.
In April 2002, we entered into an agreement with Adaptive Networks,
Inc. for development services relating to our FPGA-based prototype. We agreed to
pay Adaptive an aggregate of $1,559,000 for these services. As of July 31, 2002,
the remaining balance due to Adaptive is $844,000.
In April 2002, we issued 3,192 shares of Series B Preferred Stock to
Zaiq Technologies, Inc. in connection with our purchase of a receivable due to
Zaiq from Adaptive Networks, Inc. We then forgave the receivable as partial
payment for a worldwide, perpetual technology license from Adaptive. We must
offer to redeem all of the Series B Preferred Stock if we close a corporate
transaction resulting in a change of control or a financing transaction of at
least $15 million. If we close a financing transaction of at least $3 million
but less than $15 million, we must offer to redeem a portion of the Series B
Preferred Stock based on a fraction, the numerator of which is the cash proceeds
we receive in the financing transaction and the denominator of which is $15
million. We are also required to offer to redeem the outstanding Series B
Preferred Stock in eight equal quarterly payments beginning March 31, 2005 and
ending December 31, 2006.
In July 2002, we borrowed $500,000 from the Charles R. Cono Trust.
These borrowings are unsecured and bear interest at 10% per annum. All principal
and interest will be due in a lump sum on or before November 1, 2002.
Management has observed over the last several months that due to the
current economic and stock market climate, our recent stock price and market
volatility, and general market conditions in the semiconductor and
telecommunications industries, funding for our operations has become more
difficult to secure and more expensive than in prior periods. Management is
presently taking steps to reduce monthly cash outlays through arrangements with
vendors to accept longer payment terms and reductions of recurring expenses,
when possible, including potential staff and management changes. Our management
team also agreed in August to temporarily defer a portion of executive salaries
in order to reduce monthly cash expenditures while the Company continues to
pursue additional financing. However, additional cash must be raised in order to
continue to meet liquidity needs and satisfy our proposed business plan.
Management is presently investigating potential financing transactions that it
believes can provide additional cash for operations and be profitable in both
the short and long-term. Management also intends to attempt to raise funds
through private sales of common stock and borrowings. Although management
believes these efforts will enable us to meet our liquidity needs in the future,
there can be no assurance that these efforts will be successful.
GOING CONCERN CONSIDERATION
We have continued losses in each of our years of operation, negative
cash flow and liquidity problems. These conditions raise substantial doubt about
our ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability of reported assets or liabilities should we be unable to continue
as a going concern.
30
We have been able to continue based upon our receipt of funds from the
issuance of equity securities and borrowings, and by acquiring assets or paying
expenses by issuing stock. Our continued existence is dependent upon our
continued ability to raise funds through the issuance of our securities or
borrowings, and our ability to acquire assets or satisfy liabilities by the
issuance of stock. Management's plans in this regard are to obtain other debt
and equity financing until profitable operation and positive cash flow are
achieved and maintained. Although management believes, based on the fact that it
raised approximately $10,555,000 through sales of common stock and $3,673,000
from borrowings from November 1, 1999 through July 31, 2002, that it will be
able to secure suitable additional financing for the company's operations, there
can be no guarantee that such financing will continue to be available on
reasonable terms, or at all.
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, 2002. See the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2001 for additional discussions
regarding quantitative and qualitative disclosures about market risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 28, 2002, we settled a lawsuit pending in California Superior
Court brought by Allan L. Blevins and Michael Shepperd, in which New Visual
Corporation and Ray Willenberg, Jr., our Chairman and an executive officer, were
defendants. The lawsuit stemmed from a dispute regarding a February 2000 merger
agreement and three million shares of our common stock issued to Messrs. Blevins
and Shepperd under the merger agreement. Pursuant to the terms of the
settlement, Messrs. Blevins and Shepperd agreed to return 2.2 million of the 3
million shares to us. Upon receipt, the 2.2 million returned shares of our
common stock will be cancelled and cease to be outstanding. The Company or its
assignee will purchase from Messrs. Blevins and Shepperd a total of 500,000
shares of common stock for $375,000 ($0.75 per share). We also agreed to pay
$75,000 in attorneys' fees to Messrs. Blevins' and Shepperd's attorneys. These
purchases and payments are to occur in four equal installments in August,
September, November and December 2002.
We have entered into an agreement with a company to assign our right
and obligation to purchase at least $293,000 of common stock from Messrs.
Blevins and Shepperd under the settlement agreement. Accordingly, the
accompanying financial statements reflect our remaining obligation to repurchase
109,333 shares of common stock from Messrs. Blevins and Shepperd for $82,000.
Messrs. Blevins and Shepperd will continue to hold 300,000 shares of
our common stock acquired in the merger, which, pursuant to the terms of the
settlement, will be subject to a lockup arrangement and only become available
for public sale in installments between now and January 2004. The settlement
agreement also grants us a right of first refusal to purchase the shares held by
Messrs. Blevins and Shepperd as they become available for resale under the
lockup arrangement. Finally, we agreed to transfer certain assets related to the
merger agreement to Messrs. Blevins and Shepperd. We do not believe any of the
transferred assets are material to our financial condition, results of
operations, business or prospects.
Subsequent to July 31, 2002, a lawsuit was filed in California Superior
Court in Santa Clara County against New Visual Corporation and NV Technology, by
Brad Lundahl (d/b/a Lundahl Engineering) alleging that we breached a contract
for consulting services entered into between us and Mr. Lundahl in July 2000, by
failing to pay Mr. Lundahl for his services as provided under the agreement. The
lawsuit sought to compel arbitration based upon a provision mandating
arbitration contained in the contract in question. We have agreed to arbitrate
this matter and intend to vigorously dispute whether any amount is due to Mr.
Lundahl. The amount in controversy is not stipulated in the lawsuit but is
believed to be approximately $40,000. We do not believe the resolution of this
matter will have a material adverse effect on our financial condition or results
of operations.
Subsequent to July 31, 2002, we reached an agreement to settle a
lawsuit was filed against us in February 2002 by Creditors Adjustment Bureau,
Inc., a California corporation, who was allegedly assigned rights to any
judgement collected on amounts allegedly owed by us to Arter & Hadden, LLP, our
former legal counsel. The plaintiff sought damages in the amount of $110,559.86,
plus 10% interest, costs of the suit and reasonable attorney's fees. In the
31
settlement, we agreed to pay Creditors Adjustment Bureau, Inc. an aggregate of
$80,000 in eight monthly installments beginning in October 2002, or an aggregate
of $70,000 if we pay the entire amount due on or before December 31, 2002. We do
not believe the resolution of this matter will have a material adverse effect on
our financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) During the three months ended July 31, 2002, the Company sold
unregistered securities as follows:
In May 2002, we:
o issued 9,500 shares of common stock to one individual for
services rendered;
o issued 234,375 shares of common stock upon conversion of a
convertible note held by one investor, resulting in the
cancellation of $93,750 in principal and interest that would
have been outstanding under the note;
o sold 84,337 shares of common stock to one investor for total
proceeds of $70,000; and
o issued an aggregate of $450,000 principal amount of
convertible promissory notes to seven investors, which notes
are convertible into our common stock at a conversion price of
$1.00 per share.
In June 2002, we:
o issued 105,000 shares of common stock upon conversion of two
promissory notes held by two investors, resulting in the
cancellation of $105,000 in principal and interest that would
have been outstanding under the notes; and
o issued an aggregate of $138,000 principal amount of
convertible notes to seven investors, which notes are
convertible into shares of our common stock at conversion
prices ranging from $.90 to $1.00 per share.
In July 2002, we:
o issued 105,000 shares of common stock upon conversion of two
promissory notes held by two investors, resulting in the
cancellation of $81,000 in principal and interest that would
have been outstanding under the notes;
o sold 200,334 shares of common stock to four investors for
total proceeds of $120,200;
o issued a convertible promissory note with a principal amount
of $26,000 to one investor, which may be converted into shares
of our common stock at a conversion price of $.65 per share;
and
o issued 350,000 shares of common stock to a company in
consideration of consulting services.
Following the quarter ended July 31, 2002, during August 2002, we:
o issued an aggregate of $35,000 principal amount of convertible
promissory notes to four investors, which may be converted
into shares of our common stock at exercise prices ranging
from $.70 to $.82 per share.
In September 2002, we:
o issued 225,000 shares of common stock to one investor for
total proceeds of $150,000;
o issued an aggregate of $46,000 principal amount of convertible
promissory notes to two investors, which notes are convertible
into shares of our common stock at $.60 and $.65 per share;
and
o issued 9,869 shares of common stock upon conversion of a
convertible promissory note held by one investor, resulting in
the cancellation of $7,500 in principal and interest that
would have been outstanding under the note.
All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of such Securities Act. The recipients of
securities in each such transaction acquired the securities for investment only
and not with a view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates issued in such
transactions. The Company believes the recipients were all "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
32
Securities Act, or had such knowledge and experience in financial and business
matters as to be able to evaluate the merits and risks of an investment in its
common stock. All recipients had adequate access, through their relationships
with the Company and its officers and directors, to information about the
Company. None of the transactions described above involved general solicitation
or advertising.
ITEM 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 July 12, 2002.
(a) The Company's shareholders were asked to vote for the election of
Ivan Berkowitz, Bruce Brown, Thomas J. Cooper, John Howell, Ray Willenberg, Jr.
and C. Rich Wilson III to the Board of Directors of the Company, to hold office
until the 2003 Annual Meeting of Shareholders. The nominees were all elected
pursuant to the following votes:
------------------------- ------------------- ---------------------
For Withheld Authority
------------------------- ------------------- ---------------------
Ivan Berkowitz 32,403,675 4,590,897
------------------------- ------------------- ---------------------
Bruce Brown 33,129,026 3,865,546
------------------------- ------------------- ---------------------
Thomas J. Cooper 35,150,499 1,844,073
------------------------- ------------------- ---------------------
John Howell 32,854,345 4,140,227
------------------------- ------------------- ---------------------
Ray Willenberg, Jr. 32,479,031 4,515,541
------------------------- ------------------- ---------------------
C. Rich Wilson III 32,747,847 4,246,725
------------------------- ------------------- ---------------------
(b) The Company's shareholders were asked to ratify the Company's 2001
Stock Incentive Plan. The ratification of the 2001 Stock Incentive Plan was
approved with 15,629,017 votes cast for, 6,616,577 votes cast against, and
278,047 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, 2002. The shareholders ratified the selection of the
independent auditors with 35,322,924 votes cast for, 1,684,245 votes cast
against, and 173,403 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Convertible Promissory Note dated March 8, 2002 by New Visual
Corporation in favor of Tony Finn.
10.2 Convertible Promissory Noted dated March 8, 2002 by New Visual
Corporation in favor of James Joseph Redmon.
10.3 Convertible Promissory Note dated March 22, 2002, by New
Visual Corporation in favor of the M. Lucile Way Trust.
10.4 Convertible Promissory Note dated March 22, 2002 by New Visual
Corporation in favor of D W Construction, Inc.
10.5 Convertible Promissory Note dated April 5, 2002 by New Visual
Corporation in favor of D W Construction, Inc.
10.6 Convertible Promissory Note dated May 21, 2002 by New Visual
Corporation in favor of John Marsden.
10.7 Convertible Promissory Note dated May 21, 2002 by New Visual
Corporation in favor of Randy Arnett.
33
10.8 Convertible Promissory Note dated May 30, 2002 by New Visual
Corporation in favor of the M. Lucile Way Trust.
10.9 Convertible Promissory Note dated May 31, 2002 by New Visual
Corporation in favor of Robert E. Casey, Jr.
10.10 Convertible Promissory Note dated June 12, 2002 by New Visual
Corporation in favor of Bonnie Davis.
10.11 Employment Agreement dated July 1, 2002, by and between New
Visual Corporation and Brad Ketch.
10.12 Stock Option Agreement dated July 1, 2002, by and between New
Visual Corporation and Brad Ketch.
10.13 Consulting Agreement dated as of July 17, 2002, by and between
New Visual Corporation and Charles R. Cono.
10.14 Promissory Note dated July 17, 2002, by New Visual Corporation
in favor of Charles R. Cono Trust, Charles R. Cono, TTEE.
10.15 Consulting Agreement dated as of July 30, 2002, by and between
New Visual Corporation and Advisor Associates, Inc.
(b) Reports on Form 8-K:
o Form 8-K dated July 12, 2002, was filed pursuant to Item 5
(Other Events and Regulation FD Disclosure).
o Form 8-K dated September 6, 2002, was filed pursuant to Item 4
(Changes in Registrant's Certifying Accountant).
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 16, 2002 By: /s/ THOMAS J. COOPER
-------------------------------------
THOMAS J. COOPER
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Dated: September 16, 2002 By: /s/ THOMAS J. SWEENEY
-------------------------------------
THOMAS J. SWEENEY
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
34
CERTIFICATIONS
I, Thomas J. Cooper, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Visual Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
September 16, 2002 /S/ THOMAS J. COOPER
-----------------------------------------
Thomas J. Cooper, Chief Executive Officer
I, Thomas J. Sweeney, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Visual Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
September 16, 2002 /S/ THOMAS J. SWEENEY
------------------------------------------
Thomas J. Sweeney, Chief Financial Officer
35
EXHIBIT INDEX
10.1 Convertible Promissory Note dated March 8, 2002 by New Visual
Corporation in favor of Tony Finn.
10.2 Convertible Promissory Noted dated March 8, 2002 by New Visual
Corporation in favor of James Joseph Redmon.
10.3 Convertible Promissory Note dated March 22, 2002, by New Visual
Corporation in favor of the M. Lucile Way Trust.
10.4 Convertible Promissory Note dated March 22, 2002 by New Visual
Corporation in favor of D W Construction, Inc.
10.5 Convertible Promissory Note dated April 5, 2002 by New Visual
Corporation in favor of D W Construction, Inc.
10.6 Convertible Promissory Note dated May 21, 2002 by New Visual
Corporation in favor of John Marsden.
10.7 Convertible Promissory Note dated May 21, 2002 by New Visual
Corporation in favor of Randy Arnett.
10.8 Convertible Promissory Note dated May 30, 2002 by New Visual
Corporation in favor of the M. Lucile Way Trust.
10.9 Convertible Promissory Note dated May 31, 2002 by New Visual
Corporation in favor of Robert E. Casey, Jr.
10.10 Convertible Promissory Note dated June 12, 2002 by New Visual
Corporation in favor of Bonnie Davis.
10.11 Employment Agreement dated July 1, 2002, by and between New Visual
Corporation and Brad Ketch.
10.12 Stock Option Agreement dated July 1, 2002, by and between New Visual
Corporation and Brad Ketch.
10.13 Consulting Agreement dated as of July 17, 2002, by and between New
Visual Corporation and Charles R. Cono.
10.14 Promissory Note dated July 17, 2002, by New Visual Corporation in favor
of Charles R. Cono Trust, Charles R. Cono, TTEE.
10.15 Consulting Agreement dated as of July 30, 2002, by and between New
Visual Corporation and Advisor Associates, Inc.