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, 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.)
1762A 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 17, 2004
- -------------------------- ------------------------------------
Common Stock, 15,503,298
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........ 18
Item 3. Controls and Procedures.......................................... 22
PART II
Item 1. Legal Proceedings................................................ 22
Item 2. Changes in Securities and Use of Proceeds........................ 22
Item 3. Defaults Upon Senior Securities.................................. 23
Item 4. Submissions of Matters to a Vote of Security Holders............. 24
Item 5. Other Information................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................. 24
Signatures....................................................... 25
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
July 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 262,452
Accounts receivable, net of allowance
for bad debts of $590,000 10,000
Other assets 166,663
-----------
Total current assets 439,115
Property and equipment, at cost, net 672,281
Other assets 23,836
-----------
$ 1,135,232
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 285,839
Accrued liabilities 394,590
Accrued interest payable 234,532
Notes payable - related parties 125,000
Notes payable 1,914,800
Current portion of long term obligations 218,117
-----------
Total current liabilities 3,172,878
Long term obligations less current portion 659,519
Compensation debenture 390,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 50,000,000 shares
authorized, 15,123,863 issued and outstanding 15,124
Preferred stock, $0.001 par value; 1,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,097,989
Deficit accumulated during the development stage (9,205,144)
-----------
Total stockholders' deficit (3,092,031)
-----------
$ 1,135,232
===========
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 Three months ended From
July 31, July 31, May 26, 2000
---------------------------- ---------------------------- through
2004 2003 2004 2003 July 31, 2004
------------ ------------ ------------ ------------ ------------
Revenue $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Operating expenses
Salaries, payroll taxes, and employee benefits 198,165 187,454 662,854 580,927 3,363,039
Professional fees and consultants 62,107 15,298 95,271 174,598 1,159,391
Technology development consulting 138,962 34,676 191,899 92,807 567,373
Directors compensation through stock plan -- -- -- -- 95,000
Rent 8,000 12,000 32,000 33,000 240,305
Provision for bad debts -- -- -- 149,000 590,000
Travel and conventions 17,614 -- 24,557 14,991 190,566
Depreciation and amortization 6,324 6,324 18,970 18,971 137,675
Utilities 5,522 2,923 16,182 15,734 85,458
Gain on transfer of license agreements -- -- -- -- (114,509)
Write off of goodwill -- -- -- -- 958,628
Other 15,012 5,420 35,669 76,529 523,471
------------ ------------ ------------ ------------ ------------
451,706 264,095 1,077,402 1,156,557 7,796,397
============ ============ ============ ============ ============
Operating loss (451,706) (264,095) (1,077,402) (1,156,557) (7,796,397)
Interest income -- -- -- -- 5,578
Legal Settlement -- -- (97,400) -- (97,400)
Gain on sale of stock, net -- -- -- -- 338,049
Interest and beneficial conversion expense (179,010) (113,844) (376,121) (345,462) (1,580,988)
Expense for stock options on guarantee -- -- (69,120) -- (69,120)
Minority interests -- -- -- -- (4,866)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (630,716) (377,939) (1,620,043) (1,502,019) (9,205,144)
Income taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS (630,716) (377,939) (1,620,043) (1,502,019) (9,205,144)
============ ============ ============ ============ ============
Loss per common share
Basic and Diluted $ (0.04) $ (0.06) $ (0.16) $ (0.25)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 15,081,896 6,138,379 10,348,539 5,994,345
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 nine months ended July 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)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2002 -- -- 5,876,596 5,877 3,709,355 (5,595,611)
(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 nine months ended July 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)
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)
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 611,500 612 128,089 --
Services -- -- 300,000 300 59,700 --
Stock incentive plans -- -- 10,200 10 11,440 --
Legal settlement -- -- 80,000 80 22,320 --
Private placement -- -- 500,000 500 224,500 --
Conversion of debt -- -- 6,429,056 6,429 1,580,851 --
Issuance of stock options for guarantee -- -- -- -- 69,120 --
Net loss for the period -- -- -- -- -- (607,195)
--------- ---------- ----------- ----------- ----------- -----------
Balance at April 30, 2004 $ -- $ -- 15,012,952 $ 15,013 $ 6,284,045 $(8,574,428)
Issuance of common stock for:
Services -- -- 98,611 99 13,401 --
Stock incentive plans -- -- 12,300 12 13,838 --
Issuance of stock options for services
and loans -- -- -- -- 176,705 --
Fees related to equity distribution
Agreement -- -- -- -- (390,000) --
Net loss for the period -- -- -- -- -- (630,716)
--------- ---------- ----------- ----------- ----------- -----------
Balance at July 31, 2004 $ -- $ -- 15,123,863 $ 15,124 $ 6,097,989 $(9,205,144)
========= ========== =========== =========== =========== ===========
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 nine months ended May 26, 2000
July 31, (inception)
-------------------------- Through
2004 2003 July 31, 2004
----------- ----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $(1,620,043) $(1,502,019) $(9,205,144)
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 18,970 18,971 137,679
Interest expense recognized on beneficial conversion -- 120,000 423,900
Issuance of common stock under stock plans 131,000 28,115 759,671
Issuance of common stock for services 73,500 -- 539,769
Issuance of common stock for interest 128,701 83,249 419,592
Options issued on guarantee, services, and loans 245,825 -- 245,825
Issuance of common stock for legal settlement 22,400 -- 22,400
Changes in assets and liabilities
Other assets (86,280) (130,258) (190,499)
Accounts payable and accrued liabilities 176,497 259,954 680,429
Accrued interest 75,317 161,631 451,812
----------- ----------- -----------
Total adjustments 785,930 690,662 4,591,514
----------- ----------- -----------
Net cash used in operating activities (834,113) (811,357) (4,613,630)
----------- ----------- -----------
Net cash flows from investing activities -
Investment stock and licenses, net -- -- 555,791
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment (20,383) (1,931) (140,378)
----------- ----------- -----------
Net cash flows used in investing activities (20,383) (1,931) (184,587)
----------- ----------- -----------
Cash flows from financing activities
Increase in notes payable 610,000 790,000 3,764,800
Proceeds from lease 357,000 -- 357,000
Payments on lease (85,437) -- (85,437)
Proceeds from issuance of common stock 225,000 -- 1,024,306
----------- ----------- -----------
Net cash provided by financing activities 1,106,563 790,000 5,060,669
----------- ----------- -----------
Net increase (decrease) in cash 252,067 (23,288) 262,452
Cash at beginning of period 10,385 31,297 --
----------- ----------- -----------
Cash at end of period $ 262,452 $ 8,009 $ 262,452
=========== =========== ===========
The accompanying notes are an integral part of these statements.
6
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
- ------------------------------------------
During the nine months ended July 31, 2004 the Company entered into a capital
lease that resulted in an increase of property and equipment totaling $606,073.
Additionally, the Company converted $1,370,000 of notes payable and $217,280 of
accrued interest payable into common stock. During the three months ended July
31, 2004, the company issued a convertible compensation debenture totaling
$390,000 in exchange for fees related to an equity distribution agreement.
The accompanying notes are an integral part of these statements.
7
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. (the Company) as of July 31,
2004 and for the three and nine months ended July 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 and nine months ended July 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 and nine months ended July 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
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, residences, and condominiums.
At July 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 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 J, K, L,
and N 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 $223,000 for the three months ended July 31, 2004
(563,000 for the nine months ended July 31, 2004).
As of July 31, 2004, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $8,154,000 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 July 31, 2004. As
of April 30, 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 M)
NOTE H - OTHER ASSETS
At July 31, 2004, other assets consisted of the following:
Non trade receivables $ 6,663
Prepaid services 60,000
Promissory loan fee (Note M) 100,000
------------
$ 166,663
============
Long term other assets consists of a deposit required under a capital lease
totaling $23,836.
9
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - PROPERTY AND EQUIPMENT
At July 31, 2004, property and equipment and estimated useful lives consist of
the following:
Amount Years
---------- ---------
Equipment $ 140,379 3-5
Equipment under capital lease 606,073 3-5
----------
746,452
Less accumulated depreciation
and amortization 74,171
----------
$ 672,281
==========
NOTE J - NOTES PAYABLE
The Company originated approximately $460,000 in non-interest bearing notes
payable during the three months ended July 31, 2004. Of the total, $60,000
($10,000 of which was received by the Company as of July 31, 2004) is
convertible at $0.72 per share and the holder was granted the option to purchase
120,000 shares of Videolocity common stock at $0.72 through the second
anniversary of the agreement. The remaining $400,000 was issued with the option
to purchase 400,000 shares of Videolocity common stock at $0.77 per share
through the third anniversary of the agreement. The $400,000 promissory note is
payable on demand five days after the Company has secured and received a minimum
of one million in debt or equity funding. The value of the options granted is
based on the fair value at the date of grant calculated using the Black-Scholes
option-pricing model. Expense was recognized at the time the options become
exercisable.
At July 31, 2004 the Company has notes payable totaling $2,039,800 due to
various individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $1,264,800 is written
at 8 percent simple interest and $775,000 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 $602,800 is convertible at the option of the
debt holder in the following amounts: $177,800 is convertible at $1.00 per
share, $10,000 is convertible at $0.72 per share, $85,000 is convertible at
$0.30 per share, $80,000 is convertible at $0.25 per share, $65,000 is
convertible at $0.22 per share, $125,000 is convertible at $0.20 per share,
$60,000 is convertible at $0.15 per share. The notes payable have maturities as
follows: $20,000 matured during October 2002, $435,000 matured during November
2002, $30,000 matured during January 2003, $729,800 matured during August 2003,
$25,000 matured during November 2003, $690,000 is callable on demand when the
Company has secured between $1 million and $5 million in new debt or equity
funding, $10,000 is due December 2004, and $100,000 has no set maturity and is
payable until paid in full (Note R).
10
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - NOTES PAYABLE (continued)
The Company has outstanding options to purchase Company stock under certain of
the notes originated in the following amounts: 400,000 shares at $0.77, 120,000
shares at $0.72, 20,000 shares at $0.50, 100,000 shares at $0.25, 302,000 shares
at $0.20. 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.
Where necessary, the value of the options granted is based on the fair value at
the date of grant calculated using the Black-Scholes option-pricing model.
Expense is recognized at the time the options become exercisable.
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. During the
nine months ended July 31, 2004, the Company converted a total of $535,000 of
notes payable under the UCC-1 into common stock of the Company including
$100,000 to current related parties. As of July 31, 2004 there remains a total
of $965,000 of notes payable under the UCC-1. The notes payable under the UCC-1
have maturities 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
$480,000 matured during August 2003 (Note R).
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 K - LONG TERM OBLIGATIONS
During February 2004, the Company signed a lease agreement that included
approximately $606,000 in equipment and approximately $357,000 in operating
capital. The lease terms require approximately $24,000 in monthly payments over
a 48 month 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. Expense recognized for the period ended April
30, 2004 related to these options totaled $69,120. The equipment was recorded as
equipment under capital leases.
The following is a schedule by year of future minimum payments under long term
obligations, together with the present value of the net payments as of July 31,
2004:
Equipment Cash Total
---------- ---------- ----------
2004 $ 45,003 $ 26,508 $ 71,511
2005 180,011 106,033 286,044
2006 180,011 106,033 286,044
2007 180,011 106,033 286,044
2008 60,004 35,344 95,348
---------- ---------- ----------
Total minimum payments 645,040 379,951 1,024,991
Less amount representing interest 92,734 54,621 147,355
---------- ---------- ----------
Present value of net minimum payments 552,306 325,330 877,636
Less current portion 137,261 80,856 218,117
---------- ---------- ----------
Long-term portion $ 415,045 $ 244,474 $ 659,519
========== ========== ==========
11
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - 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, 2004, the Company has 978,384
plan units that have been awarded under the plan. Of the total awarded, 918,784
plan units have met the vesting requirement and have been converted to common
stock and 59,600 plan units are subject to additional vesting requirements.
During the three months ended July 31, 2004 the Company issued 12,300 shares of
common stock in exchange for vested plan units resulting in compensation expense
of approximately $13,850.
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. During the first quarter of 2004, the Board of Directors
approved 30,000 shares for issuance to consultants of the Company under the plan
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,
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.
12
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK INCENTIVE PLANS (continued)
Three months Three months Nine months Nine months
ended ended ended ended
July 31, July 31, July 31, July 31,
2004 2003 2004 2003
------------- ------------ ------------- ------------
Net earnings (loss):
As reported $( 652,382) $( 377,939) $ (1,641,709) $(1,502,019)
Proforma $( 816,198) $( 377,939) $ (2,236,145) $(1,502,019)
Basic earnings (loss) per share:
As reported $(0.04) $(0.06) $(0.16) $(0.25)
Pro forma $(0.05) $(0.06) $(0.22) $(0.25)
Diluted earnings (loss) per share:
As reported $(0.04) $(0.06) $(0.16) $(0.25)
Pro forma $(0.05) $(0.06) $(0.22) $(0.25)
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 shares
granted during the nine months ended July 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 nine months ended
-------------------------
July 31, July 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
The following table summarizes stock option activity for the nine months ended
July 31, 2004:
13
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK INCENTIVE PLANS (continued)
Shares subject Weighted-average
to options exercise price
Shares subject Weighted-average
to options exercise price
- ------------------------------- ------------------- -------------------
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
Granted - $ -
Exercised (10,200) $ 1.12
Forfeited (-) $ -
- ------------------------------- ------------------- -------------------
Outstanding at April 30, 2004 9,304,300 $ 0.14
Granted - $ -
Exercised (12,300) $ 1.12
Forfeited (2,400) $ -
- ------------------------------- ------------------- -------------------
Outstanding at July 31, 2004 9,289,600 $ 0.14
- ------------------------------- ------------------- -------------------
Exercisable at April 30, 2004 9,200,000 $ 0.13
- ------------------------------- ------------------- -------------------
Options outstanding at January 31, 2004 had a weighted-average remaining
contractual life of 4.4 years and exercise prices ranging from $0.13 to $1.50
per share.
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company is engaged in various 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 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 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
14
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES (continued)
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. On March 15, 2004, the Company reached a settlement
agreement on the redeemable preferred stock. The settlement agreement included
the Company issuing 80,000 shares of common stock and 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. As of July 31.2004 the
Company has a remaining balance on the settlement of $40,000.
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 other assets at July 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. 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.
NOTE N - STANDBY EQUITY DISTRIBUTION AGREEMENT AND COMPENSATION DEBENTURE
The Company entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners, LP, a New Jersey-based domestic investment fund. The agreement
was completed in May 2004. Pursuant to the terms of the funding agreement with
Cornell Capital, Videolocity has the right, but not the obligation, to require
Cornell Capital to purchase shares of the company's common stock in amounts up
to $350,000 per drawdown and up to $1 million per month to a maximum of $20
15
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - STANDBY EQUITY DISTRIBUTION AGREEMENT AND COMPENSATION DEBENTURE
(continued)
million over the 24 months following the effective date. The effective date of
the agreement is the date that the Securities and Exchange Commission first
declares a registration statement effective registering the resale of the
securities. The drawdowns are subject to an effective registration statement
with the United States Securities and Exchange Commission covering the resale of
the shares. The equity drawdowns are entirely at Videolocity's discretion and
the agreement does not require minimum drawdowns. The Company filed a SB-2 on
July 9, 2004 to register shares pursuant to the agreement. The SB-2 was declared
effective by the Securities and Exchange Commission on July 22, 2004.
As consideration for Cornell to enter into the agreement, the Company issued a
$390,000, 5% convertible debenture. The principal and interest are due during
May 2007. At the Company's option, the principal and interest due can be repaid
or converted to common stock at a rate of 250% of the current closing bid price
of the common stock as listed on a principal market as quoted by Bloomberg L.P.
or 100% of the lowest closing bid price of the Company's common stock for the
three trading days immediately preceding the conversion date. At the holder's
option, they may convert to the Company's stock until paid in full. The Company
may redeem all or a portion of the outstanding principal at a redemption price
of 120% multiplied by the portion of the principal sum being redeemed plus any
accrued and unpaid interest.
NOTE O - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Current officers and directors have made 8.0 percent loans to the Company
totaling approximately $125,000. Additionally, the Company has accounts payable
totaling approximately $58,000 due to a director. As of July 31, 2004, Directors
and Executive Officers of the Company hold approximately 14 percent of the
outstanding shares.
NOTE P - 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 Q - 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 R - SUBSEQUENT EVENTS
Notes Payable
As of September 13, 2004 approximately $1,239,800 of notes payable are past due.
Management is currently in discussions with certain note holders pursuing
extensions and/or conversions.
16
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby Equity Distribution Agreement
During September 2004, the Company drew down $40,000 on our Standby Equity
Distribution Agreement which resulted in the Company issuing 140,746 shares of
common stock.
17
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 technology company that is committed to continued
development and marketing of innovative, high quality, cost effective systems to
build future ongoing revenue streams. We are currently, and intend to remain a
technology company. We have developed proprietary technologies that reduce
bandwidth requirements for numerous applications of digital content. We are
currently using advanced proprietary technologies to transmit streaming video at
speeds of 1Mbps or less. We have the technological capacity to enter into a
variety of markets that include hospitality, healthcare, residential, security
and corporate training with currently developed technologies.
To date we have been focused on the acquisition and development of our
proprietary technologies. Our current business strategy is to continue with
development of additional technologies as well as enhancements to our current
proprietary technologies to further enable their use in other markets. We also
intend to actively market our first product, the Videolocity Digital
Entertainment System(TM) (DES(TM)) in the hospitality, healthcare, residential,
and other similar markets in both wired and wireless applications. 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, Mexico and the
Caribbean. However, as we expand operations we fully intend to operate and
market our products wherever prudent, including internationally. We operate our
business through five subsidiaries that perform various functions strategic to
their market place or core competency.
18
We have started to actively market our Digital Entertainment System(TM)
(DES(TM)). DES(TM) is a complete digital entertainment system using our
proprietary technologies to deliver video on demand streaming at 1Mbps or less,
full screen, in like DVD quality. In addition to video content viewing, DES(TM)
provides high-speed Internet access, digital music on demand, games, full Web
surfing and a variety of e-commerce applications as well as customer specific
informational and educational content. The Videolocity DES(TM) can be deployed
in closed network environments such as hotels, timeshare condominiums,
hospitals, and assisted living facilities, or over wide area networks serving
intelligent communities, residences and personal digital assistants (PDAs). The
Videolocity DES(TM) is currently available using Wireless 802.11 WAN/LAN, Fiber,
Satellite, Ethernet or DSL network architectures. We tailor the user interface
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(TM) is available on either a
Microsoft or Linux operating system in a stand-alone set top box. The flexible,
highly customizable and fully scalable delivery platforms combined with advanced
embedded software applications allow for full remote system upgrades and easy
updates of content and/or system enhancements. Our DES(TM) 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. Content is owned by third parties, such as movie studios, and will be
paid for on a revenue share basis when DES(TM) is deployed and operating
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 have started deploying our DES(TM) into signed contracts.
We intend to use our existing capital, together with proceeds from prospective
future financings, to continue marketing and deployment of our DES and to fund
development of new technologies and enhancements of existing proprietary
technologies. Management estimates that minimum expenses to carry out our
business plan 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. 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.
19
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(TM).
Management believes that we will begin to realize revenues during our fourth
quarter of 2004 from our first installations started during the third 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.
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(TM). As of the date hereof, we have not
formalized any new funding except for a Standby Equity Distribution Agreement
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.
During May we entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners, LP, a New Jersey-based domestic investment fund. We anticipate
that this agreement will provide us with adequate working capital for at least
the next 24 months. Under the equity distribution agreement, 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 million over a 24-month
period. There is no minimum draw down although we may draw-down up to four times
per month at a maximum $350,000 per draw and a maximum of $1 million per month.
The draw-downs are subject to an effective registration statement with the
United States Securities and Exchange Commission covering the resale of the
shares. The 24-month term commences on the effective date of the registration
statement. The registration statement was declared effective by the Securities
and Exchange Commission on July 22, 2004. The purchase price of the shares will
be 98% 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.
Without drawing against the standby equity distribution agreement 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 operations 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 July 31, 2004, our total current assets increased
approximately $3,800 and total assets increased approximately $18,000 from
approximately $1,117,000 to approximately $1,135,000. The increase in current
assets is primarily due to our receiving operating capital from $410,000 in new
notes payable less operational expenses for the quarter. The increase in the
remaining assets is due to approximately 23,000 in equipment purchases.
20
During the three months ended July 31, 2004, total current liabilities increased
from approximately $2,691,000 to approximately $3,173,000. This net increase
totaling approximately $482,000 to our current liabilities is attributed
primarily to $410,000 of new notes payable. Accrued expenses and accounts
payable combined increased by approximately $38,000 and accrued interest
increased by approximately $31,000 during the three months ended July 31, 2004.
Long term liabilities were increased by $390,000 with the issuance of a
debenture as compensation for the signing of a $20 million Standby Equity
Distribution Agreement.
A total of $460,000 in non-interest bearing notes payable was originated during
the three months ended July 31, 2004, of which, $410,000 of the total was
received during the three months ended July 31, 2004. The total amount borrowed
is being used for general operational expenses. $10,000 of the new notes payable
is convertible at $0.72 per share which was the market value of our common stock
on the date of origination. $60,000 of the notes are payable during December
2004 and the remainder of the notes have no set maturity date and are payable
until paid in full or when the Company receives $1 million in debt or equity
funding. Interest has been imputed on all non-interest bearing notes payable
from date of origination.
Results of Operations
To date, we have not realized revenues from our operations. For the three months
ended July 31, 2004, operational expenses increased approximately $188,000, or
approximately 71%, as compared to the three months ended July 31, 2003. This is
attributed primarily to an increase in consulting expenses of approximately
$104,000, due to working on enhancements of our existing technologies, and to
consultants hired in conjunction with our initial installation of DES(TM). Also
contributing to the increase in expenses was an increase in professional fees of
approximately $47,000, resulting from increased legal and accounting fees
associated with filing a registration statement on our standby equity
distribution agreement, and working with a consultant for additional content for
our DES(TM). We also had an increase in our non operating expenses of
approximately $65,000, which included additional interest expense recorded for
the issuance of detachable options with notes payable combined with interest
from a capital lease and compensation debenture that the Company did not have in
the prior year.
For the nine months ended July 31, 2004, operational expenses decreased
approximately $79,000, or approximately 7%, as compared to the nine months ended
July 31, 2003. This is attributed primarily to a decrease in consulting expenses
of approximately $79,000, as management of the company internalized certain
functions to reduce professional fees, and a decrease in provision for bad debts
of $149,000. Professional fees and consultant expenses were higher in the three
months ended July 31, 2004, even though they decreased substantially in the nine
months ended July 31, 2004 as compared to the nine months ended July 31, 2003.
The increase in the third quarter was related to additional fees incurred for
filing a registration statement. The decreases were off-set by increases to
technology consulting of approximately $99,000 from enhancements being made to
our existing technologies, and consultants hired in combination with our initial
installation of DES(TM). We also had an increase in our non operating expenses
of approximately $197,000 during the nine months ended July 31, 2004 as compared
to the nine months ended July 31, 2003. The increase was primarily due to
expenses related to a legal settlement and expenses related to issuance of
options for a guarantee of our capital lease by a unrelated company.
Management anticipates that as we scale up the installation of our DES(TM), 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
21
Net Operating Loss
As of April 30, 2004, we have, together with our subsidiaries, accumulated a net
operating loss carryforward of approximately $8,154,000, with an operating loss
tax benefit of approximately $3,041,000. 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.
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 included our issuing
80,000 shares of common stock and payments totaling $70,000 as follows: $10,000
at execution of the agreement and $5,000 per month beginning May 1, 2004 and
continuing until paid in full. As of July 31, 2004 we have a remaining balance
of $40,000.
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.
22
On June 2, 2003, we 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 we
filed a multi count civil complaint against the privately held company. The
$100,000 fee is included in other assets at April 30, 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. 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.
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 April 30, 2004, we issued an aggregate of 110,911
shares of common stock. Of that total, 98,611 shares were issued as
consideration for services provided to the Company.
All of the aforementioned shares were issued without registration under the
Securities Act of 1933 in reliance on the exemption from such registration
requirements provided by Section 4(2) of that Act. The shares were issued
without general advertising or solicitation and purchasers acknowledged that
they were acquiring restricted securities which had not been registered under
the Securities Act. Certificates representing the shares bear the usual and
customary restricted stock legend.
Additionally, during the three months ended July 31, 2004 we issued 12,300
shares to employees 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 13, 2004 we
are in default on notes payable due to ISOZ, LC. totaling $215,000 and current
accrued interest of approximately $54,000.
23
Our 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, $729,800 matured during August 2003, $25,000
matured during November 2003, $690,000 is callable on demand when we have
secured between $1 million and $5 million in new debt or equity funding, 10,000
matures during December 2004, and $100,000 has no set maturity and is payable
until paid in full. As of September 13, 2004, we had a total of $1,239,800 in
notes payable that are past due. We are actively pursuing extensions and/or
conversions on the notes payable.
Item 4. Submissions of Matters to a Vote of Security Holders
During the quarter ended July 31, 2004, the Board of Directors approved for
submission to the Company's shareholders an amendment to the Company's Articles
of Incorporation to increase the number of authorized shares of common stock
from 50,000,000 to 100,000,000 and the number of authorized shares of preferred
stock from 1,000,000 to 5,000,000. The Company did not solicit proxies and made
the proposal as of July 31, 2004 to shareholders holding at least a majority of
the outstanding shares. As of September 16, 2004, the Company has received
written consent representing approximately 55 percent, or 8,309,974 shares of
common stock, out of 15,123,863 shares issued and outstanding at July 31, 2004.
Action will be taken based on the written consent of shareholders as soon as
administratively possible.
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
We filed a current report on Form 8-K on May 6, 2004 reporting under Item 9
"fair disclosure", the signing of a Standby Equity Distribution Agreement.
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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 20, 2004
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: September 20, 2004
25