Viewcast Com Inc - Quarterly Report (10-Q)

Table of Contents

 

 

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-29020

ViewCast.com, Inc.

(Exact name of registrant as specified in its charter)

Delaware		75-2528700
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3701 W. Plano Parkway, Suite 300, Plano, TX		75075
(Address of principal executive offices)		(Zip Code)

[phone]
(Registrant’s telephone number including area code)

N/A

(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

32,107,992 shares of common stock, par value $0.0001 per share, outstanding at July 31, 2008

 

 

 

 

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ViewCast.com, Inc. and Subsidiaries
Index to Form 10-Q

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2007 and June 30, 2008 (Unaudited)			2
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2007 and 2008 (Unaudited)			3
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months ended June 30, 2008 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007 and 2008 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Result of Operations.			12
Item 3. Quantitative and Qualitative Disclosure About Market Risk			17
Item 4. Controls and Procedures			17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			18
Item 1A. Risk Factors			18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			18
Item 3. Defaults Upon Senior Securities			18
Item 4. Submission of Matters to a Vote of Security Holders			18
Item 5. Other Information			18
Item 6. Exhibits			18
SIGNATURES			19
Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) CEO Certification
Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) CFO Certification
Exhibit 32.1 - Section 1350 CEO Certification
Exhibit 32.2 - Section 1350 CFO Certification

 

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VIEWCAST.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		December 31,				June 30,
		2007				2008
						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,135,416			$	2,629,386
Accounts receivable, less allowance for doubtful accounts of $30,390 and $57,304 at December 31, 2007 and June 30, 2008, respectively			2,261,133				1,988,755
Inventories, net			2,367,200				1,920,557
Prepaid expenses			243,614				245,460
Total current assets			6,007,363				6,784,158
Property and equipment, net			721,413				743,030
Intangible assets, net			323,367				372,132
Deposits			45,566				47,694
Total assets		$	7,097,709			$	7,947,014
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	456,641			$	795,207
Accrued expenses			927,857				984,911
Current maturities of long-term debt			21,345				32,668
Total current liabilities			1,405,843				1,812,786
Long-term debt less current maturities			28,157				51,733
Stockholder note payable			5,141,361				5,141,361
Stockholder accrued interest			192,994				238,421
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value, authorized 5,000,000 shares:
Series B convertible — issued and outstanding shares - 800,000 — liquidation value of $15 per share as of December 31, 2007 and June 30, 2008			80				80
Series C convertible — issued and outstanding shares - 200,000 — liquidation value of $31 per share as of December 31, 2007 and June 30, 2008			20				20
Series E convertible — issued and outstanding shares - 80,000 — liquidation value of $102 per share as of December 31, 2007 and June 30, 2008			8				8
Common stock, $.0001 par value, authorized 100,000,000 shares:
Issued shares - 32,341,753 and 32,369,489 at December 31, 2007 and June 30, 2008, respectively			3,234				3,237
Additional paid-in capital			69,990,960				70,046,879
Accumulated deficit			(69,653,042	)			(69,335,605	)
Treasury stock, 261,497 shares at cost			(11,906	)			(11,906	)
Total stockholders’ equity			329,354				702,713
Total liabilities and stockholders’ equity		$	7,097,709			$	7,947,014

The accompanying notes are an integral part of these condensed consolidated statements.

 

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VIEWCAST.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		For the three months ended								For the six months ended
		June 30,								June 30,
		2007				2008				2007				2008
Net sales		$	3,926,394			$	4,205,085			$	7,408,856			$	8,321,551
Cost of sales			1,623,999				1,279,645				3,071,320				2,617,254
Gross profit			2,302,395				2,925,440				4,337,536				5,704,297
Operating expenses:
Selling, general and administrative			1,666,275				1,912,023				3,113,852				3,587,073
Research and development			518,743				748,922				976,501				1,494,566
Depreciation and amortization			97,733				114,782				159,155				227,035
Total operating expenses			2,282,751				2,775,727				4,249,508				5,308,674
Operating income			19,644				149,713				88,028				395,623
Other (income) expense:
Interest expense, net (including $73,480, $36,844, $146,988, and $87,409 of expense to related parties, respectively)			74,943				40,421				148,589				93,082
Interest (income)			(14,161	)			(8,840	)			(24,063	)			(21,296	)
Other (income)			—				—				(250,000	)			—
Total other (income) expense			60,782				31,581				(125,474	)			71,786
Income tax expense			—				1,600				—				6,400
NET INCOME (LOSS)		$	(41,138	)		$	116,532			$	213,502			$	317,437
Preferred stock dividends			(204,250	)			(205,000	)			(406,255	)			(410,029	)
Net loss applicable to common stockholders		$	(245,388	)		$	(88,468	)		$	(192,753	)		$	(92,592	)
Net loss per share
Basic		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.00	)
Diluted		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.00	)
Weighted average number of common shares outstanding
Basic			32,048,553				32,103,001				31,349,864				32,091,629
Diluted			32,048,553				32,103,001				31,349,864				32,091,629

The accompanying notes are an integral part of these condensed consolidated statements.

 

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VIEWCAST.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(UNAUDITED)

		Series B								Series C								Series E
		Convertible								Convertible								Convertible																Additional												Total
		Preferred Stock								Preferred Stock								Preferred Stock								Common Stock								Paid-in				Accumulated				Treasury				Stockholders’
		Shares				Par Value				Shares				Par Value				Shares				Par Value				Shares				Par Value				Capital				Deficit				Stock				Equity
Balances, December 31, 2007			800,000			$	80				200,000			$	20				80,000			$	8				32,341,753			$	3,234			$	69,990,960			$	(69,653,042	)		$	(11,906	)		$	329,354
Stock based compensation expense			—				—				—				—				—				—				—				—				49,039				—				—				49,039
Exercise of stock options			—				—				—				—				—				—				19,165				2				3,881				—				—				3,883
Employee stock issuance			—				—				—				—				—				—				8,571				1				2,999				—				—				3,000
Net income			—				—				—				—				—				—				—				—				—				317,437				—				317,437
Balances, June 30, 2008			800,000			$	80				200,000			$	20				80,000			$	8				32,369,489			$	3,237			$	70,046,879			$	(69,335,605	)		$	(11,906	)		$	702,713

The accompanying notes are an integral part of these condensed consolidated statements.

 

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VIEWCAST.COM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the six months ended
		June 30,
		2007				2008
Operating activities:
Net income		$	213,502			$	317,437
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Bad debt expense			24,649				26,914
Depreciation of property and equipment			137,521				170,504
Amortization of software development costs			21,634				56,531
Stock based compensation expense			6,706				49,039
Common stock issued to employee			—				3,000
Changes in operating assets and liabilities
Accounts receivable			321,427				245,464
Inventories			(1,572,775	)			446,643
Prepaid expenses			(69,257	)			(1,846	)
Deposits			(12,097	)			(2,128	)
Accounts payable			297,337				338,566
Accrued expenses and stockholder accrued interest			(2,924	)			102,481
Net cash provided by (used in) operating activities			(634,277	)			1,752,605
Investing activities:
Capitalized software development costs			(74,241	)			(105,296	)
Purchase of property and equipment			(488,912	)			(143,759	)
Net cash used in investing activities			(563,153	)			(249,055	)
Financing activities:
Proceeds from exercise of stock options			9,820				3,883
Net proceeds from exercise of warrants			936,434				—
Repayments of long-term debt			(3,619	)			(13,463	)
Net cash provided by (used in) financing activities			942,635				(9,580	)
Net increase (decrease) in cash and cash equivalents			(254,795	)			1,493,970
Cash and cash equivalents, beginning of period			567,509				1,135,416
Cash and cash equivalents, end of period		$	312,714			$	2,629,386
Supplemental cash flow information:
Cash paid for interest		$	58,781			$	47,656
Non-cash items:
Acquisition of property and equipment under capital leases		$	43,229			$	48,362

The accompanying notes are an integral part of these condensed consolidated statements.

 

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ViewCast.com, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of ViewCast.com, Inc. and its wholly-owned subsidiaries, Osprey Technologies, Inc., VideoWare, Inc., ViewCast Online Solutions, Inc., and ViewCast Technology Services Corporation, previously known as Delta Computec Inc. (collectively, the “Company” or “ViewCast”). All material inter-company accounts and transactions have been eliminated in consolidation.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in Amendment No. 1 to the Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 2007 filed with the Securities and Exchange Commission.

2. Accounts Receivable

The Company’s accounts receivable are primarily due from resellers and distributors of our video communications products and services. Credit is extended based on evaluation of each customer’s financial condition and, generally, collateral is not required except for certain international customers. Accounts receivable are generally due within 30 days and are stated net of an allowance for doubtful accounts. Accounts that are outstanding longer than contractual payment terms are considered past due. The Company records an allowance on a specific basis by considering a number of factors, including the length of time trade accounts are past due, the Company’s previous loss history, the credit-worthiness of individual customers, economic conditions affecting specific customer industries and economic conditions in general. The Company writes-off accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited against write-offs in the period the payment is received.

Changes in the Company’s allowance for doubtful accounts for the three and six months ended June 30, 2007 and 2008 are as follows:

		For the three months ended								For the six months ended
		June 30,								June 30,
		2007				2008				2007				2008
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Beginning balance		$	41,128			$	44,325			$	30,756			$	30,390
Bad debt expense			14,277				12,979				24,649				26,914
Ending balance		$	55,405			$	57,304			$	55,405			$	57,304

3. Inventories

Inventories consist of the following:

		December 31,				June 30,
		2007				2008
						(Unaudited)
Purchased materials		$	1,351,377			$	926,947
Finished goods			1,015,823				993,610
		$	2,367,200			$	1,920,557

 

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4. Accrued Expenses

Accrued expenses consist of the following:

		December 31,				June 30,
		2007				2008
						(Unaudited)
Accrued compensation		$	174,030			$	288,845
Accrued warranty			133,940				168,849
Accrued inventory purchases			55,713				51,523
Customer deposits			22,435				46,619
Deferred rent			100,555				87,096
Deferred revenue			174,084				168,248
Accrued taxes and other			267,100				173,731
		$	927,857			$	984,911

5. Warranty Reserves

Reserves are provided for the estimated warranty costs when revenue is recognized. The costs of warranty obligations are estimated based on warranty policy or applicable contractual warranty, historical experience of known product failure rates and use of materials and service delivery charges incurred in correcting product failures. Specific warranty accruals may be made if unforeseen technical problems arise. If actual experience, relative to these factors, significantly differs from these estimates, additional warranty expense may be required.

The following table below shows the changes in accrued warranty expense for the three and six months ended June 30, 2007 and 2008:

		For the three months ended								For the six months ended
		June 30,								June 30,
		2007				2008				2007				2008
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Beginning balance		$	100,786			$	164,156			$	117,636			$	133,940
Charged to expense			46,660				28,748				85,243				62,575
Usage			(57,292	)			(24,055	)			(112,725	)			(27,666	)
Ending balance		$	90,154			$	168,849			$	90,154			$	168,849

6. Property and Equipment

Property and equipment, at cost, consists of the following:

		Estimated
		Useful Life				December 31,				June 30,
		(Years)				2007				2008
										(Unaudited)
Service equipment			3			$	242,362			$	242,362
Computer equipment			3				309,112				362,453
Software			3				182,110				184,038
Leasehold improvements			1 to 6				130,409				161,644
Office furniture and equipment			5				890,300				995,916
							1,754,293				1,946,413
Less accumulated depreciation and amortization							(1,032,880	)			(1,203,383	)
						$	721,413			$	743,030

 

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7. Stockholder Term Note

Since October 1998, the Company has maintained a credit facility with an entity controlled by one of its principal stockholders, Mr. H.T. Ardinger. In December 2006, ViewCast.com, Inc., Osprey Technologies, Inc. and VideoWare, Inc. (jointly and severally, “the Borrower”) amended the terms and conditions of the loan and security agreement with the Ardinger Family Partnership, Ltd. Under the amended terms the $1,250,000 of primary principal and $3,891,361 of secondary principal are due December 31, 2009, subject to certain earlier payment conditions. The interest on the primary principal amount will accrue and be paid monthly based on the effective prime rate plus 1.0% (8.25% and 6.00% as of December 31, 2007 and June 30, 2008, respectively). Interest on the secondary principal amount will accrue based on the effective Applicable Federal Rate, as defined in the agreement, (3.88% and 2.08% as of December 31, 2007 and June 30, 2008) and be paid in full on the maturity date. The amended note agreement is secured by all the assets of the Borrower.

The Company’s long-term debt consists of:

		December 31,				June 30,
		2007				2008
Outstanding Principal (“Primary Principal Amount”), with interest due at a rate per annum equal to prime plus 1.0% (8.25% and 6.00% at December 31, 2007 and June 30, 2008, respectively), due December 31, 2009		$	1,250,000			$	1,250,000
Outstanding Principal (“Secondary Principal Amount”), with interest due at a rate per annum equal to the Applicable Federal Rate (3.88% and 2.08% at December 31, 2007 and June 30, 2008, respectively), due December 31, 2009			3,891,361				3,891,361
Other long-term debt			49,502				84,401
Total long-term debt			5,190,863				5,225,762
Less current maturities			(21,345	)			(32,668	)
Total long-term debt less current maturities		$	5,169,518			$	5,193,094

8. Warrants

Following is a summary of warrant activity from January 1, 2008 through June 30, 2008:

		Warrants
										Weighted-
		Number				Exercise				Average
		of Warrants				Price				Exercise Price
Outstanding and exercisable at December 31, 2007			2,500,000				0.48			$	0.48
Granted			—
Exercised			—
Cancelled			—
Outstanding and exercisable at June 30, 2008			2,500,000				0.48			$	0.48

At June 30, 2008, the Company had outstanding 2,500,000 warrants to purchase common stock of the Company with exercise prices of $0.48 per share and expiration dates in December 2013.

 

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9. Net loss Per Share Data

Basic net loss per share is calculated by dividing net loss by the number of weighted average common shares outstanding for the period. Since the Company has reported net losses applicable to common shareholders for all periods presented, the computation of diluted loss per share excludes the effects of convertible preferred stock, options, and warrants since their effect is anti-dilutive.

Following is a summary of excluded securities:

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2007				2008				2007				2008
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Stock options			2,426,225				3,995,184				2,462,350				3,550,406
Warrants			2,825,485				2,500,000				3,465,817				2,500,000
Convertible preferred stock — Series B			2,206,896				2,206,896				2,206,896				2,206,896
Convertible preferred stock — Series C			3,333,333				3,333,333				3,333,333				3,333,333
Convertible preferred stock — Series E			15,686,274				15,686,274				15,686,274				15,686,274
			26,478,213				27,721,687				27,154,670				27,276,909

10. Stock-Based Compensation

The Company has various stock-based employee compensation plans, which are described more fully in Note 10 to Consolidated Financial Statements in Amendment No. 1 to the Company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2007.

Stock-based compensation expense recognized under SFAS 123(R) was $6,706 and $49,039 for the six months ended June 30, 2007 and June 30, 2008, respectively. During the six months ended June 30, 2008, 1,377,500 new options were granted by the Company. Stock-based compensation expense recognized in the Company’s Statement of Operations for the first six months of 2007 and 2008 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Stock-based compensation expense recognized in the Company’s Statement of Operations for the first six months of 2007 and 2008 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company uses the Black-Scholes option-pricing model (“Black-Scholes”) as its method of valuation under SFAS 123(R). This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Black-Scholes was also previously used for the Company’s pro forma information required under SFAS 123 for periods prior to fiscal year 2006. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes model is affected by our stock price as well as other assumptions. These assumptions include, but are not limited to the expected stock price volatility over the term of the awards and the actual and projected employee stock option exercise behaviors.

At June 30, 2008, the balance of unearned stock-based compensation to be expected to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, is approximately $93,411. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately three years.

 

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Following is a summary of stock option activity from January 1, 2008 through June 30, 2008:

		Stock Options
										Weighted-
										Average
		Number				Price Per				Exercise Price
		of Shares				Share				Per Share
Outstanding at January 1, 2008			2,660,850			$	0.20 - $7.14			$	1.99
Granted			1,377,500				0.30 - 0.48				0.38
Exercised			(19,165	)			0.20 - 0.22				0.20
Canceled/forfeited			(20,500	)			0.22 - 3.56				1.92
Outstanding at June 30, 2008			3,998,685			$	0.20 - $7.14			$	1.45

The following information applies to options outstanding at June 30, 2008:

						Weighted-
						Average				Weighted-								Weighted-
Range of		Outstanding at				Remaining				Average				Exercisable at				Average
Exercise		June 30,				Contractual				Exercise				June 30,				Exercise
Prices		2008				Life				Price				2008				Price
$0.20 - 1.00			2,749,335				6.4			$	0.39				923,051			$	0.40
1.01 - 2.00			541,350				2.7				1.12				541,350				1.12
2.01 - 3.00			110,000				1.6				2.51				110,000				2.51
3.01 - 4.00			57,500				0.6				3.49				57,500				3.49
4.01 - 5.00			12,500				1.3				4.53				12,500				4.53
5.01 - 6.00			116,000				1.5				5.50				116,000				5.50
6.01 - 7.00			2,000				0.8				7.00				2,000				7.00
7.01 - 7.14			410,000				1.2				7.10				260,000				7.10
			3,998,685				4.9			$	1.44				2,022,401			$	1.98

11. Income Taxes

In January 2007, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (FIN 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. The Company did not recognize any adjustments to its financial statements as a result of its implementation of FIN 48.

At December 31, 2007 the Company has federal income tax net operating loss carryforwards of approximately $70,000,000. The Company recognized $6,400 federal income tax expense in the first six months of 2008.

 

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12. Related Party Transactions

Since October 1998, the Company has maintained a credit facility with an entity controlled by one of its principal stockholders, Mr. H.T. Ardinger. In December 2006, ViewCast.com, Inc., Osprey Technologies, Inc. and VideoWare, Inc. amended the terms and conditions of the loan and security agreement with the Ardinger Family Partnership, Ltd. Under the amended terms, $1,250,000 of primary principal and $3,891,361 of secondary principal are due December 31, 2009, subject to certain earlier payment conditions. See Note 7. The Company incurred $146,988 and $87,409 in related party interest expense in the six months ended June 30, 2007 and 2008, respectively.

13. Accounts Receivable Loan Facility

On June 29, 2007, the Company entered into a Purchase and Sale Agreement/Security Agreement (the “Agreement”) with Amegy Bank National Association, a national banking association. The Agreement provides the Company with an accounts receivable loan facility to provide a source of working capital. As of June 30, 2008 the Company had no borrowings under this facility.

14. Preferred Stock Dividends

There were no preferred stock dividends declared or paid during the six months ended June 30, 2008. The Series B and Series C preferred stock issues carry cumulative dividends of 8% and 9% per year, respectively, and are generally payable semi-annually in arrears in cash or in ViewCast common stock, at ViewCast’s option. At June 30, 2008, cumulative dividends in arrears which have not been declared are: Series B-$4,186,667, Series C-$1,197,500. Holders of Series B and Series C preferred stock have no voting rights except as required by law. The Series E preferred stock has no dividend feature.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Report on Form 10-Q under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding ViewCast’s expectations, beliefs, hopes, intentions or strategies regarding the future. These statements involve known and unknown risks, uncertainties, and other factors that may cause ViewCast or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, product demand and market acceptance risks, the impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraints or difficulties, general business and economic conditions, the availability of sufficient working capital, the ability to service our debt, continued losses, the ability to successfully integrate acquired operations, the effect of our accounting polices and other risks detailed in filings with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “expects,” “should,” “anticipates,” “believes,” “estimates,” “predicts,” “plans,” “potential,” “intends” or “continue” or the negative of such terms or other comparable terminology.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty, nor do we undertake any obligation, to update any of the forward-looking statements after the date of this report to conform such statements to actual results.

Overview

ViewCast.com, Inc., doing business as ViewCast Corporation (“ViewCast”), develops and sells video and audio communications products for delivering media dynamically via a variety of network types and protocols. These products include Osprey ^® Video capture cards and Niagara ^® video encoders/servers, featuring Niagara SCX encoder management software and other related products. Organizations increasingly utilize high-quality, dynamic video and audio to quickly and easily connect with customers, employees, partners or students. ViewCast’s products create, manage and deliver live and on-demand digital media in various formats to multiple wired or wireless connected devices.

ViewCast products are deployed within a communications network and are used for a variety of audio and video communication applications, including corporate communications, information gathering, security, training, distance learning, conferencing, Internet video and broadcast applications. Telecommunications companies, content delivery networks (“CDNs”), corporations, media broadcasters, financial institutions, educational networks, healthcare facilities, and government agencies utilize our products, as do their customers, vendors and others with whom they may communicate. Worldwide, ViewCast markets and sells its video products and services directly to end-users or through indirect channels including original equipment manufacturers (“OEMs”), value-added resellers (“VARs”), resellers, distributors and computer system integrators.

 

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Critical Accounting Policies

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis we evaluate our estimates, including those related to accounts receivable, inventories, investments, warranty obligations, income taxes, restructuring and contingencies and litigation. Our estimates are based on historical experience and other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. In addition to the items listed above which are affected by estimates, we believe that the following are critical accounting policies used in the preparation of our consolidated financial statements:

	•		Revenue Recognition – We apply provisions of Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements as revised by SAB 104, Revenue Recognition, SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions and EITF 00-21, Revenue Arrangements with Multiple Deliverables to transactions involving sales of our hardware and software products. Under these guidelines, we recognize revenue on transactions where persuasive evidence of an arrangement exists, title has transferred, product payment is not contingent upon performance of installation or service obligations, the price is fixed or determinable and payment is reasonably assured. We accrue warranty costs and sales allowances for promotional activities at time of shipment based on historical experience. In addition, we defer revenue associated with maintenance and support contracts and recognize revenue ratably over the contract term.
	•		Allowance for Doubtful Accounts — We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers or distribution partners were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
	•		Excess and Obsolete Inventories — We write down our inventories for estimated obsolescence and unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less than those projected by management, additional write-downs may be required.
	•		Deferred Taxes — We record a valuation allowance to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. In our opinion, realization of our net operating loss carryforward is not reasonably assured, and a valuation allowance has been provided against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements. However, should we in the future determine that realization of deferred tax assets in excess of recorded amounts is likely, an adjustment to the deferred tax assets would increase income in the period such determination was made.

 

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Results of Operations

Three and Six Months Ended June 30, 2008 compared to
Three and Six Months Ended June 30, 2007.

Net Sales . During the three months ended June 30, 2008, net sales increased by 7.1% to $4,205,085 compared to the same period net sales in 2007 of $3,926,394. During the six months ended June 30, 2008, net sales of $8,321,551 increased by 12.3% compared to same period net sales in 2007 of $7,408,856. The net sales improvement was due to sales growth of our Osprey board products offset by a decline in our Niagara product and third party software sales. Sales increased in all three of our sales regions with 13.6% in North America, 5.0% in Europe, Middle East, and Africa and 21.6% in the combined region of the Pacific Rim and Middle and South America. We expect continued sales growth as new products begin to ship during the fourth quarter of 2008 and into 2009.

ViewCast Niagara ^® Streaming/Encoding System Sales. During the three months ended June 30, 2008, combined system and software sales decreased 28.7% verse the second quarter of 2007. During the six months ended June 30, 2008, combined system and software sales decreased 11.6% verse 2007 levels and represented 32.7% of total net sales, compared to 41.6% of total net sales during the same period in 2007. During the first six months of 2008 the appliance type Niagara products, such as Niagara Pro, showed double digit growth compared to the same period in 2007 offset by a decline in our non-appliance systems sales, including some revenue loss from models discontinued for 2008. In addition, during the second quarter of 2007 there was a substantial third party software sale that was not repeated in 2008. We anticipate that sales will improve during the last half of 2008 due to increased sales personnel in the North America and EMEA regions, the recently introduced Niagara GoStream ^® SURF, the completion of our OEM customer’s change over to a new procurement process and supplemented with another new Niagara product introduction planned for the fourth quarter time frame.

Osprey Product Sales . During the three months ended June 30, 2008, sales of Osprey video capture cards products increased 33.7% from the 2007 level for the same period. During the six months ended June 30, 2008, sales of Osprey products increased 28.2% from the 2007 level for the same period and represented 65.8% of total net sales, compared to 57.7% of total net sales in the first six months of 2007. Nearly all Osprey product families experienced increased sales with the most significant increases in the Osprey 400 and the new Osprey 450e plus the Osprey 700HD product introduced in the fall of 2007.

Other Revenues . Other revenues consist of software maintenance, training, engineering consulting fees, and professional services and represented 1.5% of revenues for the six months ended June 30, 2008. For the quarter and the six months ended June 30, 2008, other revenues totaled $66,745 and $121,073, respectively, compared to the quarter and the six months ended June 30, 2007 of $25,400 and $54,850, respectively.

Cost of Sales and Gross Profit . Cost of sales totaled $1,279,645 for the quarter ended June 30, 2008, a 21.2% decrease from the $1,623,999 reported for the same period in 2007. Cost of sales totaled $2,617,254 for the six months ended June 30, 2008, a 14.8% decrease from the $3,071,320 reported for the same period in 2007.

Gross profit for the quarter ended June 30, 2008 was $2,925,440 or a 27.1% increase compared to $2,302,395 in 2007. Gross profit for the six months ended June 30, 2008 was $5,704,297 or a 31.5% increase compared to $4,337,536 in 2007. The gross profit as a percentage of net sales for the six months ended June 30, 2008 was 68.5% compared to 58.5% for the same period in 2007. The increase in gross profit was primarily due to increased net sales, price adjustments for selected products and improvements in supply chain procurement in 2007 that continue to benefit cost of sales in 2008.

We expect future gross profit margins for the video products to remain comparable to historical margins in the 55%-68% range. Margins will be affected quarter to quarter by promotional activities, price adjustments, cost of materials, inventory obsolescence, the introduction of new products and the sales mix between the products, software and third party products sold in any one reporting period.

Selling, General and Administrative Expense . Selling, general and administrative expenses for the three and six months ended June 30, 2008 totaled $1,912,023 and $3,587,073, respectively, a 14.7% and 15.2% increase, respectively, from the $1,666,275 and $3,113,852, respectively, reported last year for the same periods. The increase is primarily due to increases in sales, marketing and support personnel, sales activities such as travel, and in marketing and advertising expenses.

 

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Research and Development Expense. Research and development expense for the three and six months ended June 30, 2008 totaled $748,922 and $1,494,566, respectively, an increase of 44.4% and 53.1% to comparable 2007 levels. The increase reflects additional personnel plus higher new product prototype and related development expenses compared to the first six months of 2007. Research and development expenses fluctuate depending on the number of product introductions planned and as new product prototypes, testing and certifications are completed.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three and six months ended June 30, 2008 totaled $114,782 and $227,035, respectively, an increase of 17.4% and 42.7% from the same period last year from expenditures for IT infrastructure, test equipment, demo gear and service assets.

Other (Income) Expense . Total other expense for the first six months of 2008 totaled $71,786 compared to total other income of $125,474 in 2007. In the first quarter of 2007, ViewCast received $250,000 proceeds from the settlement of a business interruption insurance claim caused by the temporary disruption of parts supplied by a vendor which occurred in 2005. Interest expense during the second quarters of 2008 and 2007 was $40,421 and $74,943, respectively. Interest expense during the first six months of 2008 and 2007 was $93,082 and $148,589, respectively, representing interest primarily from stockholder debt. The decrease in interest expense is principally due to the decrease of interest rates from our stockholder debt. Interest income during the second quarters of 2008 and 2007 was $8,840 and $14,161, respectively. Interest income during the first six months of 2008 and 2007 was $21,296 and $24,063, respectively. The decrease in interest income is due to the decline of interest rates compared to 2007.

Liquidity and Capital Resources

ViewCast’s primary sources of funds for conducting its business activities are derived from sales of its products and services, from its credit facilities and from the placement of its equity securities with investors. ViewCast requires working capital primarily to increase inventories and accounts receivable during sales growth, develop products, service debt, purchase capital assets, fund operations and strategic acquisitions.

Net cash provided by operating activities for the six months ended June 30, 2008 was $1,752,605 resulting from net income of $317,437, non-cash operating expense of $305,988, and net cash provided from operating assets and liabilities of $1,129,180. Cash provided by changes in operating assets and liabilities was principally due to decreased accounts receivable and inventories, supplemented by an increase in account payable and accrued expense.

Cash utilized for investing activities during the six months ended June 30, 2008 totaled $249,055 for property and equipment purchased and software development costs capitalized.

During the six months ended June 30, 2008, ViewCast’s financing activities used cash of $9,580, which resulted from repayment of long-term debt of $13,463, offset by cash provided from the exercise of employee stock options of $3,883.

Since October 1998, ViewCast has maintained a credit facility with an entity controlled by one of its principal stockholders, Mr. H.T. Ardinger. In December 2006, ViewCast.com, Inc., Osprey Technologies, Inc. and VideoWare, Inc. amended the terms and conditions of the loan and security agreement with the Ardinger Family Partnership, Ltd. Under the amended terms, $1,250,000 of primary principal and $3,891,361 of secondary principal are due December 31, 2009, subject to certain earlier payment conditions. The interest on the primary principal amount will accrue and be paid monthly based on the effective prime rate plus 1.0% (8.25% and 6.00% as of December 31, 2007 and June 30, 2008, respectively). Interest on the secondary principal will accrue based on the effective Applicable Federal Rate, as defined in the agreement, (3.88% and 2.08% as of December 31, 2007 and June 30, 2008, respectively) and will be paid in full on the maturity date. The amended note agreement is secured by all the assets of the Borrower.

 

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In June 2007, ViewCast entered into a Purchase and Sale Agreement/Security Agreement with Amegy Bank National Association, a national banking association. This agreement provides ViewCast with an accounts receivable loan facility to provide a source of working capital. As of June 30, 2008 we had no borrowings under this facility.

At June 30, 2008, ViewCast had outstanding 2,500,000 non-redeemable warrants with exercise prices of $0.48 per share and an expiration date in December 2013.

In October of 2005, ViewCast adopted the ViewCast 2005 Stock Incentive Plan, which replaced ViewCast’s expired stock option plans (the 1995 Employee Stock Option Plan and the 1995 Director Stock Option Plan) and become the sole plan for providing equity-based incentive compensation to ViewCast’s employees, non-employee directors and other service providers. ViewCast adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year. ViewCast recorded $49,039 for stock-based compensation expense in the first six months of 2008. During the quarter ended June 30, 2008, there were 1,377,500 new options granted under the ViewCast 2005 Stock Incentive Plan.

There were no preferred stock dividends declared or paid during the first quarter of 2008. The Series B and Series C preferred stock issues carry cumulative dividends of 8% and 9% per year, respectively, and are generally payable semi-annually in arrears in cash or in ViewCast common stock, at ViewCast’s option. At June 30, 2008, cumulative dividends in arrears on preferred shares are approximately: Series B-$4,186,667, Series C-$1,197,000. Holders of Series B and Series C preferred stock have no voting rights except as required by law. The Series E preferred stock has no dividend feature.

At June 30, 2008, ViewCast had working capital of $4,971,372 and cash and cash equivalents of $2,629,386. ViewCast utilizes significant capital to design, develop and commercialize its products and intends to fund its operating activities and sales growth during the next twelve months by utilizing existing cash, cash contributed from operations and its available working capital lines of credit to the extent possible. ViewCast anticipates it will utilize working capital during 2008 and 2009 to support the expansion of sales channels and market distribution, to develop and introduce new products and services, to enhance existing product offerings, to address unanticipated competitive threats or technical problems, to transition adverse economic conditions, to service its debt and for potential acquisition transactions.

ViewCast plans to obtain additional working capital position by increasing sales and through other initiatives that may include raising additional equity. Additional working capital may also be provided if existing warrant holders choose to exercise warrants that they hold. This is partially dependent on existing market conditions. Although ViewCast has no firm arrangements with respect to additional capital financing, in an ongoing basis, it considers proposals received from potential investors relating to the issuance of equity securities in exchange for a cash investment in ViewCast. There can be no assurance that additional financing will be available to ViewCast on acceptable terms, or at all. Additional equity financing may involve substantial dilution to our then existing stockholders.

At June 30, 2008, ViewCast had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

ViewCast does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on ViewCast’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

All of our sales transactions during the first six months of 2008 were denominated in U.S. dollars and the majority of our operations is based in the U.S. and, accordingly, is also denominated in U.S. dollars. We do have a foreign-based sales office in the London area where transactions are denominated in the foreign currency. The impact of fluctuations in the relative value of the currency for the first six months of 2008 was not material.

Our interest income earned on cash and cash equivalents is subject to interest rate risk from the changes in the general level of U.S. interest rates, particularly short-term rates. We believe this risk in immaterial due to the short-term nature of the investment commitment.

The interest rates under our stockholder related loan and security agreement is subject to change based on the effective prime rate for the primary principal amount and the effective Applicable Federal Rate for the secondary principal amount. At June 30, 2008 a balance of $1,250,000 was outstanding on the primary principal and $3,891,361 outstanding on the secondary principal.

Item 4. Controls and Procedures

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal finance officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

(None)

Item 1A.Risk Factors

(Not Applicable)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(None)

Item 3. Defaults Upon Senior Securities

(None)

Item 4. Submission of Matters to a Vote of Security Holders

(None)

Item 5. Other Information

(a) (None)

(b) (None)

Item 6. Exhibits

See Exhibit Index.

 

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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.

	ViewCast.com, Inc.
	(Registrant)
Date: August 14, 2008	BY:	/s/ David T. Stoner
		David T. Stoner
		Chief Executive Officer Principal Executive Officer
		/s/ Laurie L. Latham
		Laurie L. Latham
		Chief Financial Officer Principal Financial and Accounting Officer

 

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EXHIBIT INDEX

Exhibit
Page No.				Description of Exhibit
	31.1			Rule 13a-14(a)/15d-14(a) CEO Certification
	31.2			Rule 13a-14(a)/15d-14(a) CFO Certification
	32.1			Section 1350 CEO Certification
	32.2			Section 1350 CFO Certification

 

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