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 January 31, 2004
[ ] 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 March 31, 2004
- -------------------------- ------------------------------------
Common Stock, 10,359,881
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.........................16
Item 3. Controls and Procedures...........................................................19
PART II
Item 1. Legal Proceedings.................................................................20
Item 2. Changes in Securities and Use of Proceeds.........................................20
Item 3. Defaults Upon Senior Securities...................................................20
Item 4. Submissions of Matters to a Vote of Security Holders..............................21
Item 5. Other Information.................................................................21
Item 6. Exhibits and Reports on Form 8-K..................................................21
Signatures........................................................................22
Videolocity International Inc. and Subsidiaries
-----------------------------------------------
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
January 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 19,117
Accounts receivable, net of allowance
for bad debts of $590,000 10,000
Other assets-advance deposits 107,441
-----------
Total current assets 136,558
PROPERTY AND Equipment, at cost, net 58,471
-----------
$ 195,029
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 263,395
Accrued liabilities 447,297
Accrued interest payable 431,797
Notes payable - related parties 260,000
Notes payable 2,559,800
-----------
Total current liabilities 3,962,289
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 50,000,000 shares
authorized, 7,082,196 issued and outstanding $ 7,082
Preferred stock, $0.001 par value; 1,000,000 shares
authorized none outstanding --
Additional paid-in capital 4,188,025
Deficit accumulated during the development stage (7,967,233)
-----------
Total stockholders' deficit (3,772,126)
-----------
$ 195,029
===========
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
Cumulative
From
May 26
Three Three 2000(inception)
m months ended months ended Through
January 31, January 31, January 31,
2004 2003 2004
----------- ----------- --------------
Revenue $ -- $ -- $ --
----------- ----------- -----------
Operating expenses
Salaries, payroll taxes and employee benefits 270,962 191,317 2,971,147
Professional fees and consultants 4,848 120,144 1,068,968
Directors compensation through stock incentive plan -- -- 95,000
Rent 16,000 13,000 224,305
Other 2,076 35,117 489,878
Technology development consulting 23,343 -- 398,817
Bad debts -- 149,000 590,000
Write off of goodwill -- -- 958,628
Utilities 2,443 10,608 71,720
Travel and conventions 835 10,404 166,844
Gain on transfer of license agreement -- -- (114,509)
Depreciation and amortization 6,324 6,163 125,028
----------- ----------- -----------
Total operating expenses 326,831 535,753 7,045,826
----------- ----------- -----------
Operating loss (326,831) (535,753) (7,045,826)
Interest and beneficial conversion (55,301) (170,652) (1,260,168)
Gain on sale of investment stock, net -- -- 338,049
Interest income -- -- 5,578
Minority interests -- -- (4,866)
----------- ----------- -----------
Loss before income taxes (382,132) (706,405) (7,967,233)
Income taxes -- -- --
----------- ----------- -----------
NET LOSS $ (382,132) $ (706,405) $(7,967,233)
=========== =========== ===========
Loss per common share
Basic and Diluted $ (0.06) $ (0.12)
Weighted-average shares outstanding
Basic and Diluted 6,371,785 5,908,822
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, 2002 and 2003
and for the three months ended January 31, 2004
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 incentive plans -- -- 504,539 505 453,637 --
Net loss for the year -- -- -- -- -- (3,086,210)
----------- ----------- ----------- ----------- ----------- -----------
(continued)
4
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, 2001,2002 and 2003
and for the three months ended January 31, 2004
Deficit
Accumulated
Preferred stock Common stock Additional during the
--------------------- -------------------------- paid-in Development
Shares Amount Shares Amount capital Stage
--------- --------- ----------- ----------- ----------- -----------
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 --
Services -- -- 16,000 16 944 --
Stock incentive plans -- -- 119,400 119 169,847 --
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
Net loss for the period -- -- -- -- -- (1,989,490)
--------- --------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 $ -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $ 7,585,101)
Balance at October 31, 2003 $ -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
Issuance of common stock for:
Stock incentive plans -- -- 735,200 735 104,965 --
Net loss for the period -- -- -- -- -- (382,132)
--------- --------- ----------- ----------- ----------- -----------
Balance at January 31, 2004 $ -- $ -- 7,082,196 $ 7,082 $ 4,188,025 $(7,967,233)
========= ========= =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
5
Videolocity International Inc. and Subsidiaries
-----------------------------------------------
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
For the three months ended May 26, 2000
January 31, (inception)
------------------------- Through
2004 2003 July 31,
2004
----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (382,132) $ (706,405) $(7,967,233)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- -- 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 6,324 6,163 125,033
Interest expense recognized on beneficial conversion -- 120,000 423,900
Issuance of common stock under stock plans 105,700 11,614 734,808
Issuance of common stock for services -- -- 465,832
Issuance of common stock for interest -- 8,400 290,891
Changes in assets and liabilities
Other assets (3,222) (14,452) (107,441)
Accounts payable and accrued liabilities 206,760 (9,996) 710,692
Accrued interest 55,302 41,002 431,797
----------- ----------- -----------
Total adjustments 370,864 311,731 4,176,448
----------- ----------- -----------
Net cash used in operating activities (11,268) (394,674) (3,790,785)
----------- ----------- -----------
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) (119,995)
----------- ----------- -----------
Net cash flows used in investing activities -- (1,931) (164,204)
----------- ----------- -----------
Cash flows from financing activities
Increase in notes payable 20,000 400,000 3,174,800
Proceeds from issuance of common stock -- -- 799,306
----------- ----------- -----------
Net cash provided by financing activities 20,000 400,000 3,974,106
----------- ----------- -----------
Net increase in cash 8,732 3,395 19,117
Cash at beginning of period 10,385 31,297 --
----------- ----------- -----------
Cash at end of period $ 19,117 $ 34,692 $ 19,117
=========== =========== ===========
The accompanying notes are an integral part of these statements
6
Videolocity International Inc. and Subsidiaries
-----------------------------------------------
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
For the three months ended May 26, 2000
January 31, (inception)
------------------------- Through
2004 2003 July 31,
2004
----------- ----------- -----------
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
7
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. as of January 31, 2004 and
for the three months ended January 31, 2004 and 2003 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, 2004 should be
read in conjunction with the Company's annual report on Form 10-KSB for the
fiscal year ended October 31, 2003. The results of operations for the three
months ended January 31, 2004 may not be indicative of the results that may be
expected for the year ending October 31, 2004.
NOTE C - ORGANIZATION AND BUSINESS ACTIVITY
We are 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 January 31, 2004, 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.
8
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE E - NET EARNINGS (LOSS) PER SHARE
Basic Earnings (Loss) 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 I
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 $130,000 for the Quarter ended January 31, 2004.
As of July 31, 2003, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $7,020,000 expiring through 2024.
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 $15,000 at January 31, 2004.
As of January 31, 2004, the Company has recorded an allowance for bad debt
totaling $590,000 against the note receivable. The Company started a legal
action against Merit Studios, Inc. toward collection of the note receivable.
On May 29, 2003, the Company was awarded a summary judgment against Merit
Studios, Inc. totaling approximately $673,000 plus reasonable costs and
attorneys fees to collect. (Note J)
NOTE H - NOTES PAYABLE
The Company originated approximately $20,000 in convertible non-interest bearing
notes payable during the three months ended January 31, 2004. The $20,000 is
convertible at $0.10 which was the fair market value at the date of origination.
At January 31, 2004, the Company has notes payable totaling $2,819,800 due to
various individuals and companies including $260,000 to current related parties
including Board of Directors and Management. Of the total, $1,849,800 is written
at 8 percent simple interest and $970,000 has no stated interest rate. Interest
has been imputed from the date of issuance on all non-interest bearing notes
payable. Of the total notes payable $1,097,800 is convertible at the option of
the debt holder at the following amounts: $177,800 is convertible at $1.00 per
share, $100,000 is convertible at $0.25 per share, $65,000 is convertible at
$0.22 per share, $675,000 is convertible at $0.20 per share, $60,000 is
convertible at $0.15 per share, and $20,000 is convertible at $0.10 per share.
The notes payable have maturities or have been extended as follows: $20,000
matured during October 2002, $435,000 matured during November 2002, $30,000
matured during January 2003, $100,000 matured during July 2003, $1,264,800
matured during August 2003, $75,000 matured during November 2003, $75,000
matures during April 2004, $175,000 matures during June 2005, $375,000 is
callable on demand when the Company has secured five million in new debt or
equity funding and $270,000 has no set maturity and is payable until paid in
full (Note O).
9
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company has granted options to purchase Company stock under certain of the
notes originated during 2003 in the following amounts: 20,000 shares at $0.50,
100,000 shares at $0.25, 302,000 shares at $0.20, and 40,000 shares at $0.15.
All options granted in conjunction with new notes payable were granted at or
above fair market value on the date the notes payable were originated.
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. The notes
payable under the UCC-1 have maturities or have been extended under the UCC-1 as
follows: $20,000 matured during October 2002, $435,000 matured during November
2002, $30,000 matured during January 2003 and $1,015,000 matured during August
2003. (Note O)
On February 6th, 2003 the Company received a formal notice of default from ISOZ,
LC regarding the $215,000 in notes payable to ISOZ, LC.
NOTE I - 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, 2004, the Company has
980,784 plan units that have been awarded under the plan. Of the total awarded,
896,284 plan units have met the vesting requirement and have been converted to
common stock and 84,500 plan units are subject to additional vesting
requirements. During the three months ended January 31, 2004 the Company issued
735,200 shares of common stock in exchange for vested plan units resulting in
compensation expense of approximately $104,965.
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 Board of Directors approved 30,000 shares for
issuance to consultants of the Company under the plan during the three months
ended January 31, 2004 but to date have not issued the shares. The Company has
issued a total of 467,855 shares under the Plan.
Additionally, during December 2003, as an incentive and to retain current key
individuals, the Board of Directors approved a total of 9,200,000 options to
purchase stock outside of the plans to employees and directors that vest at
various times through FY 2004. The options were issued pursuant to the Restated
Articles of Incorporation approved by a majority of the stockholders on November
15, 2000. The Restated Articles of Incorporation authorizes the Board of
Directors to issue, from time to time, without any vote or other action by the
stockholders, of any or all shares of the Corporation of any class at any time
authorized, and any securities convertible into or exchangeable for such shares,
10
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE I - STOCK INCENTIVE PLANS (continued)
in each case to such persons and for such consideration and on such terms as the
Board of Directors from time to time in its discretion lawfully may determine,
provided that the consideration for the issuance of shares of stock of the
corporation having par value shall not be less than such par value.
Stock-based compensation costs- SFAS No. 123, "Accounting for Stock-Based
Compensation," establishes accounting and reporting standards for stock-based
employee compensation plans. As permitted by SFAS No. 123, the Company accounts
for such arrangements under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recognized for stock option grants
because the exercise price of the stock options equals the market price of the
underlying stock on the date of grant for employees and directors.
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," requires disclosure in interim statements of the proforma effect on
net income (loss) and earnings (loss) per share as if the Company had applied
the fair value recognition provision of SFAS No. 123 to stock-based
compensation. This disclosure is presented in the accompanying table.
Three months Three months
ended ended
January 31, January 31,
2004 2003
------------- ------------
Net earnings (loss):
As reported $( 382,132) $( 706,405)
Proforma $( 477,293) $( 706,405)
Basic earnings (loss) per share:
As reported $(0.06) $(0.12)
Pro forma $(0.08) $(0.12)
Diluted earnings (loss) per share:
As reported $(0.06) $(0.12)
Pro forma $(0.08) $(0.12)
For purposes of pro forma disclosures, the estimated fair value of the stock
option is amortized to expense over the option's vesting period. The
weighted-average fair value of stock options granted was $0.13 for the three
months ended January 31, 2004. The fair value of these stock options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
For the three months ended
--------------------------
January 31, January 31,
2004 2003
----------- -----------
Risk-free interest rate 2.5% 3.6%
Dividend yield 0% 0%
Volatility factor .59 .59
Expected option term life in years 2.5 2.1
11
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE I - STOCK INCENTIVE PLANS (continued)
The following table summarizes stock option activity for the three months ended
January 31, 2004:
Shares subject Weighted-average
(In thousands, except per share amounts) to options exercise price
-------------- ----------------
OMITTED] Outstanding at October 31, 2003 94,700 $ 1.04
Granted 9,955,000 $ 0.13
Exercised (735,200) $ 0.14
Forfeited (-) $ -
-------------- ----------------
Outstanding at January 31, 2004 9,314,500 $ 0.14
-------------- ----------------
Exercisable at October 31, 2003 - $ -
Exercisable at January 31, 2004 1,900,000 $ 0.13
-------------- ----------------
Options outstanding at January 31, 2004 had a weighted-average remaining
contractual life of 4.9 years and exercise prices ranging from $0.13 to $1.50
per share.
NOTE J - COMMITMENTS AND CONTINGENCIES
Note Receivable
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
Redeemable Preferred Stock
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 (Note O).
12
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE J - COMMITMENTS AND CONTINGENCIES (continued)
Promissory Loan Agreement
On June 2, 2003, the Company signed a ten percent simple interest promissory
note with an unrelated privately held Company where the privately held Company
was to provide $5,000,000 in operating funds to the Company. The terms of the
note provided that the Company pay a two percent fee totaling $100,000 for
arranging the loan. Terms of repayment included interest on a quarterly basis
and the balance of the note at the end of thirty-six months. Additionally, the
privately held Company would receive one seat on the Board of Directors until
such time as the promissory note was paid in full.
After weeks of delays and promises regarding funding, the privately held Company
signed an addendum to the original note promising funding of the note by
September 19, 2003. When the funding was not met according to the addendum, the
privately held Company signed a second addendum promising funding of the note by
November 10, 2003. After months of delays, and the privately held Company not
fulfilling the terms of the original agreement and/or the signed addendums the
Company filed a multi count civil complaint against the privately held company.
The $100,000 fee is included in advance deposits at January 31, 2004 pending
outcome of the complaint. Management, based on the advice of legal counsel,
believes that at a minimum the $100,000 is recoverable in its action against the
privately held company (Note O).
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 the Company's financial position or results of operations.
NOTE K - 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, we are 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. We are 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 L - 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 $73,000 due to directors. As of January 31, 2004,
Directors and Executive Officers of the Company hold approximately 18 percent of
the outstanding shares.
13
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE M - 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 N - 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. The Company's product
is ready for immediate deployment, although the Company needs to obtain capital,
either long-term debt or equity to continue the implementation of its overall
business plan. 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 O - SUBSEQUENT EVENTS
Notes Payable
As of March 31, 2004 approximately $1,924,800 of notes payable are past due.
Management is currently in discussions with certain note holders pursuing
extensions and/or conversions. During March 2004, $1,050,000 of notes payable
were converted to approximately 4,701,000 shares of common stock.
Operating lease
During February 2004, the Company signed an operating lease agreement totaling
approximately $989,000 which includes approximately $632,000 in equipment and
approximately $357,000 in operating capital. The lease terms require
approximately $25,000 in monthly payments over a four year term. The lease was
guaranteed by an unrelated privately held Company. The privately held Company
was granted 1,000,000 options to purchase common stock at $0.20 per share that
expire February 4, 2006. Additionally, if the Company's outstanding shares
surpass 20,000,000 prior to February 4, 2006, the privately held Company will be
granted additional options at the then current market price to purchase shares
equal to 2.5 percent of the then outstanding shares of the Company.
14
Videolocity International Inc. and Subsidiaries
(A development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE O - SUBSEQUENT EVENTS (continued)
Reedemable Preferred Shares
On March 15, 2004, we reached a settlement agreement on the redeemable preferred
stock referred to in Note J. The settlement agreement includes the Company
issuing 80,000 shares of common stock and a total payments of $70,000 payable as
follows: $10,000 at execution of the agreement and $5,000 per month beginning
May 1, 2004 and continuing until paid in full.
Promissory Loan Agreement (Note J)
The privately held company filed a motion with the Court to dismiss the
complaints filed by the Company. This motion to dismiss was denied by the Court
on March 12, 2004.
15
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 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.
16
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 can 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.
We intend to use our existing capital, together with proceeds from prospective
future financings, to continue marketing and deployment of our DES. Management
estimates that minimum expenses during the next twelve months will be
approximately $2.6 million, consisting of $1.45 million in payroll, payroll
taxes, employee health insurance and other related employee costs including the
hiring of additional personnel, $160,000 for office rent, utilities, and related
costs, and $310,000 for marketing and related expenses, and $330,000 for general
and administrative expenses including legal and accounting fees. Research and
development expenses are estimated to be a minimum of approximately $350,000
during the next twelve months. These expenses will be directed at further
development of the DES integration into television sets, other monitors and
usage of our intellectual property into new products. 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
from future long-term lease 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 third
quarter of 2004 from our first installations started during the second quarter
of 2004, 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.
17
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 $15 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 we may make up to four draws per month at a maximum
$250,000 per draw. We are 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. We are currently
working toward completion of the registration. The purchase price of the shares
will be 95% of the lowest closing bid price of our common stock during the five
consecutive trading days immediately following receipt of notice of our intent
to make a draw. In addition to the shares to be issued under the Equity Line, we
will include in our 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.
Liquidity and Capital Resources
During the three months ended January 31, 2004, our total current assets
increased approximately $12,000 and total assets increased from approximately
$189,000 to approximately $195,000. The increase is primarily due to borrowing
funds during the quarter.
During the three months ended January 31, 2004, our total current liabilities
increased from approximately $3,680,000 to approximately $3,962,000. The
increase is attributed to the increase in notes payable of $20,000, an increase
in accrued interest of approximately $55,000 and an increase in accounts payable
and accrued liabilities of approximately $207,000.
During the three months ended January 31, 2004 our notes payable increased by
$20,000. These funds were borrowed from an individual and are being used for
general operational expenses. The $20,000 note is convertible at $0.10 per share
which was the market value of our common stock on the day of issuance. The note
has no set maturity date and is payable until paid in full.
To date, we have not realized revenues from our operations. For the three months
ended January 31, 2004, total expenses decreased approximately $324,000 or
approximately 46% as compared to the three months ended January 31, 2003. This
is attributed primarily to a $149,000 decrease in provision for bad debts, and a
decrease in interest expense and beneficial conversion of approximately
$115,000. Interest expense for the period ended January 31, 2003 included a
beneficial conversion feature totaling approximately $120,000. 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.
18
Net Operating Loss
As of January 31, 2004, we have, together with our subsidiaries, accumulated a
net operating loss carryforward of approximately $7,020,000, with an operating
loss tax benefit of approximately $2,457,000. 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 2024.
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
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective to cause the material information required to be
disclosed by us in the reports that we file or submit under the Exchange Act to
be recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There have been no significant changes
in our internal controls or in other factors which could significantly affect
internal controls subsequent to the date we carried out our evaluation.
19
PART II
Item 1. Legal Proceedings
During December 2000 we issued 950,000 shares of preferred stock for the
purchase of 5th Digit Technologies, LLC. During 2002, we exchanged 180,000
shares of our common stock for 600,000 shares of the preferred 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.
On March 15, 2004, we reached a settlement agreement which includes our issuing
80,000 shares of common stock and payments totaling $70,000 payable as follows:
$10,000 at execution of the agreement and $5,000 per month beginning May 1, 2004
and continuing until paid in full.
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.
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 our 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 January 31, 2004, we issued an aggregate of
735,200 shares of common stock to employees and consultants under the
Videolocity, Inc. 2000 Stock Incentive Plan. These shares 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 $43,000.
The notes payable have maturities or have been extended as follows: $20,000
matured during October 2002, $435,000 matured during November 2002, $30,000
matured during January 2003, $100,000 matured during July 2003, $1,264,800
matured during August 2003, $75,000 matured during November 2003, $75,000
matures during April 2004, $175,000 matures during June 2005, $375,000 is
callable on demand when we have secured five million in new debt or equity
funding and $270,000 has no set maturity and is payable until paid in full.
20
As of March 31, 2004, we had a total of $1,924,800 in notes payable that are
past due and related accrued interest of approximately $343,000. We are actively
pursuing extensions and/or conversions 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.
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
On March 5, 2004, our Board of Directors met and unanimously approved a
resolution to dismiss Andersen Andersen & Strong, L.C. from its position as our
independent certifying accountants.
The audit report of Andersen Andersen & Strong, L.C. for the year ended October
31, 2002, contained a modification expressing substantial doubt as our ability
to continue as a going concern. The audit report contained no other adverse
opinion, disclaimer of opinion or modification as to uncertainty, audit scope or
accounting principle. In connection with its audits for the past two fiscal
years and review of unaudited financial statements through July 31, 2003, and
through the date of dismissal on March 5, 2004, there have been no disagreements
with Andersen Andersen & Strong L.C. on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which if not resolved to the satisfaction of Andersen Anderson & Strong L.C.,
would have caused them to make reference thereto on the financial statements.
Also on March 5, 2004, our Board of Directors unanimously approved a resolution
to engage Madsen & Associates, CPAs, Inc. to audit our financial statements for
the year ended October 31, 2003. During the two most recent fiscal years and
through March 5, 2004, we have not consulted with Madsen & Associates regarding
(i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the our financial statements, and no written report or oral advice was provided
to us by concluding there was an important factor to be considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue;
or (ii) any matter was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions
thereto, or a reportable event, as set forth in Item 304(a)(1)(iv) of Regulation
S-B.
21
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: April 9, 2004
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: April 9, 2004
22