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 June 30, 2005
[ ] 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.
_______________________________________________________________
(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
___________________________________________________________
(Address of Principal Executive Offices) (Zip Code)
(801) 562-2252
_______________________________________________
(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 July 31, 2005
_____________________ _______________________________
Common Stock 20,839,851 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 12
Item 3. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on 8-K 17
Signatures 19
2
Item 1. Financial Information
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
June 30,
ASSETS 2005
- ------ ------------
Current assets
Cash and cash equivalents $ 2,267,340
Trade receivable, net 341,874
Inventory 22,642
Prepaid expenses 1,083,270
------------
Total current assets 3,715,126
------------
Non-current assets
Equipment and leasehold improvements, net 628,621
Patents net 192,273
Other assets 7,824
------------
Total assets $ 4,543,844
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities
Accounts payable $ 200,164
Accrued Payroll & related expenses 156,965
Other accrued liabilities 83,540
Unearned revenue 135,304
Current debt obligations 915,153
-----------
Total current liabilities 1,491,126
-----------
Long-term debt
Long-term obligations, net of discount of $2,875,000 265,373
Deferred bonus 600,000
-----------
Total liabilities 2,356,499
-----------
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; 20,839,851 shares issued and outstanding 1,041,993
Additional paid-in capital 23,941,776
Accumulated deficit (22,796,424)
-----------
Total stockholders' equity 2,187,345
-----------
Total liabilities and stockholders' equity $ 4,543,844
===========
See accompanying notes to consolidated condensed financial statements
3
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
REVENUES:
Net sales $ 999,495 $ 1,556,040 $ 1,977,146 $ 2,931,896
Interest and other income 31,390 14,958 34,890 17,403
------------- ------------- ------------- -------------
1,030,885 1,570,998 2,012,036 2,949,299
COSTS AND EXPENSES:
Cost of sales 1,232,373 1,511,644 2,335,722 2,869,691
Research and development
in process - 10,343,945 - 11,519,377
Administrative and general 678,775 296,504 952,291 989,025
Selling and marketing 229,806 265,086 378,225 458,266
Interest 385,885 445,657 635,799 795,306
------------- ------------- ------------- -------------
2,526,839 12,862,836 4,302,037 16,631,665
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS
BEFORE INCOME TAXES (1,495,954) (11,291,838) (2,290,001) (13,682,366)
Income Tax Benefit - - - -
------------- ------------- ------------- -------------
NET LOSS $ (1,495,954) $(11,291,838) $ (2,290,001) $(13,682,366)
============= ============= ============= =============
TOTAL NET LOSS PER SHARE
- Basic and Diluted $ (.07) $ (.59) $ (.11) $ (.73)
============= ============= ============= =============
Weighted average number of
shares of Common Stock
outstanding
- Basic and Diluted 20,755,433 19,019,793 20,718,536 18,663,465
============= ============= ============= =============
See accompanying notes to consolidated condensed financial statements
4
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-----------------------------
June 30, June 30,
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,290,001) $ (13,682,366)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 183,440 202,199
Beneficial conversion 449,876 795,230
Amortization of discount on long-term debt 125,000 -
Common stock issued for services 235,170 420,000
Common stock and options issued for research and
development in process - 10,228,019
Liabilities assumed for research and development
in process - 1,291,358
Provision for losses on accounts receivable 6,747 26,000
(Increase) decrease in:
Receivables 129,477 (287,645)
Inventories (2,576) 50,334
Prepaid and other assets (208,193) (15,903)
Increase (decrease) in:
Accounts payable and accrued expenses 55,355 70,594
Unearned revenue (69,774) (51,822)
-------------- --------------
Net cash used in operating activities (1,385,479) (954,002)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (47,151) (32,779)
Technology patents (13,329) (137,552)
-------------- --------------
Net cash used in investing activities (60,480) (170,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (35,093) (13,830)
Related party note receivable, net - (182,800)
Proceeds from the sale of stock 124,980 465,362
Loan proceeds, net 3,449,876 795,230
-------------- --------------
Net cash provided by financing activities 3,539,763 1,063,962
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,093,804 (60,371)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 173,536 314,667
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,267,340 $ 254,296
============== ==============
See accompanying notes to consolidated condensed financial statements
5
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
June 30, 2005
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 Item 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, in order to make the financial statements
not misleading have been included. Operating results for the three months and
the six months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. For
further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 2004 included in the
Company's Annual Report on Form 10-KSB (file number 000-13316).
NOTE B - RECLASSIFICATIONS
Certain 2004 financial statement amounts have been reclassified to
conform to 2005 presentations.
NOTE C - 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 period, 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 period. Options to purchase
7,775,596 and 6,030,903 shares of common stock at prices ranging from $.02 to
$60.00 per share were outstanding at June 30, 2005 and 2004, respectively, but
were excluded for the calculation of diluted earnings per share because the
effect of stock options was anti-dilutive.
NOTE D - 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. No common stock was
issued for compensation during the six months and three months ended June 30,
2005, as well as the three months ending June 30, 2005, however during the six
months ended June 30, 2004, 5,000 shares of common stock were issued to an
individual of the management of the Company. The amount of expense recognized
on the 2004 income statement was $20,000, which is included in stock issues
for services. No options to purchase shares of the Company's common stock were
granted as compensation to employees and management during the three and six
months ended June 30, 2005, as well as the three months ended June 30, 2004,
6
however, options to purchase 258,000 shares of the Company's common stock were
granted to employees and management for six months ended June 30, 2004. All
options granted had an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant. The options vested
during the three and six months ended June 30, 2005 would have the following
effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
<s> <c> <c> <c> <c>
Net loss, as reported $ (1,495,954) $(11,291,838) $ (2,290,001) $(13,682,366)
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 (52,427) (124,767) (177,194) (241,973)
------------- ------------- ------------- -------------
Pro forma net loss $ (1,548,381) $(11,416,605) $ (2,467,195) $(13,924,339)
============= ============= ============= =============
(Loss) earnings per share:
Basic and diluted - as reported $ (.07) $ (.59) $ (.11) $ (.73)
============= ============= ============= =============
Basic and diluted - pro forma $ (.07) $ (.60) $ (.12) $ (.75)
============= ============= ============= =============
The weighted average fair value of options granted during the six months ended
June 30, 2004 was $3.07 per share. The fair value for the options granted in
the six months ended June 30, 2004 were estimated at the date of grant using a
Black Scholes option pricing model with the following weighted average
assumptions:
Risk free interest rate 4.04%
Expected life (in years) 8
Expected volatility 37.49%
Expected dividend yield 0.00%
NOTE E - SIGNIFICANT ACCOUNTING POLICIES
Patents
Patents represent legal and filing costs incurred to apply for United
States as well as international patents on the CodecSys technology. Once
granted these costs are amortized on a straight-line basis over their useful
life, averaging approximately 15 years. As of June 30, 2005 one patent has
been granted with the associated amortization expense recognized of $139 for
the six months ended June 30, 2005. If all additional patents were granted
prior to December 31, 2005 the estimated amortization expense on patents for
each of the next five years would be as follows:
7
Year ending December 31:
2005 $ 5,965
2006 11,930
2007 11,930
2008 11,930
2009 11,930
Long-Lived Assets
We review our long-lived assets, including patents, whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future un-discounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, then the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the estimated fair value of
the assets. Fair value is determined by using cash flow analyses and other
market valuations.
NOTE F - LONG-TERM NOTES PAYABLE
On May 16, 2005, the Company consummated a private placement of
$3,000,000 principal amount of 6% Senior Secured Convertible Three-Year Notes
and related securities, including common stock warrants and additional
investment rights. Specifically, this transaction may ultimately result in
gross proceeds to the Company of $13,800,000 if the additional investment
rights and warrants to purchase common stock of the Company are exercised in
full. In connection with these notes, the Company has filed a registration
statement with the Securities and Exchange Commission on Form S-3 registering
the shares of common stock issuable upon conversion of all notes convertible
to common stock, additional investment rights and warrants to purchase common
stock, if they are exercised in the future. The Securities and Exchange
Commission has not declared this filing effective.
600,000 A warrants and 600,000 B warrants to purchase common stock
with an exercise price of $2.50 and $4.00, respectively, subject to certain
reset provisions and potential reductions of the exercise prices, were issued
with the debt. The warrants are valued at $1,232,450 and are recorded as a
debt discount. In addition, the debt is convertible to common stock at $2.50
per share, with an effective beneficial rate of $1.47 per share after
consideration of the value allocated to the warrants. The beneficial
conversion feature is valued at $1,767,550 and is recorded as a debt discount.
The beneficial conversion feature and the warrants resulted in a total
discount to the notes of $3,000,000 which is being amortized over the
three-year term of the notes. As of June 30, 2005, $125,000 has been
amortized, and future amortization will be approximately $83,333 per month
until the note is converted or retired. Additional information regarding this
transaction may be found in Form 8-K filed with the Securities and Exchange
Commission dated May 16, 2005.
8
NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended June 30, 2005 and 2004, non-cash expenses of
$235,170 and $400,000 was recorded in Administrative and General Expense for
services rendered by consultants compensated by the issuance of 67,000 and
100,000 shares of common stock, respectively. During the six months ended
June 30, 2004, a non-cash expense of $20,000 was recorded in Administrative
and General Expense for services rendered by an individual of management
compensated by the issuance of 5,000 shares of common stock.
For the six months ended June 30, 2005 Broadcast International issued
100,000 shares of common stock and warrants to purchase 120,000 shares of the
company's common stock, at a purchase price of $2.50 per share, valued at
approximately $351,000 and $331,147, respectively, to the affiliates of a
placement agent in connection with the long-term convertible notes described
above. Additionally, the placement agent received $240,000 in cash. The
cumulative value of the stock, warrants and cash totaling approximately
$922,147 was recorded as prepaid expense and will be recognized as interest
expense over the three-year term of the notes. As of June 30, 2005, $38,423
has been included in interest expense; future expense recognition will be
approximately $25,615 per month.
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
foreign corporations. The Company may obtain advances as needed to fund
operating expenses. On June 30, 2004, the line of credit was amended to
increase the limit from $1,000,000 to $2,000,000 with the original due date of
the line of credit extended from March 31, 2005 to April 1, 2006. Any portion
of the note under the line of credit is convertible at the lenders sole
discretion, for common shares of the Company at the rate of $1.00 per share.
During the six months ended June 30, 2005 and 2004, the Company borrowed
$449,876 and $795,230, respectively. The balance of the note at June 30, 2005
was $844,966.
The note bears an annual interest rate of 6%. Accrued interest,
however, is forgiven upon conversion pursuant to the terms of the line of
credit. The Company believes the entire amount of the note will be converted,
whereby it has recorded only the immediately exercisable beneficial conversion
feature of the note into interest expense. During the six months June 30, 2005
and 2004, the Company recorded $449,876 and $795,230, respectively, as there
is an immediately convertible beneficial conversion feature associated with
the advances made under the line of credit. These amounts are included in
interest expense.
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. The Company recorded the
following 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 (1,066,773)
Research and development in process 1,291,358
Trade receivables, net 13,506
Inventory 6,997
Prepaid expenses 2,166
Equipment 46,450
Accounts payable and accrued liabilities (28,696)
---------------
-
9
In accordance with the Plan, in exchange for the common shares of
IDI, the Company issued 120,308 shares of common stock of Broadcast
International, Inc. valued at approximately $733,866 to the former creditors
of IDI. Additional payments totaling approximately $332,907 will be made to
the former IDI creditors in equal quarterly installments of approximately
$20,000 over of the next four years, which together total the $1,066,773
liabilities assumed by the Company.
Additionally, the principals of Streamware Solutions AB, a Swedish
Corporation, purchased 187,500 shares of 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)
------------
-
The Company paid no cash for income taxes or interest expense during
the three and six months ended June 30, 2005 and 2004, but as of June 30,
2005, $22,500 has been accrued due to be paid in November 2005.
NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R, Share Based Payment,
which requires companies to measure and recognize compensation expense for all
stock based payments at fair value. SFAS 123R is effective for small business
insurers for interim periods or the fiscal year beginning after December 15,
2005 and, thus, will be effective for us beginning with the first quarter of
2006. Early adoption is encouraged and retroactive application of the
provisions of SFAS 123R to the beginning of the fiscal year that includes the
effective date is permitted, but not required. We are currently evaluating
the impact of SFAS 123R and expect the adoption to have a material impact on
our financial position and results of operations. See Stock Compensation in
Note 2 of our Notes to Consolidated Financial Statements for more information
related to the pro forma effects on our reported net income and net income per
share of applying the fair value recognition provisions of the previous SFAS
123, Accounting for Stock Based Compensation, to stock based employee
compensation.
10
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1
("FAS 109-1"), "Application of FASB Statement No. 109, "Accounting for Income
Taxes," to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004, ("AJCA"). The AJCA introduces a
special 9% tax deduction on qualified production activities. FAS 109-1
clarifies that this tax deduction should be accounted for as a special tax
deduction in accordance with Statement 109. The Company does not expect the
adoption of these new tax provisions to have a material impact on the
Company's consolidated financial position, results of operations, or cash
flows.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107"), to provide further guidance regarding the interaction of the provisions
of SFAS 123R and certain SEC rules and regulations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement 154, Accounting Changes and Error Corrections, which requires
retrospective application (the application of the changed accounting principle
to previously issued financial statements as if that principle had always been
used) for voluntary changes in accounting principle unless it is impracticable
to do so. Previously the cumulative effect of such changes was recognized in
net income of the period of the change. The effective date is for changes made
in fiscal year beginning after December 15, 2005.
In June 2005, the Emerging Issues Task Force ("EITF") issued three
Consensuses that are subject to later ratification by the FASB:
The first is EITF 04-5 which establishes a framework for evaluating
whether a general partner or a group of general partners controls a limited
partnership and therefore should consolidate it. Unless the limited partners
have "kick-out rights" allowing them to dissolve or liquidate the partnership
or otherwise remove the general partner "without cause", or "participating
rights" allowing the limited partners to participate in significant decisions
made in the ordinary course of the partnership's business, the general
partner(s) hold effective control and should consolidate the limited
partnership. This would be effective immediately for newly-formed limited
partnerships and for existing limited partnership agreements that are
modified. For existing limited partnership agreements that are not modified,
it would be effective for the beginning of the first reporting period after
December 15, 2005. The Company does not expect the adoption of EITF 04-5 to
have a material impact on the Company's consolidated financial position,
results of operations, or cash flows.
The second Consensus is EITF 05-2 which provides guidance for
issuers of debt and preferred-stock instruments with conversion features that
may need to be accounted for as derivatives. The Company does not expect the
adoption of EITF 05-2 to have a material impact on the Company's consolidated
financial position, results of operations, or cash flows.
The third Consensus is EITF 05-6, "Determining the Amortization
Period for Leasehold Improvements". The guidance requires that leasehold
improvements acquired in a business combination or purchased subsequent to the
inception of a lease be amortized over the lesser of the useful life of the
assets or a term that includes renewals that are reasonably assured at the
date of the business combination or purchase. The guidance is effective for
periods beginning after June 29, 2005. The Company does not expect the
adoption of EITF 05-6 to have a material impact on the Company's consolidated
financial position, results of operations, or cash flows
11
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
June 30, 2005 and June 30, 2004
Revenues
The Company generated approximately $999,000 in revenue during the three
months ended June 30, 2005. During the same three-month period in 2004, the
Company generated revenue of approximately $1,556,000. The decrease in
revenue of $557,000 was due primarily to a decrease in sales of equipment to
customers of $360,144, a decrease in revenue from video production services of
$130,306 and a decrease of $60,053 in customer license fees, due to the
expiration of a customer contract during the quarter ended June 30, 2005.
Cost of Revenues
Costs of Revenues decreased by approximately $279,000 to $1,232,373 for
the three months ending June 30, 2005, from $1,511,644 for the three months
ending June 30, 2004. The decrease was due primarily to the decreased sales
of equipment referenced above, which resulted in a decrease in the cost of
equipment sold to the Company's customers of $247,114. The remainder of the
decrease was due to a decrease in the cost of delivering the services related
to primarily lower employee costs in the quarter ended June 30, 2005 compared
to the quarter ended June 30, 2004. There was not a decrease in the cost of
equipment relative to the sales price of the equipment.
12
Expenses
Operating Expenses for the three months ending June 30, 2005 were
$908,581 compared with operating expenses for the three months ending June 30,
2004 of $10,905,535. The decrease of approximately $10,000,000 resulted from
the issuance of common stock and grants of options and recording the value
thereof as $10,343,945 non cash expenses in the prior year for research and
development in process related to the Company's CodecSys technology. This
expense was not repeated in the current quarter. Administrative and General
expenses increased by $382,271 primarily from an increase in legal fees, and
from the issuance of stock for investor relations services. The increase in
administrative and general expenses was partially offset by a decrease in
selling and marketing expenses of $35,280.
Other
For the three months ended June 30, 2005, the Company incurred interest
expense of $385,885 compared to interest expense for the three months ended
June 30, 2004 of $445,657. The full amount of the decrease resulted from the
Company recording less interest expense related to a Convertible Note's
beneficial conversion feature, the amount of which is calculated as the
difference between the conversion price of $1.00 per share and the average
trading price of the Company's stock during the quarter and assuming that the
note holder will exercise its option to convert and satisfy the obligation
through conversion. The decrease was offset by recording interest expense of
$147,500 related to recently completed financing, $22,500 of which is payable
in cash and the remainder is amortization of note discount.
The Company realized a net loss for the three months ending June 30,
2005 of $1,495,954 compared with a net loss for the three months ended June
30, 2004 of $11,291,838. Absent the $10,343,945 Research and Development in
Process expense for the quarter ended June 30, 2004, the net loss for the
three months ended June 30, 2005 increased by approximately $548,000 when
compared to the net loss for the three months ended June 30, 2004 excluding
the research and development in progress expense. This approximate $548,000
increase in net loss excluding the impact of the research and development in
progress expense as mentioned above is due primarily to the decrease in
revenue and the increase in Administrative and General Expenses as discussed
above.
Results of Operations for the six months ended
June 30, 2005 and June 30, 2004
Revenues
The Company generated approximately $1,977,147 in revenue during the six
months ended June 30, 2005. During the same six-month period in 2004, the
Company generated revenue of approximately $2,931,896. The decrease in
revenue of $954,749 was primarily a combination of a decrease in sales of
equipment to customers of $ 640,015 and a decrease in studio and video
production revenue of $249,223. In addition, license fees and advertising
fees also decreased, but the decrease was partially offset by an increase in
satellite fees.
Cost of Revenues
Costs of Revenues decreased by approximately $534,000 to $2,335,722 for
the six months ended June 30, 2005, from $2,869,691 for the six months ended
June 30, 2004. The decrease was due primarily to the decreased sales of
equipment referenced above, which resulted in a decrease in the cost of
equipment sold to the Company's customers of $436,722. In addition the cost of
delivering the services decreased by $138,734 due primarily to a decrease of
employee salaries and related expenses. There was not a decrease in the cost
of equipment relative to the sales price of the equipment. The decrease in
costs of revenues was partially offset by an increase of $18,758 in
depreciation and amortization of equipment and leasehold improvements and
$60,246 in satellite distribution costs.
13
Expenses
Operating Expenses for the six months ending June 30, 2005 were
$1,330,516 compared with operating expenses for the six months ending June 30,
2004 of $12,966,668. The decrease of approximately $11,636,000 resulted
primarily from one non-cash expense, which included $11,519,377 of research
and development in process expenses, related to the Company's CodecSys
technology. In addition selling and marketing expenses decreased by
approximately $80,000 due primarily to a decrease in trade shows attended and
Administrative and General expenses decreased by approximately $36,000.
Other
For the six months ended June 30, 2005, the Company incurred interest
expense of $635,799 compared to interest expense for the six months ended June
30, 2004 of $795,306. The decrease resulted from the Company recording less
interest expense related to a Convertible Note's beneficial conversion
feature, the amount of which is calculated as the difference between the
conversion price of $1.00 per share and the average trading price of the
Company's stock during the period and assuming that the note holder will
exercise its option to convert and satisfy the obligation through conversion.
The decrease was offset by recording interest expense of $147,500 related to
recently completed financing, $22,500 of which is payable in cash and the
remainder is amortization of a note discount.
The Company realized a net loss for the six months ending June 30, 2005
of $2,290,001 compared with a net loss for the six months ended June 30, 2004
of $13,682,366. The decrease in the net loss for the six months ended June 30,
2005 of $11,392,365 resulted almost entirely from the absence of any Research
and Development in Process expenses in the current six-month period. The
Research and Development in Process expenses recorded for the six months ended
June 30, 2004 was $11,519,377. Absent the recording of the Research and
Development in Process described above, the net loss for the six months ended
June 30, 2005 increased by $127,012 when compared to the net loss less
Research and Development in Process expenses for the six months ended June 30,
2004. The increase in net loss resulted primarily from decreased revenue
offset by a decrease in various expenses including a reduction in interest
expense of $159,507.
Liquidity and Capital Resources
At June 30, 2005, the Company had cash of approximately $2,267,000 and
total current assets of approximately $3,715,000 compared to total current
liabilities of $1,491,126 and total stockholder's equity of $2,187,345.
For the six months ended June 30, 2005, the Company used $1,385,479 of
cash for operating activities compared to cash used for operating activities
for the six months ended June 30, 2004 of $954,002. The cash used for
operations was provided from proceeds from sales of Company common stock and
from loan financing.
On May 16, 2005, the Company completed a loan financing with a
consortium of four institutional investors ("Lenders"), under the terms of
which the Company received $3,000,000 gross proceeds in cash pursuant to a
Senior Secured Convertible Note ("Note"). The principal of the Note is due
May 16, 2008 with
14
interest at 6% per annum due quarterly. The Note is convertible into
1,200,000 shares of common stock of the Company at $2.50 per share convertible
any time during the term of the Note. In addition, the Lenders received A
Warrants to acquire 600,000 shares of common stock of the Company exercisable
at $2.50 per share and B Warrants to acquire 600,000 shares of common stock of
the Company at $4.00 per share (collectively the "Warrants"). The Warrants are
exercisable any time for a five-year period beginning on the date of grant.
Finally, the Lenders also have an additional investment right to make an
additional loan of $3,000,000 on the same terms as the Note and receive
additional A and B Warrants with the same terms as the Warrants already
received by the Lenders. The additional investment right must be exercised
within 90 days following the effective date of an S-3 Registration Statement
filed by the Company in connection with this financing. In the event the
Lenders exercise their additional investment right and exercise all of their
Warrants, the Company would have received approximately $13,800,000 in total
from this financing. The Company paid approximately $345,000 in cash for
commissions, finders fees and expenses in securing this financing.
The Company secured a new customer contract during the quarter ended
June 30, 2005, which the Company believes will result in an increase in
revenues, although there is no assurance of increased revenue. The Company is
in the process of increasing its capacity to service the new contract. The
Company estimates that its monthly expenses over the next quarter will exceed
its monthly income by between approximately $100,000 and $150,000 per month,
depending on the level of activity of the Company and the speed with which the
Company can begin generating revenues from the new contract. The Company
anticipates that its negative cash flow will diminish as the new contract is
fully implemented, which may take until the end of the current fiscal year or
longer. However, to the extent the Company continues to experience a revenue
shortfall between its revenue and the Company's operating costs even
considering the new contract, the Company would have the need for infusions of
capital in the next fiscal year. 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 and the financing
described above. There can be no assurance that the Lenders will exercise
their additional investment right or exercise their Warrants, which would
provide additional investment capital to the Company. Over the next twelve
months it is not anticipated that the Company will require additional
investment capital even absent the failure of the Lenders to exercise their
additional investment right, although there can be no assurance that this will
occur.
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 fully implement its
new contract and that the Company will derive sufficient revenue from the new
contract to fully satisfy the cash needs of the Company at its current level
of operations, 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.
15
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Our disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosures.
As required by Rule 13a-15(b) of the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2005. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of June 30, 2005
in alerting them in a timely manner to material information required to be
included in our reports filed under the Exchange Act. This evaluation,
however, did identify a significant deficiency in our disclosure controls and
procedures with respect to applying existing accounting literature related to
beneficial conversion features and associated accounting entries. Management
is taking steps to implement appropriate corrective action in this regard.
For the six months ended June 30, 2005, management of the Company, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, implemented corrective action with respect to a
significant deficiency previously identified regarding new and recent
accounting pronouncements and required disclosures. This action included
changes to the way we obtain and process required information pursuant to
which we have acquired and implemented a financial statement disclosure and
procedure checklist that will be updated on a regular basis through review of
authoritative information sources and consultation with professional service
providers.
Other than the items described above, there has been no change in our
internal control over financial reporting during the period ending June 30,
2005 that has materially affected, or is reasonably likely to materially
effect, our internal control over financial reporting.
Important Considerations
The effectiveness of our disclosure controls and procedures and our
internal control over financial reporting is subject to various inherent
limitations, including cost limitations, judgments used in decision making,
assumptions about the likelihood of future events, the soundness of our
systems, the possibility of human error, and the risk of fraud. Moreover,
projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions and the risk that the degree of compliance with policies or
procedures may deteriorate over time. Because of these limitations, there can
be no assurance that any system of disclosure controls and procedures or
internal control over financial reporting will be successful in preventing all
errors or fraud or in making all material information known in a timely manner
to the appropriate levels of management.
16
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
On May 16, 2005, the Company issued 100,000 shares of common stock to
two affiliates of the placement agent as commissions for securing the Senior
Secured Convertible Notes described above.
On June 1, 2005, the Company issued 67,000 shares of common stock for
services to two individuals.
In each of the forgoing transactions, the Company relied on the
exemption from registration under the 1933 Act set forth in Section 4(2)
thereof.
The Company's working capital needs currently prevent it from paying
dividends. Moreover, management intends to retain any and all earnings to
finance the development of its business, at least in the foreseeable future.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on 8-K
The Company filed a report on Form 8-K on May 16, 2005.
Exhibit No.
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
18
10.1 Employment Agreement of Rodney M. Tiede dated April 28, 2004
(Incorporated by reference to Exhibit No. 10.1 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004
filed with the SEC on May 12, 2004.)
10.2 Employment Agreement of Randy Turner dated April 28, 2004
(Incorporated by reference to Exhibit No. 10.2 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004
filed with the SEC on May 12, 2004.)
10.3 Employment Agreement of Reed L. Benson dated April 28, 2004
(Incorporated by reference to Exhibit No. 10.3 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004
filed with the SEC on May 12, 2004.)
10.4 Stock Option Plan (Incorporated by reference to Exhibit No. 10.4 of
the Company's Annual Report of Form 10-KSB for the year ended
December 31, 2003 filed with the SEC on March 30, 2004.)
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
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
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
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
18
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: August 12, 2005 /s/ Rodney M. Tiede
_____________________________________________
By: Rodney M. Tiede
Its: President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2005 /s/ Randy Turner
_____________________________________________
By: Randy Turner
Its: Chief Financial Officer (Principal
Financial and Accounting Officer)
19