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BCST > SEC Filings for BCST > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for BROADCAST INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BROADCAST INTERNATIONAL INC


13-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risk and uncertainties. Any statements about our expectations, beliefs, plans, objectives, strategies or future events or performance constitute forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend" and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied therein. All forward-looking statements are qualified in their entirety by reference to the factors discussed in this report and to the following risk factors discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011:

dependence on commercialization of our CodecSys technology;

our need and ability to raise sufficient additional capital;

uncertainty about our ability to repay our outstanding convertible notes;

our continued losses;

delays in adoption of our CodecSys technology;

concerns of OEMs and customers relating to our financial uncertainty;

restrictions contained in our outstanding convertible notes;

general economic and market conditions;

ineffective internal operational and financial control systems;

rapid technological change;

intense competitive factors;

our ability to hire and retain specialized and key personnel;

dependence on the sales efforts of others;

dependence on significant customers;

uncertainty of intellectual property protection;

potential infringement on the intellectual property rights of others;

extreme price fluctuations in our common stock;


price decreases due to future sales of our common stock;

future shareholder dilution; and

absence of dividends.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of future events or developments. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our assumptions and estimates, including those related to recognition of revenue, valuation of investments, valuation of inventory, valuation of intangible assets, valuation of derivatives, measurement of stock-based compensation expense and litigation. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discuss our critical accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no other significant changes in our critical accounting policies or estimates since those reported in our Annual Report.

Executive Overview

The current recession and market conditions have had substantial impacts on the global and national economies and financial markets. These factors, together with soft credit markets, have slowed business growth and generally made potential funding sources more difficult to access. We continue to be affected by prevailing economic and market conditions, which present considerable risks and challenges to us.

On July 1, 2010, we released CodecSys 2.0, which has been installed in various large telecoms and labs for evaluation by potential customers. In 2011 we continued development of additional sales channel partners by integrating CodecSys on hardware manufactured and sold by Fujitsu, which has adopted CodecSys as its compression technology for use in its NuVola cloud initiative and has commenced sales and marketing efforts including CodecSys as an integral part of the products. We continue to make sales presentations and respond to requests for proposals at other large telecoms, cable companies and broadcasting companies. These presentations have been made with our technology partners which are suppliers of hardware and software for video transmission applications in media room environments such as IBM, HP Fujitsu and Microsoft. In October 2011, we completed our first sale of CodecSys to a small cable operator in Mexico as part of its Over the Top ("OTT") product offering operating on Fujitsu hardware. It is currently in operation and demonstrates that the CodecSys product offering does operate to its operating specifications in a working environment, which we believe will help in our sales and marketing efforts. Although license revenue from the CodecSys technology has been minimal to date, we believe we have made significant progress and continue to believe that our CodecSys technology holds substantial revenue opportunities for our business. We have continued to market our products to the industry and have recently entered into sales agreements with four additional cable, satellite and broadcast companies for their OTT initiatives. Revenues from these sales will be first recorded in the third and fourth quarters of 2012.

On July 31, 2009, we entered into a $10.1 million, three-year contract with Bank of America, a Fortune 10 financial institution, to provide technology and digital signage services to approximately 2,100 of its more than 6,000 retail and administrative locations throughout North America. This contract has been extended to February 1, 2013. BofA is in the process of expanding its network to additional locations and we now furnish services to approximately 33,000 screens at more than 2,500 locations. In addition, BofA selected us to be its vendor for certain additional audio visual services. A factor in securing this contract was the benefits of the CodecSys technology in delivering our services. For the quarter ended September 30, 2012, we realized approximately $1,680,927 in revenue from this contract, which contributed approximately 82% of our revenues for the quarter. BofA is in the process of soliciting requests for proposals from competing vendors, to which we have responded as well.


Our revenues for the quarter ended September 30, 2012 decreased by approximately $231,796 or 10% compared to the quarter ended September 30, 2011. Although we experienced a decrease in our revenues our gross margin increased approximately $20,290 or 3% for the quarter ended September 30, 2012 compared to the same period in 2011. However, we continue to deplete our available cash and need future equity and debt financing as we continue to spend more money than we generate from operations.

To fund operations through the remainder of the current year, we engaged our investment banker to raise funds through the issuance of convertible promissory notes. We anticipate issuing promissory notes with a principal amount of up to $5,000,000 ("2012 Convertible Debt Offering") due and payable on or before July 13, 2013. As of September 30, 2012, we have issued notes with an aggregate principal value of $2,800,000 as explained below. The notes bear interest at 12% per annum and may be convertible to common stock at a $.25 per share conversion price. We also granted holders of the notes warrants with a five year life to acquire up to 200,000 shares of our common stock for each $100,000 of principal amount of the convertible notes. The notes are secured by all of our assets with the exception of the equipment and receivables secured by the equipment lessor for equipment used in providing services for our largest customer's digital signage network. On July 13, 2012, we entered into a note and warrant purchase and security agreement with individual investors and broke escrow on the initial funding under the 2012 Convertible Debt Offering, the principal amount of which was $1,900,000, which included the conversion of $900,000 of previously issued short term debt (See Bridge Loan described below) to the 2012 Convertible Debt Offering, which extinguished the Bridge Loan. We realized $923,175 of cash in the initial closing and issued warrants to acquire 3,800,000 shares of our common stock. We paid $76,825 in investment banking fees and costs of the offering. On August 15, 2012, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $900,000, from which we realized cash of $851,624 after payment of investment banking fees of $48,376.

On March 26, 2012, we closed on an equity financing (the "2012 Equity Financing") as well as a restructuring of our outstanding senior convertible indebtedness (the "2012 Debt Restructuring"), resulting in complete satisfaction of our senior indebtedness.

We entered into an Engagement Agreement, dated October 28, 2011, with MDB Capital Group, LLC ("MDB"), pursuant to which MDB agreed to act as the exclusive agent of the Company on a "best efforts" basis with respect to the sale of the Company's securities of up to a maximum gross consideration of $6,000,000, subsequently verbally increased to $10,000,000, subject to a minimum gross consideration of $3,000,000. The Company agreed to pay to MDB a commission of 10% of the gross offering proceeds received by the Company, to grant to MDB warrants to acquire up to 10% of the shares of our common stock issued in the financing, and to pay the reasonable costs and expenses of MDB related to the offering.

Pursuant to the Engagement Agreement, we entered into a Securities Purchase Agreement ("SPA") dated March 23, 2012 with select institutional and other accredited investors for the private placement of 27,800,000 units of its securities. The SPA included a purchase price of $.25 per unit, with each unit consisting of one share of common stock and two forms of Warrant: (1) The "A" Warrant grants the investors the right to purchase an additional share of common stock for each two shares of common stock purchased, for a term of six years and at an exercise price of $.35 per share; and (2) The "B" Warrant will not be exercisable unless and until the occurrence of a future issuance of stock at less than $0.25 per share, but, in the event of such issuance, grants the investors the right to acquire additional shares at a price of $0.05 to reduce the impact of the dilution caused by such issuance, but in no event shall the number of shares to be issued under the B Warrant cause us to exceed the number of authorized shares of common stock. The shares in excess of our authorized shares that would have been issuable under the B Warrant shall be "net settled" by payment of cash in an amount equal to the number of shares in excess of the authorized common shares multiplied by the closing price of our common stock as of the trading day immediately prior to the applicable date of the exercise of such B Warrant. The B Warrant shall be extinguished upon the earlier of: (a) a subsequent financing of at least $5 million on terms no more favorable than that received by the investors in the 2012 Equity Financing; (b) after the effective date of the registration statement registering securities issued in the Equity Financing if the volume-weighted average closing price of the Company's common stock exceeds $.50 per share for a period of 30 trading days and no Volume Failure (as defined in the B Warrant) (measuring the daily average dollar volume of our Common Stock against a minimum volume of $500,000 per day) exists during such period, and the Company is then current in its public filings; or (c) 78 months.


Net proceeds from the 2012 Equity Financing, after deducting the commissions and the estimated legal, printing and other costs and expenses related to the financing, were approximately $6.1 million. Coincident to the closing of the 2012 Equity Financing, we also closed on the 2012 Debt Restructuring. In connection therewith, the Company paid $2.75 million to Castlerigg Master Investment Ltd. ("Castlerigg"), and issued to Castlerigg 2,000,000 shares of common stock in full and complete satisfaction of the remaining principal balance and all accrued interest of the Amended and Restated Note. In consideration of negotiating the 2012 Debt Restructuring, we issued to one of our placement agents 586,164 shares of our common stock and paid $275,041.

In December 2011, we entered into a loan with 7 accredited individuals and entities under the terms of which we borrowed $1,300,000 to be used as working capital ("Bridge Loan"). The Bridge Loan bears an interest rate of 18% per annum and had a maturity date of February 28, 2012, which was subsequently extended to the earlier of the date nine months from the original maturity date or the date we close on an additional sale of our securities that results in gross proceeds to us of $12 million. In consideration of the Bridge Loan we granted to the holders of the Bridge Loan warrants with a five year term to purchase 357,500 shares of our common stock at an exercise price of $0.65 per share. In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share.

In connection with the 2012 Equity Financing and under the terms of the SPA, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. In addition, one other entity converted the amount owed by us for equipment purchases in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from these conversions were treated as funds raised with respect to the financing.

In connection with the 2012 Equity Financing and under the terms of the SPA, the Company agreed to prepare and file, and did file, within 60 days following the issuance of the securities, a registration statement covering the resale of the shares of common stock sold in the financing and the shares of common stock underlying the Warrants. The Company did file the registration statement on April 9, 2012 and it was declared effective on August 1, 2012.

In April 2012, an additional investment was accepted by us as part of the 2012 Equity Financing in the aggregate amount of $154,000, which included cash of $100,000 and the conversion of $54,000 of director fees owed to two of our directors to stock and warrants on the same terms as the offering. This resulted in the issuance of 616,000 shares of common stock and the issuance of warrants to acquire up to 308,000 shares of our common stock. In connection with this part of the transaction we paid a commission of $15,400 to our investment banker and issued to the broker warrants to acquire 92,400 shares of our common stock on the same terms as in the financing.

During 2010 we sold 1,601,666 shares of our common stock to 19 separate investors at a purchase price of $1.00 per share together with a warrant to purchase additional shares of our stock for $1.50 per share. The warrant expires at the end of three years. The net proceeds from the sale of these shares were used for general working capital purposes. Each of the investors was given the right to adjust their purchase in the event we sold additional equity at a price and on terms different from the terms on which their equity was purchased. Upon completion of the 2010 Equity Financing described below, each of the investors converted their purchase to the terms contained in the 2010 Equity Financing. This resulted in the issuance of an additional 2,083,374 shares of common stock and the cancellation of 2,495,075 warrants with an exercise price of $1.50 and the issuance of 2,079,222 warrants with an exercise price of $1.00 and an expiration date of five years from the conversion.

On December 24, 2010, we closed on an equity financing (the "2010 Equity Financing") as well as a restructuring of our then outstanding convertible indebtedness (the "2010 Debt Restructuring"). The 2010 Equity Financing and the 2010 Debt Restructuring are described as follows.

We entered into a Placement Agency Agreement, dated December 17, 2010, with Philadelphia Brokerage Corporation ("PBC"), pursuant to which PBC agreed to act as the exclusive agent of the Company on a "best efforts" basis with respect to the sale of up to a maximum gross consideration of $15,000,000 of units of the Company's securities, subject to a minimum gross consideration of $10,000,000. The Units consisted of two shares of our common stock and one warrant to purchase a share of our common stock. The Company agreed to pay PBC a commission of 8% of the gross offering proceeds received by the Company, to issue PBC 40,000 shares of its common stock for each $1,000,000 raised, and to pay the reasonable costs and expenses of PBC related to the offering. The Company also agreed to pay PBC a restructuring fee in the amount of approximately $180,000 upon the closing of the 2010 Equity Financing and the simultaneous 2010 Debt Restructuring.


Pursuant to the Placement Agency Agreement, we entered into Subscription Agreements dated December 23, 2010 with select institutional and other accredited investors for the private placement of 12,500,000 units of our securities. The Subscription Agreements included a purchase price of $1.20 per unit, with each unit consisting of two shares of common stock and one warrant to purchase an additional share of common stock. The warrants have a term of five years and had an exercise price of $1.00 per share, but are now exercisable at $0.78 per share pursuant to the 2012 Equity Financing.

Net proceeds from the 2010 Equity Financing, after deducting the commissions and debt restructuring fees payable to PBC and the estimated legal, printing and other costs and expenses related to the financing, were approximately $13.5 million. We used a portion of the net proceeds of the Equity Financing to pay down debt and the remainder was used for working capital.

On November 29, 2010, we entered into a bridge loan transaction with three accredited investors pursuant to which we issued unsecured notes in the aggregate principal amount of $1.0 million. Upon the closing of the 2010 Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the 2010 Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing.

In connection with the 2010 Equity Financing and under the terms of the Subscription Agreements, the Company agreed to prepare and file and did file, within 60 days following the issuance of the securities, a registration statement covering the resale of the shares of common stock sold in the financing and the shares of common stock underlying the Warrants. The registration statement continues to be effective.

On December 24, 2010, we also closed on the 2010 Debt Restructuring. In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the principal amount of $5.5 million (the "Amended and Restated Note") to Castlerigg Master Investment Ltd. ("Castlerigg"), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the loan restructuring agreement under which the Amended and Restated Note and other documents were issued (the "Loan Restructuring Agreement"), and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010. As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

The Amended and Restated Note, dated December 23, 2010, was a senior, unsecured note that matured in three years from the closing and bore interest at an annual rate of 6.25%, payable semi-annually. We paid the first year's interest of approximately $344,000 at the closing. The Amended and Restated Note was fully satisfied as described above.

In connection with the 2010 Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We also issued 150,000 shares to the holder of this note and a warrant to acquire up to 75,000 shares of our common stock as consideration to extend the term of the note. The warrant is exercisable for $0.90 per share and has a five year life.

Results of Operations for the Nine Months ended September 30, 2012 and September 30, 2011

Revenues

We generated $5,790,363 in revenue during the nine months ended September 30, 2012. During the same nine month period in 2011, we generated revenue of $6,321,495. The decrease in revenue of $531,132 was due primarily to a decrease in revenue from sales of equipment and installation fees from our digital signage contract with our largest customer, a financial services company, which accounted for approximately 84% of our revenues for the nine months ending September 30, 2012. License fees increased by $337,851, but system sales and installation revenues decreased by $1,156,931 in the nine months ended September 30, 2012, almost all of which changes were due to fewer work orders from our major digital signage customer. The increase in license fees and the decrease in system sales and installation revenues actually resulted in an increase in gross margin due to higher gross margins in the license fee category than for system sales and installation services. In addition, revenue from studio and production services increased by $111,766 and revenue from web services and other services increased by $180,548 both of which partially offset the loss of revenue due to sales of equipment and installation activities.


Sales revenues from our largest customer accounted for approximately 84% and 91% of total revenues for the nine months ended September 30, 2012 and 2011, respectively. Revenues from all of our customers, except our largest customer, increased by $347,223 or 63% in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This increase resulted primarily from the addition of one new customer to which we provide web hosting and streaming services.

Cost of Revenues

Cost of revenues decreased by approximately $556,721 to $3,857,682 for the nine months ended September 30, 2012 from $4,414,402 for the nine months ended September 30, 2011. Costs of equipment and installation services decreased by $339,771 primarily due to decreased installation of new equipment used in the continued expansion of our largest customer's digital signage network. In addition, depreciation decreased by $135,754 due to equipment used in our largest network being fully depreciated and costs of the production and maintenance department decreased by $79,482 due to cost reduction efforts by management.

Expenses

General and administrative expenses for the nine months ended September 30, 2012 were $3,589,602 compared to $5,124,883 for the nine months ended September 30, 2011. The decrease of $1,535,281 resulted primarily from a decrease of approximately $1,757,022 in the amount charged for the issuance of options and warrants. This decrease was partially offset by an increase of $128,557 in temporary help expenses, $60,845 in increased consulting fees, and $30,649 in increased employee and related expenses.

Research and development in process decreased by $447,056 for the nine months ended September 30, 2012 to $1,346,540 from $1,793,596 for the nine months ended September 30, 2011. The decrease resulted primarily from a decrease of $228,110 in consulting expenses, $108,780 in conventions and travel expenses, $62,298 in temporary help expenses, and $60,970 in expenses related to grants of options and warrants.

Sales and marketing expenses increased $732,964 to $1,557,735 for the nine months ending September 30, 2012 from $824,771 for the nine months ended September 30, 2011. The increase reflects an increase in employee and related costs of $423,792, an increase of $198,978 in general operating costs including travel and tradeshow expenses and an increase in other professional services and consulting fees of $ 93,504. The increase in sales and marketing expenses primarily reflects increased staff and activity in marketing the CodecSys technology.

Interest Expense

For the nine months ended September 30, 2012, we incurred interest expense of $1,066,598 compared to interest expense for the nine months ended September 30, 2011 of $745,925. The increase of $320,673 resulted primarily from the interest recorded to account for the issuance of our Bridge Loan and the issuance of our 2012 Convertible Debt, which was not outstanding during the nine months ended September 30, 2011 and resulted in the increase in interest expense. Of the total interest expense recorded for the nine months ended September 30, 2012, $310,000 was the amount incurred on the $1,000,000 principal outstanding on our 8.0% unsecured convertible note, $290,216 was incurred on our 2012 Convertible Debt, $217,520 was incurred on our Bridge Note and $96,512 was incurred on our equipment lease financing. Of the total amount of our interest expense, $353,451 was interest actually paid or accrued and $713,147 was non-cash interest expense related to the note accretion on our $1,000,000 unsecured convertible note and amortization of debt offering costs related to other indebtedness.

Net Income

We realized a net loss for the nine months ended September 30, 2012 of $49,357 compared with net income for the nine months ended September 30, 2010 of $3,729,513. The change from realizing net income to a net loss aggregated $3,778,870 and was due primarily to a decrease in gain related to our derivative valuation calculation of warrants and convertible notes of $6,617,504, an . . .

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