UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the Quarterly Period ended April 30, 2007
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
Commission File Number 33-2310-D
VIDEOLOCITY INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0429154
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5532 Lillehammer Lane, Suite 300, Park City, Utah 84091
(Address of principal executive officers)
Issuer's telephone number: (435) 615-8338
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2) of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date:
Class Outstanding as of June 15, 2007
- -------------------------- ------------------------------------
Common Stock, 31,815,353
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.............................................................. 23
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........................... 23
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
April 30, 2007
ASSETS
CURRENT ASSETS
Cash $ 900
-----------
Total current assets 900
Property and equipment, at cost, net 535,459
Technology 148,157
Other assets 26,493
-----------
$ 711,009
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 301,234
Accrued liabilities 4,980,467
Accrued interest payable 749,473
Notes payable 1,949,800
Notes payable - related parties 125,000
Compensation debenture 290,000
Current portion of long term obligations - capital lease 244,362
-----------
Total current liabilities 8,640,336
Long term obligations less current portion - capital lease 4,170
Notes payable 400,000
MINORITY INTERESTS 4,866
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 100,000,000 shares
authorized, 31,815,353 issued and outstanding 31,815
Preferred stock, $0.001 par value; 5,000,000 shares
authorized none outstanding --
Additional paid-in capital 6,977,354
Deficit accumulated during the development stage (15,347,532)
-----------
Total stockholders' deficit (8,338,363)
-----------
$ 711,009
===========
The accompanying notes are an integral part of these statements.
-2-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended Six months ended From
April 30, April 30, May 26, 2000
---------------------------- ---------------------------- through
2007 2006 2007 2006 April 30, 2007
------------ ------------ ------------ ------------ --------------
Revenue $ -- $ -- $ -- $ -- $ 124,645
Cost of Goods Sold -- -- -- -- 94,948
------------ ------------ ------------ ------------ ------------
Gross Profit -- -- -- -- 29,697
Operating expenses
Salaries, payroll taxes, and employee benefits 353,209 163,465 778,218 249,658 7,881,525
Professional fees and consultants 15,645 16,483 24,894 42,672 1,434,440
Technology development consulting -- 5,520 -- 22,080 866,725
Directors compensation through stock plan -- -- -- -- 304,990
Rent and utilities 3,000 4,024 6,385 20,588 447,772
Provision for bad debts -- 1,091 -- 1,091 601,091
Travel, conventions, meals and entertainment 2,297 1,963 8,306 2,763 288,675
Depreciation and amortization 2,844 7,077 5,688 42,437 240,938
Write off of goodwill -- -- -- -- 958,628
Other 2,969 10,425 7,239 16,705 648,388
------------ ------------ ------------ ------------ ------------
379,964 210,048 830,730 397,994 13,673,172
------------ ------------ ------------ ------------ ------------
Operating loss (379,964) (210,048) (830,730) (397,994) (12,643,475)
Interest income -- -- -- -- 5,578
Legal Settlement -- -- -- -- (200,433)
Gain on transfer--license agreements and technology -- -- 228,157 -- 699,813
Gain on sale of investment stock, net -- -- -- -- 338,049
Interest and beneficial conversion expense (42,189) (59,345) (109,122) (175,970) (2,453,552)
Expense for stock options on services, debt -- -- -- -- (88,646)
Minority interests -- -- -- -- (4,866)
------------ ------------ ------------ ------------ ------------
Loss before income taxes (422,153) (269,393) (711,695) (573,964) (15,347,532)
Income taxes
-- -- -- -- --
NET LOSS $ (422,153) $ (269,393) $ (711,695) $ (573,964) $(15,347,532)
============ ============ ============ ============ ============
Loss per common share
Basic and Diluted $ (0.01) $ (0.01) $ (0.02) $ (0.02)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic and Diluted 30,157,163 24,344,339 29,443,409 23,885,191
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 six months ended April 30, 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 six months ended April 30, 2007
Deficit
Accumulated
Additional during the
Preferred stock Common stock paid-in Development
Shares Amount Shares Amount capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 2003 -- $ -- 6,346,996 $ 6,347 $ 4,083,060 $(7,585,101)
Fees related to 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)
Issuance of common stock for:
Conversion of debt -- -- 2,424,743 2,424 15,576 --
Net loss for the three months -- -- -- -- -- (422,153)
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2007 -- $ -- 31,815,353 $ 31,815 $ 6,977,354 $(15,347,532)
=========== =========== ========== =========== =========== ============
The accompanying notes are an integral part of this statement.
-5-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
From
For the six months ended May 26, 2000
April 30, (inception)
---------------------------- Through
2007 2006 April 30, 2007
------------ ------------ ------------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (711,695) $ (573,964) $(15,347,532)
Adjustments to reconcile net loss to
net cash (used in) provided by 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 and technology (228,157) -- (342,666)
Loss on write-off of loan fees -- -- 100,000
Depreciation and amortization 5,688 42,437 351,156
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 -- 22,554 (126,493)
Accounts payable and accrued liabilities 792,541 159,247 4,698,373
Deferred revenue -- 273,647 --
Accrued interest 94,107 89,793 968,851
------------ ------------ ------------
Total adjustments 664,179 601,719 9,530,581
------------ ------------ ------------
Net cash provided by (used in) operating activities (47,516) 27,755 (5,816,951)
------------ ------------ ------------
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 -- (514) (165,492)
------------ ------------ ------------
Net cash provided by (used in) investing activities 55,000 (514) (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 (20,000) (25,000) (100,000)
Proceeds from issuance of common stock -- -- 1,024,306
------------ ------------ ------------
Net cash (used in) provided by financing activities (20,000) (25,000) 5,947,552
------------ ------------ ------------
Net increase (decrease) in cash (12,516) 2,241 900
Cash at beginning of period 13,416 2,271 --
------------ ------------ ------------
Cash at end of period $ 900 $ 4,512 $ 900
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ -- $ -- $ --
Income taxes -- -- --
(continued)
-6-
Noncash investing and financing activities
During the six months ended April 30, 2007 the Company transferred approximately
$136,500 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 3,758,076 shares of common stock to retire $30,000 of
its compensation debenture. Additionally, the Company transferred $175,000 that
was recorded as accounts payable in the prior year 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 April
30, 2007 and for the three and six months ended April 30, 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 and six months ended April 30, 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 and six months ended April 30, 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 April 30, 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, M,
and P are not included in the computation of diluted loss per share for periods
of net loss because to do so would be anti-dilutive.
-8-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - OTHER ASSETS
At April 30, 2007, other assets consisted of the following:
Non trade receivables $ 1,316
Deposits 25,177
-------------
$ 26,493
=============
NOTE G - PROPERTY AND EQUIPMENT
At April 30, 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 287,646
---------
$ 535,459
=========
NOTE H - ACCRUED LIABILITIES
At April 30, 2007, accrued liabilities consisted of the following:
Payroll, payroll taxes, and related amounts $ 4,050,229
Director and consultant compensation 212,990
Capital lease paid on Company's behalf (Note K) 701,608
Other 15,640
------------
$ 4,980,467
============
NOTE I - SALE OF TECHNOLOGY
On December 11, 2006, the Board of Directors approved the sale of the technology
that the Company had re-purchased for $150,000 during October 2006 from a
previous joint venture. The sales price was set at $18,719,000 using a third
party valuation of the technology when combined with a certain amount of
operational capital. The purchase price was 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 Assets currently in development or any
subsequent version thereof; (ii) ten percent 10% of the net revenues derived by
Purchaser's deployment 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 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 than $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 has used the installment method of recording the gain on
the sale of the technology as the collectability of the sales price is
ultimately uncertain until the purchaser begins deploying the purchased
technology which then triggers the repayment based on the agreed upon schedule.
As of April 25, 2007, the Company 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
On April 25, 2007, after discussions and further negotiations with the purchaser
company, the Board of Directors approved converting the remaining sales price
into eight (8%) of the purchasers Company and notified the purchaser Company of
its intent to do so. The following conditions were also forwarded: a)
Videolocity will receive no less than $15,000 a month in financial support from
the purchaser company for a period of no less than six (6) months for the
payment of current legal and operational costs b) Videolocity will perform the
role of a sales and marketing agent for the purchasers company and will be
entitled to receive no less than ten percent (10%) of the residual revenues from
any/all contracts or service agreements that use any portion of the technology
that was purchased from Videolocity c) Videolocity will receive support for
sales and marketing from financial institutions that the purchaser company has
initiated that will fund and/or secure the contracts or service agreements that
use a portion of the purchased technologies. As of April 30, 2007 Videolocity is
waiting for the paperwork acknowledging the eight percent (8%) conversion and
other conditions from the purchasing company. (Note R)
NOTE J - NOTES PAYABLE
At April 30, 2007 the Company has notes payable totaling $2,474,800 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 P) and
$140,000 (original $215,000) is due on a schedule of $5,000 per month until paid
in full (noted below). We are currently working toward a new schedule of payment
for the $320,000 due using advances under the Company's Standby Equity Line.
Approximately $655,000 is past due as of April 30, 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 UCC-1 notes payable and during the six months ended
April 30, 2007, the Company paid back $20,000 of notes payable under the UCC-1.
As of April 30, 2007 there remains a total of $770,000 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 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 $140,000 (originally $215,000) as noted below.
-10-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 6th, 2003 the Company received a formal notice of default regarding
a $215,000 note payable under the UCC-1. During the year ended October 31, 2005,
the Company received a demand notice on the $215,000 note payable. On November
30, 2005, with an addendum signed on December 5, 2005, the Company and the
$215,000 note holder reached an agreement to settle the note payable, in total,
with twenty four monthly payments of $5,000 per month beginning January 5, 2006
and ending on December 5, 2007 for the aggregate amount of $120,000. The note
holder has agreed to stay any actions to enforce or collect during the repayment
term. At any time the Company fails to meet its required payment, the note
holder will have the right to proceed with all legal remedies to collect upon
and satisfy the note payable. The Company has the right to prepay all or a
portion of the total at its discretion. The settlement agreement also provided
that the Company release the note holder, ISOZ, LC, and its employees, agents,
representatives and affiliates and assigns, from any and all actions, judgments,
claims or causes of action and from any claim or allegation previously made by
the Company against the note holder. The Company has made all required payments
through February 2007 totaling $75,000, and currently is two payments past due.
As of April 30, 2007 the Company has $45,000 owing to fulfill it's obligation
under the agreement.
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 $702,000 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 April 30,
2007:
Cash
proceeds from
Equipment Lease Total
---------- ---------- ----------
Through April 30, 2008 $ 167,096 $ 88,360 $ 255,456
Through April 30, 2009 4,272 -- 4,272
Thereafter -- -- --
---------- ---------- ----------
Total minimum payments 171,368 88,360 259,728
Less amount representing interest 7,766 3,430 11,196
---------- ---------- ----------
Present value of net minimum payments 163,602 84,930 248,532
Less current portion 159,432 84,930 244,362
---------- ---------- ----------
Long-term portion $ 4,170 $ -- $ 4,170
========== ========== ==========
NOTE L - INCOME TAXES
The Company has sustained net operating losses in all periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero. The increase in the valuation
allowance was approximately $164,000 for the six months ended April 30, 2007 and
$127,000 for the three months ended April 30, 2007.
As of April 30, 2007, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $10,450,000 expiring through 2027.
-11-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - STOCK INCENTIVE PLANS
The Company has had 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 April 30, 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.
The plan expired on March 26, 2007 and through that date the Company has granted
and issued a total of 467,855 shares under the Plan.
The Restated Articles of Incorporation, approved by a majority of the
stockholders on November 15, 2000, authorizes the Board of Directors to issue,
from time to time, without any vote or other action by the stockholders, 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. The Board of Directors has also approved the issuance of restricted stock
grants as noted below.
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
three months ended April 30:
-12-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
April 30,
---------------------------------
2007 2006
--------------- -------------
Compensation Cost:
Stock options $ -- $ --
Restricted stock 59,825 --
--------------- -------------
Total share based compensation expense $ 59,825 $ --
=============== =============
Compensation expense per share: $ 0.01 $ 0.00
We did not receive cash from stock option exercises for the three months ended
April 30, 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 April 30, 2007
included non-cash compensation expense of $59,825 related to non-vested shares
(restricted stock).
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 April 30,
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 Months Three Months
Ended Ended
April 30, 2007 April 30, 2006
------------------ -------------------
Net loss, as reported $ (422,153) $ (269,393)
Add: stock based employee compensation expense included in reported net loss 59,825 --
Less: stock based employee compensation expense determined under fair value
method, net of related tax effects (59,825) --
------------------ -------------------
Net loss, pro forma $ (422,153) $ (269,393)
================== ===================
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 April 30, 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 quarter ended April 30 are set forth in
the table below.
April 30, April 30,
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 April 30, 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 April 30, 2007 11,200,000 $ 0.12
Exercisable at April 30, 2007 11,200,000 $ 0.12
- --------------------------------------------------------------- ----------------------- -------------------
Weighted Average Weighted Average
Range of Exercise Number Remaining Contractual Exercise Price
Prices Outstanding / Exercisable Life (Years) Outstanding / Exercisable
------------------------- ------------ -------------------------
$0.00 to 0.10 2,000,000 / 2,000,000 8.05 $0.09 / $0.09
$0.11 to 0.20 9,200,000 / 9,200,000 6.85 $0.13 / $0.13
------ ------ ---- ---- ----
11,200,000 /11,200,000 7.07 $0.12 / $0.12
-14-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's aggregate intrinsic value of stock options represents the
difference between the closing stock price on April 30, 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
April 30, 2007. Accordingly, the intrinsic value of options at April 30, 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). During February 2007 the Board of Directors
approved 2,000,000 shares to officers as consideration for continued performance
to the Company while not being paid for significant time periods and continually
paying operational expenses of the Company. The Board of directors also approved
4,000,000 shares of restricted stock as an incentive to retain key personnel.
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 April 30, 2007 is set forth below:
Weighted
Average
Non-vested Grant-date
Shares Fair Value
-------------- -------------
Non-vested shares outstanding, beginning of period 1,108,333 $ 0.01
Granted 6,000,000 0.01
Vested 7,108,333 0.01
Forfeited/canceled -- --
--------------
Non-vested shares outstanding, end of period -- $ --
==============
Unrecognized Compensation Expense
As of April 30, 2007 unrecorded compensation costs related to awards issued
under the Company's various share-based compensation arrangements are as
follows:
Weighted average
April 30, recognition period
2007 (months)
--------------- ---------------------
Unrecognized compensation cost:
Stock options, net of expected forfeitures $ -- --
Non-vested shares (restricted stock) -- time based vesting -- --
---------------
Total unrecognized compensation cost $ -- --
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 - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
As of April 30, 2007 the Company has 8% notes payable to current directors, and
officers totaling $125,000. The Company has accounts payable totaling
approximately $47,000 due to a former director at April 30, 2007. As of April
30, 2007 executive officers and directors of the Company own approximately 3% of
the outstanding stock.
-15-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - STANDBY EQUITY DISTRIBUTION AGREEMENT AND COMPENSATION DEBENTURE
During May 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, a New Jersey-based domestic
investment fund. Pursuant to the terms of the funding agreement with Cornell
Capital, Videolocity 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
April 30, 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 April 30, 2007, the holder has converted
$100,000 of the debenture balance into 7,279,756 shares of the Company's common
stock. The balance of the compensation debenture as of April 30, 2007 totals
$290,000.
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 April 30, 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 April 30, 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. The Company has had discussions and
correspondence with Cornell regarding setting up a new payment schedule but has
not worked the schedule out through April 30, 2007. Those shares not issued
under drawdowns or as repayment on the loans will be returned to the Company. As
of April 30, 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 had
conversations and correspondence with Cornell regarding setting up a new payment
schedule to resolve this demand and as of April 30, 2007 have not reached an
agreement (Note R).
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.
-16-
Videolocity International Inc. and Subsidiaries
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - SUBSEQUENT EVENTS
Notes Payable and Compensation Debenture
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 $140,000 (original $215,000) is due on a set
schedule of $5,000 per month until paid in full. Approximately $655,000 remains
past due as of June 15 2007. Additionally, the Company's compensation debenture
totaling $290,000 due during May 2007 is past due.
Technology
The Company forwarded its intent to convert its receivable from the technology
purchaser (Note I) into an equity position of the purchaser but to date has not
received notification of the completed transaction.
-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 Events
Technology
On December 11, 2006 the Board of Directors approved the sale of the technology
that the Company had repurchased from a joint venture during October 2006. We
repurchased the technology from the joint venture for $150,000.
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.
The sales price was set at $18,719,000 using a third party 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 that we have previously developed and in
the event that we generate revenues from the use of the intellectual properties
we will remit back 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.
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 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 had deferred their salaries for
Videolocity for long periods of time and the intent was that in the future they
would be compensated independently by both companies. Both the CEO and CFO will
be non controlling equity members of the new company started by EMCI.
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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
ultimately uncertain until the purchaser begins deploying the purchased
technology which then triggers the repayment based on the agreed upon schedule.
As of April 25, 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.
On April 25, 2007, after discussions and renegotiations with SMG, the Board of
Directors approved converting the remaining sales price into eight (8%) of the
purchasers Company and notified SMG of its intent to do so. The following
conditions were also forwarded: a) Videolocity will receive no less than $15,000
a month in financial support from SMG for a period of no less than six (6)
months for the payment of current legal and operational costs b) Videolocity
will perform the role of a sales and marketing agent for the purchasers company
and will be entitled to receive no less than ten percent (10%) of the residual
revenues from any/all contracts or service agreements that use any portion of
the technology that was purchased from Videolocity c) Videolocity will receive
support for sales and marketing from financial institutions that SMG initiated
that will fund and/or secure the contracts or service agreements that use a
portion of the purchased technologies. We are currently waiting for the
paperwork acknowledging the eight percent (8%) conversion and other conditions
from the purchasing company.
Officer
Effective May 1, 2007 our President/CEO, Robert Holt resigned from the Company
and has moved on to other opportunities. Dan Driscoll the Chairman of the Board
of Directors will serve as Acting President/CEO.
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 with the conversion of our receivable into equity of Summit
Media we will also become a sales agent for Summit Media which will further our
plan to market the digital entertainment system we developed. Summit Media will
provide banking relationships that will provide the financing for the systems
that we sell. 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 and while maintaining license and sales agreements to
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
worked with. There are several groups that we have maintained contact 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 our
sales of the digital entertainment system product. 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 digital entertainment system
product. 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 sales of the product 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.
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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 conversion into equity occurs at which
time the amount will be $15,000 per month for six months. We will then receive
no less than ten (10%) of all the residual revenues we generate. 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 entertainment systems. We believe this deployment capital
will be available through arrangements made through SMG for individual
deployments. 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 sales of the digital entertainment system, as well as,
proceeds from prospective future financings, to continue marketing and
deployment of the digital entertainment system. Although we are currently
operating as minimally as possible until we have additional capital, 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 which we believe
will be available from banking arrangements through SMG. We also have accrued
liabilities, accounts payable, and notes payable that will require capital to
begin to retire. As we receive capital from sale of the entertainment system we
will begin to address these debts.
We can not give assurance that we will be able to secure additional funding on
favorable terms to us, or otherwise. We have had a Standby Equity Distribution
Agreement with Cornell Capital, which has been used to maintain operations
during prior periods; however, the agreement expired during July 2006.
Currently, we do not intend to sell any hardware or software. It is anticipated
that we will sell the use of system equipment and realize a sales commission as
a percentage 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.
Liquidity and Capital Resources
During the three months ended April 30, 2007, our total current assets decreased
approximately $26,000 and total assets decreased approximately $28,000 from
approximately $739,000 to approximately $711,000. The decrease in current assets
during the quarter is primarily due to the decrease in cash of approximately
$26,000 that was used for operational purposes. The decrease in total assets is
primarily due to the use of cash for operational purposes. We have minimized all
corporate activities and operations until we have finalized agreements with new
funding sources and are able to continue our operational plan.
During the six months ended April 30, 2007, our total current assets decreased
approximately $13,000. The net decrease was primarily from an inflow of cash of
approximately $55,000 received from the sale of our technology offset by use of
that cash for operational purposes. During the six months ended April 30, 2007,
total assets decreased approximately $20,000 primarily due to maintaining
operations and the use of cash for operations.
During the three months ended April 30, 2007, total current liabilities
increased from approximately $7,929,000 to approximately $8,640,000, an increase
of approximately $711,000. There are several factors that contributed to this
net increase in current liabilities during the period including an increase in
accrued liabilities totaling approximately $432,000 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. There was
approximately a $290,000 increase to current liabilities from the transfer of a
compensation debenture from long term liabilities to short term during the
period.
During the six months ended April 30, 2007, total current liabilities increased
from approximately $6,452,000 to approximately $8,640,000, an approximate
$2,188,000 increase. There are several significant factors that contributed to
this net increase in current liabilities during the period including a transfer
of approximately $1,375,000 in notes payable from long term notes payable to
short term liabilities to reflect the underlying contracted terms and
approximately $939,000 increase in accrued liabilities from officers not
receiving or not receiving all of their salaries, additional liability accrued
to account for a third party guarantor making payments on our lease. We also
have accrued approximately $94,000 of accrued interest during the period on our
debt. All of the increases to liabilities for the six months ended April 30,
2007 were offset by an approximate $185,000 decrease to accounts payable.
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Results of Operations
To date, we have been primarily a development stage company and have realized
revenues from one installation of the technologies we developed. During the
three months ended April 30, 2007 we did not realize revenues from our intended
operations.
For the three months ended April 30, 2007, operational expenses increased
approximately $170,000, or approximately eighty-one percent, as compared to the
three months ended April 30, 2006. This is attributed primarily to the board of
directors approving a one time cash bonus of approximately $100,000 and a one
time restricted stock bonus that increased compensation expenses by
approximately $27,000. The remaining increase is primarily due to normal
compensation expenses for existing employees. Other than the payroll expenses
noted above, we had decreases in most operational expenses during the three
months ended April 30, 2007 as compared to the similar period in the prior year
including, technology development consulting of approximately $6,000,
depreciation of approximately $4,000,and other of approximately $7,000. We still
are maintaining a strong effort to minimize all expenses possible until we have
secured additional funding and can continue with our business plan and normal
operations. During the three months ended April 30, 2007, non operating expenses
decreased approximately $17,000 as compared to the three months ended April 30,
2006 primarily resulting from the decrease of interest expense as the prior
comparable period included bonus interest on some debt. The overall increase in
net losses for the three months ended April 30, 2007 as compared to April 30,
2006 of approximately $153,000 or fifty-seven percent is primarily the result of
the operational differences noted above.
For the six months ended April 30, 2007, operational expenses increased
approximately $432,000, or approximately 51 percent, as compared to the six
months ended April 30, 2006. This is attributed primarily to an increase in
salaries and other payroll expenses of approximately $529,000 as well as
decreases in most other operational expenses during the period. Payroll expenses
increased substantially as compared to the prior period primarily from the Board
of Directors approving additional compensation in the form of bonuses during the
six months ended April 30, 2007 to officers that have not been paid salary or
not their total salary for months on end. These bonuses increased the payroll
expenses by approximately $490,000 and were made up between cash and restricted
stock awards. These amounts were accrued as we currently do not have the cash to
pay the approved bonuses. 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 $22,000, professional
fees of approximately $18,000, rent and utilities of approximately $14,000,
depreciation of approximately $37,000 and other of approximately $9,466. During
the six months ended April 30, 2007, non operating expenses decreased
approximately $67,000 as compared to the six months ended April 30, 2006
primarily resulting from differences in interest expense and bonus interest
given in the prior year. For the six months ended April 30, 2007 we also
incurred a gain on the sale of technology of approximately $228,000 which offset
non operational expenses. As the result of these factors, total net loss
increased by approximately $138,000 or twenty-four percent for the six months
ended April 30, 2007 as compared to the six months ended April 30, 2006.
Our plan of operation will depend on our ability to raise substantial additional
capital, of which there can be no assurance.
Net Operating Loss
As of April 30, 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 $3,895,000. 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.
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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 or
second fiscal quarters 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 April 30, 2007, we issued an aggregate of
2,424,743 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 to Cornell Capital 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 and correspondence with Cornell regarding
setting up a new payment schedule to resolve this demand. To date, a new payment
schedule has not been worked out. As of the date hereof, the $290,000
compensation debenture is past due.
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. Through February 2007, the Company has made all required payments under
the agreement totaling $75,000 and is currently delinquent $15,000 out of a
total 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 $140,000 (original $215,000) is due on a set
schedule of $5,000 per month until paid in full. As of the date hereof
approximately $650,000 is past.
Item 4. Submissions of Matters to a Vote of Security Holders
This item is not applicable.
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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 Principal Accounting Officer 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 Principal Accounting Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
This Item is not applicable.
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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/ DAN DRISCOLL
------------------------------------
DAN DRISCOLL
Chairman
Date: June 19, 2007
BY: /S/ CORTNEY TAYLOR
Principal Accounting Officer
Date: June 19, 2007
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