================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
___________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2003
COMMISSION FILE NUMBER 0-21785
___________________
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)
___________________
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 March 14, 2003, was 59,858,651.
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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
JANUARY 31, 2003
Page Nos.
---------
PART I - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 1
At January 31, 2003 (Unaudited) and October 31, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) 2
For the Three Months Ended January 31, 2003 and 2002
For the Period from November 1, 1999 to January 31, 2003
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY (Unaudited) 3 - 4
For the Three Months Ended January 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 5 - 6
For the Three Months Ended January 31, 2003 and 2002
For the Period from November 1, 1999 to January 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7 - 24
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 25 - 27
CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 27
ITEM 4 - CONTROLS AND PROCEDURES 27
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 27 - 28
ITEM 2 - CHANGES IN SECURITIES 28 - 29
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 31
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
January 31, October 31,
2003 2002
------------- -------------
(Unaudited)
Current Assets:
Cash $ 3,056 $ 311,577
Receivable from officers 10,032 10,032
Other current assets 10,433 1,650
------------- -------------
Total Current Assets 23,521 323,259
Property and Equipment - Net 56,229 64,533
Technology License and Capitalized Software Development Fee 5,751,000 5,751,000
Projects under Development 2,178,831 2,178,831
Other Assets 14,679 14,679
------------- -------------
Total Assets $ 8,024,260 $ 8,332,302
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable $ 907,500 $ 954,500
Notes payable 771,407 971,407
Accounts payable and accrued expenses 1,895,770 2,247,698
License and development fees payable 543,000 734,000
------------- -------------
Total Liabilities 4,117,677 4,907,605
------------- -------------
Redeemable Series B Preferred Stock 3,192,000 3,192,000
------------- -------------
Commitments, Contingencies and Other Matters
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series A junior participating preferred stock; -0- shares
issued and outstanding -- --
Common stock - $0.001 par value; 100,000,000 shares authorized;
52,901,974 and 49,787,069 shares issued and outstanding at
January 31, 2003 and October 31, 2002, respectively 52,903 49,787
Additional paid-in capital 46,997,854 47,097,830
Unearned financing fees (134,345) (214,952)
Unearned compensation (8,676) (331,581)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during the development stage (33,893,120) (34,068,354)
------------- -------------
Total Stockholders' Equity 714,583 232,697
------------- -------------
Total Liabilities and Stockholders' Equity $ 8,024,260 $ 8,332,302
============= =============
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 Three Months Ended
January 31, For the Period from
----------------------------- November 1, 1999 to
2003 2002 January 31, 2003
------------- ------------- -------------
REVENUES $ -- $ -- $ 12,200
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales -- -- 21,403
Projects costs written-off -- -- 114,613
Acquired in-process research and
development expenses -- -- 6,050,000
Compensatory element of stock issuances
related to selling, general and
administrative expenses 605,155 702,407 9,881,749
Research and development 40,000 329,113 2,993,324
Selling, general and administrative expenses 498,728 671,614 10,183,219
Litigation settlement -- -- 1,000,000
Loss on disposal of equipment -- -- 7,500
------------- ------------- -------------
TOTAL OPERATING EXPENSES 1,143,883 1,703,134 30,251,808
------------- ------------- -------------
OPERATING LOSS (1,143,883) (1,703,134) (30,239,608)
------------- ------------- -------------
OTHER (INCOME) EXPENSES:
Interest expense 61,391 157,843 1,454,183
Amortization of unearned financing costs 93,492 80,607 3,673,329
Unusual item - Gain on litigation settlement (1,474,000) -- (1,474,000)
------------- ------------- -------------
TOTAL OTHER EXPENSES (INCOME) (1,319,117) 238,450 3,653,512
------------- ------------- -------------
NET INCOME (LOSS) $ 175,234 $ (1,941,584) $(33,893,120)
============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ .00 $ (.06)
============= =============
Diluted $ .00 $ (.06)
============= =============
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES:
Basic 41,652,310 32,479,898
============= =============
Diluted 51,810,248 32,479,898
============= =============
See notes to condensed consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2003
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
Three Months Ended January 31, 2003:
------------------------------------
Balance - October 31, 2002 49,787,069 $ 49,787 $ 47,097,830
Issuance of common stock for cash ($.15 to $.35 per share) 4,328,587 4,329 904,077
Issuance of common stock for conversion of promissory notes
and interest 475,733 476 197,525
Issuance of common stock in payment of deferred payroll 88,710 89 54,911
Issuance of common stock under consulting agreements 421,875 422 244,828
Cancellation of shares under legal settlement (2,200,000) (2,200) (1,471,800)
Stock offering cost -- -- (79,402)
Value assigned to beneficial conversion -- -- 12,885
Value assigned to warrants issued to consultant -- -- 37,000
Amortization of unearned compensation expense -- -- --
Amortization of unearned financing cost -- -- --
Net income -- -- --
------------- ------------- -------------
Balance - January 31, 2003 52,901,974 $ 52,903 $ 46,997,854
============= ============= =============
Unearned Unearned
Financing Compensation
Costs Expense
------------- -------------
Three Months Ended January 31, 2003:
------------------------------------
Balance - October 31, 2002 $ (214,952) $ (331,581)
Issuance of common stock for cash ($.15 to $.35 per share) -- --
Issuance of common stock for conversion of promissory notes
and interest -- --
Issuance of common stock in payment of deferred payroll -- --
Issuance of common stock under consulting agreements -- --
Cancellation of shares under legal settlement -- --
Stock offering cost -- --
Value assigned to beneficial conversion (12,885) --
Value assigned to warrants issued to consultant -- (37,000)
Amortization of unearned compensation expense -- 359,905
Amortization of unearned financing cost 93,492 --
Net income -- --
------------- -------------
Balance - January 31, 2003 $ (134,345) $ (8,676)
============= =============
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' DEFICIENCY
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2003
Total
Accumulated Stockholders'
Deficit Deficiency
------------- -------------
Three Months Ended January 31, 2003:
------------------------------------
Balance - October 31, 2002 $(46,368,387) $ 232,697
Issuance of common stock for cash ($.15 to $.35 per share) -- 908,406
Issuance of common stock for conversion of promissory notes
and interest -- 198,001
Issuance of common stock in payment of deferred payroll -- 55,000
Issuance of common stock under consulting agreements -- 245,250
Cancellation of shares under legal settlement -- (1,474,000)
Stock offering cost -- (79,402)
Value assigned to beneficial conversion -- --
Value assigned to warrants issued to consultant -- --
Amortization of unearned compensation expense -- 359,905
Amortization of unearned financing cost -- 93,492
Net Income 175,234 175,234
------------- -------------
Balance - January 31, 2003 $(46,193,153) $ 714,583
============= =============
Accumulated deficit as of November 1, 1999 $(12,300,033)
Accumulated deficit during development stage
(November 1, 1999 to January 31, 2003) (33,893,120)
-------------
Total Accumulated Deficit as of January 31, 2003 $(46,193,153)
=============
See notes to condensed consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002
AND THE PERIOD FROM NOVEMBER 1, 1999 TO JANUARY 31, 2003
For the Three Months Ended
January 31, For the Period from
----------------------------- November 1, 1999 to
2003 2002 January 31, 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 175,234 $ (1,941,584) $(33,893,120)
Adjustments to reconcile net loss to net cash used
in operating activities:
Consulting fees and other compensatory
elements of stock issuances 605,155 702,407 9,852,250
Stock issued for litigation settlement -- -- 1,000,000
Loss on disposal of equipment -- -- 7,500
Projects costs written-off -- -- 114,613
Amortization of unearned financing costs 93,492 80,607 3,673,329
Depreciation 8,304 20,732 301,429
Stock issued for acquired in-process
research and development -- -- 6,050,000
Unusual item - Gain on litigation settlement (1,474,000) -- (1,474,000)
(Increase) decrease from changes in:
Other current assets (8,782) (8,670) (53,052)
Due from related parties -- (33,402) 64,010
Other assets -- (298) (9,679)
Increase (decrease) from changes in:
Accounts payable and accrued expenses (230,928) (142,664) 2,367,971
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (831,525) (1,322,872) (11,998,749)
------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment -- 1,083 (408,548)
Proceeds from sale of equipment -- -- 145,616
Projects under development -- (801) (2,159,699)
Acquisition of license (191,000) -- (1,266,000)
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (191,000) 282 (3,688,631)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 908,406 513,001 11,708,823
Offering costs related to stock issuances (79,402) -- (326,395)
Proceeds from notes payable -- 145,000 1,456,886
Proceeds from the issuance of convertible notes
payable 85,000 312,500 2,495,250
Repayments of notes payable (200,000) -- (700,000)
Proceeds from exercise of options and warrants -- 143,000 993,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 714,004 1,113,501 15,627,564
------------- ------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (308,521) (209,089) (59,816)
CASH AND CASH EQUIVALENTS - BEGINNING 311,577 294,802 62,872
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 3,056 $ 85,713 $ 3,056
============= ============= =============
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002
AND THE PERIOD FROM NOVEMBER 1, 1999 TO JANUARY 31, 2003
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
For the
Period from
For the Three Months Ended November 1,
January 31, 1999 to
----------------------- January 31,
2003 2002 2003
----------- ---------- -----------
Cash paid during the period for:
Interest $ -- $ -- $ 526
=========== ========== ===========
Income taxes $ -- $ -- $ --
=========== ========== ===========
Non-Cash Investing and Financing Activities:
Shares of common stock issued in the conversion
of notes payable and accrued interest $ 198,000 $ -- $2,381,626
=========== ========== ===========
Common stock issued for acquisition of license $ -- $ -- $ 750,000
=========== ========== ===========
Redeemable Series B Preferred stock issued for
acquisition of license $ -- $ -- $3,192,000
=========== ========== ===========
See notes to condensed consolidated financial statements.
6
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 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 three months ended January
31, 2003, the Company incurred a net operating loss of approximately
$1,144,000 and had a working capital deficiency of $4,094,156. 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.
7
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 marketing of its
broadband technology. No assurance can be given that the Company can
complete such technology, or that it can commercialize it 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 three months ended January 31, 2003,
the Company borrowed $85,000 from two individuals and issued
convertible promissory notes.
During the three months ended January 31, 2003, the Company received
$908,406 from the sale of 4,328,587 shares of its common stock. 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 three-month period ended
January 31, 2003 are not necessarily indicative of the results that may
be expected for the year ending October 31, 2003.
The condensed consolidated balance sheet at October 31, 2002 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.
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
(CONTINUED)
BUSINESS AND CONTINUED OPERATIONS (CONTINUED)
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant's Annual Report on
Form 10-K for the year ended October 31, 2002.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, 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.
PROJECT UNDER DEVELOPMENT
Statement of Positions SOP-00-2, "Accounting by Producers or
Distributors of Films" ("SOP-00-2"), requires that film costs be
capitalized and reported as a separate asset on the balance sheet. Film
costs include all direct negative costs incurred in the production of a
film, as well as allocations of production overhead and capitalized
interest. Direct negative costs include cost of scenario, story,
compensation of cast, directors, producers, writers, extras and staff,
cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2
also requires that film costs be amortized and participation costs
accrued, using the individual-film-forecast-method-computation method,
which amortizes or accrues such costs in the same ratio that the
current period actual revenue (numerator) bears to the estimated
remaining unrecognized ultimate revenue as of the beginning of the
fiscal year (denominator).
In addition, SOP-00-2 also requires that if an event or change in
circumstances indicates that an entity should assess whether the fair
value of a film is less than its unamortized film costs, then an entity
should determine the fair value of the film and write-off to the
statement of operations the amount by which the unamortized capital
costs exceeds the film's fair value. The Company adopted the standard
effective November 1, 2001, which did not have a material effect on the
Company's financial position or results of operations.
The Company commences amortization of capitalized film costs and
accrues expenses of participation costs when a film is released and it
begins to recognize revenue from the film.
9
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES CONDENSED TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NET INCOME (LOSS) PER COMMON SHARE
The Company has reported its earnings in accordance with SFAS No. 128,
"Earnings Per Share". Basic net income per common share is based on the
weighted average number of shares outstanding during the period.
Diluted net income per common share is based on the weighted average
number of shares outstanding during the period, including common stock
equivalents. The calculation of net income per common share is as
follows:
Three Months Ended January 31,
----------------------------
2003 2002
------------- -------------
Net income (loss) available to common stock-
holders $ 175,234 $ (1,941,584)
============= =============
Average common shares outstanding - basic 41,652,310 32,479,898
Effect of dilutive securities:
Stock options 559,649 --
Stock warrants 131,228 --
Convertible notes payable 2,212,516 --
Series B Preferred stock 7,254,545 --
------------- -------------
Average common shares outstanding -
diluted 51,810,248 32,479,898
============= =============
Net income (loss) per common share - basic $ .00 $ (.06)
Net income (loss) per common share - diluted $ .00 $ (.06)
For purposes of computing diluted net income per common share, weighted
average common share equivalents do not include stock options with an
exercise price that exceeds the average fair market value of the
Company's common stock for the period (i.e., "out-of-the-money"
options). On January 31, 2003 and 2002, options and warrants to
purchase common shares of 5,801,601 and 3,011,715, respectively, were
excluded from the computation.
10
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)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility
for the Company's computer software is generally based upon achievement
of a detail program design free of high risk development issues and the
completion of research and development on the product hardware in which
it is to be used. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized computer
software development costs requires considerable judgment by management
with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware
technology.
Amortization of capitalized computer software development costs
commences when the related products become available for general
release to customers. Amortization is provided on a product by product
basis. The annual amortization is the greater of the amount computed
using (a) the ratio that current gross revenue for a product bears to
the total of current and anticipated future gross revenue for that
product, or (b) the straight-line method over the remaining estimated
economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, the capitalized
costs of each software product is then valued at the lower of its
remaining unamortized costs or net realizable value.
The Company has no amortization expense for the three months ended
January 31, 2003 and 2002 for its capitalized software development
costs.
STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation". SFAS 123
establishes accounting and reporting standards for stock-based employee
compensation plans. This statement allows companies to choose between
the "fair value-based method of accounting" as defined in this
statement and the "intrinsic value-based method of accounting" as
prescribed by Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees". The Company has elected to
continue to follow the accounting guidance provided by APB 25 for stock
compensation issued to employees or directors, as permitted. Stock
compensation issued to non-employees/directors is accounted for in
accordance with SFAS No. 123.
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
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company evaluates its long-lived assets
for financial impairment, and continues to evaluate them as events or
changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values.
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 to the
current year presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
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
accounting and reporting for costs associated with exit or disposal
activities and nullifies 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 and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does
not expect the adoption of this statement to have a material effect on
its financial statements.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (" FIN 45"). FIN 45
requires a company, at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN
45 are effective for guarantees issued or modified after December 31,
2002 and adoption of the disclosure requirements are effective for the
Company during the first quarter ending January 31, 2003. Adoption of
FIN 45 during the first quarter ending January 31, 2003 did not have a
material effect on the Company's financial position or results of
operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. Statement 148
amends SFAS Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition to SFAS No. 123's fair
value method of accounting for stock-based employee compensation.
Statement 148 also amends the disclosure provisions of SFAS No. 123 and
APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual
and interim financial statements. While the statement does not amend
SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS 148 are
applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair
value method of SFAS No. 123, or the intrinsic value method of APB
Opinion 25. The Company will continue to account for stock-based
compensation according to APB 25, while its adoption of SFAS No. 148
requires the Company to provide prominent disclosures about the effect
of SFAS No. 123 on reported income and will require the Company to
disclose these effects in the interim financial statements as well.
13
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 January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its results of operations and financial condition.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
At January 31, At October 31,
2003 2002
-------------- --------------
Furniture and fixtures $ 54,097 $ 54,097
Camera equipment 298,165 298,165
Office equipment 109,430 109,430
-------------- --------------
461,692 461,692
Less: Accumulated depreciation 405,463 397,159
-------------- --------------
Total $ 56,229 $ 64,533
============== ==============
For the three months ended January 31, 2003 and 2002, depreciation
expense was $8,304 and $20,732, respectively.
14
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - TECHNOLOGY LICENSE AND DEVELOPMENT 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
software 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. As of January 31, 2003, $543,000 of
this development fee was outstanding.
The Company capitalized the consideration issued in connection with the
license fee and development fee totaling $5,751,000. The Company's
technical employees and advisors concluded that as of March 2002 the
Company had established technological feasibility for its ultimate
telecommunication product to be marketed. Additional development
services and testing, to be performed principally by ANI, are necessary
to complete the product development.
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.
15
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - PROJECT UNDER DEVELOPMENT
In April 2000, the Company entered into a joint venture production
agreement to produce a feature length film for theatrical distribution.
The Company agreed to provide the funding for the production in the
amount of $2,250,000 and, in exchange, received a 50% share in all net
profits from worldwide distribution and merchandising, after receiving
funds equal to its initial investment of up to $2,250,000. 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. As of January 31, 2003, the Company has funded
approximately $2,179,000 of production and other costs, which was
included in projects under development in the accompanying consolidated
balance sheet. As of January 31, 2003, the film was completed.
Management of the Company expects to sign a distribution agreement
during the year ended October 31, 2003. No amortization of the
capitalized film cost was necessary for the three months ended January
31, 2003 and 2002.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
At January 31, At October 31,
2003 2002
-------------- --------------
Deferred officers compensation $ 157,393 $ 181,596
Accrued bonuses and payroll 381,727 334,307
Professional fees 429,984 623,044
Interest payable 534,287 541,350
Consulting fees 50,109 62,018
Miscellaneous 342,270 505,383
------------- --------------
$ 1,895,770 $ 2,247,698
============= ==============
NOTE 7 - CONVERTIBLE NOTES PAYABLE
During the three months ended January 31, 2003, the Company entered
into two convertible promissory note agreements with two individuals,
totalling $85,000. The Company agreed to pay the principal and an
amount equal to 50% of the principal sum if the Company reaches a
certain milestone 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 $.42 to $.43.
During the three months ended January 31, 2003, five convertible
promissory notes were converted to 475,733 shares of the Company's
common stock, totalling $198,000, of which $66,000 represented accrued
interest.
16
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
As of January 31, 2003, the outstanding amount for the above notes was
$1,361,250, which included $453,750 of accrued interest expense.
The two convertible note agreements that were entered into during the
quarter ended January 31, 2003 are convertible into common stock at a
conversion rate lower than the market price at the issuance of the
convertible notes. Therefore, as of January 31, 2003, the value of such
beneficial conversion feature was $12,885 and such amount was charged
to financing costs during the three months ended January 31, 2003.
NOTE 8 - NOTES PAYABLE
On November 4, 2002, the Company repaid $200,000 under a promissory
note agreement entered on October 29, 2002.
NOTE 9 - REDEEMABLE SERIES B PREFERRED STOCK
On April 10, 2002, the Company amended its Articles of Incorporation
and designated 4,000 shares 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 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.
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - REDEEMABLE SERIES B PREFERRED STOCK (CONTINUED)
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.
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. Based on the January 31, 2003 closing stock
price of the common stock, the Series B Preferred Stock would be
convertible into 7,254,545 shares of common stock. 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 4. As of October 31, 2002, there were 4,000
authorized shares Series B Preferred Stock and 3,192 shares issued and
outstanding. Based on the redemption term, the Series B Preferred Stock
is not included in stockholders' equity.
NOTE 10 - STOCKHOLDERS' EQUITY
2003 CONSULTANT STOCK PLAN
On January 30, 2003, the Company adopted its 2003 Consultant Stock Plan
to promote the interests of the Company, its affiliated entities and
its stockholders by using investment interests in the Company to
attract, retain and motivate certain outside consultants, to encourage
and reward such persons' contributions to the performance of the
Company and to align their interests with the interests of the
Company's stockholders. The Company's employees, officers and directors
are not eligible to receive awards under this Plan. The maximum number
of shares of common stock reserved and available for issuance under
this Plan is 6,000,000, subject to adjustment. The 2003 Consultant
Stock Plan is administered by the Board of Directors. Only
non-qualified stock options may be issued under this plan. The exercise
price for each stock option is determined by the Board of Directors as
of the date such stock option is granted. The Board of Directors may
grant stock options under the plan that may be exercised for a period
of up to ten years.
SIGNIFICANT COMMON STOCK ISSUANCES DURING THE THREE MONTHS ENDED
JANUARY 31, 2003
During the quarter ended January 31, 2003, the Company received
approximately $908,406 for the issuance of 4,328,587 shares of common
stock to investors.
During the quarter ended January 31, 2003, the Company issued 421,875
shares of its common stock, in connection with various consulting
agreements and services, in satisfaction of $245,250 in consulting
expenses. As of January 31, 2003, $245,250 was charged to operations.
During the quarter ended January 31, 2003, the Company issued 88,710
shares of common stock to two officers of the Company in satisfaction
of $55,000 in accrued compensation.
During the quarter ended January 31, 2003, 2.2 million shares of the
Company's common stock previously issued to the former owners of New
Wheel and former officers of the Company were returned to the Company,
resulting in a non-cash gain of $1,474,000.
18
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - 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 - October 31, 2002 2,168,750 $ 1.29 4,192,500 $ 2.16
Options granted - 11/02 - 01/31/03:
In the Plans -- -- -- --
Options granted - 11/02 - 01/31/03:
Outside the Plans -- -- 1,500,000 .64
Options forfeited:
In the Plans -- -- -- --
Outside the Plans -- -- (1,500,000) 1.02
----------- --------- ------------ ---------
Outstanding - January 31, 2003 2,168,750 $ 1.29 4,192,500 $ 2.03
=========== ========= ============ =========
Exercisable at January 31:
2003 1,688,125 $ 1.01 2,659,167 $ 2.82
2004 1,949,688 $ 1.22 3,175,833 $ 2.47
2005 2,168,750 $ 1.29 3,692,500 $ 2.23
2006 2,168,750 $ 1.29 4,192,500 $ 2.03
The exercise price for options outstanding as of January 31, 2003
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 January 31, 2003 would have
been $522,098, or $.01 per share.
19
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
On November 21, 2002, the Company granted a company warrants to
purchase 100,000 shares of its common stock at an exercise price of
$.25. The warrants vested immediately and expire on November 21, 2007.
The fair value of stock warrants estimated on the date of grant using
the Black-Scholes option pricing model is $.37 per share, or $37,000.
At January 31, 2003, 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 $6.00 November 17, 2003
or 50% of
market ($.44
at 01/31/03)
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 May 30, 2007
November 21, 2002 100,000 .25 November 20, 2007
------------ -------------
3,142,943 $0.22-$11.50 June 7, 2003 - October 1, 2006
============ =============
Exercisable at
January 31, 2003 3,142,943
============
20
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
SUBSTANTIAL ISSUANCES AFTER JANUARY 31, 2003 THROUGH MARCH 5, 2003
Sale of common stock for cash 4,101,369
==========
Issuance of common stock for consulting fees 3,000,000
==========
Warrants to purchase common stock 500,000
==========
Cashless exercise of warrants 40,476
==========
NEW EMPLOYMENT AGREEMENTS
On December 2, 2002, the Company entered into a new three-year
employment agreement with its Chief Marketing Officer replacing the
executive's former employment agreement. Under the terms of the new
agreement, the executive became the Company's President and Chief
Executive Officer and receives a base salary of $20,833 per month. In
addition, the employment agreement provides that the executive is
entitled to receive an annual bonus at the discretion of the Board of
Directors of the Company. Pursuant to the terms of the agreement, the
executive was issued options to purchase 1,500,000 shares of the
Company's common stock at $.64 per share. The options vest in twelve
equal, quarterly installments starting March 1, 2003. The options
expire on December 2, 2012.
NEW CONSULTING AGREEMENTS
In January 2003, the Company entered into a one-year consulting
agreement for financial consulting services, pursuant to which the
Company agreed to issue 1,000,000 shares of the Company's common stock
to a principal of the consultant. The consulting agreement provides
that either party may terminate the consulting services at any time
upon thirty days' written notice to the other party. On February 4,
2003, 1,000,000 shares of the Company's common stock were issued.
In January 2003, the Company entered into a one-year consulting
agreement for financial consulting services, pursuant to which the
Company agreed to issue to each of two principals of the consultant
1,000,000 shares of the Company's common stock. The consulting
agreement provides that either party may terminate the consulting
services at any time upon thirty days' written notice to the other
party. On February 5, 2003, 2,000,000 shares of the Company's common
stock were issued.
21
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL DISPUTES AND SETTLEMENTS
Gary Tomsic Dispute
-------------------
In August 1998, the Company authorized the issuance to Gary Tomsic of
an option to purchase 130,000 shares of the Company's common stock in
satisfaction of monies owed to Tomsic for services rendered to the
Company. Tomsic exercised the option in 1999 and 55,000 shares were
delivered. A dispute arose between the parties concerning their
respective obligations, but did not result in litigation. In December
2002, the Company and Tomsic entered into a settlement agreement and
mutual release. In accordance with the settlement agreement, the
Company paid $15,000 to Tomsic and issued to him 51,562 shares of
common stock valued at $23,203 during the quarter ended January 31,
2003.
Brad Lundahl Dispute
--------------------
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. On February 10, 2003, the Company agreed to a settlement
of this dispute. The settlement called for payments to the plaintiff
totalling $40,000, which was accrued during the three months ended
January 31, 2003 to be made in the fiscal quarter ending April 30,
2003, and ends all claims associated with this matter.
Douglas Furth Dispute
---------------------
In September 2002, the Company entered into a consulting agreement with
Douglas Furth, pursuant to which, among other things, Mr. Furth agreed
to provide certain consulting services and the Company agreed to pay
for these services by, among other things, issuing 200,000 shares of
common stock. A dispute arose between the parties concerning their
respective obligations, but did not result in litigation. In December
2002, the Company and the individual entered into a settlement
agreement and mutual release. In accordance with the settlement
agreement, Mr. Furth is to receive 150,000 shares of common stock which
was valued at $69,000 in three equal installments due on January 15,
February 10 and March 10, 2003. The settlement agreement cancelled the
consulting agreement and provided for additional shares to be issued in
the event of any failure to perform by the Company.
Blevins and Shepperd Settlement
-------------------------------
On June 28, 2002, the Company entered into a settlement agreement and
mutual releases in certain litigation filed by the former owners of New
Wheel and former officers of the Company ("Blevins and Shepperd").
Under the terms of the settlement agreement, Blevins and Shepperd
agreed to return to the Company 2.2 million shares of the Company's
common stock previously issued to them in connection with the
acquisition of New Wheel.
22
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL DISPUTES AND SETTLEMENTS (CONTINUED)
Blevins and Shepperd Settlement, continued
------------------------------------------
The return of the 2.2 million common shares is conditioned on the
Company, or its assignee, purchasing from Blevins and Shepperd a total
of 500,000 shares of the Company's common stock for $375,000, payable
in four equal installments of $93,750, due on August 1, 2002, September
15, 2002, November 1, 2002 during the quarter ended January 31, 2003.
The Company assigned to a third party all of its rights to purchase the
500,000 shares of common stock. As of January 31, 2003, $375,000 was
paid to Blevins and Shepperd. Accordingly, in December of 2002, the 2.2
million shares of common stock were returned to the Company and were
subsequently cancelled, resulting in an unusual non-cash gain of
$1,474,000.
NOTE 12 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
For the Three Months Ended January 31, 2003:
Telecommunication Entertainment
Business Business Unallocated Totals
----------------- ------------- ------------ ------------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $ (40,000) $ -- $(1,103,883) $(1,143,883)
Depreciation and
Amortization $ 84,164 $ 3,062 $ 1,145 $ 88,371
Total Identifiable Assets $ 5,766,084 $ 2,232,069 $ 26,107 $ 8,024,260
For the Three Months Ended January 31, 2002:
Telecommunication Entertainment
Business Business Unallocated Totals
----------------- ------------- ------------ ------------
Net Sales $ -- $ -- $ -- $ --
Operating Loss $ (329,113) $ -- $ (1,374,021) $(1,703,134)
Depreciation and
Amortization $ 84,276 $ 3,898 $ 13,165 $ 101,339
Total Identifiable Assets $ 57,096 $ 2,069,170 $ 477,298 $ 2,603,564
23
NEW VISUAL CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS
COMMON STOCK
As of March 13, 2003, the Company had received approximately $693,000
for the issuance of 4,101,369 shares of common stock to investors.
WARRANTS
On February 13, 2003, the Company granted an individual warrants to
purchase 500,000 shares of its common stock at an exercise price of
$.40. The warrants vested immediately and expire on February 13, 2005.
The fair value of the stock warrants estimated on the date of grant
using the Black-Scholes Option Pricing Model is $.29 per share, or
$145,000.
On February 3, 2003, warrants to purchase 100,000 shares of common
stock were exercised on a cashless basis, for which the Company issued
40,476 shares of common stock.
SERIES C CONVERTIBLE PREFERRED STOCK
In connection with a proposed credit facility, on February 24, 2003,
the Company amended and restated the Articles of Incorporation and
designated 100,000 shares of its authorized preferred stock as Series C
Preferred Stock, par value $.01 per share. The Series C Preferred Stock
will not be entitled to receive any dividends.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and related notes contained in this Quarterly Report on
Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2003 AND THE THREE MONTHS ENDED
JANUARY 31, 2002
REVENUES. There were no revenues for the three months ended January 31,
2003 or the three months ended January 31, 2002.
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 $1,144,000 for the three months ended January 31, 2003, from
approximately $1,703,000 for the three months ended January 31, 2002. The
compensatory element of stock issuances decreased to approximately $605,000 for
the three months ended January 31, 2003 from approximately $702,000 for the
three months ended January 31, 2002. Research and development expenses decreased
from approximately $329,000 for the three months ended January 31, 2002 to
approximately $40,000 for the three months ended January 31, 2003. The Company,
however, also paid approximately $191,000 to Adaptive Networks, Inc. during the
first quarter of fiscal 2003 in previously accrued development fees that
therefore were not included as operating expenses during the quarter. Selling,
general and administrative expenses decreased to approximately $499,000 for the
three months ended January 31, 2003 from approximately $672,000 for the three
months ended January 31, 2002, principally due to decreased expenses relating to
the Company's facilities and operations in Pleasanton, California in the first
quarter of fiscal 2003 compared to the same period in fiscal 2002.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs, interest expense and a gain on the settlement of litigation.
Total other expenses decreased from approximately $238,000 for the three months
ended January 31, 2002 to a gain of approximately $1,319,000 for the three
months ended January 31, 2003. A gain of $1,474,000 was recorded during the
first quarter of fiscal 2003 in connection with the settlement of litigation
between the Company and Allan Blevins and Michael Shepperd, former officers of
the Company. The gain resulted from the return to the Company and cancellation
of 2.2 million shares of common stock that had previously been issued to Messrs.
Blevins and Shepperd. Interest expense decreased from approximately $158,000 for
the three months ended January 31, 2002 to approximately $61,000 for the three
months ended January 31, 2003. In the 2002 fiscal period the Company recognized
interest expense related to the issuance of approximately $160,000 of
convertible notes payable. Because the Company issued only $85,000 of
convertible notes payable during the first quarter of fiscal 2003, interest
expense was less during this period. Amortization of unearned financing costs
increased from approximately $81,000 for the three months ended January 31, 2002
to approximately $93,000 for the three months ended January 31, 2003.
NET INCOME. The Company reported net income of approximately $175,000,
or $0.00 per common share ($0.00 on a fully diluted basis), for the three
months ended January 31, 2003, compared to a loss of approximately $1,942,000,
or $0.06 per common share (on both a basic and fully diluted basis), for the
three months ended January 31, 2002. The principal reason for the 2003 net
income was the $1,474,000 non-cash gain relating to the litigation settlement
described above under "Other Expenses."
25
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $832,000 for
the three months ended January 31, 2003 and approximately $1,323,000 for the
three months ended January 31, 2002. Cash balances totaled approximately $3,000
as of January 31, 2003 and approximately $312,000 as of October 31, 2002.
Since November 1, 1999, operations have been financed principally
through sales of common stock, the exercise of warrants and options to purchase
common stock, and the issuance of convertible notes payable and notes payable.
Net proceeds from financing activities amounted to approximately $714,000 for
the three months ended January 31, 2003, including sales of common stock
amounting to approximately $908,000 and proceeds from convertible notes payable
amounting to $85,000. The Company also repaid $200,000 of debt during the first
quarter of fiscal 2003 and incurred approximately $79,000 in offering costs
related to stock issuances. Net proceeds from financing activities amounted to
approximately $1,114,000 for the three months ended January 31, 2002, including
sales of common stock amounting to approximately $513,000, the exercise of
warrants resulting in proceeds of approximately $143,000, loans amounting to
$145,000 and convertible notes payable amounting to approximately $313,000.
Stock was issued in the payment of selling, general and administrative
expenses amounting to approximately $605,000 for the three months ended January
31, 2003 and approximately $702,000 for the three months ended January 31, 2002.
In April 2000, we entered into a joint venture production agreement to
produce STEP INTO LIQUID, a feature length film for theatrical distribution.
Under the agreement, we are providing the funding for the production in the
amount of up to $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 January 31, 2003, we
had funded approximately $2,179,000 of the production costs towards this
project.
Research and development expenses totaled approximately $40,000 for the
three months ended January 31, 2003 and approximately $329,000 for the three
months ended January 31, 2002. During the three months ended January 31, 2003
the Company also paid approximately $191,000 in technology development fees to
Adaptive Networks, Inc. that were capitalized.
During the fiscal years ended October 31, 2001 and October 31, 2002 and
during the three months ended January 31, 2003 the Company issued convertible
notes payable totaling approximately $2,495,000. The Company 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 STEP INTO LIQUID. The notes that
remain outstanding 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. As
of January 31, 2003 the Company's liability associated with convertible notes
payable that remained outstanding was approximately $1,362,000. Several of these
convertible notes payable, with aggregate principal and interest of $375,000,
become due on May 21, 2003.
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 a license and development agreement with
Adaptive Networks, Inc. which included development services relating to our
FPGA-based prototype. We agreed to pay Adaptive an aggregate of $1,559,000 for
these services. As of January 31, 2003, the remaining balance due to Adaptive is
$543,000 under the license and development agreement.
26
In April 2002, in consideration of the grant of a technology license
from Adaptive Networks, Inc., we assumed certain debt obligations of Adaptive to
Zaiq Technologies, Inc. ("Zaiq"). We then issued 3,192 shares of 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.
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, the Company borrowed $500,000 from the Charles R. Cono
Trust. These borrowings are unsecured and bear interest at 10% per annum.
Principal and accrued interest are payable three days after written demand by
the payee.
On December 2, 2002 a separation agreement was signed with Thomas
Cooper, our former President and Chief Executive Officer. One of the terms of
the agreement obligates the Company to pay Mr. Cooper $57,692 in accrued salary
that was voluntarily deferred by Mr. Cooper during his employment. The entire
amount is to be paid by March 31, 2003. As of January 31, 2003 the outstanding
balance due to Mr. Cooper in connection with the separation agreement was
$47,692.
For a period between August and December, 2002, the Company's
management team temporarily deferred a portion of executive salaries in order to
reduce monthly expenses. As of January 31, 2003 the remaining balance of these
executive salary deferrals amounted to approximately $157,000.
Management believes funds on hand and available sources of financing
will enable the Company to meet its liquidity needs for at least the next three
months. However, funding for the Company's operations has become more difficult
to secure and more expensive than in prior periods due to the current economic
and stock market climate, the Company's recent stock price and market
volatility, and general market conditions in the semiconductor and
telecommunications industries. 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. However, additional cash must be raised in order
to continue to meet liquidity needs and satisfy the Company's proposed business
plan. Management is presently investigating potential financing transactions
that it believes can provide additional cash for operations and lead to
profitability 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 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.
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 $11,709,000 through sales of common stock and $3,952,000
from borrowings from November 1, 1999 through January 31, 2003, 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.
27
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States of
America requires management to make judgments, assumptions, and estimates that
affect amounts reported in the Consolidated Financial Statements and
accompanying notes. Note 2 to the Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended October 31, 2002, describes the
significant accounting policies and methods used in the preparation of the
Consolidated Financial Statements. Management bases its estimates on historical
experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best knowledge of current events and
actions that may impact the Company in the future, actual results may differ
from these estimates and assumptions. Our critical accounting policies are those
that affect our financial statements materially and involve difficult,
subjective or complex judgments by management. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates used
in the preparation of the Consolidated Financial Statements.
PROJECT UNDER DEVELOPMENT. The Company capitalizes costs of production
to investment in films. These costs are amortized to direct operating expenses
in accordance with SOP-00-2. These costs are stated at the lower of unamortized
film costs and fair value. These costs for an individual film are amortized in
the proportion that current period actual revenues bear to management's
estimates of the total revenue expected to be received from such film. As a
result, if revenue estimates change with respect to a film, the Company may be
required to write down all or a portion of the unamortized costs of such file.
No assurance can be given that unfavorable changes to revenue estimates will not
occur, which may result in significant write-downs affecting our results of
operations and financial condition.
Revenue is driven by audience acceptance of a film, which represents a
response not only to artistic merits but also to critics' reviews, marketing and
the competitive market for entertainment, general economic conditions, and other
intangible factors, all of which can change rapidly.
RESEARCH AND DEVELOPMENT. Research and development expenses relate to
the design and development of new telecommunications products. Payments made to
independent software developers under development agreements are capitalized to
software development costs once technological feasibility is established or if
the development costs have an alternative future use. Prior to establishing
technological feasibility, software development costs are expensed to research
and development costs and to cost of revenues subsequent to confirmation of
technological feasibility. Internal development costs are capitalized to
software development costs once technological feasibility is established.
Technological feasibility is evaluated on a product-by-product basis.
Research and development expenses generally consist of salaries,
related expenses for engineering personnel and third-party development costs.
CONTINGENCIES AND LITIGATION. The Company makes an assessment of the
probability of an adverse judgment resulting from current and threatened
litigation. The Company accrues the cost of an adverse judgment if, in our
estimation, an adverse settlement is probable and the Company can reasonably
estimate the ultimate cost of such litigation.
STOCK-BASED COMPENSATION. The Company has elected to account for fixed
award stock options and nonemployee directors' options under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." As such, no compensation
cost has been recorded in the financial statements relative to these options.
The Company utilizes, the Black-Scholes option pricing model to estimate the
fair value of these options for disclosure purposes. Stock compensation issued
to non-employees/directors is accounted for in accordance with SFAS No. 123.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Accounting Standards No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS 123" ("SFAS 148").
This statement amends SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, this statement amends the disclosure requirements of SFAS 123 to
require disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. We will adopt the annual disclosure provisions
of SFAS 148 in our financial reports beginning with the year ended October 31,
2003 and we will adopt the interim disclosure provisions for financial reports
beginning with the quarter ended April 30, 2003. As our adoption of this
standard involves disclosures only, we do not expect any impact on our
consolidated financial position, results of operations or cash flows.
28
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 addresses
consolidation by business enterprises of variable interest entities. Under that
interpretation, certain entities known as Variable Interest Entities ("VIEs")
must be consolidated by the primary beneficiary of the entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIEs in which a significant (but not majority)
variable interest is held, certain disclosures are required. It applies
immediately to variable interest entities created after January 31, 2003, and
applies in the first year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. We are currently assessing the impact the
adoption of this interpretation will have on our consolidated financial
position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the Company's market risk for
the three months ended January 31, 2003. See the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2002 for additional discussions
regarding quantitative and qualitative disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES.
As indicated in the certifications contained in this report, the
principal executive officer, principal financial officer and principal
accounting officer of New Visual Corporation have evaluated the Company's
disclosure controls and procedures as of January 31, 2003. Based on that
evaluation, these officers have concluded that the Company's disclosure controls
and procedures are effective for the purpose of ensuring that material
information required to be in this quarterly report is made known to them by
others on a timely basis. There have not been changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of this evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 10, 2003, we settled a dispute with Brad Lundahl, which was
previously described in our Report on Form 10-Q for the period ended July 31,
2002 and our Report on Form 10-K for the period ended October 31, 2002. Pursuant
to the settlement agreement, we agreed to pay Mr. Lundahl a total of $40,000,
$15,000 of which was due and paid on or before February 15, 2003, $15,000 of
which was due and paid on or before March 12, 2003, and the remainder of which
is due and payable on or before April 11, 2003. Upon payment of the $40,000, Mr.
Lundahl has agreed to formally dismiss the lawsuit styled LUNDAHL V. N.V.
TECHNOLOGY, ET AL with prejudice, which was filed in Santa Clara Superior Court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) During the three months ended January 31, 2003, the Company sold
unregistered securities as follows:
In November 2002, we:
o issued an aggregate of $85,000 principal amount of convertible
promissory notes to two investors, which notes are convertible
into shares of our common stock at a conversion price of $.39;
o issued 96,612 shares of common stock upon conversion of
convertible promissory notes held by three investors, resulting in
the cancellation of $48,000 in principal and interest that would
have been outstanding under the notes;
o sold an aggregate of 166,667 shares of common stock to five
investors for total proceeds of $42,500;
o issued 32,258 shares of common stock to an executive officer in
lieu of $20,000 in compensation owed to the officer;
o issued 300,000 shares of common stock to a company valued at
$144,000 pursuant to a contractual arrangement; and
29
o sold 183,179 shares of common stock to a "non-US Person" (as such
term is defined in Regulation S of the Securities Act of 1933) for
total proceeds of $27,164.
In December 2002, we:
o issued 379,121 shares of common stock upon conversion of two
convertible promissory notes held by one investor, resulting in
the cancellation of $150,000 in principal and interest that would
have been outstanding under the notes;
o sold an aggregate of 367,135 shares of common stock to 13
investors for total proceeds of $98,740;
o issued 56,452 shares of common stock to a director and former
officer of the Company in lieu of $35,000 in compensation owed to
the former officer;
o issued 25,000 shares of common stock valued at $15,750 to an
individual for past services rendered to the Company
o issued 350,000 shares of common stock valued at $199,500 to a
consultant for services rendered to the Company; and
o sold 1,180,454 shares of common stock to a "non-US Person" (as
such term is defined in Regulation S under the Securities Act of
1933) for total proceeds of $181,038.
In January 2003, we:
o sold an aggregate of 1,878,528 shares of common stock to 12
investors for total proceeds of $476,505, of which $337,535 were
received in 2002;
o issued 46,875 shares of common stock to our vice chairman in lieu
of $30,000 of deferred compensation owed to the director; and
o sold 638,683 shares of common stock to a "non-US Person" (as such
term is defined in Regulation S under the Securities Act of 1933)
for total proceeds of $109,573.
Following the quarter ended January 31, 2003,we have issued the
following unregistered securities:
In February 2003, we:
o sold an aggregate of 1,220,827 shares of common stock to 21
investors for total proceeds of $267,643; and
o sold 1,652,361 shares of common stock to a "non-US Person" (as
such term is defined in Regulation S under the Securities Act of
1933) for total proceeds of $249,016.
In March 2003, we:
o sold an aggregate of 458,274 shares of common stock to three
investors for total proceeds of $102,485;
o issued 40,476 shares of common stock valued at $17,000 to a
company upon its cashless exercise of a warrant; and
o sold 1,039,848 shares of common stock to a "non-US Person" (as
such term is defined in Regulation S under the Securities Act of
1933) for total proceeds of $140,375.
All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act or Regulation S under
such Securities Act. Except with respect to securities sold under Regulation S,
the recipients of securities in each such transaction acquired the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access, through
their relationships with the Company and its officers and directors, to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4.1 Certificate of Designation of Series C Convertible Preferred Stock. *
10.1 Severance Agreement and Release dated December 2, 2002, by and between
New Visual Corporation and Thomas J. Cooper (incorporated by reference
to Exhibit 10.58 to the Company's Report on Form 10-K for the period
ended October 31, 2002 (the "2002 10-K")).
10.2 Employment Agreement dated December 2, 2002, by and between New Visual
Corporation and Brad Ketch (incorporated by reference to Exhibit 10.59
to the 2002 10-K0)
10.3 Stock Option Agreement dated December 2, 2002, by and between New
Visual Corporation and Brad Ketch (incorporated by reference to Exhibit
10.60 of the 2002 10-K).
10.4 2003 Consultant Stock Plan. *
10.5 Consulting Agreement dated as of January 30, 2003, by and between
Starburst Innovations LLC and New Visual Corporation. *
10.6 Consulting Agreement dated as of January 30, 2003, by and between LF
Technology Group, LLC and New Visual Corporation. *
10.7 Warrant Certificate dated February 12, 2003, issued by New Visual
Corporation to Dan Lombardi. *
---------------------
* Filed herewith.
(b) Reports on Form 8-K: None.
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: March 17, 2003 By: /s/ Brad Ketch
--------------------------------------------
BRAD KETCH
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Dated: March 17, 2003 By: /s/ Thomas J. Sweeney
--------------------------------------------
THOMAS J. SWEENEY
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
31
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brad Ketch, President and Chief Executive Officer of New Visual Corporation,
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 statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filling date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003 /s/ Brad Ketch
-----------------------------------
Brad Ketch
President and Chief Executive Officer
32
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas J. Sweeney, Chief Financial Officer of New Visual Corporation, 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 statement made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filling date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003 /s/ Thomas J. Sweeney
----------------------------
Thomas J. Sweeney
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SS. 1350 ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of New Visual Corporation (the
"Company") on Form 10-Q for the period ended January 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, Brad
Ketch, Chief Executive Officer, and Thomas Sweeney, Chief Financial Officer, of
the Company certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Brad Ketch /s/ Thomas J. Sweeney
--------------------------- ------------------------------
Brad Ketch Thomas J. Sweeney
Chief Executive Officer Chief Financial Officer
March 17, 2003 March 17, 2003
34
EXHIBIT INDEX
4.1 Certificate of Designation of Series C Convertible Preferred Stock. *
10.1 Severance Agreement and Release dated December 2, 2002, by and between
New Visual Corporation and Thomas J. Cooper (incorporated by reference
to Exhibit 10.58 to the Company's Report on Form 10-K for the period
ended October 31, 2002 (the "2002 10-K")).
10.2 Employment Agreement dated December 2, 2002, by and between New Visual
Corporation and Brad Ketch (incorporated by reference to Exhibit 10.59
to the 2002 10-K0)
10.3 Stock Option Agreement dated December 2, 2002, by and between New
Visual Corporation and Brad Ketch (incorporated by reference to Exhibit
10.60 of the 2002 10-K).
10.4 2003 Consultant Stock Plan. *
10.5 Consulting Agreement dated as of January 30, 2003, by and between
Starburst Innovations LLC and New Visual Corporation. *
10.6 Consulting Agreement dated as of January 30, 2003, by and between LF
Technology Group, LLC and New Visual Corporation. *
10.7 Warrant Certificate dated February 12, 2003, issued by New Visual
Corporation to Dan Lombardi. *
----------------------
* Filed herewith.
35