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 April 30, 2006
[ ] 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 84091
(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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2) of the Exchange Act. Yes [ ] No [X]
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 June 16, 2006
- -------------------------- ------------------------------------
Common Stock, 25,123,366
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........................................................ 20
PART II
Item 1. Legal Proceedings.............................................................. 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................... 21
Item 3. Defaults Upon Senior Securities................................................ 21
Item 4. Submissions of Matters to a Vote of Security Holders........................... 22
Item 5. Other Information.............................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................... 22
Signatures..................................................................... 23
-1-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
April 30, 2006
ASSETS
CURRENT ASSETS
Cash $ 4,512
Other assets 11,984
-----------
Total current assets 16,496
Property and equipment, at cost, net 555,155
Other assets 24,909
-----------
$ 596,560
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 262,299
Deferred revenue 273,647
Accrued liabilities 3,752,049
Accrued interest payable 578,363
Notes payable 840,000
Current portion of long term obligations - capital lease 267,110
-----------
Total current liabilities 5,973,468
Long term obligations less current portion - capital lease 248,533
Notes payable - related parties 125,000
Notes payable 1,559,800
Compensation debenture 340,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 24,456,699 issued and outstanding 24,458
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,887,755
Deficit accumulated during the development stage (14,567,320)
-----------
Total stockholders' deficit (7,655,107)
-----------
$ 596,560
===========
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
From
May 26,
Three months ended Six months ended 2000
April 30, April 30, through
---------------------------- ---------------------------- April 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
Revenue $ -- $ 32,298 $ -- $ 61,043 $ 124,645
Cost of Goods Sold -- 23,088 -- 40,320 94,948
------------ ------------ ------------ ------------ ------------
Gross Profit -- 9,210 -- 20,723 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 163,465 357,863 249,658 582,886 6,866,643
Professional fees and consultants 16,483 17,875 42,672 34,765 1,395,708
Technology development consulting 5,520 45,070 22,080 83,785 872,350
Directors compensation through stock plan -- -- -- -- 295,000
Rent 3,000 12,000 15,000 24,000 319,305
Provision for bad debts 1,091 -- 1,091 -- 601,091
Travel, conventions, meals and entertainment . 1,963 9,040 2,763 19,007 240,696
Depreciation and amortization 7,077 35,797 42,437 72,064 221,241
Utilities 1,024 5,161 5,588 8,489 115,437
Gain on transfer of license agreements -- -- -- -- (114,509)
Write off of goodwill -- -- -- -- 958,628
Other 10,425 14,045 16,705 35,746 628,688
------------ ------------ ------------ ------------ ------------
210,048 496,851 397,994 860,742 12,400,278
------------ ------------ ------------ ------------ ------------
Operating loss (210,048) (487,641) (397,994) (840,019) (12,370,581)
Interest income -- -- -- -- 5,578
Legal Settlement -- -- -- -- (200,433)
Gain on sale of stock, net -- -- -- -- 338,049
Interest and beneficial conversion expense (59,345) (30,896) (175,970) (124,459) (2,246,421)
Expense for stock options on services, debt -- (5,555) -- (19,526) (88,646)
Minority interests -- -- -- -- (4,866)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (269,393) (524,092) (573,964) (984,004) (14,567,320)
------------ ------------ ------------ ------------ ------------
Income taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $ (269,393) $ (524,092) $ (573,964) $ (984,004) $(14,567,320)
============ ============ ============ ============ ============
Loss per common share
Basic and Diluted $ (0.01) $ (0.03) $ (0.02) $ (0.06)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 24,344,339 18,682,520 23,885,191 17,495,709
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
April 30, 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
April 30, 2006
Continued
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 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)
Issuance of common stock for:
Conversion of debt -- -- 1,000,000 1000 19,000 --
Net loss for the quarter -- -- -- -- -- ( 269,393)
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2006 -- $ -- 24,456,699 $ 24,458 $ 6,887,755 $(14,567,320)
============ =========== ========== =========== =========== ============
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 six months ended May 26, 2000
April 30, (inception)
------------------------------ Through
2006 2005 April 30, 2006
------------- ------------- -------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (573,964) $ (984,004) $ (14,567,320)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interests -- -- 4,866
Provision for bad debts 1,091 -- 601,091
Write off of goodwill -- -- 958,628
Gain on sale of investment stock -- -- (338,049)
Gain on transfer of license -- -- (114,509)
Depreciation and amortization 42,437 72,064 331,459
Interest expense recognized on beneficial conversion -- -- 423,900
Issuance of common stock under stock plans 12,950 34,250 823,508
Issuance of common stock for services -- -- 553,832
Issuance of common stock for interest -- 1,833 509,925
Options issued on guarantee, services, and loans -- 19,526 275,394
Issuance of common stock for legal settlement -- -- 22,400
Changes in assets and liabilities
Accounts receivable -- (13,385) (1,091)
Other assets 22,554 20,962 (36,893)
Accounts payable and accrued liabilities 159,247 282,481 3,698,131
Deferred revenue 273,647 -- 273,647
Accrued interest 89,793 96,578 797,741
------------- ------------- -------------
Total adjustments 601,719 514,309 8,783,980
------------- ------------- -------------
Net cash provided by (used in) operating activities 27,755 (469,695) (5,783,340)
------------- ------------- -------------
Net cash flows from investing activities -
Investment stock and licenses, net -- -- 555,791
Increase in notes receivable -- -- (600,000)
Purchase of property and equipment (514) -- (165,491)
------------- ------------- -------------
Net cash flows used in investing activities (514) -- (209,700)
------------- ------------- -------------
Cash flows from financing activities
Increase in notes payable -- 325,000 4,809,800
Proceeds from lease -- -- 357,000
Cash received on equity distribution agreement -- -- 38,000
Payments on lease -- (22,130) (181,554)
Payments on notes payable (25,000) -- (50,000)
Proceeds from issuance of common stock -- -- 1,024,306
------------- ------------- -------------
Net cash (used in) provided by financing activities (25,000) 302,870 5,997,552
------------- ------------- -------------
Net increase (decrease) in cash 2,241 (166,825) 4,512
Cash at beginning of period 2,271 185,696 --
------------- ------------- -------------
Cash at end of period $ 4,512 $ 18,871 $ 4,512
============= ============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
During the six months ended April 30, 2006 the Company transferred $124,835 from
long term obligations- capital lease to accrued liabilities to reflect lease
payments made 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 April 30,
2006 and for the three and six months ended April 30, 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 and six months ended April 30, 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 and six months ended April 30, 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 April 30, 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.
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.
NOTE E - NET EARNINGS (LOSS) PER SHARE
Basic Earnings (Loss) Per Share (EPS) are calculated by dividing net earnings
(loss) available to common shareholders by the weighted-average number of common
shares outstanding during each period. Diluted EPS are similarly calculated,
except that the weighted-average number of common shares outstanding includes
common shares that may be issued subject to existing rights with dilutive
potential. All common shares with dilutive potential described in Notes J, K, L,
and O are not included in the computation of diluted loss per share for periods
of net loss because to do so would be anti-dilutive.
-7-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - OTHER ASSETS
At April 30, 2006, other assets consisted of the following:
Short term Long term
---------- ---------
Non trade receivables $ 1,584 $ --
Deposits 400 24,909
Prepaid expenses 10,000 --
----------- ----------
$ 11,984 $ 24,909
=========== ==========
NOTE G - PROPERTY AND EQUIPMENT
At April 30, 2006, property and equipment and estimated useful lives consist of
the following:
Amount Years
---------- ---------
Equipment $ 165,492 3-5
Equipment under capital lease 657,613 3-5
----------
823,105
Less accumulated depreciation
and amortization 267,950
----------
$ 555,155
==========
NOTE H - 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 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
had received written consent from shareholders representing a majority of the
outstanding stock of the Company approving the agreement. Additionally, through
April 30, 2006 the Company has 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 totaling approximately $904,000.
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 April 30,
2006 E. Oliver Capital Group has forwarded to Videolocity approximately $274,000
under the agreement that has been recorded as deferred revenue in the financial
statements. Under the agreement, the amounts forwarded to Videolocity are to be
recouped through revenue distributions from the joint venture and prior to
Videolocity receiving cash distributions from the joint venture. The joint
venture is set up similar to a technology licensing agreement where Videolocity
will not own a percentage of the joint venture; however, the Company will be
entitled to distributions from the joint venture including technical transfer
fees and licensing fees as follows: Videolocity International, Inc. shall
receive (i)100% of 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 1.0 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.
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - ACCRUED LIABILITIES
At April 30, 2006, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 3,082,974
Capital lease paid on Company's behalf (Note K) 398,479
Director and consultant compensation 217,000
Other 53,596
-------------
$ 3,752,049
=============
NOTE J - NOTES PAYABLE
The Company has actively pursued extensions on the Company's notes payable
during the six months ended April 30, 2006. The note holders were offered one
share of the Company's restricted common stock for each dollar of notes payable
that was extended. During the three months ended January 31, 2006 the Company
recorded an accrued expense totaling approximately 50,000 to account for the
expense of the restricted shares to be issued and during the three months ended
April 30, 2006 the Company recorded an additional accrual of approximately
$3,000 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 April 30, 2006 the Company has received extensions on approximately
$1,406,000 of the notes payable and has reached a re-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 totaling
approximately $904,000.
At January 31, 2006 the Company has notes payable totaling $2,524,800 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, $1,309,800 is written at 8 percent simple interest and
$845,000 has no stated interest rate. Of the total notes payable $662,800 is
convertible into common stock of the Company 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 O) and $190,000
(original $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 April 30, 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.
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 April 30, 2006 there remains a total of $820,000 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 $190,000
(originally $215,000) as noted below.
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The company has made all required payments
to date including three payments totaling $15,000 during the quarter ended April
30, 2006.
NOTE K - 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 $398,000 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 I).
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 April 30,
2006:
Cash
proceeds from
Equipment Lease Total
------------ ------------ ------------
Through April 30, 2007 $ 197,098 $ 106,033 $ 303,131
Through April 30, 2008 167,096 88,361 255,457
Through April 30, 2009 4,272 -- 4,272
Thereafter -- -- --
------------ ------------ ------------
Total minimum payments 368,466 194,394 562,860
Less amount representing interest 31,880 15,337 47,217
------------ ------------ ------------
Present value of net minimum payments 336,586 179,057
515,643
Less current portion 172,984 94,126 267,110
------------ ------------ ------------
Long-term portion $ 163,602 $ 84,931 $ 248,533
============ ============ ============
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - STOCK INCENTIVE PLANS
The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004) as of February 1, 2006. The Standard requires adoption for small business
issuers on the following effective date "as of the beginning of the first
interim period or annual reporting period that began after December 15, 2006".
This Standard applies to all awards granted after the required effective date
and to awards modified, repurchased, or cancelled after that date. Under the
Standard, the cumulative effect of initially applying the Statement, if any, is
recognized as of the required effective date and requires that all public
entities that used the fair-value-based method of either recognition or
disclosure under Statement 123 apply this Statement using a modified version of
prospective application. This transition method requires that compensation cost
be recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under Statement
123. As of February 1, 2006, the Company's effective date, the Company does not
have any unvested awards that would require compensation cost to be recorded at
this time. Additionally, all of the Company's outstanding awards have vested
prior to adoption of the revised Standard therefore there is no cumulative
effect that needs to be recorded and no awards would require the use of the
transition method under the revised Standard.
As of April 30, 2006, the Company has two share-based compensation plans and, in
addition, has issued shares outside the plans as described below.
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. Through April 30, 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. Through April 30, 2006, the Company has issued a total
of 467,855 shares under the Plan.
The Restated Articles of Incorporation, approved by a majority of the
stockholders on November 15, 2000, 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 April 30, 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.
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As previously 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 were accounted for following APB Opinion No. 25 and related
Interpretations. Had compensation cost for the Plans been determined under the
revised Standard and 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. No additional compensation cost would have been recorded during the
periods presented because no options vested during the periods presented.
Three months Three months Six months Six months
ended ended ended ended
April 30, April 30, April 30, April 30,
2006 2005 2006 2005
------------- ------------ ------------- ------------
Net earnings (loss):
As reported $ (269,393) $(524,092) $(573,964) $(984,004)
Proforma $ (269,393) $(524,092) $(573,964) $(984,004)
Basic earnings (loss) per share:
As reported $(0.01) $(0.03) $(0.02) $(0.06)
Pro forma $(0.01) $(0.03) $(0.02) $(0.06)
Diluted earnings (loss) per share:
As reported $(0.01) $(0.03) $(0.02) $(0.06)
Pro forma $(0.01) $(0.03) $(0.02) $(0.06)
There were no options granted in the three months ended April 30, 2006 or during
the three months ended April 30, 2005. No assumptions were necessary during
those periods to estimate the fair value of options.
For the quarter ended
-------------------------------------
April 30, April 30,
2006 2005
-------------------------------------
Risk-free interest rate -- --
Dividend yield -- --
Volatility factor -- --
Expected option term life in years -- --
-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 April 30, 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
Granted -- -
Exercised -- -
Forfeited -- -
- --------------------------------------------------------------------------------
Outstanding at April 30, 2006 11,230,000 $ 0.12
Exercisable at April 30, 2006 11,230,000 $ 0.12
================================================================================
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 8.82 $0.09 / $0.09
$0.11 to 0.20 9,200,000 / 9,200,000 7.60 $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 7.80 $0.12 / $0.12
-13-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - 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 $98,000 for the three months ended April 30, 2006.
As of April 30, 2006, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $10,050,000 expiring through 2026.
NOTE N - 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 wrote 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 $6,000 at April 30, 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.
-14-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - 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
April 30, 2006, the Company has 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 April 30, 2006, the holder has converted
$50,000 of the debenture balance into 1,743,902 shares of the Company's common
stock. The balance of the compensation debenture as of April 30, 2006 totals
$340,000.
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 J) and through April 30, 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 April 30, 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 April 30, 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 P - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
As of October 31, 2006 the Company has 8% notes payable to current directors,
and officers totaling $125,000. The Company has accounts payable totaling
approximately $47,000 due to a former director at April 30, 2006. As of April
30, 2006 executive officers and directors of the Company own approximately 5% of
the outstanding stock.
NOTE Q - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
has incurred losses since its inception and has not yet been successful in
establishing profitable operations. These factors raise substantial doubt about
the ability of the Company to continue as a going concern. The Company's product
is ready for immediate deployment, although the Company needs to obtain capital,
either long-term debt or equity to continue the implementation of its overall
business plan. In this regard, management is proposing to raise necessary
additional funds not provided by its planned operations through loans and/or
through additional sales of its common stock. 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.
-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
Videolocity's primary focus is to design, develop, manufacture, install, operate
and maintain its proprietary Digital Entertainment System (DES(TM)). The DES is
an Internet Protocol Television (IPTV) system that allows consumers to select,
on an on-demand basis, movies from an extensive menu of titles. It also provides
cable and digital satellite programming and interactive entertainment services
such as high speed Internet access, television Internet access, digital music,
youth programming, gaming, targeted advertising and informational applications.
Videolocity plans to derive its revenues from licensing the DES for deployment
into the hospitality, healthcare, residential and wireless markets. Videolocity
plans to expand its revenue base and global market reach through its
technology-licensing program and through strategic partnerships. Videolocity is
well positioned to provide the DES products through a direct sales and
operations model and will license the DES to other service providers for
delivery to hospitality, healthcare and more importantly, the residential market
that includes service via wireless/wired broadband, fiber to the home, broadband
over power lines and digital satellite networks. Management believes that the
flexibility and scalability of Videolocity's offerings provide a gateway into
these and other emerging markets.
Videolocity is a company that has completed the development of new technology
and is presently applying the new technology into market-accepted products. The
Company believes that its proprietary technology enhances the quality of
information transfer with superior presentation and with significantly higher
data storage compression. The Company's seasoned management team has selected
the hospitality entertainment sector as the first application of its
development. This decision has launched the Company into what is perceived to be
a well-defined market that demands an upgrade of present technology at
aggressively competitive costs, while providing value added services that
generate new residual revenue streams. Through the DES, hospitality, timeshare
and healthcare property owners will be able to offer guests superior quality,
quantity and capability for in-room entertainment and information transfer
services. Further applications, including, but not limited to security, medical
information transfer, education and advertising, are being researched and
developed to enhance future revenue streams beyond the markets already served. A
unique value associated with Videolocity and the DES product is the
year-over-year recurring revenue stream which we anticipate will be earned on
existing installations while new channels of distribution are marketed
throughout the United States, Europe, Caribbean, and Asia Pacific. Thus, the
Company now relies on the financial resources of its partners to satisfy the
growing consumer demand.
-16-
Videolocity has created a barrier to entry for competition through the
development of its proprietary technologies and trade secrets. The core
technologies are standards-based and relative to the advancement of critical
areas including but not limited to Videolocity's:
1. Digital Entertainment Solution
2. Video Encoding & Compression Process
3. Graphical User Interface
4. Embedded Software Image
5. Proprietary PCI Video Card
6. Linux Solution
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 few 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 April 30, 2006, the
Company had issued 140,746 shares to Cornell and received $38,000 under the
agreement.
Videolocity has an outstanding loan and a convertible debenture with Cornell
Capital Partners and under the terms of repayment, Cornell or its assignees have
the option to convert a portion of the loan and the debenture into registered
stock and may sell that stock into the market. Although Videolocity has only
drawn a total of $38,000 from the Standby Equity Distribution Agreement, as a
result of the stock received on conversion of the outstanding loan and
convertible debenture, Videolocity has been subject to an abundance of selling
pressure in the market.
New Business - Joint Venture
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. EOCG Media LLC was formed
as a Delaware limited liability company and is the parent company of EOCG Media
Ltd., a British Virgin Islands corporation. Videolocity assigned to EOCG Media
LLC the U.S. patent rights to the DES and EOCG Media Ltd. holds the patent
rights to DES in the rest of the World. EOCG Media is offering DES under its Mio
brand. The finalization of the agreement was contingent on shareholder approval
and Videolocity obtaining extensions of outstanding notes payable. Toward that
goal, Videolocity forwarded a proposal to certain shareholders and pursued
extensions with the holders of 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. 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 count when all of the
remaining consents are returned. Additionally, to date, 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.
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 April 30,
2006 E. Oliver Capital Group has forwarded to Videolocity approximately $274,000
to help maintain Videolocity's corporate functions. Under the agreement, the
amounts forwarded to Videolocity will be recouped through revenue distributions
from the joint venture and prior to Videolocity receiving cash distributions
from the joint venture. The joint venture is set up similar to a technology
licensing agreement where Videolocity will not own a percentage of the joint
venture; however, the Company will be entitled to distributions from the joint
venture including technical transfer fees and licensing fees as follows:
Videolocity shall receive (i) 100% of 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 1.0 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 2.0 of the
intellectual property technology currently in development.
-17-
EOCG Media has adopted the following business strategy:
1. Expand its franchise in the lodging, residential and wireless markets with
superior product offerings and aggressive sales and marketing efforts.
EOCG Media will provide interactive television services to new-build properties
and brand conversions. EOCG Media will also market to the Residential Broadband
market by providing its IPTV solution together with its strategic partners
throughout its target markets.
2) Continually improve financial performance by enhancing systems engineering
and internal processes to reduce costs and achieve greater operating efficiency.
EOCG Media is committed to continually improving and streamlining its business
practices. From executive management to customer service, all EOCG Media
employees are encouraged to contribute ideas that will make the Company a more
competitive, efficient, and customer-oriented organization. For example, EOCG
Media has integrated Envision, an operational support software (OSS) suite that
represents a quantum leap in modern design. Envision has been designed to
provide carriers with true operational support software that fully encompasses
the entire spectrum of billing, customer care and point of sale (POS)
requirements, as well as the smallest routine details of daily operations. EOCG
Media will continue these efforts and focus on preventative measures to improve
service delivery and reduce costs.
3) Create additional revenue sources from new and existing customers through
application of the Company's intellectual property assets and technology
licensing capabilities.
EOCG Media has built a customer base over the past several years. Now, the
Company is focusing on delivering new interactive services across that base that
we anticipate will garner additional "share of customer" revenue from consumers
and subscribers. An initial focus was to identify a strategic partner within the
Caribbean marketplace and in this regard EOCG Media has aligned itself with the
Caribbean Hotel Association ("CHA"), that represents 35 national hotel
associations and over 1,000 member hotels. In 2005, the CHA represented over
125,476 of the approximate 252,000 hotel rooms throughout the Caribbean and
serviced a total of 5.27 million unique visitors. Many of the Caribbean hotels
are comprised of less than 100 rooms that make them an ideal candidate for the
DES, a low-cost alternative to the incumbent systems. The DES may be deployed at
a fraction of the cost of competitive systems and provides a software based,
up-gradable alternative for future growth and additional revenue applications.
Videolocity anticipates revenues from the joint venture beginning in Q4 of
2006. To date, EOCG has launched its MIO brand commercial wireless voice and
data services within the Caribbean market to include Curacao, St. Maarten,
Bonaire and Grand Cayman and will continue to follow its aggressive build out
within the Caribbean and Latin America markets. EOCG Media will follow this
market penetration with its products and will operate under the same brand as
the wireless services.
Videolocity has minimized its staffing requirements and general business
expenses and by co-locating offices with EOCG Media LLC in their Park City, Utah
location. Videolocity is operating more efficiently as a member of the joint
venture and will continue to explore additional technological development and
market opportunities outside the scope of the joint venture.
Liquidity and Capital Resources
During the three months ended April 30, 2006, our total current assets decreased
approximately $72,000 and total assets decreased approximately $79,000 from
approximately $676,000 to approximately $597,000. The decrease in current assets
during the quarter is primarily due to the use of approximately $58,000 in cash
for operations and the repayment of approximately $15,000 in notes payable,
combined with a decrease in other assets totaling approximately $14,000
primarily consisting of prepaid expenses. The decrease in total assets also
includes approximately $7,000 in depreciation expenses taken against property
and equipment during the period.
-18-
During the six months ended April 30, 2006, our total current assets decreased
approximately $21,000 primarily due to a decrease in other assets of
approximately $23,000 primarily consisting of prepaid expenses. During the same
time frame, total assets decreased approximately $63,000 from approximately
$660,000 to $596,000 primarily from the decrease in prepaid expenses included in
other assets and depreciation expense recorded against equipment totaling
approximately $42,000. During the six months ended April 30, 2005, total current
assets decreased approximately $174,000 primarily from the use of cash for
operational purposes totaling approximately $167,000 and a decrease in other
assets, primarily prepaid expenses and deposits of approximately $21,000, which
was offset by an increase in accounts receivable of approximately $13,000.
During the three months ended April 30, 2006, total current liabilities
increased from approximately $5,699,000 to approximately $5,973,000, an
approximate $274,000 increase. There are several factors that contributed to
this net increase in current liabilities during the period. The most significant
was an increase in accrued liabilities totaling approximately $134,000 primarily
from officers not being paid all of their salary and officers not taking salary
during the period, combined with an accrual to account for the expense of stock
to be issued on the extensions of notes payable during the period and recording
an additional liability for payments made on our behalf on our lease by our
third party guarantor. The restricted stock will be issued when administratively
possible. Deferred revenue also increased approximately $97,000 and accrued
interest payable increased approximately $52,000 during the period. Deferred
revenues are advances received from a joint venture on future revenues from the
joint venture's use of our technology.
During the six months ended April 30, 2006, total current liabilities decreased
from approximately $7,024,000 to approximately $5,973,000, an approximate
$1,051,000 decrease. There are several factors that contributed to this net
decrease in current liabilities during the period including a transfer of
approximately $1,585,000 in notes payable to long term notes payable from
certain note holders signing extension agreements on the notes payable. This was
offset by approximately $302,000 increase in accrued liabilities primarily from
officers not being paid all of their salary and/or officers not taking salary
during the period, combined with an accrual to account for the expense of stock
to be issued on the extensions of notes payable during the period and recording
an additional liability for payments made on our behalf on our lease by our
third party guarantor. The restricted stock will be issued when administratively
possible. Deferred revenue also increased approximately 274,000 and accrued
interest payable increased approximately $89,000 during the period. Deferred
revenues are advances received from a joint venture on future revenues from the
joint venture's use of our technology.
Results of Operations
To date, we have been primarily a development stage company and have only
realized revenues from one installation of our technologies. We have recently
formed 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 April 30, 2006 we did not realize revenues
from our installed system as the hotel has been 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 resolution to reinstall the DES or
remove it and relocate it into another property.
For the three months ended April 30, 2006, operational expenses decreased
approximately $287,000 overall, or approximately fifty-eight percent, as
compared to the three months ended April 30, 2005. This is attributed primarily
to a decrease in salaries and other payroll expenses of approximately $194,000.
Payroll expenses were decreased substantially as compared to the prior period as
a direct result of the loss of employees. We have formed a joint venture with
another Company where those employees that did not leave Videolocity were hired
by the joint venture for continued development of the DES and other digital
products. The formation of the joint venture, and the joint venture advancing
funds for our operational expenses has enabled us to maintain our basic
operations and SEC filings 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 similar
quarter in the prior year including, technology development consulting of
approximately $40,000, travel and conventions of approximately $5,000, due to
not having the operating capital to conduct certain of those activities. We also
had decreases in rent of approximately $9,000 and utilities of approximately
$4,137 due to moving into shared office space during the quarter. During the
three months ended April 30, 2006, non operating expenses increased
approximately $23,000 as compared to the three months ended April 30, 2005
primarily resulting from the increase of interest expense recorded on notes
payable.
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For the six months ended April 30, 2006, operational expenses decreased
approximately $463,000, or approximately 54 percent, as compared to the six
months ended April 30, 2005. This is attributed primarily to a decrease in
salaries and other payroll expenses of approximately $333,000 as well as
decreases in most operational expenses during the period. Payroll expenses were
decreased substantially as compared to the prior period as a direct result of
the loss of employees.
We had decreases in most operational expenses as a result of not having the
operating capital to conduct certain activities including technology development
expenses of approximately $62,000, travel and conventions of approximately
$16,000. Other decreases in operational expenses included rent of $9,000 and
utilities of approximately $3,000 due to now sharing office space , depreciation
expense of approximately $30,000, and other of approximately $19,000. During the
six months ended April 30, 2006, non operating expenses increased approximately
$32,000 as compared to the three months ended April 30, 2005 primarily 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 April 30, 2006, we have, together with our subsidiaries, accumulated a net
operating loss carryforward of approximately $10,050,000, with an operating loss
tax benefit of approximately $3,743,000. 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 April 30, 2006, we issued an aggregate of
1,000,000 shares of common stock all of which were registered shares under the
Company's SB-2 toward an agreement for the conversion of a compensation
debenture. Subsequent to April 30, 2006 and to date, we have issued 666,667
shares toward an agreement for the conversion of a compensation debenture.
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. To date, the Company has made all required payments under the agreement
totaling $30,000.
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 and has made payments totaling approximately
$399,000 which have been recorded in accrued liabilites.
-21-
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 $190,000 (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
This item is not applicable.
Item 5. Other Information
This item is not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are included attached as exhibits to this
report.
Exhibit 31.1 Certification of CEO Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of CFO Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of CEO Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of CFO Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
This Item is not applicable.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIDEOLOCITY INTERNATIONAL, INC.
BY: /S/ ROBERT E. HOLT
------------------------------------
ROBERT E. HOLT
President and Director
Date: June 19, 2006
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: June 19, 2006
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