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 January 31, 2007
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0429154
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 March 15, 2007
- -------------------------- ------------------------------------
Common Stock, 30,640,610
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.................... 22
Item 3. Defaults Upon Senior Securities................................................ 22
Item 4. Submissions of Matters to a Vote of Security Holders........................... 23
Item 5. Other Information.............................................................. 23
Item 6. Exhibits and Reports on Form 8-K............................................... 23
Signatures..................................................................... 24
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
January 31, 2007
ASSETS
CURRENT ASSETS
Cash $ 26,501
-----------
Total current assets 26,501
Property and equipment, at cost, net 538,303
Technology 148,157
Other assets 26,493
-----------
$ 739,454
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 300,923
Accrued liabilities 4,548,476
Accrued interest payable 714,026
Notes payable 1,954,800
Notes payable - related parties 125,000
Current portion of long term obligations - capital lease 285,717
-----------
Total current liabilities 7,928,942
Long term obligations less current portion - capital lease 31,856
Notes payable 400,000
Compensation debenture 308,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 29,390,610 issued and outstanding 29,391
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,961,778
Deficit accumulated during the development stage (14,925,379)
-----------
Total stockholders' deficit (7,934,210)
-----------
$ 739,454
===========
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 2000
January 31, through
---------------------------- January 31,
2007 2006 2007
------------ ------------ ------------
Revenue $ -- $ -- $ 124,645
Cost of Goods Sold -- -- 94,948
------------ ------------ ------------
Gross Profit -- -- 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 425,009 86,193 7,528,316
Professional fees and consultants 9,249 26,189 1,418,795
Technology development consulting -- 16,560 866,725
Directors compensation through stock plan -- -- 304,990
Rent and Utilities 3,000 12,000 328,305
Provision for bad debts -- -- 601,091
Travel, conventions, meals and entertainment 6,009 800 286,378
Depreciation and amortization 2,844 35,360 238,094
Utilities 385 4,564 116,467
Write off of goodwill -- -- 958,628
Other 4,270 6,280 645,419
------------ ------------ ------------
450,766 187,946 13,293,208
------------ ------------ ------------
Operating loss (450,766) (187,946) (13,263,511)
Interest income -- -- 5,578
Legal Settlement -- -- (200,433)
Gain on sale of stock, net -- -- 338,049
Gain on tansfer of license agreements
and technology 228,157 -- 699,813
Interest and beneficial conversion expense (66,933) (116,625) (2,411,363)
Expense for stock options on services, debt -- -- (88,646)
Minority interests -- -- (4,866)
------------ ------------ ------------
Loss before income taxes (289,542) (304,571) (14,925,379)
Income taxes -- -- --
------------ ------------ ------------
NET LOSS $ (289,542) $ (304,571) $(14,925,379)
============ ============ ============
Loss per common share
Basic and Diluted $ (0.01) $ (0.03)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 28,759,929 23,441,014
The accompanying notes are an integral part of these statements.
-3-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004, October 31, 2005, October 31, 2006
and the three months ended January 31, 2007
Deficit
Accumulated
Additional during the
Preferred stock Common stock paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at May 26, 2000 (inception) -- $ -- -- $ -- $ -- $ --
Issuance of common stock -- -- 640,610 641 85,685 --
Net loss for the period -- -- -- -- -- (129,778)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2000 -- -- 640,610 641 85,685 (129,778)
Issuance of preferred stock 950,000 950 -- -- 949,050 --
Issuance of common stock for acquisition
of Videolocity, Inc. -- -- 3,028,076 3,028 386,092 --
Provision for redemption value of
preferred stock -- -- -- -- (3,957,380) --
Issuance of common stock for:
Services -- -- 20,000 20 19,980 --
Cash -- -- 610,000 610 499,390 --
Stock incentive plans -- -- 5,000 5 4,995 --
Bonus interest and extensions of debt -- -- 15,000 15 74,985 --
Net loss for the year -- -- -- -- -- (2,379,623)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2001 950,000 950 4,318,686 4,319 (1,937,203) (2,509,401)
Redemption and cancellation of preferred
stock (950,000) (950) 180,000 180 3,957,380 --
Cancellation of common stock -- -- (50,000) (50) 50 --
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 303,900 --
notes payable
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 148,500 149 132,493 --
Conversion of debt -- -- 355,000 355 354,645 --
Services -- -- 419,871 419 444,453 --
Stock incentive plans -- -- 504,539 505 453,637 --
Net loss for the year -- -- -- -- -- (3,086,210)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2002 -- -- 5,876,596 5,877 3,709,355 (5,595,611)
Interest expense recognized on
beneficial conversion feature on -- -- -- -- 120,000 --
notes payable
Issuance of common stock for:
Bonus interest and extensions on debt -- -- 335,000 335 82,914 --
Services -- -- 16,000 16 944 --
Stock incentive plans -- -- 119,400 119 169,847 --
Net loss for the year -- -- -- -- -- (1,989,490)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
Continued
-4-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the period May 26, 2000 (inception) through October 31, 2000
and for the years ended October 31, 2001, October 31, 2002, October 31, 2003,
October 31, 2004, October 31, 2005, October 31, 2006
and the three months ended January 31, 2007
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:
Bonus interest and extensions on debt -- -- 1,822,800 1,821 45,135 --
Conversion of debt -- -- 2,777,778 2,778 37,222 --
Stock incentive plans -- -- 18,500 19 12,931 --
Net loss for the year -- -- -- -- -- ( 642,481)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2006 -- $ -- 28,057,277 $ 28,057 $ 6,951,112 $(14,635,837)
Issuance of common stock for:
Conversion of debt -- -- 1,333,333 1,334 10,666 --
Net loss for the three months -- -- -- -- -- ( 289,542)
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 31, 2007 -- $ -- 29,390,610 $ 29,391 $ 6,961,778 $(14,925,379)
============ =========== ========== =========== =========== ============
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 three months ended May 26, 2000
January 31, (inception)
-------------------------------- Through
2007 2006 January 31, 2007
--------------- --------------- -------------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (289,542) $ (304,571) $ (14,925,379)
Adjustments to reconcile net loss to
net cash (used in) provided by operating
activities
Minority interests - - 4,866
Provision for bad debts - - 601,091
Write off of goodwill - - 958,628
Gain on sale of investment stock - - (338,049)
Gain on transfer of license and technology (228,157) - (699,813)
Loss on write-off of loan fees - - 100,000
Depreciation and amortization 2,844 35,361 348,312
Interest expense recognized on beneficial conversion - - 423,900
Issuance of common stock under stock plans - 12,950 823,508
Issuance of common stock for services - - 553,832
Issuance of common stock for interest - - 556,881
Options issued on guarantee, services, and loans - - 275,394
Issuance of common stock for legal settlement - - 22,400
Changes in assets and liabilities
Accounts receivable - - (1,091)
Other assets - 8,896 (126,493)
Accounts payable and accrued liabilities 429,280 102,533 4,335,112
Deferred revenue - 176,663 357,147
Accrued interest 58,660 37,997 933,404
--------------- --------------- -------------------
Total adjustments 262,627 374,400 9,129,029
--------------- --------------- -------------------
Net cash provided by provided by (used in)
operating activities (26,915) 69,829 (5,796,350)
--------------- --------------- -------------------
Net cash flows from investing activities -
Investment stock and licenses, net - - 555,791
Increase in notes receivable - - (600,000)
Purchase of technology - - (150,000)
Cash received on sale of technology 55,000 - 230,000
Purchase of property and equipment - - (165,492)
--------------- --------------- -------------------
Net cash flows provided by (used in)
investing activities 55,000 - (129,701)
--------------- --------------- -------------------
Cash flows from financing activities
Increase in notes payable - - 4,809,800
Proceeds from lease - - 357,000
Cash received on equity distribution agreement - - 38,000
Payments on lease - - (181,554)
Payments on notes payable (15,000) (10,000) (95,000)
Proceeds from issuance of common stock - - 1,024,306
--------------- --------------- -------------------
Net cash provided by (used in) financing activities (15,000) (10,000) 5,952,552
--------------- --------------- -------------------
Net increase in cash 13,085 59,829 26,501
Cash at beginning of period 13,416 2,271 -
--------------- --------------- -------------------
Cash at end of period $ 26,501 $ 62,100 $ 26,501
=============== =============== ===================
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the period for
Interest $ - $ - $ -
Income taxes - - -
(continued)
-6-
Noncash investing and financing activities
- ------------------------------------------
During the three months ended January 31, 2007 the Company transferred
approximately $67,500 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 1,333,333 shares of common stock to
retire $12,000 of its compensation debenture. Additionally, the Company
transferred $175,000 that was recorded as accounts payable in a prior quarter
into "other income" gain on sale of technology (Note I).
The accompanying notes are an integral part of these statements.
-7-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The information for Videolocity International Inc. (the "Company") as of January
31, 2007 and for the three months ended January 31, 2007 and 2006 is unaudited,
but includes all adjustments (consisting only of normal recurring adjustments)
which in the opinion of management, are necessary to state fairly the financial
information set forth therein in accordance with accounting principles generally
accepted in the United States of America.
NOTE B - UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial reporting and the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared under accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such regulations.
This report on Form 10-QSB for the three months ended January 31, 2007 should be
read in conjunction with the Company's annual report on Form 10-KSB for the
fiscal year ended October 31, 2006. The results of operations for the three
months ended January 31, 2007 may not be indicative of the results that may be
expected for the year ending October 31, 2007.
NOTE C - ORGANIZATION AND BUSINESS ACTIVITY
The Company is a Nevada corporation organized on November 5, 1985 under the name
Pine View Technologies. On November 27, 2000 the Company's name was changed to
Videolocity International, Inc. On December 4, 2000, the Company acquired
Videolocity Inc. in a transaction recorded as a recapitalization with the
Company being the legal survivor and Videolocity Inc. being the accounting
survivor and the operating entity. Videolocity Inc., the accounting survivor,
was founded on May 26, 2000. The Company and its subsidiaries were established
to develop and market systems and other products for the delivery of on demand
video, high speed internet access, and other digital content to end users such
as hotels, hospitals, residences, and condominiums.
At January 31, 2007, 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.
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - OTHER ASSETS
At January 31, 2007, other assets consisted of the following:
Non trade receivables $ 1,316
Deposits 25,177
---------------
$ 26,493
===============
NOTE G - PROPERTY AND EQUIPMENT
At January 31, 2007, 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 284,802
----------
$ 538,303
==========
NOTE H - ACCRUED LIABILITIES
At January 31, 2007, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 3,697,020
Director and consultant compensation 212,990
Capital lease paid on Company's behalf (Note K) 625,826
Other 12,640
-----------
$ 4,548,476
===========
NOTE I - SALE OF TECHNOLOGY
On December 11, 2006, the Board of Directors approved the sale of the Company's
technology. The Company had re-purchased the technology for $150,000 from a
previous joint venture during October 2006. The sales price was set at
$18,719,000 using a valuation of the technology's value when combined with a
certain amount of operational capital. The purchase price is payable to the
Company based on the following schedule and use of the technology assets: (i)
twenty-five percent (25%) of the technical transfer fees and the first 10% of
the net licensing fees derived by Purchaser in licensing of the Technology
assets currently in development or any subsequent version thereof; (ii) ten
percent 10% of the net revenues derived by Purchaser's deployment of the
technologies beginning one year after effective date of the agreement; (iii) ten
percent (10%) of the net revenues from all other products or services that uses
a portion or all of the Intellectual Property Technology. Further, until the
purchase price is paid in full the Company holds preferred shares of the
Purchaser and retains an option to convert the remaining balance of the Purchase
Price to equity in Purchaser's company at fair market value not to exceed five
percent (5%) of purchaser's company. The purchaser is required to remit $30,000
per month to maintain the Company's operations until the monthly installments
generated through the purchaser's use of the technology is greater than $30,000
per month. In the event that the actual monthly revenues from the purchased use
of the technology becomes greater that $30,000 the required installment will
follow the sales price payable formula. Further, Videolocity was granted a
non-exclusive right to use the intellectual properties to pursue any form of
legal business to include the initial plan to deploy the products into the
hospitality and residential markets. The Company is using the installment method
of recording the gain on the sale of the technology as the collectability of the
sales price is long-term and ultimately uncertain until the purchaser begins
deploying the purchased technology which then triggers the repayment based on
the agreed upon schedule. As of January 31, 2007, the Company has received
$230,000 toward the purchase of the technology with a remaining cost balance of
approximately $148,000 and $18,489,000 of remaining sales price to be collected.
-9-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - NOTES PAYABLE
At January 31, 2007 the Company has notes payable totaling $2,479,800 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, $1,264,800 is written at 8 % 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 4,049,921 shares of common stock 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 matured 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
$145,000 (original $215,000) is due on a schedule of $5,000 per month until paid
in full (noted below). Approximately $645,000 is past due as of January 31,
2007.
In prior periods, the Company has issued options to purchase 1,200,000 shares of
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 was 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 became exercisable.
On April 30, 2002 the Company filed a UCC-1 financing statement, with the state
of Nevada, on six Provisional Patent applications held in the name of
Videolocity Technologies, Inc. in favor of certain promissory note holders
totaling $1,500,000 including $235,000 to related parties at that time. 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 of notes payable under the UCC-1 into common stock of the
Company and paid back $20,000. During the year ended October 31, 2006 the
Company paid back $55,000 of notes payable and during the three months ended
January 31, 2007, the Company paid back $15,000 of notes payable under the
UCC-1. As of January 31, 2007 there remains a total of $775,000 of notes payable
that were originally under the UCC-1. During the year ended October 31, 2006,
while obtaining extensions on $630,000 of the remaining 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" which
released the UCC-1 for those signing extensions. The Company signed an agreement
for the remaining $145,000 (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
through January 31, 2007, totaling $70,000, and as of January 31, 2007 has
$50,000 owing to fulfill it's obligation under the agreement.
-10-
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 $626,000 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 H).
The following is a schedule by year of future minimum payments under long term
obligations, together with the present value of the net payments as of January
31, 2007:
Cash
proceeds from
Equipment Lease Total
---------- ---------- ----------
Through July 31, 2007 $ 197,098 $ 106,033 $ 303,131
Through July 31, 2008 23,544 8,836 32,380
Thereafter -- -- --
---------- ---------- ----------
Total minimum payments 220,642 114,869 335,511
Less amount representing interest 12,303 5,635 17,938
---------- ---------- ----------
Present value of net minimum payments 208,339 109,234 317,573
Less current portion 185,256 100,461 285,717
---------- ---------- ----------
Long-term portion $ 23,083 $ 8,773 $ 31,856
========== ========== ==========
NOTE L - STOCK INCENTIVE PLANS
As of January 31, 2007, 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 January 31, 2007, 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 January 31, 2007, the Company has granted and issued a total of 467,855
shares under the Plan.
-11-
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, 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 Company common stock outside of the plans to employees and directors
that vested at various times through FY 2004. During the year ended October 31,
2005, as an incentive, and to retain current key individuals, the Board of
Directors approved a total of 2,000,000 options to purchase Company common stock
outside of the plans to employees that vested at various times through February
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 (revised
2004) 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 January 31:
Three Months Ended
January 31,
-------------------------
2007 2006
------------ ----------
Compensation Cost:
Stock options $ -- $ 12,950
Restricted stock 16,625 --
------------ ----------
Total share based compensation expense $ 16,625 $ 12,950
============ ==========
Compensation expense per share: $ 0.00 $ 0.00
We did not receive cash from stock option exercises for the three months ended
January 31, 2007 and 2006. 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 three months ended January 31, 2007
included non-cash compensation expense of $16,625 related to non-vested shares
(restricted stock) and $12,950 for January 31, 2006 related to stock options.
-12-
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 months ended January
31, 2007. For purposes of this pro forma disclosure, the value of the options
was estimated using the Black-Scholes-Merton option-pricing formula at date of
grant and amortized to expense over the options' vesting periods.
Three
Three Months Months
Ended Ended
January 31, January 31,
2007 2006
--------------- --------------
Net loss, as reported $ (289,542) (304,571)
$
Add: stock based employee compensation expense included in reported net loss 16,625 12,950
Less: stock based employee compensation expense determined under fair
value method, net of related tax effects (16,625) (12,950)
--------------- --------------
Net loss, pro forma $ (289,542) $ (304,571)
=============== ==============
Loss per share (basic and diluted)
As reported $ (0.01) $ (0.01)
Pro forma (0.01) (0.01)
Stock Option Valuation and Expense Information under Statement 123(R)
- ---------------------------------------------------------------------
During the three months ended January 31, 2007 and 2006 we did not grant stock
options. As such, we did not value stock options during those periods. 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 quarters ended January 31 are set forth in
the table below.
January 31, January 31,
2007 2006
----------- --------------
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 -- --
-13-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the period May 26, 2000
(inception) through January 31, 2007:
Shares Weighted-average
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 (30,000) (0.30)
---------------- ----------------
Outstanding at October 31, 2006 11,200,000 $ 0.12
Granted -- -
Exercised -- -
Forfeited -- -
---------------- ----------------
Outstanding at January 31, 2007 11,200,000 $ 0.12
Exercisable at January 31, 2007 11,200,000 $ 0.12
-14-
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 8.34 $0.09 / $0.09
$0.11 to 0.20 9,200,000 / 9,200,000 7.10 $0.13 / $0.13
---------- ---------- ---- ----- -------
11,200,000 / 11,200,000 7.32 $0.12 / $0.12
The Company's aggregate intrinsic value of stock options represents the
difference between the closing stock price on January 31, 2007 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
January 31, 2007. Accordingly, the intrinsic value of options at January 31,
2007 is $0.00 because the Company does not have any in the money options as of
that date. 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 year ended October 31, 2005 as an incentive
and to retain key individuals the Board of Directors approved 2,000,000 shares
that vested quarterly through the first quarter of FY 2006. During the year
ended October 31, 2006 as an incentive and to retain key individuals, the Board
of Directors approved 6,650,000 shares that vest quarterly through the second
quarter of 2007 (March 2007). 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
A summary of the status of non-vested shares (restricted stock) and changes as
of January 31, 2007 is set forth below:
Weighted
Average
Non-vested Grant-date
Shares Fair Value
----------------- --------------
Non-vested shares outstanding, beginning of period 2,770,833 $ 0.01
Granted -- --
Vested 1,662,500 0.01
Forfeited/canceled -- --
-----------------
Non-vested shares outstanding, end of period 1,108,333 $ 0.01
=================
Unrecognized Compensation Expense
As of January 31, 2007 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 11,083 2.0
------------
Total unrecognized compensation cost $ 11,083
-15-
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 $37,000 for the three months ended January 31, 2007.
As of January 31, 2007, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $10,450,000 expiring through 2027.
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.
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 were
entirely at Videolocity's discretion and the agreement did not require minimum
drawdowns. The effective date of the agreement was 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
January 31, 2007, 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 January 31, 2007, the holder has converted
$82,000 of the debenture balance into 4,855,013 shares of the Company's common
stock. The balance of the compensation debenture as of January 31, 2007 totals
$308,000.
The Company placed 10,000,000 of the registered shares into escrow to facilitate
drawdowns and the repayment of a $400,000 note payable due to Cornell Capital
Partners LP (Note J) and through January 31, 2007 has issued 6,330,100 shares
under the Standby Equity Distribution Agreement using the proceeds to repay
$330,000 of the note. The balance of the note at January 31, 2007 totals
$70,000. The Company placed another 5,000,000 of the registered shares into
escrow to facilitate repayment of a second note payable due to Cornell Capital
Partners LP totaling $250,000. The repayment of this loan begins subsequent to
the completion of payments under the first note. The Company has not issued any
shares in repayment of the second note. Those shares not issued under drawdowns
or as repayment on the loans will be returned to the Company. As of January 31,
2007, the Company has 8,669,900 shares that remain in escrow (15,000,000 held in
escrow less 6,330,100 shares issued). The shares held in escrow are not included
in the Company's outstanding shares.
During August 2006 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 and as of January 31, 2007 have not reached an agreement.
-16-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 January 31, 2007. As of
January 31, 2007 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.
-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
We are a technology company that is committed to continued development and
marketing of innovative, high quality, cost effective systems to build future
ongoing revenue streams. We are currently, and intend to remain a technology
company.
Over the past few years, we have been focused on the development of proprietary
technologies that reduce bandwidth requirements for numerous applications of
digital content. From our inception through the sale and assignment of the
technologies that we developed into a joint venture during the first quarter of
fiscal year 2006 we were focused on the acquisition and development of those
technologies.
The technologies we developed formed the basis for what was our first product to
market, the Videolocity Digital Entertainment System. That system is a complete
digital entertainment system that uses technologies that we developed to deliver
video on demand to televisions, computers and mobile devices by using a variable
bit rate encoding solution that allows for streaming anywhere between 40Kbps and
1.5Mbps depending on the end user device. The streaming video may be delivered
over a variety of wireless and wired line network architectures. In addition to
video content viewing, the system is capable of providing high-speed Internet
access, digital music on demand, games, full Web surfing and a variety of
e-commerce applications as well as customer specific informational and
educational content. The system can be deployed in closed network environments
such as hotels, timeshare condominiums, hospitals, and assisted living
facilities, or over wide area networks serving intelligent communities,
residences and personal digital assistants (PDAs). The system is currently
available using Wireless 802.11(Wi-Fi), 802.16 (WiMAX), Fiber, Satellite,
Ethernet or DSL network architectures. The System uses a Linux operating system
in a stand-alone set top box. We developed the system to be flexible, highly
customizable, with fully scalable delivery platforms combined with advanced
embedded software applications which allows for full remote system upgrades and
easy updates of content and/or system enhancements. The system permits viewers
to select from an extensive library of movie titles, informational/educational
content and view their selections on their television screens, lap top computers
or PDAs. Content is owned by third parties, such as movie studios, and is paid
for based upon a set fee for each use by the end customer. All content is
protected through the encryption and encoding process that we developed, which
limits viewing to the person, or persons, authorized to access the movie or
other content and prevents unauthorized digital reproduction or rebroadcast. We
developed a user interface and content offering specifically to each market
segment and to each customer within that market segment. We also developed our
overall delivery system, the design, hardware components and software
applications remain identical, or only slightly modified to accommodate larger
user bases and/or infrastructures. This gives users the ability to customize the
feature settings and tailor the local content offering to the specific audiences
for each market segment.
-18-
Although the Company has developed a variety of technologies and applications it
continues to struggle with the requirements to commercialize the products and
applications derived from the technologies based on the inability to close the
required funding for the continued testing, integration, manufacturing and
deployment. The continued cost of maintaining the public company continues to be
a financial burden. The efforts of management are dominated by the constant
requirements of preparing and filing the quarterly and annual SEC requirements
and continued search for capital.
Significant Event
On December 11, 2006 the Board of Directors approved the sale of the technology
that the Company had repurchased during October 2006 from a joint venture. We
repurchased the technology from the joint venture for $150,000.
The sales price was set at $18,719,000 using a valuation of the technology's
value when combined with a certain amount of operational capital. The sales
price is payable to Videolocity based on the following schedule and use of the
technology assets: (i) twenty-five percent (25%) of the technical transfer fees
and the first 10% of the net licensing fees derived by Purchaser in licensing of
the Assets currently in development or any subsequent version thereof; (ii) ten
percent 10% of the net revenues derived by Purchaser's deployment of any of the
technologies beginning one year after effective date of the agreement; (iii) ten
percent (10%) of the net revenues from all other products or services that uses
a portion or all of the Intellectual Property Technology. Further, until the
purchase price is paid in full the Company holds preferred shares of the
Purchaser and retains an option to convert the remaining balance of the Purchase
Price to equity in Purchaser's company at fair market value not to exceed five
percent (5%) of purchaser's company. The purchaser is required to remit $30,000
per month to maintain our operations until the monthly installments generated
through the purchaser's use of the technology is greater than $30,000 per month.
In the event that the actual monthly revenues from the purchased use of the
technology becomes greater than $30,000 the required installment will follow the
sales price payable formula. Further, the Company was granted a non-exclusive
right to use the intellectual properties to pursue any form of legal business to
include the initial plan to deploy the products into the hospitality and
residential markets. We retained the rights to use the intellectual properties
and any future enhancements thereof for the purpose of pursuing any and all
legal forms of business. These rights will allow us to pursue existing business
opportunities and in the event that we generate revenues from the use of the
intellectual properties we will remit back a licensing fee to the purchasing
company that now holds the ownership of the intellectual properties. The terms
of these rights include the right to a non-exclusive license for the business
pursuit of Videolocity. In the event that we use any of the technologies that
are covered by the sale agreement, we agree to pay the purchaser on a per unit,
lump sum, or other mutually agreeable basis at a mutually agreed upon rate not
to exceed the then usual and customary rate applicable to such products at that
time. However, in no circumstance will the amount be greater than rates that the
purchaser would have to pay seller under terms of the agreement.
We borrowed the $150,000 that we used to repurchase the technology assigned to
our previous joint venture, on a short term basis, from the principle of EMCI
LLC (EMCI), a private equity firm out of Weston, Florida, with our CEO
personally guaranteeing that borrowed cash. We had previous knowledge and
associations with EMCI and EMCI was educated in the market opportunities of the
intellectual properties and as such decided to assist in the further development
and commercialization of the final products. During September 2006, in
discussions with funding alternatives, the Company had discussions with EMCI
regarding the formation of a joint venture when the technology was recovered
from the previous joint venture. EMCI provided the funds required to repurchase
the intellectual properties in addition to providing the resources for
Videolocity to secure legal counsel as necessary to recover the technology
assets. Further discussions were held regarding the formation of a joint venture
however, due to certain collateral requirements of EMCI to assist in the further
deployment and commercialization of the intellectual properties a joint venture
structure was not a viable solution. Management and the Board of Directors were
unable to find other suitable funding to keep the Company an operating entity
other than EMCI offering to purchase the technologies. We did not have the
operational capital to keep the Company an operating entity and Videolocity's
Board of Directors was left with little choice but to sell the assets that were
re-purchased during October 2006.
EMCI formed a company, Summit Media Group LLC (SMG), to begin marketing and
further developing the digital entertainment system and other uses of the
technology. EMCI named our CEO and the principle of EMCI as co-managers of that
Company. Subsequently, our interim CFO was named CFO of that entity. Although
EMCI's financial partners objected to the dual roles that the CEO and CFO would
hold in Videolocity and SMG. The principles of both EMCI and the management of
Videolocity believed it to be a requirement to protect each company's interests.
Subsequently both the CEO and CFO were authorized to perform the respective
functions for both companies. The CEO and CFO have deferred their salaries for
Videolocity for long periods of time and in the future will be compensated
independently by both companies. Both the CEO and CFO will be non controlling
equity members of the new company started by EMCI.
-19-
As of October 31, 2006 the $150,000 used to purchase the technology from the
previous joint venture was reported in our financial statements as an asset
"technology" and an additional amount borrowed from EMCI to repurchase the
technology and to retain legal counsel totaling $175,000 was included within
accounts payable reflecting the short term nature and the reality that at that
time a note had not been signed as our CEO had provided a personal guarantee.
During the three months ended January 31, 2007, the sales transaction was
completed and the Company recorded the amounts owed to EMCI and/or SMG as gain
on sale of technology and also recorded subsequent amounts received as gain on
sale of technology. We have used the installment method of recording the revenue
from the sale of the technology as the collectibility of the sales price is long
term in nature and ultimately uncertain until the purchaser begins deploying the
purchased technology which then triggers the repayment based on the agreed upon
schedule. As of January 31, 2007, the Company has received $230,000 toward the
purchase of the technology with a remaining cost balance of approximately
$148,000 and $18,489,000 of remaining sales price to be collected. As of the
date hereof SMG is delinquent on the amounts agreed by approximately $27,000.
Operations
As our primary focus is on technology, our current business strategy is to
continue with development of new technologies as well as researching and
developing enhancements and interfaces that will further enable us to use
technologies that we have previously developed into additional markets. Although
we sold our previously developed technologies we maintain a license to use the
technologies and we plan to market the digital entertainment system we
developed. We also intend to explore additional products that we can produce
using those core technologies, as well as, research and development of
additional new technologies. Over the prior few years we have marketed the
digital entertainment system we developed to individual hotels, hotel chains,
wireless carriers, and many other potential customers. The system was readily
accepted, however, our ability to survive and support the sale and deployment
with our limited capital was always a concern of potential customers. With the
sale of the technologies we now believe that we will begin to receive the cash
that will allow us to re-focus on development and also begin to market the
products again. We plan on marketing the products to potential customers we have
previously talked with. There are several groups that we have maintained contact
with that need a system for their respective businesses. Although we have very
limited capital currently, we believe we will begin to receive the necessary
capital from the sale of the technology. We plan to market the products to a
variety of markets including hospitality, healthcare, residential, security and
corporate training with currently developed technologies. We may need to, in
some cases, modify interfaces and develop additional systems to be able to use
the core technologies in new markets or for new uses. We will continue to
explore additional technological development and market opportunities.
We have significantly minimized our staffing and other operational requirements
until we begin to realize cash from the sale of the technology as outlined in
that sale agreement. We are operating as efficiently as we can with fewer full
time employees until we have additional capital to increase our operations.
Once we begin to realize the cash from the sale of the technologies we also plan
to seek additional capital through debt and equity financing that will increase
our ability to aggressively begin our plan of operation. Our plan of operation
will depend on our ability to raise substantial additional capital, of which
there can be no assurance.
The digital entertainment system is ready for immediate deployment, although we
need to obtain capital, either long-term debt or equity, to continue the
implementation of our overall business plan. As of the date hereof, we have an
agreement in place that we will receive advances from the purchaser of the
technology of $30,000 per month until the purchaser of the technology deploys
the technology and then we will receive a percentage of revenues as defined in
the sale agreement. To aggressively go after potential customers that we have a
relationship with will take additional cash and if successful in obtaining
contracts will take additional capital to deploy the systems. We have no
assurance that we will be able to obtain the capital necessary to continue
operations, enabling us to continue the execution of our business plan.
We intend to use our limited existing capital, together with support and
revenues generated from the sale of our technology, as well as, proceeds from
prospective future financings, to continue marketing and deployment of the
digital entertainment system. Management estimates that to move forward with our
planned operations we will incur expenses during the next twelve months of
approximately $2.6 million, consisting of $1.5 million in payroll, payroll
taxes, employee health insurance and other related employee costs, $80,000 for
office rent, utilities, and related costs, $320,000 for marketing and related
expenses, and $300,000 for general and administrative expenses including legal
and accounting fees. Research and development expenses are estimated to be a
minimum of approximately $400,000 during the next twelve months. These expenses
will be directed at development of additional usages of the core technologies
into new products for additional revenue streams and integration of the core
technologies and products into additional markets. We will also incur
substantial additional costs in connection with the deployment of the digital
entertainment system. Management estimates that such costs will be a minimum of
$4 to $5 million, but we are optimistic that we will be able to cover most of
those costs from future long-term lease financing. We also have accrued
liabilities, accounts payable, and notes payable that will require capital to
begin to retire. As we receive capital from the sale of the technology we will
begin to address these debts.
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Currently, we do not intend to sell any hardware or software. Our business plan
is to purchase and/or lease the equipment for the digital entertainment system
and deploy the system at no cost to the customer. It is anticipated that we will
finance the system equipment and realize the majority of the revenue stream
created by the end users. Presently, we do not anticipate any significant
purchase or sale of plant or equipment. Additionally, we do not anticipate the
addition of large numbers of employees because our business model calls for
outsourcing any and all functions that would be directly related to the number
of deployments.
We anticipate generating future revenues from the delivery of video and other
content to the end users of the digital entertainment system. We will charge a
fee for each movie or other item of content viewed through the system and/or
high-speed Internet access and we will remit a portion of each fee to the studio
or other content provider, the hotel or other sponsor, and the licensor of the
product. Our structure for content fees, although subject to change based on
location, usage, and competition is estimated to be as follows:
Internet access: $ 4.95 to $ 12.95 for one hour to 24 hour period
Video-on-demand: $ 3.95 to $ 12.95 per viewing
Games: $ 2.95 to $ 6.95 for each 1 to 4 hour period
During the next twelve months, we plan to seek additional debt and/or equity
funding, and capital leases for up to approximately $10 million. This would
permit us to cover our minimum expenses described above and accelerate the
marketing of the digital entertainment system, as well as, continue to work on
new uses for the core technologies into new markets and new products. As of the
date hereof, we have not formalized any new funding. We can not give assurance
that we will be able to secure such additional funding on favorable terms to us,
or otherwise. We have had a Standby Equity Distribution Agreement with Cornell
Capital noted elsewhere in this document which has been used to maintain
operations during prior periods however the agreement expired during July 2006.
Liquidity and Capital Resources
During the three months ended January 31, 2007, our total current assets
increased approximately $13,000 and total assets increased approximately $8,000
from approximately $731,000 to approximately $739,000. The increase in current
assets during the quarter is due to the net increase of cash. The cash inflow
totaling $55,000 was from cash received on the sale of our technology during the
three months offset by operating expenses. The increase in total assets is
primarily due to the receipt of cash from the sale of our technology offset by
cash used to maintain operations. We have minimized all corporate activities and
operations until we have finalized agreements with new funding sources.
During the three months ended January 31, 2007, total current liabilities
increased from approximately $6,452,000 to approximately $7,929,000, an
approximate $1,477,000 increase. There are several factors that contributed to
this net increase in current liabilities during the period. The most significant
was the transfer of notes payable totalling approximately $980,000 from long
term to short term reflecting the maturity of those notes is now within one year
of January 31, 2007. Other factors that contributed to the increase in current
liabilities included 1) an increase in accrued liabilities totaling
approximately $507,000, primarily from officers and other employees not being
paid their salary, combined with a Board of Director approved bonus totaling
approximately $309,000 as additional compensation to officers that have not been
paid salaries or have only received partial salaries for long periods of time as
well as the accrual of approximately $67,500 to account for an additional
liability for payments made on our behalf on our lease by our third party
guarantor. 2) an increase of approximately $59,000 from interest owed on debt
and 3) a decrease in accounts payable totaling approximately $185,000 primarily
from the transfer of approximately $175,000 recorded in a prior quarter as
accounts payable due to a short term borrowing being subsequently recorded as
gain on sale of technology as it was subsequently used as a down payment on the
sale 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. During the three months
ended January 31, 2007 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
system 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 January 31, 2007, operational expenses increased
approximately $263,000 overall, or approximately one hundred forty percent, as
compared to the three months ended January 31, 2006. The only significant
difference between the three months ended January 31, 2007 and the three months
ended January 31, 2006 was a Board of Director approved bonus to officers
totaling approximately $309,000 that was approved as consideration for the
continued efforts of officers of the Company while not being paid salary or not
total salary for long periods of time.
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The other operational expenses primarily have decreases which 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. Without the approved bonus, operational expenses would have had an
approximate twenty four percent decrease overall. During the three months, and
as disclosed in other areas of this report, we sold our technology. This
resulted in a gain on sale of technology for this quarter of approximately
$228,000. The sale of the technology was due to the needed capital and not as
part of our planned operations. Our plan of operation will depend on our ability
to raise substantial additional capital, of which there can be no assurance.
Net Operating Loss
As of January 31, 2007, we have, together with our subsidiaries, accumulated a
net operating loss carryforward of approximately $10,450,000, with an operating
loss tax benefit of approximately $3,820,000. 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 2027.
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 on this evaluation, our chief executive officer and
chief financial officer concluded our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company 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 changes in our internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 or Rule 15d-15 under the Exchange Act that occurred during our first
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
We are engaged in various other lawsuits and claims, either as plaintiff or
defendant, in the normal course of business. In the opinion of management, based
upon advice of counsel, the ultimate outcome of these lawsuits will not have a
material impact on our financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended January 31, 2007, we issued an aggregate of
1,333,333 shares of common stock all of which were issued toward an agreement
for the conversion of a compensation debenture. Subsequent to January 31, 2007
and to date we have issued an aggregate of $1,250,000 shares of common stock all
of which were issued toward an agreement for the conversion of a compensation
debenture. The shares were issued in a private transaction in reliance upon the
exemptions provided by Sections 4(2) and 3(a)(9) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
During August 2006 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. To date, a new payment schedule has not been worked out.
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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 $75,000 with a remaining balance of $45,000.
Our notes payable have maturities as follows: $50,000 matured during August
2003, $25,000 matured during November 2003, $250,000 matured 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 $145,000 (original $215,000) is due on a set
schedule of $5,000 per month until paid in full (noted below). Approximately
$645,000 is past due as of January 31, 2007.
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: March 22, 2007
BY: /S/ CORTNEY TAYLOR
------------------------------------
CORTNEY TAYLOR
Chief Financial Officer
(Principal accounting Officer)
Date: March 22, 2007
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