UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly Period ended July 31, 2003
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
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 September 09, 2003
- -------------------------- ------------------------------------
Common Stock, 6,346,996
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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......................... 10
Item 3. Controls and Procedures........................................................... 13
PART II
Item 1. Legal Proceedings................................................................. 13
Item 2. Changes in Securities and Use of Proceeds......................................... 13
Item 3. Defaults Upon Senior Securities................................................... 14
Item 4. Submissions of Matters to a Vote of Security Holders.............................. 14
Item 5. Other Information................................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................................. 14
Signatures........................................................................ 15
Certifications.................................................................... 16
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
July 31, 2003
CURRENT ASSETS
Cash $ 8,009
Note receivable, net of allowance for bad debts of $590,000 10,000
-----------
Total current assets 18,009
PROPERTY AND EQUIPMENT, at cost, net 71,118
OTHER ASSETS - advance deposits 133,158
-----------
$ 222,285
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 440,932
Accrued interest payable 287,721
Notes payable - related parties 260,000
Notes payable 2,379,800
-----------
Total current liabilities 3,368,453
COMMITMENTS AND CONTINGENCIES --
MINORITY INTERESTS 4,866
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 50,000,000 shares
authorized, 6,235,671 issued and outstanding 6,236
Preferred stock, $0.001 par value; 1,000,000 shares
authorized, none outstanding --
Additional paid-in capital 3,940,360
Deficit accumulated during the development stage (7,097,630)
-----------
Total stockholders' deficit (3,151,034)
-----------
$ 222,285
===========
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
Three months ended Nine months ended From
July 31, July 31, May 26, 2000
-------------------------- -------------------------- through
2003 2002 2003 2002 July 31, 2003
----------- ----------- ----------- ----------- -----------
Revenue $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Operating expenses
Salaries, payroll taxes, and employee benefits 187,454 198,347 580,927 572,562 2,298,509
Professional fees and consultants 15,298 202,815 174,598 494,831 1,145,790
Rent 12,000 19,500 33,000 58,500 196,305
Technology Development 34,676 38,978 92,807 71,367 228,971
Provision for bad debts -- -- 149,000 150,000 590,000
Travel and conventions -- 25,111 14,991 33,179 157,533
Depreciation and amortization 6,324 4,100 18,971 12,300 112,381
Utilities 2,923 3,068 15,734 9,181 62,079
Gain on transfer of license agreements -- -- -- -- (114,509)
Write off of goodwill -- -- -- -- 958,628
Other 5,420 25,096 76,529 155,230 706,530
----------- ----------- ----------- ----------- -----------
264,095 517,015 1,156,557 1,557,150 6,342,217
----------- ----------- ----------- ----------- -----------
Operating loss (264,095) (517,015) (1,156,557) (1,557,150) (6,342,217)
Interest income -- -- -- 5,334 5,578
Gain on sale of stock, net -- -- -- -- 338,049
Other expense - interest and beneficial conversion (113,844) (132,271) (345,462) (325,050) (1,094,174)
Minority interests -- 39 -- (73) (4,866)
----------- ----------- ----------- ----------- -----------
Loss before income taxes (377,939) (649,247) (1,502,019) (1,876,939) (7,097,630)
Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS $ (377,939) $ (649,247) $(1,502,019) $(1,876,939) $(7,097,630)
=========== =========== =========== =========== ===========
Loss per common share
Basic and Diluted $ (0.06) $ (0.12) $ (0.25) $ (0.38)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 6,138,379 5,477,835 5,994,345 4,900,399
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 nine months ended July 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
notes payable -- -- -- -- 303,900 --
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 -- -- 335,000 335 82,914 --
Stock plans -- -- 24,075 24 28,091 --
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
Net loss for the period -- -- -- -- -- (1,502,019)
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 2003 -- $ -- 6,235,671 $ 6,236 3,940,360 (7,097,630)
=========== =========== =========== =========== =========== ===========
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
For the nine months ended May 26, 2000
July 31, (inception)
------------------------- Through
2003 2002 July 31,
2003
----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $(1,502,019) $(1,876,939) $(7,097,630)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- (73) 4,866
Provision for bad debts 149,000 150,000 590,000
Write off of goodwill -- -- 958,628
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Depreciation and amortization 18,971 12,300 112,381
Interest expense recognized on beneficial conversion 120,000 -- 423,900
Issuance of common stock under stock plans 28,115 269,594 487,257
Issuance of common stock for services -- 293,008 464,872
Issuance of common stock for interest 83,249 132,642 290,891
Changes in assets and liabilities
Other assets (130,258) (560) (133,158)
Accounts payable and accrued liabilities 259,954 (91,226) 440,932
Accrued interest 161,631 (13,949) 287,721
----------- ----------- -----------
Total adjustments 690,662 751,736 3,475,732
----------- ----------- -----------
Net cash used in operating activities (811,357) (1,125,203) (3,621,898)
----------- ----------- -----------
Net cash flows from investing activities -
Investment stock and licenses, net -- -- 555,791
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment (1,931) (25,470) (119,990)
----------- ----------- -----------
Net cash flows used in investing activities (1,931) (25,470) (164,199)
----------- ----------- -----------
Cash flows from financing activities
Increase in notes payable 790,000 1,304,800 2,994,800
Proceeds from issuance of common stock -- -- 799,306
----------- ----------- -----------
Net cash provided by financing activities 790,000 1,304,800 3,794,106
----------- ----------- -----------
Net increase (decrease) in cash (23,288) 154,127 8,009
Cash at beginning of period 31,297 411 --
----------- ----------- -----------
Cash at end of period $ 8,009 $ 154,538 $ 8,009
=========== =========== ===========
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
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. as of July 31, 2003 and for
the three months and nine months ended July 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 and nine months ended July 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 and nine months ended July 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 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 and other products for the delivery of on demand
video, high speed internet access, and other digital content to end users such
as hotels, hospitals, and condominiums.
At July 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
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 approximately $140,000 for the Quarter ended July 31, 2003
(approximately $513,000 for the nine months ended July 31, 2003).
As of July 31, 2003, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $6,145,000 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 $25,000 at July 31, 2003. As
of July 31, 2003, the Company has recorded an allowance for bad debt totaling
$590,000 against the note receivable. (Note K)
NOTE H - NOTES PAYABLE
As of July 31, 2003, the Company has notes payable totaling $2,639,800 due to
various individuals and entities including $260,000 to current related parties
including members of the Board of Directors and Management. Of the total,
$2,539,800 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: $20,000 matured during October 2002, $315,000 matured
during November 2002, $10,000 matured during January 2003, $100,000 matured
during June 2003, $1,404,800 matures during August 2003, $125,000 matures during
November 2003, $75,000 matures during April 2004, $175,000 matures during June
2004, and $150,000 has no set maturity date and is payable until paid in full.
Additionally, as of July 31, 2003 approximately $265,000 of the total is
callable by the lender when the Company has received a minimum of five million
in debt or equity funding. The Company is actively pursuing extensions on the
notes payable. As of July 31, 2003, the Company holds $327,800, $640,000 and
$50,000 in notes payable that are convertible at the option of the debt holder
into the Company's common stock at $1.00, $0.20, and $0.15 respectively.
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: $20,000 matured during
October 2002, $435,000 during November 2002, $10,000 matured January 2003, and
$1,035,000 matures during August, 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.
7
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 July 31, 2003, the Company has 255,784
plan units that have been awarded under the plan. Of the total awarded, 68,259
plan units have met the vesting requirement and have been converted to common
stock and 187,525 plan units are subject to additional vesting requirements.
During the three months ended July 31, 2003 the Company issued 7,300 shares of
common stock in exchange for vested plan units resulting in compensation expense
of approximately $8,300 (24,075 shares resulting in compensation expense of
approximately $28,115 for the nine months ended July 31, 2003).
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 did not issue shares under the plan during
the three months or nine months ended July 31, 2003. The Company has issued a
total of 467,855 shares under the Plan.
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). During
June 2003 the Company received notification of a summary judgment from the Third
District Court of Salt Lake County. The Court ordered that judgment be entered
in the Company's favor totaling approximately $673,000 which includes the
original note receivable plus accrued interest to date and some other small
amounts. It was further ordered that the judgment shall be augmented in the
amount of reasonable costs and attorney's fees in collecting the judgment.
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 continues in negotiations with the original
holder of the 350,000 preferred shares. Management does not believe that the
final settlement will have a material impact on our financial statements.
The Company is engaged in various other lawsuits and claims, either as plaintiff
or defendant, in the normal course of business. In the opinion of management,
based upon advice of counsel, the ultimate outcome of these lawsuits will not
have a material impact on the Company's financial position or results of
operations.
8
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
Capital 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 8.0 percent loans to the Company
totaling approximately $260,000. Additionally, the Company has accounts payable
totaling approximately $58,000 due to directors.
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.
9
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 our 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 our ability to raise
additional capital to fund cash requirements for future operations; (ii)
uncertainties involved in the rate of growth of our business and acceptance of
our products and services; (iii) volatility of the stock market, particularly
within the technology sector; and (iv) general economic conditions. Although we
believe 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 engineering,
marketing and deployment of the Videolocity Digital Entertainment System (DES),
and other 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.
To date we have focused on the acquisition and development of our technology and
preliminary marketing activities. We are now positioned to begin to actively
market our DES and related technologies and begin deploying our DES into our
first signed contracts. Our current business strategy is to drive demand and the
usage of our DES in the hospitality, healthcare, residential and other markets
in both wired and wireless applications. 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 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 our DES and other related digital technologies. We are also committed to the
continual development of additional innovative, high quality, cost effective
technologies. We are currently, and intend to remain, a technology company.
Our 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). Content is
owned by third parties, such as movie studios, and will be paid for on a revenue
share basis when DES is deployed commercially. 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. 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. We are capable of providing a
wireless system and also offer a parallel system over wire using fiber
architectures. Our DES is available on either a Microsoft or Linux operating
system in a stand-alone set top box.
10
We intend to use our existing capital, together with proceeds from prospective
future financings, to continue deployment and sales of our DES. Management
estimates that minimum expenses during the next twelve months will be
approximately $2.6 million, consisting of $1.5 million in payroll and related
expenses including the hiring of additional personnel, approximately $140,000
for office rent, and approximately $440,000 for general and administrative
expenses including, office equipment and supplies, travel and conventions, legal
and accounting fees and approximately $300,000 for marketing and advertising
including personnel. Research and development expenses are estimated to be
approximately $220,000 during the next twelve months. These expenses will be
directed at further enhancements to our DES. We will also incur substantial
additional costs in connection with the manufacture and deployment of our 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 DES at no
initial 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. We do not presently 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 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 during our first
quarter of 2004 from our first installations started during the fourth 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.
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 a line of credit with Cornell Capital, L.P. 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 Partners, LP, a New Jersey-based domestic investment fund which, we
anticipate, will provide us with adequate working capital for at least the next
24 months. 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 up to four draws per month at a
maximum $250,000 per draw. The Company is required to file a registration
statement with the SEC 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.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.
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.
11
Liquidity and Capital Resources
During the three months ended July 31, 2003, our total current assets decreased
approximately $3,500 primarily from use of cash for operations. During the nine
months ended July 31, 2003 our total current assets decreased from approximately
$193,000 at October 31, 2002 to approximately $18,000 at July 31 2003, primarily
due to the increase in the allowance for bad debts of approximately $149,000
during the first quarter of 2003 as well as a decrease in cash of approximately
$23,000 due to operations. During the three months ended July 31, 2003, total
assets increased from approximately $111,000 to approximately $222,000. The
increase is primarily due to the Company using funds borrowed during the quarter
to make advance deposits on future borrowings. During the six months ended July
31, 2003, total assets decreased from approximately $281,000 to approximately
$222,000, which was primarily due to the increase in the allowance for bad debts
and the use of cash for operations combined with the increase in advance
deposits.
During the three months ended July 31, 2003, our total current liabilities
increased from approximately $2,926,000 to approximately $3,368,000. The
increase is attributed to the increase in notes payable of $300,000, an increase
in accrued interest of approximately $75,000 and an increase in accounts payable
and accrued liabilities of approximately $67,000. During the nine months ended
July 31, 2003, our total current liabilities increased from approximately
$2,157,000 to approximately $3,368,000. The increase is attributed to the
increase in notes payable of $790,000, an increase in accrued interest of
approximately $162,000 and an increase in accounts payable and accrued
liabilities of approximately $260,000.
During the three months ended July 31, 2003 our notes payable increased by
$300,000. These funds were borrowed from various individuals/entities and are
being used for general operational expenses. $60,000 of the total received this
quarter was received by the Company toward a note payable from our second
quarter totaling $150,000 ($90,000 was received during our second quarter). The
$150,000 note had the following additional terms. Demand for payment may be made
on one half of the principal no less than 360 days from signing and demand on
the second half may be made when we have secured and received a minimum of
$5,000,000 in debt or equity funding. The note also granted an option to
purchase 252,000 shares of Videolocity International, Inc. common stock at $0.20
per share, which expires one year from signing. The remaining $240,000 in new
notes payable originated during the three months ended July 31, 2003 mature six
months from signing and included the following additional provisions: 1) $50,000
of the total included an option to purchase 20,000 shares of Videolocity
International common stock at $0.50 per share 2) $50,000 of the total included
an option to purchase 40,000 shares of Videolocity International common stock at
$0.15 per share and is convertible at $0.15 per share 3) $25,000 of the total is
convertible into Videolocity International common stock at $0.20 per share .
To date, we have not realized revenues from our operations. For the three months
ended July 31, 2003, total expenses decreased approximately $271,000 or 42
percent as compared to the three months ended July 31, 2002. This is attributed
primarily to a 92 percent decrease in professional fees and consultants
expenses, a decrease in travel and conventions expense of approximately $25,000,
and a decrease in salaries, payroll taxes and employee benefits of approximately
$11,000. Management anticipates that as we scale up the installation of our DES,
our expenses will increase proportionately. Our plan of operation will depend on
our ability to raise substantial additional capital, of which there can be no
assurance.
Net Operating Loss
As of July 31, 2003, we have, together with our subsidiaries, accumulated a net
operating loss carryforward of approximately $6,145,000, with an operating loss
tax benefit of approximately $2,156,000. No tax benefit has been recorded in the
financial statements because the tax benefit has been fully offset by a
valuation reserve as the realization of the future tax benefit cannot be
established. 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.
12
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
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 we issued 950,000 shares of series A preferred stock for
the purchase of 5th Digit Technologies, LLC. During 2002, we exchanged 600,000
of the outstanding series A preferred shares for 180,000 shares of our common
stock. 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 continues in negotiations with the original holder of
the 350,000 preferred shares. Management does not believe that the final
settlement will have a material impact on our financial statements.
On August 26, 2002 our subsidiary, Healthcare Concierge Inc. filed an action in
the Third District Court of Salt Lake County, Utah against Merit Studios, Inc.
13
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. During June 2003 we received
notification of a summary judgment from the Third District Court of Salt Lake
County. The Court ordered that judgment be entered in the Company's favor
totaling approximately $673,000 which includes the original note receivable plus
accrued interest to date and some other small amounts. It was further ordered
that the judgment shall be augmented in the amount of reasonable costs and
attorney's fees in collecting the judgment.
We are engaged in various other lawsuits and claims, either as plaintiff or
defendant, in the normal course of business. In the opinion of management, based
upon advice of counsel, the ultimate outcome of these lawsuits will not have a
material impact on our financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended July 31, 2003, we issued an aggregate of 184,800
shares of common stock. Of the total shares issued, 177,500 shares were valued
at approximately $0.22 per share. The shares were issued to various individuals
as consideration for notes payable and bonus interest for extending the due date
of certain 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 7,300 shares to employees under the Videolocity, Inc. 2000 Stock
Incentive Plan. These shares were issued to five employees and were subject to a
registration statement filed with the SEC on July 31, 2001.
Item 3. Defaults Upon Senior Securities
On February 6, 2003 we received a formal notice of default from ISOZ, LC
regarding our $215,000 in notes payable to ISOZ, LC. As of September 9, 2003 we
are in default on notes payable due to ISOZ, LC. totaling $215,000 and accrued
interest of approximately $36,000.
As of July 31, 2003, the Company has notes payable totaling $2,639,800. The
notes payable have maturities or have been extended as follows: $20,000 matured
during October 2002, $315,000 matured during November 2002, $10,000 matured
during January 2003, $100,000 expired during June 2003, $1,404,800 matures
during August 2003, $125,000 matures during November 2003, $75,000 matures
during April 2004, $175,000 matures during June 2004, and $150,000 has no set
maturity date and is payable until paid in full. Additionally, as of July 31,
2003 approximately $265,000 of the total is callable by the lender when the
Company has received a minimum of five million in debt or equity funding. As of
September 9, 2003, the Company had a total of $1,849,800 in notes payable that
are past due and related accrued interest of approximately $272,000. The Company
is actively pursuing extensions on the notes payable.
Item 4. Submissions of Matters to a Vote of Security Holders
This Item is not applicable.
Item 5. Other Information
This Item is not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are included attached as exhibits to this
report.
14
Exhibit 31.1 Certification of CEO Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of CFO Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 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 32.2 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
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: September 22, 2003
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: September 22, 2003
15