UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarter Ended January 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0429154
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1762-A Prospector Avenue, Park City, Utah 84060
-----------------------------------------------
(address of principal executive officers)
Issuer's telephone number: (435) 615-8338
--------------
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 CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of March 24, 2003
-------------------------- --------------------------------
Common Stock, 5,917,371
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
2
3
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements............................................. 2
Item 2. Management's Discussion and Analysis or Plan of Operation........ 11
Item 3. Controls and Procedures.......................................... 14
PART II
Item 1. Legal Proceedings................................................ 15
Item 2. Changes in Securities and Use of Proceeds........................ 15
Item 3. Defaults Upon Senior Securities.................................. 16
Item 4. Submissions of Matters to a Vote of Security Holders............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
Signatures................................................................ 17
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
January 31,
2003
---------------
CURRENT ASSETS
Cash 34,692
Note receivable, net of allowance
for bad debts of $590,000 10,000
Advance deposits 5,500
---------------
Total current assets 50,192
PROPERTY AND Equipment, at cost, net 83,926
Other assets 11,852
---------------
145,970
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 170,982
Accrued interest payable 167,092
Notes payable - related parties 260,000
Notes payable 1,989,800
--------------
Total current liabilities 2,587,874
COMMITMENTS AND CONTINGENCIES --
MINORITY INTERESTS 4,866
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value;
50,000,000 shares authorized,
5,910,071 issued and outstanding 5,910
Preferred stock, $0.001 par value;
1,000,000 shares authorized,
none outstanding --
Additional paid-in capital 3,849,336
Deficit accumulated during the development stage (6,302,016)
--------------
Total stockholders' deficit (2,446,770)
--------------
$ 145,970
==============
The accompanying notes are an integral part of these statements.
2
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
From
Three months ended May 26, 2000
January 31, (inception)
-------------------------- Through
2003 2002 Jan 31, 2003
----------- ----------- ------------
Revenue $ -- $ -- $ --
----------- ----------- -----------
Operating expenses
Salaries, payroll taxes and employee benefits 191,317 164,008 1,908,899
Professional fees and consultants 120,144 24,658 1,033,205
Rent 13,000 19,500 176,305
Provision for bad debts 149,000 -- 590,000
Travel and conventions 10,404 4,004 152,947
Depreciation and amortization 6,163 4,100 99,573
Utilities 10,608 9,025 56,952
Gain on transfer of license agreements -- -- (114,509)
Write off of goodwill -- -- 958,628
Other 35,117 35,091 859,413
----------- ----------- -----------
535,753 260,386 5,721,413
----------- ----------- -----------
Operating loss (535,753) (260,386) (5,721,413)
Other Income (expense)
Interest Income -- -- 5,578
Gain on sale of investment stock -- -- 338,049
Other expense - interest and beneficial conversion (170,652) (107,798) (919,364)
Minority interests -- 14 (4,866)
----------- ----------- -----------
Loss before income taxes (706,405) (368,170) (6,302,016)
Income taxes -- -- --
----------- ----------- -----------
NET LOSS $ (706,405) $ (368,170) $(6,302,016)
=========== =========== ===========
Loss per common share
Basic and Diluted $ (0.12) $ (0.09) $ (1.33)
Weighted-average shares outstanding -
Basic and Diluted 5,908,822 4,428,692 4,745,834
The accompanying notes are an integral part of these statements.
3
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF
STOCKHOLDERS' DEFICIT For the period May 26, 2000
(inception) through October 31, 2000, the years
ended October 31, 2001 and 2002, and for the three months ended January 31, 2003
Deficit
Accumulated
Preferred stock Common stock Additional during the
-------------------------- ------------------------- paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at May 26, 2000 (inception) -- $ -- $ -- $ -- $ --
Issuance of common stock -- -- 640,610 641 85,685 --
Net loss for the period -- -- -- -- -- (129,778)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2000 -- -- 640,610 641 85,685 (129,778)
Issuance of Series A preferred stock 950,000 950 -- -- 949,050 --
Issuance of common stock for acquisition
of Videolocity, Inc. -- -- 3,028,076 3,028 386,092 --
Provision for redemption value of
preferred stock -- -- -- -- (3,957,380) --
Issuance of common stock for:
Services -- -- 20,000 20 19,980 --
Cash -- -- 610,000 610 499,390 --
Stock incentive plans -- -- 5,000 5 4,995 --
Bonus interest and extensions of debt -- -- 15,000 15 74,985 --
Net loss for the year -- -- -- -- -- (2,379,623)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2001 950,000 950 4,318,686 4,319 (1,937,203) (2,509,401)
Redemption and cancellation of preferred (950,000) (950) 180,000 180 3,957,380 --
stock
Cancellation of common stock -- -- (50,000) (50) 50 --
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 303,900 --
notes payable
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 148,500 149 132,493 --
Conversion of debt -- -- 355,000 355 354,645 --
Services -- -- 419,871 419 444,453 --
Stock plans -- -- 504,539 505 453,637 --
Net loss for the year -- -- -- -- -- (3,086,210)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2002 -- -- 5,876,596 5,877 3,709,355 (5,595,611)
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 24,000 24 8,376 --
Stock plans -- -- 9,475 9 11,605 --
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
Net loss for the period -- -- -- -- -- (706,405)
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2003 -- $ -- 5,910,071 $ 5,910 3,849,336 (6,302,016)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
4
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
May 26, 2000
For the three months ended (inception)
January 31, through
--------------------- ------------
2003 2002 Jan 31, 2003
----------- ----------- ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (706,405) $ (368,170) $(6,302,016)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- (14) 4,866
Provision for bad debts 149,000 -- 590,000
Write off of goodwill -- -- 958,628
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Depreciation and amortization 6,163 4,100 99,573
Interest expense recognized on beneficial conversion 120,000 -- 423,900
Issuance of common stock under stock plans 11,614 15,119 434,116
Issuance of common stock for services -- 12,565 539,185
Issuance of common stock for interest 8,400 82,903 172,599
Changes in assets and liabilities
Advance deposits (2,600) (480) (5,500)
Other assets (11,852) -- (11,852)
Accounts payable and accrued liabilities (9,996) 9,739 170,982
Accrued interest 41,002 21,000 167,092
----------- ----------- -----------
Total adjustments 311,731 144,932 3,091,031
----------- ----------- -----------
Net cash used in operating activities (394,674) (223,238) (3,210,985)
----------- ----------- -----------
Net cash flows from investing activities -
Costs of license agreement -- (200,000) --
Investment stock and licenses, net -- -- 556,561
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment (1,931) (3,250) (119,990)
----------- ----------- -----------
Net cash flows used in investing activities (1,931) (203,250) (163,429)
----------- ----------- -----------
Cash flows from financing activities
Increase in notes payable 400,000 428,000 2,609,800
Proceeds from issuance of common stock -- -- 799,306
----------- ----------- -----------
Net cash provided by financing activities 400,000 428,000 3,409,106
----------- ----------- -----------
Net increase in cash 3,395 1,512 34,692
Cash at beginning of period 31,297 411 --
----------- ----------- -----------
Cash at end of period $ 34,692 $ 1,923 $ 34,692
=========== =========== ===========
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
The accompanying notes are an integral part of these statements
5
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. (VII) at January 31, 2003 and
for the three months ended January 31, 2003 and 2002 is unaudited, but includes
all adjustments (consisting only of normal recurring adjustments) which in the
opinion of management, are necessary to state fairly the financial information
set forth therein in accordance with accounting principles generally accepted in
the United States of America.
NOTE B - UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial reporting and the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared under accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such regulations.
This report on Form 10-QSB for the three months ended January 31, 2003 should be
read in conjunction with the Company's annual report on Form 10-KSB for the
fiscal year ended October 31, 2002. The results of operations for the three
months ended January 31, 2003, may not be indicative of the results that may be
expected for the year ending October 31, 2003.
NOTE C - ORGANIZATION AND BUSINESS ACTIVITY
The Company is a Nevada corporation organized on November 5, 1985 under the name
Pine View Technologies. On November 27, 2000 the Company's name was changed to
Videolocity International Inc. On December 4, 2000, the Company acquired
Videolocity Inc. in a transaction recorded as a recapitalization of VII with the
Company being the legal survivor and Videolocity Inc. being the accounting
survivor and the operating entity. Videolocity Inc., the accounting survivor,
was founded on May 26, 2000. The Company and its subsidiaries were established
to develop and market systems, products, and solutions for the delivery of
video, high speed internet access, and other digital content to end users such
as hotels, hospitals, and condominiums on demand.
At January 31, 2003, the Company was considered a development stage company as
its activities had principally been related to market analysis, capital raising,
development and other business planning activities and as such the Company had
no revenue from its planned principal operations.
On December 1, 2000, the Company completed a reverse stock split of our issued
and outstanding shares on a 0.61 share for one share basis. On March 1, 2002 the
Company completed a reverse common stock split of one share for ten outstanding
shares. This report has been completed showing after stock split shares from
inception.
NOTE D - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of the
Company and its wholly owned subsidiaries, Videolocity Inc., Videolocity
Technologies Inc., Hospitality Concierge Inc., Videolocity Direct Inc., Fifth
Digit Technologies LLC and the Company's 94 percent owned subsidiary Healthcare
Concierge Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
6
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - NET EARNINGS (LOSS) PER SHARE
Basic Earnings Per Share (EPS) are calculated by dividing net earnings (loss)
available to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted EPS are similarly calculated, except
that the weighted-average number of common shares outstanding includes common
shares that may be issued subject to existing rights with dilutive potential.
All common shares with dilutive potential described in Notes H and J are not
included in the computation of diluted loss per share for periods of net loss
because to do so would be anti-dilutive.
NOTE F - INCOME TAXES
The Company has sustained net operating losses in all periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero. The increase in the valuation
allowance was $217,355 for the Quarter ended January 31, 2003.
As of January 31, 2003, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $5,350,000 expiring through 2023.
NOTE G - NOTE RECEIVABLE
The Company has a $600,000 non-interest bearing note receivable that was due on
or before February 28, 2002. The Company holds 1,000,000 shares of Merit
Studios, Inc. common stock as collateral valued at $10,000 at January 31, 2003.
As of January 31, 2003, the Company has recorded an allowance for bad debt
totaling $590,000 against the note receivable.
NOTE H - NOTES PAYABLE
At January 31, 2003, the Company has notes payable totaling $2,249,800 due to
various individuals and companies including $260,000 to current related parties
including Board of Directors and Management. Of the total, $2,149,800 is written
at 8 percent simple interest and $100,000 is written at 12 percent simple
interest. The Company's notes payable have maturities or have been extended as
follows: $45,000 matured during October 2002, $940,000 matured during November
2002, $714,800 matured during January 2003, $50,000 matures during May 2003,
$350,000 matures during June 2003, and $150,000 has no set maturity date and is
payable until paid in full. The Company is actively pursuing extensions on the
notes payable. As of January 31, 2003, the Company holds $177,800 and $550,000
in notes payable that are convertible at the option of the debt holder into the
Company's common stock at $1.00 and $0.20 respectively.
The Company originated $400,000 in notes payable during the three months ended
January 31, 2003 with the total amount being convertible into common stock at
$0.20 per share at the option of the debt holder. The conversion amount was less
than the market price of the stock on the date of issuance, which results in a
beneficial conversion. The beneficial conversion feature was recorded as an
additional noncash charge to interest expense and was recognized in the period
when the debt became convertible. For the three months ended January 31, 2003
the beneficial conversion feature resulted in an increase to interest expense of
$120,000. The notes mature no less than 180 days from the signing or on demand
when the Company has secured and received a minimum of $5,000,000 in debt or
equity funding. $350,000 of the total has the following additional terms: 1)
granted an option to purchase 50,000 shares of Videolocity International, Inc.
7
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - NOTES PAYABLE, continued
common stock at $0.20 per share which expires when all amounts owed are paid in
full and 2) 3.0 percent of all future net revenues, in lieu of payment to sales
agent, of all Hospitality, Healthcare, Convention, Education, Assisted Living
and Timeshare properties contracted by the Company within the States of Nevada,
Idaho, Montana, and Washington.
On April 30, 2002 the Company filed a UCC-1 financing statement, with the state
of Nevada, on six Provisional Patent applications held in the name of
Videolocity Technologies, Inc. in favor of certain promissory note holders
totaling $1,500,000 including $235,000 to current related parties, as security,
in exchange for an extension of maturity dates. The notes payable under the
UCC-1 have maturities or have been extended as follows: $45,000 matured during
October 2002, $520,000 matured on November 1, 2002, $400,000 matured on November
30, 2002 and 535,000 matured on January 1, 2003.
On February 6, 2003 the Company received a formal notice of default from ISOZ,
LC regarding the Company's $215,000 note payable to ISOZ, LC.
NOTE I - RECAPITALIZATION
On December 4, 2000, the Company (formerly Pine View Technologies, Inc.)
acquired Videolocity Inc. The combination of Videolocity Inc. and the Company
was recorded as a recapitalization of Videolocity Inc. with the Company being
the legal survivor and Videolocity Inc. being the accounting survivor.
Videolocity, Inc. the accounting survivor, was founded on May 26, 2000.
NOTE J - STOCK INCENTIVE PLANS
On October 1, 2000 the Company established a stock incentive plan to attract and
retain qualified people to serve as key employees. Awards made under the plan
shall be in plan units and each unit can be convertible, at the option of the
participant, into one share of the Company's common stock after the vesting
requirement has been satisfied. The Company reserved 1,000,000 common shares
that can be issued under the plan. As of January 31, 2003, the Company has
255,784 plan units that have been awarded under the plan. Of the total awarded,
51,159 plan units have met the vesting requirement and have been converted to
common stock and 204,625 plan units are subject to additional vesting
requirements. During the three months ended January 31, 2003 the Company issued
9,475 shares of common stock in exchange for vested plan units resulting in
compensation expense of approximately $11,600.
On March 26, 2002 the Company filed an additional stock option and stock award
plan, which had been approved by the shareholders of Pine View Technologies in
November 2001. The purpose of the plan is to enable the Company to attract and
retain qualified persons to serve as officers, directors, key employees and
consultants of the Company, and to align the financial interests of these
persons with those of its shareholders by providing those officers, directors,
key employees and consultants with a proprietary interest in the Company's
performance and progress through the award of stock options, appreciation rights
or stock awards from time to time. The plan shall remain in effect for a period
of five years or until amended or terminated by action of the Board. The
termination of the Plan shall not affect any outstanding awards made under the
Plan. The maximum number of shares of Common Stock, which may be issued pursuant
to the Plan is 500,000. The Company has issued 467,855 shares under the Plan.
8
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - COMMITMENTS AND CONTINGENCIES
On August 26, 2002 the Company's subsidiary, Healthcare Concierge Inc. filed an
action in the Third District Court of Salt Lake County, Utah against Merit
Studios, Inc. The action seeks $600,000 that is owed by Merit Studios to
Healthcare Concierge pursuant to a promissory note executed in consideration for
the reconveyance to Merit Studios of two license agreements (Note G). The action
is in the initial stages and, accordingly, we are unable to assess the
likelihood of success at this time.
During December 2000, the Company issued 950,000 shares of series A preferred
stock for the purchase of 5th Digit Technologies, LLC. During 2002, the Company
exchanged 600,000 of the outstanding series A preferred shares for 180,000
common shares of the Company. A legal action was filed against the holder of the
remaining 350,000 preferred shares outstanding, alleging misrepresentation of
the technology acquired as part of the purchase of 5th Digit Technologies, LLC.
On January 24, 2002 the outstanding 350,000 preferred shares were tendered for
liquidation at $5.00 per share and were subsequently deposited with the court
pending the outcome of the legal action. On April 11, 2002 the Third Judicial
District Court, Salt Lake County, signed a Default Judgment against the holder
of the outstanding 350,000 preferred shares ordering cancellation of the shares.
It was further determined that any and all redemption or other rights vested in
and related to the shares be voided. The 350,000 preferred shares were cancelled
on April 12, 2002. Subsequently, the decision of the Third Judicial District
Court was set aside. Management has been in negotiations with the original
holder of the 350,000 preferred shares and have reached a tentative agreement.
Management does not believe that the final settlement will have a material
impact on our financial statements.
NOTE L - EQUITY LINE OF CREDIT AGREEMENT
On May 28, 2002 the Company finalized an Equity Line of Credit Agreement, with
Cornell Capital Partners, LP, a New Jersey-based domestic investment fund. Under
the Equity Line, Videolocity has the right, but not the obligation, to require
Cornell Capital to purchase shares of Videolocity common stock up to a maximum
amount of $20,000,000 over a 24-month period. There is no minimum draw down
although the Company may make draws, as provided below, during the term of the
Equity Line.
Pursuant to terms of the Equity Line, the Company is required to file with the
SEC a registration statement covering the shares to be acquired by Cornell
Partners. The 24-month term commences on the effective date of the registration
statement. The Company is currently working toward completion of the
registration. The purchase price of the shares will be 95% of the lowest closing
bid price of the Company's common stock during the five consecutive trading days
immediately following receipt of the Company's notice of its intent to make a
draw. The Company may make up to four draws per month at a maximum $250,000 per
draw. In addition to the shares to be issued under the Equity Line, the Company
will include in its registration statement an additional 300,000 shares issued
to Cornell Partners and the Placement Agent in connection with the execution of
the Equity Line.
NOTE M - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Current officers and directors have made short-term 8.0 percent loans to the
Company totaling approximately $260,000. Additionally, the Company has accounts
payable totaling $32,500 due to a director.
During the three months ended January 31, 2003, the Company paid $5,000 to a
former director for office space.
9
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect that the adoption of other recent accounting
pronouncements will have a material impact on its financial statements
NOTE O - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
has incurred losses since its inception and has not yet been successful in
establishing profitable operations. These factors raise substantial doubt about
the ability of the Company to continue as a going concern. In this regard,
management is proposing to raise necessary additional funds not provided by its
planned operations through loans and/or through additional sales of its common
stock. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
NOTE P - SUBSEQUENT EVENTS
Subsequent to January 31, 2003 the Company obtained extensions on certain notes
payable. As of March 24, 2003, with extensions, the Company's notes payable
maturity schedule is as follows: $40,000 matured during October 2002, $435,000
matured during November 1, 2002, $100,000 matured during January 2003, $50,000
is due during May 2003, $350,000 is due during June 2003, $1,124,800 is due
during August 2003 and $150,000 has no set maturity date and is payable until
paid in full. As of March 24, 2003, the Company has $575,000 in notes payable
that are past due and related accrued interest of approximately $51,000.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-QSB.
- --------------------------------------------------------------------------------
Forward-Looking Information
- ---------------------------
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," expect," anticipate," "continue," "estimate," "project,"
"intend," and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions,
and financial trends that may affect the Company's future plans of operations,
business strategy, operating results, and financial position. We caution readers
that a variety of factors could cause our actual results to differ materially
from the anticipated results or other matters expressed in forward-looking
statements. These risks and uncertainties, many of which are beyond our control,
include (i) the sufficiency of existing capital resources and the Company's
ability to raise additional capital to fund cash requirements for future
operations; (ii) uncertainties involved in the rate of growth of the Company's
business and acceptance of the Company's products and services; (iii) volatility
of the stock market, particularly within the technology sector; and (iv) general
economic conditions. Although the Company believes the expectations reflected in
these forward-looking statements are reasonable, such expectations may prove to
be incorrect.
Plan of Operation
- -----------------
General
We are a development stage company engaged in the business of solution
engineering, marketing and deployment of the Videolocity Digital Entertainment
System (DES), and other advanced digital information and entertainment systems.
DES delivers video-on-demand in near DVD quality. It also delivers application
specific information, games, music, educational material, and wireless
high-speed internet access to individuals, residents, hotel guests, and
patients/attendants in the healthcare industry.
DES permits viewers to select from an extensive library of movie titles,
informational/educational content and view their selections on their television
screens, lap top computers or PDAs (personal digital assistants). All content is
protected through our proprietary encryption and encoding process, which limits
viewing to the person, or persons, authorized to access the movie or other
content and prevents unauthorized digital reproduction or rebroadcast.
To date we have focused on the acquisition and development of our technology and
preliminary marketing activities. We are now positioned to continue the
marketing of DES and related technology and products. We tailor the user
interfaces and content offering specifically to each market segment and to each
customer within that market segment. Our overall delivery system design,
hardware components and software applications remain identical, or only slightly
modified to accommodate larger user bases and/or infrastructures. This gives us
the ability to customize the feature settings and tailor the local content
offering to the specific audiences for each market segment.
11
We are committed to continued development and installation of innovative, high
quality, cost effective systems. We provide a wireless system and also offer a
parallel system over wire using Ethernet, DSL CAT5 and fiber architectures. Our
DES is available on either a Mircosoft or Linux operating system in a
stand-alone set top box. Our current business strategy is to drive demand of the
usage of our DES worldwide in the hospitality, healthcare, residential and other
markets in both wired and wireless applications.
We operate our business through five subsidiaries which perform various
functions strategic to their market place or core competency. To date, our
activities have been limited to DES and other digital technologies. We are
presently commencing the initial marketing of DES into various marketplaces.
Although we use the word International in our name, we are not currently
operating outside the U.S., except for limited marketing activities in Canada
and Mexico. However, as we expand operations and as our business warrants, we
fully intend to operate and market our products wherever prudent, including
internationally.
We intend to use our existing capital, together with proceeds from prospective
future financings, to continue deployment and sales of DES. Management estimates
that minimum expenses during the next twelve months will be approximately $2.2
million, consisting of $1.3 million in payroll and related expenses including
the hiring of additional personnel, approximately $120,000 for office rent, and
approximately $600,000 for general and administrative expenses including, office
equipment and supplies, travel and conventions legal and accounting fees.
Research and development expenses are estimated to be approximately $180,000
during the next twelve months. These expenses will be directed at further
development of the DES. We will also incur substantial additional costs in
connection with the manufacture and deployment of DES. Management further
estimates that such costs will be a minimum of $10 million, but we are
optimistic that we will be able to cover most of those costs with capital leases
and from other future financing.
Currently, we do not intend to sell any hardware or software. Our business plan
is to manufacture or purchase hardware and software and deploy our systems at no
cost to the customer. It is anticipated that we will finance the system
equipment and realize the majority of the revenue stream created by the end
users. Presently, we do not anticipate any significant purchase or sale of plant
or equipment. Additionally, we do not anticipate the addition of large numbers
of employees because our business model calls for outsourcing any and all
functions that would be directly related to the number of deployments. We are,
and intend to remain, a technology company.
We anticipate generating future revenues from the delivery of video and other
content as well as high-speed Internet access to the end users of our DES.
Management believes that we will begin to realize revenues by the end of the
second calendar quarter of 2003, from contracts currently in place and contracts
currently being negotiated with hotel and healthcare properties. We will charge
a fee for each movie or other item of content viewed through our system and/or
high-speed Internet access and we will remit a portion of each fee to the studio
or other content provider. Although we have not finalized our structure for
content fees, the following is an estimate of content fees that we will charge
end users:
Internet access $ 6.95 to $ 11.95 each 12 or 24 hour period
Video on demand $ 5.95 to $ 12.95 per viewing
Games $ 2.95 to $ 6.95 each 1 to 4 hour period
All prices are subject to change and may vary depending upon property location,
usage volume and response to competition.
12
During the next twelve months, we plan to seek additional debt funding in the
form of credit lines and capital leases for up to approximately $10 million.
This would permit us to cover our minimum expenses described above and
accelerate deployment of our DES. As of the date hereof, we have not formalized
any new funding except for the line of credit with Cornell Capital. We can not
give any assurance that we will be able to secure such additional funding on
favorable terms to us, or otherwise.
We have entered into a $20 million equity line of credit agreement with Cornell
Capital, which we anticipate will provide us with adequate working capital for
at least the next 24 months. Without drawing against the line of credit and
based on current costs of operation, contract commitments, and availability of
credit, management estimates that our current assets will be sufficient to fund
our cost of operation for approximately the next month and that we must obtain
additional financing during that time in order to continue operations.
Liquidity and Capital Resources
- -------------------------------
During the three months ended January 31, 2003 our total current assets
decreased from approximately $193,000 at October 31, 2002 to approximately
$50,000 at January 31, 2003, primarily due to the increase in the allowance for
bad debts of approximately $142,000 during the quarter. During this same period,
cash increased from approximately $31,000 to approximately $35,000. Total assets
decreased from approximately $281,000 at October 31, 2002 to approximately
$146,000 at January 31, 2003, due to the increase in the allowance for bad
debts.
Total current liabilities increased from approximately $2,157,000 on October 31,
2002 to approximately $2,588,000 at January 31, 2003. The change is primarily
attributed to the increase in notes payable of $400,000 to approximately
$2,250,000 during the three months ended January 31, 2003 due to additional
borrowing and an increase to accrued interest of approximately $41,000. Accounts
payable and accrued liabilities decreased during the three months ended January
31, 2003 from approximately $181,000 to approximately $171,000.
During the three months ended January 31, 2003 we have originated $400,000 in 8
percent convertible notes payable to various individuals. These funds are being
used for general operational expenses. The notes mature no less than 180 days
from the signing or on demand when the Company has secured and received a
minimum of $5,000,000 in debt or equity funding. $350,000 of the total has the
following additional terms: 1) granted an option to purchase 50,000 shares of
Videolocity International, Inc. common stock at $0.20 per share which expires
when all amounts owed are paid in full and 2) 3.0 percent of all future net
revenues, in lieu of payment to sales agent, of all Hospitality, Healthcare,
Convention, Education, Assisted Living and Timeshare properties contracted by
the Company within the States of Nevada, Idaho, Montana, and Washington.
13
To date, we have not realized revenues from our operations. For the three months
ended January 31, 2003, total expenses increased approximately 92 percent as
compared to the three months ended January 31, 2002. This is attributed
primarily to a 106 percent increase in administrative expenses in 2003, which
reflects our increased activities related to readying the DES for installation
and a provision for doubtful accounts. Administrative expenses include ongoing
research and development of our technology. Additionally, we incurred interest
expense of approximately $171,000 for the three months ended January 31, 2003
compared to approximately $108,000 for the three months ended January 31, 2002,
reflecting our financing activities in 2003. The interest expense for the three
months ended January 31, 2003 includes a beneficial conversion feature of
approximately $120,000 that was incurred on the origination of notes payable.
Management anticipates that as we scale up the installation of the DES, our
expenses will increase proportionately. The Company's plan of operation will
depend on its ability to raise substantial additional capital, of which there
can be no assurance.
Net Operating Loss
- ------------------
As of January 31, 2003, the Company and its subsidiaries had accumulated a net
operating loss carryforward of approximately $5,350,000, with a operating loss
tax benefit of approximately $1,996,000. No tax benefit has been recorded in the
financial statements because the tax benefit has been fully offset by a
valuation reserve as the use of the future tax benefit is in doubt. The net
operating loss will expire through 2023.
Inflation
- ---------
In the opinion of management, inflation has not and will not have a material
effect on our operations in the immediate future.
Item 3. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. All such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial 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 designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Accordingly, management necessarily was required to
apply its judgement in evaluating the cost-benefit relationship of possible
controls and procedures.
Evaluation of Disclosure Controls and Procedures. Based on an evaluation under
the supervision and with the participation of the our management as of a date
within 90 days of the filing date of this Quarterly Report on Form 10-QSB, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934), are effective to ensure
that information required to be disclosed in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
14
the time periods specified in SEC rules and forms.
Changes in Internal Controls. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken. However, the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events and there is no
certainty that any design will succeed in achieving its stated goal under all
potential future considerations, regardless of how remote.
PART II
Item 1. Legal Proceedings
During December 2000 the Company issued 950,000 shares of series A preferred
stock for the purchase of 5th Digit Technologies, LLC. During 2002, the Company
exchanged 600,000 of the outstanding series A preferred shares for 180,000
common shares of the Company. A legal action was filed against the holder of the
remaining 350,000 preferred shares outstanding, alleging misrepresentation of
the technology acquired as part of the purchase of 5th Digit Technologies, LLC.
On January 24, 2002 the outstanding 350,000 preferred shares were tendered for
liquidation at $5.00 per share and were subsequently deposited with the court
pending the outcome of the legal action. On April 11, 2002 the Third Judicial
District Court, Salt Lake County, signed a Default Judgment against the holder
of the outstanding 350,000 preferred shares ordering cancellation of the shares.
It was further determined that any and all redemption or other rights vested in
and related to the shares be voided. The 350,000 preferred shares were cancelled
on April 12, 2002. Subsequently, the decision of the Third Judicial District
Court was set aside. Management has been in negotiations with the original
holder of the 350,000 preferred shares and have reached a tentative agreement.
Management does not believe that the final settlement will have a material
impact on our financial statements.
On August 26, 2002 the Company's subsidiary, Healthcare Concierge Inc. filed an
action in the Third District Court of Salt Lake County, Utah against Merit
Studios, Inc. The action seeks $600,000 that is owed by Merit Studios to
Healthcare Concierge pursuant to a promissory note executed in consideration for
the reconveyance to Merit Studios of two license agreements. The action is in
the initial stages and, accordingly, we are unable to assess the likelihood of
success at this time.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
- ---------------------------------------
During the three months ended January 31, 2003, we issued an aggregate of 33,745
shares of common stock. Of the 33,745 shares issued, 24,000 shares, valued at
approximately $0.35 per share, were issued to various individuals as
consideration and bonus interest for extending the due date of certain secured
notes. These issuances were made in private transactions and, accordingly, we
relied upon the exemption from registration under the Securities Act of 1933
provided by Section 4(2) of the Act. These shares are deemed to be restricted
securities.
We also issued 9,745 vesting shares to employees under the Videolocity, Inc.
2000 Stock Incentive Plan. These shares were issued to seven employees and were
subject to a registration statement filed with the SEC on July 31, 2001.
15
Item 3. Defaults Upon Senior Securities
On February 6, 2003 the Company received a formal notice of default from ISOZ,
LC regarding the Company's $215,000 in notes payable to ISOZ, LC. As of March
21, 2003 the Company is in default on notes payable due to ISOZ, LC. totaling
$215,000 and accrued interest of approximately $28,000.
At January 31, 2003, the Company has notes payable totaling $2,249,800. The
notes payable have maturities or have been extended as follows: $45,000 matured
during October 2002, $940,000 matured during November 2002, $714,800 matured
during January 2003, $50,000 matures during May 2003, $350,000 matures during
June 2003, and $150,000 has no set maturity date and is payable until paid in
full. The Company is actively pursuing extensions on the notes payable. At
January 31, 2003 the Company has a total of $1,699,800 in notes payable that are
past due.
Subsequent to January 31, 2003 the Company obtained extensions on certain notes
payable. As of March 24, 2003, with extensions, the Company's notes payable
maturity schedule is as follows: $40,000 matured during October 2002, $435,000
matured during November 1, 2002, $100,000 matured during January 2003, $50,000
is due during May 2003, $350,000 is due during June 2003, $1,124,800 is due
during August 2003 and $150,000 has no set maturity date and is payable until
paid in full. As of March 24, 2003, the Company has $575,000 in notes payable
that are past due and related accrued interest of approximately $51,000.
Item 4. Submissions of Matters to a Vote of Security Holders
This Item is not applicable.
Item 5. Other Information
Resignation of Officer
- ----------------------
On December 31, 2002 Martin P. Senn resigned as an officer, director and
employee of Videolocity International, Inc. and/or any of its subsidiaries and
subsequently signed on as a consultant to Videolocity Inc. On March 7, 2003 Mr.
Senn announced that he would take an indefinite leave of absence to spend more
time with his family and evaluate his career objectives.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are included attached as exhibits
to this report.
Exhibit 99.1 Certification of CEO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99.2 Certification of CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
None
16
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEOLOCITY INTERNATIONAL, INC.
BY: /S/ ROBERT E. HOLT
-----------------------------------
ROBERT E. HOLT
President and Director
Date: March 24, 2003
BY: /S/ CORTNEY TAYLOR
-----------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: March 24, 2003
17
Certifications
--------------
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert E. Holt, Chief Executive Officer of Videolocity
International, Inc. (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Videolocity International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarlerly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Robert E. Holt
- ----------------------------
Robert E. Holt
Chief Executive Officer
18
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cortney L. Taylor, Chief Financial Officer of Videolocity
International, Inc. (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Videolocity International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Cortney L. Taylor
- ------------------------------
Cortney L. Taylor
Chief Financial Officer
19