UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
COMMISSION FILE NUMBER 0-21785
NEW VISUAL CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 95-4545704
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
305 NE 102ND AVE., SUITE 105
PORTLAND, OR 97220 (503) 667-7844
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
5920 FRIARS ROAD, SUITE 104
SAN DIEGO, CALIFORNIA 92108
(619) 692-0333
(former address and phone number)
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 11, 2005, was
95,735,615.
Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]
FORM 10-QSB
NEW VISUAL CORPORATION
JANUARY 31, 2005
TABLE OF CONTENTS
PART ITEM PAGE
I Financial Information:
1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEET
At January 31, 2005 (Unaudited) 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended January 31, 2005 and 2004 3
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
For the Three Months Ended January 31, 2005 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended January 31, 2005 and 2004 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 22
3. CONTROLS AND PROCEDURES 26
II OTHER INFORMATION:
1. LEGAL PROCEEDINGS 26
2. CHANGES IN SECURITIES 27
6. EXHIBITS AND REPORTS ON FORM 8-K 27
1
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
January 31,
2005
--------------
ASSETS
------
Current Assets:
Cash $ 138,193
Other current assets 4,272
-------------
TOTAL CURRENT ASSETS 142,465
Property and equipment - net 19,706
Technology license and capitalized software development fee 5,751,000
Film in distribution - net 1,015,097
Deferred financing costs 195,823
Other assets 7,434
-------------
TOTAL ASSETS $ 7,131,525
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current Liabilities:
Convertible notes payable $ 906,000
Convertible debentures (net of
debt discount of $413,888) 236,112
Notes payable 1,357,561
Accounts payable and accrued expenses 1,760,271
Redeemable series B preferred stock 1,596,000
-------------
TOTAL CURRENT LIABILITIES 5,855,944
Long-term Convertible debentures (net of
debt discount of $142,136) 40,914
Redeemable series B preferred stock 1,596,000
-------------
TOTAL LIABILITIES 7,492,858
-------------
Commitments, Contingencies and Other Matters
Stockholders' Deficiency:
Preferred stock - 0.01 par value; 15,000,000 shares
authorized; Series A junior participating preferred
stock; -0- shares issued and outstanding --
Common stock - 0.001 par value; 500,000,000 shares
Authorized; 92,369,873 shares issued and outstanding 92,370
Additional paid-in capital 56,047,516
Unearned compensation (404,821)
Accumulated deficit (56,096,398)
-------------
TOTAL STOCKHOLDERS' DEFICIENCY (361,333)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 7,131,525
=============
See notes to condensed consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
January 31,
--------------------------------
2005 2004
------------- -------------
REVENUES $ 8,801 $ 140,643
------------- -------------
OPERATING EXPENSES:
Cost of sales 6,625 71,394
Research and development 7,053 10,000
Compensatory element of stock issuances for selling,
general and administrative expenses 279,548 749,581
Selling, general and administrative expenses 317,397 505,103
------------- -------------
TOTAL OPERATING EXPENSES 610,623 1,336,078
------------- -------------
OPERATING LOSS (601,822) (1,195,435)
OTHER (INCOME) EXPENSES:
Interest expense 278,783 147,208
Amortization of deferred financing costs 24,619 --
Amortization of unearned financing costs -- 89,484
------------- -------------
TOTAL OTHER (INCOME) EXPENSES 303,402 236,692
------------- -------------
NET LOSS $ (905,224) $ (1,432,127)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.02)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 87,568,203 75,861,470
============= =============
See notes to condensed consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED JANUARY 31, 2005
(UNAUDITED)
Common Stock Additional Total
-------------------------------- Paid-In Unearned Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Deficiency
----------------------------------------------------------------------------------------------------------
Balance- November 1,
2004 84,781,959 $ 84,782 $ 55,031,976 $ (164,500) $(55,191,174) $ (238,916)
Issuance of common
stock for cash 2,661,250 2,661 210,239 -- -- 212,900
Issuance of common
stock under consulting
agreements 2,800,000 2,800 333,200 (336,000) -- --
Issuance of common
stock for services 128,571 129 17,871 (18,000) -- --
Issuance of common
stock for conversion
of notes payable 1,411,428 1,411 210,303 -- -- 211,714
Issuance of common
stock for liquidated
damages 586,665 587 87,413 -- -- 88,000
Stock Options issued
for professional
services -- -- 165,869 (165,869) -- --
Stock offering costs -- -- (9,355) -- -- (9,355)
Amortization of
unearned compensation
expense -- -- -- 279,548 -- 279,548
Net loss -- -- -- -- (905,224) (905,224)
---------------------------------------------------------------------------------------------------
Balance at January 31,
2005 92,369,873 $ 92,370 $ 56,047,516 $ (404,821) $(56,096,398) $ (361,333)
===================================================================================================
See notes to condensed consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(UNAUDITED)
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (905,224) $(1,432,127)
Adjustments to reconcile net loss to net cash
used in operating activities:
Consulting fees and other compensatory elements of
stock issuances 279,548 749,581
Amortization of unearned financing costs -- 89,484
Amortization of deferred financing costs 24,619 5,718
Amortization of film in production costs 6,625 71,394
Amortization on debt discount on notes 225,503 27,778
Depreciation 4,168 4,448
Change in Assets (Increase) Decrease:
Other current assets 3,712 96
Other assets -- (103)
Change in Liabilities (Decrease):
Accounts payable and accrued expenses (101,440) (193,658)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (462,489) (677,389)
CASH USED IN INVESTING ACTIVITIES
Acquisition of license -- (95,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES -- (95,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 212,900 224,501
Offering costs related to stock issuances -- (5,725)
Proceeds from convertible debentures -- 1,000,000
Proceeds from note payable 300,000 --
Capitalized financing costs (33,029) (112,500)
Repayments of convertible debentures -- (300,000)
Repayments of convertible notes payable (7,000) (230,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 472,871 576,276
INCREASE (DECREASE) IN CASH 10,382 (196,113)
CASH - BEGINNING 127,811 319,786
------------ ------------
CASH - ENDING $ 138,193 $ 123,673
============ ============
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(UNAUDITED)
January 31,
2005 2004
----------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,400 $ 3,540
======================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for Convertible notes and accrued
interest $211,714 $ --
======================
Common stock issued for extension of convertible
convertible notes payable $ -- $ 15,992
======================
Value assigned to warrants issued to placement
agent $ -- $ 83,333
=====================
Accounts payable and accrued expenses satisfied
By issuance of common stock $ -- $113,750
=====================
Common stock issued for accrued liquidated damages $ 88,000 $ --
======================
Stock offering costs $ 9,355 $ --
======================
Value assigned to beneficial conversion in
connection with the 7% convertible debenture
due December 31, 2006 $ -- $577,259
======================
Value assigned to warrants issued to purchasers
of convertible debentures $ -- $422,741
======================
Accrued expenses converted to note payable $ 55,251 $ --
======================
See notes to condensed consolidated financial statements.
6
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BUSINESS AND CONTINUED OPERATIONS
The condensed consolidated financial statements include the accounts of New
Visual Corporation ("New Visual") and its wholly owned operating subsidiaries,
NV Entertainment, Inc. ("NV Entertainment") (including its 50% owned subsidiary
Top Secret Productions, LLC), and NV Technology, Inc.(formerly New Wheel
Technology, Inc.) ("New Wheel" collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated. The Company
consolidates its 50% owned subsidiary Top Secret Productions, LLC due to the
Company's control of management, board of directors and financial matters of
such entity.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
Unites States of America ("US GAAP"). In the opinion of management, the
accompanying unaudited financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements should be read
in conjunction with the financial statements and notes related thereto, included
in the Annual Report on Form 10-KSB for year ended October 31, 2004.
These results for the period ended January 31, 2005 are not necessarily
indicative of the results to be expected for the full fiscal year. The
preparation of the consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
New Visual Corporation was incorporated under the laws of the State of Utah on
December 5, 1985. In November of 1999, the Company began to focus its business
activities on the development of new Semiconductor Technologies. Pursuant to
such plan, in February of 2000, the Company acquired New Wheel. The Company's
technology business has generated no revenues to date.
The Company operates in two business segments, the production of motion
pictures, films and videos (Entertainment Segment) and development of new
semiconductor technologies (Semiconductor Segment). The Company's Entertainment
Segment is dependent on future revenues from the Company's film Step Into
Liquid. The Semiconductor Segment is dependent on the Company's ability to
successfully commercialize its developed technology.
Through its subsidiary NV Entertainment the Company has operating revenues for
its Entertainment Segment, but may continue to report operating losses for this
segment. The Semiconductor Segment will have no operating revenues until
successful commercialization of its developed technology, but will continue to
incur substantial operating expenses, capitalized costs and operating losses.
7
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BUSINESS AND CONTINUED
OPERATIONS-CONTINUED
GOING CONCERN UNCERTAINTY
-------------------------
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 and
the realization of assets and the satisfaction of liabilities in the normal
course of business.
The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company has suffered significant recurring operating losses, used substantial
funds in its operations, and needs to raise additional funds on an immediate
basis to be able to accomplish its objectives. For the three months ended
January 31, 2005, the Company incurred net losses of approximately $905,000 and
as of January 31, 2005 had a working capital deficiency of approximately $5.7
million. In addition, management believes that the Company will continue to
incur net losses and cash flow deficiencies from operating activities through at
least October 31, 2005. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
As more fully described in the Notes below, the Company funded its operations
during 2004 and 2003 from the sale of its common stock, par value $0.001 per
share (the "Common Stock"), proceeds from the sale of notes and convertible
notes and the exercise of options and warrants, resulting in approximate net
proceeds to the Company of $2,300,000 and $3,411,000, respectively. In addition,
during the quarter ended January 31, 2005, the Company funded its operations
through the sales of its common stock resulting in net proceeds to the Company
of $212,900 and raised approximately $267,000 in net proceeds from the sale of
promissory notes.
The Company's ability to continue to operate as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan and secure funding sufficient to provide for the working
capital needs of the business. If the Company is unable to raise sufficient
funds, the Company will not be able to maintain operations as presently
conducted and may cease operating as a going concern.
Management of the Company is continuing its efforts to secure funds through
equity and/or debt instruments for its operations. The Company will require
additional funds for its operations and to pay down its liabilities, defend
legal claims made against it, as well as finance its expansion plans consistent
with its business plan. However, there can be no assurance that the Company will
be able to secure additional funds and that if such funds are available, whether
the terms or conditions would be acceptable to the Company and whether the
Company will be able to turn into a profitable position and generate positive
operating cash flow. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty and these
adjustments may be material.
8
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FILM IN DISTRIBUTION
Statement of Position 00-2, Accounting by Producers or Distributors of Films
("SOP-00-2") requires that film costs be capitalized and reported as a separate
asset on the balance sheet. Film costs include all direct negative costs
incurred in the production of a film, as well as allocations of production
overhead and capitalized interest. Direct negative costs include cost of
scenario, story, compensation of cast, directors, producers, writers, extras and
staff, cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2 also
requires that film costs be amortized and participation costs accrued, using the
individual-film-forecast-computation method, which amortizes or accrues such
costs in the same ratio that the current period actual revenue (numerator) bears
to the estimated remaining unrecognized ultimate revenue as of the beginning of
the fiscal year (denominator). The Company makes certain estimates and judgments
of its future gross revenue to be received for each film based on information
received by its distributors, historical results and management's knowledge of
the industry. Revenue and cost forecasts are continually reviewed by management
and revised when warranted by changing conditions. A change to the estimate of
gross revenues for an individual film may result in an increase or decrease to
the percentage of amortization of capitalized film costs relative to a previous
period.
In addition, SOP-00-2 also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of a film is less
than its unamortized film costs, then an entity should determine the fair value
of the film and write-off to the statements of operations the amount by which
the unamortized film costs exceeds the films fair value. During January of 2005,
the Company performed its review, and it was determined that the unamortized
film costs exceeded the Film's fair value. The Company determined that its
previous estimation of the expenses incurred by the Film's distributor were too
low and the estimation of future revenue were too high. As a result of this
review, the Company wrote-down the carrying value attributed to its Film In
Distribution to $1,021,722 at October 31, 2004. This resulted in an impairment
of $977,799 which is included in consolidated statement of operations for the
year ended October 31, 2004.
The Company commenced amortization of capitalized Film costs and accrued
(expensed) participation costs when its film was released and it began to
recognize revenue from the film. The Company had amortization costs of $6,625
and $71,394 for the three months ended January 31, 2005 and 2004, respectively.
9
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
REVENUE RECOGNITION
-------------------
The Company recognizes film revenue from the distribution of its feature film
and related products when earned and reasonably estimable in accordance with SOP
00-2. The following conditions must be met in order to recognize revenue in
accordance with SOP 00-2:
o persuasive evidence of a sale or licensing arrangement with a
customer exists;
o the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate
and unconditional delivery;
o the license period of the arrangement has begun and the
customer can begin its exploitation, exhibition or sale;
o the arrangement fee is fixed or determinable; and
o collection of the arrangement fee is reasonably assured.
Under a rights Agreement with Lions Gate Entertainment ("LGE") the domestic
distributor for its Film entitled Step Into Liquid, the Company shares with LGE
in the profits of the Film after LGE recovers its marketing, distribution and
other predefined costs and fees. The agreement provides for the payment of
minimum guaranteed license fees, usually payable on delivery of the respective
completed film, that are subject to further increase based on the actual
distribution results in the respective territory.
RESEARCH AND DEVELOPMENT
------------------------
Research and development costs are charged to expense as incurred. Amounts
allocated to acquired-in-process research and development costs, from business
combinations, are charged to earnings at the consummation of the acquisition.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high-risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
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.
10
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (CONTINUED)
--------------------------------------------------
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.
No assurance can be given that such technology will receive market acceptance.
Accordingly it is possible that the carrying amount of the technology
license may be reduced materially in the near future.
The Company has no amortization expense for the three months ended January 31,
2005 and 2004 for its capitalized software development costs.
Series B Redeemable Preferred Stock
-----------------------------------
Series B Redeemable Preferred Stock, which includes characteristics of both
liabilities and equity, is classified as a long-term liability in accordance
with the provisions of SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." Based on the
Company's April 17, 2002 agreement with Adaptive Networks, Inc. the Company is
obligated to redeem the Series B Preferred Stock at its liquidation preference,
in eight equal quarterly payments, commencing March 31, 2005 and ending on
December 31, 2006. As of January 31, 2005 the Company has classified $1,596,000
as short-term due to the fact that the Company is obligated to redeem 1,596
Series B Preferred Stock at its liquidation preference.
LOSS PER COMMON SHARE
---------------------
Basic loss per common share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted loss per share reflects
the potential dilution from the exercise or conversion of all dilutive
securities into common stock based on the average market price of common shares
outstanding during the period. For the period ended January 31, 2005 and 2004,
no effect has been given to outstanding options, warrants or convertible
debentures in the diluted computation, as their effect would be anti-dilutive.
STOCK-BASED COMPENSATION
------------------------
The Company follows Statement of Financial Standards ("SFAS No. 123"),
Accounting for Stock-Based Compensation. SFAS No. 123 establishes accounting and
reporting standards for stock-based employee compensation plans. This statement
allows companies to choose between the fair value-based method of accounting as
defined in this statement and the intrinsic value-based method of accounting as
prescribed by Accounting Principles Board Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees.
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS No. 123.
In December 2002, the Financial Accounting Standard Board (FASB) issued SFAS No.
148, Accounting for Stock-Based Compensation -Transition and Disclosure - an
Amendment of FASB Statement No. 123. This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures.
11
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
------------------------------------
Three Months Ended
January 31,
-----------------------------
2005 2004
------------ ------------
Net loss, as reported $ (905,224) $(1,432,127)
Add: Stock-based employee compensation
expense included in reported net loss -- --
Less: Total stock-based employee compensation
expense determined under the fair value-based
method of all awards -- --
------------ ------------
Proforma net loss (905,224) (1,432,127)
Basic and Diluted Net Loss per Common Stock:
As reported $ (0.01) $ (0.02)
============ ============
Proforma $ (0.01) $ (0.02)
============ ============
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN 46 also requires
consolidation of a VIE by an enterprise that holds such a controlling interest.
In December 2003, the FASB completed its deliberations regarding the proposed
modification to FIN 46 and issued Interpretation Number 46(R), "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46(R)"). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46(R) is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public small
business issuers' entities is required in all interim and annual financial
statements for periods ending after December 15, 2004. The adoption of FIN 46(R)
did not have a material effect on the Company's financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R, "Shared-Based Payment." SFAS
123(R) eliminates the alternative to use APB No. 25's intrinsic value method of
accounting that was provided in SFAS No. 123 as originally issued. SFAS No. 123R
requires entities to recognize the cost of employee services in exchange for
awards of equity instruments based on the grant-date fair value of those awards
(with limited exceptions). That cost will be recognized over the period during
which the employee is required to provide the service in exchange for the award.
No compensation cost is recognized for equity instruments for which employees do
not render the requisite service. SFAS No. 123R requires entities to initially
measure the cost of employee services received in exchange for an award of
liability instruments based on its current fair value; the fair value of the
award will be remeasured at each reporting date through the settlement date.
Changes in fair value during the requisite service period will be recognized as
compensation cost over that period. The grant date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments. SFAS No. 123R is
effective as of the beginning of the Company's interim reporting period that
begins on February 1, 2006.
12
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
The transitional provisions of SFAS No. 123R will not have a material effect on
the Company's consolidated financial position or results of operations as
substantially all outstanding equity instruments vest on or prior to January 31,
2006. The Company will utilize the fair value method for any future instruments
after the implementation date.
In March 2005, the FASB issued FSP No. 46(R)-5, "Implicit Variable Interests
under FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities" ("FSP 46(R)-5"), which provides guidance for a
reporting enterprise on whether it holds an implicit variable interest in a
variable interest entity (VIE) or potential VIE when specific conditions exist.
FSP 46(R)-5 is effective the first period beginning after March 31, 2005 and,
accordingly, will be adopted by the Company on May 1, 2005. The Company is
currently evaluating the effect that the adoption of FSP 46(R)-5 will have on
its financial condition or results of operations.
NOTE 3 - FILM IN DISTRIBUTION
In April 2000, the Company entered into a joint venture production agreement to
produce a feature length film ("Step Into Liquid") for theatrical distribution.
The Company agreed to provide 100% of the funding for the production in the
amount of up to $2,250,000 and, in exchange, received a 50% share in all net
profits from worldwide distribution and merchandising, after receiving funds
equal to its initial investment of up to $2,250,000. As of October 31, 2004 the
Company has funded a net of $2,335,101 for completion of the film. The film is
currently in distribution. The Company recognized revenues of $8,801 and
$140,643 for the three months ended January 31, 2005 and 2004, respectively.
Based upon information received from the Company's film distributor in January
2005, the Company recorded an impairment charge of $977,799 and reduced the
carrying value of its film in distribution to $1,021,722 with respect to the
three months ended October 31, 2004. The impairment charge was due to higher
than expected distribution costs and lower than expected average retail selling
price for the DVD.
The Company had amortization costs of $6,625 and $71,394 for the three months
ended January 31, 2005 and 2004, respectively, for the film. The total film
production costs and related amounts capitalized are as follows:
JANUARY 31,
2005
--------------
Released films (1) $ 1,357,302
Less cumulative amortization of film production costs 342,205
--------------
Total film production costs capitalized for released films 1,015,097
Films in production -
Films in development or pre-production -
--------------
Total film production costs capitalized, net $ 1,015,097
==============
(1) In the fourth quarter of fiscal 2004, the Company recorded a
fourth quarter impairment charge to its film in distribution
totaling $977,799.
13
NOTE 3 - FILM IN DISTRIBUTION (CONTINUED)
Based on anticipated future revenues, amortization of the costs of the film in
distribution are estimated to be for the years ending October 31:
2005 (9 months) $ 83,070
2006 192,660
2007 154,563
2008 154,563
2009 112,593
Thereafter 317,648
----------
Total $1,015,097
==========
NOTE 4- DEFERRED FINANCING COST
At January 31, 2005, deferred financing cost consisted of costs incurred in
connection with the sale of $1,350,000 of 7% convertible debentures and issuance
of a note payable:
Deferred financing cost $ 298,869
Less: accumulated amortization 103,046
---------
Deferred financing cost, net $ 195,823
=========
Amortization of deferred financing cost for the three months ended January 31,
2005 and 2004 was $24,619 and $5,718 respectively.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
The Company entered into several convertible promissory note agreements with
various trusts and individuals. The Company agreed to pay the principal and an
additional amount equal to 50% of the principal on all notes below except for
nine notes totaling $110,000 which accrues interest at of 9 and 12% per annum.
The notes are due when the Company reaches certain milestones from the
distribution of its motion picture (Note 6). The notes may be converted at any
time, in whole or in part, into that number of fully paid and non-assessable
shares of common stock at conversion prices ranging from $.33 to $1.00. These
and the Company's other notes are summarized in the table below: At January 31,
2005 -------------- Note payable (1) $133,000 Notes payable (ten notes) (2)
483,000 Note payable, 9% interest (3) 10,000 Notes payable (four notes), 12%
interest (4) 180,000 Notes payable (eight notes), 12% (5) 100,000 TOTAL $906,000
(1) Due when receipts received by the Company from the joint
venture exceed $375,000.
(2) Due when receipts received by the Company from the joint
venture exceed $2,250,000.
(3) Due when receipts received by the Company from the joint
venture exceed $750,000.
14
NOTE 5 - CONVERTIBLE NOTES PAYABLE-(CONTINUED)
(4) Notes had an original due date of November 21, 2003. The note
holders extended the due date until January 7, 2004 in
exchange for 160,000 shares of common stock. In January 2004
the Company paid $180,000 of principal payments and further
extended the remaining notes until the next round of financing
is completed.
(5) On September 21, 2004, the Company entered into eight
identical loan agreements totaling $100,000. The loan is
evidenced by a promissory note dated September 21, 2004 ("the
Promissory Note") issued by the Company to the lender. The
principal amount of the loan and any accrued and unpaid
interest is due and payable on June 21, 2005. The Company may
prepay the loan in whole or in part at any time without
penalty. All unpaid interest shall be converted into common
shares of the Company's stock equal to the interest on the
principal amount divided by the applicable conversion price
(40% of the average market price for the previous 10 trading
days before conversion).
NOTE 6 - CONVERTIBLE DEBENTURES
During the quarter ended January 31, 2005, $199,450 of principal amount of 7%
Debentures plus accrued interest of $12,264 were converted into 1,411,428 shares
of the Company's Common Stock leaving a principal balance of $833,050.
Principal Unamortized Net carrying
Amount Debt Discount Value
--------- --------------- ------------
Current portion $ 650,000 $ 413,888 $ 236,112
Long term portion $ 183,050 $ 142,136 $ 40,914
--------- --------------- ------------
Total $ 833,050 $ 556,024 $ 277,026
========= =============== ============
With respect to debentures that were placed in April and May 2004 in an
aggregate principal amount of $350,000, the Company may be required to remit to
these purchasers an aggregate amount of $350,000 upon a demand for rescission by
them as these securities may have been sold in violation of Section 5 of the
Securities Exchange Act of 1933 as amended. As of March 11, 2005, no request
rescission has been made.
NOTE 7 - NOTES PAYABLE
The Company has the following notes payable outstanding at January 31, 2005:
Note Payable (five individual notes with identical terms),
unsecured, 6% interest, due on demand with three days notice $ 256,886
Note payable, 10% interest, unsecured, due on demand with
three days notice 483,424
Note Payable, unsecured, 15% interest, due March 24, 2005 (1) 250,000
Note payable (2) 12,000
Note payable (3) 300,000
Note payable(4) 55,251
----------
TOTAL $1,357,561
==========
(1) On September 24, 2004, the Company entered into a loan agreement with a
stockholder pursuant to which the Company borrowed $250,000. The loan is
evidenced by a promissory note dated as of September 24, 2004 (the "Promissory
Note") issued by the Company to the lender. The principal amount of the loan and
any accrued and unpaid interest is due and payable on March 24, 2005. The
Company may prepay the loan in whole or in part at any time without penalty.
Interest on the principal amount of the loan outstanding accrues at the annual
rate of 15% and is payable on the earlier of December 24, 2004 or the maturity
of the loan, or upon prepayment of the principal. The Company received net
proceeds of $220,000 following the payment of transaction related fees and
expenses. The Company's obligations under the Promissory Note become immediately
due and payable if: (i) the Company's failure to pay any obligations there under
when due continues for more than ten days after demand for payment has been
made; (ii) any representation or warranty made by the Company in the loan
documents are false or misleading in any material respect at the time made;
(iii) the Company becomes insolvent or a bankruptcy or similar proceeding is
initiated by or against the Company; (iv) a liquidator or receiver is appointed
for, or any governmental agency takes control of, the Company or a substantial
portion of its assets or (v) a judgment of $400,000 is entered against the
Company. Also upon the occurrence of any of the foregoing, interest on the loan
accrues at the annual rate of 18% or the maximum amount allowed by law.
17
NOTE 7 - NOTES PAYABLE-(CONTINUED)
(2) In March 2004, the Company entered into a loan agreement, pursuant to which
the Company has borrowed $12,000 from the Lender. The loan is evidenced by an
Installment Note dated as of March 26, 2004 (the" Installment Note") issued by
the Company to such lender. The principal amount of the loan and any accrued and
unpaid interest at a rate of 5% were due and payable on July 26, 2004. On July
26, 2004, the Lender agreed to extend payment and unpaid accrued interest until
November 15, 2004. The lender has agreed to extend payment and unpaid interest
until November 15, 2005.
(3) In December 2004, the Company entered into a loan agreement with a third
party. ("Lender"), pursuant to which the Company borrowed $300,000 from the
Lender. The principal amount of the loan and any accrued and unpaid interest is
due and payable on June 24, 2005. The Company may prepay the loan in whole or in
part at any time without penalty. Interest on the principal amount of the loan
outstanding accrues at the annual rate of 15% and is payable on the earlier of
March 24, 2005 or the maturity of the loan, or upon prepayment of the principal.
The Company received net proceeds of $267,000 from this loan following the
payment of due diligence fees and transaction related fees and expenses.
(4)- In December 2004, the Company entered into a non-interest promissory note
with a former director of the Company for amounts owed to him. Under the terms
of the promissory note, the note shall become due if the Company enters into a
permanent financing transaction which results in the Company receiving of at
least $5 million or (b) the six-month anniversary of the date of the note
NOTE 8 - STOCKHOLDERS' (DEFICIENCY)
COMMON STOCK ISSUANCES DURING THE QUARTER ENDED JANUARY 31, 2005:
-----------------------------------------------------------------
During the quarter ended January 31, 2005, the Company issued
o 2,661,250 shares Common Stock to various investors for cash
proceeds of $212,900;
o 128,571 shares of Common Stock for various services
valued at $18,000;
o 2,800,000 shares of Common Stock for consulting
services valued at $336,000;
o 1,411,428 shares of Common Stock for converted
promissory notes and accrued interest valued at $211,714
o 586,665 shares of Common Stock as penalty for delayed
filing/effectiveness of a registration statement valued at
$88,000.
OPTIONS GRANTED
---------------
On November 22, 2004, the Company granted to a consultant under the 2000 Plan
the option to purchase 1,000,000 shares of its Common Stock at an exercise price
of $.15 per share. The options are fully vested. The fair value of stock options
estimated on the date of grant using the Black-Scholes option pricing model was
$165,869 and this amount is being charged to operations over the one-year period
of the consulting agreement.
18
NOTE 9 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
NET LOSS PER SHARE
Securities that could potentially dilute basic earnings per share (EPS), in the
future, that were not included in the computation of diluted EPS because to do
so would have been anti-dilutive for the periods presented, consist of the
following:
Warrants to purchase common stock 11,819,999
Options to purchase common stock 7,170,000
Convertible notes payable and accrued interest 3,893,250
7% convertible debenture and accrued interest 4,661,942
Series B Preferred stock (based on a floor conversion
price of $.34 at January 31, 2005) 9,388,235
----------
Total as of January 31, 2005 36,933,426
Substantial issuances after January 31, 2005 through
March 11, 2005
Sale of common stock for cash 830,000
Issuance of common stock for services 413,341
Issuance of common stock for liquidation damages 53,333
Issuance of common stock to directors and employee of the Company 750,000
19
Legal Disputes
The Company has been served with the following three summonses and complaints,
each filed on July 26, 2004 in the Superior Court of California (San Diego
County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New Visual
Corporation, Top Secret Surf Productions, LLC and Does 1 through 100; Gerald
Handler, Trustee of the Handler Children Trust v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr., Trustee
of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top Secret
Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by us in December 2001 and payable, according
to its terms, out of film distributions that we receive. Each complaint alleges,
among other things: that we have failed to pay the amount due and owing under
the convertible promissory note issued to the plaintiff despite demands for
payment; that our management has acted to forestall payments to our creditors,
including the plaintiff; and that we fraudulently induced the plaintiff to enter
into the convertible promissory note. The plaintiffs are seeking: money damages
in the aggregate amount of $375,000, plus interest; an accounting; an order
compelling the conveyance of monies to the plaintiffs and punitive damages.
The three complaints filed on July 26th were dismissed without prejudice on
August 11, 2004.
The Company has been served with the following additional summons and complaint,
filed on July 30, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of
the Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks:
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
The Company filed an answer to the complaints filed on July 30, 2004, denying
all allegations. Additionally, the Company was successful in its opposition of
Plaintiff's attempt to seek a Writ of Attachment. A mediator has been selected
and mediation is required to be completed by April 28, 2005. No assurance can be
provided that this matter will be resolved to the Company's satisfaction through
mediation.
The Company believes that it has meritorious defenses to these claims and, if
necessary, intend to vigorously defend this matter, although the ultimate
outcome cannot be determined at this time. The litigation is thus in its
preliminary stages and no substantive discovery has been conducted in the case.
Our current limited financial resources will have a material adverse effect on
our ability to adequately defend ourselves against these claims, prosecute any
counterclaims that may be available to us or satisfy any judgment in the event
that any of these claims is determined adversely to us. It is not possible to
predict at this time the extent of the Company's liability, if any. Accordingly,
the Company has not recorded any liability relating to this lawsuit.
NOTE 10 - AMENDMENT TO DEVELOPMENT AND LICENSING AGREEMENT
The Company and Adaptive Networks, Inc. ("ANI") have, as of November 26, 2004,
amended and restated their Development and License Agreement, dated as of April
17, 2002 (as so amended and restated the "Amended Agreement"). Under the Amended
Agreement, the Company has accepted from ANI final delivery of the source code,
the intellectual property rights related thereto and other materials related to
certain technologies that were to be developed by ANI. Under the original
Development and License Agreement entered into by the Company and ANI as of
April 17, 2002, the Company acquired a worldwide, perpetual license to ANI's
Powerstream technology, which provides the core technology for the Company's
semiconductor technologies. The Company contemplates that HelloSoft, Inc.
("HelloSoft"), an independent software developer based in California, will
provide certain development work necessary to the completion of the
semiconductor chipset. The Company and HelloSoft are parties to a Services
Agreement, dated as of March 31, 2004, under which HelloSoft provides continuing
development services relating to the Company's semiconductor chipset.
Under the Amended Agreement, the Company and ANI's joint ownership rights will
continue with respect to any improvements, developments, discoveries or other
inventions that are developed under the agreement with HelloSoft.
In addition, under the Amended Agreement, ANI has agreed that the first $5
million of royalties otherwise payable by the Company to ANI thereunder from
proceeds of the sale or license of the semiconductor technologies are to be
offset by a credit in the same amount.
NOTE 11 - SEGMENT INFORMATION- =
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
20
For the Three Months Ended January 31, 2005
Telecommunications Entertainment
Business Business Unallocable Totals
----------------------------------------------------------------------
Net Sales - domestic $ -- $ 2,501 $ -- $ 2,501
======================================================================
Net Sales - foreign $ -- $ 6,300 $ -- $ 6,300
======================================================================
Operating loss (Income) $ (1,159) $ (3,716) $ (596,946) $ (601,821)
======================================================================
Depreciation $ 1,159 $ 3,009 $ -- $ 4,168
======================================================================
Total Identifiable Assets at
January 31, 2005 $ 5,966,529 $ 1,015,097 $ 149,899 $ 7,131,525
======================================================================
For the Three Months Ended January 31, 2004
Telecommunications Entertainment
Business Business Unallocable Totals
----------------------------------------------------------------------
Net Sales - domestic $ -- $ 65,000 $ -- $ 65,000
======================================================================
Net Sales - foreign $ -- $ 75,463 $ -- $ 75,463
======================================================================
Operating loss (Income) $ (80,997) $ 927 $ (1,115,365) $(1,195,435)
======================================================================
Depreciation $ 1,159 $ 3,289 $ -- $ 4,448
======================================================================
Total Identifiable Assets at
January 31, 2004 $ 5,960,386 $ 2,107,429 $ 132,702 $ 8,200,517
======================================================================
NOTE 11 - SUBSEQUENT EVENTS-
Employment Agreement
On March 3, 2005, the Company entered into a three-year employment agreement
with its current Executive Vice President. The new employment agreement does not
provide for the payment of a base salary but provides for payments based on any
equity or long-term debt financing the Company may obtain that is introduced
directly by the Executive Vice President. Under the new agreement, these
payments equal 6% of the aggregate annual proceeds of such financings up to $2
million; 5% of the aggregate annual proceeds of such financings in excess of $2
million and up to $5 million; and 4% of the aggregate annual proceeds of such
financings in excess of $5 million. The Executive Vice President is also
entitled to be paid a bonus equal to (i) 2% of the total annual amount paid to
the Company by Top Secret Productions, LLC ("Top Secret") in respect of the film
co-produced by Top Secret and the Company and (ii) the amount, if any, paid as a
bonus to the Chief Executive Officer of the Company in connection with the
successful commercialization of the Company's technologies. In addition, under
the new employment agreement, subject to the existing rights of first refusal in
favor of the other members of Top Secret, the Company has granted its Executive
Vice President the right of first refusal to purchase the Company's membership
interest in Top Secret in case of a bona fide third-party offer to purchase that
interest or a determination of by the Company to offer that interest for sale at
a specified price.
Lease
-----
On March 2, 2005, the Company entered into a lease agreement for office space in
Portland, Oregon. The office lease is for a term of 36 months commencing on
April 1, 2005 at $1,725 per month for the first year of the lease with scheduled
increases for the remaining two years.
Stock issuances
---------------
From January 1, 2005 to March 1, 2005 we issued unregistered securities as
follows:
In February 2005 we issued:
(i)830,000 shares of Common Stock for cash proceeds of $66,400;
(ii) 413,341 shares of Common Stock for legal services valued at $70,268;
In March 2005 we issued:
(i) 17,857 shares of Common Stock for the for converted promissory note and
interest valued at $7,500.
In March 2005, the Company's board of directors, upon recommendation of its
compensation committee, unanimously approved the award of 200,000 shares of
Common Stock to each of Bruce Brown and Thomas J. Cooper, non-employee
directors, 300,000 shares to a newly appointed director, Jack Peckham and 50,000
shares to a non-management employee. These shares are fully vested upon issuance
and are non-forfeitable, 112,000 will be charged to operations during the
quarter ending April 30, 2005 in respect of these issuances.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere
herein. All statements in this Form 10-QSB related to New Visual Corporation and
Subsidiaries ongoing financial operations and expected future results constitute
forward-looking statements. The actual results may differ materially from those
anticipated or expressed in such statements.
OVERVIEW
The Semiconductor Technologies are in the development and testing stage. Our
objective over the next twelve months is to complete the development and testing
of a beta version of our Semiconductor Technologies. Through our subsidiary, NV
Entertainment, we recognized in fiscal year 2004 gross profit from the revenues
from the Film.
FILM. The Film has completed its domestic theater run grossing approximately
$3.7 million in box office revenues, according to the Film's distributor. We
recognized revenues of approximately $287,570 during the year ended October 31,
2004 and $8,801 during the three months January 31, 2005. The Film is currently
being distributed to foreign markets. The DVD was released domestically in April
2004 and the cable TV release occurred in October 2004. The broadcast television
release is presently scheduled for summer 2005. The Film's foreign theatrical
run began in Australia and New Zealand in January 2004 and will continue
throughout 2005 in Japan, Brazil, Norway and Sweden. All references henceforth
to our business relating to the Film will sometimes be referred to in this
Annual Report as our "Entertainment Business."
SEMICONDUCTOR TECHNOLOGIES. We continue to work on a beta version of our
Semiconductor Technologies. Currently, we estimate that we will need to raise an
additional $3 million to $4 million in order to complete the design and
development of the Semiconductor Technologies, complete a commercially
deployable version of the semiconductor chip and commence marketing the chip. We
have no commitments for these amounts and no assurance can be given that we will
be successful in raising these or other amounts on commercially acceptable terms
or on any terms.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2005 AND THE THREE MONTHS ENDED
JANUARY 31, 2004
REVENUES. Revenues for the quarter ended January 31, 2005 of $8,801 were
attributable to our Entertainment Business. Revenues for the quarter ended
January 31, 2004 of $140,643 from our Entertainment Business were attributable
to guarantee fees from foreign distribution of the Film.
COST OF SALES. Cost of sales for the quarter ended January 31, 2005 and 2004 of
$6,625 and $71,394, respectively represent the amortization of film cost for our
Film in distribution. The decrease was the result of lower revenues generated
from the film during the quarter ended January 31, 2005 as compared to the same
quarter during 2004.
OPERATING EXPENSES. Operating expenses included research and development
expenses in connection with the Semiconductor business, compensatory element of
stock issuances, selling, general and administrative expenses, the costs of
settlement of litigation, and the impairment of film in distribution. Total
operating expenses decreased 54% to $610,823 for the quarter ended January 31,
2005 from $1,336,078 for the quarter ended January 31, 2004. Selling, general
22
and administrative expenses decreased 37% or $187,706 during the same period
primarily as a result of a reduction in staffing, including the elimination of
executive level positions, lower professional fees and lower travel and
entertainment expenses. Compensatory element of stock issuances decreased 63%
from $749,581 for the period ended January 31, 2004 to $279,548 for the period
ended January 31, 2005 as we better managed the use of stock for compensation
purposes.
OTHER EXPENSES. Other expenses included interest expense, amortization of
deferred financing costs. Interest expense increased $131,575 primarily as a
result of the issuance of $1,350,000 in principal amount of convertible
debentures. Amortization of unearned financing costs decreased to - 0 - from
$89,484 as a result of decreased financing costs incurred by the Company.
NET LOSS. For the quarter ended January 31, 2005, the net loss decreased
$526,903 or 37% from $1,432,127 to $905,224 as the result of gross profit
generated on the film $67,073, lower operating expenses (725,455), higher
interest costs ($131,575), lower amortization of unearned financing costs
($89,484), higher amortization of deferred financing costs ($24,619).
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $138,193 as of January 31, 2005 compared to
$127,811 at October 31, 2004. In December 2004, we received net proceeds of
$267,000 from a loan, the details of which are discussed below.
Net Cash used in operating activities was $462,489 for the quarter
ended January 31, 2005 compared to $677,389 for the same period in 2004. Net
Cash used in operating activities for the quarter ended January 31, 2005 was
primarily attributable to (i) the net loss of $905,224, offset by consulting
fees and other compensatory elements of stock issuance of $279,548, (ii)
amortization of deferred financing costs of $24,619, (iii) amortization of the
Film in production costs in the amount of $6,625, (iv) amortization of debt
discount on notes of $225,503, (v) depreciation expense of $4,168,(vi) decrease
in accounts payable and accrued liabilities of $101,439, and (v) decrease in
other current assets of $3,711.
Net cash used in investing activities for the quarter ended January 31,
2005 was $0 compared to $95,000 for the quarter ended January 31, 2004. Net cash
used in investing activities was primarily the result of acquisition of license
of $95,000 in 2004.
Net cash provided by financing activities was $472,871 for the quarter
ended January 31, 2005 compared to $576,276 for the quarter ended January 31,
2004. Net cash provided by financing activities for the quarter ended January
31, 2005 was the result of proceeds from issuance of Common Stock in the amount
of $212,900 and proceeds from notes payable of $300,000.
Since inception, we have funded our operations primarily through the
sale of our Common Stock and debt securities. Our recent financings are
discussed below.
In December 2003 and in April-May 2004, we raised net proceeds of
approximately $888,650 from the private placement to certain private and
institutional investors of our three year 7% Convertible Debentures.
In September 2004, we entered into a loan agreement with Melton
Management Ltd. ("Melton"), pursuant to which we borrowed $250,000 from Melton.
The principal amount of the loan and any accrued and unpaid interest is due and
payable on March 24, 2005. We may prepay the loan in whole or in part at any
time without penalty. Interest on the principal amount of the loan outstanding
accrues at the annual rate of 15% and is payable on the earlier of December 24,
2004 or the maturity of the loan, or upon prepayment of the principal. We
received net proceeds of $220,000 from this loan following the payment of
transaction related fees and expenses. We are trying to obtain an extension the
maturity date of this note; no assurance can, however, be afforded that we will
be successful in obtaining such extension.
In December 2004, we entered into a loan agreement with Double U Master
Fund LP. ("Double U"), pursuant to which we borrowed $300,000 from Double U. The
principal amount of the loan and any accrued and unpaid interest is due and
payable on June 24, 2005. We may prepay the loan in whole or in part at any time
without penalty. Interest on the principal amount of the loan outstanding
accrues at the annual rate of 15% and is payable on the earlier of March 24,
2005 or the maturity of the loan, or upon prepayment of the principal. We
received net proceeds of $267,000 from this loan following the payment of due
diligence fees and transaction related fees and expenses.
Notwithstanding the proceeds of the loans described above, we need to
raise a minimum of $820,000 on an immediate basis in order to maintain our
operations as presently conducted through April 30, 2005. If we are unable to
raise this amount, we will not be able to maintain operations as presently
conducted and may cease operating as a going concern. Additionally, unless the
Entertainment Business generates revenues, we will need to raise an additional
$3 million to $4 million to realize our business plan as contemplated and
complete the design and testing of a commercially deployable version of the
Semiconductor Technologies and its eventual commercialization.
We have no commitments for any such financing, and there can be no
assurance that additional capital will be available to us on commercially
acceptable terms or at all. Management also intends to attempt to raise funds
through private sales of Common Stock and borrowings. The inability to obtain
such financing will have a material adverse effect on our business, its
operations and future business prospects.
24
The independent registered public accounting firm's report accompanying
our financial statements for the year ended October 31, 2004, includes an
explanatory paragraph relating to the uncertainty of our ability to continue as
a going concern, which may make it more difficult for us to raise additional
capital. Our auditors believe that there are conditions that raise substantial
doubt about the 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.
It is also anticipated that any successful financing will have a
significant dilutive effect on existing stockholders.
Post Quarter Event
------------------
In March 2005, our board of directors, upon recommendation of our
compensation committee, unanimously approved the award of 200,000 shares of
Common Stock to each of Bruce Brown and Thomas J. Cooper, non-employee
directors, 300,000 shares to a newly appointed director, Jack Peckham and 50,000
shares to an employee. These shares are fully vested upon issuance and are
non-forfeitable, The Company expects that approximately $112,000 will be charged
to operations during the quarter ending April 30, 2005 in respect of these
issuances.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN 46 also requires
consolidation of a VIE by an enterprise that holds such a controlling interest.
In December 2003, the FASB completed its deliberations regarding the proposed
modification to FIN 46 and issued Interpretation Number 46(R), "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46(R)"). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46(R) is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public small
business issuers' entities is required in all interim and annual financial
statements for periods ending after December 15, 2004. The adoption of FIN 46(R)
is not expected to have an impact our consolidated financial position, results
of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-Based
Payment." SFAS 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB 25, which was permitted under SFAS No. 123, as originally issued.
The revised statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
SFAS No. 123(R) is effective for small business issuers financial statements for
the first interim or annual reporting period that begins after December 15,
2005, with early adoption encouraged. We are currently evaluating the impact
that this statement will have on our financial condition or results of
operations.
In March 2005, the FASB issued FSP No. 46(R)-5, "Implicit Variable Interests
under FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities" ("FSP 46(R)-5"), which provides guidance for a
reporting enterprise on whether it holds an implicit variable interest in a
variable interest entity (VIE) or potential VIE when specific conditions exist.
FSP 46(R)-5 is effective the first period beginning after March 3, 2005 and,
accordingly, will be adopted by New Visual on May 1, 2005. We are currently
evaluating the effect that the adoption of FSP 46(R)-5 will have on our
financial condition or results of operations.
25
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its reports is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to management, including our Chief Executive Officer (and Principal
Financial and Accounting Officer), as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c).
In connection with our audit for the year ended October 31, 2004, our auditors
proposed several adjusting journal entries which we recorded in our 2004
financial statements, comprising a material weakness in our internal control
system relating to our closing process. Our auditors did not have any
adjustments to our quarterly financial statements for the three months ended
January 31, 2005.
We have initiated corrective actions to address these identified deficiencies,
and will continue to evaluate the effectiveness of our disclosure controls and
internal controls and procedures on an ongoing basis, taking corrective action
as appropriate.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
January 31, 2005, except as noted above, there have been no changes in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, these controls.
PART II - OTHER INFORMATION
ITEM 1.
We have been served with the following three summonses and complaints, each
filed on July 26, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New Visual
Corporation, Top Secret Surf Productions, LLC and Does 1 through 100; Gerald
Handler, Trustee of the Handler Children Trust v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr., Trustee
of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top Secret
Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by us in December 2001 and payable, according
to its terms, out of film distributions that we receive. Each complaint alleges,
among other things: that we have failed to pay the amount due and owing under
the convertible promissory note issued to the plaintiff despite demands for
payment; that our management has acted to forestall payments to our creditors,
including the plaintiff; and that we fraudulently induced the plaintiff to enter
into the convertible promissory note. The plaintiffs are seeking: money damages
in the aggregate amount of $375,000, plus interest; an accounting; an order
compelling the conveyance of monies to the plaintiffs and punitive damages.
The three complaints filed on July 26th were dismissed without prejudice on
August 11, 2004.
We have been served with the following additional summons and complaint, filed
on July 30, 2004 in the Superior Court of California (San Diego County): Gerald
Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of the
Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
26
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
We filed an answer to the complaints filed on July 30, 2004, denying all
allegations. Additionally, we were successful in our opposition to the
plaintiff's attempt to seek attachment. A mediator has been selected and
mediation is required to be completed by April 28, 2005. No assurance can be
provided that these matters can be successfully resolved through mediation to
the Company's benefit.
We believe we have meritorious defenses to these claims and, if necessary,
intend to vigorously defend this matter, although the ultimate outcome cannot be
determined at this time. The litigation is in its preliminary stages and no
substantive discovery has been conducted in the case. Our current limited
financial resources will have a material adverse effect on our ability to
adequately defend ourselves against these claims, prosecute any counterclaims
that may be available to us or satisfy any judgment in the event that any of
these claims is determined adversely to us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended January 31, 2005, the Company issued unregistered
securities as follows:
o issued 2,661,250 shares of Common Stock to various investors
for aggregate cash proceeds of $212,900;
o issued 128,571 shares of Common Stock to consultants for
services rendered that were valued at $18,000;
o issued 2,800,000 shares of Common Stock for consulting
services valued at $336,000;
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Employment Agreement between New Visual Ray Willenberg dated as of March
23, 2005
31. Rule 13a-14(a) / 15d-14(a) Certification
32. Section 1350 Certification
(b) Reports on Form 8-K:
(i) New Visual filed a Current Report on Form 8-K on November 19, 2004
announcing the resignation of John Howell from its Board of Directors.
(ii) New Visual filed a Current Report on Form 8-K on December 3, 2004 relating
to the amendment of a material agreement.
(iii) New Visual filed a Current Report on Form 8-K on December 30, 2004
relating to the closing of a six month loan.
(iv) New Visual filed a Current Report on Form 8-K on March 3, 2005 announcing
the resignation of Ivan Berkowitz from its Board of Directors and the addition
of Jack Peckham to its Board of Directors
(v) New Visual filed a Current Report on Form 8-K on March 9, 2005 announcing a
new employment agreement for Ray Willenberg, Jr. scheduled to take effect as of
March 23 2005.
27
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, 2005 BY: /S/ BRAD KETCH
--------------------------------------------
BRAD KETCH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(CHIEF EXECUTIVE AND PRINCIPAL FINANCIAL AND
AND ACCOUNTING OFFICER)
28