NITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the Quarterly Period ended January 31, 2005
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
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(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.)
5532 Lillehammer Lane, Suite 300, Park City, Utah 84098
(Address of principal executive officers)
Issuer's telephone number: (435) 615-8338
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of March 17, 2006
- -------------------------- ------------------------------------
Common Stock, 24,456,699
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements.............................................. 2
Item 2. Management's Discussion and Analysis or Plan of Operation......... 16
Item 3. Controls and Procedures........................................... 19
PART II
Item 1. Legal Proceedings................................................. 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 20
Item 3. Defaults Upon Senior Securities................................... 20
Item 4. Submissions of Matters to a Vote of Security Holders.............. 21
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 21
Signatures........................................................ 22
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
January 31, 2006
ASSETS
CURRENT ASSETS
Cash $ 62,100
Accounts receivable 1,091
Other assets 25,642
-----------
Total current assets 88,833
Property and equipment, at cost, net 561,717
Other assets 24,909
-----------
$ 675,459
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 276,748
Deferred revenue 176,663
Accrued liabilities 3,617,770
Accrued interest payable 526,567
Notes payable 840,000
Current portion of long term obligations - capital lease 261,185
-----------
Total current liabilities 5,698,933
Long term obligations less current portion - capital lease 317,574
Notes payable - related parties 125,000
Notes payable 1,574,800
Compensation debenture 360,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 23,456,699 issued and outstanding 23,458
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,868,755
Deficit accumulated during the development stage (14,297,927)
-----------
Total stockholders' deficit (7,405,714)
-----------
$ 675,459
===========
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 From
January 31 May 26, 2000
---------------------------- through
2006 2005 January 31, 2006
------------ ------------ ------------
Revenue $ -- $ 28,275 $ 124,645
Cost of Goods Sold -- 17-232 94,948
------------ ------------ ------------
Gross Profit -- 11,513 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 86,193 225,023 6,718,178
Professional fees and consultants 26,189 16,890 1,364,225
Technology development consulting 16,560 38,715 866,830
Directors compensation through stock plan -- -- 295,000
Rent 12,000 12,000 316,305
Provision for bad debts -- -- 600,000
Travel, conventions, meals and entertainment 800 9,967 238,733
Depreciation and amortization 35,360 36,267 214,164
Utilities 4,564 3,328 114,413
Gain on transfer of license agreements -- -- (114,509)
Write off of goodwill -- -- 958,628
Other 6,280 21,607 618,263
------------ ------------ ------------
187,946 363,891 12,190,230
------------ ------------ ------------
Operating loss (187,946) (352,378) (12,160,533)
Interest income -- -- 5,578
Legal settlement -- -- (200,433)
Gain on sale of stock, net -- -- 338,049
Interest and beneficial conversion expense (116,625) (93,563) (2,187,076)
Expense for stock options on guarantee
services, debt -- (13,971) (88,646)
Minority interests -- -- (4,866)
------------ ------------ ------------
Loss before income taxes (304,571) (459,912) (14,297,927)
------------ ------------ ------------
Income taxes
-- -- --
NET LOSS $ (304,571) $ (459,912) $(14,297,927
============ ============ ============
Loss per common share
Basic and Diluted $ (0.01) $ (0.03)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 20,441,014 16,347,598
The accompanying notes are an integral part of these statements.
-3-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the period May 26, 2000 (inception) through October 31, 2000,
and for the years ended October 31, 2001, October 31, 2002,October 31, 2003,
October 31, 2004, October 31, 2005 and the quarter ended January 31, 2006
Deficit
Accumulated
Additional during the
Preferred stock Common stock 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 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
stock (950,000) (950) 180,000 180 3,957,380 --
Cancellation of common stock -- -- (50,000) (50) 50 --
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 303,900 --
notes payable
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 148,500 149 132,493 --
Conversion of debt -- -- 355,000 355 354,645 --
Services -- -- 419,871 419 444,453 --
Stock 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)
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
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 --
Net loss for the year -- -- -- -- -- (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)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the period May 26, 2000 (inception) through October 31, 2000,
and for the years ended October 31, 2001, October 31, 2002,October 31, 2003,
October 31, 2004, October 31, 2005 and the quarter ended January 31, 2006
Deficit
Accumulated
Additional during the
Preferred stock Common stock 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 eFees 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 stock options for:
Loan -- -- -- -- 19,526 --
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 36,667 37 2,796 --
Cash under Equity Line -- -- 6,330,100 6,331 323,669 --
Conversion of debt -- -- 1,489,334 1,489 210,609 --
Stock incentive plans -- -- 48,800 49 36,551 --
Legal settlement -- -- 30,000 30 1,170 --
Net loss for the year -- -- -- -- -- (4,250,636)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2005 -- $ -- 23,438,199 $ 23,439 $ 6,855,824 $(13,993,356)
Issuance of common stock for:
Stock incentive plans -- -- 18,500 19 12,931 --
Net loss for the quarter -- -- -- -- -- (304,571)
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2006 -- $ -- 23,456,699 $ 23,458 $ 6,868,755 $(14,297,927)
============ =========== ========== =========== =========== ============
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
May 26, 2000
For the quarter ended (inception)
January 31, Through
-------------------------------- January 31,
2006 2005 2006
--------------- --------------- -------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (304,571) $ (459,912) $(14,297,927)
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 35,361 36,267 324,383
Interest expense recognized on beneficial conversion -- -- 423,900
Issuance of common stock under stock plans 12,950 17,200 823,508
Issuance of common stock for services -- -- 553,832
Issuance of common stock for interest -- -- 509,925
Options issued on guarantee, services, and loans -- 13,971 275,394
Issuance of common stock for legal settlement -- -- 22,400
Changes in assets and liabilities
Accounts receivable -- (4,152) (1,091)
Other assets 8,896 15,252 (50,551)
Accounts payable and accrued liabilities 102,533 5,591 3,641,417
Deferred revenue 176,663 -- 176,663
Accrued interest 37,997 67,989 745,945
------------ ------------ ------------
Total adjustments 374,400 152,118 8,556,661
------------ ------------ ------------
Net cash (used in) provided by operating activities 69,829 (307,794) (5,741,266)
Net cash flows from investing activities -
Investment stock and licenses, net -- -- 555,791
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment -- -- (164,977)
------------ ------------ ------------
Net cash flows used in investing activities -- -- (209,186)
------------ ------------ ------------
Cash flows from financing activities
Increase in notes payable -- 285,000 4,809,800
Proceeds from lease -- -- 357,000
Cash received on equity distribution agreement -- -- 38,000
Payments on lease -- (19,528) (181,554)
Payments on notes payable (10,000) -- (35,000)
Proceeds from issuance of common stock -- -- 1,024,306
------------ ------------ ------------
Net cash (used in) provided by financing activities (10,000) 265,472 6,012,552
------------ ------------ ------------
Net increase (decrease) in cash 59,829 (42,322) 62,100
Cash at beginning of period 2,271 185,696 --
------------ ------------ ------------
Cash at end of period $ 62,100 $ 143,374 $ 62,100
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
During the quarter ended January 31, 2006 the Company transferred $61,719 from
long term obligations- capital lease to accrued liabilities to reflect payments
made to the lease on behalf of the Company by the third party guarantor.
The accompanying notes are an integral part of these statements.
-6-
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 January
31, 2006 and for the three months ended January 31, 2006 and 2005 is unaudited,
but includes all adjustments (consisting only of normal recurring adjustments)
which in the opinion of management, are necessary to state fairly the financial
information set forth therein in accordance with accounting principles generally
accepted in the United States of America.
NOTE B - UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial reporting and the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared under accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such regulations.
This report on Form 10-QSB for the three months ended January 31, 2006 should be
read in conjunction with the Company's annual report on Form 10-KSB for the
fiscal year ended October 31, 2005. The results of operations for the three
months ended January 31, 2006 may not be indicative of the results that may be
expected for the year ending October 31, 2006.
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 January 31, 2006, 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.
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.
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.
-7-
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 K, L, M,
and P 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
January 31, 2006. 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 O). As of
January 31, 2006, the Company has recorded an allowance for bad debt totaling
$600,000 against the note receivable.
NOTE G - OTHER ASSETS
At January 31, 2006, other assets consisted of the following:
Short term Long term
Non trade receivables $ 1,585 $ --
Deposits -- 24,909
Prepaid expenses 24,057 --
------------ -------------
$ 25,642 $ 24,909
============ =============
NOTE H - PROPERTY AND EQUIPMENT
At January 31, 2006, 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 260,874
----------
$ 561,717
==========
NOTE I - JOINT VENTURE AND DEFERRED REVENUES
On December 1, 2005, the Company entered into an operating agreement with E.
Oliver Capital Group LLC toward the formation of a joint venture between
Videolocity International, Inc. and E. Oliver Capital Group LLC.
The finalization of the agreement is contingent on shareholder approval and
Videolocity obtaining extensions of all outstanding notes payable. Toward that
goal, the Company forwarded a proposal to certain shareholders and has been in
discussions with the holders of all notes payable. The Company did not solicit
proxies and submitted the proposal to shareholders holding at least a majority
of the outstanding shares of the Company. Through January 31, 2006, the Company
has received written consent from shareholders representing a majority of the
outstanding stock of the Company approving the agreement. Additionally, through
January 31, 2006 we have received extensions on notes payable totaling
approximately $1,406,000 and have worked out a payment schedule on an additional
$215,000 of notes payable. The Company is currently working to obtain extensions
on the remaining notes payable.
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the agreement E. Oliver Capital Group LLC is required to advance to
Videolocity the funds required to maintain corporate functions of Videolocity
including SEC reporting, legal, audit, public relations, investor relations, and
general business based on the budgets provided by Videolocity. Through January
31, 2006 E. Oliver Capital Group has forwarded to Videolocity approximately
$177,000 under the agreement that has been recorded as deferred revenue in the
financial statements. Under the agreement, the amounts forwarded to Videolocity
will be recouped through distributions from the joint venture and prior to
Videolocity receiving cash distributions from the joint venture. Videolocity
will be entitled to distributions from the joint venture including technical
transfer fees and licensing fees as follows: Videolocity International, Inc.
shall receive (i) all technical transfer fees (the mark up over cost and
installation of equipment deployed) and the first 5% of the net licensing fees
derived by the LLC in licensing the Intellectual Property Technology from the
current version 1 of the Intellectual Property Technology and (ii) twenty-five
percent (25%) of the technical transfer fees and the first 5% of the net
licensing fees derived by the LLC in licensing version 2 of the intellectual
property technology currently in development.
NOTE J - ACCRUED LIABILITIES
At January 31, 2006, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 3,026,578
Director and consultant compensation 217,000
Capital lease paid on Company's behalf (Note L) 322,696
Other 51,496
--------------
$ 3,617,770
==============
NOTE K - NOTES PAYABLE
During the quarter ended January 31, 2006, the Company contacted note holders
regarding extensions on the Company's notes payable. The note holders were
offered one share of the Company's restricted common stock for each dollar of
notes payable that was extended. As of January 31, 2006 the Company has recorded
an accrued expense totaling approximately $50,000 to account for the expense of
the restricted shares to be issued. The restricted common stock will be issued
as soon as administratively possible. As of January 31, 2006 the Company
received extensions on $1,404,800 of the notes payable and has reached a payment
schedule on an additional $215,000. The Company remains in discussions with
certain note holders regarding extensions on the Company's remaining notes
payable.
At January 31, 2006 the Company has notes payable totaling $2,539,800 due to
various individuals and companies including $125,000 to current related parties
including Board of Directors and Management. Of the total, $370,000 is written
at 12% simple interest, $1,324,800 is written at 8 percent simple interest and
$845,000 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
$662,800 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 $80,000 is convertible at
$0.04 per share. The notes payable have maturities as follows: $50,000 matured
during August 2003, $25,000 matured during November 2003, $250,000 matures
during December 2006, $1,034,800 matures during December 2007, $120,000 matures
during January 2008, $535,000 is callable on demand when the Company has secured
between $1 million and $5 million in new debt or equity funding, $320,000 is due
on a schedule of $10,000 per week until paid in full using advances under the
Company's Standby Equity Line (Note P) and $205,000 (originally $215,000) is due
on a set schedule of $5,000 per month until paid in full (noted below).
Approximately $75,000 is past due as of January 31, 2006.
In prior periods, the Company has issued options to purchase Company stock under
certain of the notes payable originated in the following amounts: 400,000 shares
at $0.77 per share, 120,000 shares at $0.72 per share, 20,000 shares at $0.50
per share, 200,000 shares at $0.14 per share, 60,000 at $0.12 per share and
400,000 at $0.04 per share. 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. 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 was recognized at the time the options become
exercisable.
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
payable under the UCC-1 into common stock of the Company including $135,000 to
related parties. During the year ended October 31, 2005, the Company converted
$100,000 and paid back $20,000 of notes payable under the UCC-1. As of January
31, 2006 there remains a total of $835,000 of notes payable under the UCC-1.
While obtaining extensions on $630,000 of the UCC-1 notes, the Company received
a release from "any and all security interest in debtors intellectual properties
and assets to include proceeds and products of collateral". The Company signed
an agreement for the remaining $205,000 (originally $215,000) as noted below.
The notes payable under the UCC-1 have maturities under the UCC-1 as follows:
$580,000 matures during December 2007 and $50,000 matures during January 2008,
and $205,000 (originally $215,000) is due on a set schedule of $5,000 per month
until paid in full as noted below.
On February 6th, 2003 the Company received a formal notice of default regarding
a $215,000 note payable under the UCC-1. During the year ended October 31, 2005,
the Company received a demand notice on the $215,000 note payable. On November
30, 2005, with an addendum signed on December 5, 2005, the Company and the
$215,000 note holder reached an agreement to settle the note payable, in total,
with twenty four monthly payments of $5,000 per month beginning January 5, 2006
and ending on December 5, 2007 for the aggregate amount of $120,000. The note
holder has agreed to stay any actions to enforce or collect during the repayment
term. At any time the Company fails to meet its required payment, the note
holder will have the right to proceed with all legal remedies to collect upon
and satisfy the note payable. The Company has the right to prepay all or a
portion of the total at its discretion. The settlement agreement also provided
that the Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder During the quarter ended January 31, 2006
the company made two payments on the note totaling $10,000.
NOTE L - LONG TERM OBLIGATIONS - CAPITAL LEASE
The Company has a capital lease agreement that included 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 expired February 4, 2006. Additionally, there was a clause that if
the Company's outstanding shares surpassed 20,000,000 prior to February 4, 2006,
the privately held Company would 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. This clause also expired on February 4, 2006.
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. The Company has been unable to make the required payments on the lease
and the guarantor has made approximately $323,000 in lease payments on behalf of
the Company. The amounts paid on behalf of the Company have reduced the
outstanding balance on the lease and have been recorded as accrued liabilities
of the Company (Note J).
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 January
31, 2006:
Cash
proceeds from
Equipment Lease Total
---------- ---------- ----------
Through January 31, 2007 $ 197,098 $ 106,033 $ 303,131
Through January 31, 2008 197,098 106,033 303,131
Through January 31, 2009 23,544 8,836 32,380
Thereafter -- -- --
---------- ---------- ----------
Total minimum payments 417,740 220,902 638,642
Less amount representing interest 40,319 19,564 59,883
---------- ---------- ----------
Present value of net minimum payments 377,421 201,338 578,759
Less current portion 169,081 92,104 261,185
---------- ---------- ----------
Long-term portion $ 208,340 $ 109,234 $ 317,574
========== ========== ==========
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - 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 January
31, 2006, the Company recognized approximately $13,000 of compensation expense
with the issuance of 18,500 shares of stock under vesting schedules. Through
January 31, 2006, the Company has granted 998,384 plan units of which 998,384
units have been exercised under the plan.
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 January 31, 2006, the Company
has issued a total of 467,855 shares under the Plan.
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. Pursuant to the Articles
of Incorporation, 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. 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. As of January 31,
2006 the 2,000,000 shares of restricted stock has not been issued, however the
Company has recorded an accrued liability for the expense incurred in the period
they were granted. The above noted options and restricted stock were issued
pursuant to the Restated Articles of Incorporation approved by a majority of the
stockholders on November 15, 2000.
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As currently 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 (NOTE S). 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.
Cumulative
from
May 28,
2000 (inception)
Quarter ended Quarter ended Through
January 31, January 31, January 31,
2006 2005 2006
------------- ------------ ------------
Net earnings (loss):
As reported $ (304,571) $ (459,912) $(14,898,882)
Proforma $ (304,571) $ (459,912) $(15,677,241)
Basic earnings (loss) per share:
As reported $(0.01) $(0.03) $(1.57)
Pro forma $(0.01) $(0.03) $(1.66)
Diluted earnings (loss) per share:
As reported $(0.01) $(0.03) $(1.57)
Pro forma $(0.01) $(0.03) $(1.66)
Weighted average fair value per plan unit
granted during the quarter $ 0.00 $ 0.27
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 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
----------------------------------
January 31, January 31,
2006 2005
--------------- ----------------
Risk-free interest rate -- 3.5 %
Dividend yield -- 0 %
Volatility factor -- .59
Expected option term life in years -- 3.5
There were no options granted in the three months ended January 31, 2006. No
assumptions were necessary during the period to estimate the fair value of
options.
-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 January 31, 2006:
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 2,020,000 $ 0.09
Exercised (48,800) $ 0.75
Forfeited -- --
- --------------------------------------- ---------------- ----------------
Outstanding at October 31, 2005 11,248,500 $ 0.12
Granted -- $ ---
Exercised (18,500) $ 0.70
Forfeited -- $ --
--------------------------------------- ---------------- ----------------
Outstanding at January 31, 2006 11,230,000 $ 0.12
Exercisable at January 31, 2006 11,230,000 $ 0.12
The plan units vested at various dates ranging from May 2003 through November
2005.A further summary of information related to options outstanding at January
31, 2006 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 0.10 2,000,000 / 2,000,000 9.07 $0.09 / $0.09
$0.11 to 0.20 9,200,000 / 9,200,000 7.85 $0.13 / $0.13
$0.21 to 0.30 30,000 / 30,000 0.01 $0.30 / $0.30
----------- ---------- ---- -------- --------
11,230,000 /11,230,000 8.05 $0.12 / $0.12
-13-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - 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 $110,000 for the three months ended January 31,
2006.
As of January 31, 2006, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $9,800,000 expiring through 2026.
NOTE O - 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.
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 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. 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. However, based on
the anticipated costs to recover the $100,000, the Company has written off the
fee during the year ended October 31, 2005.
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 $9,000 at January 31, 2006.
As of the year ended October 31, 2005, the Company recorded an allowance for bad
debt totaling $600,000 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. The Company's attorney, working with the courts, is attempting to
identify assets of Merit Studios in order to enforce the judgment.
NOTE P - 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
January 31, 2006, the Company had issued 140,746 shares to Cornell and received
$38,000 under the agreement.
-14-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 January 31, 2006, 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 January 31, 2006 totals
$360,000.
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 K) and through January 31, 2006 has issued 6,330,100 shares under the
Standby Equity Distribution Agreement using the proceeds to repay $330,000 of
the loan. The balance of the loan at January 31, 2006 totals $70,000. The
Company placed another 5,000,000 of the registered shares into escrow to
facilitate repayment of a second loan 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 January 31, 2006, the Company has 8,669,900 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 6,330,100 shares issued).
NOTE Q - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
As of January 31, 2006 the Company has 8% notes payable to current directors,
and officers totaling $125,000. The Company has accounts payable totaling
approximately $41,000 due to a former director at January 31, 2006. As of
January 31, 2006 executive officers and directors of the Company own
approximately 5% of the outstanding stock.
NOTE R - 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 S - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R sets accounting requirements for "share-based" compensation to
employees and requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation. SFAS
No. 123R is effective in interim or annual periods beginning after June 15, 2005
for companies that do not file as small business issuers and December 15, 2005
for companies that file as small business issuers. We will be required to adopt
SFAS No. 123R in our second quarter of fiscal 2006 and currently disclose the
effect on net (loss) income and (loss) earnings per share of the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
The Company currently does not have any unvested share based payments.
Subsequent issuances of share based compensation, if any, could have a material
impact and will be addressed under the new accounting pronouncement as issued.
The Company does not expect that the adoption of other recent accounting
pronouncements will have a material impact on its financial statements
-15-
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-QSB.
Forward-Looking Information
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," expect, ," "should, " 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.
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. We operate our business
through five subsidiaries that perform various functions strategic to their
market place or core competency.
We are actively marketing our DES(TM), 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 a 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.
-16-
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 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 based
upon a set fee for each use by the end customer. 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 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
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 noted below and an operating agreement toward the
formation of a joint venture, also noted below, which would provide Videolocity
with operating capital. We can not give any assurance that we will be able to
secure such additional funding on favorable terms to us, or otherwise.
On December 1, 2005, we entered into an operating agreement with E. Oliver
Capital Group LLC toward the formation of a joint venture between Videolocity
International, Inc. and E. Oliver Capital Group LLC. The finalization of the
agreement is contingent on shareholder approval and Videolocity obtaining
extensions of all outstanding notes payable. Toward that goal, we forwarded a
proposal to certain shareholders and have been in discussions with the holders
of all notes payable. We did not solicit proxies and submitted the proposal to
shareholders holding at least a majority of the outstanding shares of the
Company. Through January 31, 2006, we have received written consent from
shareholders representing a majority of the outstanding stock of the Company
approving the agreement and will report the final count when all of the
remaining consents are returned. Additionally, through January 31, 2006 we have
received extensions on notes payable totaling approximately $1,406,000 and have
worked out a payment schedule on an additional $215,000 of notes payable. The
Company is currently working to obtain extensions on the remaining notes
payable.
-17-
Under the agreement E. Oliver Capital Group is required to advance to
Videolocity the funds required to maintain corporate functions of Videolocity
including SEC reporting, legal, audit, public relations, investor relations, and
general business based on the budgets provided by Videolocity. Through January
31, 2006 E. Oliver Capital Group has forwarded to Videolocity approximately
$177,000 to help maintain Videolocity's corporate functions. Under the
agreement, the amounts forwarded to Videolocity will be recouped through
distributions from the joint venture and prior to Videolocity receiving cash
distributions from the joint venture. Videolocity will be entitled to
distributions from the joint venture including technical transfer fees and
licensing fees as follows: Videolocity shall receive (i) all technical transfer
fees (the mark up over cost and installation of equipment deployed) and the
first 5% of the net licensing fees derived by the LLC in licensing the
Intellectual Property Technology from the current version 1 of the Intellectual
Property Technology and (ii) twenty-five percent (25%) of the technical transfer
fees and the first 5% of the net licensing fees derived by the LLC in licensing
version 2 of the intellectual property technology currently in development.
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 four 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. As of January 31, 2006, the
Company had issued 140,746 shares to Cornell and received $38,000 under the
agreement.
Without drawing against the standby equity distribution agreement and/or
finalization of the joint venture 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 quarter 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 January 31, 2006, our total current assets
increased approximately $51,000 and total assets increased approximately $15,000
from approximately $660,000 to approximately $675,000. The increase in current
assets during the quarter is primarily due to the receipt of advances on future
revenues "deferred revenues". Approximately $177,000 was advanced to us during
the quarter to help us maintain our corporate functions while finalizing a joint
venture. Under the terms of the joint venture, Videolocity will receive
distributions of revenue from the use of our technologies within the joint
venture. The decrease in the remaining assets is due to depreciation taken on
property and equipment.
During the three months ended January 31, 2006, total current liabilities
decreased from approximately $7,024,000 to approximately $5,699,000. There are
several factors that contributed to this net decrease in current liabilities.
The most significant is a decrease in current notes payable during the quarter.
During the quarter, we contacted the holders of our notes payable and numerous
discussions were held regarding the extension of our notes payable. From these
discussions, we were able to reclassify approximately $1,406,000 of current
notes payable to long term notes payable from receipt of signed extensions. This
amount was offset by an increase in accrued liabilities of approximately
$168,000 from recording additional liability for payments made on our lease by
our third party guarantor, and from recording approximately $50,000 of accrued
expense to reflect the restricted stock that will be issued to those note
holders that have extended their notes to date. Note holders were offered one
share of Videolocity common stock for each dollar of note payable extended. The
restricted stock will be issued when administratively possible. The decrease in
notes payable was further offset by the receipt of approximately $177,000 of
advances on future revenues "deferred revenues" that will be generated through a
joint venture.
Results of Operations
To date, we have been a development stage company and have only realized
revenues from an installation of our technologies in one hotel. We are in the
process of forming a joint venture that will be actively marketing the
Videolocity DES and is currently signing contracts for the installation of our
DES into various hotels. During the three months ended January 31, 2006 we did
not realize revenues from our installed system as the hotel was undergoing a
major renovation. The system was shut down in the final phase of the renovation.
We are currently working with hotel management to determine a date for our
installation team to be on site and re-hook up the servers and bring the system
up to capacity. We believe that once we have the system operational within the
newly remodeled hotel that revenue will be increased over comparable periods in
the prior year.
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For the three months ended January 31, 2006, operational expenses decreased
approximately $176,000 overall, or approximately forty-eight percent, as
compared to the three months ended January 31, 2005. This is attributed
primarily to a decrease in payroll expense of approximately $139,000. Payroll
expenses were decreased substantially during the quarter as compared to the
prior year as a direct result of the loss of several of our employees during the
quarter. As we continue to work on the formation of a joint venture we have been
advanced funds that will enable us to maintain our current employee base and we
believe that as the joint venture begins to deploy the Videolocity DES and we
begin to realize the resulting revenues we will be able to bring the level of
staffing to previous levels. We had decreases in most operational expenses
during the quarter as compared to the prior year including, technology
development, travel and conventions, due to not having the funds to conduct
certain of those activities during the quarter. Professional fees and
consultants increased over the prior year by approximately $9,300. Although
legal fees and similar costs were lower than the prior year, we needed some
additional consultants to help with some of the activities performed by
employees that had left during the quarter. During the quarter ended January 31,
2006, non operating expenses increased approximately $9,100 as compared to the
three months ended January 31, 2005 resulting from the increase of interest
expense recorded on notes payable.
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 January 31, 2006, we have, together with our subsidiaries, accumulated a
net operating loss carryforward of approximately $9,800,000, with an operating
loss tax benefit of approximately $3,655,000. 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 2026.
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
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.
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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
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. 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. However, based on the anticipated costs to recover the $100,000, the
Company has written off the fee during the year ended October 31, 2005.
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 a note
payable in the amount of $215,000. Prior to October 19, 2005 the Company was
unaware of the judgment and did not have knowledge that a complaint had been
filed because the Company had not been served. Accordingly, being unaware of the
complaint the Company did not respond. On November 30, 2005, with an addendum
signed on December 5, 2005, the Company and the note holder reached an agreement
to settle the note payable, in total, with twenty four monthly payments of
$5,000 per month beginning January 5, 2006 and ending on December 5, 2007 for
the aggregate amount of $120,000. The note holder has agreed to stay any actions
to enforce or collect upon the judgment during the repayment term. At any time
the Company fails to meet its required payment, the note holder will have the
right to proceed with all legal remedies to collect upon and satisfy the
judgment and note payable. The Company has the right to prepay all or a portion
of the total at its discretion. The settlement agreement also provided that the
Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder.
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 January 31, 2006, we issued an aggregate of 18,500
shares of common stock all of which were registered shares under the Company's
employee stock incentive plans. Subsequent to January 31, 2006 and to date, we
have issued 1,000,000 shares that were registered under an SB-2 toward an
agreement for the conversion of a compensation debenture.
We did not issue unregistered shares during the quarter ended January 31, 2006,
or subsequently through the date hereof.
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. 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
note payable. Prior to October 19, 2005 the Company was unaware of the judgment
and did not have knowledge that a complaint had been filed because the Company
had not been served. Accordingly, being unaware of the complaint the Company did
not respond. On November 30, 2005, with an addendum signed on December 5, 2005,
the Company and the note holder reached an agreement to settle the note payable,
in total, with twenty four monthly payments of $5,000 per month beginning
January 5, 2006 and ending on December 5, 2007 for the aggregate amount of
$120,000. The note holder has agreed to stay any actions to enforce or collect
upon the judgment during the repayment term. At any time the Company fails to
meet its required payment, the note holder will have the right to proceed with
all legal remedies to collect upon and satisfy the judgment and note payable.
The Company has the right to prepay all or a portion of the total at its
discretion. The settlement agreement also provided that the Company release the
note holder, ISOZ, LC, and its employees, agents, representatives and affiliates
and assigns, from any and all actions, judgments, claims or causes of action and
from any claim or allegation previously made by the Company against the note
holder.
-20
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: $50,000
matured during August 2003, $25,000 matured during November 2003, $250,000
matures during December 2006, $1,034,800 matures during December 2007, $120,000
matures during January 2008, $535,000 is callable on demand when the Company has
secured between $1 million and $5 million in new debt or equity funding,,
$320,000 is due on a schedule of $10,000 per week until paid in full using
advances under the Company's Standby Equity Line and $205,000 (originally
$215,000) is due on a set schedule of $5,000 per month until paid in full.
Approximately $75,000 is currently 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
On December 1, 2005, the Company entered into an operating agreement with E.
Oliver Capital Group LLC toward the formation of a joint venture between
Videolocity International, Inc. and E. Oliver Capital Group LLC. The Board of
Directors approved for submission to the Company's shareholders a "Shareholder's
Consent to Proposed Action by Videolocity International, Inc." seeking approval
to finalize the agreement with E. Oliver Capital Group LLC. The Company did not
solicit proxies and made the proposal as of December 1, 2005 to shareholders
holding at least a majority of the outstanding shares.
To date, we have received written consent from shareholders representing a
majority of the outstanding stock of the Company approving the agreement and
will report the final totals when all of the remaining consents are returned.
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 2002. 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 it's Board of Directors. During February 2006 the Board of Directors rehired
the Chief Financial Officer in his previous roles, with finalization of his new
contract scheduled for the next Board of Directors meeting.
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
This Item is not applicable.
-21-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEOLOCITY INTERNATIONAL, INC.
BY: /S/ ROBERT E. HOLT
------------------------------------
ROBERT E. HOLT
Chief Executive Officer and Director
Date: March 20, 2006
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: March 20, 2006
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