INSTANT VIDEO TECHNOLOGIES INC FILES ANNUAL REPORT (10KSB)
EDGAR Online SEC Filings - April 16, 1999 17:23
The EDGAR Online Glimpse is an extraction of the Management's
Discussion and Analysis section contained in the full 10KSB, available
from EDGAR Online
All SEC Filings for INSTANT VIDEO TECHNOLOGIES INC from EDGAR Online
edgar-online.com
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar meaning, constitute forward-looking statements which involve risks and uncertainties. IVT's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those factors set forth under "Risks and Uncertainties" below.
GENERAL
The Company's headquarters is located in San Francisco, California, with offices in Detroit, Michigan, and Phoenix, Arizona. The Company expects to increase its sales offices in 1999 with additional locations in the United States and Europe.
Although the Company remains optimistic about its future, its prospects must be considered and evaluated in light of the risks, operating and capital expenditures required, and uncertainty of economic conditions that may impact its customers. Emerging companies are characterized by a high degree of market and financial risk and investors should take this into account in their evaluation of financial results and future prospects. To achieve and sustain profitability, IVT must successfully launch, market, and establish its software products, successfully develop new products and services, meet the demands of its customers, respond quickly to changes in its markets, attract and retain qualified employees, and control expenses and cash usage.
The Company believes that period-to-period comparisons of its
operating results, including its revenues, cost of sales, gross margins, expenses, and capital expenditures may not necessarily provide meaningful results and should not be relied upon as indications of future performance. The Company does not believe that its historical growth rates are indicative of future growth or trends.
IVT has incurred significant losses since its inception, and as of December 31, 1998, it had an accumulated deficit of $24,458,165. There can be no assurance that the Company will achieve or sustain profitability and the Company believes that it will incur a net loss in 1999.
RESULTS OF OPERATIONS
Revenue
During the year ended December 31, 1998, the Company earned revenue in the amount of $15,000 compared to $247,879 for 1997. The 1998 revenue was from a single domestic transaction relating to a field trial. 1997 revenue was from consulting services for a different domestic customer.
Cost of Revenue
The Company had no cost of revenue for the year ended December 31, 1998, since the above mentioned field trial had no costs associated with it. 1997 cost of revenue consisted of costs of services related to customization of software for the Company's customer.
Operating Expenses
Costs and expenses during the year ended December 31, 1998, totaled $4,678,867 as compared to $1,946,306 during 1997. The increase was primarily due to increased software development expense, increased labor expense, increased sales and marketing expenses, and non-cash compensation expense relating to stock options.
Software research and development expenses for 1998 increased 322% from $189,719 in 1997 to $800,567 in 1998. R&D expenditures accounted for 17% of total operating expenses in 1998. All R&D costs are expensed as they are incurred. The majority of R&D expenses were labor-related for employee salaries and benefits and expenses for consultants as the result of the Company's decision to expand its internal product development team. The Company will continue to incur increasing research and development costs as it continues to develop its Burstware(R) product line and follow-on products.
Sales and marketing expenses increased 103% from $408,369 in 1997 to $830,998 in 1998 and accounted for 18% of total operating expenses in 1998. The increase in 1998 was due to expenditures for developing and producing marketing collateral materials, developing a public relations and promotion campaign strategy, travel expenses, and labor expenses due to increased headcount in 1998. The Company forecasts that sales and marketing expenses will increase to 30-35% of total operating expenses in 1999. The increase is due to increased marketing, advertising and promotion expenses necessary to establish the Company's brand and software products.
General and administrative expenses increased from $1,348,218 in 1997 to $3,047,302 in 1998 and accounted for 65% of total operating expenses in 1998. The 126% increase from 1997 to 1998 was due to $1,219,473 non-cash, stock option compensation in addition to increased labor and consultant expenses and increased legal expenses for the Company's patent filings. The Company forecasts that general and administrative expenses should decrease as a percentage of total operating expenses in 1999 as a result of increased spending in sales and marketing.
Other Expenses
Total other expense for 1998 was $2,252,553 versus $133,736 in 1997. Actual cash expenditures for interest however, were $65,935 in 1998 versus $56,782 in 1997. The increase was a result of increased interest expense and compensation expense for non-cash transactions described as follows.
Interest expense for 1998 increased 1,520% from $139,013 in 1997 to $2,252,553 in 1998. The increase in 1998 was due to the cost of warrants issued with debt and preferred equity in 1998, and for the convertible debt issued in 1998. Due to the risk of the Company's business and associated market risk, the Company felt it was necessary to provide an additional equity provision in order to attract investors in the Company's debt and equity offerings. IVT would expect this need to continue in their planned financing in 1999.
1998 compensation related to the issuance of stock options was $1,319,473, with zero recorded in 1997. The increase in 1998 was due to the Company recording compensation for non-qualified option granted to consultants and third parties in lieu of cash payments. Although the stock option compensation was a non-cash expense, it fairly represents the value of services provided by consultants and third parties and the cash savings to the Company.
The Company incurred a net loss of $6,916,420 and a net loss to common
shareholders of $15,678,845, ($2.35 per common share) year ended December 31, 1998, as compared to a net loss and net loss to common shareholders of $2,062,373 ($.39 per share) for 1997. The 1998 loss is primarily caused by virtually no revenue, increased operating expenses, non-cash interest expense relating to now retired debt, and compensation expense relating to stock options granted to employees and consultants. The additional loss of $8,762,425 to common shareholders in 1998 resulted from costs associated with beneficial conversion terms for its Series B Preferred Stock. The beneficial conversion expense was the result of a $6.375 per share price difference between the $2.00 per share price for the Series B offering and the closing price of $8.375 for IVT's common stock. This difference was the result of volatility in the Company's per share price. The Company was also not able to re-price the Series B offering since the offering price for Series B had been agreed upon prior to the increase in the Company's common share price. Management expects to continue to incur losses for 1999 as the Company establishes its brand and expands sales and market share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had a working capital surplus of $2,591,930 as compared to a working capital deficiency of $1,069,614 at December 31, 1997. The surplus was primarily due to cash balances resulting from the sale of Series B Convertible Preferred Stock that raised $4,210,000 in new funds, as well as the exercise of $750,000 in Series A Convertible Preferred Warrants in 1998.
Subsequent to December 31, 1998, the Company raised an additional $1,237,500 from the exercise of Series A Warrants in February 1999.
Cash used in operating activities totaled $3,298,752 during the year ended December 31, 1998, as compared to $1,760,507 during 1997. The 87% increase was primarily a result of increased spending for labor, development, and sales and marketing.
Cash used in investing activities during the year ended December 31, 1998, was $162,669 as compared to $85,367 for 1997. The increase of 91% was due to spending on computer and network equipment. The Company expects to have material capital expenditures for computer and network equipment in excess of $500,000 in 1999 as the Company adds employees and expands its software test lab and training capabilities.
Cash flows provided by financing activities during the year ended December 31, 1998, were $5,653,010 as compared to $1,657,812 during the year ended December 31,1997. The 241% increase was due to the proceeds from the sale of Preferred Stock and additional convertible debt and proceeds from the exercise of warrants. IVT repaid $891,179 of debt in 1998. $500,000 of this amount was for the repayment of the line of credit from Imperial Bank. IVT was able to raise approximately $6.7 million of equity in 1998. This is comprised of $750,000 received from the exercise of warrants, $4.2 million in a private placement of preferred stock and $1.7 million in debt that was converted into equity by the end of 1998.
Although the Company has been successful to date in raising funding to meet operating requirements, the Company will have to raise additional funding in the form of equity or debt to meet future operating requirements. IVT is exploring several funding options at this time. Any new funding raised may have a dilutive effect on the Company's existing shareholders. IVT makes no guarantees, representations, nor warranties that it will be successful in its efforts to raise adequate financing.
RECENT DEVELOPMENTS
Subsequent to December 31, 1998, the Company entered into agreements for strategic relationships with Sprint, Digital Creators/Teletech, Virage, and Carsey-Werner LLC. The relationships provide for potential sales of IVT's Burstware(R) software products. However, at this time the actual amount of forecast sales is still under negotiation. In March 1999, the Company secured European distribution of Burstware(R) through the EMS Group.
RISKS AND UNCERTAINTIES
Liquidity
As in 1997, IVT received a "going concern" opinion from its independent auditors in 1998. Although the Company has been successful in its fundraising efforts to meet prior operating requirements, there can be no guarantee that the Company will be successful in future fundraising efforts. At the time of this report IVT had insufficient cash reserves and receivables necessary to meet forecast operating requirements. In the event the Company were to be unsuccessful in its fundraising it would be required to significantly reduce cash outflows through the reduction of marketing and sales, development, capital, and administrative expenditures resulting in decreased potential revenue and potential profitability.
Market for the Company's Products
IVT believes that there is a market for the Company's Burstware(R) suite of software products. Since Burstware(R) has only been commercially available since February 1999, the Company has not yet established a track record in the sales of commercial software nor does it have any sales at this time. The Company is in the process of negotiating agreements with value-added resellers and original equipment manufacturers for the sale and distribution of Burstware(R). However, the Company's lack of operating and sales history may be a detriment in obtaining new customers.
IVT believes its Burstware(R) suite of software and intellectual property is positioned for the anticipated growth in broadband networks. The delay of growth in broadband networks or problems associated with broadband networks could have a negative impact on the Company's ability to realize sales and market share. Developments in Internet, intranet, and extranet infrastructure could have a significant impact on the market for video delivery and network management software. There can be no assurance that the growth of broadband networks or improvements in infrastructure will be present in 1999 or beyond.
Management Growth and Dependence on Key Personnel and Skilled Associates
The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have an adverse material effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and skilled associates. Failure to do so could adversely affect the Company's operations. The Company is currently in the process of recruiting a full-time CFO as well as other key positions in marketing and sales.
The challenge to IVT to manage the growth of its executive team and Company staff is also crucial to its success. The Company has reached a level of employment that it has not experienced before and as a result is faced with the challenges associated with rapid growth. The Company will be improving management and corporate communication through the use of information technology and the introduction of new policies and procedures.
Possible Volatility of Market Price of Common Stock
The trading price of the common stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics industry and other factors. In addition, the stock market is subject to price and volume fluctuations that affect the market price for many high technology companies in particular, and that often are unrelated to operating performance. The Company is working to improve the market for its stock by building a capital structure that will allow IVT to list its stock on the National NASDAQ exchange. The Company is contractually obligated to register certain shares of its unregistered common and preferred shares with the Securities and Exchange Commission. Upon the effectiveness of any such registrations, the increased liquidity in the Company's stock could depress the Company's share price.
Intellectual Property Protection
The Company's ability to compete may be affected by its ability to protect its proprietary information. The Company holds a number of U.S. and foreign patents related to the technology incorporated in the Company's current and future software products. The Company believes these patents are valuable. However, there can be no assurance that these patents will provide meaningful protection for the Company's technology or products.
There can be no assurance that third parties will not assert infringement claims against the Company or its customers in the future or that the Company may have to assert infringement claims against third parties. In the event of such a claim, the Company may be required to expend significant resources to defend its patents and technology. There can be no assurance that the Company would be successful in its efforts. In addition, such litigation could be lengthy and costly and could have an adverse material effect on the Company's financial condition regardless of the outcome of such litigation.
Competition
The software industry for the delivery of video and audio over networks is dominated by a few companies that have achieved substantial market share. Certain competitors may have greater financial, research and development, and marketing resources than the Company. The Company believes that the primary bases of competition in its targeted markets are technology, quality,responsiveness, and price. To be competitive, the Company must provide technologically advanced software, high product quality levels, and reliable delivery of its products on a timely and price competitive basis. The Company currently may be at a competitive disadvantage due to the cost of establishing a brand and corporate awareness and the limited amount of financial resources the Company has to effectively launch and promote its products.
Evolving Business Model
The Company has limited history with its current product and intellectual property licensing. The Company currently is in the process of refining pricing for its software and intellectual property. There can be no assurance that the strategies developed will be accepted by customers or the market nor that the strategies will provide sufficient income for the Company to reach profitability.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the application year. Programs or products that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. In addition, the year 2000 is a leap year, which may also lead to incorrect calculations, functions or systems failure. As a result, this year, computer systems and software used by many companies may need to be upgraded to comply with such Year 2000 requirements. In 1998, the Company began a project to determine if any actions were required regarding date-related effects to: (i) the Company's software products; (ii) the Company's internal operating and desktop computer systems and non-information technology systems; and (iii) the readiness of the Company's third-party vendors and business partners.
The Company has formed a team consisting of operations, development, marketing, and finance members to determine the impact of Year 2000 and to take corrective action. As of February 1999, the Company had completed testing of its suite of Burstware(R) software products and has found no known Year 2000 issues. The Company has also tested its internal operating and desktop hardware and software and has found that all its software is Year 2000 compliant and appears to have no known Year 2000 issues. The Company has also confirmed with its third-party vendors and business partners to ensure that their software and hardware will not impact IVT operations. At this time, the Company knows of no known Year 2000 issues or problems with its vendors, or business partners.
The majority of the costs associated with this project are not incremental to the Company, but represents a reallocation of existing resources. The Company believes that modifications deemed necessary will be made on a timely basis and does not believe that the cost of such modifications will have a material effect on the Company's operating results. To date, the Company's costs related to the year 2000 issues have not been material, and the Company does not expect the aggregate amount spent on the year 2000 issue to be material. In addition, the Company is in the process of evaluating the need for contingency plans with respect to year 2000 requirements. The necessity of any contingency plan must be evaluated on a case-by-case basis and may vary considerably in nature depending on the year 2000 issue it may address.
The Company's expectations as to the extent and timeliness of modifications required in order to achieve year 2000 compliance is a forward-looking statement subject to risks and uncertainties. Actual results may vary materially as a result of a number of factors, including, among others, those described above in this section. There can be no assurance that unexpected delays or problems, including the failure to ensure year 2000 compliance by systems or products supplied to the Company by third parties, will not have an adverse effect on the Company, its financial performance and results of operations. In addition, the Company cannot predict the effect of the year 2000 issues on its customers or other third party business partners or the resulting effect on the Company. As a result, if such third parties do not take preventative and/or corrective actions in a timely manner, the year 2000 issue could have an adverse effect on their operations and accordingly have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the Company's current understanding of expected costs is subject to change as the project progresses and does not include the cost of internal software and hardware replaced in the normal course of business whose installation otherwise may be accelerated to provide solutions to year 2000 compliance issues.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of the Auditors and the accompanying financial statements and notes to the financial statements are hereto set forth on pages F-1 through F-17. Financial Statement schedules are not required and have therefore been omitted.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On March 27, 1997, the Board of Directors of the Company elected to replace Evers & Company Ltd. as its independent auditors and replace them with KPMG LLP.
This change was approved by the Company's Board of Directors, and is a result of the Company's desire to utilize the services of a national accounting firm. During the two years prior to the dismissal of the former accountants, their reports did not contain an adverse opinion or disclaimer of opinion, nor were they modified as to uncertainty, audit scope, or accounting principles.
During the two years prior to their dismissal, there were no disagreements with the former accountants on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants,would have caused them to make reference to the subject matter of the disagreements in connection with their reports.
Prior to engaging KPMG LLP, neither the Company nor someone on its behalf consulted with KPMG LLP regarding (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, or (ii)any matter that was either the subject of a disagreement or a reportable event. |
