SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended Sept 30, 2002
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ___________
Commission file number 0-27043
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E-VIDEOTV, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 51-0389325
-------------------------------- ---------------------------
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.)
2111 Wilson Blvd - Suite #700, Arlington VA 22201
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(Address of Principal Executive Offices)
703-351-5011
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common shares, as of the latest practicable date: 32,223,882
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
E-VIDEOTV, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED Sept 30,2002
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 2
Item 2. Management's Discussion and Analysis and Plan of
Operation. . . . . . . . . . . . . . . . . . . . . . . . 1
PART II OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 3
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . 3
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 3
Item 4. Submission of Matters to a Vote of Security Holders. . . 3
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . 3
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . 3
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are included as part of this quarterly
report:
Unaudited Consolidated Balance Sheet at Sept 30, 2002 and December 31, 2001.
Unaudited Consolidated Statement of Operations for the period from inception,
March 5, 1999, to Sept 30, 2002, and the nine months ended Sept 30, 2002 and
2001.
Unaudited Consolidated Statement of Cash Flows for the period from inception,
March 5, 1999, to Sept 30, 2002, and the nine months ended Sept 30, 2002 and
2001.
Notes to the Unaudited Consolidated Financial Statements . . . . . . . . . . . .
====================================================================================================
E-VIDEOTV, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
Sept 30 December 31
2002 2001
====================================================================================================
(unaudited) (audited)
ASSETS
Current
Cash $ 1,813 $ -
Sundry receivables 4,300 -
Prepaid expenses - 4,225
------------ -------------
6,113 4,225
Non-current receivables (Note 4) 80,500 32,500
Computer equipment (net of accumulated depreciation of $52,966
(2001: $22,398)) 31,833 21,097
Software development costs (net of accumulated amortization of $59,800) 593,330 -
Advances to Ziracom Digital Communications, Inc. - 269,744
Debt issue costs (Note 7) 55,242 113,782
------------ -------------
$ 767,018 $ 441,348
============ =============
====================================================================================================
LIABILITIES
Current
Accounts payable and accrued liabilities (Note 5) $ 624,097 $ 233,341
Loans from related parties (Note 6) 127,788 102,713
Convertible debentures (Note 7) 555,022 237,667
Loan payable - 100,139
------------ -------------
1,306,907 673,860
Deferred revenue 340,000 -
------------ -------------
1,646,907 673,860
------------ -------------
SHAREHOLDERS' DEFICIENCY
Capital stock (Note 8)
Issued and outstanding:
32,223,882 (2001: 18,397,743) common shares 3,222 1,840
Additional paid-in capital 5,490,272 5,151,439
Share subscriptions 79,200 79,200
------------ -------------
5,572,694 5,232,479
Deficit accumulated during the development stage (6,452,583) (5,464,991)
------------ -------------
(879,889) (232,512)
------------ -------------
$ 767,018 $ 441,348
============ =============
====================================================================================================
Continuance of operations (Note 1)
Commitments (Note 11)
Contingency (Note 12)
See accompanying notes to the consolidated financial statements.
2
==============================================================================================================
E-VIDEOTV, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
Cumulative Nine Months Nine Months Quarter Quarter
March 5, 1999 Ended Ended Ended Ended
to Sept 30 Sept 30 Sept 30 Sept 30 Sept 30
2002 2002 2001 2002 2001
==============================================================================================================
Revenue $ 60,000 60,000 $ - $ 20,000 $ -
--------------- ------------ ------------- ------------ ------------
General and administrative expenses
Amortization 722,677 96,507 238,761 31,400 82,532
Compensation expense for stock
option (Note 8) 408,583 16,000 - - -
Corporate promotion 280,191 20,072 63,193 1,554 32,440
General corporate expenses 186,924 11,525 52,809 (1,508) 23,202
Interest expense 878,411 487,394 177,948 142,363 177,948
Management and consulting fees 1,457,458 243,720 444,634 131,704 156,469
Office expenses 214,312 25,651 55,716 1,899 16,705
Professional fees 425,436 78,239 88,600 20,101 28,559
Rent 170,686 35,954 39,880 - 8,322
Royalties 250,000 - 166,667 - 62,500
Travel 212,344 32,530 53,799 11,629 30,198
--------------- ------------ ------------- ------------ ------------
5,207,022 1,047,592 1,382,007 339,142 618,875
--------------- ------------ ------------- ------------ ------------
Write-off software development
costs (Note 3) 1,316,935 - - - -
Interest income (11,374) - (1,319) - (1,319)
--------------- ------------ ------------- ------------ ------------
Net loss 6,452,583 987,592 1,380,688 319,142 617,556
=============== ============ ============= ============ ============
Weighted average number of
common shares outstanding 29,444,379 16,657,738 32,223,882 18,308,959
============ ============= ============ ============
Net loss per share, basic and
Diluted $ 0.03 $ 0.08 $ 0.01 $ 0.03
============ ============= ============ ============
==============================================================================================================
See accompanying notes to the consolidated financial statements.
3
===================================================================================================================
E-VIDEOTV, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
Cumulative Nine Months Nine Months
March 5, 1999 Ended Ended
to June 30 Sept 30 Sept 30
2002 2002 2001
===================================================================================================================
CASH DERIVED FROM (APPLIED TO)
OPERATING
Net loss for period $ (6,452,583) $ (987,592) $ (1,380,688)
Compensation expense for stock options 408,583 16,000 -
Write-off of distribution rights and software development costs 1,316,935 - -
Depreciation and amortization 732,611 96,507 238,761
Amortization of debenture discount 789,788 437,298 158,913
Debenture Interest paid in shares 4,433 3,158 224
Management fee paid in shares 238,000 - -
Subscription of shares for services 25,200 - -
Deferred revenue (60,000) (60,000) -
Change in non-cash operating capital
Receivables and prepaids 14,736 6,357 (16,824)
Prepaid royalties - - (85,783)
Payables and accruals 526,436 271,325 83,709
--------------- ------------- -------------
(2,455,861) (216,947) (1,001,688)
--------------- ------------- -------------
FINANCING
Proceeds from issuance of common shares 1,538,101 - -
Shares subscribed - - 444,500
Convertible debentures issued 1,000,000 - 1,000,000
Convertible debenture issue costs (163,250) - (163,250)
Loans from related parties 187,288 25,075 71,677
Loans from parent company prior to acquisition 115,000 - -
Loan payable - (100,139) -
Cash acquired on acquisition of parent company 1,001,481 - -
--------------- ------------- -------------
3,678,620 (75,064) 1,352,927
--------------- ------------- -------------
INVESTING
Advances to Ziracom Digital Communications, Inc. 76,843 346,587 (106,050)
Non-current receivables (80,500) (48,000) -
Computer equipment (48,258) (4,763) (19,919)
Distribution rights (300,000) - -
License (445,000) - -
Software development (424,031) - -
--------------- ------------- -------------
(1,220,946) 293,824 (125,969)
--------------- ------------- -------------
Net increase in cash 1,813 1,813 225,270
--------------- ------------- -------------
Cash, beginning of period - - 2,276
--------------- ------------- -------------
Cash, end of period $ 1,813 $ 1,813 $ 227,546
=============== ============= =============
NON-CASH ACTIVITIES NOT INCLUDED IN CASH FLOWS
Shares issued to acquire Ziracom (Note 3) $ 259,654 259,654 $ -
Shares issued on conversion of debentures $ 126,758 61,403 $ 15,681
Compensation expense for stock options $ 408,583 16,000 $ -
Debenture interest paid in shares $ 4,433 3,158 $ 224
Shares issued to settle loan from related party $ 59,500 $ - $ 59,500
Shares subscribed to settle trade payables $ 54,000 $ - $ 54,000
Shares issued to pay management fees $ 238,000 $ - $ 238,000
Shares issued to acquire license $ 791,773 $ - $ -
Cancellation of loans from parent company on acquisition $ 115,000 $ - $ -
Value of shares issued in excess of cash acquired on
acquisition of parent company $ 95,374 $ - $ -
Shares cancelled on termination of license $ 30,163 $ - $ -
===================================================================================================================
See accompanying notes to the consolidated financial statements.
4
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
1. BASIS OF PRESENTATION
The company was incorporated in the state of Delaware, U.S.A. on July 25, 1997
under the name Oro Rico Mining Corporation. On August 25, 1997, ORM, Inc., an
inactive company incorporated in Colorado on July 25, 1997, was merged into the
company. The name of the company was changed to Asia Pacific Enterprises, Inc.
on October 16, 1997 and to e-VideoTV, Inc. on August 6, 1999.
On June 23, 1999 the company acquired all of the outstanding shares of e-Video
U.S.A., Inc. This business combination has been accounted for as an acquisition
of the company by e-Video U.S.A., Inc.
The company had previously commenced its planned principal operations although
it had not yet earned any revenue. The company's previous operational focus was
to secure licensing operators for its Faster-Than-Real-Time ("FTRT") video on
demand service. To that end, management devoted substantially all of the
company's resources to the identification and qualification of such potential
licenses.
In November 2001, the company changed its operational focus from the licensing
of FTRT video on demand service to focus on the acquisition of technologies,
especially in the field of video compression, and sell these technologies to
interested parties and/or enter into reseller agreements. The company has sold
its exclusive license rights in the U.S.A. for analog copy protection for video
transmissions received in FTRT back to Macrovision Corporation. The company
still has its agreement with U.S.A. Video Interactive Corp. to exclusively
sub-license their "Store and Forward Video System" patent in areas related to
digital set-top boxes with hard-drives in the U.S.A. (Note 11). This agreement
has yet to be completed.
The company has acquired, through its acquisition of Ziracom Digital
Communications, Inc. ("Ziracom") (Note 3), video compression technology. The
Alpha-Omega CODEC uses a set of proprietary algorithms to analyse a video signal
and determine how best to apply its selection of compression techniques. The
compression techniques utilized in Alpha-Omega include MPEG-Discrete Cosine
Transforms, Wavelet Transforms, Color Tables, Color Quantization, and Video
Masking. The company has commenced its new planned principal operations and has
generated revenues in the first three quarters of $60,000. This is revenue
earned from the sale of a five (5) year license for a total consideration of
$400,000. All funds were paid in January 2002.
The Company's consolidated financial statements for the period ended Sept 30,
2002, have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business for the foreseeable future. The Company incurred a net
loss of $987,592 for the nine months ended Sept 30, 2002 and has a working
capital deficiency of $1,380,794 and accumulated deficit of $6,452,583 at Sept
30, 2002. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent upon its ability to achieve capital through private
placements and other types of venture fundings and through financing agreements
with its clients. The outcome of these matters cannot be predicted at this time.
No assurances can be given that the Company will be successful in raising
sufficient additional capital. Further, there can be no assurance, assuming the
Company successfully raises additional funds, that the Company will achieve
positive cash flow. If the Company is unable to obtain adequate additional
financing, management will be required to curtail the Company's operating
expenses. These consolidated financial statements do not include any adjustments
to the specific amounts and classifications of assets and liabilities that might
be necessary should the Company be unable to continue in business.
5
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These unaudited consolidated financial statements are presented in U.S. dollars
in accordance with accounting principles generally accepted in the United States
of America and have been prepared on the same basis as the annual audited
consolidated financial statements.
In the opinion of management, these audited consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation for each of the periods presented. The results of
operations for interim periods are not necessarily indicative of results to be
achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01
of Regulation S-X, the accompanying consolidated financial statements and
related footnotes have been condensed and do not contain certain information
that will be included in the company's annual consolidated financial statements
and footnotes. For further information, refer to the consolidated financial
statements and related footnotes for the years ended December 31, 2001 and 2000
included in the company's Annual Report on Form 10-KSB.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (FAS) 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, the company has capitalized certain computer software development
costs upon the establishment of technological feasibility. Technological
feasibility is considered to have occurred upon completion of a detailed program
design which has been confirmed by documenting and tracing the detail program
design to product specifications and has been reviewed for high-risk development
issues, or to the extent a detailed program design is not pursued, upon
completion of a working model that has been confirmed by testing to be
consistent with the product design. Amortization is provided based on the
greater of the ratios that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product, or the
straight line method over the estimated useful life of the product commencing
upon technological feasibility. The estimated useful life for the straight-line
method is determined to be five years.
Management regularly reviews the carrying value of its software development
costs to assess whether or not there has been an impairment in its carrying
value. When the carrying values of these assets exceed their estimated net
recoverable amounts, an impairment provision is recorded.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 141 and 142
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the company are as follows:
6
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001;
- intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability;
- effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator;
- all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
The company has followed SFAS 141 and 142 in accounting for its acquisition of
Ziracom Digital Communications Inc. (Note 3).
SFAS 143 and 144
In July 2001, FASB issued SFAS No 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assts and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development, and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No 144, Accounting for the impairment or
Disposal of Long-Lived Assets. The statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No 121, Accounting for the impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
The Company is evaluating the impact of the adoption of these standards and has
not yet determined the effect of adoption on its financial position and results
of operations.
================================================================================
3. ACQUISITION
Pursuant to a Share Purchase Agreement entered into between the Company, Ziracom
Digital Communications Inc, and its shareholders, the company agreed to purchase
all of Ziracoms' outstanding common shares for 8,655,139 of the Company's common
shares. This transaction closed on February 14, 2002.
Ziracom shareholders would have received additional shares should earnings
before interest, taxes, depreciation and amortization exceed $500,000 for the
period August 1, 2001 and August 31, 2002. This did not happen and no additional
shares are due to the Ziracom shareholders.
As a result of this transaction, Ziracom became a subsidiary of e-VideoTV, Inc.
The transaction has been accounted for by the purchase method with the company
as the acquirer. The results of Ziracom's operations are included subsequent to
its acquisition date.
7
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
3. ACQUISITION (Continued)
Net identifiable assets acquired:
Receivables $ 6,432
Due from Ziracom Digital Communications Inc. 76,843
Capital assets 25,724
Software development costs 670,086
Payables and accruals (119,431)
Deferred revenue (400,000)
----------
$ 259,654
==========
Consideration
8,655,139 common shares $ 259,654
==========
================================================================================
4. NON-CURRENT RECEIVABLES
As at Sept 30, 2002, the company had advanced $80,500 (December 31, 2001:
$32,500) to companies that it is considering either acquiring or entering into a
business relationship with. These loans bear no interest and have no set terms
of repayment.
================================================================================
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Sept 30 December 31
2002 2001
-------- ------------
Accrued management fees (Note 10) $237,500 $ 70,000
Trade payables and accrued liabilities 386,597 163,341
-------- ------------
$624,097 $ 233,341
======== ============
================================================================================
6. LOANS FROM RELATED PARTIES Sept 30 December 31
2002 2001
-------- ------------
Loans from directors with no specific terms of repayment $103,788 $ 78,713
Loans from shareholders bearing no interest, unsecured
and repayable at $3,000 per month. At Sept 30, 2002,
the company's payments under this loan are 13 months
in arrears 24,000 24,000
-------- ------------
$127,788 $ 102,713
======== ============
8
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
7. CONVERTIBLE DEBENTURES
On July 6, 2001, the company received $1,000,000 from the sale of convertible
debentures and warrants to purchase up to 666,666 shares of the company's common
stock (Note 8). The principal on the debentures is due June 6, 2003. Interest
at 8% per annum on the debenture principal outstanding is due quarterly
commencing September 30, 2001. The debentures and any unpaid and accrued
interest may be converted at the option of the holder into common shares of the
company. The conversion price per share is the lesser of $0.4747 and 80% of the
average of the three lowest closing prices of the common shares on the principal
market where the shares trade for the sixty trading days prior to conversion.
The company may redeem the convertible debentures on five days notice by paying
the holders 190% of the principal outstanding plus accrued interest. Upon
receiving the repayment notice, the debenture holders have the option of
converting the debentures to common shares within five days.
The company has determined the fair value of the warrants to be $486,600, using
the Black Scholes option-pricing model. This warrant value is reflected as an
addition to paid-in capital and a discount to the debenture principal.
The debentures contain a "beneficial conversion" feature as the fair value of
the underlying stock was greater than the fair value of the debenture at the
date of issuance. The value of the beneficial conversion feature has been
calculated as $513,400, which has been recognized as an addition to paid-in
capital and a discount to the debenture principal.
The discounts to the debenture principal are amortized over the life of the
debentures as interest expense. Any unamortized discounts related to debentures
converted to common stock are written off as interest expense at the conversion
date.
The company incurred $163,750 in cash commissions and expenses related to the
issuance of the debentures, which has been recognized as a deferred cost to be
amortized by the interest method over the term of the debt. Any unamortized
issue costs related to debentures converted to common stock are written off as
interest expense at the conversion date.
9
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
7. CONVERTIBLE DEBENTURES (Continued)
The following table summarizes the activity in the debentures to September 30,
2002.
Convertible Debentures
--------------------------------------
Deferred
Original Unamortized Net Book Issue
Principal Discounts Value Costs
----------- ------------- ---------- ----------
DURING THE YEAR ENDED DECEMBER 31,
2001
Debentures issued on July 6, 2001 $1,000,000 $ 1,000,000 $ - $ 163,250
Debentures converted to common stock (65,354) (59,251) (6,103) (9,673)
Amortization of discounts (243,770) 243,770 (39,795)
----------- ------------- ---------- ----------
934,646 696,979 237,667 113,782
Balance, December 31, 2001
DURING THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Debentures converted to common stock (61,403) (45,789) (15,614) (6,434)
Amortization of discounts - (332,969) 332,969 (52,106)
----------- ------------- ---------- ----------
Balance, Sept 30, 2002 $ 873,243 $ 318,221 $ 555,022 $ 55,242
=========== ============= ========== ==========
The company has not made interest payments as required under the terms of the
convertible debenture agreements. At Sept 30, 2002, $83,999 in interest on
these convertible debentures has been accrued but is unpaid. Notwithstanding
this technical default, the creditor has agreed not to demand repayment of the
loan.
================================================================================
8. CAPITAL STOCK
AUTHORIZED CAPITAL
100,000,000 shares of common stock with a par value of $0.0001
5,000,000 shares of preferred stock with a par value of $0.0001
10
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
8. CAPITAL STOCK (Continued)
STOCK OPTIONS
The company accounts for the options issued to directors and employees in
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Options Issued to Employees. Had compensation cost for the stock option plan
been determined based on the fair value at the grant date consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the company's
net loss and net loss per share would have been the pro forma amounts indicated
below:
Sept 30 December 31
2002 2001
------------ -------------
NET LOSS:
Actual net loss $ (987,592) $ (2,756,522)
Pro forma net loss $(1,025,592) $ (3,300,362)
LOSS PER SHARE:
Actual net loss per share $ (0.02) $ (0.16)
Pro forma net loss per share $ (0.02) $ (0.19)
The fair value of each option grant was estimated at the grant date using the
Black-Scholes option-pricing model for the period ended Sept 30, 2002, assuming
a risk-free interest rate of 4.88%, volatility of 2.16%, zero dividend yield,
and an expected life of 5.00 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price volatility.
Because the company's employee stock options and warrants have characteristics
significantly different from traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.
The company granted options to purchase 4,100,000 shares of the company's common
stock to directors during the period ended Sept 30, 2002. There were no changes
in the quarter ending Sept 30, 2002.
During the period ended Sept 30, 2002, the company granted 800,000 options to
purchase shares to consultants and recognized expense related to these options
of $16,000. The expense amount was determined by the fair value of the options
issued calculated using the Black-Scholes model.
11
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E-VIDEOTV, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2002
(Unaudited)
================================================================================
8. CAPITAL STOCK (Continued)
SHARES ISSUABLE UNDER CONVERTIBLE DEBENTURES
Based on an estimate of the company's share price at Sept 30, 2002, the terms of
the company's convertible debenture (Note 7) would enable the debenture holder
to exercise its conversion rights in the amount of approximately 88,000,000
common shares. There were no conversions in the quarter ending Sept 30, 2002.
================================================================================
9. INCOME TAXES
At Sept 30, 2002, the company had net operating losses carried forward of
approximately $6,400,000 (December 31, 2001: $5,140,000) that may offset
against future taxable income until 2020. The potential tax benefits of the
losses carried forward are offset by a valuation allowance of the same amount as
there is substantial uncertainty that the losses will be used before they
expire.
================================================================================
10. RELATED PARTY TRANSACTIONS
During the period ending Sept 30, 2002 consulting fees of $60,000 (2001:
$249,000) have been accrued to other companies that employ current directors and
officers of the company. Accrued liabilities at Sept 30, 2002 include $216,500
(2001: $70,000) of amounts due to officers, directors and former directors
under management or consulting agreements.
================================================================================
11. COMMITMENTS
PATENT LICENSING AGREEMENT
On June 27, 2001, the company entered into a short form sub-licensing agreement
for certain digital video delivery technology with an international designer and
supplier of high-tech internet streaming video and video-on-demand systems,
services and innovative end-to-end solutions.
In consideration of this sub-license, the company has agreed to issue $300,000
of its common shares on the date a long form agreement is signed. The parties
have yet to finalize this long form agreement. Based on an estimate of the
company's share price at December 31, 2001, the company would be required to
issue 6,000,000 shares upon finalization of a long form agreement.
================================================================================
12. CONTINGENCY
On January 8, 2002, the company was served with a writ regarding allegations of
intentional and negligent interference with business relationships. This writ
was also served to Ziracom Digital Communications, Inc., and three of its
directors. The plaintiffs in the lawsuit have claimed damages of approximately
$2,000,000. Company's counsel has concluded that it is reasonably possible that
an agreement on the amount of damages exigible will be met. A trial on related
matters involving the plaintiffs recently completed and the jury ruled against
the plaintiffs and awarded damages to the defendants The Company is not certain
as to the status of the outstanding writ nor is it aware at this time whether or
not the case will proceed. Accordingly, the amount of damages to be awarded (if
any), is not determinable at this time and as such, no amounts have been
recorded in these financial statements.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the quarter ending Sept 30,2002, the company continued development of its
"Alpha -Omega" Video Compression CODEC including video conferencing and
continued beta testing of its CODEC. The acquisition on February 14, 2002 was
completed by issuance of 8,655,139 restricted common shares of the Company for
100% of the issued and outstanding shares of Ziracom. There will be no
additional shares issued to Ziracom shareholders as original profit projections
to August 31 2002 that could have resulted in additional shares being issued,
were not achieved and the shares issued February 14, 2002 constitute full
payment for 100% of the shares of Ziracom.
The "Alpha-Omega" Video Compression CODEC, owned by e-Video offers a powerful
solution to users needing high compression rates while maintaining excellent
video quality for video streaming applications, video file downloads, and video
conferencing.
The development of the Alpha-Omega CODEC continues the company's focus on video
compression technologies to electronically deliver video signals for remote
video surveillance, education and entertainment, wireless hand-held computers,
and video cell phones.
During the quarter ending Sept 30, 2002 the Company executed a contract for a
non-exclusive Marketing Agreement with a company that has existing clients
interested in the Alpha-Omega software. This Company is currently demonstrating
the software technology with prospective customers.
The Alpha-Omega software has a number of proprietary techniques to perform video
compression using an automated intelligent algorithm that selects in real- time
the most efficient combinations of its internal compression methods for each
scene and frame. The Alpha-Omega also incorporates additional proprietary
methods to reduce image macro blocking in low bandwidth applications. The
Alpha-Omega supports file formats of type ASF (streaming) and AVI (video files).
In January 2002, the Company completed a 5-year licensing agreement with a
customer for $400,000. The Company received the entire $400,000 in January 2002,
and has recognized $60,000 of this as revenue in its financial statements for
the nine months ending Sept 30, 2002. The remaining funds received will be
recognized over the remaining period of the license.
The Company intends to market the Alpha-Omega technology through non-exclusive
Marketing Agreements similar to the one mentioned above and through its own
in-house personnel.
The Company has relocated its head office to 2111 Wilson Blvd, Arlington
Virginia, 22201, where key personnel will be located, including technical and
marketing staff. An administration and marketing office will be maintained in
Vancouver BC Canada. The Company has interested parties who are currently
assessing the Alpha-Omega software. The applications for the Alpha-Omega include
Internet video streaming, wireless video devices, video cell phones, cable &
satellite television broadcasts, remote security devices, remote newsgathering,
and downloading of movies. Both the encoder and decoder can be customized to be
compatible with alternate platforms, custom solutions, and stand-alone
solutions.
The Company will continue its research and development program to extend this
technology to include handheld PDA devices, and fully intends to license the
Alpha-Omega to semiconductor companies for embedding into their devices. This
research will continue at its relocated head office.
The Company recognizes that it will require additional financing even though its
Alpha-Omega software is now ready for market. Additional funding will be
required for continued development of its Alpha-Omega software, doing product
demonstrations, as well as general operating expenses for the Company. The
Company acknowledges that it currently does not have sufficient funds to carry
on its operation but management intends to seek financial assistance through
private loans from existing directors, shareholders and outside parties although
there can be no assurance that the Company will be able to secure this financial
assistance. As well, the Company anticipates revenue from its technology in the
last quarter of 2002 or early in the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ending Sept 30 2002, the Company had revenue of $20,000,
while the nine-month results show revenue of $60,000. This represents the first
nine months of a five (5) year license agreement for a total of $400,000. These
funds were all received in January 2002, but the revenue recognition is being
recorded over the five-year life of the license. During the quarter ending Sept
30, 2002, the Company incurred losses of $319,142 vs. $617,556 for the quarter
ending Sept 30 2001. For the nine months ended Sept 30, 2002, these losses
amounted to $987,592 vs. $1,380,688 for the nine months ending Sept 30 2001. The
losses for the nine-month period ending Sept 30 2002 include depreciation and
amortization of $96,507 and amortization of debenture discount of $437,298. As
these are not cash expenses, the actual cash loss was significantly lower. The
Company has successfully reduced general and administrative expenses for the
nine months ending Sept 30 2002. Management and consulting fees have been
reduced to $243,000 to Sept 30 2002, compared to $444,634 for the nine months
ending Sept 30 2001. General expenses such as travel, rent, professional fees,
office and general corporate expenses amount to $203,971 for the nine months
ending Sept 30 2002 compared to $393,496 for the nine months ending Sept 30
2001.
Operating expenses have been reduced significantly and will continue to decline
as significant the marketing activities are being conducted by other parties on
a revenue sharing basis.
The 8% convertible debenture closed on July 6 2001, with the Company receiving
$1,000,000 less issue costs. Interest is payable quarterly and to date, this
interest has accrued and not been paid. At Sept 30 2002, the accrued interest
amounted to $83,999. This includes $17,883 in the quarter ending Sept 30 2002.
The debenture is due June 6 2003. The unconverted balance of this debenture at
Sept 30 2002 is $873,242. The Lender has provided a waiver re default on the
outstanding interest. The debenture is convertible based on a conversion
formula. In addition to the debenture, the fund received 666,666 warrants to
purchase additional shares in the Company. These warrants have an exercise price
of approximately $0.40 per share. The Company is in discussions with the Lender
regarding the debt and both parties are actively working towards a mutually
satisfactory option to the ultimate repayment of this debt.
The floating conversion price for the convertible debentures is the lesser
of (i) 80% of the average of the three lowest closing bid prices of the common
stock for the twenty (20) trading days prior to the closing date, or (ii) 80% of
the average of the three lowest closing bid prices of the common stock for the
sixty (60) trading days prior to the conversion date, as defined in the convert-
ible debenture. The maximum number of shares of common stock that the subscriber
or group of affiliated subscribers may own after conversion at any given time is
4.99%. In connection with the financing, the company entered into certain
covenants including, but not limited to, the following: (i) the company may not
redeem the convertible debentures without the consent of the holder; (ii) the
company will pay to certain finders a cash fee of ten percent (10%) of the
principal amount of the convertible debentures for location of the financings;
(iii) the company has agreed to incur certain penalties for untimely delivery of
the shares.
The Company further recognizes that its development schedule will be
delayed unless additional capital required is available when needed. The Company
anticipates revenue from licensing of its Alpha-Omega software either in the
last quarter of 2002 or early in the first quarter of 2003. In addition to this,
the Company is exploring loans from private investors, and additional loans from
directors and/or existing shareholders although there can be no assurance that
these loans will be successfully obtained. In the event that the Company is not
able to obtain these loans it will be unable to fund its operations.
Inflation has not been a factor during the quarter ending Sept 30 2002.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 8 2002, the company was served with a writ regarding allegations of
intentional and negligent interference with business relationships. This writ
was also served to Ziracom Digital Communications, Inc. and three of its
directors. The Company feels the complaint is without merit and will defend its
position vigorously should the complaint proceed. The plaintiffs in the lawsuit
with e-Video have claimed damages of approximately $2,000,000. The amount of
damages to be awarded (if any) however, is not determinable at this time and as
such, no amounts have been recorded in these financial statements
A trial was completed recently on a complaint with defendants who are also
defendants in the litigation that the Company has been named in. While the
Company was not a party to this litigation, this case was somewhat similar and
the jury in this case awarded damages of $3,000,000 to the defendants. The
plaintiffs are the same people regarding the Ziracom, e-Video lawsuit and it is
unknown whether they intend to try to appeal the jury decision nor is it known
if they will proceed with the action filed against the Company.
ITEM 2. CHANGES IN SECURITIES.
There are no changes in the Company's securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults upon senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the six
months ended June 30, 2002.
ITEM 5. OTHER INFORMATION.
The Company has no other information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
E-VIDEOTV, INC.
Date November , 2002 By /s/ Robert G. Dinning
----------------- -------------------------------------
Robert G. Dinning
Chairman and Chief Financial Officer
Date November , 2002 By /s/ Gianfranco Fiorio
----------------- -------------------------------------
Gianfranco Fiorio
Chief Executive Officer
Certification of Principal Financial Officer Regarding Facts and Circumstances
Relating to Exchange Act Filings
I, Robert G. Dinning, certify that:
1. I have read this quarterly report on Form 10-QSB of e-VideoTV, Inc.;
2. To my knowledge, the information in this report is true in all important
respects as of September 30, 2002; and
3. This report contains all information about the company of which I am
aware that I believe is important to a reasonable investor, in light of the
subjects required to be addressed in this report, as of September 30, 2002.
4. I:
(a) am responsible for establishing and maintaining internal
controls;
(b) have designed such internal controls to ensure that material
information relating to the company is made known to me by others within the
company, particularly during the period in which the periodic reports are being
prepared;
(c) have evaluated the effectiveness of the issuer's internal
controls as of a date within 90 days prior to the report; and
(d) have presented in the report my conclusions about the
effectiveness of their internal controls based on my evaluation as of that date;
5. I have disclosed to the company's auditors and the audit committee of
the board of directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's ability to record,
process, summarize, and report financial data and have identified for the
company'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 company's internal controls;
and
6. I have indicated in the 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 their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
For purposes of this certification, information is "important to a
reasonable investor" if:
(a) There is a substantial likelihood that a reasonable investor would
view the information as significantly altering the total mix of information
in the report; and
(b) The report would be misleading to a reasonable investor if the
information is omitted from the report.
BY: /s/ Robert G. Dinning Subscribed and sworn to
----------------------------------- before me this 14 day of
Robert G. Dinning, Chairman and C.F.O. November, 2002
(Principal Executive Officer)
DATE: November 14, 2002
------------------ /s/ Ann Croudy
-------------------------
Notary Public
My Commission Expires:
Comm #1264893 - Riverside
County California