UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the Quarterly Period ended July 31, 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 September 15, 2006
- -------------------------- ------------------------------------
Common Stock, 28,057,277
Par Value $0.001 par value
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
VIDEOLOCITY INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Financial Statements........................................................... 2
Item 2. Management's Discussion and Analysis or Plan of Operation...................... 18
Item 3. Controls and Procedures........................................................ 22
PART II
Item 1. Legal Proceedings.............................................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................... 23
Item 3. Defaults Upon Senior Securities................................................ 23
Item 4. Submissions of Matters to a Vote of Security Holders........................... 24
Item 5. Other Information.............................................................. 24
Item 6. Exhibits and Reports on Form 8-K............................................... 24
Signatures..................................................................... 25
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
July 31, 2006
ASSETS
CURRENT ASSETS
Cash $ 23,489
Other assets 11,584
-----------
Total current assets 35,073
Property and equipment, at cost, net 548,151
Other assets 24,909
-----------
$ 608,133
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 257,824
Deferred revenue 357,147
Accrued liabilities 3,872,108
Accrued interest payable 611,586
Notes payable 840,000
Current portion of long term obligations - capital lease 273,171
-----------
Total current liabilities 6,211,836
Long term obligations less current portion - capital lease 177,924
Notes payable - related parties 125,000
Notes payable 1,544,800
Compensation debenture 320,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 26,624,477 issued and outstanding 26,626
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,917,287
Deficit accumulated during the development stage (14,720,206)
-----------
Total stockholders' deficit (7,776,293)
-----------
$ 608,133
===========
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 Nine months ended 2000
July 31, July 31, through
---------------------------- ---------------------------- July 31,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
Revenue $ -- $ 39,101 $ -- $ 100,144 $ 124,645
Cost of Goods Sold -- 16,917 -- 57,237 94,948
------------ ------------ ------------ ------------ ------------
Gross Profit -- 22,184 -- 42,907 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 79,447 172,724 329,105 755,610 6,961,090
Professional fees and consultants 6,852 28,845 49,524 63,610 1,387,560
Technology development consulting -- 25,580 22,080 109,365 872,350
Directors compensation through stock plan 9,990 200,000 9,990 200,000 304,990
Rent and Utilities 3,000 18,706 23,588 51,195 437,742
Provision for bad debts -- -- 1,091 -- 601,091
Travel, conventions, meals and entertainment -- 8,143 2,763 27,150 240,696
Depreciation and amortization 7,004 35,689 49,441 107,753 228,245
Gain on transfer of license agreements -- -- -- -- (114,509)
Write off of goodwill -- -- -- -- 958,628
Other 2,136 18,279 18,841 54,025 630,824
------------ ------------ ------------ ------------ ------------
108,429 507,966 506,423 1,368,708 12,508,707
------------ ------------ ------------ ------------ ------------
Operating loss (108,429) (485,782) (506,423) (1,325,801) (12,479,010)
Interest income -- -- -- -- 5,578
Legal Settlement -- -- -- -- (200,433)
Gain on sale of stock, net -- -- -- -- 338,049
Interest and beneficial conversion expense (44,457) (90,108) (220,427) (214,567) (2,290,878)
Expense for stock options on services, debt -- -- -- (19,526) (88,646)
Minority interests -- -- -- -- (4,866)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (152,886) (575,890) (726,850) (1,559,894) (14,720,206)
Income taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $ (152,886) $ (575,890) $ (726,850) $ (1,559,894) $(14,720,206)
============ ============ ============ ============ ============
Loss per common share
Basic and Diluted $ (0.01) $ (0.03) $ (0.03) $ (0.09)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 24,993,384 20,022,380 24,430,461 18,347,188
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
July 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
July 31, 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 -- -- -- -- (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 1,000 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)
Issuance of common stock for:
Conversion of debt -- -- 1,777,778 1,778 18,222 --
Bonus interest and extensions on debt -- -- 390,000 390 11,310 --
Net loss for the quarter -- -- -- -- -- ( 152,886)
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 31, 2006 -- $ -- 26,624,477 $ 26,626 $ 6,917,287 $(14,720,206)
============ =========== ========== =========== =========== ============
The accompanying notes are an integral part of this statement.
-5-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
For the nine months ended May 26, 2000
July 31, (inception)
---------------------------- Through
2006 2005 July 31, 2006
------------ ------------ ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (726,850) $ (1,559,894) $(14,720,206)
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 49,441 107,754 338,463
Interest expense recognized on beneficial conversion -- -- 423,900
Issuance of common stock under stock plans 12,950 36,600 823,508
Issuance of common stock for services -- -- 553,832
Issuance of common stock for interest -- 2,433 509,925
Options issued on guarantee, services, and loans -- -- 275,394
Issuance of common stock for legal settlement -- 19,526 22,400
Changes in assets and liabilities
Accounts receivable -- (6,638) (1,091)
Other assets 22,954 24,146 (36,493)
Accounts payable and accrued liabilities 221,983 522,133 3,760,867
Deferred revenue 357,147 -- 357,147
Accrued interest 123,016 152,616 830,964
------------ ------------ ------------
Total adjustments 788,582 858,570 8,970,843
------------ ------------ ------------
Net cash provided by (used in) operating activities 61,732 (701,324) (5,749,363)
------------ ------------ ------------
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 -- 595,000 4,809,800
Proceeds from lease -- -- 357,000
Cash received on equity distribution agreement -- -- 38,000
Payments on lease -- (40,104) (181,554)
Payments on notes payable (40,000) (25,000) (65,000)
Proceeds from issuance of common stock -- -- 1,024,306
------------ ------------ ------------
Net cash (used in) provided by financing activities (40,000) 529,896 5,982,552
------------ ------------ ------------
Net increase (decrease) in cash 21,218 (171,428) 23,489
Cash at beginning of period 2,271 185,696 --
------------ ------------ ------------
Cash at end of period $ 23,489 $ 14,268 $ 23,489
============ ============ ============
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
Noncash investing and financing activities
- ------------------------------------------
During the nine months ended July 31, 2006 the Company transferred $189,383 from
long term obligations- capital lease to accrued liabilities to reflect lease
payments made on behalf of the Company by a third party guarantor. The Company
also issued 390,000 shares of common stock totaling $11,700 from accruals as the
expense had been recorded and accrued in a prior quarter.
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 July 31,
2006 and for the three and nine months ended July 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 and nine months ended July 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 and nine months ended July 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 July 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.
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 July 31, 2006, other assets consisted of the following:
Short term Long term
Non trade receivables $ 1,584 $ --
Prepaid expenses 10,000 --
Deposits -- 24,909
---------- ----------
$ 11,584 $ 24,909
========== ==========
NOTE G - PROPERTY AND EQUIPMENT
At July 31, 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 274,954
---------
$ 548,151
=========
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. 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 July 31, 2006 E.
Oliver Capital Group has forwarded to Videolocity approximately $357,000 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 distributions from the joint venture and prior to Videolocity
receiving cash distributions from the joint venture. Videolocity is 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.
NOTE I - ACCRUED LIABILITIES
At July 31, 2006, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 3,142,962
Director and consultant compensation
212,990
Capital lease paid on Company's behalf (Note K)
474,261
Other 41,895
-----------
$ 3,872,108
===========
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - NOTES PAYABLE
At July 31, 2006 the Company has notes payable totaling $2,509,800 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, $1,294,800 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 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
$175,000 (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 July 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.
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, and during the nine months ended July 31, 2006,
the Company has paid back $40,000 of notes payable under the UCC-1.
As of July 31, 2006 there remains a total of $805,000 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 $175,000 (originally $215,000) 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. The Company has made all required payments
to date including three payments totaling $15,000 during the quarter ended July
31, 2006.
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $474,000 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 July 31,
2006:
Cash
proceeds
from
Equipment Lease Total
---------- ---------- ----------
Through July 31, 2007 $ 197,098 $ 106,033 $ 303,131
Through July 31, 2008 122,092 61,854 183,946
Thereafter -- -- --
---------- ---------- ----------
Total minimum payments 319,190 167,887 487,077
Less amount representing interest 24,383 11,599 35,982
---------- ---------- ----------
Present value of net minimum payments 294,807 156,288 451,095
Less current portion 176,978 96,193 273,171
---------- ---------- ----------
Long-term portion $ 117,829 $ 60,095 $ 177,924
========== ========== ==========
NOTE L - STOCK INCENTIVE PLANS
As of July 31, 2006, the Company has two share-based compensation plans and, in
addition, has approved and issued stock 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 July 31, 2006, the
Company has granted 998,384 plan units of which 998,384 units have vested and
have been exercised under the plan.
On March 26, 2002 the Company filed an additional stock option and stock award
plan. 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 July 31, 2006, the Company has granted and issued a total of 467,855
shares under the Plan.
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Prior to February 1, 2006, we accounted for our stock option and incentive plans
under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations, as
permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation.
Accordingly, compensation costs for stock options were measured as the excess,
if any, of the quoted market price of our stock at the date of grant over the
amount an employee must pay to acquire the stock.
The Company adopted Statement of Financial Accounting Standards No. 123(R) as of
February 1, 2006 which requires the measurement and recognition of compensation
expense for all stock-based awards based on estimated fair values. 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. During March 2005, the SEC
issued Staff Accounting Bulletin No. 107 ("SAB 107") providing supplemental
guidance for the implementation of Statement 123(R). We have applied the
provisions of SAB 107 in our adoption of Statement 123(R). We adopted Statement
123(R) using the modified prospective transition method. In accordance with that
method, the consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of Statement 123(R).
Share-based compensation expense recognized during 2006 under Statement 123(R)
would include: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of February 1, 2006 of which the Company had none, and
(b) compensation cost for all share-based payments granted subsequent to
February 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of Statement 123(R). The following amounts were recognized
in our consolidated statement of operations for share-based compensation for the
periods ended July 31:
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Compensation Cost:
Stock options $ -- $ 2,350 $ 12,950 $ 36,600
Restricted stock 16,625 -- 16,625 --
---------- ---------- ---------- ----------
Total share based compensation
expense $ 16,625 $ 2,350 $ 29,575 $ 36,600
========== ========== ========== ==========
Compensation expense per share: $ 0.00 $ 0.00 $ 0.00 $ 0.00
We did not receive cash from stock option exercises for the nine months ended
July 31, 2006 and 2005. Statement 123(R) requires that the cash retained as a
result of the tax deductibility of employee share-based awards be presented as a
component of cash flows from financing activities in the consolidated statement
of cash flows. Due to our net operating loss position, we did not recognize a
tax benefit from options exercised under the share-based payment arrangements.
Cash flow from operating activities for the nine months ended July 31, 2006
included non-cash compensation expense related to stock options of $12,950 and
non-cash compensation expense in the amount of $16,625 related to non-vested
shares (restricted stock).
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Information under Statement 123
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement 123 to
options granted under our stock option plan for the three and nine months ended
July 31, 2005. For purposes of this pro forma disclosure, the value of the
options was estimated using the Black-Scholes option-pricing formula at date of
grant and amortized to expense over the options' vesting periods.
Three Months Nine Months
Ended Ended
July 31, 2005 July 31, 2005
-------------- ---------------
Net loss, as reported $ (575,890) $ (1,559,894)
Add: stock based employee compensation expense included in reported net loss 2,350 36,600
Less: stock based employee compensation expense determined under fair value
method, net of related tax effects (45,991) (45,991)
-------------- ---------------
Net loss, pro forma $ (619,531) $ (1,569,285)
============== ===============
Loss per share (basic and diluted)
As reported $ (0.03) $ (0.09)
Pro forma (0.03) (0.09)
Stock Option Valuation and Expense Information under Statement 123(R)
During the three months and nine months ended July 31, 2006 and 2005 we did not
grant stock options. As such, we did not value stock options during those
periods. All options granted previous to the Company's adoption of Statement
123(R) were 100 percent vested prior to the adoption of the Statement. In the
future, if the Board of Directors grants additional stock options we plan to use
the Black-Scholes-Merton option pricing model to determine the fair value of the
options issued, which is an acceptable model in accordance with Statement
123(R). The Black-Scholes-Merton model requires the use of exercise data and the
use of a number of behavior assumptions including the volatility of the stock
price, the weighted average risk-free interest rate, dividend rate, and the
weighted average expected life of the options.
Statement 123(R) requires forfeitures to be estimated at the time of grant and
revised in subsequent periods if actual forfeitures differ from those estimates.
Prior to adoption of Statement 123(R), we accounted for forfeitures as they
occurred for the purposes of our pro forma information under Statement 123, as
disclosed in the Notes to Consolidated Financial Statements for the related
periods. The weighted average fair value of options granted and the assumptions
used in the Black-Scholes-Merton model during the quarter ended July 31 are set
forth in the table below.
July 31, July 31,
2006 2005
---------- --------------
Weighted average fair value of options granted $ 0.00 $0.00
Dividend yield 0.0% 0.0%
Weighted average risk-free interest 0.0% 0.0%
Weighted average expected volatility 0.0% 0.0%
Weighted average expected life - employee - -
Weighted average expected life - non-employee director - -
-12-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the period May 26, 2000
(inception) through July 31, 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
Granted -- -
Exercised -- -
Forfeited (30,000) (0.30)
------------- -----------
Outstanding at July 31, 2006 11,200,000 $ 0.08
Exercisable at July 31, 2006 11,200,000 $ 0.12
-13-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 8.59 $0.09 / $0.09
$0.11 to 0.20 9,200,000 / 9,200,000 7.35 $0.13 / $0.13
------------- ------------ ---- ------- --------
11,200,000 /11,200,000 7.57 $0.12 / $0.12
The Company's aggregate intrinsic value of stock options represents the
difference between the closing stock price on July 31, 2006 and the exercise
price, multiplied by the number of in-the-money options that would have been
received by the option holders had all option holders exercised their options on
July 31, 2006. Accordingly, the intrinsic value of options at July 31, 2006 is
$0.00 because the Company does not have any in the money options as of that
date.
In the three months ended July 31, 2006, 30,000 of vested options to purchase
shares with a weighted average exercise price of $0.30 expired. The remaining
outstanding share options expire in 2013 though 2015.
Non-Vested Shares (Restricted Stock)
Certain officers, directors and key employees have been awarded non-vested
shares (restricted stock). Vesting applicable to non-vested shares (restricted
stock) lapse based either on performance or service standards as determined by
the Board of Directors. During the three months ended April 30, 2005 as an
incentive and to retain key individuals, 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 July 31, 2006 the 2,000,000
shares of restricted stock have not been issued, however the Company has
recorded an accrued liability for the expense incurred during the vesting
period. Additionally, during June 2006 the Board of Directors approved a total
of 6,650,000 shares of restricted stock that vests quarterly through the second
quarter of 2007 (March 2007) to retain certain key individuals.
The fair value of the non-vested shares is equal to the fair market value on the
date of grant and is amortized ratably over the vesting period. The fair value
of the restricted stock is currently being amortized ratably over the specific
vesting period.
A summary of the status of non-vested shares (restricted stock) and changes as
of July 31, 2006 is set forth below:
Weighted
Average
Non-vested Grant-date
Shares Fair Value
--------- ------------
Non-vested shares outstanding, beginning of period -- $ --
Granted 6,650,000 0.01
Vested 1,662,500 0.01
Forfeited/canceled -- --
--------- ------------
Non-vested shares outstanding, end of period 4,987,500 $ 0.01
========= ============
-14-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrecognized Compensation Expense
As of July 31, 2006 unrecorded compensation costs related to awards issued under
the Company's various share-based compensation arrangements are as follows:
Weighted
average
recognition
July 31, period
2006 (months)
------------ ------------
Unrecognized compensation cost:
Stock options, net of expected forfeitures $ -- -
Non-vested shares (restricted stock) -- time based vesting 49,875 0.67
------------
Total unrecognized compensation cost $ 49,875
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 $57,000 for the three months and approximately
$274,000 for the nine months ended July 31, 2006.
As of July 31, 2006, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $10,500,000 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.
-15-
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 had 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 were subject to an
effective registration statement with the United States Securities and Exchange
Commission covering the resale of the shares. The Company filed an SB-2 on July
9, 2004 to register 19,314,099 shares of common stock and the SB-2 was declared
effective by the Securities and Exchange Commission on July 22, 2004. As of July
31, 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 July 31, 2006, Cornell has converted
$70,000 of the debenture balance into 3,521,680 shares of the Company's common
stock. The balance of the compensation debenture as of July 31, 2006 totals
$320,000.
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 July 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 July 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 July 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 P - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
As of July 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 July 31, 2006. As of July 31,
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.
NOTE R - SUBSEQUENT EVENTS
During August 20006 we received a formal demand letter from Cornell Capital
regarding repayment of the two notes payable originally totaling $650,000 with a
remaining balance of $320,000. The demand letter and subsequent correspondence
demanded repayment of the notes on or before September 8, 2006. We have been in
conversations with Cornell regarding setting up a new payment schedule to
resolve this demand.
-16-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 8, 2006 we mailed a formal default notification to E Oliver
Capital Group LLC because of its failure to contribute funds and make cash
payments to Videolocity as required under the Operating Agreement. We have
demanded the immediate withdrawl by E Oliver Capital Group LLC from EOCG Media
LLC as well as the immediate reassignment of all rights to the Intellectual
Property Technology, which includes the DESTM and related services, trade
secrets, patents, copyrights; and any other intellectual property rights
including High Speed Internet Access together with digital streaming video
technology, existing license agreements and agreements for Video-on-Demand
programming for DESTM previously assigned by Videolocity pursuant to the
Operating Agreement and/or Joint Venture Agreements between the companies.
-17-
Item 2. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-QSB.
Forward-Looking Information
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," expect, ," "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. Our plan of operation will depend on our ability to
raise substantial additional capital, of which there can be no assurance.
-18-
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. Under
the equity distribution agreement, Videolocity had 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 could 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
were 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 commenced on the effective date
of the registration statement. The purchase price of the shares were 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. From
the effective date through July 31, 2006, the Company has issued 140,746 shares
to Cornell and received $38,000 under the agreement.
Videolocity has two outstanding loans 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 loans and
convertible debenture, Videolocity has been subject to an abundance of selling
pressure in the market.
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. Under the agreement Videolocity
assigned to EOCG Media LLC the U.S. patent rights to the DES and assigned EOCG
Media Ltd. the patent rights to DES in the rest of the World. 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 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 May 30, 2006, we received written consent from
shareholders representing a majority of the outstanding stock of the Company
approving the agreement. Additionally, we reached extensions on notes payable
totaling approximately $1,406,000 and have worked out a payment schedule on an
additional $215,000 of notes payable.
Under the agreement E. Oliver Capital Group was required to advance to
Videolocity the funds necessary 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. Under the
agreement, the amounts forwarded to Videolocity were to be recouped through
revenue distributions from the joint venture and prior to Videolocity receiving
cash distributions from the joint venture. Videolocity would 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. Additionally, under the agreement Capital Group LLC
was required to "contribute from time to time such funds as necessary to operate
and deploy the E. Oliver intellectual property technology including necessary
salaries and other operating expenses and capital expenditures of the LLC".
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On September 8, 2006 we mailed a formal default notification to E Oliver Capital
Group LLC because of E. Oliver Capital Group LLC's continued failure
to"contribute from time to time such funds as necessary to operate and deploy
the intellectual property technology, including necessary salaries and other
operating expenses and capital expenditures of the LLC" and its failure to make
its obligatory cash payments to Videolocity as required under the Operating
Agreement. Videolocity's letter gave notice of the default and under the terms
of the Agreement demanded the immediate withdrawl by E Oliver Capital Group LLC
from EOCG Media LLC as well as the immediate reassignment of all rights to the
Intellectual Property Technology, which includes the DESTM and related services,
trade secrets, patents, copyrights; and any other intellectual property rights
including High Speed Internet Access together with digital streaming video
technology, existing license agreements and agreements for Video-on-Demand
programming for DESTM previously assigned by Videolocity pursuant to the
Operating Agreement and/or Joint Venture Agreements. We have given E. Oliver
Capital Group ten days to complete the reassignment and to withdraw from EOCG
Media LLC. The Agreement does not give any cure time and if these items are not
completed within ten days we will pursue all other appropriate legal actions to
resolve this matter to the benefit of Videolocity.
New Opportunities
We are currently evaluating several financing sources to continue to bring the
Videolocity DES product to market. We have identified and had discussions with
another funding entity that is interested in forming a joint venture similar in
structure to the agreement that Videolocity previously entered with E. Oliver
Capital Group. Discussions initially have been focused on funding amounts and
structure, as well as, residual revenues and technology transfer fees that will
be due to Videolocity under such an agreement. As we already have had
considerable contact with several potential strategic partners in the Caribbean
marketplace, we have aligned 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 has minimized its staffing requirements and general business
expenses until we have finalized agreements with funding sources. Videolocity is
operating more efficiently, with fewer full time employees, although several key
employees remain. Videolocity will continue to explore additional technological
development and market opportunities.
Liquidity and Capital Resources
During the three months ended July 31, 2006, our total current assets increased
approximately $19,000 and total assets increased approximately $12,000 from
approximately $596,000 to approximately $608,000. The increase in current assets
during the quarter is primarily due to the increase of cash of approximately
$19,000. The cash inflow was from cash received as deferred revenue through our
joint venture agreement. We have minimized all corporate activities and
operations until we have finalized agreements with new funding sources.
During the nine months ended July 31, 2006, our total current assets decreased
approximately $3,000 primarily from an increase in cash of approximately $21,000
received from our joint venture, which was offset by a decrease in other assets
of approximately $23,000, primarily consisting of prepaid expenses. We have
received approximately $357,000 from our joint venture during the nine months
ended July 31, 2006, which was used to maintain our operations until the joint
venture started deploying the DES technology product into the market. During the
nine months ended July 31, 2006, total assets decreased approximately $52,000,
primarily due to maintaining operations including a decrease in other assets of
approximately $23,000, which primarily consisted of prepaid expenses, a decrease
in property and equipment approximately $49,000 from depreciation expenses,
offset by an increase in cash of approximately $22,000.
During the three months ended July 31, 2006, total current liabilities increased
from approximately $5,974,000 to approximately $6,212,000, an approximate
$238,000 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 $120,000, 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 an additional
liability for payments made on our behalf on our lease by our third party
guarantor. Deferred revenue also increased by approximately $83,000 and accrued
interest payable increased approximately $33,000 during the period. Deferred
revenues were advances received from a joint venture on future revenues from the
joint venture's use of our technology.
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During the nine months ended July 31, 2006, total current liabilities decreased
from approximately $7,024,000 to approximately $6,212,000, an approximate
$812,000 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 their notes payable. This
was offset by approximately $422,000 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 record an additional
liability for payments made on our behalf on our lease by our third party
guarantor totaling. Deferred revenue also increased approximately 274,000 and
accrued interest payable increased approximately $123,000 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 realized
revenues from one installation of our technologies. We formed a joint venture
that was actively marketing the Videolocity DES. During the three months ended
July 31, 2006 we did not realize revenues from our previously installed system
as the system has not been reactivated since the hotel underwent a major
renovation. The system was shut down in the final phase of the renovation. We
have worked with hotel management to determine a resolution to reinstall the DES
or remove it and relocate it into another property and have also consulted with
legal counsel to determine a path to resolution. No formal action has taken
place to date.
For the three months ended July 31, 2006, operational expenses decreased
approximately $400,000 overall, or approximately seventy-nine percent, as
compared to the three months ended July 31, 2005. This is attributed primarily
to a strong effort to minimize all expenses possible until we have secured
additional funding and can continue with our business plan and normal
operations. The overall decrease for the three months is primarily made up of a
decrease in salaries and other payroll expenses of approximately $94,000, or
fifty four percent. Payroll expenses were decreased substantially as compared to
the prior period as a direct result of fewer employees until the additional
funding is formalized. We had decreases in most operational expenses during the
three months ended July 31, 2006 as compared to the similar period in the prior
year including, technology development consulting of approximately $26,000,
depreciation of approximately $29,000, professional fees and consultants of
approximately $22,000, travel and conventions of approximately $8,000, due to
not having the operating capital to conduct certain of those activities. The
largest decrease totaling approximately $190,000 was in Director compensation
through the stock plan. We also had decreases in rent and utilities of
approximately $16,000 due to moving into shared office space. During the three
months ended July 31, 2006, non-operating expenses decreased approximately
$46,000 as compared to the three months ended July 31, 2005 primarily resulting
from the decrease of interest expense.
For the nine months ended July 31, 2006, operational expenses decreased
approximately $862,000, or approximately 63 percent, as compared to the nine
months ended July 31, 2005. This is attributed primarily to a decrease in
salaries and other payroll expenses of approximately $427,000 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 reduction 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 $87,000, travel and
conventions of approximately $24,000. Other decreases in operational expenses
included rent and utilities of approximately $28,000 due to now sharing office
space, depreciation expense of approximately $58,000, other expenses of
approximately $35,000 and professional fees and consultants of approximately
$14,000. During the nine months ended July 31, 2006, non-operating expenses
decreased approximately $14,000 as compared to the nine months ended July 31,
2005 primarily resulting from recording of an expense for stock options of
approximately $19,000 in the three months ended July 31, 2005.
Our plan of operation will depend on our ability to raise substantial additional
capital, of which there can be no assurance.
Net Operating Loss
As of July 31, 2006, we have, together with our subsidiaries, accumulated a net
operating loss carryforward of approximately $10,500,000, with an operating loss
tax benefit of approximately $3,913,000. 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.
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Item 3. Controls and Procedures
We maintain disclosure controls and procedures that are designed to be effective
in providing reasonable assurance that information required to be disclosed in
our reports under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC, and that such information is accumulated and communicated to our
management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute assurance of achieving the
desired objectives. Also, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based, in part, upon certain assumptions
about the likelihood of future events and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
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 principal 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 Exchange Act.
Based upon that evaluation, management concluded that our disclosure controls
and procedures are effective to cause the information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods prescribed by SEC,
and that such information is accumulated and communicated to management,
including our chief executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
There was no change in our internal controls over financial reporting identified
in connection with the requisite evaluation that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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.
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.
-22-
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 July 31, 2006, we issued an aggregate of 2,167,778
shares of common stock, 666,667 of which were registered shares under the
Company's Form SB-2 registration statement toward an agreement for the
conversion of a compensation debenture.
We also issued 1,111,111 shares of restricted common stock pursuant to a
conversion of a compensation debenture and as per the exemption as provided by
Section 3(a)(9) of the Securities Act of 1933. Additionally, we issued 390,000
shares of unregistered common stock as compensation for extensions of notes
payable.
Subsequent to July 31, 2006 and to date, we have issued 1,432,800 shares as
compensation for extensions of notes payable. These shares and the 390,000
shares issued during the third quarter were issued in private, isolated
transactions pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act of 1933. We accrued an expense during the timeframe that
the extensions were signed and have now issued the stock.
Item 3. Defaults Upon Senior Securities
During August we received a formal demand letter from Cornell Capital regarding
repayment of the two notes payable originally totaling $650,000 with a remaining
balance of $320,000. The demand letter and subsequent correspondence demanded
repayment of the notes on or before September 8, 2006. We have been in
conversations with Cornell regarding setting up a new payment schedule to
resolve this demand.
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 $45,000.
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
$474,000 which have been recorded in accrued liabilities.
-23-
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 $175,000 (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: September 19, 2006
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: September 19, 2006
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