;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, 2005
[ ] 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 October 15, 2005
- -------------------------- ------------------------------------
Common Stock, 23,428,199
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......... 19
Item 3. Controls and Procedures........................................... 22
PART II
Item 1. Legal Proceedings................................................. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 24
Item 3. Defaults Upon Senior Securities................................... 24
Item 4. Submissions of Matters to a Vote of Security Holders.............. 25
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 26
Signatures........................................................ 26
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
July 31, 2005
ASSETS
CURRENT ASSETS
Cash $ 14,268
Accounts receivable 15,676
Other assets 47,938
-----------
Total current assets 77,882
Property and equipment, at cost, net 632,700
Other assets 124,909
-----------
$ 835,491
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 262,181
Accrued liabilities 849,856
Accrued interest payable 419,479
Notes payable - related parties 125,000
Notes payable 2,464,800
Current portion of long term obligations - capital lease 235,930
-----------
Total current liabilities 4,357,246
Long term obligations less current portion - capital lease 597,130
Compensation debenture 360,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 20,585,634 issued and outstanding 20,586
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,798,277
Deficit accumulated during the development stage (11,302,614)
-----------
Total stockholders' deficit (4,483,751)
-----------
$ 835,491
===========
The accompanying notes are an integral part of these statements.
-2-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended Nine months ended From
July 31 July 31, May 26, 2000
---------------------------- ---------------------------- through
2005 2004 2005 2004 July 31, 2005
------------ ------------ ------------ ------------ ------------
Revenue $ 39,101 $ -- $ 100,144 $ -- $ 110,369
Cost of Goods Sold 16,917 -- 57,237 -- 65,966
------------ ------------ ------------ ------------ ------------
Gross Profit 22,184 -- 42,907 -- 44,403
Operating expenses
Salaries, payroll taxes, and employee benefits 172,724 198,165 755,610 662,854 4,277,064
Professional fees and consultants 28,845 62,107 63,610 95,271 1,318,784
Technology development consulting 25,580 138,962 109,365 191,899 722,522
Directors compensation 200,000 -- 200,000 -- 295,000
Rent 12,000 8,000 36,000 32,000 292,305
Provision for bad debts -- -- -- -- 600,000
Travel, conventions, meals and entertainment 8,143 17,614 27,150 24,557 234,436
Depreciation and amortization 35,689 6,324 107,753 18,970 253,394
Utilities 6,706 5,522 15,195 16,182 106,810
Gain on transfer of license agreements -- -- -- -- (114,509)
Write off of goodwill -- -- -- -- 958,628
Other 18,279 15,012 54,025 35,669 617,222
------------ ------------ ------------ ------------ ------------
507,966 451,706 1,368,708 1,077,402 9,561,656
------------ ------------ ------------ ------------ ------------
Operating loss (485,782) (451,706) (1,325,801) (1,077,402) (9,517,253)
Interest income -- -- -- -- 5,578
Legal settlement -- -- -- (97,400) (97,400)
Gain on sale of stock, net -- -- -- -- 338,049
Interest and beneficial conversion expense (90,108) (179,010) (214,567) (376,121) (1,938,076)
Expense for stock options on services, debt -- -- (19,526) (69,120) (88,646)
------------ ------------ ------------ ------------ ------------
Minority interests -- -- -- -- (4,866)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (575,890) (630,716) (1,559,894) (1,620,043) (11,302,614)
------------ ------------ ------------ ------------ ------------
Income taxes
------------ ------------ ------------ ------------ ------------
NET LOSS $ (575,890) $ (630,716) $ (1,559,894) $ (1,620,043) $(11,302,614)
============ ============ ============ ============ ============
Loss per common share
Basic and Diluted $ (0.03) $ (0.04) $ (0.09) $ (0.16)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 20,022,380 15,081,896 18,347,188 10,348,539
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
July 31, 2005
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)
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)
=========== =========== =========== =========== =========== ===========
(continued)
-4-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
July 31, 2005
Deficit
Accumulated
Preferred stock Common stock Additional during the
-------------------------- -------------------------- paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 $ -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $ (7,585,101)
Fees related to Equity
Distribution Agreement -- -- -- -- (390,000) --
Issuance of stock options for:
Guarantee -- -- -- -- 69,120 --
Services -- -- -- -- 46,316 --
Loan -- -- -- -- 140,432 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 736,500 736 215,464 --
Services -- -- 500,000 500 87,500 --
Cash -- -- 500,000 500 224,500 --
Cash under Equity Line -- -- 140,746 141 37,859 --
Conversion of debt -- -- 6,429,056 6,429 1,580,851 --
Stock incentive plans -- -- 770,000 770 144,081 --
Legal settlement -- -- 80,000 80 22,320 --
Net loss for the year -- -- -- -- -- (2,157,619)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2004 -- -- 15,503,298 15,503 6,261,503 (9,742,720)
Issuance of common stock for:
Conversion of debt -- -- 745,432 745 181,353 --
Stock incentive plans -- -- 23,000 23 17,177 --
Advances on Equity Line -- -- 1,494,722 1,495 158,505 --
Issuance of stock options on loans -- -- -- -- 13,971 --
Net loss for the period -- -- -- -- -- (459,912)
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2005 -- -- 17,766,452 17,766 6,632,509 (10,202,632)
Issuance of common stock for:
Stock incentive plans -- -- 22,900 23 17,027 --
Advances on Equity Line -- -- 1,493,764 1,494 88,506 --
Payment on compensation debenture -- -- 500,000 500 19,500 --
Legal settlement -- -- 30,000 30 1,170 --
Bonus interest and extensions of debt -- -- 16,667 17 1,816 --
Issuance of stock options on loans -- -- -- -- 5,555 --
Net loss for the period -- -- -- -- -- (524,092)
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2005 -- -- 19,829,783 19,830 6,766,083 (10,726,724)
Issuance of common stock for:
Stock incentive plans -- -- 2,900 3 2,347 --
Advances on Equity Line -- -- 499,049 499 19,501 --
Payment on compensation debenture -- -- 243,902 244 9,756 --
Bonus interest and extensions of debt -- -- 10,000 10 590 --
Net loss for the period -- -- -- -- -- (575,890)
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 2005 $ -- $ -- 20,585,634 $ 20,586 $ 6,798,277 $ (11,302,614)
=========== =========== =========== =========== =========== ===========
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
2005 2004 July 31, 2005
------------ ------------ ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (1,559,894) $ (1,620,043) $(11,302,614)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- -- 4,866
Provision for bad debts -- -- 600,000
Write off of goodwill -- -- 958,628
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Depreciation and amortization 107,754 18,970 253,400
Interest expense recognized on beneficial conversion -- -- 423,900
Issuance of common stock under stock plans 36,600 131,000 810,558
Issuance of common stock for services -- 73,500 553,832
Issuance of common stock for interest 2,433 128,701 509,525
Options issued on guarantee, services, and loans 19,526 245,825 275,394
Issuance of common stock for legal settlement -- 22,400 22,400
Changes in assets and liabilities
Accounts receivable (6,638) -- (15,676)
Other assets 24,146 (86,280) (172,847)
Accounts payable and accrued liabilities 522,133 176,497 1,113,237
Accrued interest 152,616 75,317 638,857
------------ ------------ ------------
Total adjustments 858,570 785,930 5,523,516
------------ ------------ ------------
Net cash used in operating activities (701,324) (834,113) (5,779,098)
------------ ------------ ------------
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) (164,977)
------------ ------------ ------------
Net cash flows used in investing activities -- (20,383) (209,186)
------------ ------------ ------------
-6(a)-
(continued)
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
2005 2004 July 31, 2005
------------ ------------ ------------
Cash flows from financing activities
Increase in notes payable 595,000 610,000 4,789,800
Proceeds from lease -- 357,000 357,000
Cash received on equity distribution agreement -- -- 38,000
Payments on lease (40,104) (85,437) (181,554)
Payments on notes payable (25,000) -- (25,000)
Proceeds from issuance of common stock -- 225,000 1,024,306
------------ ------------ ------------
Net cash provided by financing activities 529,896 1,106,563 6,002,552
------------ ------------ ------------
Net increase (decrease) in cash (171,428) 252,067 14,268
Cash at beginning of period 185,696 10,385 --
------------ ------------ ------------
Cash at end of period $ 14,268 $ 262,452 $ 14,268
============ ============ ============
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, 2005 the Company retired $270,000 of notes
payable using proceeds from it's equity distribution agreement and converted
$30,000 of its compensation debenture into common stock. Additionally, the
Company converted $180,000 of notes payable and $2,098 of accrued interest
payable into common stock.
The accompanying notes are an integral part of these statements.
-6(b)-
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,
2005 and for the three and nine months ended July 31, 2005 and 2004 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 and nine months ended July 31, 2005
should be read in conjunction with the Company's annual report on Form 10-KSB
for the fiscal year ended October 31, 2004. The results of operations for the
three months and nine months ended July 31, 2005 may not be indicative of the
results that may be expected for the year ending October 31, 2005.
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, 2005, 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 has
recorded minimal revenue from its planned principal operations.
On December 1, 2000, the Company completed a reverse stock split of its 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. As of September 16, 2004, the Company received written consent from
shareholders representing approximately 55 percent of the outstanding shares, at
that time, 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. On March 3, 2005, the increase in authorized shares
was recorded by the State of Nevada based on the written consent of the
shareholders.
There are currently no preferred shares outstanding. Preferred shares may be
issued from time to time in one or more distinctly designated series. The Board
of Directors has the authority to designate the powers, preferences,
qualifications, powers, limitations, and the rate and timing of dividends prior
to the issuance of any series of preferred stock.
-7-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 I, J, K,
N, and R 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 - 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 approximately $9,000 on July
31, 2005. 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 attorney's fees to collect (Note M). As of July 31,
2005, the Company has recorded an allowance for bad debt totaling $600,000
against the note receivable.
NOTE G - OTHER ASSETS
At July 31, 2005, other assets consisted of the following:
Short term Long term
---------- ----------
Non trade receivables $ 1,817 $ --
Deposits 267 24,909
Prepaid expenses 45,854 --
Promissory loan fee (Note M) -- 100,000
---------- ----------
$ 47,938 $ 124,909
========== ==========
NOTE H - PROPERTY AND EQUIPMENT
At July 31, 2005, property and equipment and estimated useful lives consist of
the following:
Amount Years
---------- -------
Equipment $ 164,978 3-5
Equipment under capital lease 657,613 3-5
--------
822,591
Less accumulated depreciation and amortization 189,891
--------
$ 632,700
========
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - NOTES PAYABLE
The Company received the proceeds from approximately $250,000 in notes payable
during the three months ended July 31, 2005 and received $20,000 toward an
$80,000 note payable originated in a prior quarter. The remaining $20,000 due to
the Company under the $80,000 note payable is scheduled to be remitted on a
monthly basis of $10,000 per month until the total amount of the note payable is
received.
At July 31, 2005 the Company has notes payable totaling $2,589,800 due to
various individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $380,000 is written
at 12%, $1,129,800 is written at 8 percent, $250,000 is variable between 10
percent and 25 percent depending on repayment date and $830,000 has no stated
interest rate. Interest has been imputed from the origination date on all
non-interest bearing notes payable. Of the total notes payable, $642,800 is
convertible at the option of the debt holder in the following amounts: $167,800
is convertible at $1.00 per share, $60,000 is convertible at $0.72 per share,
$10,000 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, $15,000 is
convertible at $0.12 per share and $60,000 is convertible at $0.04 per share.
The notes payable have maturities as follows: $20,000 matured during October
2002, $335,000 matured during November 2002, $10,000 matured during January
2003, $719,800 matured during August 2003, $25,000 matured during November 2003,
$250,000 matured during July 2005, 135,000 is due on demand no earlier than
September 2005, $615,000 is callable on demand when the Company has secured
between $1 million and $5 million in new debt or equity funding, $100,000 has no
set maturity and is payable until paid in full and $380,000 is due on a set
schedule of $10,000 per week beginning during July 2005 until paid in full using
proceeds from advances under the Company's Standby Equity Line. (Note N).
Approximately $1,359,800 of the total notes payable is past due as of July 31,
2005. As of July 31, 2005 the Company received demand notices on three notes
payable totaling $485,000. Of that total, the Company is currently reviewing
anticipated cash inflows to determine a time-frame for repayment on one note
payable totaling $250,000. The Company has agreed to a payback schedule on a
$20,000 note payable consisting of 5,000 a month until paid in full. The
remaining $215,000 note payable that the Company has received a formal demand
notification is noted below in the UCC-1 description.
The Company has granted options to purchase Company stock under certain of the
notes payable originated in the following amounts: 400,000 shares at $0.77,
120,000 shares at $0.72, 20,000 shares at $0.50, 200,000 shares at $0.14, 60,000
shares at $0.12 and 400,000 shares at $0.04. All options granted in conjunction
with new notes payable were granted at or above the fair market value on the
date the notes payable were originated. 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 has been 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 $100,000 to current related parties. During the
year ended October 31, 2004, the Company converted a total of $535,000 of notes
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payable under the UCC-1 into common stock of the Company including $135,000 to
related parties. During the quarter ended January 31, 2005, the Company
converted a total of $100,000 of notes payable under the UCC-1 into common stock
of the company. As of July 31, 2005 there remains a total of $845,000 of notes
payable under the UCC-1. The notes payable under the UCC-1 have maturities as
follows: $20,000 matured during October 2002, $335,000 matured during November
2002, $10,000 matured during January 2003 and $480,000 matured during August
2003. On February 6th, 2003 the Company received a formal notice of default from
ISOZ, LC regarding the $215,000 in notes payable under the UCC-1 to ISOZ, LC and
on March 29, 2005 the Company received a demand letter regarding the $215,000 in
notes payable to ISOZ, LC. The Company has forwarded certain documentation
regarding the note payable over to federal authorities toward their examination
and investigation regarding the origination of the $215,000 in notes payable to
the Company and certain other transactions including the origination of the
borrowed funds. The Company will work with the federal authorities and rely on
their examination and investigation in determining the actions the Company will
take in response to this demand notice (Note R).
NOTE J - LONG TERM OBLIGATIONS - CAPITAL LEASE
The Company has a capital lease agreement that includes approximately $658,000
in equipment and approximately $357,000 in operating capital. The lease terms
require approximately $26,000 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 October 31, 2004 related to these
options totaled $69,120. The equipment was recorded as equipment under capital
leases. As of July 31, 2005, the Company was in default on the lease and the
guarantor of the lease has taken over the payments on the lease.
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,
2005:
Cash
proceeds from
Equipment Lease Total
---------- ---------- ----------
Through July 31, 2006 $ 197,098 $ 106,033 $ 303,131
Through July 31, 2007 197,098 106,033 303,131
Through July 31, 2008 197,098 106,033 303,131
Through July 31, 2009 34,273 17,672 51,945
Thereafter -- -- --
---------- ---------- ----------
Total minimum payments 625,567 335,771 961,338
Less amount representing interest 84,999 43,279 128,278
---------- ---------- ----------
Present value of net minimum payments 540,568 292,492 833,060
Less current portion 152,702 83,228 235,930
---------- ---------- ----------
Long-term portion $ 387,866 $ 209,264 $ 597,130
========== ========== ==========
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - STOCK INCENTIVE PLANS
On October 1, 2000 the Company established a stock incentive plan to attract and
retain qualified key employees. The Company reserved 1,000,000 common shares
that can be issued under the plan. Awards made under the plan are issued in
units with each unit being convertible into one share of common stock at the
option of the holder. The plan units vest, generally, over three years as
specified in each individual grant. The individual units are issued with a
strike price of $0.00. Accordingly, compensation expense is incurred by the
Company over the vesting periods and is calculated using the stock price on the
grant date times the number of shares vesting. During the quarter ended July 31,
2005, the Company recognized approximately $2,400 of compensation expense with
the issuance of 2,900 shares of stock under vesting schedules. Through July 31,
2005, the Company has granted 998,384 plan units of which 979,884 units have
been exercised under the plan and 18,500 plan units remain subject to vesting
requirements.
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. Through July 31, 2005, 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 vested at
various times through FY 2004. Additionally, during the quarter ended April 30,
2005, as an incentive, and to retain current key individuals, the Board of
Directors approved a total of 2,000,000 options to purchase stock outside of the
plans to employees that vest at various times through FY 2006. Additionally, the
Board of directors approved 2,000,000 shares to be issued in restricted stock to
officers of the Company to be issued when administratively possible. The expense
for the granted shares has been accrued and is currently within accrued
liabilities until the restricted stock is issued. The above noted incentives
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 having par
value shall not be less than such par value.
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As permitted under accounting principles generally accepted in the United States
of America, grants to employees under the Plan and other grants to employees of
options are accounted for following APB Opinion No. 25 and related
Interpretations. Had compensation cost for the Plan been determined based on the
grant date fair values of awards using the Black-Scholes option pricing model,
reported net earnings (loss) and earnings (loss) per common share would have
been changed to the pro forma amounts shown below.
Three months Three months Nine months Nine months
ended ended ended ended
July 31, July 31, July 31, July 31,
2005 2004 2005 2004
------------- ------------ ------------- ------------
Net earnings (loss):
As reported $( 575,890) $( 630,716) $(1,559,894) $(1,620,043)
Proforma $( 621,881) $( 816,198) $(1,605,885) $(2,236,145)
Basic earnings (loss) per share:
As reported $(0.03) $(0.04) $(0.09) $(0.16)
Pro forma $(0.03) $(0.05) $(0.09) $(0.22)
Diluted earnings (loss) per share:
As reported $(0.03) $(0.04) $(0.09) $(0.16)
Pro forma $(0.03) $(0.05) $(0.09) $(0.22)
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 $0.09 for the shares
granted during the nine months ended July 31, 2005. 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 quarter
ended
---------------------
July 31, July 31,
2005 2004
---------- --------
Risk-free interest rate 3.5 % 2.5 %
Dividend yield 0 % 0 %
Volatility factor .59 .59
Expected option term life in years 3.0 2.5
-12-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the period May 26, 2000
(inception) through July 31, 2005:
Shares subject Weighted-average
to options exercise price
- --------------------------------- ----------------- -----------------
Outstanding at May 26, 2000
(inception) -- $ -
Granted -- $ -
Exercised -- $ -
Forfeited -- $ -
- --------------------------------- ----------------- -----------------
Outstanding at October 31, 2000 -- $ -
Granted 490,833 $ 1.13
Exercised (5,000) $ 1.00
Forfeited -- $ -
- --------------------------------- ----------------- -----------------
Outstanding at October 31, 2001 485,833 $ 1.14
Granted 185,400 $ 1.08
Exercised (36,684) $ 1.35
Forfeited (416,249) $ 1.01
- --------------------------------- ----------------- -----------------
Outstanding at October 31, 2002 218,300 $ 1.30
-----------------
Granted -- $ -
Exercised (119,400) $ 1.45
Forfeited (4,200) $ 1.40
- --------------------------------- ----------------- -----------------
Outstanding at October 31, 2003 94,700 $ 1.04
Granted 9,955,000 $ 0.13
Exercised (770,000) $ 0.19
Forfeited (2,400) $ 1.50
- --------------------------------- ----------------- -----------------
Outstanding at October 31, 2004 9,277,300 $ 0.14
Granted 20,000 0.27
Exercised (23,000) 0.75
Forfeited -- -
- --------------------------------- ----------------- -----------------
Outstanding at January 31, 2005 9,274,300 $ 0.13
Granted 2,000,000 0.09
Exercised (22,900) 0.75
Forfeited -- -
- --------------------------------- ----------------- -----------------
Outstanding at April 30, 2005 11,251,400 $ 0.13
Granted -- -
Exercised (2,900) 0.81
Forfeited -- -
- --------------------------------- ----------------- -----------------
Outstanding at July 31, 2005 11,248,500 $ 0.13
Exercisable at July 31, 2005 9,730,000 $ 0.13
- --------------------------------- ----------------- -----------------
-13-
The plan units vest at various dates ranging through February 2006. A further
summary of information related to options outstanding at July 31, 2005 is as
follows:
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
------------------------- ------------ -------------------------
$0.00 to 0.50 11,230,000 / 9,730,000 8.57 $0.13 / $0.13
0.51 to 1.00 18,500 / - 0.25 0.70 / -
------ ---- ---- ---- ----
11,248,500 / 9,730,000 8.81 $0.13 / $0.13
-14-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - 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 $564,000 for the nine months ended July 31, 2005.
As of July 31, 2005, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $9,500,000 expiring through 2025.
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 F). 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. The Company's
attorney, working with the courts, is attempting to identify assets of Merit
Studios in order to enforce 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. 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, 2005 the
Company has completed the payments required under the settlement agreement.
-15-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005 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
During May 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, a New Jersey-based domestic
investment fund. 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 million
over the 24 months following the effective date. The equity drawdowns are
entirely at Videolocity's discretion and the agreement does not require minimum
drawdowns. The effective date of the agreement is the date that the Securities
and Exchange Commission first declared 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 Company filed an SB-2 on July
9, 2004 to register 19,314,099 shares of common stock and the SB-2 was declared
effective by the Securities and Exchange Commission on July 22, 2004. As of July
31, 2005, the Company had issued 140,746 shares to Cornell and received $38,000
under the agreement.
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. Through July 31, 2005, the holder has converted
$30,000 of the debenture balance into 743,902 shares of the Company's common
stock. The balance of the compensation debenture as of July 31, 2005 totals
$360,000.
-16-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company placed 10,000,000 of the registered shares into escrow to facilitate
drawdowns and the repayment of a $400,000 loan due to Cornell Capital Partners
LP (Note I). and through July 31, 2005 has issued 3,487,535 shares under the
Standby Equity Distribution Agreement using the proceeds to repay $270,000 of
the loan. The balance of the loan at July 31, 2005 totals $130,000. The Company
placed another 5,000,000 of the registered shares into escrow to facilitate
repayment of a second lone totaling $250,000. The repayment of this loan begins
subsequent to the completion of payments under the first loan. The Company has
not issued any shares in repayment of the second loan. Those shares not issued
under drawdowns or as repayment on the loan will be returned to the Company. As
of July 31, 2005, the Company has 11,512,465 shares that remain in escrow. The
shares held in escrow are not included in the Company's outstanding shares
(15,000,000 held in escrow less 3,487,535 shares issued).
NOTE O - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
As of July 31, 2005, 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, 2005, Directors and Executive Officers of the Company hold approximately 10
percent of the outstanding shares.
NOTE P - 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. Our plan of operation will depend
on our ability to raise substantial additional capital, of which there can be no
assurance. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE Q - 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 R - SUBSEQUENT EVENTS
Notes Payable
As of October 21, 2005 approximately $1,359,800 of notes payable are past due
including $215,000 of principal under a default judgment noted below. Management
is currently in discussions with certain note holders pursuing extensions and/or
conversions.
On October 19, 2005, the Company's attorney received notification that a default
judgment was filed with the third district court on June 21, 2005 totaling
approximately $318,000 including principal, accrued interest, and legal fees,
together with interest from that date until paid in full regarding the Company's
note payable to ISOZ, LC. (Note I). Prior to October 19, 2005 the Company was
-17-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unaware of the judgment and did not have knowledge that a complaint had been
filed because it had not been served. Accordingly, being unaware of the
complaint the Company did not respond. The Company is confident that the default
judgment will be overturned pending the outcome of the federal authorities
investigation into this note payable and certain other transactions including
the origination of the borrowed funds (Note I).
Issuance of Stock
The Company has issued 2,842,565 shares of common stock out of escrow under the
Company's Standby Equity Line, using the proceeds to make payments on a loan
commitment (Notes I and N). After the issuance the Company has 8,669,900 shares
that remain in escrow.
Resignation
On September 16, 2005 the Company's Chief Financial Officer resigned with cause
due to the Company's inability to make payroll in a timely manner. By contract,
the Company has 30 days to cure the cause of the resignation. If not cured
within 30 days, the Chief Financial Officer is entitled to immediate vesting in
all options and/or shares previously granted which have not vested to date and
is also entitled to receive all amounts currently owing and the officer's normal
salary through the end of the current contract in a lump sum distribution.
-18-
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.
We have started to actively market our 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.
-19-
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 is paid
for on a revenue share basis when the content is viewed on the DES(TM). 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(TM) 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, $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 the DES(TM). 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(TM) 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(TM).
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 $ 12.95 for each 1 to 24 hour period
Video on demand $ 3.95 to $ 12.95 per viewing
Games $ 2.95 to $ 6.95 each 1 to 4 hour period
-20-
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 2004 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 nine 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 registration statement was declared
effective by the Securities and Exchange Commission on July 22, 2004. The
24-month term commences on the effective date of the registration statement. 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. Our plan of operation will depend on
our ability to raise substantial additional capital, of which there can be no
assurance.
Liquidity and Capital Resources
During the three months ended July 31, 2005, our total current assets decreased
approximately $15,000 and total assets decreased approximately $50,000 from
approximately $886,000 to approximately $835,000. The decrease in current assets
is primarily due to use of cash for operational expenses during the quarter
offset by collection of account receivables. The decrease in the remaining
assets is due to depreciation taken on property and equipment.
During the three months ended July 31, 2005, total current liabilities increased
from approximately $3,837,000 to approximately $4,357,000. This net increase
totaling approximately $520,000 to our current liabilities is attributed
primarily to an increase to accrued liabilities of approximately $252,000, an
increase to accrued interest payable of approximately $56,000, a net increase to
notes payable of approximately $225,000, offset by a decrease to accounts
payable of approximately $12,000. The decrease in notes payable is from an
increase in notes payable during the quarter totaling $270,000 offset by the
repayment of $45,000 with cash and using the proceeds from our Standby Equity
Distribution Agreement. The increase in accrued expenses is primarily from the
accrual of Board of Director compensation to be issued in restricted stock as
well as the operational accruals for payroll and related payroll taxes.
A total of $250,000 in notes payable were originated during the three months
ended July 31, 2005. The Company also received, $20,000 of an $80,000 note
payable that was originated in a prior quarter. We are receiving $10,000 per
month for a total of $80,000 under that note payable. $40,000 of the total was
received during the quarter ended April 30, 2005, we received $20,000 during
this quarter, and the remaining $20,000 was received by the Company subsequent
to July 31, 2005. The total amount borrowed is being used for general
operational expenses.
-21-
Results of Operations
To date, we have been a development stage company and are just beginning to
realize revenue from our planned operations. During the three months ended July
31, 2005 we realized approximately $39,000 in revenue generated through our
DES(TM) with hotel guests purchasing Internet access, video content, and games.
Cost of goods sold for the three months ended July 31, 2005 totaled
approximately $17,000 resulting in gross profit for the three months of
approximately $22,000. Cost of goods sold consists primarily of the variable
content cost for each usage and the fixed costs of interest on an equipment
lease. The DES(TM) is installed in a Hotel that is currently undergoing a major
renovation. As we continue to add content to the system and the hotel completes
its renovation we anticipate that revenue will increase and the resulting gross
profit and gross profit percentage will increase. According to the hotel's
management, the construction/remodel of the Hotel San Remo into Hooter's Hotel
and Casino is scheduled to be completed in January of 2006 and at such time
occupancy should increase and interruptions to the power and DES(TM) will then
be minimal which we believe will result in increased revenues generated and
gross profit from the Hotel.
For the three months ended July 31, 2005, operational expenses increased
approximately $56,000 overall, or approximately twelve percent, as compared to
the three months ended July 31, 2004. This is attributed primarily to the
accrual of directors compensation which will be issued in restricted stock when
administratively possible. We had decreases in most operational expenses
including salaries and related payroll taxes (an approximate $25,000 decrease),
outsourcing of technology development (an approximate $113,000 decrease),
professional fees and consultants (an approximately $33,000 decrease), and
travel conventions and meals (an approximate $9,000 decrease). Also contributing
to the increase in expenses was an increase in depreciation and amortization of
approximately $29,000 from equipment that the Company did not own in the prior
period. During the three months ended July 31, 2005, non operating expenses
decreased approximately $89,000 as compared to the three months ended July 31,
2005 resulting from the decrease of interest and beneficial conversion expense
primarily due to bonus interest on origination and/or extensions of debt issued
in the prior year.
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
Net Operating Loss
As of July 31, 2005, we have, together with our subsidiaries, accumulated a net
operating loss carryforward of approximately $9,500,000, with an operating loss
tax benefit of approximately $3,543,000. 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 2025.
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
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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. During the quarter ended April 30, 2005 we paid
the balance of the necessary payments 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 sought $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. The Company's attorney, working with the
courts, is attempting to identify assets of Merit Studios in order to enforce
the judgment.
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
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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, 2005 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.
On October 19, 2005, we received notification that a default judgment was filed
with the third district court on June 21, 2005 totaling approximately $318,000
including principal, accrued interest, legal fees, together with interest from
that date until paid in full regarding the Company's note payable to ISOZ, LC.
The Company has previously forwarded certain documentation regarding this note
payable over to federal authorities toward their examination and investigation
regarding the origination of the $215,000 in notes payable to the Company and
certain other transactions including the origination of the borrowed funds.
Prior to October 19, 2005 the Company was unaware of the judgment and did not
have knowledge that a complaint had been filed because it had not been served.
Accordingly, being unaware of the complaint the Company did not respond. The
Company is confident that the default judgment will be overturned pending the
outcome of the federal authorities investigation into this note payable and
certain other transactions including the origination of the borrowed funds.
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. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended July 31, 2005, we issued an aggregate of 755,851
shares of common stock. Of the total 10,000 shares were unregistered. We issued
those 10,000 shares under an agreement negotiated under a note payable.
Subsequent to July 31, 2005 and to date, we have issued 2,842,565 shares under
the Company's Standby Equity Line, all of which are registered shares, using the
proceeds to repay a loan commitment.
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.
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. On March 29, 2005 the
Company received a demand letter regarding the $215,000 in notes payable to
ISOZ, LC. The Company has forwarded certain documentation over to federal
authorities toward their examination and investigation regarding the origination
of the $215,000 in notes payable to the Company and certain other transactions
including the origination of the borrowed funds. The Company will work with the
federal authorities and rely on their examination and investigation in
determining the actions the Company will take in response to this demand notice.
On October 19, 2005, we received notification that a default judgment was filed
with the third district court on June 21, 2005 totaling approximately $318,000
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including principal, accrued interest, and legal fees, together with interest
from that date until paid in full regarding the Company's note payable to ISOZ,
LC. Prior to October 19, 2005 the Company was unaware of the judgment and did
not have knowledge that a complaint had been filed because it had not been
served. Accordingly, being unaware of the complaint the Company did not respond.
The Company is confident that the default judgment will be overturned pending
the outcome of the federal authorities investigation into this note payable and
certain other transactions including the origination of the borrowed funds.
During May the Company received a demand notice from an individual for
collection of notes payable totaling $20,000. The Company worked out an
agreement to repay $5,000 per month on the note until paid in full. As of the
date hereof, the Company had made $20,000 in payments.
During September the Company received a demand notice from an entity regarding a
$250,000 note payable. The Company is currently reviewing anticipated cash
inflows to determine a time-frame for repayment of the $250,000 note payable and
has been in discussions with the note holder.
Also, during the quarter ended July 31, 2005, the Company received a default
notice on our lease payable. Currently, the guarantor of the lease has taken
over the payments on the lease.
Our notes payable have maturities or have been extended as follows: $20,000
matured during October 2002, $335,000 matured during November 2002, $10,000
matured during January 2003, $719,800 matured during August 2003, $25,000
matured during November 2003, $250,000 matured during July 2005, $135,000 is due
on demand no earlier than September 2005, $615,000 is callable on demand when we
have secured between $1 million and $5 million in new debt or equity funding,
$380,000 is due on a set schedule of $10,000 per week beginning in during July
2005 until paid in full using advances under the Company's Standby Equity Line
and $100,000 has no set maturity and is payable until paid in full. As of
October 21, 2005, we had a total of $1,359,800 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
This Item is not applicable
Item 5. Other Information
On September 16, 2005 the Company's Chief Financial Officer resigned with cause
due to the Company's inability to make payroll in a timely manner. At the time
of his resignation, the Company's Chief Financial Officer had not received his
contracted salary for approximately the prior two months and was also owed for
approximately six months salary from the calendar year 2003. The resignation was
accepted by the Board of Directors on September 25, 2005. The resignation was
not due to any disagreements with any other member of the Company's management
or its Board of Directors. The Board of directors has appointed Robert Holt as
acting Financial Officer until such time as a replacement of the Chief Financial
Officer can be found. The Board of Directors plans to begin a search for a
replacement as soon as possible.
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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 and Acting Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of CEO and Acting Financial Officer 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
This Item is not applicable.
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: October 21, 2005
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