UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly Period ended September 30, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transitional period ________ to __________.
Commission File Number: 0-13316
BROADCAST INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
Utah 87-0395567
----------------------- --------------------------------
(State of Incorporation) (IRS Employer Identification No.)
7050 Union Park Ave. #600, Salt Lake City, Utah 84047
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(Address of Principal Executive Offices) (Zip Code)
(801) 562-2252
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(Issuer's telephone number, including area code)
Check whether the issuer (1) 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. ( x ) Yes ( ) No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding as of October 26, 2004
-------------------------------- -----------------------------------
Common Stock, $.05 Par Value 20,416,235 shares
Transitional Small Business Disclosure Format: Yes ( ) No ( X )
Broadcast International, Inc.
Form 10-QSB
Table of Contents
Part I - Financial Information Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis or
Plan of Operation 10
Item 3. Controls and Procedures 14
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Small Business
Issuer Purchases of Equity Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Item 1. Financial Information
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
September 30,
ASSETS 2004
- ------ --------------
CURRENT ASSETS
Cash and cash equivalents $ 481,081
Trade receivable (net) 360,537
Inventory 33,828
Prepaid expenses 204,984
--------------
Total Current Assets 1,080,430
--------------
NON-CURRENT ASSETS
Equipment and leasehold improvements, net 827,450
Patents 149,929
Other assets 7,824
--------------
TOTAL ASSETS $ 2,065,633
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES
Accounts payable $ 138,633
Accrued payroll & related expenses 281,741
Other accrued liabilities 52,565
Unearned revenue 203,816
Current portion of long term liabilities 157,857
--------------
Total Current Liabilities 834,612
--------------
LONG-TERM DEBT
Deferred bonus 600,000
Notes and other liabilities 588,103
--------------
Total Liabilities 2,022,715
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, no par value, 10,000,000
shares authorized; no shares issued -
Common Stock, $.05 par value, 40,000,000
shares authorized; 20,416,235 shares
issued and outstanding 1,020,812
Additional paid-in capital 18,573,868
Accumulated deficit (19,551,762)
--------------
Total Stockholders' Equity 42,918
--------------
$ 2,065,633
==============
See accompanying notes to consolidated condensed financial statements
3
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
-------------- ------------- -------------- -------------
<s> <c> <c> <c> <c>
REVENUES:
Net sales $ 1,284,877 $ 1,092,532 $ 4,216,770 $ 3,803,073
Interest and other income 5,362 2,620 22,765 8,096
-------------- ------------- -------------- -------------
1,290,239 1,095,152 4,239,535 3,811,169
COSTS AND EXPENSES:
Cost of sales 1,321,664 1,262,702 4,191,364 3,645,531
Research and development in process 1,139,717 2,024,956 12,659,094 2,024,956
Administrative and general 248,632 203,501 1,237,659 706,141
Selling and marketing 132,033 232,246 590,283 662,760
Interest 299,880 202 1,095,186 2,318
-------------- ------------- -------------- -------------
3,141,926 3,723,607 19,773,586 7,041,706
-------------- ------------- -------------- -------------
LOSS FROM OPERATIONS
BEFORE INCOME TAXES (1,851,687) (2,628,455) (15,534,051) (3,230,537)
Income Tax Benefit - - - -
-------------- ------------- -------------- -------------
NET LOSS $ (1,851,687) $ (2,628,455) $ (15,534,051) $ (3,230,537)
============== ============= ============== =============
TOTAL NET LOSS PER SHARE
- Basic and Diluted $ (.09) $ (.15) $ (.82) $ (.20)
============== ============= ============== =============
Weighted average number of shares
of Common Stock outstanding
- - Basic and Diluted 19,615,240 17,210,336 18,981,711 16,247,429
============== ============= ============== =============
See accompanying notes to consolidated condensed financial statements
4
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------
September 30, September 30,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (15,534,051) $ (3,230,537)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 299,775 302,109
Deferred bonus payable - 120,000
Beneficial conversion 1,095,110 -
Common stock issued for services 420,000 -
Common stock and options issued for research and
development in process 11,439,520 -
Liability assumed for research and development
in process 1,219,573 -
Write off research and development - 2,024,956
Provision for losses on accounts receivable 31,000 (27,000)
(Increase) decrease in:
Receivables 51,025 818,211
Inventories 44,341 (4,690)
Other assets (43,230) 36,223
Increase (decrease) in:
Accounts payable and accrued expenses 66,595 (7,820)
Unearned revenue (53,147) (122,854)
-------------- --------------
Net cash used in operating activities (963,489) (91,402)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (45,100) (119,025)
Technology patents (149,929) -
Investment in related party - (299,956)
-------------- --------------
Net cash used in investing activities (195,029) (418,981)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases (55,740) (84,686)
Related party note receivable, net (182,800) -
Proceeds from the sale of stock and option exercises 468,362 1,316,817
Loan proceeds 1,095,110 -
-------------- --------------
Net Cash provided by financing activities 1,324,932 1,232,131
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 166,414 721,748
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 314,667 316,166
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 481,081 $ 1,037,914
============== ==============
See accompanying notes to consolidated condensed financial statements
5
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2004
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and the instructions
to Form 10-QSB and Rule 310 of Regulation S-B. Accordingly, they do not
include all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America. In the opinion
of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months and the nine months ended September 30,
2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2003 included in the Company's Annual Report on Form 10-KSB (file
number 0-13316).
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared under the
assumption that the Company will continue as a going concern. Such assumption
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue
as a going concern. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain profitability. Potential sources of cash
include external debt and the sale of new shares of company stock or
alternative methods such as mergers or sale transactions. No assurances can
be given, however, that the Company will be able to obtain any of these
potential sources of cash.
NOTE C - RECLASSIFICATIONS
Certain 2003 financial statement amounts have been reclassified to
conform to 2004 presentations.
NOTE D - WEIGHTED AVERAGE SHARES
The computation of basic earnings (loss) per common share is based on
the weighted average number of shares outstanding during each period.
The computation of diluted earnings per common share is based on the
weighted average number of common shares outstanding during the periods
presented, plus the common stock equivalents that would arise from the
exercise of stock options and warrants outstanding, using the treasury stock
method and the average market price per share during the periods presented.
Options to purchase 6,289,381 and 3,185,427 shares of common stock at prices
ranging from $.02 to $60.63 per share were outstanding at September 30, 2004
and 2003, respectively, but were excluded for the calculation of diluted
earnings per share because the effect of stock options was anti-dilutive.
6
NOTE E - STOCK COMPENSATION
The Company accounts for stock-based compensation under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements for employees, except when the exercise price is below the market
price of the stock on the date of grant. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in fiscal year 2004 and 2003 consistent with the
provisions of SFAS No. 123, the Company's approximate net loss and loss per
share would have been the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss, as reported $ (1,851,687) $ (2,628,455) $(15,534,051) $ (3,230,537)
Addback:
Stock-based employee
compensation expense
determined under
intrinsic value based
method for all awards,
net of related tax
effects - - - -
Deduct:
Total stock-based employee
compensation expense
determined under fair
value based method for all
awards, net of related
tax effects (124,767) - (366,740) (23,398)
------------- ------------- ------------- -------------
Pro forma net loss $ (1,976,454) $ (2,628,455) $(15,900,791) $ (3,253,935)
============= ============= ============= =============
(Loss) earnings per share:
Basic and diluted -
as reported $ (.09) $ (.15) $ (.82) $ (.20)
============= ============= ============= =============
Basic and diluted -
pro forma $ (.10) $ (.15) $ (.84) $ (.20)
============= ============= ============= =============
The weighted average fair value of options granted during the nine months ended
September 30, 2004 was $2.32 per option. The fair value for the options granted in
the nine months ended September 30, 2004 were estimated at the date of grant using a
Black-Scholes option-pricing model.
NOTE F - SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months ended September 30, 2004, a non-cash expense of
$420,000 was recorded in Administrative and General Expense for services
rendered by consultants compensated by the issuance of 105,000 shares of
common stock.
On May 18, 2004 an Order Confirming the Debtor in Possession's Plan
of Reorganization (the Plan) in the bankruptcy case for Interact Devices, Inc.
(IDI) was issued. As a result of this action, the Company was issued
approximately 50,127,218 shares of the common stock of IDI representing
approximately 79% of the outstanding stock of IDI at that time.
7
On September 1, 2004, the Company entered into a settlement agreement
with the Co-founders of IDI and certain companies owned, controlled or
associated with the Co-founders (the Parties). This agreement called for the
Co-founders to return to the treasury of IDI common stock totaling
approximately 6,098,000 shares in exchange for certain assets and obligations
of the parties of approximately $210,000. As part of the aforementioned
agreement, the Company was relieved of an obligation to provide 8,466 shares
of the Company's common stock and approximately $20,657 of cash payments due
to the parties as part of the Company's funding of the IDI Plan of
Reorganization. With the reduction of the number of outstanding shares of
stock in IDI, the Company now owns approximately 86% of the outstanding stock
of IDI.
The Company recorded the following net amounts related to the
acquisition of research and development in process from IDI from the
assumption of liabilities and consolidation of IDI:
Receivable from IDI $ (265,008)
Liabilities assumed from IDI (994,988)
Research and development in process 1,219,573
Trade receivables, net 13,506
Inventory 6,997
Prepaid expenses 2,166
Equipment 46,450
Accounts payable and accrued liabilities (28,696)
--------------
In accordance with the Plan, in exchange for the common shares of
IDI, the Company issued a net total 111,842 shares of common stock of
Broadcast International, Inc. valued at approximately $682,222 to the former
creditors of IDI. Additional payments totaling approximately $312,766 will be
made to the former IDI creditors in equal quarterly installments of
approximately $18,000 over of the next four years, which together total the
$994,988 liabilities assumed by the Company.
Additionally, the principals of Streamware Solutions AB, a Swedish
Corporation, purchased 187,500 shares of the Company's common stock below fair
market value pursuant to a Stock Purchase and Option Grant Agreement dated
February 6, 2004. Streamware was issued an additional 1,000,000 shares of
common stock pursuant to a Stock Issuance and Option Grant Agreement also
dated February 6, 2004. The Company also issued to Streamware or its
principals 2,812,500 options to purchase common shares of the Company at an
exercise price of $4.50 per share, expiring February 6, 2006, associated with
the agreements mentioned above. These agreements were entered concurrently
with IDI entering into an amended Partner Agreement with Streamware, and all
expenses associated with Streamware and the IDI bankruptcy settlement above
were recorded as Research and Development in Process, as part of the on-going
development costs of the CodecSys technology. The Company recorded the
following related to these agreements:
Research and development in process expense,
stock issued below market 375,000
Research and development in process expense,
additional stock issued 6,000,000
Research and development in process expense,
fair value of stock options 3,853,019
Common stock (50,000)
Additional paid-in capital (10,178,019)
8
On April 1,2003, the Company entered into a Stock Purchase Agreement
with three of the founders of Interact Devices, Inc. ("IDI") to acquire
approximately 25% of IDI. Coincident to the Agreement the President of
Broadcast International was granted the right to vote the remaining shares
owned by the founders for a one year period, which resulted in the Company
having the right to vote in excess of 60% of the voting stock of IDI. The
Agreement required a $300,000 initial payment and at the conclusion the
Company either: a) purchased the shares representing 25% of the outstanding
shares of IDI or b) return the shares to the founders of IDI and remit to them
an additional $300,000. The Company elected to return the shares to the
founders. On September 1, 2004, the Company entered into a settlement
agreement with the founders of IDI, in which the Company would contribute
$210,000 (an obligation of the founders) to IDI in behalf of the founders and
pay a total $90,000, in cash, to the founders in four monthly payments of
$22,500, beginning September 2004. The $90,000 expense is recorded in research
and development in process. Additionally, the Company granted the founders
options to purchase 450,000 shares of common stock of the Company at a
purchase price of $6.25 per share. The Company recognized an expense in
research and development in process, of $1,121,501 using a Black-Scholes
option-pricing model.
On December 23, 2003, the Company entered into a convertible line of
credit for up to $1,000,000 with Meridel LTD and Pascoe Holdings LTD, both
Turks and Caicos corporations. The Company may obtain advances as needed to
fund operating expenses. On June 30, 2004 the Note was amended to increase the
limit from $1,000,000 to $2,000,000 with the original due date of the Note
extended from March 31, 2005 to April 1, 2006. Any portion of the note is
convertible at the lenders sole discretion, for common shares of the Company
at the rate of $1.00 per share. During the nine months ended September 30,
2004, the Company borrowed an additional $1,095,110 making the total amount
borrowed $1,195,090. Although the note bears an annual interest rate of 6%,
which would be forgiven upon conversion, the Company believes the entire
amount of the note will be converted, whereby it has recorded the beneficial
conversion feature of the note. During the nine months ended September 30,
2004, the Company recorded $1,095,110 as a beneficial conversion feature
associated with the advances made under this line of credit. The $1,095,110 is
included in interest expense. On September 30, 2004 the note holders exercised
their conversion rights and converted a total of $800,000 ($400,000 each)
into 800,000 shares of common stock of the Company. The remaining balance of
the note at September 30, 2004 is $395,090.
The Company paid no cash for income taxes or interest expense during
the three and nine months ended September 30, 2004 and 2003.
NOTE G - SUBSEQUENT EVENT
None.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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," 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 the
Company's future plans of operations, business strategy, operating results,
and financial position. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. To comply with the
terms of the safe harbor, 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 the Company's ability to raise
additional capital to fund cash requirements for future operations; (ii)
uncertainties involved in the rate of growth of the Company's business and
acceptance of the Company's products and services; (iii) volatility of the
stock market, particularly within the technology sector; and (iv) general
economic conditions. Although the Company believes the expectations reflected
in these forward-looking statements are reasonable, such expectations may
prove to be incorrect.
Results of Operations for the three months ended September 30, 2004 and
September 30, 2003
Revenues
The Company generated approximately $1,285,000 in revenue during the
three months ended September 30, 2004, which represents an 18% increase in
revenue over the same period in the prior year. During the same three-month
period in 2003, the Company generated revenue of approximately $1,093,000.
The increase in revenue of $192,000 was due primarily to an increase in sales
of equipment to customers of $ 172,000 and an increase of $95,000 in Studio
and Video Production, which was partially offset by a decrease in other
revenue sources consisting principally of license fees, which decreased
approximately $55,000.
Cost of Sales
Costs of Sales increased by approximately $59,000 to $1,322,000 for
the three months ending September 30, 2004, from $1,263,000 for the three
months ending September 30, 2003. The increase was due primarily to the
increased sales of equipment referenced above, which resulted in an increase
in the cost of equipment sold to the Company's customers of $90,000. There was
not an increase in the cost of equipment relative to the sales price of the
equipment. The increase in costs of revenues was partially offset by a
decrease of $13,000 in operating costs included in cost of revenues and
$15,000 in satellite distribution costs.
11
Research and Development in Process
The Company recorded a non-cash expense of approximately $1,140,000
in the three months ending September 30, 2004. All of this expense related to
the issuance of 450,000 options to purchase Company common stock at $6.25 per
share and the payment of $90,000 to the three co-founders of Interact Devices,
Inc. ("IDI") in exchange for the termination of the Stock Purchase Agreement,
wherein the Company was to acquire a portion of the founders IDI common stock
and the surrender of all of the founders stock to IDI for cancellation. The
Company's relative ownership of IDI increased approximately 7% to 86% of IDI
with the cancellation of the founders IDI shares.
Expenses
Operating Expenses for the three months ending September 30, 2004
were approximately $380,700 compared with operating expenses for the three
months ending September 30, 2003 of approximately $435,700. The decrease of
approximately $55,000 resulted from a decrease in various expense items
primarily a decrease in salaries.
Other
For the three months ended September 30, 2004, the Company incurred
interest expense of $299,880 compared to interest expense for the three months
ended September 30, 2003 of $202. The full amount of the increase resulted
from the Company recording interest expense related to the beneficial
conversion feature on the Convertible Note and assuming that the note holders
will exercise their option to convert and satisfy the obligation through
conversion. The note holders did exercise their option to convert with regard
to $800,000 of the principal of the Note and all related accrued interest
thereon.
The Company realized a net loss for the three months ending September
30, 2004 of $1,851,687 compared with a net loss for the three months ended
September 30, 2003 of $2,628,455. Of the net loss for the quarter ended
September 30, 2004, $1,139,717, or approximately 62% resulted from costs of
Research and Development in Process. The other significant factor was the
increase to $299,880 in interest expense resulting from the beneficial
conversion feature of the convertible note. Absent these two items, the total
loss for the three months ended September 30, 2004 would have been
approximately $412,000, which represents a decreased net loss of approximately
$191,000 when compared to the net loss for the three months ended September
30, 2003, when adjusted for Development in Process expenditures for that
quarter.
Results of Operations for the nine months ended September 30, 2004 and
September 30, 2003
Revenues
The Company generated approximately $4,217,000 in revenue during the
nine months ended September 30, 2004. During the same nine-month period in
2003, the Company generated revenue of approximately $3,803,000. The increase
in revenue of $414,000 was primarily the result of a combination of an
increase in sales of equipment to customers of $ 986,000 and an increase in
studio and video production revenue of $300,000 and an increase in satellite
fees of approximately $60,000, which was offset by a decrease in license fees
of approximately $508,000 and a decrease in installation and service revenue
of approximately $447,000.
Cost of Sales
Costs of Sales increased by approximately $546,000 to $4,191,000 for
the nine months ending September 30, 2004, from $3,645,000 for the nine months
ending September 30, 2003. The increase was due primarily to the increased
sales of equipment referenced above, which resulted in an increase in the cost
of equipment sold to the Company's customers of $670,000. There was not an
increase in the cost of equipment relative to the sales price of the
equipment. The increase in costs of revenues was partially offset by a
decrease of $48,000 in operating costs included in cost of revenues and
$74,000 in satellite distribution costs.
Research and Development in Process
The Company recorded a non-cash expense of $12,659,094 in the nine
months ending September 30, 2004 compared to an expense of $2,024,956 for the
nine-month period ending September 30, 2003. The expenses in 2003 related to
the expensing of an investment in Interact Devices, Inc. determined at that
time to not be recoverable. The expense in 2004 related primarily to obtaining
of in process technology and clarification of marketing and development rights
through amendments to existing technology licensing agreements of the
Company's CodecSys technology. Details of this expense are as follows: 1)
$6,375,000 for the issuance of 1,187,500 shares of common stock of Company to
Streamware Solutions AB, a Swedish company, and its principals; 2)
approximately $3,853,000 for options to purchase 2,812,500 shares of common
stock of the Company at an exercise price of $4.50 per share, 3) approximately
$994,988 to provide funding to former IDI creditors as specified in IDI's Plan
of Reorganization, offset by approximately $40,000 of net assets obtained from
IDI 4) approximately $265,000 in cancellation of a note due the Company from
IDI. The issuance of stock and options were recorded as an expense due to the
amendments to existing technology licensing agreements. See additional details
in Note F and Part II, Item number 5.
An additional component of the non-cash expense resulted from
recording as an expense approximately $1,121,500 related to the issuance of
450,000 options to purchase Company common stock at $6.25 per share and the
payment of $90,000 to the three co-founders of IDI in exchange for the
termination of the Stock Purchase Agreement, wherein the Company was to
acquire a portion of the founders IDI common stock and the surrender of all of
the founders stock to IDI for cancellation. The Company's relative ownership
of IDI increased approximately 7% to 86% of IDI with the cancellation of the
founders IDI shares.
Expenses
Operating Expenses for the nine months ending September 30, 2004 were
approximately $1,828,000 compared with operating expenses for the nine months
ending September 30, 2003 of approximately $1,369,000. The increase of
approximately $459,000 resulted primarily from two items; 1) $420,000 from the
issuance of 105,000 shares of common stock for services rendered by outside
consultants assisting the Company in positioning the development of the
CodecSys technology, 2) approximately $60,000 increase in general and
administrative expense for additional legal, audit and investor relations
costs associated with being publicly traded, 3) Other material items include
an increase of approximately $172,000 in sales and marketing expenses
primarily due to additional presence at trade shows and an increase of
approximately $50,000 in other operating expenses offset by a decrease in
other product development expenses of approximately $244,000.
12
Other
For the nine months ended September 30, 2004, the Company incurred
interest expense of approximately $1,095,000 compared to interest expense for
the nine months ended September 30, 2003 of approximately $2,000. The full
amount of the increase resulted from the Company recording interest expense
related to the beneficial conversion feature on the Convertible Note and
assuming that the note holder will exercise its option to convert and satisfy
the obligation through conversion.
The Company realized a net loss for the nine months ending September
30, 2004 of approximately $15,534,000 compared with a net loss for the nine
months ended September 30, 2003 of approximately $3,230,000. The increase in
the net loss for the nine months ended September 30, 2004 was $12,304,000 of
which $11,908,000 resulted primarily from five non cash expenses: 1)
$6,375,000 for the issuance of 1,187,500 shares of common stock of Company to
Streamware, 2) approximately $3,853,000 for options to purchase 2,812,500
shares of common stock of the Company at an exercise price of $4.50 per share,
3) approximately $994,988 to provide funding to former IDI creditors as
specified in The Plan of Reorganization 4) approximately $265,000 fulfillment
of a note due the Company from IDI, 5) $420,000 from the issuance of common
stock for services rendered by outside consultants assisting the Company in
positioning the development and deployment of the CodecSys technology.
Interest expense of approximately $1,095,000 from the beneficial
conversion feature of the convertible note was recorded by the Company.
An additional component of the non-cash expense resulted from
recording as an expense approximately $1,140,000 related to the issuance of
450,000 options to purchase Company common stock at $6.25 per share and the
payment of $90,000 to the three co-founders of IDI in exchange for the
termination of the Stock Purchase Agreement, wherein the Company was to
acquire a portion of the founders IDI common stock and the surrender of all of
the founders stock to IDI for cancellation.
Absent the treatment of the non cash expenses described above, and
the beneficial conversion feature interest, the total loss for the nine months
ended September 30, 2004 would have increased by approximately $95,000 when
compared to the net loss for the nine months ended September 30, 2003 after
making a similar adjustment for non cash expenses related to the CodecSys
technology.
Liquidity and Capital Resources
At September 30, 2004, the Company had cash of approximately $481,000
and total current assets of $1,080,430 compared to total current liabilities
of $834,612 and total stockholder's equity of 42,918.
13
For the nine months ended September 30, 2004, the Company used
$963,489 of cash for operating activities compared to cash used for operations
for the nine months ended September 30, 2003 of $91,402. The cash used in
operations was provided primarily from proceeds from sales of Company common
stock and from loan financing.
The Company estimates that its monthly expenses over the next several
months will exceed its monthly income by between approximately $100,000 and
$150,000 per month, depending on the level of activity of the Company. The
Company anticipates that its negative cash flow will diminish somewhat as a
result of recent sales activity. However, to the extent the Company continues
to experience a revenue shortfall between its sales activities and the
Company's operating costs, the Company will continue to have the need for
infusions of capital over at least the next several months. To date, the
Company has met its working capital needs through payments received from sales
of its common stock and borrowings under a convertible line of credit
agreement. There can be no assurance that the Company will continue to
receive loans or equity contributions if the Company does not demonstrate
increased revenues and other favorable operating results over the next several
months. In the event payments were to terminate, for any reason, the Company
would be in immediate need of another source of capital or would be required
to restructure its development program and reduce its costs, which may have a
negative impact on the Company and its ability to continue with its business
plan. The dilution experienced by the existing shareholders in the event of
such additional capital infusions cannot be determined at this time. There
can be no assurance that, in such event, the Company will be able to locate a
source of capital on terms acceptable to the Company, if at all.
Risk Factors and Cautionary Statements
This quarterly report contains certain forward-looking statements.
The Company wishes to advise readers that actual results may differ
substantially from such forward-looking statements. Forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in or implied by the statements,
including but not limited to, the following: the ability of the Company to
maintain a sufficient customer base to have sufficient revenues to fund and
maintain its operations, and the ability of the Company to meet its cash and
working capital needs, and to have sufficient revenues to continue operations.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based upon an
evaluation under supervision and with the participation of Registrant's
management, as of September 30, 2004, Registrant's principal executive officer
and principal financial officer have concluded that the Registrant's
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c)) under the Securities Exchange Act of 1934, are effective to ensure
that information required to be disclosed (in reports that we file or submit
under that Exchange Act) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
Changes in Internal Accounting. There were no significant changes in
Registrant's internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation. There were
no significant deficiencies or material weaknesses, and therefore there were
no corrective actions taken. However, the design of any system of controls is
based in part upon the assumptions about the likelihood of future events, and
there is no certainty that any design will succeed in achieving its stated
goal under all potential future considerations, regardless of how remote.
14
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On September 30, 2004, the Company issued 800,000 shares of common
stock of the Company to two lenders pursuant to a demand by the lenders to
convert $800,000 of the principal balance and all accrued interest applicable
thereto, of a Convertible Line of Credit Promissory Note dated December 23,
2003, to common stock.
The Company granted options to purchase 450,000 shares of common
stock of the Company to the three co-founders of Interact Devices, Inc.
pursuant to a Settlement Agreement between the Company and the co-founders
dated September 1, 2004. These options are exercisable at $6.25 per share.
These options were granted pursuant an exemption contained in Rule 701.
For the issuance of unregistered stock referenced above, except for
the options to purchase stock, the Company relied upon an exemption from
registration under Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information
On May 18, 2004, the Plan of Reorganization (the "Plan") filed by
Interact Devices, Inc. on April 8, 2004, was confirmed by the United States
Bankruptcy Court. The Company had entered into an agreement with Interact
Devices, Inc. ("IDI") to provide the funding required by IDI's Plan of
Reorganization. As a result of the confirmation, the Company received
50,127,218 shares of common stock of IDI, these shares along with
approximately 1,299,501 convertible preferred shares of stock previously owned
by the Company, represented an approximate 79% ownership of IDI. Funding of
the Plan provided by the Company to former creditors of IDI, was in the form
of issuing 120,308 shares of common stock of the Company valued at
approximately $733,866 along with deferred cash payments totaling
approximately $332,907 to be remitted over the next four years.
15
On September 1, 2004, the Company entered into a settlement agreement
with the Co-founders of IDI and certain companies owned, controlled or
associated with the Co-founders (the Parties). This agreement called for the
Co-founders to return to the treasury of IDI common stock totaling
approximately 6,098,000 shares in exchange for certain assets and obligations
of the parties of approximately $210,000. As part of the aforementioned
agreement, the Company was relieved of an obligation to provide 8,466 shares
of the Company's common stock and approximately $20,657 of cash payments due
to the parties as part of the Company's funding of the IDI Plan of
Reorganization. As a result of this Agreement, the Company issued a total net
111,842 shares of common stock of Broadcast International, Inc. valued at
approximately $682,222 to the former creditors of IDI along with the cash
payments totaling approximately $312,766 in equal quarterly installments of
approximately $18,000 over of the next four years. The Company now owns
approximately 86% of the outstanding stock of IDI due to the reduction in the
number of outstanding shares of stock of IDI.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a
-14(A) of the Securities Exchange Act of 1934, As Amended, As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(A) of the Securities Exchange Act of 1934, As Amended, As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 Certification of Chief Executive Officer 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 Chief Financial 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
None.
16
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.
Broadcast International, Inc.
Date: November 12, 2004 /s/ Rodney M. Tiede
--------------------------------------------
By: Rodney M. Tiede
Its: President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2004 /s/ Randy Turner
-------------------------------------------
By: Randy Turner
Its: Chief Financial Officer (Principal
Financial and Accounting Officer)
17