USA VIDEO INTERACTIVE CORP (USVO.OB)
Quarterly Report (SEC form 10-Q)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
Certain statements contained in this Quarterly Report on Form 10-Q ("Report"), including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements." Readers should not place undue reliance on these forward-looking statements. USA Video's actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks and uncertainties set forth in USA Video Interactive Corp.'s Annual Report on Form 10-K, the most important of which are summarized below under Factors Which May Affect Future Results of Operations, as well as in other documents USA Video files with the Securities and Exchange Commission
("SEC").
The following information has not been audited. You should read this information in conjunction with the unaudited financial statements and related notes to financial statements included in this report.
OVERVIEW OF THE COMPANY
USA Video Interactive Corp. ("USVO" or the "Company") designs and markets to business customers streaming video and video-on-demand services, systems, and source-to-destination digital media delivery solutions that allow live or recorded digitized and compressed video to be transmitted through Internet, intranet, satellite, or wireless connectivity. The Company's systems, services, and delivery solutions include video content production, content encoding, media asset management, media and application hosting, content distribution, specialized engineering services, and Internet streaming hardware. Key areas of market focus are advertising, education, training, and entertainment for corporations, institutions, and consumers.
USVO holds the patent for Store-and-Forward Video-on-Demand (#5,130,792), filed in 1990 and issued by the United States Patent and Trademark Office on July 14, 1992. It has been cited by at least 145 subsequent patents. USVO holds similar patents in England, France, Spain, Italy, Germany, and Canada, and has a patent pending in Japan. USVO is actively engaged in licensing this patent.
MARKETS AND PRODUCTS:
As an outgrowth of its video streaming systems business and specialized engineering services, USVO has identified emerging markets for global media streaming services and has developed a unique solution to provide a wide range of business customers with value-added streaming media support services. With this services-based approach, called StreamHQ(TM), customers can leverage USVO's infrastructure and technical expertise, while focusing on their own core business competencies.
StreamHQ(TM) facilitates the transmission of digitized and compressed video to the user's desktop via multiple streaming modes that take advantage of the available connectivity. While competitive services take a "one-size-fits-all" streaming approach, StreamHQ(TM) brings unique value propositions to individual vertical markets with functionality designed specifically for those markets. Beyond quality streaming, USVO's overriding goal has been to give customers media asset management tools and information that provide a basis for them to calculate their return on investment in streaming media expenditures.
StreamHQ(TM) encompasses a range of end-to-end services from source to viewing, including content production, content encoding, asset management and protection, media and application hosting, multi-mode content distribution, and transaction data capture and reporting.
USVO has tailored an initial deployment product, Zmail(TM), which uses StreamHQ(TM) to deliver rich media emails. Zmail(TM) leverages the diverse functional capabilities of this architecture to provide a value-added service to advertisers, as well as other business applications, such as corporate communications, consumer notices, product recalls, and customer support.
Clicking on a link within a Zmail(TM) accesses a customized web page with an embedded, non-proprietary streaming player (e.g., Windows Media, QuickTime). The user can customize his or her viewing experience and access any of the web page links for additional information, guidance, or e-commerce. Zmail(TM) functionality monitors all media player transactions, as well as web click-throughs, and aggregates the data across multiple users to provide web-based campaign reports to the customer.
TECHNOLOGY APPROACH:
USVO is approaching the global media streaming services market with a Tier 1 media-streaming infrastructure that the Company has attempted to differentiate from competitive products and services in terms of architectural, functional, and business features. Leveraging some of the industry's most prominent providers for data storage, networking, and data management, StreamHQ(TM) strives to compete based on service availability, an efficient streaming process, redundancy and fail-over features, and continuity in the event of power outages.
USVO has created a modular system that can be scaled to meet the requirements of a growing clientele. StreamHQ(TM) can also be rapidly replicated to provide a streaming utility in multiple Internet Data Centers around the world.
StreamHQ(TM) functionality is software driven, allowing USVO to create future system enhancements based on the needs of the marketplace. Additionally, USVO can customize the baseline features of StreamHQ(TM) and plans to expand the system features to support the specialized needs of additional types of customers.
RESEARCH AND DEVELOPMENT:
USVO has ongoing research and development (R&D) efforts that are aimed at improving the efficiency and security of media delivery to clients. Among these R&D efforts is the ongoing development of wavelet-based video compression techniques that allow high-quality video files to be streamed at low bit rates, thereby optimizing the use of available bandwidth. USVO also has a proprietary still-image wavelet compression technology. Part of USVO's R&D effort is the development of technology that will help protect the intellectual property of content owners.
BUSINESS OBJECTIVES:
USVO has established the following near-term business objectives: 1. Establish StreamHQ(TM) as the industry standard in the streaming video and rich media marketplace; 2. Generate services- and systems-based revenues in accordance with the corporate business plan; 3. Attain industry recognition for the superior architectural, functional, and business differentiators of the StreamHQ(TM) architecture; 4. Leverage USVO's digital video patent for licensing fees and partnerships in the United States and internationally; 5. Develop at least one client per year for a complete StreamHQ(TM) system, including intellectual property licensing and operational support; 6. Expand StreamHQ(TM) functionality to provide enhanced support for corporate training and education markets; and 7. Patent and license new technology developed within the corporate R&D program.
MARKET PERSPECTIVE:
With its StreamHQ(TM) service offering, USVO's goals are: 1) to become a market-leading streaming media service provider; 2) to establish itself as a leader in streaming technology innovation; 3) to capture revenue and market share from services and products in advertising, corporate communications, education, entertainment, and other markets. Numerous published reports estimate the current value of these markets as in excess of 20 billion dollars. As a secondary objective, USVO intends to leverage its broad video-on-demand patent by licensing it to other companies.
The Company was incorporated on April 18, 1986, as First Commercial Financial Group Inc. in the Province of Alberta, Canada. In 1989,its name was changed to Micron Metals Canada Corp., which purchased 100% of the outstanding shares of USA Video Inc., a Texas corporation, in order to focus on the digital media business. In 1995, the Company changed its name to USA Video Interactive Corp. and continued its corporate existence to the State of Wyoming. The Company has four wholly-owned subsidiaries: USA Video (California) Corp., USA Video Corp., USA Video Productions Inc., and USA Video Technologies, Inc. USA Video's executive and corporate offices are located in Mystic, Connecticut, and its Canadian offices are located in Vancouver, British Columbia.
RESULTS OF OPERATIONS
Sales
The Company had essentially no sales revenue for the six-month period ended June 30, 2001, compared to revenue of $238,600 for the six-month, $75,000 three month
period ended June 30, 2000. The decline in revenue, which began in the fourth quarter and is continuing, is attributable to the continuing decline in demand throughout the technology sector, as well as the Company's decreased marketing of its hardware products in connection with the shift in focus of its core business. Starting in the fourth quarter of 2000 and continuing during the first six months of 2001, the Company concentrated its managerial and technical efforts on the remaining critical stages of developing and refining its new streaming rich media services. The Company expects to bring these services to market during the third quarter of 2001.
These services are intended to become the Company's core business in place of its hardware-based systems for video encoding, decoding and streaming; the market for which has diminished significantly in the last nine to 12 months. The Company believes the market declined for a number reasons, the most important of which is that customers no longer can afford to invest in expensive hardware systems of this type. As a result, profit margins on the Company's hardware systems have continued to decline, as the Company has lowered prices in the face of declining demand. A change in focus was necessary to capture the market for affordable streaming media services.
The change in focus required shifting technical and managerial resources from sales of the old line of products to service-based offerings. Additionally, the Company was required to make a significant investment in a centralized computer hardware and software infrastructure that will be used to provide the new services, as well as hiring a core sales team on which to build a growing sales organization for the future.
Cost of Sales
The cost of sales for the six months ended June 30, 2001 was $20,566, as compared to $152,583 for the comparable period of 2000. For the three month period ended June 30, 2001, the cost of sales was $19,843 as compared to $50,641 for the comparable period 2000. The decrease in cost of sales is directly attributable to the decline in sales.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses consisted of product marketing expenses, consulting fees, office, professional fees and other expenses to execute the business plan and for day-to-day operations of the Company.
Selling, General and Administrative expenses for the three months ended June 30, 2001 decreased $135,338 to $638,490 from $773,828 for the three months ended June 30, 2000. The six months eneded June 30, 2001 these cost decreased by $182,385 to $1,060,996 from $1,243,381 for the comparable period.
Product marketing expenses for the six months ended June 30, 2001, decreased to $314,092 from $333,630 for the comparable period of 2000 and increased to $200,170 for the three months ended June 30, 2001 from $180,792 for the comparable period in 2000, as the Company reduced its marketing efforts for its old, hardware-based systems. The Company expects product marketing expenses to increase significantly during the remainder of 2001 as new products are launched. The Company has hired additional staff and engaged in marketing activities in an effort to identify and assess appropriate market segments, develop business arrangements with prospective partners, create awareness of new products and services, and communicate to the industry and potential customers. Other components of Selling, General and Administrative expense did not change significantly.
Research and Development Expenses
Research and development expenses consisted primarily of compensation, hardware, software, licensing fees, and new product applications for the Company's proprietary StreamHQ(TM). Research and development expenses increased by 76% to $439,609 for the six months ended June 30, 2001, from $250,490 for the comparable period in 2000 and by 10% to $204,375 for the three months ended June 30, 2001 from $185,232 for the comparable period in 2000, reflecting development of the StreamHQ(TM) and other technologies underlying the shift in the Company's business to a services-based model.
As the Company expands its business, its product development, product marketing, and other general and administrative expenses will continue to increase. Product development expenses, which include research and development expenses, will increase as the Company adds engineering personnel to its technology and Web development teams, and as its new technologies are integrated into its product line. Product marketing expenses will increase as the Company adds business development, sales, and marketing personnel to build business relationships, sell advertising time and build brand awareness. Advertising also will increase as the Company invests to grow its business. Other general and administrative expenses will grow as the Company continues to build its management infrastructure, including additional personnel, office space and internal information systems.
Non-Cash Compensation Charges
Non-cash compensation charges for the six months ended June 30, 2001 reflected charges in the first quarter of 2001 of $565,597. Of this amount, $462,097 was due to the issuance of common shares and common share warrants to the Company's officers, directors and employees at a price or exercise price below the market price of the common shares at the time of issuance. Because the rules of the Canadian Venture Exchange require that the offering price for privately placed securities of listed companies be set when the offering is first announced, rather than upon closing, and the market price of the common shares increased between announcement of the offering and closing, the sale price of the common shares and the exercise price of the warrants were below the market price of the common shares on the date of issuance. In addition, the Company issued options to purchase 150,000 common shares to consultants, resulting in a $97,500 charge. The Company also incurred a charge of $6,000 for the issuance of employee stock options.
Net Losses
To date, the Company has not achieved profitability and, in fact, expects to incur substantial net losses for at least the remainder of 2001. The Company's net loss for the six months ended June 30, 2001 was $2,217,876 as compared with a net loss of $1,413,769 for the six months ended June 30, 2000 and for the three months ended June 30, 2001 was $919,808 as compared to $890,615 for the comparable period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company's had a cash position of $109,460, compared to $231,197 at December 31, 2000. The Company's principal sources of cash during the six months ended June 30, 2001, were proceeds of $1,333,260 from the issuance of stock in a private placement and $60,859 from the exercise of outstanding warrants. This was substantially offset by $1,393,280 of cash used in operating activities.
The Company will require additional financing to fund current operations through the third quarter of 2001. The Company has historically satisfied its capital needs primarily by issuing equity securities. The Company will require an additional $3.0 million to $3.5 million to finance operations for the rest of fiscal 2001 and intends to seek such financing through sales of its equity securities.
Assuming the aforementioned $3.0 million to $3.5 million in financing is obtained, the Company believes that continuing operations for the longer term will be supported through anticipated growth in revenues and through additional sales of the Company's securities. Although longer-term financing requirements may vary depending upon the Company's sales performance, management expects that the Company will require additional financing of $5.0 million to $6.0 million for fiscal 2002. The Company has no binding commitments or arrangements for additional financing, and there is no assurance that management will be able to obtain any additional financing on terms acceptable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain risks and uncertainties could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. Risks and uncertainties have been set forth in the Company's Annual Report on Form 10-K, as well as in other documents the Company files with the SEC. These risk factors include the following:
THE COMPANY'S LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE ITS
BUSINESS AND PROSPECTS.
The Company's business and prospects must be considered in light of the risks encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as streaming media.
IF THE COMPANY IS UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING IN THE NEXT
FEW MONTHS IT MAY NOT BE ABLE TO MAINTAIN OPERATIONS AT CURRENT LEVELS.
The Company requires substantial additional financing to maintain operations at current levels beyond the second quarter of 2001. Financing may not be available when needed on terms favorable to the Company, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may be unable to further develop or enhance its products and services, take advantage of future opportunities or respond to competitive pressures, or ultimately, to continue in business.
CONTINUATION OF THE CURRENT SLUMP IN THE TECHNOLOGY SECTOR WILL ADVERSELY AFFECT
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES.
The Company's sales have been adversely affected by the ongoing slump in the technology industry segment and the continuation of these market conditions can be expected to result in depressed demand for the Company's products and services.
THE COMPANY'S OPERATING RESULTS IN FUTURE PERIODS ARE EXPECTED TO BE SUBJECT TO
SIGNIFICANT FLUCTUATIONS, WHICH WOULD LIKELY AFFECT THE TRADING PRICE OF ITS
COMMON SHARES.
Factors that could cause such fluctuations include the Company's ability to attract and retain customers; the introduction of new video transmission services or products by others; price competition; the continued development of and changes in the streaming media market; its ability to remain competitive in its product and service offerings; its ability to attract new personnel; and potential U.S. and foreign regulation of the Internet.
THE COMPANY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER THE
COMPANY'S PRODUCTS AND SERVICES OBSOLETE.
Keeping pace with the technological advances may require substantial expenditures and lead time, particularly with respect to acquiring updated hardware and infrastructure components of its systems. The Company may require additional financing to fund such acquisitions. Any such financing may not be available on commercially reasonably terms, if at all, when needed.
IF THE COMPANY DOES NOT CONTINUOUSLY IMPROVE ITS TECHNOLOGY IN A TIMELY MANNER,
ITS PRODUCTS COULD BE RENDERED OBSOLETE.
These changes and developments may render the Company's products and technologies obsolete in the future. As a result, the Company's success depends on its ability to develop or adapt products and services or to acquire new products and services that can compete successfully. There can be no assurance that the Company will be successful in these efforts.
THE COMPANY INTENDS TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE
INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE
COMMON SHARES. |
